Scope of “Error in Navigation” Defence under the Hague (Hague-Visby) Rules

Mercuria Energy Trading Pte v. Raphael Cotoner Investments Ltd (The Afra Oak) [2023] EWHC 2978 (Comm)

If the master of the chartered vessel, in breach of charterer’s employment instructions, causes a loss to the charterer, would the owner be entitled to rely on Article IV(2)(a) of the Hague-Visby Rules (error in navigation) as a defence in a claim brought by the charterer for compensation? This was the central issue in The Afra Oak. The facts are relatively straightforward. On 7 February 2019, the charterers instructed the owners “to proceed to Spore EOPL for further orders.” On 9 February, the master, while on passage, took a decision to anchor within Indonesian territorial waters to wait for orders on the basis that it was an easier place to anchor. On 12 February 2019, the Indonesian Navy detained the vessel and arrested the master. It transpired that the vessel was not entitled to anchor under the United Nations Convention on Law of the Sea (UNCLOS) 1982 in Indonesian territorial waters and such anchoring was prohibited by Indonesian law and by doing so the master committed a criminal offence which he was convicted for in October 2019. The charterer demanded damages from the owner by claiming that the vessel was unseaworthy (due to the fact that the master had a disabling lack of knowledge in relation to anchoring in territorial waters) and also the actions of the master amounted to breach of its employment instructions. The arbitration tribunal held against the charterer on the first issue (that the vessel was unseaworthy) but decided in its favour on the second (i.e. the actions of the master amounted to breach of employment instructions given). However, this was not adequate to bring victory to charterer in the present case as the tribunal also held that the owner was entitled in this instance to rely on Article IV(2)(a) of the Hague Rules (there is no difference between Hague and Hague Visby Rules in this respect and the Rules were incorporated in this instance into the charterparty) which provided a defence to the owner. This provision states:

“Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from: (a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship….”

The charterer appealed to the High Court contending that the tribunal made an error in law in holding that Article IV(2)(a) of the Rules would be applicable in the present case. The charterers case primarily based on the House of Lords decision in The Hill Harmony [2001] 1 AC 638 where the owner was not allowed to rely on the same exception when it opted to follow a route different than the one recommended by the charterer. More precisely, the master declined to take the shorter northern circle route recommended to charterers by a weather routeing service for a trans-Pacific voyage and took the longer more southerly rhumb line route. He did so because on a previous trans-Pacific voyage, the vessel had encountered very bad weather and had suffered damage. The House of Lords were adamant that in such a case the owner could not rely on the “error in navigation” defence as the master had no rational justification for doing what he did.

Sir Nigel Teare was able to distinguish the present case than The Hill Harmony stressing that the master here simply failed to exhibit good navigation and seamanship in failing to take into account of the risk of anchoring in Indonesian territorial waters. Put differently, in this instance what caused the master to fail to comply with the charterer’s order was his failure to exhibit good navigation and seamanship. Conversely, in The Hill Harmony the master’s choice of route was not caused by any error in navigation or seamanship.

Sir Nigel Teare, correctly in author’s view, came to the conclusion that The Hill Harmony was not authority for the proposition that where there has been a failure to follow an employment order the exception in respect of a fault in the navigation of the vessel is unavailable. He stressed that there could be instances like The Hill Harmony where the master not due to any error in navigation and seamanship (but simply due to a commercial choice) takes a decision in breach of the employment instructions. In such cases, the navigational error defence found in Article IV(2)(a) of the Rules would not be open to the owner. However, in a case like the present one the defence might certainly be available, It is worth noting, however, that to be able to rely on the defence it is essential for a shipowner to demonstrate that the master’s actions were in the navigation or management of the vessel and an exercise of (poor) seamanship! Sir Teare’s judgment is a sigh of relief to owners especially when trading to ports where territorial boundaries in surrounding waters can be unclear. In such places, any mistake made by the crew in determining the place of anchorage (or making any other navigational decision) which might cause loss to the charterer might provide a defence to the owner if the Rules are successfully incorporated into the charterparty.

Charterparty Provision Capable of Creating A Claim in “Debt” or A Claim in “Damages”? That is the Question!  

Smart Gain Shipping Ltd v. Langlois Enterprises Ltd (The Globe Danae) [2023] EWHC 1683 (Comm)  

If the charterparty contains a clause that indicates that certain expenses are “always at charterers’ time and expense”, does that create a claim in “debt” for the benefit of the owner or claim in “damages” especially if expenses are incurred after the chartered vessel is redelivered? This is an interesting question as in the latter case, the owner needs to prove its loss to be successful in its claim. This was the main contention in the present case.

Facts can be briefly summarized. The Globe Danae was trip chartered to carry metallurgical coke in bulk to Brazil with an estimated duration of 40 to 50 days. The charterparty contained a “hull fouling” clause (cl 86) which stipulated:  

“Owners not to be responsible for any decrease in speed/increase in consumption of the Vessel whether permanent or temporary cause (sic) by Charterers staying in ports exceeding 25 days’ trading in tropical and 30 days if in non-tropical waters. In such a case, underwater cleaning of hull including propeller etc. to be done at first workable opportunity and always at Charterers’ time and expense. After hull cleaning vessel’s performance warranties to be reinstated.”  

