Much Ado About Nothing! A Marine Insurance Case That Promised A Lot But Delivered Very Little

McKeever v. Northernreef Insurance CO SA (22 May 2019)(LM-2018-000044) 

The owner of a sailing yacht named CREOLA, Mrs McKeever, brought an action against Northernreef Insurance CO SA, a Uruguayan insurance company, under a yacht policy providing against the usual range of marine risks, including perils of the seas, piracy, malicious acts and theft.

On 19 March 2014, the insured yacht grounded on a reef in the Sulu Sea. The assured and her friend’s attempts to re-float her were unsuccessful and they had to abandon the yacht as the waves were becoming stronger. Having secured and padlocked the hatches, they were picked up by a fishing vessel which responded to their mayday signal. The next day, they returned to the yacht with the coastguard to find out that the windows had been broken and she had been looted. Various valuable items including electronic navigation aids had been stolen. The assured engaged a firm to guard the yacht and also a salvage company to move the yacht to a place of safety. The salvage company found flooding to a depth of six inches in the portside midsection. On 7 April 2014, the salvage company managed to re-float the yacht and tow her to the Penuwasa boatyard.

The assured’s numerous attempts to claim from the insurer failed. The current proceedings were issued against the insurer in the UK and served on its UK agent. The insurer failed to engage with any of the litigation process save for filing a defence and did not attend trial.

The assured’s claim included:

  1. Damage to the yacht;
  2. Indemnity for the items stolen;
  3. Recovery of the sums paid for guarding the yacht and sums paid for re-floating and towing the yacht (as sue and labour expenses)

Miss Julia Dias QC sitting as the Deputy High Court Judge awarded the assured the diminution in the market value of the yacht owing to the totality of the damage suffered, the value of the stolen items, and her sue and labour expenses.

Grounding Damage

The trial judge was convinced that the initial damage of the hull was caused by “perils of the seas” as the grounding itself was fortuitous. The defendant insurer’s counter arguments that i) the maintenance warranty was breached; ii) the yacht was unseaworthy owing to out-dated charts; and iii) the grounding was caused by the assured’s negligence, had no prospect of success as no evidence was presented by the insurer to maintain these points. There was also no doubt that damage caused by the ingress of water was also recoverable as a loss caused by perils of the seas. In this context, discussion was carried out whether damage caused by ingress of water could be attributable to “piracy” or “theft” or “malicious acts” of third parties given that the looters broke the windows and left hatches open enabling the entry of seawater. The observations of the judge on these points are interesting. On the point of piracy, she indicated that piracy in English law can be defined as “forcible robbery at sea” (The Andreas Lemos [1983] 1 QB 647, at 796-7). She then, relying on s. 8(1) of the Theft Act 1968 reached the conclusion that robbery requires there to be a threat of violence or use of force directed at some person and it was, accordingly, not adequate that violence was directed at the property. This conclusion is not free from criticism. Most would find it strange that assistance is sought from a national legislation, e.g. the Theft Act 1968, in ascertaining the meaning of a marine peril which invariably occurs at high seas, i.e. outside the jurisdiction of any national state. More fundamentally, however, in relevant authorities (especially Republic of Bolivia v. Indemnity Mutual Marine Assurance Co [1909] 1 KB 785, at 796-7) emphasis has been made to the fact that piracy was in essence indiscriminate plunder for personal benefit carried out at sea and with force. There is nothing in that case stressing that violence must be directed to people and violence directed at property would not suffice for the purposes of defining the boundaries of piracy. 

The judge acknowledged that violence directed at property was adequate to bring an action under the peril of the “theft”, she held that while the water ingress can be regarded as having resulted in a general sense from the theft, its proximate cause was the forcible entry rather than the theft of the machinery and it is only the latter which is insured under the policy. This is a curious reasoning, to say the least, considering that the efficient cause of the loss here seems to be breaking of the windows to facilitate theft of various items on board the yacht.

It was relatively easy to rule out “malicious acts” as a cause of the loss on the premise that the looters here were motivated by self-interest (i.e. their actions were motivated for the purpose of facilitating theft).

