Gard Marine & Energy v China National Chartering - The Ocean Victory

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DMC/SandT/17/07

England

Gard Marine & Energy Ltd v China National Chartering Co Ltd and another / China National Chartering Co Ltd v Gard Marine & Energy Ltd and another / Daiichi Chuo Kisen Kaisha v Gard Marine & Energy Ltd and another (The “Ocean Victory”)

United Kingdom Supreme Court: Mance, Clarke, Sumption, Hodge and Toulson SCJJ: [2017] UKSC 35: 10 May 2017

Mark Howard QC, James A Turner QC and Simon Burt QC (instructed by Ince & Co LLP) for Gard

Dominic Kendrick QC, David Goldstone QC and Gavin Geary (instructed by MFB Solicitors) for Daiichi

Michael Davey QC (instructed by Winter Scott LLP) for Sinochart (time charterers)

DEMISE CHARTERPARTY: TIME CHARTERPARTY: CONTACT WITH BREAKWATER AND GROUNDING AT PORT RESULTING IN CONSTRUCTIVE TOTAL LOSS AND WRECK REMOVAL OF VESSEL: WHETHER LOSS CAUSED BY BREACH OF SAFE PORT UNDERTAKING OR BY AN ABNORMAL OCCURRENCE: WHETHER SUBROGATED RIGHTS OF HULL INSURERS AND INSURED LOSSES OF OWNERS AGAINST DEMISE CHARTERERS PRECLUDED BY DEMISE CHARTERPARTY TERMS: WHETHER TIME CHARTERERS ENTITLED TO LIMIT LIABILITY AGAINST HULL INSURERS AND OWNERS: BARECON 89 FORM: MERCHANT SHIPPING ACT 1995: CONVENTION ON LIMITATION OF LIABILITY FOR MARITIME CLAIMS 1976

Summary

The rare concurrent occurrence of two otherwise common features of the port of Kashima, which had caused the total loss of the vessel, amounted to an abnormal occurrence, such that there was no breach of the safe port undertaking by charterers.

But had there been a breach of the safe port undertaking by charterers, then the rights of subrogation of hull insurers against, and also the rights of owners to claim insured losses from, demise charterers were precluded by clause 12 of the Barecon 89 form of demise Charterparty. As a result, any claims against time charterers for insured losses under the hull policy were also precluded.

On the correct interpretation of the Convention on Limitation of Liability for Maritime Claims 1976 as enacted into UK law by the Merchant Shipping Act 1995, there was no right for time charterers to limit their liability for the loss of the vessel itself.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member, and International Contributor to DMC’s Case Notes

Background

The appeal arose out of the constructive total loss of “Ocean Victory” when, in attempting to leave Kashima port in Japan during a severe storm in October 2006, she contacted the northern end of the south breakwater, went aground and thereafter broke in two, necessitating her removal.

Owners of “Ocean Victory” had demise chartered her to a related company, on the Barecon 89 form. That company in turn period time chartered her to Sinochart, which in turn trip time chartered her to Daiichi (with all charterparties containing a materially identical safe port undertaking) for a voyage which encompassed the call at Kashima port.

Gard, as hull insurers, having indemnified owners for their insured losses, pursued subrogated recovery claims against demise charterers. They in turn passed such claims down the charterparty chain, ending with Daiichi as the final charterers.

The judge at first instance had held that there had been a breach of the safe port undertaking and awarded Gard substantial damages for loss of vessel (USD88.5m), liability for SCOPIC (Special Compensation P & I Clause) expenses (USD12m), liability for wreck removal expenses (USD34.5m), and loss of hire (USD2.7m).

The Court of Appeal set aside the judgment holding that (a) the conditions which affected Kashima port were an abnormal occurrence; in consequence there was no breach of the safe port undertaking, and (b) the insurance provisions in the demise charterparty meant Gard, as assignees of owners, were not entitled to claim against demise charterers in respect of losses covered by the hull insurance.[[1]]

The issues for decision on appeal to the United Kingdom Supreme Court were:

(1) Was there a breach of the safe port undertaking? More specifically, was there an “abnormal occurrence” within the context of the safe port undertaking, which would mean that there was no breach of the undertaking?

(2) If there was a breach of the safe port undertaking, did the joint insurance provisions in clause 12 of the Barecon 89 form preclude the rights of subrogation of hull insurers and the right of owners to recover from demise charterers in respect of losses covered by hull insurers?