On the instructions of the charterer, the cargo was loaded in India but after rejected by intended buyers, the vessel remained in idle, still laden, in tropical water ports in Brazil for 42 days. After the cargo was delivered and contract came to an end, the owners undertook cleaning of the hull and propeller prior to delivering her to next employment. The owners made a claim against the charterers in the sum of US$ 74,506.70 for the loss of time of 2.29 days spent cleaning. The charterers rejected the claim arguing that their obligation to carry out cleaning came to an end on the redelivery of the vessel, so that the only remedy open to owners was damages and to be successful in that claim they had to prove that they suffered loss of hire as a result of hull fouling. The arbitration tribunal held that the owners’ claim was in debt (not merely in damages) for loss of time and they were successful accordingly. The charterers appealed.

The High Court dismissed the appeal. Sir Ross Cranston stressed that it was important to construe the relevant clause (cl 86) in the charterparty in a manner that would make commercial sense. Considering the fact that the charterparty in question was for a single trip, he indicated that the first workable opportunity to clean the hull of the vessel was likely to present itself after the termination of the charterparty (after redelivery).  On that basis, he reached the conclusion that it must have been the intention of the parties with this clause to create an obligation on charterers to undertake such cleaning at the charterparty rate regardless of when it takes place.

To support this reasoning, he drew support from Damon Compania Naviera v. EAL Europe Africka Lime GmbH (The Nicki R) [1984] 2 Lloyd’s Rep 186. This case concerned a charterparty for a roundtrip from Europe to West Africa which included a similar clause: “Charterers to be responsible for damage to the vessel… done by stevedores … all damages… to be repaired after the completion of the voyage at charterer’s expense but in owner’s time provided that such damage does not affect vessel’s seaworthiness.” Stevedores caused damage on the chartered vessel and after the conclusion of the voyage the charterers arranged for repairs at the discharge port. While the repairs took place, over a period of five days, the owners also carried out repair work on the vessel’s damaged engine. The owners claimed hire for the period of repair. Bingham, J, held that where the damage affected seaworthiness, the charterers were responsible for the time spent on repairs at the hire rate whether or not the charterparty had come to an end. It was also held that there was no deduction for engine repairs given that the claim was in debt, based on period of repairs, not on damages for breach of contract (hence additional repairs were irrelevant). Sir Ross Cranston had no doubt that cl. 86 in the present charterparty was analogous to the one in The Nicki R, except that the issue there was stevedore damage rather than marine growth that necessitated hull cleaning.      

Ultimately, this was yet another charterparty case that turned on the construction of a clause in the contract. Few would suggest that the solution reached is not in line with commercial realities. The judgment also serves as a reminder that any clause in a charterparty (particularly in a time and trip charterparty) stating that liability for a particular event/occurrence is “always at charterer’s expense” is likely to extend charterer’s exposure to expenses incurred even after redelivery as a clause of that nature is likely to be construed as one that capable of creating a claim in “debt” rather than a claim in damages.            

ChatCPT- A New Threat for Cyber Risk Insurers?

The ChatGPT (Generative Pretrained Transformer)- an OpenAI platform- was released in November 2022 and has been an instant success. In simple terms, ChatCPT is an artificially intelligent model that has been trained to generate text that imitates human language once it has been prompted with a query or question. The producers of the model expect to release a new version soon!       

ChatGTP has been identified as a problem in education sector that could potentially enable some students to engage in unfair practice undermining the integrity of assessment procedures. We have also in the press read about lawyers in different jurisdictions making submissions to courts by using texts obviously prepared by ChatCPT. In insurance sector, especially cyber risk insurers are also concerned of the potential disruptive impact of this OpenAI platform on their business models.

If prompted ChatCPT will refuse to write ransomware or malicious codes and when denying such requests, it will explain that ransomware is both “illegal” and “unethical”. However, there is no guarantee that a person will not find a way to create a malicious code by utilizing ChatCPT. As long as right questions are posed, the current version of the model could give anyone step by step guidance as to how to create a malicious code. This is a genuine concern for cyber risk insurers as it potentially makes it easier to produce such a malicious code (even by amateurs) and then target a business. Small and medium sized (SMEs) businesses, which do not have appropriate cyber security measures in place, are particularly vulnerable to ransomware attacks.  

Also, it is possible that if prompted ChatGPT can write convincing phishing emails that can be utilized in social engineering campaigns by threat actors. Again, this increases the possibility that an employee in a company or business could engage with such a convincing phishing email potentially compromising the cyber security of the organization in question.  

In recent months, cyber risk insurers have reported that ChatCPT has been utilized by criminals in ransomware negotiations potentially tilting the balance in favour of such criminal elements-one underwriter who discussed the matter with the author believes that ransomware negotiations are getting more difficult by the day thanks to ChatGPT and sums paid by insurers are increasing as a result!  

The main problem stems from the fact that OpenAI remains largely an unregulated area and realistically this will not change anytime soon. While there is an expectation on the creators of ChatGPT to ensure that their tool cannot be easily manipulated by threat factors, there is no denying the fact that ChatGPT has broadened the potential attack surface for businesses and this a particular concern for cyber risk insurers. If the new version of ChatGPT is not designed to better detect such threat factors (and block such requests), we should expect an increase in the successful ransomware attacks on businesses which will potentially lead to a further increase in cyber risk insurance premiums. We cannot stop innovation, but we have every right to expect the producers to put in place mechanism to prevent their harmful use. Cyber risk insurers are hoping that the new version of this OpenAI tool will be equipped to deal with those who are panning to use it for criminal purposes. This will be a good illustration of how tech can perform the function of regulation as well as innovation!   

Insurable Interest in Marine Insurance- The Liberal Spirit Altering the Nature of the Doctrine?