Indemnity for items stolen

The insurers themselves had conceded that indemnity for the items stolen was recoverable under the peril of the “theft” as there was clear evidence of violence against the property.

Sue and Labour Expenses

The trial judge had no doubt that expenses incurred, i.e. engaging a firm to protect the insured yacht and engaging the salvage company to remove her from the reef and tow to Penuwasa boat yard were properly and reasonably incurred for the purpose of taking reasonable measures to avert or minimise a loss

Conclusion

The case leaves so many points unanswered. The conclusion about the essential elements of “piracy” in the context of a marine insurance policy is debatable. Also, the judge’s findings on issue of identifying “proximate cause” of the loss are questionable. The case also presented an opportunity to deliberate to what extent a clause excluding claims from negligence of an assured is valid in the context of a policy that is taken by an individual. No doubt, these issues would have been evaluated further had the insurer appeared before the Court. As it stands, the judgment does not add much to the development of marine insurance law. 

Supreme Court Clarifies the Law on CTL Calculation in Marine Insurance

The Swedish Club v Connect Shipping (The MV Renos) [2019] UKSC 29

Under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906, there is constructive total loss (CTL) when the insured ship is damaged by a peril it’s insured against and the cost of repairing said damage would exceed the insured value of the ship when repaired. In estimating the cost of repairs for the purposes of this provision, it has been held by Knowles, J, [2016] EWHC 1580 (Comm) that i) the costs incurred prior to the date of notice of abandonment and ii) the costs of salvage operations performed before the notice of abandonment, including sums payable under the SCOPIC clause, should be taken into account.

The underwriters’ appeal to the Court of Appeal on these points was rejected unanimously [2018] EWCA Civ 230 (per Hamblen, LJ, with whom Simon, LJ and Sir Geoffrey Vos C agreed). In a previous case note, the author was critical of the Court of Appeal’s reasoning, especially with regard to the second point, i.e. taking into account SCOPIC expenses incurred before the notice of abandonment in estimating the cost of repairs.

The Supreme Court (composed of Lords Sumption, Reed, Hodge, Kitchin and Lloyd Jones) allowed the appeal on this ground holding that SCOPIC charges cannot be considered as part of the “cost of repairing the damage” under s. 60(2)(ii) of the MIA 1906 (or the “cost of recovery and/or repair” under clause 19.2 of the Institute Hull Clauses). The Supreme Court stressed that the primary purpose of SCOPIC expenditure is to protect owners’ potential liability for environmental pollution not to enable the ship to be repaired. Hence, such expenditure is not connected with the damage to the hull or its hypothetical reinstatement and the mere fact that a prudent uninsured owner would have contracted with the same contractors for both prevention of environmental pollution and protection of the property does not make them indivisible. The author believes that the Supreme Court’s decision on this issue is intuitive and makes sense.   

On the issue of whether expenses incurred prior to the notice of abandonment should count towards the calculation of a CTL under s. 60(2)(ii) of the MIA 1906, the Supreme Court rejecting the submission of the underwriters, affirmed the findings of the lower courts. The Supreme Court approached the matter with reference to basic principles of insurance law indicating that several older judgements on the matter (in particular Hall v. Hayman (1912) 17 Comm Cases 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361) lacked reasoning and legal argument. Taking into account the objective character of the factual enquiry of whether a vessel is a CTL and the fact that in marine insurance context the loss is suffered at the time of the casualty, the Supreme Court was adamant that the reference to “damage” in s. 60(2)(ii) was in fact reference to the entire damage arising from the casualty from the moment that it happened. Therefore, it cannot make any difference when costs are incurred, i.e. pre or post notice of abandonment. On that premise, the Supreme Court evaluated whether this principle might be affected by the legal requirement for a notice of abandonment but reached the conclusion that it is not.                   