(3) If there was a breach of the safe port undertaking, were Daiichi as against Sinochart and in turn, Sinochart as against Gard entitled to limit their liability for Gard’s losses pursuant to section 185 and Schedule 7 article 2(1) of the Merchant Shipping Act 1995?

Judgment

(1) Was there an “abnormal occurrence” within the context of the safe port undertaking, which was no breach of the undertaking?

All their lordships agreed with the leading speech of Lord Clarke, who held that there was no breach of the safe port undertaking due to the casualty having been caused by the abnormal occurrence of a rare event, being the concurrent occurrence of two prevailing characteristics of Kashima port.

On the facts, the danger facing “Ocean Victory” was related to two prevailing characteristics of Kashima port: first, the vulnerability of the raw materials quay to long swell, which could require vessels to leave the berth to head out to sea for safety and second, the vulnerability of the fairway to northerly gales caused by a local meteorological depression, which – if very severe - could make exiting the port unsafe. These characteristics were considered normal in their own right but the concurrent occurrence of both together was a rarity.

The uncontested expert evidence was that the storm that affected the port on the day of the casualty, 24 October 2006, was one of the most severe to have affected Kashima in terms of severity, speed of deterioration and duration. Further, the combination of the two weather events (namely long waves and strong northerly winds) had never apparently happened in the previous 35 years preceding time charterers’ instructions to proceed to Kashima.

Both parties accepted the classic dictum in The “Eastern City” (fn1) that:

“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 parties were, however, in dispute about (a) what, as a matter of law, was the correct test for abnormal occurrence, and (b) whether, as a matter of fact, the weather conditions on the casualty date amounted to an abnormal occurrence. The judge at first instance had held, in particular, that there was no abnormal occurrence, despite the rarity of the two conditions coinciding, because both conditions were characteristics or attributes of the port.

Having considered the relevant case law and the submissions of the parties, their lordships accepted that the phrase ‘abnormal occurrence’ was to bear its ordinary meaning. An ‘occurrence’ meant just an event – something that happened at a particular time at a particular place in a particular way – and ‘abnormal’ meant something well removed from the normal – namely out of the ordinary course and unexpected – such that this was something which the notional charterer or owner would not have had in mind at the time the charterparty was concluded.

As such, in giving the safe port undertaking, charterers had assumed responsibility only for risks that were sufficiently regular or sufficiently foreseeable to amount to an attribute or characteristic of the port. As such, the right way to approach the test was to imagine a charterer or owner with full knowledge of the port giving the order to proceed, having first positively affirmed that it would be safe for the ship to reach, use and depart from the port barring some abnormal occurrence, as rare events could not be considered ‘attributes’ or ‘characteristics’ of (namely features that arose in the ordinary course of events at) the port.

In applying the facts to the law, their lordships accepted that, in deciding whether the critical combination was itself a normal characteristic of the port or an abnormal occurrence, there was a requirement to evaluate the evidence in relation to the past frequency of such an event occurring and the likelihood of it occurring again. Based on the uncontested expert evidence and the first instance judge’s own finding, that “the concurrent occurrence of those events was rare”, there would have been only one conclusion which could have been reached.

As such, their lordships concluded that the conditions which affected Kashima port on 24 October 2006 were an abnormal occurrence, such that there was no breach by charterers of the safe port undertaking. Accordingly, they allowed the appeal on this ground.

(2) Did clause 12 of the Barecon 89 form preclude the rights of subrogation of hull insurers against and the right of owners to recover in respect of insured losses from demise charterers for breach of an express safe port undertaking?

Given the decision on the first question, the second question did not strictly arise for decision but their lordships considered it as one of general public importance (although strictly speaking the issue turned on clause 12 of the Barecon 89 form and its relationship with clause 29, a bespoke provision of the demise charterparty).

Lords Mance and Hodge agreed with Lord Toulson, who gave the leading speech on this issue, that clause 12 of the Barecon 89 form precluded rights of subrogation and the right to claim insured losses against demise charterers. Lords Clarke and Sumption dissented.

The basic structure of the unamended version of Barecon 89 was first considered. The standard terms, in Part II of the form, contain nothing about safe ports. Clause 5, headed “Trading Limits”, stipulates the vessel is to be employed in lawful trades for the carriage of suitable lawful merchandise within trading limits which may be specified in the schedule which forms Part I of the form, and that the vessel is not to be employed otherwise than in accordance with the terms of the insurance which is required to be maintained.

