CONSTRUCTIVE TOTAL LOSS
DEFINITIONS OF CONSTRUCTIVE TOTAL LOSS
The concept of constructive total loss, whereby the subject matter insured is effectively lost to the assured, but is not actually destroyed, is unique to marine insurance. This concept is outlined within s 60 of the Marine Insurance Act 1906, which defines, in s 60(1), constructive total loss as follows:
Subject to any express provision in the policy, there is a constructive total loss where the subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
Section 60 is a complete definition
Although s 60(2) appears to qualify the general provisions laid down in s 60(1), this is not the case. In Robertson v Petros M Nomikos Ltd, below, the House of Lords confirmed that the two sub-sections within s 60 contained two separate definitions, which may be applied to different conditions of fact.
Robertson v Petros M Nomikos Ltd  AC 371, HL
The plaintiffs (respondents) were the owners of a tanker which was chartered to carry crude oil from the Caribbean to Europe; the chartered freight being insured with the defendant (appellant) underwriters. Prior to proceeding to her port of loading under the charterparty, the tanker suffered an explosion and fire whilst undergoing boiler repairs in Rotterdam. Because of the conditions laid down in the hull policy, the owners did not claim for a constructive total loss, although they could have done so. Instead, they chose to claim for a partial loss on that policy and did not abandon. They then claimed on their policy covering the chartered freight for a total loss, but the underwriters refused payment, on the basis that, under a term in the freight policy, such a claim was invalid unless the vessel was, in fact, a constructive total loss.
The House of Lords, in affirming the decision of the Court of Appeal, ruled that the vessel had been a constructive total loss, and that a notice of abandonment, with respect to a hull policy, was not intended to show that there was a constructive total loss, but rather that the assured intended to claim for such. Furthermore, no such notice of abandonment was required to claim for a total loss of freight, and, therefore, the plaintiffs could recover under their policy on chartered freight.
Lord Wright: [p 382] …The objective definition of a constructive total loss is found in the preceding section of the Act [s 60]. Some difficulty has been found in interpreting that section, because it consists of two parts. Subsection 2 is purely objective; it gives the two cases of constructive total loss of ship, the first being deprivation of possession, the second the cost of repairs. This is completely consistent with s 61. But s 60(1) is said to be inconsistent, because it makes the constructive total loss depend on the condition that the subject matter is reasonably abandoned for either of the reasons stated. This, I think, does not qualify the definition in sub-s 2. The two sub-sections contain two separate definitions, applicable to different conditions of circumstances.
Lord Porter: [p 392] …That s 60 is intended to be a complete and not a partial definition appears to follow from the wording of s 56, when it says: ‘Any loss other than a total loss, as hereinafter defined, is a partial loss.’ But, it does not follow that the first sub-section [in s 60] lays down the general rule, whereas the second gives certain particular instances already covered by the general rule. Indeed, whatever may be the case with regard to sub-s 2(i), subsub-ss (ii) and (iii) do not appear to be covered in terms by the definition in sub-s 1.
But in any case, unless there is some reason to the contrary, a definition must be held to include the whole of the wording, and if particular instances are given which include matters which are outside the more general definition, that is no reason for supposing that their application is limited by the more general words. They do not merely illustrate—they add to the terms of the definition. Section 60 does not confine constructive total loss to cases where the subject matter of insurance has been abandoned, though, in some circumstances, there may be no constructive total loss unless abandonment has taken place.
Rickards v Forestal Land, Timber and Railways Co Ltd  3 All ER 62, HL
A German vessel was scuttled by the master and crew off the Faroe Islands in order to avoid capture by a British warship. The cargo-owners successfully claimed for a constructive total loss caused by the actions of the German Government in taking over control of all German shipping.
Lord Wright: [p 79] …Some aspects of the section [s 60] have been recently discussed in this House in Robertson v Petros M Nomikos. In particular, the difficulty of fitting together the two sub-sections of s 60 and reading them together with s 61 was there considered. I think the view which this House arrived at was that the two sub-sections contain two separate definitions, which may be applied to different conditions of fact. Thus, an assured can base his claim on the terms of sub-s (2), which give an objective criterion in each case, ship, goods or freight, not only more precise than, but substantially different from, that in sub-s (1). Sub-section (2), as compared with sub-s (1), is thus additional, and not merely illustrative.
But, in Irvin v Hine, below, a claim for constructive total loss was based on the proposition that the complete definition contained in s 60 did not preclude other claims which were valid under common law.
