Syarikat Takaful Malaysia v Global Process
Syarikat Takaful Malaysia Berhad v. Global Process Systems Inc & Anor
United Kindgom Supreme Court: Lords Mance, Collins, Clarke, Dyson, and Saville:  UKSC 5: 1 February 2011
MARINE INSURANCE: CAUSATION: WHETHER LEGS OF OIL RIG FALLING OFF DURING VOYAGE CAUSED BY PERILS OF SEA OR INHERENT VICE: s.55(2)(c) MARINE INSURANCE ACT 1906 : s.55(1) MARINE INSURANCE ACT 1906
In this case the Supreme Court determined, in an unanimous decision, that, for the purposes of s.55 of the Marine Insurance Act (as incorporated at clause 4.4 of the Institute Cargo Clauses)(fn.1), the exclusion of losses caused by inherent vice is limited to circumstances in which that loss is either inevitable or is caused by something internal to the cargo
Steven Gee QC and Peter Stevenson, instructed by Hill Dickinson LLP, for the appellant insurers
Gordon Pollock QC and Claire Blanchard QC, instructed by Watson, Farley & Williams, for the Respondent rig owners.
This note is based on an article written by Peter Stevenson of Stone Chambers - junior counsel for the Insurers in the case - and published on the Stone Chambers website (www.stonechambers.com) on 2 March 2011. The article also appeared in Lloyd’s List, edition of 8 March 2011
In 2005, Global Process Systems purchased the oil rig, Cendor Mopu, and arranged for her to be transported from Texas to Malaysia on a barge with her three massive tubular legs in place above the platform so that they extended some 300 feet into the air. Global placed insurance with Syarikat Takaful Malaysia Berhad (‘the Insurer’), on terms which incorporated the Institute Cargo Clauses, and, in particular, clause 4.4 which excludes “loss, damage or expense caused by inherent vice or nature of the subject matter insured”.
The barge set off from Galveston in August 2005 and arrived at Saldanha Bay, just north of Cape Town, in October 2005, where some repairs were made to the legs. The voyage then resumed but, on the evening of 4 November 2005, one of the legs broke off and fell into the sea. The following evening the other two legs fell off.
Global brought a claim on the policy arguing that the loss was caused by a peril of the sea, namely the fortuitous intervention of the waves that the barge encountered off South Africa. This claim was rejected by Insurers on the grounds that the real cause of the accident was the weakness of the legs which constituted inherent vice, an excluded peril.
The Insurers’ case was accepted by Mr Justice Blair, who heard the case at first instance. Having found that the breakages were the result of metal fatigue caused by the motion of the waves combined with the impact of a “leg-breaking wave” which was required to generate the final fracture, he applied the test set out in The Mayban  2 Lloyd’s Rep 609: he held that the loss fell within the inherent vice exclusion because the proximate cause of the loss was the fact that the legs were not capable of withstanding ‘the normal incidents of the insured voyage’ including the weather reasonably to be expected.
This judgment was overturned on appeal. Waller LJ, giving the leading judgment in the Court of Appeal, stated that the test to be applied was not whether the rig had been capable of withstanding the weather which was reasonably to be expected on the voyage but rather, whether she was capable of withstanding such weather as was bound to occur. As Blair J had found that the loss was not bound to occur, it followed that it did not fall within the exclusion.
Appeal to the Supreme Court
On appeal to the Supreme Court, both parties disavowed the ‘bound to occur’ test. Insurers argued that the test was too narrow while Global argued that the exclusion should only apply where loss was caused by something internal to the cargo and that, accordingly, where external conditions were the effective cause of the loss, the exclusions should not apply, irrespective whether those external conditions were bound to occur.
Both sides relied upon the definition of inherent vice provided by Lord Diplock in Soya v White  1 Lloyd’s Rep 122. Lord Diplock held that inherent vice ‘means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty’. Insurers argued that, in circumstances in which the waves encountered off South Africa were not only foreseeable but were ordinary and usual, they could not constitute a fortuitous external accident.
