13 May, 2017
The Supreme Court in The Ocean Victory has considered and confirmed the approach to safe port warranties. It has also given its views on related questions of general importance on limitation of liability and subrogated claims where there is co-insurance, although it was not necessary to do so following its decision that the port of Kashima was a safe port.
The bulk carrier Ocean Victory had been let by owners on an amended Barecon 89 to demise charterers, who had in turn sub-chartered the vessel on time charter. There was a safe port warranty contained within each charterparty.
Sub-charterers ordered the vessel to discharge at Kashima, Japan. Before discharge was completed, swell caused by "long waves" endangered the vessel's mooring. When the master decided to leave the port, the vessel was subject to winds of up to Beaufort Scale 9 while exiting the port along the Kashima Fairway. The vessel had limited room to manoeuvre in the Fairway, foundered on the breakwater and eventually broke up and became a total loss.
The vessel had been subject to a rare combination of events: (a) swell generated from the "long waves" (a phenomenon affecting ports around the Pacific rim) and (b) very severe northerly gale force winds. This placed the vessel in a difficult situation: the swell made it potentially unsafe for the vessel to remain at berth, while the gale force winds made the Kashima Fairway (the only way in or out of the port) unsafe to navigate safely.
Kashima is a modern port. It is one of the largest in Japan and has a good safety record. While it is sometimes exposed to swell from "long waves" and while severe northerly winds could affect the navigability of the Fairway, this was the only time such an incident had occurred in the port's 35 year history.
Owners and demise charterers were co-assureds under the vessel's hull and machinery policy and claimed accordingly. Hull underwriters paid the claim under the policy and became assignees of owners' and demise charterers' rights. On that basis, they advanced claims against sub-charterers for breach of the safe port warranty contained in the time charter. Underwriters' claim totalled USD137.8 million. This sum was made up of the market value of the vessel, salvage costs, wreck removal and loss of earnings.
When is a port unsafe?
The charterers gave an undertaking in the time charter that they would only order the vessel to "good and safe berths, ports or areas". What was meant by “safe”?
The classic test was set down by the Court of Appeal in The Eastern City (1959):
"… a port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship."
The subsequent question is how to evaluate whether a particular occurrence is "abnormal"?
Decisions of the Lower Courts
Mr Justice Teare decided at first instance that the port was unsafe. The "long waves" and high winds were both characteristics and attributes of the port and were both foreseeable. Although the two events occurring together was "rare", it was foreseeable and flowed from the characteristics of the port. Charterers were therefore in breach of the safe port undertaking.
The Court of Appeal reversed Teare J.'s decision and held that the combination of events was an
"abnormal occurrence" and therefore the port was safe. The judges held that Teare J. 'failed to formulate the critical… question which he had to answer: namely, whether the simultaneous coincidence of the two critical features, viz (a) such severe swell from long waves that it was dangerous for a vessel to remain at her berth at the Raw Materials Quay… and (b) conditions in the Kashima Fairway being so severe because of gale force winds… , as to make navigation of the Fairway dangerous or impossible… , was an abnormal occurrence or a normal characteristic of the port?'
Instead, Teare J. had considered each event separately and had focussed on the combination of those events being foreseeable.
The Court of Appeal gave the foreseeability argument fairly short shrift, holding that mere foreseeability is per se insufficient to turn what Teare J. had himself described as "a rare event in the history of the port", into a normal characteristic or attribute of the port.
The Court went on to state that one has to look at the reality of the particular situation in the context of all the evidence, to work out whether the particular event was likely to have become an attribute of the port. Teare J. should have considered the evidence relating to the past frequency of such an event occurring and the likelihood of it happening again, taking into account evidence regarding the exceptional nature of the storm in terms of its rapid development, duration and severity.
Supreme Court Decision
Safe port issue
Clarke SCJ, on behalf of the Supreme Court, agreed with the Court of Appeal and held that the port was safe. He reiterated that the test was whether the event was an "abnormal occurrence"; not whether the events were foreseeable. And "abnormal occurrence" does not have any particular legal meaning, it should simply be given its ordinary and natural meaning.
The relevant event for the purpose of this case was the combination of the long waves and high winds, not the individual constituent events. The correct approach to take for the purpose of evaluating the prospective safety of the port was therefore to look at that relevant event and consider whether it was a normal attribute of the port or an abnormal occurrence. Such an approach inevitably included considering the past history of the port, and whether such an event had occurred previously and was likely to occur again. No vessel had ever before experienced the combination of conditions faced by Ocean Victory, i.e. the coincidence of the long waves phenomenon and gale force winds in the Fairway. There was also evidence that the storm had developed rapidly and was particularly severe.
The Supreme Court was also asked to consider whether the sub-charterers would be able to limit their liability in respect of any claim from the subrogated insurers, Gard. This had not been argued in the Court of Appeal, because that court was bound by the decision of the Court of Appeal in The CMA Djakarta (CMA CGM S.A. v Classica Shipping Co. Ltd  1 Lloyd's Rep 460). Further, it was not necessary for the Supreme Court to decide the issue in light of their conclusion that there was no breach of the safe port warranty. However, it was considered to be an issue of potential importance and so judgment was given.