Irvin v Hine  1 KB 555
A trawler was severely damaged after stranding on a rock and the owner gave notice of abandonment to the insurers, which was refused. The owner’s claim that the trawler was a constructive total loss was based on the fact that, due to the wartime restrictions then in place, he could not obtain a licence in a reasonable time in order to repair the vessel. The owner accepted that the claim was not tenable under any of the heads specified in s 60, but contended that the claim was justified under the common law, and that the claim was not inconsistent with the provisions of s 60, and was also valid under s 91(2), which preserved the application of the rules of the common law provided they were consistent with the express provisions of the Act.
The court ruled that the loss was a partial loss, and, in so ruling, clarified the interpretation of s 60, which was held to be a complete definition.
Devlin J: [p 567] …Section 56(1) provides: ‘…Any loss other than a total loss, as hereinafter defined, is a partial loss.’ That seems, as Lord Porter pointed out in Robertson v Nomikos  2 All ER 734, to mean that the definition of constructive total loss in s 60 must be complete. If any loss outside s 57 (which defines actual total loss) and s 60 were to be held to be a total loss, it could not be a partial loss, as that would be inconsistent with the express provision of s 56. I see no answer to this argument, except possibly that it puts too literal a construction on the words of s 56. That makes it material to consider whether such a construction is out of harmony with the object of s 60, as shown in its marginal note, and with the general purpose of the Act. The marginal note is ‘Constructive total loss defined’. This is in keeping with the words of s 56, ‘total loss, as hereinafter defined’, and shows that s 60 is intended to contain a definition. I have used the words ‘complete definition’, as Lord Porter did, as a convenient and expressive term. I dare say it is not meticulously accurate, for, strictly speaking, a definition must be complete, else it is not a definition at all. The question really is whether s 60 is a definition section, defining constructive total loss as a whole, and not merely categories of it, or whether, as counsel for the plaintiff in terms argued, all it does is to lay down the main characteristics of a constructive total loss. This argument gives no weight to the word ‘defined’, both in s 56 and in the marginal note to s 60. I think that that word shows conclusively that s 60 is intended to define a constructive total loss, which is the same as saying that s 60 circumscribes completely the conception of constructive total loss.
Loss of voyage or adventure
Although it is established that, within the Act, s 60 is a complete definition of constructive total loss, it was shown, first in Rodocanachi v Elliott (1874) LR 9 CP 518, and later in British and Foreign Marine Insurance Co v Samuel Sunday and Co  1 AC 650, HL (hereinafter referred to as the Sanday case), that there was another form of constructive total loss which existed under common law before the Act. Unlike insurance on a ship, it has long been established by the law merchant that, when hostilities exist, goods may be lost to an assured not just by physical damage, but also by the very existence of the hostile conditions themselves, which may lead to the voyage or adventure being terminated prematurely.
The Marine Insurance Act 1906 makes no express reference to this type of loss whereby an owner of goods might suffer loss or damage because of the termination of the whole venture or voyage caused by an insured peril. Since the Sanday case, cited below, which is the leading authority on this subject, it is now firmly established that a claim for constructive total loss of goods may be brought when the voyage or adventure is abandoned or frustrated. The House of Lords in that case was in agreement that this form of constructive total loss must remain valid, as it is not in conflict with the provisions of the Act and is also admissible under s 91(2).
However, as mentioned earlier, it was the case of Rodocanachi v Elliot, below, which first raised the issue, some years before the passing of the Act.
Rodocanachi v Elliott (1874) LR 9 CP 518
A cargo of silks was shipped from the Far East to Marseilles by sea, and thence by rail and sea to Boulogne and London. At the time the consignment of silks was passing through Paris, the German army invaded France and besieged the city. The owners of the goods served notice of abandonment upon the insurers, and laid claim for a constructive total loss.
The court ruled in their favour on the basis that there was a constructive total loss caused by ‘the restraint of princes’, a peril insured against.
Keating J: [p 667] …There are few English cases to be found of English goods blockaded in a foreign port; but there are several cases where the question has arisen as to the goods which are prevented by a blockade from getting in. It seems to me that goods which are within a besieged or a blockaded town or port, stand precisely in the same position as goods detained under an embargo. It is true that, in the one case, the detention is the act of the sovereign of the State in which the goods are, and in the other it is the act of the enemy. But in both a restraint is placed upon the owner of the goods by a sovereign power. That is precisely the case. It is found that it was impossible, in consequence of the German armies having closely invested Paris, to remove the silks from the railway station there. I apprehend that was a loss which was covered by these policies. The goods were for an indefinite time lost to the assured. If, therefore, the case of a besieged town is analogous to that of a blockaded port, as I think it is, the assured were clearly entitled to abandon.
A British firm of corn merchants shipped two consignments of linseed and wheat aboard the British steamships St Andrew and Orthia from Argentina to Hamburg. The consignments were insured by the defendants and, in both cases, the usual f c and s clauses were deleted and an increased premium was paid by the cargo-owners. Before the ships reached Hamburg, hostilities broke out between Germany and Great Britain, and both vessels were ordered into British ports. The cargo-owners warehoused their goods and served notice of abandonment on their insurers.