At the commencement of litigation, it was agreed by the parties that, to be declared a CTL under s. 60 of the MIA 1906, the repair costs needed to be in excess of US$ 8 million. The matter in the light of the Supreme Court judgment will be remitted to the trial judge to determine whether the vessel had been a CTL and what financial consequences would follow from that. 

Waiver of Further Disclosure- The First Case Under the Insurance Act 2015

The Insurance Act (IA) 2015, which came into force on 12 August 2016, applies in England and Wales, Scotland and Northern Ireland (s. 23 of the IA 2015). It fell to the Court of Session (Outer House) in Scotland to deliver the first judgment under the Act in Young v. Royal and Sun Alliance plc [2019] CSOH 32.

The co-assureds (Mr Young and Kaim Park Investments Ltd, a company of which Mr Young was a director) brought a claim of £ 7.2 million for extensive fire damage to commercial premises insured. The insurer, Royal and Sun Alliance plc, rejected the claim on the basis that the assured failed to disclose material information (a commercial assured is under a duty of fair presentation under the IA 2015).

The policy had been entered through an insurance broker. The assured was requested by the insurance broker to fill in a proposal form which was prepared using the broker’s software. One part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The drop-down menu that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent. Neither Mr Young nor Kaim Park Investments had been declared bankrupt or insolvent, however, Mr Young had previously been a director of four other companies which had entered into insolvency. The option which was selected on the proposal form was “None”. Accordingly, the proposal forwarded to the insurer showed the option selected, i.e. “None”, and the list of persons to which the declaration related. Once receiving the presentation, the insurer sent an e-mail to the brokers providing a quote for cover and a list of conditions. The conditions, inter alia, included: “Insured has never been declared bankrupt or insolvent.

In the present case, the assured’s argument was that the insurer’s e-mail response amounted to a waiver by the insurer of its right to receive the undisclosed information regarding the four insolvent companies.

The 2015 Act introduces no fundamental change on the law on waiver (a point which both parties agreed). By virtue of s. 3(5) (e) of the Act, the assured is not required to disclose a circumstance “if it is something as to which the insurer waives information.”

The judge, Lady Wolffe, reviewing the case law under the Marine Insurance Act (MIA) 1906 reiterated that waiver in this context can typically arise in one of two ways:

  • Where the insured had submitted information that would prompt a reasonably careful insurer to make further enquiries but the insurer had failed to do so (WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA [2004] 2 All ER (Comm) 613); and
  • Where the insurer had asked a “limiting question” such that the insured could reasonably infer that the insurer had no interest in knowing information falling outwith the scope of the question (Doheny v New India Assurance Co [2005] 1 All ER (Comm) 382). The classic example is where the proposal form asks about convictions within the last 5 years and which can instruct waiver of information about convictions more than 5 years ago.

It was decided by Lady Wolffe that only the second of these forms of waiver could be relevant in the present case. Therefore, the key issue was whether it could be inferred from the e-mail of the insurer to the broker stating that the “assured has never been declared bankrupt or insolvent” that the insurer waived information regarding the involvement of Mr Young in other companies which had entered insolvency.

Reviewing the case law on the point, Lady Wolffe stressed that in determining whether the insurer’s email response amounted to waiver, the key consideration was whether a reasonable person in the position of the assured would be justified in thinking that the insurer had restricted its right to receive all material information. It needs to be borne in mind that when presenting the risk to the insurer, the broker utilized its own form rather than the insurer’s proposal form. The relevant part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The choices that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent, but when assessing the risk, the insurer had only seen the selected option of “None” in the presentation. They had not seen the full list of options which the assured had selected from (which the judge referred to as matters concerning “Moral Hazards”). Therefore, the insurer’s email response intended to clarify that unknown matter. The insurer had done this by listing in the email the various hazards that required to be included. As a result, it was held that the reference in the email response to “the Insured” was not intended to limit the scope of the information being provided but had simply been used as shorthand for the group of persons identified in the presentation. Accordingly, there was no waiver on the part of the insurer with regard to the information not fully disclosed (i.e. the involvement of Mr Young in four insolvent companies).