Quadra Commodities SA v. XL Insurance and others [2023] EWCA Civ 432

The assured, a trader of agricultural commodities, entered into a series of contracts for the sale and purchase of grain with companies within the Agroinvest Group. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that a fraud was perpetuated by the Agrionvest Group whereby the commodities stored in warehouses in Ukraine were routinely sold and refinanced multiple times, and ultimately misappropriated via the issuance of fraudulent warehouse receipts. As a result, the goods purchased by the assured disappeared from the warehouses in which they were apparently stored. The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts.  There was no dispute that the loss was covered under the policy which provided cover for “loss of or damage to goods… through the acceptance by the Assured of… fraudulent shipping documents” and/or under a clause that provided cover for loss “directly caused by misappropriation”. The insurers sought to argue unsuccessfully before the High Court [2022] EWHC 431 (Comm) that the assured had no insurable interest in the goods (this was commented on by the author at this blog last year).

The insurers appealed against the decision essentially arguing:

(a) That the first instance judge’s finding that there were goods corresponding in quantity and quality to the purchased cargoes physically present in storage at the time when the warehouse receipts were issued could not be substantiated based on evidence.

(b) That there could be no insurable interest in the goods in circumstances where they did not form part of a bulk which was sufficiently identified (and this was the case here).

(c) That the first instance judge’s finding that the assured could also rely on insurable interest derived from its immediate right to possession of goods by way of warehouse receipts was wrong as this issue should be determined as a matter of English law not Ukrainian law.  

The Court of Appeal upheld the first instance judgment rejecting all the arguments put forward. On (a), the Court of Appeal found that there was “ample evidence” that goods corresponding to the sale contracts and warehouse receipts were physically present. It was appreciated that it was a part of the fraudulent scheme employed here that the same goods were sold to several buyers, but this did not change the fact that the goods corresponding to that amount specified in the sale contract was present as evidenced primarily by the assured’s contemporaneous inspection reports.  

On (b), stressing the fact that the law relating to property in goods is distinct from the question whether a person has an insurable interest in them, the assured relied on a US case from the Supreme Judicial Court of Maine, namely Cumberland Bone Co v. Andes Insurance Co (1874) 64 Me 466. The case was based on English authority and supported the proposition that an assured may have insurable interest in unascertained goods irrespective of whether they form part of an identified or unidentified bulk. The Court of Appeal endorsed the principle in Cumberland Bone stating that it should now be recognized as a principle of English law.   

On (c), the Court of Appeal held that the insurers had failed to call evidence of Ukrainian law on this issue, and it would be procedurally unfair to allow them to contend on appeal that the issue should be determined by reference to English law.


The outcome of the case did not come as a surprise to the author as it is in line with the recent trend in cases that courts will lean towards finding that an insurable interest exists. It is now clear that the insurable interest in goods will be found not only as a result of legal ownership/title to the goods, or as a result of possession of and a right to possession of the goods (at least when accompanied by an economic interest in the goods) but also when the assured makes payment or part-payment for the unascertained goods irrespective of whether they form part of an identified or unidentified bulk This is a new development and sets a new precedent in that regard in English law highlighting the fact that courts would be nowadays more liberal in finding insurable interest especially if they are convinced that the assured was pursuing a genuine economic interest in obtaining the insurance cover. A contrary outcome in this case would have entitled the insurers to exonerate themselves from liability for a risk they have assumed in the genuine belief that such goods existed even though they have charged the assured a premium for undertaking this potential liability. As Sir Julian Flaux C put it (at [108]) “it is unremarkable that the law should require [the insurers] to fulfil their contractual obligations”.

It is also worth pointing out that the assured’s success in the present case was based on its ability to convince the Court that the corresponding goods existed by providing contemporaneous reports. There is a lesson here for buyers that they should consider commissioning contemporaneous inspections of warehouses (especially when purchasing cargo in bulk from overseas) and also ensure that reports of such inspections are provided and recorded.     

Safe Port Warranty in Charterparties- London Arbitration 2/23

The chartered vessel (a gearless Panamax bulk carrier) ran aground while entering the port of Chaozhou under pilotage. As a result, she suffered damage to hull structure. The owners claimed the cost of repairs and associated damages in the amount of US$ 1,158.559.59 plus interest and costs on the premise that charterer directed the vessel to an unsafe port in breach of a safe port warranty in the charterparty.

The charterers defended the claim arguing that the vessel was unseaworthy as she lacked the proper charts which prevented the master from preparing an effective berth-to-berth passage plan (The CMA CGM Libra [2021] UKSC 51). On that basis, the charterers argued that unseaworthiness was the effective cause of the loss and as the Hague-Visby Rules were incorporated into the charterparty by a Paramount Clause, they were able to rely on breach of Article III Rule (1) of the Rules as a defence of circuity of action to the owners’ claim for breach of the unsafe port warranty, according to the principle in Post Office v. Hampshire [1980] QB 124.

Was the port unsafe?

There is authority pointing to the fact that a systematic error in the infrastructure of a port could potentially make that port unsafe (The Ocean Victory [2017] UKSC 35)- the pilots employed by a port can certainly be considered part of that port’s infrastructure. It was in essence the submission of the owners that the pilot’s failure to deploy the stern tug in “indirect” mode to bring the stern of the Vessel around to port and her head around to starboard meant that he was incompetent. (according to the owners, this failure demonstrated a disabling lack of skill or knowledge amounting to incompetence in line with the test laid down in The Eurasian Dream [2002] 1 Lloyd’s Rep 719). The tribunal disagreed. After a technical evaluation assisted by expert mariners, it was held that the main fault of the pilot in this case was failure to execute the manoeuvre required to enter into a port (that poses some navigational challenges) correctly. This was deemed to be an isolated error on his part. The pilot worked at Chaozhou for 5 years before this incident, continued working as a pilot there for some five years afterwards, and had not been involved in any other incidents. He had demonstrated the ability to control the Vessel and the tugs in other respects during this incident.