The House of Lords, affirming the decisions of both the lower courts, ruled that there was a constructive total loss of the goods by a peril insured against, brought about by the destruction of the adventure, and the cargo-owners could recover.
Earl Loreburn: [p 657] …So far I see nothing in the Act to alter the law, but I do see that under the old decisions there is a constructive total loss. The argument, however, is that the ‘subject matter insured’ on such a policy no longer included the adventure. There is not a line in the Act which says so, and, if it were relevant, many reasons might be urged against the probability of so inconvenient a change being made…The words of this policy have, for generations, been understood and held by judges to designate not merely the goods, but also the adventure. So far from abrogating this designation of subject matter, I should have thought the Act took pains to preserve it and others like it.
I will merely in a sentence refer to s 91(2) of the Act, which preserves the rules of the common law, including the law merchant, save in so far as they are inconsistent with the express provisions of this Act. It seems to me that Parliament was triply guarded against the danger that the Act should be construed in the sense urged upon us by Sir Robert Finlay [for the insurers]. It has refrained from saying that the old rule shall be altered. It has twice warned us that we are to regard and preserve rules and usages in terms that are applicable to this rule. Accordingly, I take with me the conclusion that the adventure was a subject matter insured, when I proceed to inquire whether or not the loss of it is to be compensated under the clause protecting the assured against restraint by kings or princes.
Lord Wrenbury: [p 672] …Before the Marine Insurance Act 1906, authority is uniform that, where goods are insured at or from one port to another, the insurance is not confined to an indemnity to be paid in case the goods are injured or destroyed, but extends to an indemnity to be paid in case the goods do not reach their destination. This may be variously described as an insurance of the venture, or an insurance of the voyage, or an insurance of the market, as distinguished from an insurance of the goods simply and solely. Goods delivered at the port of destination may be of value very different from their value at the port of loading. The underwriter’s obligation is to pay money in the event of the goods failing to arrive at their destination uninjured by any perils insured against. Bramwell B, in Rodocanachi v Elliott, says: ‘It is well established that there may be a loss of the goods by a loss of the voyage in which the goods are being transported, if it amounts, in the words of Lord Ellenborough, “to a destruction of the contemplated adventure”.’ The insurance is on the venture, and the loss of the venture is a constructive total loss of the goods.
I cannot find that the Act of 1906 has in any way altered this. On the contrary, it seems to me to have preserved it. The Act is expressed by its title to be an Act to codify the law relating to marine insurance. Attention has been called to certain particulars in which, nevertheless, the Act alters the law. That is true. But it remains that the Act is a codifying Act. That being so, I should look more carefully in a codifying Act to see whether any existing law is altered by express words, and should not hold that the Act is going beyond codification unless it puts the matter beyond dispute. I can find nothing which upon this matter has any such effect.
(Atkinson LJ, pp 661–63, and Parmoor LJ, pp 667–68, pursued the same argument.)
It must be emphasised that, in a claim based on loss of voyage or adventure, the assured is not deprived of control or possession of the goods in the legal sense; such deprivation of possession would come under s 60(2)(i). And it is further emphasised that the principle of ‘loss of voyage’, laid down in the Sunday case, is only applicable to goods, and not to a ship (see Doyle v Dallas (1831) 1 M&Rob 48, cited below).
Doyle v Dallas (1831) 1 M&Rob 48
The plaintiff was the owner and master of the vessel Triton, which was anchored off Buenos Aires when she fouled a discarded anchor lying on the sea-bed, which pierced her hull, and she sank. Triton had been contracted to carry a cargo back to England, but, although she was sold by the plaintiff and later raised by the purchaser, she was still pronounced unfit for the contracted voyage. The plaintiff claimed for a (constructive) total loss of the ship and included the loss of voyage as a reason for the claim. The insurers were only prepared to settle for a partial loss.
The court ruled that Triton was not a total loss, but the issue of loss of voyage was raised with regard to it having any bearing on the constructive total loss of a ship.
Lord Tenterden CJ: [p 55] …The loss of the voyage will not, in my opinion, make a constructive total loss of the ship. Some cases have been so decided; but as the thing insured remained in specie, I do not think that amounted to a total loss. The best thing for the underwriters must be done, not merely for the owner; and as they indemnify only against the loss of the ship, the loss of the voyage would not injure them.
Following the ruling in the Sanday case, above, the frustration clause was introduced into cl 3.7 of the Institute War Clauses (Cargo) (IWC(C)(82)) and cl 3.8 of the Institute Strikes Clauses (Cargo) (ISC(C)(82)); it states:
In no case shall this insurance cover…any claim based upon loss of or frustration of the voyage or adventure.
