UK – No Cover For Old Methanol.
MOK Petro Energy FZC -v- Argo (No. 604) Ltd & others (F1) [2024] EWHC 1935 (Comm)
In this insurance dispute, the Court has carefully examined the cause and timing of alleged cargo contamination and provided helpful analysis of Sections 10 and 11 of the Insurance Act 2015 (IA 2015).
Finding for the defendant insurers, the Court held that phase separation of the cargo was inevitable and did not constitute ‘damage’, as alleged by the claimant assured. The Court also rejected the assured’s contention that the blending of the cargoes by the shippers was beyond their control and therefore fortuitous and covered by the policy.
The background facts
The Claimant, MOK (the Assured) insured a petrochemical cargo under an all-risks open cover policy (the Policy), issued by “Cedar Insurance & Reinsurance Co. Ltd” (Cedar). The Defendants were London market insurers who reinsured Ceder on back-to-back terms and were directly liable to the Assured under the Policy by virtue of a cut-through clause.
The Policy included (inter alia) the following term:
“EXPRESS WARRANTIES:
… Quantitative/Qualitative survey carried out by internationally recognised marine surveyor at loading port/discharge port at owners cost, including inspection/certification of the cleanliness of the vessel tanks at load port and the shore tanks at discharge port and the connecting pipelines between the vessel and the shore tanks at both load and discharge port.”
The Assured declared a cargo of gasoline and methanol to be blended on board (the Cargo) under the policy, for shipment between the ports of Sohar in Oman to one of two nominated ports in Yemen. The endorsement by which the cargo was declared under the policy provided for cover “Shore Tank to Shore Tank”.
The Institute Cargo Clauses (A) which were incorporated into the Policy include the following:
“Risks Clause
1. This insurance covers all risks of loss of or damage to the subject-matter insured except as provided in Clauses 4, 5, 6 and 7 below.
… EXCLUSIONS
General Exclusion Clause
4. In no case shall this insurance cover
…
4.4. loss damage or expense caused by inherent vice or nature of the subject-matter insured.”
The gasoline and methanol were loaded on board the vessel ‘F1’ (the Vessel) as separate parcels, to be co-mingled on-board during loading, between 12 and 14 May 2017. This is a common practice in this particular trade, where the oxygenating properties of the methanol increase the octane rating of the fuel.
Gasoline and water are almost entirely immiscible whereas methanol will mix readily with water. As a consequence, when a gasoline/methanol blend comes into contact with more water than can readily be absorbed, phase separation takes place, making the blended product unsuitable for combustion and rendering the product off-spec. The greater the proportion of water in a blend, the higher the temperature required to maintain its stability. The temperature below which a blend will phase separate is known as its phase separation temperature (“PST”).
The sales contract described the cargo as 92 RON (Research Octane Number) unleaded gasoline but did not stipulate any protocol for samples to be tested.
A tank inspection took place prior to loading, following which a certificate was issued confirming that all of the Vessel’s cargo tanks, lines and pumps had been found to be clean and suitable to load the cargo. There was a dispute between the parties as to what extent the shorelines had been checked for residues, prior to loading. The methanol was loaded first, followed by the gasoline, which was common practice in the trade. Samples of the cargo were taken from the Vessel’s tanks upon completion of loading and the cargo certified as having met the contractual specifications.
The Vessel sailed to Hodeida in Yemen where, during the sampling process, phase separation of the cargo was visually observed to be taking place. Laboratory analysis of the cargo confirmed it was off-spec and it was therefore rejected for import by the authorities. The Vessel was diverted to Fujairah, where joint sampling was carried out by representatives for both the Assured and the Defendants. The cargo was ultimately sold to a salvage buyer.
Further joint testing of the samples taken at Fujairah and retained load-port shore tank samples were carried out in 2018. On the basis of the results of this testing, the Defendants asserted that the cargo’s PST as blended was around 170C and that it could never have been below 10C, as required in order to permit the prescribed test methods to be correctly applied. The Assured disputed this, arguing that the results of testing of cargo samples taken 15 months prior could not be relied upon.
The Defendants asserted that the cargo was off-spec prior to loading due to water contamination, as evidenced by the results of sample analysis carried out in 2018. The Assured argued that these tests could not be relied upon and that water contamination occurred on board the Vessel.
The Assured also asserted that the proportions in which the gasoline and methanol were mixed to produce the final co-mingled product, which were beyond the control of the Assured, is what rendered the cargo off-spec. They further contended that this constituted a fortuity, which was covered under the policy and is necessary for an insurance claim to succeed under English law.
