Melinda Holdings v Hellenic Mutual

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DMC/INS/11/03

England

Melinda Holdings SA v. Hellenic Mutual War Risks Association (Bermuda) Ltd.

English High Court; Burton J; [2011] EWHC 181 (Comm), 18 February 2011

Christopher Butcher QC and Adam Turner (instructed by Waterson Hicks) for the Claimant, Melinda Holdings

Stephen Moriaty QC and James Cutress (instructed by Ince & Co) for the Defendant, Hellenic Mutual

WAR RISKS INSURANCE: EXCLUDED CAUSES: ORDINARY JUDICIAL PROCESS: INSURED’S OBLIGATION TO SUE AND LABOUR: STANDARD OF PROOF

Summary

In determining that the Claimant’s claim against its War Risk insurers succeeded, the Court held that the arrest of the “Silva” by Egypt’s Port Suez Court for the purpose of obtaining payments into its ‘Judges’ Fund’ was effectively extortion, not “ordinary judicial process”. The Court was further of the opinion that a breach of the duty to sue and labour required that the insured act differently from any ordinarily competent person in their position, which was not the case here.

This case note has been contributed by Justin Gan Boon Eng, LLB (Hons) (NUS), a trainee solicitor in Singapore

Background

Melinda took out War Risks insurance (“the Policy”) with Hellenic for the “Silva” The “Silva” was arrested by Egypt’s Port Suez Court on 24 December 2008 and remained under arrest as at date of judgment.

The parties agreed that under the Policy’s terms, (i) the “Silva” was a constructive total loss, (ii) the quantum of any payout would cover lost freight, disbursements, and the hull and machinery of the “Silva” itself, and (iii) the loss was due to an insured cause, namely “capture, seizure, arrest, restraint or detainment, and the consequences thereof”.

Hellenic refused to pay out, claiming that the loss arose from the excepted cause of “ordinary judicial process” and that Melinda had failed to take reasonable steps to avert the loss. Hellenic agreed that it had the burden of bringing itself within the “ordinary judicial process” exception. Melinda sued.

Judgment

Melinda was successful; it was held entitled to recover US$19,200,000.00 from Hellenic under the Policy.

Ordinary judicial process

Burton J. found that Hellenic had rightly conceded that it bore the burden of establishing that the claim fell within the “ordinary judicial process” exclusion. However, if prima facie there was ordinary judicial process, the onus would fall on the insured to show that the Court in question “was not acting bona fide as an independent judicial body, but merely acting as a puppet court, following directions of the Government, or knowingly exceeding its powers” (citing The “Anita”, [1971] 1 WLR 882 (CA) at 889). Such cases fall outside ordinary judicial process because they involve an exercise of State power through the Courts for its own purposes, not the simple provision of judicial services to litigants.

Burton J. examined the facts leading up to the “Silva”’s arrest in some detail, and considered expert evidence on Egyptian law from two senior experienced Egyptian lawyers. He found that the “Silva”’s arrest was manufactured for the sole purpose of procuring payments into the Judges’ Fund, which pays the health and welfare benefits of Egyptian judicial officials and their families. He further found that the arrest was supported by forged documents obtained by the Port Suez Court’s ‘commission agent’ and maintained despite the Port Suez Court’s knowledge of the same.

On the particularly egregious facts proved, the Port Suez Court effectively attempted extortion and was “acting piratically”. Therefore, despite considering the interests of international comity, Burton J. found that the acts of the Port Suez Court were not carried out bona fide as an independent judicial body and therefore fell outside the Policy’s ordinary judicial process exclusion.

Burton J. noted in passing that:

(a) Policy exclusions for “action taken for the purpose of enforcing or securing payment of a claim” referred to lawful and reasonable action in relation to a bona fide claim; and

(b) Policy exclusions for “any financial cause of any nature” were confined to financial issues triggered by a reasonable and legitimate claim against the vessel.

The obligation to sue and labour

Having set out the facts extensively, Burton J. decided that Melinda had not failed to sue and labour, and accordingly characterized the discussion that followed as obiter dicta, that is to say, as not forming a binding part of his judgment for the purposes of the rules of precedent.

First, Burton J. noted that a breach of the statutory obligation to sue and labour would not forfeit the insured’s cover unless the breach was the proximate cause of the loss (citing State of Netherlands v. Youell, [1998] 1 Lloyds Rep 236 (CA) at 238). The same principle was extended to contractual obligations to sue and labour by The Aliza Glacial, [2002] 2 Lloyds Rep 421 (CA) at 433.

However, Hellenic’s sue and labour clause contained a suffix granting Hellenic discretion to reject or reduce claims involving a breach of the obligation to sue and labour, viz. “…the Directors may reject any claim by the Owner against the Association arising out of the occurrence or reduce the sum payable by the Association in respect thereof by such amount as they may determine.”

While accepting that the proximate cause requirement protects insured parties from a loss of cover, Burton J. found such protection unnecessary where there was express contractual provision for failure to sue and labour, for example when the insurer’s directors were contractually empowered with a discretion. When this was so, the contractual discretion would supersede the proximate cause test. Such discretion must, of course, be exercised reasonably.

Second, Burton J. rejected an argument that the term ‘agent’ in sue and labour clauses should be read restrictively as referring only to those whom the shipowner delegated for the purposes of a maritime adventure (that is, master and crew).

Third, a failure to sue and labour must be proved by showing that any ordinarily competent shipowner/agent would have acted differently, all circumstances considered. This inquiry included considering whether any alternative actions would have had a realistic prospect of achieving a different result.

Burton J. then set out in some detail the alternative actions suggested by Hellenic’s counsel, concluding that whatever the test, no alternative action would have affected the outcome.

Melinda’s claim was accordingly allowed.

Comment

Melinda Holdings provides a rare example of judicial process being illegitimate. In this regard, the extensive examination and findings of fact in the case merely illustrate the difficulty insured parties face in attempting to show that judicial process is not ordinary – a particularly egregious and well-documented case is required.

The accuracy of Burton J.’s first obiter dictum on sue and labour clauses remains to be seen. If accepted, it would encourage insurers to insert discretionary suffixes to sue and labour clauses, rendering the established proximate cause test otiose. Nonetheless, the requirement that such discretion be exercised reasonably may make the difference (if any) between sue and labour clauses with and without discretionary suffixes more theoretical than real.