Attention is drawn to the fact that this frustration clause only appears in the IWC(C)(82) and the ISC(C)(82), and not in the ICC (A), (B) or (C), reflecting that the principle of loss of voyage or adventure no longer applies during conditions of strife. However, should a planned adventure, under normal circumstances of trade, be frustrated, for example, by a vessel no longer being capable of prosecuting the voyage and there being no alternative method of continuing the venture, the principle laid down in the Sanday case would still be applicable.
TYPES OF CONSTRUCTIVE TOTAL LOSS
Section 60 of the Marine Insurance Act 1906 defines, in two sub-sections, the meaning of constructive total loss and the manner in which it may occur. The two sub-sections are separate: s 60(2) does not qualify s 60(1). Section 60(1) relates in general terms to the subject matter insured, be it ship, goods or freight, whereas s 60(2) is more specific. Section 60(2)(i) is applicable to ship or goods only, whilst s 60(2)(ii) is concerned with damage to a ship; and s 60(2)(iii) only with damage to goods.
To acquire an understanding of how these provisions apply in practice and how the language within s 60 may be interpreted, reference must be made to past authorities, where the construction of the section, and the words within it, were carefully analysed.
Reasonable abandonment of the subject matter insured
There are two distinct and separate elements to s 60(1), when it states:
Subject to any express provision, there is a constructive total loss where the subject matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it would not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
Although the term ‘reasonable abandonment’ is common to both elements of s 60(1), ‘abandonment’ in the context of a ship may mean actually leaving the ship or giving it up for lost. The former is the physical act of vacating the property, the latter is a decision based on economics and business expediency. Scott LJ remarked in graphic terms that one can be expressed ‘in boats’, the other in ‘a letter’.
Naturally, where goods are concerned, it is only possible to give them up for lost. It is to be noted that in relation to goods, the provisions in s 60(1) are reiterated, almost verbatim, in cl 13 of all the Institute Cargo Clauses, as follows:
No claim for Constructive Total Loss shall be recoverable hereunder unless the subject matter insured is reasonably abandoned either on account of its actual total loss appearing to be unavoidable, or because the cost of recovering, reconditioning and forwarding the subject matter to the destination to which it is insured would exceed its value on arrival.
Meaning of abandonment
Although the Lavington Court case, cited below, was not a marine insurance case, the issue of what constituted the abandonment of a ship arose under a wartime charter, and is equally relevant to marine insurance.
Court Line Ltd v R, ‘Lavington Court’  78 LlL Rep 390, CA
The motor vessel Lavington Court, owned by the plaintiffs (respondents), was chartered to the Ministry of War Transport when she was torpedoed, in the Atlantic, whilst sailing in convoy. The master and crew abandoned her on 18 July 1942, the day she was torpedoed, but she did not sink until 1 August, two weeks later, by which time she had been taken in tow by a naval vessel. The Crown submitted that the charterparty ended on 18 July, when abandonment took place, and not on 1 August, when she actually sank.
The Court of Appeal affirmed the decision of the lower court (Stable J dissenting), and ruled that there was no constructive total loss at the time of the abandonment, because, at that time and with the naval authorities later trying to save her, there was nothing to show that a total loss was unavoidable. The fact that the insurers had settled for a total loss occurring on 18 July did not affect the plaintiffs’ rights under the charterparty.
Scott LJ was of the opinion that the word ‘abandoned’, as used in s 60(1), should be interpreted in two different ways.
Scott LJ: [p 396] …The word ‘abandon’, as was said in Bradley v Newsom, Sons and Co  AC 16, has, in the English legal use, several different meanings. It is used in three different senses in the very group of sections which deal with constructive total loss. Indeed, it is used in two different senses in the first sub-section of s 60. When the ship is spoken of as ‘abandoned on account of its actual total loss appearing to be unavoidable’, the word is used in nearly the same sense as when, according to the law of salvage, the ship is left by master and crew in such a way as to make it a ‘derelict’, which condition confers on salvors a certain, but not complete, exclusiveness of possession, and a higher measure of compensation for salvage services. But to constitute the ship a ‘derelict’, it must have been left: (a) with that intention (animo derelinquendi) (The John and Jane 4 C Rob 216); (b) with no intention of returning to her; and (c) with no hope of recovering her. Obviously, that sense of the word is frequently inappropriate to the second case to which the first sub-section applies, namely, because it could not be preserved from total loss (that is, an economic test) ‘without an expenditure which would exceed its value when the expenditure had been incurred’.