The sub-charterers argued that the claim by Gard against them would fall within Article 2(1)(a) of the 1976 Limitation Convention as being liability "occurring on board or in direct connexion with the operation of the ship". Such liability can be limited.
The Supreme Court declined to alter the established law on this issue. They agreed with the Court of Appeal in The CMA Djakarta that "the vessel cannot be both victim and the perpetrator and …the "property" envisaged in the article must be the property of a third party either on board the vessel (eg cargo) or external to the vessel". It was a question of construction and the ordinary and natural meaning of the words. The Supreme Court concluded that where a party is entitled to limit its liability to claims arising from the operation of a particular vessel, that entitlement to limit does not apply to claims pertaining to the loss of the vessel itself.
The Supreme Court was further asked to consider whether Gard, having paid out for the loss of the vessel, was entitled, pursuant to their subrogated rights, to bring a claim against sub-charterers for breach of the safe port undertaking. Teare J. said that they were. The Court of Appeal disagreed and held that clause 12 of Barecon 89 meant that the parties had agreed that there would be an insurance funded outcome to any loss or damage. Demise charterers did not therefore have any loss to which the insurers could be subrogated.
At this point the unanimity of the Supreme Court ended. Toulson SCJ gave the majority decision, supported by Mance and Hodge SCJJ. Sumption and Clarke SCJJ were the dissenting minority.
All the judges agreed that the general principle between co-insureds was that neither can claim against the other in respect of an insured loss. The difference in opinion arose as to why this was the case. This was a question of construction of the contract.
The majority agreed with the Court of Appeal that "the proper construction of clause 12 was that there was to be "an insurance funded result in the event of loss or damage to the vessel by marine risks" and that, if the demise charterers had been in breach of the safe port clause, they would have been under no liability to the owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation. It did not consider that the introduction of clause 29 [the safe port undertaking] was intended to alter the way in which clause 12 was to operate."
The commercial purpose of joint insurance was to provide a fund to make good the loss and avoid litigation between the owner and demise charterer. Clause 12 therefore provided a comprehensive code that dealt with the risks of loss or damage to the vessel and what was to happen in such an event. It applied irrespective of any question of fault for the loss or damage.
As a result, the bareboat charterer had no liability to the owner of the vessel in respect of the subject loss. Accordingly, in circumstances where bareboat charters incurred no liability to owners for any breach of the safe port warranty, bareboat charterers would not have suffered any loss in respect of which, they could advance their own claim against time charterers. In turn, underwriters would find themselves in the same position.
The minority judges took the view that "the insurers were bound ..to pay [the vessel's] insured value to the head owner…But the natural inference from (i) the fact that the demise charterer is insured for his interest in the ship, (ii) the implied prohibition of claims for damages between the co-insured for loss of or damage to the ship, and (iii) the avoidance of double recovery, is that the insurer's payment to the head owner makes good the head owner's loss not just as between the insurer and the head owner but as between both of them and the demise charterer. The demise charterer's liability under the demise charter for the loss of the ship has not been excluded. It has been satisfied." Insurers should therefore be able to bring a subrogated claim against sub-charterers.
Sumption and Clarke SCJJ highlighted clause 13 of Barecon 89 which had materially identical provisions to clause 12, but also included an express exclusion of the rights of recovery or subrogation between owner and demise charterer. Clause 13 was intended for use as an alternative to clause 12, where the vessel was bareboat chartered for a short period of time and it made sense for the owner to continue with insurances already in place and add the demise charterer as a co-assured. The minority judges considered that the inclusion of an express exclusion of subrogation rights in clause 13 and its absence in clause 12 added to the argument that there was no such exclusion in the present contract (which included clause 12, not 13), either express or implied. The majority judges took the view that such a clause was necessary in clause 13 because the charterer was to be given the benefit of the owner's existing insurance and he should not therefore have greater liability than under clause 12. The complete code in clause 12 made such a clause unnecessary. If anything, the presence of such a term in clause 13 confirmed the intended scheme.
The Supreme Court's unanimous decision on the question of breach of the safe port undertaking confirms the status quo and provides useful and timely guidance on the approach to be adopted when deciding whether a port is safe.
The Supreme Court's unanimous decision in relation to the application of the 1976 Limitation Convention to charterers, and their confirmation that in this case charterers could not avail themselves of the protection of limitation, is likewise a confirmation of the status quo.
However, the Supreme Court's decision in relation to insurers' entitlement to pursue a subrogated claim against a third party is more problematic. As a result of this decision, insurers may now be precluded from pursuing subrogated claims in circumstances where they had previously thought their right to do so was a "given". This will inevitably lead to a reassessment by underwriters of the risk profile of bareboat charterparty structures which include joint insurance provisions. While this component of the decision is not formally binding (the Court's comments were "obiter"), such comments from the Supreme Court will carry weight, and the 3:2 split of an eminent bench will no doubt lead to uncertainty and more litigation in this area.
For further information, please contact:
Mike Phillips, Partner, Stephenson Harwood