Even though the case is the first one considered under the Insurance Act 2015, it does not shed any light on any of the novel concepts introduced by the Act. The decision was concerned with the preliminary question of waivers and was decided in light of authorities on the subject which have already existed for some time. Essentially, the fact that the broker’s own proposal form was used meant that the scope of information provided had been controlled by the assured and that it was impossible to be found as a waiver.

The Saga Continues- What Really Happened to the Brillante Virtuoso?

The Brillante Virtuoso was sailing from Ukraine to China with a cargo of fuel oil when she was boarded by pirates off Gulf of Aden on 5 July 2011. The pirates directed the vessel to Somalia but when the engine stopped and could not be re-started, they allegedly placed a detonator in the engine room causing a huge damage to the vessel. The vessel was insured for $US 55 million with an additional $US 22 million increased cover with ten Lloyd’s underwriters. The underwriters refused to indemnify the assured (Suez Fortune Investments Ltd). The assured and its bank (Pireus Bank AE) brought a claim against the insurers. In the first stage of the trial, the claimants were successful and Flaux, J, (as he then was) held that the vessel was a constructive total loss under s. 60(2)(i) of the Marine Insurance Act 1906 as she was damaged by an insured peril and the cost of repairs would exceed the insured value of the ship when repaired [2015] EWHC 42 (Comm). The insurers argued unsuccessfully that in taking into account the repair value of the damage, the cost of repairs at China should be taken into account. The claimants, on the other hand, argued that the repairs were completed in Dubai and the cost incurred at Dubai should be taken into account even though the cost of repairs in Dubai was 17.5 % more than the cost of repairs in China. Flaux, J, held that that the appropriate location for repairs will depend on the individual circumstances of the case. In this case, he was of the view that Dubai was the most appropriate place for repairs taking into account i) risks that will be associated with further towage to China; ii) cost of insurance for the tow; iii) loss of income for additional period of time; and iv) reputation of yards (not only with regard to the quality of workmanship but also accuracy of cost estimates and the risk of delay).                        

The Brillante Virtuoso after the incident!

The second stage of the trial which will determine the issues of liability of the insurers commenced on 18 February 2019. Parties have different views of what happened to the Brillante Virtuoso in July 2011. The owners argue that the attack was carried out by the pirates who were or used to be members of the Yemeni navy or coast guard. The insurers, on the other hand, put forward the view that the attack was staged by the owners of the ship so this is a case of “wilful misconduct” of the assured. The insurers also rely on other defences, such as breach of various warranties in the policy. It is expected that this will be a lengthy trial but hopefully we shall finally find out what really happened to The Brillante Virtuoso.

Condition Precedents/Warranties in Insurance Contracts

Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC)

Constructing the meaning of words used in insurance contracts is a regular function of courts. In this case, the meaning of various terms, which appeared in the policy that Wheeldon (the assured) had with Millennium Insurance Co Ltd (the insurer), received judicial airing. The assured owned a waste processing plant which was destroyed in a major fire in June 2014. The assured’s claim for indemnity was turned down by the insurer who argued that the assured was in breach of several terms of the policy. The assured brought this action seeking declaratory relief that the insurer is liable under the policy for the loss.

The Deputy Judge, Mr Jonathan Acton Davis QC, first of all sought to identify the cause of fire at the plant. The plant produced solid recovered fuel by removing non-combustible components from inputted waste material transported on conveyor belts. It was discovered that a failed bearing caused a misalignment of one of the conveyor belts which created a gap between it and a trommel (a rotating industrial sieve). Combustible materials which would have been otherwise caught by the sieve, dropped through the gap at the bottom of the conveyor and began to accumulate there. The friction caused by the failed bearing led to hot metal fragments dropping into the accumulated combustible material thus starting a fire.