The Commercial Court decision
There were three issues to be decided by the Court, summarised as follows:
- Could the 2018 joint analysis results be relied upon and, if so, could the Assured establish that the Inspectorate Certificates of 7 and 14 May 2017 accurately reflected the cargo quality on loading given MOK’s suggested mechanism of water contamination?
- Was the choice of blended proportions a fortuity for the purposes of the policy and, if so, what, if any, damage was caused to the cargo as a result?
- Was there a breach of the survey warranty in relation to the shorelines?
As is typical of insurance disputes, the particular facts of the matter were integral, and the parties relied heavily on expert evidence.
The 2018 analysis and results
The Assured contended that the 2018 test results could not be relied upon and therefore did not accurately reflect the actual condition of the cargo at the time of loading. The Assured identified four alleged flaws in the testing of 2018, despite having participated in the testing, agreed to the testing protocol and raising no objections at the time.
The Court decided that, on the balance of probabilities, the samples tested in 2018 were taken in 2017, from the same cargo tank as the cargo. Favouring the evidence of the Defendant’s expert, the Court was also satisfied that the condition of the cargo as tested in 2018 was likely to be very close to identical to that which was loaded in 2017.
Fortuity
Although described by the Court as ingenious, it ultimately concluded that the Assured’s case on fortuity was wrong.
In order for their claim to succeed, the Assured was required to show that the cargo suffered damage. This damage, they asserted, was “Phase separation at 170C”, however by the time of closing arguments, this had been modified to a suggestion that the damage actually consisted of the propensity to phase separate.
The Court rejected the notion that a propensity to separate could in itself be regarded as damage. The Court also noted how the cargo was described in the endorsement, wherein it was declared that it did not actually exist until it was mixed upon loading. Therefore, cover for damage could not extend to damage in the shore tank, notwithstanding the fact that the policy provided for cover “shore-tank to shore tank”.
The Assured advanced a number of suggestions as to how different blending may have produced a cargo that met the specifications prescribed in the sale contract. However, the Court found there was a complete lack of evidence that the cargo could have been cooled below 10C, in order for proper testing to be carried out and that, even if it could, the cargo would have remained on-spec, if it were.
Given its conclusions in respect of the Assured’s arguments on fortuity, the Court did not need to deal with the defence based on inherent vice.
Survey warranty
Turning to the warranted load-port survey, the Court was satisfied that the survey activities at the load port were sufficient to comply with the inspection part of the warranty. However, as no certificate was issued at the relevant time, the Court held that the Assured was in breach of this warranty, despite the Assured’s attempt to rely on a certificate issued in respect of the inspections in March 2023.
The Assured also sought to rely on a certificate issued on 1 July 2017, but it was held to be incomplete as it did not deal with shorelines.
Section 10(4)(b) of the IA 2015 provides that:
“(4) Subsection (2) does not affect the liability of the insurer in respect of losses occurring, or attributable to something happening—
(b)if the breach can be remedied, after it has been remedied.”
Subsection 2 states:
“An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied.”
While the Defendants also sought to rely on Section 10(4(b) of the IA 2015 to avoid liability, the Court did not consider the issue, having already decided that the provision of a certificate did not cure ex post facto the breach of warranty.
The Assured also sought to argue that the Defendants were estopped from relying on the breach, asserting that the wording in the Policy that “Failure to comply with a warranty will, in normal circumstances, void this insurance policy” amounted to an agreement to contract out of the IA 2015. The Court disagreed.
The Court also considered an assertion by the Assured in its closing submissions that the breach in this case related only to a lack of certification, which was not causative of the loss. The Court, however, concluded that it was right to interpret Section 11 as being directed at the effect of compliance with the entire term and not with the consequences of a specific breach.
The Court held that, even if the Assured succeeded in principle on either its primary or its alternative case, the claim would nonetheless have failed on grounds of breach of warranty.
Comment
This decision provides a useful insight into how fact-heavy marine insurance disputes can be and the importance of presenting a case which is supported by the solid, well-founded opinion of a reputable expert.
It also serves as a warning to traders of liquid cargoes to ensure coverage is effective and, where cargoes are to be blended either at the manifold or on board, that protection under the policy extends to both the individual and blended cargoes.
For further information, please contact:
Andrew Lee, Partner, Hill Dickinson
andrew.lee@hilldickinson.com