Another distinction between those two alternative grounds in sub-s (1) for claiming a constructive total loss is that, in the latter case, the financial estimate is one which normally would be made by the owner; whereas the forecast of the probability of actual total loss would, at any rate a century ago, nearly always have to be made by the master on the spot; and even in these days of easy and quick wireless communication, the decision would very often devolve on the master. The making of the financial estimate is, of course, merely an exercise of business judgment and discretion. The abandonment which follows after it may be expressed in a letter, and not in boats, as in the first alternative; or be a mere mental decision by the owner that he will exercise the option which s 61 allows him.
On the other hand, Du Parcq LJ was disinclined to give the word ‘abandoned’ two separate meanings within s 60, and suggested that the true meaning of ‘abandon’ was ‘to give up for lost’. In effect, by equating the meaning of ‘abandon’ to the phrase ‘give up for lost’, Du Parcq LJ introduced a phrase which was broad enough to encompass both interpretations put forward by Scott LJ, and, thus, both judges arrived at the same solution by different routes.
Du Parcq LJ: [p 399] …The word ‘abandoned’ in s 60 cannot, in my opinion, be given one sense in relation to the first, and another in relation to the second limb of sub-s (1). The same word is sometimes used more than once in a section, with different meanings, but I cannot believe that the same word, used once, can be intended to mean more than one thing. I agree with Tucker J that the word ‘abandon’ must refer to something done by the shipowner or his agent with his authority, and I would add that the master may often be an agent of necessity. I understand ‘abandon’ to mean ‘give up for lost’, and when I say give up for lost I mean that the owners are renouncing all their rights in the ship except the right to recover insurance. This meaning fits both limbs of the sub-section. Of course, the master may, in this sense, abandon the ship on behalf of the owners, but, in order to prove that he has done so, it is not enough to show that he and the crew left the ship temporarily to her fate, or that, having left her, he had grave doubt whether she would be recovered or ultimately saved. It must, I think, be made clear that he so acted as to show an intention to renounce all the owner’s (his principal’s) rights in the ship, their right to property as well as to possession.
It must be emphasised that, whether the abandonment be of ship or goods, the assured is, under s 60(1) (and cl 13 of all the ICC), not deprived of control or possession of the subject matter insured; the case of a deprivation of possession falls under s 60(2)(i).
Actual total loss appearing unavoidable
There is a constructive total loss when the abandonment takes place ‘on account of an actual total loss appearing to be unavoidable’. What may be deemed to be ‘unavoidable’ was an issue raised in Lind v Mitchell (1928) 45 TLR 54, CA, where a master abandoned a sailing ship after she was damaged by ice, and a gale was expected.
Scrutton LJ: [p 56] …Next, one comes to a question of fact; was this, in the language of s 60(1) of the Act, which deals with constructive total loss, a reasonable abandonment of the ship ‘on account of its actual total loss appearing to be unavoidable’; that is to say, total loss probable from the leak appearing, judged to be unavoidable, and therefore a reasonable abandonment of the vessel which it is reasonably thought will anyhow be lost by perils of the sea? Now I am satisfied that the abandonment was unreasonable.
In Read v Bonham (1821) 3 Brod&B 147, a ship sailed from Calcutta in a seaworthy state but, due to severe weather, had to return to Calcutta, where she was sold by the master, after a survey, in the best interests of all parties, because of the exorbitant cost of repairs. As the owners had claimed for a constructive total loss, it was necessary to consider the issue of whether her total loss was unavoidable.
Park J: [p 155] …The verdict was clearly right on the first point; for a case of stronger necessity to justify the sale of a ship has seldom been made out. The captain could not procure money for repairs, and it was not to be expected that he should let the ship rot. Did he then act as a fair man ought? He went to the very person whom he thought authorised to act in the business (that person, indeed, denied any authority to accept an abandonment); but he was called in to the survey, and the ship was sold, as the most advisable way of disposing of her when the result of the survey was known.
However, in Court Line Ltd v R, ‘Lavington Court’ (1945) 78 LlL Rep 390, CA, where the vessel was torpedoed during the war and the question before the court was when, in relation to the total loss becoming unavoidable, the abandonment actually took place, the court sought to qualify the meaning of ‘unavoidable’.
Stable J: [p 401] …The word ‘unavoidable’ is undoubtedly a strong word, and it may be said in one sense that nothing is unavoidable until it has actually happened. In my judgment, in considering the meaning of avoidability in relation to some future event, one cannot assign such an absolute meaning to the word as inevitable in the sense of something which must in the course of nature happen. To attempt to give a definition of the word applicable in all circumstances is, I think, likely to do more harm than good. It is sufficient to say that I think the word connotes a very high degree of probability, with the additional element that there is no course of action, project or plan, present at the time or place in the mind of the person concerned which offers any reasonable possibility of averting the anticipated event.