Clause 12 in the unamended form (fn2) deals comprehensively with the risks of loss or damage to the ship and what is to happen in such an event. In summary, demise charterers are responsible for arranging and maintaining insurance, in a form approved by owners, in the names of both parties for an agreed value; charterers are responsible for effecting all insured repairs; charterers are also responsible for repairs not covered by the insurance, for example, by reason of deductibles under the insurance terms (or, for that matter, use of the ship outside the insurance terms); and in the case of a total loss covered by the insurance, the clause provides for the processing of the insurance money.

However, clause 13 (which is less often selected) can apply in place of clause 12 if the parties so chose in Part I of the form, such that in relation to P&I risks during the charter, clause 13 follows the provisions of clause 12, but in relation to marine and war risks clause 13(a) puts the responsibility for maintaining cover on owners, and provides:

“During the Charter period the Vessel shall be kept insured by the Owners at their expense against marine and war risks under the form of policy or policies attached hereto. The Owners and/or insurers shall not have any right of recovery or subrogation against the Charterers on account of loss of or any damage to the Vessel or her machinery or appurtenances covered by such insurance, or on account of payments made to discharge claims against or liabilities of the Vessel or the Owners covered by such insurance. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear.”

As such, clause 13 provides that the vessel is to be kept insured by owners against marine and war risks, and that owners and their insurers are to have no right of recovery or subrogation against demise charterers on account of loss or damage covered by such insurance. Equivalent words would be unnecessary in clause 12, and so the parties’ intention cannot have been for charterers’ exposure to liability to be greater under clause 13, where cover against marine and war risks was to be maintained at owners’ expense, than under clause 12, where such insurance was to be maintained at charterers’ expense.

Lord Toulson, accordingly, agreed with the Court of Appeal that the exclusion of rights of recovery or subrogation in clause 13 was “a confirmation rather than a negation of such exclusion in the more usually adopted clause 12 for the longer term charters when it is the charterers who pay the premium”.

In this case, with the position confirmed under the standard form, the critical question that then arose was as to the effect, in relation to the operation of clause 12, of the substitution of clause 5 by clause 29, which provided that the vessel was to be employed in lawful trades for the carriage of lawful merchandises “only between good and safe berths, ports or areas where the [vessel] can safely lie always afloat”.

The relevance of the demise charterparty in this context was that Gard’s claim depended on demise charterers being liable to owners for the amount claimed by way of damages for breach of clause 29, for Gard then to be able to exercise subrogated rights of demise charterers in turn against time charterers. The critical question, therefore, was whether the contractual scheme between owners and demise charterers precluded any claim by the former against the latter for the insured loss of the ship. This was a matter of construction, which depended on the provisions of the particular contract.

In agreeing with the Court of Appeal, Lord Toulson considered 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 demise charterers had been in breach of the safe port clause, they would have been under no liability to owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation, and the introduction of clause 29 was not intended to alter the way in which clause 12 was to operate.

Accordingly, their lordships considered by a majority that the Court of Appeal was right in concluding that Gard were precluded from pursuing a subrogated recovery claim against time charterers. The appeal on this ground was dismissed accordingly.

(3) Were time charterers entitled to limit their liability for losses of hull insurers, owners and demise charterers under the 1976 Convention enacted by the 1995 Act?

Given the decision on the first question, the third question did not strictly arise for decision but, again, their lordship considered it to be one of general public importance.

All their lordships agreed with the leading speech of Lord Clarke, who held that the sole substantive opinion of Longmore LJ in the Court of Appeal judgment in The “CMA Djakarta” (fn3), that time charterers could not limit their liability against owners and demise charterers under the 1976 Convention, was correct, essentially for the reasons which Longmore LJ gave.

Whether or not the Court of Appeal judgment in The “CMA Djakarta” was correct concerns the correct interpretation of the 1976 Convention. The general approach to interpreting the 1976 Convention was considered by Longmore LJ in The “CMA Djakarta”, who set out a number of principles:

First, the interpretation of international conventions must not be controlled by domestic principles but by reference to broad and generally acceptable principles of construction, such that the task of the court is to construe the 1976 Convention as it stands without any English law preconceptions.

Second, some particular broad and generally acceptable principles of construction set out in articles 31-32 of the 1969 Vienna Convention on the Law of Treaties are to be taken into account, such that (fn4):

“[T]he duty of a court is to ascertain the ordinary meaning of the words used, not just in their context but also in the light of the evident object and purpose of the convention. The court may then, in order to confirm that ordinary meaning, have recourse to what may be called the travaux preparatoires and the circumstances of the conclusion of the convention. I would, for my part, regard the existence and terms of a previous international convention (even if not made between all the same parties) as one of the circumstances which are part of a conclusion of a new convention but recourse to such earlier convention can only be made once the ordinary meaning has been ascertained. Such recourse may confirm that ordinary meaning. It may also sometimes determine that meaning but only when the ordinary meaning makes the convention ambiguous or obscure or when such ordinary meaning leads to a manifestly absurd or unreasonable result.”