It is not beyond the bounds of possibility that a pilot employed by a harbour authority could be regarded as incompetent but the burden that the owners need to discharge in such a case is a considerable one and unless it can be demonstrated that the pilot in question is recently appointed and no adequate training opportunities are offered to him/her by the harbour authority to familiarise himself/herself with particular navigational challenges the relevant port poses, it is likely that any navigational error of the pilot will be judged as one off as was the case here.

Was the vessel unseaworthy?

The finding on the safety of the port was adequate to dispose the owners’ claim but the tribunal also made the following observations regarding the vessel’s seaworthiness. It was found that the vessel did not have the up-to-date Chinese paper chart on board showing the limits of the dredged deepwater channel. On that basis it was held that the passage plan must have been defective as it could not have been based on appropriate channel data at the time the vessel departed the loading port. The tribunal also found that as a result the Master and deck team failed to alert the pilot to his errors and failed to attempt any action to avoid the grounding. Therefore, it was evident that the vessel was unseaworthy. However, it was held that the unseaworthiness was not an effective cause of the grounding. We can only assume that the tribunal after evaluating the expert evidence concluded that pilot’s negligence was the main effective cause of the grounding- put differently but for the pilot’s negligence the vessel could have still entered the port in a safe manner despite the fact that the passage plan, based on incomplete data, was defective. This is obviously a factual finding, and it is hard for us to comment on without having access to the expert evidence that the tribunal had the chance to see.

That said it would have been very interesting to see how the tribunal would have reacted to the point raised by the charterers: i.e. if the port had been deemed unsafe and unseaworthiness was found to be an effective cause of the loss. In that case, would the charterer be able to avoid liability without having the need to demonstrate that the Vessel’s unseaworthiness was a novus actus interveniens which severed the chain of causation between the unsafety of the port and the grounding? Possibly yes, but that is a moot point which needs to be decided on another day.

The New Warranty Regime Tested in A Common Law Court   

PT Adidaya Energy Mandiri v. MS First Capital Insurance Ltd [2022] SGHC(I) 14; [2022] 2 Lloyd’s Rep 381

Factual and Contractual Matrix

The assured operated an unmanned single point mooring buoy (SPM) at a gas field which was moored to seabed by nine set of chains at three locations on its skirt area. The insurance policy provided cover for physical damage to the SPM on total loss basis only with an insured value of US$ 4, 700,0000. The policy, inter alia, contained two warranties:

Clause 1- “The Insured Equipment is only to be operated by and under the supervision of suitably trained and authorised personnel…”

Clause 8- “Suitable precautions and preservation/maintenance measures to be adopted when storing, handling, transporting and operating Insured Equipment.

The policy was subject to English law as amended by the Insurance Act (IA) 2015. It also contained a clause to the effect that the assured should notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy.   

Between 1 and 13 July 2018, several collisions between the SPM and a crude oil tanker (The Bratasena) occurred during loading operations leading to the flooding of the SPM’s compartments. Emergency repairs were carried out in August/September 2018 and further repairs were made in situ in December 2018. The SPM received further repairs in May/June and November 2019. The assured claimed that the SPM was a constructive total loss (CTL) by tendering a Notice of Abandonment (NoA) on 22 May 2019. The assured also claimed expenses incurred to prevent the SPM from becoming a total loss as sue and labouring expenses. The assured’s indemnity claim was rejected by the insurer on various grounds mainly due to breach of marine warranties and procedural issues. The assured’s claim for sue and labouring expenses was also rejected by the insurer. The assured brought the current proceedings against the insurer before the Singapore International Commercial Court as per jurisdiction agreement in the contract.

Breach of Warranty

Sir Jeremy Cooke IJ, was of the opinion that both of the warranties in the contract were breached. The assured was in breach of Clause 1 as no evidence was presented showing that the crew was adequately trained to operate the insured equipment. It was also held that there was a breach of cl. 8 as there was no static tow in place to ensure that The Bratasena did not surge into the SPM. Moreover, it was found that there was no 24/7 watchkeeping during loading operations which meant another failure in the provision of suitable precautions and preservation measures. It was also found that the crew’s failure to notify the assured of every contact with the SPM constituted a further breach as that prevented any corrective measure taken.

Having established that both cl 1 and 8 were breached, the trial judge held that the cover was suspended at the time of the loss by virtue of s. 10(2) of the IA 2015. It was also held that s. 11(3) of the IA 2015 could not assist the assured here as there was no prospect of the assured showing that non-compliance with the warranties did not increase the risk of the loss which actually occurred in the circumstances which it did occur.

Other Defences Raised by the Insurer

The clause requiring the assured to notify the insurer within 30 days of becoming aware of any incident giving rise to a claim which may be covered under the policy was held to be a condition precedent to the liability of the insurer. It was held that this clause was breached (which barred recovery) as the assured even though by 17 July 2018 was aware that there had been several collisions between the SPM and The Bratasena, gave no notification to the insurer until 5 September 2018.    