The insurer, inter alia, argued that the assured was in breach of:

  1. A condition precedent to liability which provided that “combustible waste must be stored at least 6m away from any fixed plant” (storage condition)
  2. A warranty that required “all combustible stocks and/or wastes to be removed from picking station base and/or trommels and/or hopper feeds and balers etc when business is closed.” (combustible materials warranty)
  3. A condition precedent which required the assured “to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines and keep records of all such maintenance” (maintenance condition)

At the plant, there were potentially combustible materials, such as a combination of glass, stones and soils which passed through the sieve, and were kept 6 meters of the fixed plants. Also, combustible materials had accumulated in the gap created by the conveyor belt misalignment. The Deputy Judge held that the presence of such materials did not amount to breach of the “storage condition” in the policy. It was stressed that the word “combustible” should be given the meaning, which would be understood by an ordinary person and not its scientific meaning, which is anything which burns when ignited. On that basis, a layman would not regard a combination of “glass, stones and soils” as combustible. The judge also indicated that the word “store” implied a degree of permanence and a conscious decision by the assured to designate an area to keep a particular material. On that basis, materials accumulated in the gap created by malfunctioning cannot said to be “stored” within the meaning of the condition in the policy.

With regard to (ii), the combustible materials warranty, the assured provided evidence that there was a system requiring employees to undertake a visual inspection and carry out the necessary cleaning each day. The judge held that even though the system, without more, was insufficient, the fact that it was in place and had been adhered to were adequate to comply with the warranty.

On third point, the judge found that the failure of the bearing, without more, did not conclusively mean that there was a breach of this condition. In any event, there was no evidence of any breach. As to the requirement to keep formal records, the judge agreed with the assured that their system of daily and weekly checklist was adequate. Furthermore, the judge stressed that if the insurer required records to be kept in a particular format, this should have been prescribed clearly in the maintenance condition.

Although the focus of the case is construction of certain terms in an insurance contract, it is a reminder to insurers that they need to be clear and specify the particulars carefully in the clause if they want to attribute a specific or scientific meaning to a word or requirement on the part of the assured. Otherwise, any word or requirement in a condition precedent or warranty is likely to be construed by courts as an ordinary person would read them.

It should be noted that request for permission to appeal against this judgment has recently been turned down by the Court of Appeal.

Insurable Interest in Insurance- Adopting A Commercial Solution

Broadgrain Commodities Inc v. Continental Casualty Company [2017] ONSC 4721

Does a CIF seller still have an insurable interest in a cargo policy after the goods are delivered to the carrier (i.e. risk of loss or damage to the goods is transferred to the buyer under the CIF contract)? This was the main debate in the case before the Ontario Superior Court of Justice (Canadian Marine Insurance Act 1993 is similar to the unamended version of the UK Marine Insurance Act 1906).

Here,a cargo of 26 containers of sesame seeds were sold by the claimant (Broadgrain) on CIF basis and insured by the insurers under an open policy which intended to insure the claimant and its property as well as the property of others in respect of which the claimant had an obligation to insure under various contracts entered into during the insurance period. The cargo was loaded on board the carrying vessel in Nigeria in October. It was common ground that the risk had passed to the buyer at that stage. The full contract amount was paid by 12 December by the buyers. Under the sale contract, the title in the good was to pass upon payment and the buyer granted the seller a security interest in the cargo until all amounts had been paid. When the vessel arrived at its destination, Xingang, on 17 December, it was discovered the goods had been damaged during transit and the claimant sought indemnity under the insurance policy from the underwriters.                    

The insurers moved for a summary judgment to dismiss the action on two grounds: i)the claimant did not have “insurable interest” in the goods at the time of the loss; and ii) the claimant did not sustain any loss as, despite the damage to the goods, it was paid in  full by the buyer for the shipment in question.

On the first point, the insurers sought to rely on two Federal Court decisions(Green Forest Lumber Ltd v. General Security Insurance Co of Canada [1977] 2F.C. 351 (F.C.T.); aff’d [1978] 2 F.C. 773 (F.C.A), aff’d [1980] 1 S.C.R. 176 and Union Carbide Corp v. Fednav Ltd [1997] F.C.J.No. 665 (F.C.T)) which contained statements made in obiter to the effect that, where goods are shipped on CIF terms and the goods are loaded on board the ship, the seller no longer has an insurable interest and cannot claim under a policy of insurance. 