An expenditure which would exceed its value
Abandonment of ship
The abandonment of a ship for the above reason would now, in the light of advances made in communications, be the prerogative of the owners rather than the master. Such an abandonment is brought about because the subject matter insured cannot be preserved from being an actual total loss without incurring an expenditure in excess of her value. The abandonment is based on economic expediency.
A shipowner, whose ship has been so severely damaged that the cost of repairing the damage would exceed the value of the ship when repaired, could, besides s 60(2)(ii), rely on the general wording of this limb of s 60(1) (read with s 61) to base his claim.
In Court Line Ltd v R, ‘Lavington Court’  78 LlL Rep 390, CA, cited in full earlier in this chapter,1 Scott LJ expanded on the issue of economic abandonment, astutely describing it as one made by means of a letter rather than a lifeboat.
Scott LJ: [p 397] …Another distinction between those two alternative grounds in sub-s (1) for claiming a constructive total loss is that, in the latter case, the financial estimate is one which normally would be made by the owner; whereas the forecast of the probability of actual total loss would, at any rate a century ago, nearly always have to be made by the master on the spot; and even in these days of easy and quick wireless communication, the decision would very often devolve on the master. The making of the financial estimate is, of course, merely an exercise of business judgment and discretion. The abandonment which follows after it may be expressed in a letter, and not in boats, as in the first alternative; or be a mere mental decision by the owner that he will exercise the option which s 61 allows him.
Abandonment of goods
It should be noted that, under s 60(1) of the Act and cl 13 of all the Institute Cargo Clauses, a cargo-owner may abandon goods and claim for a constructive total loss even though the insured goods are not in fact a total loss. According to cl 13, an assured may abandon the cargo if the cost of recovering, reconditioning and forwarding the goods has become uneconomic (see Farnworth v Hyde (1866) LR 2 CP 204 and Vacuum Oil Co v Union Insurance Society of Canton (1926) 25 LlL Rep 546, CA, cited below).
Commercial viability of recovering, reconditioning and forwarding the goods
In general terms, with respect to goods, the second part of s 60(1), read with cl 13, may apply to the situation where goods, by reason of an insured peril, have been prevented from reaching their intended destination and the cost of ensuring their delivery becomes prohibitive. In other words, it is not economically viable to recover, recondition and forward the goods to their proper destination.
In this regard, a distinction has to be drawn between a commercial viability and the physical impossibility of forwarding the goods to their proper destination. The latter, which has already been discussed, is the Sanday principle. And, provided the loss of voyage or adventure caused by an insured peril has occurred in peacetime conditions, a claim for a constructive total loss could be brought under the Institute Cargo Clauses by reason of the absence of the frustration clause, which appears only in the War and the Strikes Clauses.
The two following cases: Farnworth v Hyde, a pre-statute case, and Vacuum Oil Co v Union Insurance Society of Canton, a post-statute case, are included to give examples of what expenses may be included when ascertaining a claim for constructive total loss where the deciding factor is commercial viability.
Farnworth v Hyde (1866) LR 2 CP 204
Avon was carrying the insured cargo from Quebec to Liverpool when she was driven ashore in the St Lawrence by severe weather and ice. The ship and cargo had to remain in situ until the following spring, when both were sold at auction. In order to recover for a constructive total loss, it had to be shown that the cost of recovering the cargo would have been more than the cargo was worth when recovered. Thus, the question before the court was what expenses were to be included when calculating the cost of recovery.
The court determined that the cost of recovery should include all the extra expenses incurred consequent on the loss by perils of the seas. That is, the cost of landing, drying, warehousing and re-shipping the goods, but not including the freight payable if the goods were forwarded in the original ship or one substituted by the original shipowners; such freight remains payable by the cargo owners at destination. On that calculation, there was no constructive total loss.
Channel B: [p 225] …where goods are in consequence of the perils insured against lying at a place different from the place of their destination, damaged, but in such a state that they can at some cost be put into a condition to be carried to their destination, the jury are to determine whether it is practically possible to carry them on, that is, according to the well known exposition in Moss v Smith, whether to do so will cost more than they are worth; and that, in determining this, the jury should take into account all the extra expenses consequent on the perils of the sea, such as drying, landing, warehousing, and reshipping the goods, and that they ought not to take into account the fact that if they are carried in the original bottom, or by the original shipowner in a substituted bottom, they will have to pay the freight originally contracted to be paid; that being a charge to which the goods are liable when delivered, whether the perils of the sea affect them or not. And we also agree that Rosetto v Gurney correctly decides that, where the original bottom is disabled by perils of the seas, so that the shipowner is not bound to carry the goods on, and he does not choose to do so, the jury are not to take into account the whole of the cost of transit from the place of distress to the place of destination, which must be incurred by the goods owner if he carries them on, but only the excess of that cost above that which would have been incurred if no peril had intervened.