Agreeing with the contention of the insurer, the Court also found that the SPM was not a constructive total loss as the repair costs (estimated to be around US$ 2 million by the insurer’s expert and US$ 3.2 million by the assured’s expert) did not exceed the insured value under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906. It was also held that (even if the repair costs had exceeded the insured value of the SPM), the assured could not treat the loss as constructive total loss as it failed to tender NoA within a reasonable time (as required by s. 62(1)(3) of the MIA 1906). The trial judge stressed that NoA was not tendered until 22 May 2019 even though the temporary and permanent repairs required to preserve the vessel from being a total loss had been completed by mid-December 2018.  Sir Jeremy Cooke IJ was convinced that the assured had waived its right to abandon the SPM to the insurers as it sold the equipment in June 2019 for US$ 400,000 at an undervalued price on the premise that it was a liability, but it kept operating it following the collision and kept earning a revenue. All these inconsistent actions pointed to the Court that the assured was dealing with SPM for its own account throughout so its offer to cede its interest in the SMP to the insurer was taken to have been withdrawn.   

The assured’s claim for sue and labouring costs were mostly rejected. By virtue of s. 78(3) of the MIA 1906, to qualify as a sue and labour expense, it is necessary to show the assured that the expenses were incurred for the purpose of averting or minimising a loss to the insured property. This puts a serious limit on a policy like this one which provides cover on “total loss basis” only allowing the assured to claim costs that had been spent to prevent the insured property from an immediate risk of total loss as sue and labouring expenses. On that basis, the Court held that most of the expenses were not recoverable as sue and labouring expenses. More precisely:

  1. Replacement of the mooring hawser was not incurred to preserve the property from total loss;
  2. Inspection costs of the mooring chain, SPM riser and the pipeline end manifold, had no influence on the loss;
  3. Effecting permanent repairs (especially in 2019) did not qualify as there was no longer a risk of sinking.

The only expense recoverable as sue and labouring expense was the inspection costs and repairs to prevent further flooding immediately after the collisions in July 2018 (US$ 20,875 on the estimate of the insurer’s expert).


The Court’s findings on the CTL issue and sue and labour clause do not break any new ground. What we see here is a very good application of established legal principles to the facts of the case with the assistance of insurance experts.

However, given that this is the first case (known to the author) that gives judicial airing to the changes introduced on the traditional warranty regime by the IA 2015 (in addition to academic scrutiny carried out- see, for example, observations of the author in 3rd edition of Warranties in Marine Insurance (2017, Routledge), his contribution to Cambridge Law Journal [2016] “Risk Control Clauses in Insurance Law” pp, 109- 127, Professor Clarke’s observations published in The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (Informa Law, 2017), pp. 54-59 comments of R. Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004), it is worth commenting on that aspect of the case.

The case is a very good reminder that when dealing with a warranty that requires the assured to adopt safety standards and practices (such as cl 8 here),  when such standards are not maintained by the assured, it will be very difficult (if not impossible) to convince the Court that non-compliance with such warranty could not have increased the risk of loss which actually occurred in the circumstances in which it occurred (s. 11(3) of the IA 2015). From the way the arguments were presented to the judge, it is also evident that (as predicted by academics) the effect of s. 11(3) is to introduce a test of causation from the backdoor! Inevitably, the courts will be drawn into an enquiry as to whether the loss would have happened in the manner it did, had the safety standards been appropriately adopted.    

One should also bear in mind that the effect of s. 11(3) could be negated altogether (i.e., the assured could be prevented from arguing that the breach of warranty did not contribute to the occurrence of the loss so that it should not have any detrimental impact on coverage) if it is drafted in a way that serves the purpose of describing the limits of the cover as a whole. A warranty of that nature is excluded from the application of s. 11(3) on the premise that such a term will have a general limiting effect not linked to a specific risk (s. 11(1) stipulates: “This section applies to a term (express or implied) other than a term defining the risk as a whole,…”). Unfortunately, this matter was not deliberated by the trial judge in depth, but it could be plausibly argued that cl. 1 is such a term as it requires the insured equipment to be operated only by and under the supervision of suitably trained and authorised personnel. On that basis, it can be viewed as going to the definition of the insured risk rather than simply being a term designed to reduce the risk of a particular type of loss. If so, regardless of whether breach of cl. 1 has contributed to the loss, the risk is suspended the moment the insured equipment is operated by personnel who are not adequately trained until that situation is rectified (as long as, of course, the breach does have a lasting impact on the risk (s. 10(2) of the IA 2015). Lack of discussion on the nature of cl. 1 did not here have any impact on the outcome as the judge was convinced that non-compliance with the warranty did, in fact, increase the risk of loss which actually occurred in the manner in which it occurred but such an analysis would have helped us to see how judges actually deal with the issue of identifying whether a warranty is one that “describes the risk” (which is excluded from the application of s. 11(3) of the IA 2015) or is one which is designed to reduce the risk of “loss of a particular kind” or “loss at a particular location” or “loss at a particular time”.     

New “Consumer Duty”- Would It Affect Insurers Utilising AI and Algorithms?

By 31 July 2023, all retailers in the UK must comply with a new “Consumer Duty” when selling new and existing products and services to their customers (the date of implementation is 31 July 2024 for firms offering closed products and services). This Duty has been introduced by the Financial Conduct Authority (FCA) with an amendment to existing Principles for Business (PRIN) and intends to impose a higher standard of behaviour for firms interacting directly or indirectly with retail customers. The scope of the duty has been extended to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), and on that basis applies not only to insurers but also to insurance intermediaries (e.g., insurance brokers).

What Does the New “Consumer Duty” Entail?

In a nutshell, the new “Consumer Duty” requires retailers to take a more proactive approach and put their customers’ needs first. It should, however, be noted that the duty is neither a “duty of care” nor a “fiduciary” one. It also does not require retailers to provide advice to customers.  Although the Duty does not give customers a private right of action, it enables the FCA to investigate any allegation of breach and the FCA could accordingly issue fines against firms and secure redress for customers who have suffered harm through a firm’s breach of the Duty.