The court, rightly so, indicated that the Supreme Court of Canada in Kosmopoulosv. Constitution Insurance [1987] 1 SCR 2 has adopted a non-technical definition of “insurable interest” pointing out that any real interest of any kind in a marine adventure should qualify as an insurable interest. It was stressed that a contrary solution would act to the detriment of international trade. On that basis, it was held that in the present case even though the risk passed upon loading in October, and the title passed upon payment, the seller’s retention of security interest would qualify as an equitable relation to the adventure such as to give the seller an insurable interest that subsisted throughout the voyage.

However, judge’s finding on the insurable interest point was not adequate to secure victory for the claimant.  The summary judgment for insurers was granted on the second ground. Accordingly, it was held that the claimant had suffered no loss as payment had been made by the buyer in full and the assertion that the buyer had reduced payments on subsequent cargoes was dismissed for lack of evidence.

The case is a yet another illustration of the fact that when defining insurable interest, courts are taking a more liberal stance as advocated in various English judgments (e.g. The Moonacre [1992] 2 Lloyd’s rep 501; National Oilwell (UK) Ltd v. Davy Offshore Ltd [1993] 2 Lloyd’s Rep 380 and The Martin P [2003] EWHC 3470 (Comm)) and not likely to follow the lead of Macaura v. Northern Assurance Co Ltd (1925) 21 LIL Rep 333 to insist that a legal or equitable relation must exist between the policy and the subject matter insured. It is safe, therefore, to say that courts are likely to find insurable interest in cases where they are convinced that the assured has not entered into the policy as an act of wager or is not attempting to make an illegitimate gain from the insurance transaction and as long as some kind of connection (even merely economic) between the insured property and the assured exists.             

Where is General Average?

Jurisdiction decisions in the shipping context follow each other in close succession. Yesterday we had another, from Males J, of some interest to insurers: namely, Griffin Underwriting Ltd v Varouxakis (The Free Goddess) [2018] EWHC 3259 (Comm).

The Free Goddess, a 22,000 dwt bulker owned by Freeseas, was seized by Somali pirates while en route to Thailand with steel coils. K & R insurers Griffin, based in Guernsey but doing business in London, paid out something over $6 million to free her, whereupon she sailed to Oman. Griffin clearly had a right to take over from Freeseas a pretty cast-iron GA claim against cargo interests: on arrival it duly entered into a settlement agreement with Freeseas under which Freeseas agreed to furnish all assistance, including preservation of security, in claiming GA and also to account to Griffin for all sums received on that basis. GA, as might be expected, was settlable and payable in London.

According to Griffin’s (as yet unestablished) allegations, Freeseas did no such thing. Instead of the obvious course of oncarrying the cargo to Thailand and claiming GA in due course, it sold the ship in Oman, destroying any security for GA and providing cargo with a counterclaim for damages which was likely to dwarf the GA liability in any case. In addition it had allegedly trousered a large sum in interim GA contributions without accounting for it. 

Freeseas not being worth powder and shot, Griffin sued one Ion Varouxakis, the Greek-domiciled owner of the company, for inducing it to break the settlement agreement. They alleged that the damage had been suffered in London and therefore they could invoke Art.7, the tort article of Brussels I Recast. Mr Varouxakis insisted that he could only be sued in Greece, arguing for good measure that this was a suit by an underwriter in a matter relating to insurance under Art.14, so the other exceptions did not apply.

In fact Mr Varouxakis was held to have waived any jurisdiction point, so the claim is going ahead in London anyway. But Males J did go on to give a view on the other points. On the issue of the loss of the right to GA, he regarded the issue of where the loss had been suffered as finely balanced, but expressed the view that the direct damage had been suffered in Oman, where he opined that the right to enforce GA had been effectively lost: the fact that GA had not been paid in London he regarded as a remoter consequence and not in account because of decisions such as Kronhofer v Mayer [2004] All ER (EC) 939. So there would have been no jurisdiction. On the other hand, he thought the loss had been suffered in London as regarded the failure to account, and so would have allowed the claim under that head to go ahead on that head in any event. As for the suggestion that this was a matter relating to insurance, he smartly rebuffed the point: insurance might be the background, but this arose out of an independent settlement agreement.