Vacuum Oil Co v Union Insurance Society of Canton  25 LlL Rep 546, CA
The sailing vessel Agios Georgios was carrying a cargo of tins of petroleum from Alexandria to Cyprus when she went ashore and was lost. The tins of petroleum, however, floated, and many were saved although, in many cases, the contents were contaminated. The question before the court was whether, given the circumstances, the loss was total or partial.
The Court of Appeal, in affirming the decision of the trial judge, ruled that there had been a constructive total loss but, as no notice of abandonment had been given, the plaintiffs could not claim on their policy of insurance.
Atkin LJ: [p 553] …I think it is unnecessary to consider the other alternatives, as to the new tins, which seems to me to involve a calculation which no businessman, indeed, nobody but an underwriter trying to show that there was no constructive loss, would have contemplated for a moment. It involved going to the expense of making a very large number of new tins, and then finding some vessel which would transport them at a very large cost to Tripoli, the total cost of getting to Tripoli amounting to something like £1,200, and then it involved the question of chartering a ship which arrived at such a time as would coincide with the time when the tins had arrived and the refilling was ready, and then transporting the goods in that vessel to the port of destination, Cyprus, at which time, when they did arrive, they still would be subject to the fact that it was salved oil, and a very possible chance of the oil being mixed with seawater and fresh water. It appears to me quite plain that there was a constructive total loss in this case; but, unfortunately for the assured, it is not sufficient on the policy of insurance to show that you in fact lost all your goods. On a constructive total loss you have also to give a notice of abandonment.
Section 60(2)(i) is applicable to ship or goods where it states:
In particular, there is a constructive total loss:
(i) Where the assured is deprived of the possession of his ship or goods by a peril insured against; and
(a) it is unlikely that he can recover the ship or goods, as the case may be; or
(b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered…
Meaning of deprived of possession
It is generally accepted that s 60(2)(i) is primarily concerned with losses likely to have been caused by the capture or seizure of a ship or goods by a belligerent State or other hostile act. Such deprivation of possession may ultimately bring about what amounts to a constructive total loss. That is, the assured no longer has control of the ship or goods insured and it is unlikely that the ship or goods can be recovered, or the cost of such recovery would exceed their value when recovered. It is conceivable that such a deprivation of possession could occur in other circumstances where, for example, a ship is impounded for a breach of regulations or taken away by a barratrous crew, but, in general, the cases illustrating the effects of s 60(2)(i) relate to capture and seizure brought about by hostilities or political strife.
That the whole doctrine of constructive total loss was originally based on the effects of capture and seizure was clearly illustrated in Moore v Evans, below. Although it was not a marine case, Atkinson LJ, in his summation, considered it necessary to explain the concept, origin and purpose of constructive total loss.
Moore v Evans  AC 185, HL
The plaintiffs were a London firm of jewellers which dispatched insured pearls to trading customers in Belgium and Germany on the basis of sale or return. The property in the goods remained with the plaintiffs until the jewels were sold. When war broke out between the western powers and Germany invaded Belgium, it became impossible for the plaintiffs to recover their goods, and they claimed on their policy of insurance.
The House of Lords, affirming the decision of the Court of Appeal, ruled that the plaintiffs could not recover as their policy (non-marine) covered the goods, and not the adventure. Atkinson LJ took pains to show that the principle of constructive total loss did not apply to ordinary contracts of insurance, and then proceeded to explain the whole background to constructive total loss, including a most seemly quote from the classic work of Marshall on Marine Insurance.
Atkinson LJ: [p 193] …Marine insurance grew out of the necessities of maritime trade and commerce. It dealt with the hazardous enterprise of the navigation of the sea by ships carrying cargo for reward. The law dealing with it is a branch of the law maritime as well as of the law merchant. It is founded upon the practices of merchants who were themselves for long the expounders of its principles, which principles general convenience had established in order to regulate the dealings of merchants with each other in all countries. Its utility, according to Marshall on Marine Insurance, 3rd edn, Vol I, pp 3 et seq, cannot be better expressed than in the words of the preamble of a very early statute, 43 Eliz c 12, which recites that by means of policies of insurance: ‘it cometh to pass upon the loss or perishing of any ship, there followeth not the undoing of any man, but the loss lighteth rather easily upon many than heavily upon few, and rather upon them that adventure not than on those that do adventure, whereby all merchants, especially the younger sort, are allured to venture more willingly and more freely.’