More specifically, the Duty introduces:

  1. An overarching customer principle that firms must act to deliver good outcomes for retail customers.
  1. This overarching principle requires firms: i) to act in good faith; ii) to avoid causing foreseeable harm; and iii) to enable and support customers to pursue their financial objectives. No firm definition of the term “good faith” in this context has been provided but the FCA put forward some examples where a firm would be judged not be acting in good faith. Accordingly, an insurance firm will not be acting in good faith if it sells insurance to a customer by taking advantage of his/her vulnerability. Similarly, an insurance company will not be acting in good faith if it exploits its customers’ behavioural bias- i.e. renewing a policy automatically without reviewing the details of any revised terms or endorsements as well as any changes to excess or premiums introduced by the policy.    
  1. The Duty focuses on four outcomes (products and services, price and value, consumer understanding and consumer support) and requires firms to ensure consumers receive communications so that they can understand products and services that meet their needs, offer fair value and the support needed to consumers.

The Duty, therefore, will require insurers to reflect on how they assemble, sell, market insurance products to their customers and what kind of support they provide to customers who make inquiries. The insurers are now under a statutory duty to act in good faith, avoid causing foreseeable harm and support their customers in the process of delivering these outcomes.      

Specific Implications for Insurance Companies- Especially Those Using AI and Algorithms

The insurers are already reflecting on how they present their policies and various terms in their policies. They will be expected to inform customers fully of the limits of cover (especially policy excesses). Similarly, any proposed changes to cover at renewal stage should be made clear to customers so that they are aware of the changes to their policy and scope of cover. Many insurers would tell you that these are the good practices that they have been implementing for some time anyway.

One area that insurers need to pay careful attention is the standard questions they expect potential customers to answer in cases where they utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. In some recent cases, the vagueness of such questions has raised legal issues (see, for example, Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc [2021] EWHC 2538 (Ch)). For example, if a consumer had a “declined to quote” decision from a pervious insurer, how would s/he be expected to respond to a standard question on such an automated system asking him/her to specify whether s/he has been refused insurance previously? Would a standard customer expected to appreciate that “decline to quote” might not necessarily mean refusal of insurance? The insurers need to think how they phrase such questions, and it would be advisable in the light of the new Duty to provide additional explanation on such a question posed on an automated underwriting platform. 

However, more interesting questions might arise in cases where insurance companies utilise AI and algorithms for pricing, risk assessment and consumer support purposes.

Naturally, there is an expectation on any insurance firm that utilise AI in risk assessment process to ensure that the system in use does not inadvertently lead to discriminating outcomes and the new Consumer Duty amplifies this. That is easy to say but difficult to achieve in practice. It is well-known that it is rather difficult, if not impossible, when algorithms are used for risk assessment purposes to know what data has been used by the algorithm and what difference any factor made in such risk assessment (commonly known as the ‘black-box problem’). Insurers rely on programmers, designers and tech experts when they employ AI for risk assessment purposes and as much as they expect such experts to assist them in fulfilling their “Consumer Duty”, it is ultimately something they have very little control over. More significantly, it is rather doubtful that the FCA will have that degree of expertise and technical knowledge to assess whether an algorithm used could deliver good outcomes for the customers. To put differently, it is not clear at this stage whether the new Consumer Duty will in practice enhance the position of consumers when underwriting decisions are taken by AI and algorithms.

Another advantage that algorithms could provide to insurers is to differentiate in price not simply based on risk related factors but other factors (such as the tendency of an individual to pay more for the same product). If allowed or left unchecked, an algorithm by taking into account factors (i.e. number of luxury items ordered by an individual online), might quote a higher premium to an individual than it would have quoted for another individual with a similar risk portfolio. We have a similar problem here- could the algorithm be trained not to do this and more significantly how can a regulator check whether this is complied with or not?

Also, today many insurance companies use chatbots when interacting with customers. Given that the Customer Duty requires insurance companies to provide adequate support to consumers, it is likely that an insurer might fall short of this duty by employing a chatbot that could not deal with unexpected situations or non-standard issues. Checking whether a chatbot is fit for purpose should be easier than trying to understand what factors an algorithm has utilised in making an insurance decision. I suppose the new Consumer Duty would mean that insurers must invest in more advanced chatbots or should put in place alternative support mechanisms for those customers who do not get adequate or satisfactory answers from chatbots.

There is no doubt that the objective of the new Consumer Duty is to create a culture change and encourage retailers, and insurers, to monitor their products and make changes to ensure that their practices and products are “appropriate” and deliver good outcomes for customers. This will also be the motivating factor when insurers utilise AI and algorithms for product development, underwriting and customer support. However, it is also evident that the technical expertise and knowledge within the insurance sector is at an elementary level, and it will probably take some time until the insurers and regulators have the knowledge and expertise to assess and adapt AI and algorithms in line with the consumers’ needs.              

A Nice Try! But Off-Hire Remains the Main Remedy Unless A Separate Breach of the Charter Can Be Demonstrated

London Arbitration 9/22

The vessel was chartered on a trip basis on an amended NYPE form for carriage of bulk titanium slog and bulk rutile sand. On arrival at the first loading port, the surveyors appointed by the charterers to inspect the cargo holds found that the holds were not ready for loading of the intended cargo. The relevant charterparty form stipulated (cl 49):

Vessel holds on arrival at the first load port(s) to be clean, dry, free of rust and/or scale and cargo residues and ready in all respects to load any/all permissible cargoes under the charterparty to the satisfaction of charterers’ nominated surveyor. If the vessel is not approved by the surveyor, the vessel is to be placed off-hire from the time of that failure until the vessel passed a subsequent survey. All expenses, losses and liabilities arising from the failure are for owners’ account.