The second point was fairly obvious: if someone infringes my right to an accounting in London, it is difficult to think of anywhere apart from London where the damage occurs. The third is also welcome: the insurance rules under under Art.14 are ill-thought-out even by Euro-standards, and anything that prevents their becoming any more bloated than they already are can only be a good thing.  

This blog is less sure about the first. Saying the damage occurred in Oman gets pretty close to conflating damage with the act giving rise to it; it also means that the place of the damage in cases of this sort becomes wildly arbitrary, depending on which port a vessel happens to be in at the time. On the other hand, if GA is settled and negotiated in London, it seems fairly convincing to argue that preventing it being settled and paid there causes a direct loss within the Square Mile. Unfortunately, because the claimants won in any case, we are unlikely to see an appeal here. But this shouldn’t be regarded as necessarily the last word.


Atlantik (misplaced) Confidence — the saga continues.

Last year we dealt here with Teare J’s meticulous decision in Aspen Underwriting Ltd & Ors v Kairos Shipping Ltd [2017] EWHC 1904 (Comm), in which following the Atlantik Confidence debacle, hull underwriters, having previously paid out on the orders of her owners’ (Dutch) bank under an insurance assignment provision, now sued the bank to recover their money on the basis that the ship had been deliberately scuttled. The issue was whether the bank could insist on being sued in the Netherlands on the basis of Art.4 of Brussels I Recast. The decision was that most claims, including those based on unjust enrichment, had to be brought in the Netherlands. Howver, claims based on tortious misrepresentation and under the Misrepresentation Act 1967 could be brought here. The fact that such claims related to insurance under Art.14 was no bar, since there was no question of a large Dutch bank being a weaker party who, according to Recital 18 to the Regulation, needed to be protected from the machinations of big bad insurers.

The Court of Appeal has dismissed an appeal (seeAspen Underwriting Ltd & Ors v Credit Europe Bank NV [2018] EWCA Civ 2590). On most points it simply said that the Judge had got it absolutely right. The only exception was that it was not open to a judge, consitently with Euro-law, to take the sensible view and decline to apply Art.14 to anyone he thouht was not in fact a weaker party. But this did not matter, since in Kabeg v Mutuelles Du Mans Assurances (Case C-340/16) [2017] I.L. Pr. 31 the ECJ Advocate-General had since Teare J’s judgment accepted that Art.14 could be disapplied to a subrogee “regularly involved in the commercial or otherwise professional settlement of insurance-related claims who voluntarily assumed the realisation of the claim as party of its commercial or otherwise professional activity”. This was near enough to the position of the bank here to justify ignoring Art.14.

Some good news, in other words, for marine underwriters trying to get their money back from those acting for crooks.  On the other had, the moral we advanced in our previous article still stands: all policies in future ought to contain a term, rigorously enforced, stating that no monies will be paid out save against a signed receipt specifically submitting to the exclusive jurisdiction of the English courts in respect of any subsequent dispute respecting the payment or the policy generally.

 

Insurer’s ‘exposure’ to risk of US sanctions.

 

 

In Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] EWHC 2643 (Comm).  the effect of the on-off-on again of US sanctions against Iran which are due to kick in again this Sunday 4 November at 1159 pm EST came under consideration. A claim under the marine insurance policy was made in respect of the theft of cargo carried from Russia to Iran in 2012, under a bill of lading naming an Iranian national was the consignee. The US sanctions regime came into effect in 2013, was lifted in 2016, and is reimposed this Sunday. The policy provided ““to the extent that …payment of such claim …would expose that insurer to any sanction, prohibition or restriction under …the trade or economic sanctions, laws, or regulations…” and the issue was whether the insurer could refuse to pay out on the ground that payment would ‘expose’ it to US and/or EU sanctions within the meaning of the policy clause.