In support of this argument, Insurers cited various cargo cases. Particular significance was given to T M Noten BV v Harding  Lloyd’s Rep 283 in which industrial leather gloves shipped from Calcutta to Rotterdam were found to be wet, stained, mouldy and discoloured as a result of moisture absorbed in humid conditions in Calcutta. Reversing the first instance decision in that case, the Court of Appeal had held that the gloves deteriorated as a result of their natural behaviour in the ordinary course of the contemplated voyage, without the intervention of any fortuitous external accident. In particular, Bingham LJ noted that the temperature in Calcutta and on the vessel’s arrival in Rotterdam had not been unusual.
Insurers argued that if the ordinary but not inevitable temperatures in Calcutta and Rotterdam did not constitute a fortuitous external accident, it must follow that the ordinary but not inevitable wave conditions off South Africa were equally irrelevant.
This argument was rejected by the Supreme Court. While four consistent reasoned judgments were given, the most instructive is that of Lord Mance. Although at the hearing his Lordship appeared to recognise the difficulty of distinguishing, on the one hand, the effects on a cargo of temperature and atmosphere, and on the other, the effects of wind and waves, in his judgment he analysed Noten v Harding in rather more simple terms. He held that the gloves essentially damaged themselves under such conditions through their own moisture content, and it was not sensible to describe them as having sustained any fortuitous external accident. By contrast, the loss of the Cendor Mopu’s legs was neither expected nor contemplated and occurred only under the influence of a leg-breaking wave of a particular direction and strength catching the first leg at just the right moment.
In a passage which will surely be cited in all future cases involving inherent vice, Lord Mance explained the distinction by reference to the definition provided by Lord Diplock. He held, at paragraphs 80 and 81, that (1) Lord Diplock’s reference to “the ordinary course of the contemplated voyage” was not intended to embrace the weather conditions foreseeable on such a voyage, but was rather used as a counterpoint to a voyage on which some fortuitous external accident or casualty occurred and (2) there was no apparent limitation in Lord Diplock’s qualification “without the intervention of any fortuitous external accident or casualty” – in other words, on the face of it, anything that would otherwise count as a fortuitous external accident or casualty will suffice to prevent the loss being attributed to inherent vice.
The effect of this ruling is stark: irrespective of how fragile a cargo is, where the actions of waves and wind have played a part in causing loss, it will be almost impossible for insurers to deny liability based on the exclusion of inherent vice.
With the greatest respect to their Lordships, it is difficult to see how damage to gloves which occurred as a result of the normal temperature in which they were stored can be so easily distinguished from damage to the legs of a rig which occurred as a result of the normal waves that it encountered on its voyage. While reference to ‘leg-breaking waves’ does paint a powerful image, it should be remembered that the finding of the judge at first instance was that such waves were usual and expected off the South African coast. However, irrespective of whether it is justified to make such a distinction, this is the position at law and insurers will need to deal with it.
The practical effect of the judgment is that the exclusion of loss caused by inherent vice and nature of the thing insured has become of much less use to insurers. They will not be entitled to rely on the unsuitability of cargo for sea transit to exclude recovery unless loss occurs as a result of the inherent characteristics or defects of the goods causing loss or damage to themselves without any intervention from waves or wind (or other perils of the sea).
Unattractive and impractical though it might seem to insurers, it follows that - unless changes are made to the standard policies - they must take additional steps to understand quite how susceptible to damage the insured cargo is. If they do not, and loss is sustained as a result of the foreseeable but not inevitable actions of waves or wind, they will have to pay the claim under the policy. This will be the case equally where the probability of such loss occurring is 5% or 95%.
Fn.1 The relevant provisions of the Marine Insurance Act 1906 read as follows: “55. INCLUDED AND EXCLUDED LOSSES
1. Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.
2. In particular—... c. Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject-matter insured…”