It was not in dispute that the failure in inspection triggered the application of cl 49 and the chartered vessel was off-hire from the date the formal inspection was carried out until the surveyor found that the vessel was ready for loading on 12 October (this was a typical period off-hire clause). The dispute here was whether the vessel was off-hire at an earlier date (i.e. 2 October)- this was the date when an informal survey was carried out at anchorage by the same surveyor. The request for this survey was made by the charterer and the owners agreed to it so as to save time at the berth but the report was evidently “advisory to master” and the tribunal had no difficulty disregarding the contention that the vessel was off-hire from 2 October highlighting that the language used in the report was not a language of a report with consequences.

This was the easy part. Two further contentions of the charters, however, required the tribunal to engage in a more analytical legal discussion.

  1. The charterers pointed out that if the holds had been clean, the vessel would have been at a berth at an earlier date (at 11.20 on 9 October) whereas the vessel on facts managed to berth on 18 October (at 1605).  On that basis, the charterers were claiming damages for the delay in addition to the vessel being off-hire until 12 October. Their claim was US$ 39,062.50 (hire based on the rate of US$ 6,250 per day) from the time when the holds were found at an acceptable state by the surveyor (at 1010 on 12 October) until the vessel berthed at 1605 on 18 October. 

This is an interesting debate especially given that there was certainly a causal link between the delay in berthing and the failure to pass the inspection. However, from the contract law perspective the key issue is whether the remedy stipulated in the contract (here the “off-hire remedy”) allows any other remedy than deduction from hire for the period of time lost. The tribunal found that cl 49 was clear in setting out the consequences of the vessel’s holds being rejected by the charterers’ surveyor: namely the vessel would be off-hire from the time of failure until she passed a subsequent survey. This precludes any further remedy being awarded to the charterers (an application of the principle that “specific remedy” displaces the general one). Furthermore, the fact that cl 56 of the charterparty conferred the option on the charterer to add any off-hire period to the end of the charter term was viewed as a clear indication that the remedy expressly conferred by the charterparty provided a complete code for failure of holds inspection and according to the tribunal this weakened any case for a claim in damages generally. The argument was put in a sophisticated manner but it was essentially an attempt to bypass the established rule that to claim additional damages on the top of off-hire, one needs to show separate breach of the charterparty. The tribunal, correctly in the view of the author, refused to alter this well-established principle.

  • The second argument put forward by the charterers was an interesting one too. The charterparty contained a clause concerning the rate of hire. Clause 4 provided that the hire would be “at the rate of US$ 6,250 per day pro-rata including the overtime for the first 55 days and US$ 12,000 per day thereafter.”

The chartered vessel was delivered to service at 0900 of 24 September and re-delivered at 0430 on 30 November. Given that the off-hire at the first port occurred during the first 55 days of the hire period, the owners calculated off-hire at the rate of US$ 6,250 per day. However, the charterers claimed that they were entitled to damages as they were required to pay hire at in increased rate of US$ 12,000 per day after the first 55 days of the charter period had expired- essentially they were claiming the differential between the basic hire rate and higher hire rate for the time from when the vessel would have berthed at 1120 on 9 October until 1605 on 18 October when she in fact berthed (US$ 47,138.50).

The tribunal was firmly of the view that this argument was reliant on the construction of the language used in cl. 4 of the charterparty. On that premise, it concluded that the charterers would have had a strong case had cl 4 made specific reference to “on hire days”. If it had,  this would have possibly implied that the increased rate should have applied after the off-hire period added to the time which was the threshold for higher hire rate. However, as this was not the case, there was no reason to look beyond the plain meaning of the term “the first 55 days”, and the manner in which the owners dealt with the off-hire at the first loading port correctly reflected the terms of the charterparty.    

There is a message for charterers here especially if they agree to a hire clause that introduce a higher rate after a period of time. In those instances, if they do not wish the hire deduction to be made at the lower rate in a case when the vessel is redelivered after the threshold for higher hire is passed (for loss of time occurring earlier during the charterparty), they need to say so explicitly in the charterparty. Most charterparties used in practice do not say so!

Deviation for Crew Change- Who Pays for Additional Delay?

London Arbitration 11/22

What happens if parties agree that the chartered vessel (time or trip charter) would deviate to perform a specific task (e.g. crew change) but after the agreed task is completed further delay arises as a result of other factors (e.g. bad weather) and consequently additional time is lost? Is this a risk that shipowner assumes or is it simply an operational hazard that charterer in a time/trip charter is normally expected to bear?

This was the main issue that the tribunal was asked to address in London Arbitration 11/22 (a proceeding brought under LMAA Small Claims Procedure). The vessel was chartered under an amended NYPE 93 form for a trip from a sole load port in the Sea of Japan to a discharge port in the South China Sea carrying a cargo of steel billets and with an estimated duration of 25 to 30 days. The parties agreed in the charter that the vessel would have had a crew change at Hongai (Vietnam) and the deviation time and bunker costs to be at owners’ account. After the crew change had taken place on departing Hongai the vessel encountered bad weather in the South China Sea and her speed was reduced. The charterers made a deduction of 1.05 day from hire for the delay caused by bad weather following departure from Hongai. The owners argued that the charterers’ deduction was unlawful and breach of charterparty.   