 

Teare J held that the present clause referred to a payment which “would expose” the insurer “to any sanction, prohibition or restriction”, rather than being “exposed” to the risk of being sanctioned (in the sense of being subject to the risk of a sanction).  Before a sanction can lawfully be applied there must be conduct which is prohibited. It was not enough that that the regulatory agency in question might conclude that there was prohibited conduct (when in law there was not or may not be) and so impose a sanction. Accordingly, the clause provided that the insurer was not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus “would expose” the Defendants to a sanction. Nor did the sanctions clause extinguish liability under the policy when sanctions against Iran were previously imposed in 2013.

 

The claimants had also argued that the EU Blocking Regulation[1] would preclude the claimants from refusing to pay out under the policy. In the light of the construction of the sanctions clause, this issue did not fall to be decided but Teare J saw “[c]onsiderable force in the Defendants’ “short answer” to the point, namely that the Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause such as the one in the Policy. In such a case, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment.”

 

[1] Regulation (EC) 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, as amended by Commission Delegated Regulation (EU) 2018/1100, amending the Blocking Regulation with effect from 7 August 2018 by including the various US sanctions against Iran

Autonomous Ships- Regulatory Work Begins

The idea of developing smart ships that have ability to navigate without human input has been around for some time and as a result of technological developments in recent years, it is believed that this could be a reality in near future.

The Maritime Safety Committee (MSC) of the International Maritime Organisation (IMO) at its most recent meeting (MSC 99) in May 2018 agreed to establish a Working Group (WC) (named as Maritime Autonomous Surface Ships (MASS) WC) to undertake a scoping exercise with a view to identifying which of the existing international instruments dealing with maritime safety should be amended and what new instruments should be developed to facilitate the operation of such vessels in international waters.

For the purposes of this exercise, a number of provisional definitions have been prescribed. Most significantly, MASS is defined as “a ship which, to varying degree, can operate independent of human interaction”. This is a very broad definition and encompasses all of the ships that are currently under consideration. The WG has prescribed four degrees of autonomy: (MSC 99/WP.9 Annex 1, para 4)

  1. Ship with automated processes and decision support. Such ships have on board seafarers to operate and control shipboard systems and functions.
  2. Remotely controlled ships with seafarers on board. The ship is controlled and operated from a distant location.
  3. Remotely controlled ships without seafarers on board. The ship is controlled and operated from a distant location.
  4. Fully autonomous ships. Here, the operating system of the ship is able to make decisions and determine actions by itself.

The categorisation seems to be rather basic but perhaps simplicity is necessary at this early stage. We suppose in case of (ii), it is envisaged that seafarers on board will have technical knowledge and knowhow to intervene and take control in case of an emergency. It is also worth noting that ever increasing cyber risks should be taken into account and especially in case of (iii), it is curious to know what steps can be taken to ensure that the safety is not compromised in a case where contact between the ship and offshore operator is lost. This could be also a significant issue with regard to vessels which have full autonomy (e.g. iv).

It is worth reminding ourselves that the scope of this exercise is restricted to instruments concerning maritime safety (i.e. COLREG 1972, SOLAS 1974, STCW 1974, SAR 1979 and International Convention on Loadlines 1966). Once smart ships become operational other problems, i.e. the liability of manufacturers/software producers, impact of cyber risks on traditional division of liability, salvage law, are also likely to arise. These issues do not form at this stage part of the IMO’s work on the subject.

It is expected that the work of the MASS WC will be completed by the end of 2020. Even then, this is only beginning of a long journey. It will possibly take another decade or so to formulate new legal rules and amend existing ones to enable autonomous ships to engage in cross-border commercial operations. However, as Lao Tzu once famously said:

“The journey of a thousand miles begins with one step”.

Please note that smart ships will form part of the discussion in our 14th Annual Colloquium to be held on 10-11 September 2018:

https://www.eventbrite.co.uk/e/new-technologies-and-shippingtrade-law-tickets-46148370017