[p 194] …So, also, as soon as these marine policies came to be regarded as indemnities and not wagering policies, the law of constructive total loss based upon notice of abandonment was shaped and moulded by decisions of Lord Mansfield about the middle of the 18th century. The doctrine had its origin in cases of the capture. Goss v Withers and Hamilton v Mendes were both cases of capture and recapture, and were apparently based upon the principle that the assured should not be obliged to wait till he had definitely ascertained whether his ship had been recaptured or not, but might upon capture proceed at once and, after notice of abandonment, recover his capital, the value of his ship, from the underwriters, provided he was not aware of her recapture when he commenced his action.
The link between capture and this type of constructive total loss was referred to in Polurrian Steamship Co Ltd v Young  1 KB 922, CA (hereinafter referred to as the Polurrian case) cited in full later in this chapter,2 where a neutral vessel was detained for six weeks and her owners claimed for a constructive total loss. Warrington J, when he was considering the meaning of the phrase ‘unlikelihood of recovery’, confirmed that s 60(1) and 60(1)(a) – introduced into the Act to replace ‘uncertainty of recovery’—were related to constructive total loss by capture.
Warrington J: [p 937] …Whence the statute derived the phrase ‘unlikely that he can recover’ as expressing a necessary condition of the assured’s right to recover for a constructive total loss by capture I do not know. I have referred to many of the reported capture cases, and I have been unable to find it used judicially in any of them.
But, in The Bamburi  1 Lloyd’s Rep 312, where a vessel was indefinitely detained in Iraq because of the outbreak of hostilities between Iraq and Iran, Staughton J was obliged to interpret the meaning of ‘deprivation of possession’ in a broad sense, when the owners claimed for a constructive total loss even though there were still crew members aboard.
Staughton J: [p 316] …The concept of possession in English law was never simple, whether under the Larceny Act 1916, or elsewhere. It is admitted that if possession has its narrowest legal significance in the present case, the claimants have not been deprived of it. There are still four crew members on board the ship, who are there by virtue of the claimants’ title; there is no Iraqi presence on board; and neither the Iraqi nor the Iranian government asserts any right to, interest in or claim over the vessel.
On the other hand, it is alleged, and I find, that the owners have been wholly deprived of the free use and disposal of their vessel. All movement of the ship is prohibited. There is not even an opportunity similar to that afforded to the owners of ships trapped in the Suez canal some years ago, of organising races in the Great Bitter Lake on Sunday afternoons. She must remain as idle as a painted ship.
Meaning of unlikely
In the Polurrian case, below, the court deliberated on the fact that, when the 1906 Act was codified, the previously used phrase of ‘uncertainty of recovery’ was replaced by the phrase ‘unlikelihood of recovery’. Warrington J was of the opinion that the change in phraseology was to the detriment of the assured in that ‘unlikelihood’ is a more severe test than ‘uncertainty’.
Polurrian Steamship Co Ltd v Young  1 KB 922, CA
The neutral steamship Polurrian was owned by the plaintiffs and insured by the defendants ‘against the risk of capture seizure and detention’. In 1912, during the war between Greece and Turkey, Polurrian sailed with a cargo of Welsh coal for Constantinople but, when nearing her destination, she was captured and detained by a Greek warship for carrying contraband. The plaintiffs claimed for a constructive total loss; the defendants admitted detainment, but not capture.
The Court of Appeal upheld the decision of the trial judge, and ruled that, although the recovery of Polurrian was uncertain, it was not unlikely.
Warrington J: [p 936] …One may, I think, without disrespect, express some regret about the two expressions ‘reasonably abandoned on account of its actual total loss appearing to be unavoidable’ and ‘unlikely that he can recover the ship’ should be used apparently to describe the same position of things; for in my view, at any rate, it is one thing to predicate that a total loss of a thing reasonably appears to be unavoidable and another to predicate that its recovery is unlikely. Taking, however, the latter and, as it seems to me, the less severe test of the right to treat a capture as constituting a constructive total loss, I think that the statute has modified the pre-existing law to the disadvantage of the assured. One is always properly afraid of incompleteness in attempting a definition; but I venture to say that the test of ‘unlikelihood of recovery’ has now been substituted for ‘uncertainty of recovery’.
[p 937] …Addressing myself, however, to the best of my ability to the question which this s 60 directs me to consider, my conclusion is that whilst I hold that on 26 October—the crucial date, because the date of commencement of the plaintiffs’ action—the recovery of Polurrian by her owners was quite uncertain, I do not feel myself justified in holding that the balance of probabilities has been proved to me so clearly against her recovery that I can say that such recovery was ‘unlikely’. This being so, the plaintiffs have failed to make out their case, and this appeal must be dismissed.
In Court Line Ltd v R, ‘Lavington Court’  78 LlL Rep 390,