In effect, this is a dispute concerning the application of “causation principles” in the context of a term in a charterparty. There can be no doubt that any time lost during the process of deviating to Hongai for crew exchange is on the owners’ account. However, does the owner remain responsible for any delay that occurs after the crew change had been completed on the premise that further delay would not have happened had the vessel not deviated to Hongai in the first instance?

There is little doubt that the deviation was a “but for” cause of the further delay arising due to bad weather after leaving Hongai but is this adequate to make owners’ liable? The tribunal thought “not”! And rightly so! Imagine that a taxi driver is involved in an accident after dropping a customer at a cottage in a remote location. Will it be possible for the driver to revert to the customer seeking compensation for the loss asserting that s/he would not have ben at that location if the customer had not engaged his/her services in the first place. Naturally not! One might say this is a different situation here as the charterer and owner are still in a contractual relationship. That is true but to make one party liable for consequential losses emerging in a contract, it is necessary that the term in question adopts a broad “causation trigger” to that effect. The clause in question here did not, but merely stated that “the deviation time/bunker/costs to be at Owners’ time/account”. In a similar context (indemnity for charterer’s orders) , the Supreme Court in The Kos [2012) UKSC 17, [2012] 2 Lloyd’s Rep 292 making a distinction between “effective causes” and “but for” causes ruled that in the absence of contrary wording in the relevant clause only losses emerging from an effective cause of the loss are recoverable. Here it can plausibly be argued that the relevant clause (enabling deviation for crew change) did not introduce a broad causation trigger and the loss arising due to bad weather was a “but for” cause and not an effective one.                         

Performance Claims (Again) in Time Charters and Causation

London Arbitration 29/22

Charterparty agreements in contemporary practice invariably deal with risk allocation between parties and to that end incorporate lengthy provisions. However, such provisions might not always secure the outcome one party hopes to achieve as their legal construction are bound to be influenced from legal precedents and/or legal causation still plays a vital role in the outcome as charterers and also owners in the current dispute found out to their detriment. Several legal issues raised in this dispute, but it is worth elaborating 3 of them which might provide guidance to parties in future when it comes to drafting similar clauses in their agreements.

Speed and consumption calculations (performance)

The charterparty in question (which was on amended NYPE 1946 form), inter alia, stipulated:

Clause 29:

Speed/consumption based on good weather conditions up to Beaufort Scale 4 and Douglas Sea State 3. No adverse current and no negative influence of swell.

Clause 88:

… no hire to be deducted for alleged underperformance claim until it has been agreed by both parties.

In the absence of consistent discrepancy between deck log and weather routing service and in the absence of amicable settlement the matter will be referred to arbitration.

Charterers argued that the vessel did not perform as warranted on four voyages (in breach of cl 29) and they, accordingly, made deductions from hire. These deductions were based on the report prepared by a weather bureau appointed by the charterers. The reports found that the vessel’s performance was short of what was warranted on four voyages and time was lost consequently. The weather expert appointed by the owners doubted the methodology adopted by the charterers’ expert highlighting several technical reasons why the calculations were not accurate.

The tribunal agreed in general with the evidence provided by the owners’ weather expert especially stressing that:

  1. The charterers’ expert seems to include in calculations performance assessment during periods of adverse currents or when there was a negative influence of swell in contradiction with good weather indices of cl. 29;
  2. The vessel’s log was a more reliable indicator of currents than AIS positioning alone in moderate weather conditions:
  3. Satellite telemetry records did not provide sufficient accurate data regarding localised wind and sea state so as to automatically cast immediate doubt on ship’s observations.

From a legal pointy of view, the tribunal’s decision makes the point again that in instances where the relevant performance provision is silent on the beneficial currents, the owners are entitled to any benefit gained as a result of such currents (a point also made in The Divinegate [2002] EWHC 2095 (Comm)). More significantly, the tribunal’s decision demonstrates that in determining the performance of the chartered vessel, the data in the logbook will not automatically taken into account but equally calculations from weather experts would only be preferred if they are scientifically sound to doubt the accuracy of logbook data.                    

Hull fouling

Clause 82 of the charterparty provided that the charterers are responsible for the cost of hull and/or propeller cleaning if such cleaning is required following the vessel remaining idle at any safe anchorage for a total of 20 consecutive days.  

The vessel stayed at Bin Qasim for 22 days and the owners sought to recover the cost of cleaning at the next drydock. The owners also attempted to claim the cost of cleaning hard barnacle roots became embedded in the vessel’s hull discovered just before re-delivery after a report from an underwater operation carried out in Taiwan.

The tribunal found that the hull and propeller fouling was the result of the vessel’s call at Bin Qasim and the charterers were in breach of cl 82 for failing to arrange an underwater inspection and carrying out the necessary cleaning required. However, it was held that the claim for future freshwater washing and sandblasting was not covered by cl 82 as it was unlikely that hard barnacle roots became embedded in the vessel’s hull during the time spent at Bin Qasim. This highlights the need to demonstrate the existence of a causal link between the alleged loss and breach.      

Damage to hull

The owners claimed that one of the holds was damaged during loading and discharging operations. The claim was backed by a post-discharge survey and the master’s reports and indemnity for this damage was sought from the charterer under clause 8 of the charterparty which obliged the charterer to undertake all cargo operations and indemnify the owners for the consequences of the charterers’ employment orders.   

The tribunal found that it was very likely that the damage was caused during cargo operations but the owners failed in their claim for indemnity as they submitted no invoice following the drydocking giving the tribunal the impression that repairs were either not carried out or had been incorporated with other repairs. Put differently, the owners’ claim was not successful as they failed to prove loss. This is a timely reminder to owners that such indemnity claims need to be documented for recovery.