Having set out the correct approach to interpretation, the Court of Appeal in The “CMA Djakarta” considered the ordinary meaning of the key articles of the 1976 Convention (fn5) as enacted into UK law by the 1995 Act. Clearly charterers, when acting in their capacity as charterers, fell within article 1(2) of the 1976 Convention. However, the wording of article 2(1)(a) was not, by its ordinary meaning, apt to include a right for charterers to limit their liability against owners in respect of a claim for damage to the chartered ship.

The focus of article 2(1)(a) was on damage to property on board the ship or in direct connection with the ship rather than with damage to the ship itself. As such, what was envisaged was damage to the property of third parties on board the ship (e.g. cargo) or external to the ship (e.g. a single buoy mooring).

Having also noted that there was nothing in the travaux préparatoires which supported any other conclusion, their lordships considered there to be nothing absurd, unreasonable, ambiguous or obscure in giving the ordinary meaning to article 2(1)(a). They therefore concluded that the Court of Appeal decision in The “CMA Djakarta” was correct, and dismissed the appeal on this ground accordingly.

Comment

This dispute has garnered considerable interest in the 10 years since the casualty, given the amounts at stake and the range of matters in dispute, covering aspects of dry shipping law (safe port warranty), marine insurance law (subrogation rights) and admiralty law (right to limit liability).

Their lordships upheld, and provided useful commentary concerning ‘abnormal occurrence’ on, the traditional test to determine if there is a breach of a safe port undertaking by charterers. Thus they maintained the certainty of and further developed the long-standing and substantial body of case law in this area.

While their lordships were not in unison on the subrogation issue, the majority view on the rights of marine insurers to pursue recovery claims is in keeping with the scheme of the demise charterparty and the reason for owners and demise charterers agreeing to obtain insurance to cover unexpected losses for their joint protection.

Their lordships again upheld the leading analysis of the Court of Appeal on charterers not having the right to limit their liability under the 1976 Convention against owners/demise charterers for the loss of the ship itself, in keeping with the obligation to achieve consistency in the application of international conventions.


Footnote 1: [1958] 2 Lloyd’s Rep 127, 131, per Sellers LJ

Footnote 2: Clause 12 in the unamended Barecon 89 form provided:

“(a) During the Charter period the Vessel shall be kept insured by the Charterers at their expense against marine, war and Protection and Indemnity risks in such form as the Owners shall in writing approve, which approval shall not be unreasonably withheld. Such marine, war and P and I insurances shall be arranged by the Charterers to protect the interests of both the Owners and the Charterers and mortgagees (if any), and the Charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear…

The Charterers shall, subject to the approval of the Owners and the Underwriters, effect all insured repairs and shall undertake settlement of all costs in connection with such repairs as well as insured charges, expenses and liabilities (reimbursement to be secured by the Charterers from the Underwriters) to the extent of coverage under the insurances herein provided for.

The Charterers also to remain responsible for and to effect repairs and settlement of costs and expenses incurred thereby in respect of all other repairs not covered by the insurances and/or not exceeding any possible franchise(s) or deductibles provided for in the insurances.

All time used for repairs under the provisions of sub-clause (a) of this Clause and for repairs of latent defects according to Clause 2 above including any deviation shall count as time on hire and shall form part of the Charter period…

Footnote 3: CMA CGM S.A. v Classica Shipping Co Ltd [2004] 1 Lloyd’s Rep 460, [2004] EWCA Civ 114

Footnote 4: The “CMA Djakarta” (fn3), per Longmore LJ, at [10]

Footnote 5: Articles 1 and 2 of the 1976 Convention provide:

“Article 1. Persons entitled to limit liability

1. Shipowners …, as hereinafter defined, may limit their liability in accordance with the rules of this Convention for claims set out in article 2.

2. The term ‘shipowner’ shall mean the owner, charterer, manager or operator of a seagoing ship…

Article 2. Claims subject to limitation

1. Subject to articles 3 and 4 the following claims, whatever the basis of liability may be, shall be subject to limitation of liability:

(a) claims in respect of loss of life or personal injury or loss of or damage to property (including damage to harbour works, basins and waterways and aids to navigation) occurring on board or in direct connexion with the operation of the ship or with salvage operations, and consequential loss resulting therefrom; …”