Connect Shipping v Sveriges Angfartygs Assurans Förening
Connect Shipping Inc and another v Sveriges Angfartygs Assurans Förening and others
Supreme Court; Lords Reed, Hodge, Lloyd-Jones, Kitchin, Sumption;  UKSC 29; 12 June 2019
Mr Michael Ashcroft QC and Mr Luke Pearce, instructed by Thomas Cooper llp, for the insurers/Defendants/Appellants
Mr Steven Berry QC and Mr Neil Hart, instructed by Hill Dickinson llp, for the owners and managers/Claimants/Respondents to the Appeal
HULL AND MACHINERY INSURANCE: FIRE CAUSING SERIOUS DAMAGE TO VESSEL: SALVORS APPOINTED: SPECIAL COMPNESATION AND INDEMNITY CLAUSE (SCOPIC) EXPENDITURE: NOTICE OF ABANDONOMENT: WHETHER VESSEL A CONSTRUCTIVE TOTAL LOSS UNDER MARINE INSURANCE ACT 1906, S. 60(2)(ii): WHETHER EXPENDITURE INCURRED PRIOR TO NOTICE OF ABANDONMENT AND SCOPIC COSTS COUNT TOWARDS “COST OF REPAIRING THE DAMAGE”
S.60(2)(ii) of the Marine Insurance Act 1906 (“1906 Act”) provides that in the case of damage to a ship, there is a constructive total loss where “she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired”. For the purpose of determining whether a vessel was a constructive total loss under s.60(2)(ii) of the 1906 Act, the Supreme Court was asked to consider two issues: (i) whether expenditure incurred prior to the service of the notice of abandonment counted towards the costs of repair; and (ii) whether the charges payable to the salvors under the Special Compensation, Protection and Indemnity Clause (“SCOPIC”) counted towards the costs of repair. In partially reversing the decision of the judge at first instance and the Court of Appeal, the Supreme Court held that costs already incurred prior to the service of the notice of abandonment could rank towards the “cost of repairing the damage” in s.60(2)(ii) of the 1906 Act, but that the SCOPIC costs could not.
This Case Note has been contributed by Candice Lau, BBA(Law), LLB (HKU), LLM (Cantab), a barrister at Alan Leong SC’s Chambers, Hong Kong.
The owners’ vessel was seriously damaged by a fire. The vessel was insured with the defendant insurers under a hull and machinery policy. The owners appointed salvors under Lloyd’s Open Form 2011. The vessel was salvaged. The salvors invoked the SCOPIC clause in the Lloyd’s Open Form, which entitled salvors to additional remuneration for measures taken while performing the salvage services in order to prevent or minimise damage to the environment.
Five months after the fire, the owners served a notice of abandonment on the insurers claiming that the vessel was a constructive total loss under s.60(2)(ii) of the 1906 Act because the “cost of repairing the damage” would exceed her insured value. S.60(2)(ii) of the 1906 Act provides that a damaged ship is a constructive total loss where “she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired. In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired.”
The insurers acknowledged liability for a partial loss but rejected the notice of abandonment and denied that the vessel was a constructive total loss, contending that neither the cost of recovery and repair incurred prior to the notice of abandonment nor the SCOPIC costs (which were also incurred before the service of the notice of abandonment) could count towards the constructive total loss calculation for the purposes of s.60(2)(ii) of the 1906 Act, and hence, the cost of repairing the damage did not exceed the vessel’s insured value.
The owners made a claim against the insurers seeking an indemnity for the constructive total loss of the vessel. At first instance, the judge found for the owners and held that both the cost of recovery and repair incurred prior to the date of notice of abandonment and the SCOPIC costs could be counted as costs of repairs for the purpose of s.60(2)(ii) of the 1906 Act and therefore, that the vessel was a constructive total loss. The Court of Appeal upheld the judge’s decision and dismissed the insurers’ appeal. The insurers further appealed. The Supreme Court reversed the Court of Appeal’s decision in part.
The sole judgment of the Supreme Court was given by Lord Sumption, with whom Lord Reed DPSC, Lord Hodge, Lord Lloyd-Jones, Lord Kitchin JJSC agreed.
On the issue of expenditure incurred prior to the service of the notice of abandonment, the court held that the “cost of repairing the damage” for the purpose of determining whether the vessel was a constructive total loss under s.60(2)(ii) of the 1906 Act included all the reasonable costs of salving and safeguarding the vessel from the time of the casualty, together with the prospective costs of repair, irrespective of whether such costs were incurred before or after the service of the notice of abandonment. The court specifically rejected the insurers’ submissions that the references in s.60 to expenditure which “would” be incurred pointed only towards expenditure to be incurred post-abandonment, and that the reference in s.60(2)(ii) to “future” salvage operations and general average contributions indicated only expenditure post-abandonment.
Upon dismissing the insurers’ linguistic arguments, the court further approached the issue from the perspective of basic principles of insurance law. As a general rule, loss under a hull and machinery policy occurred at the time of the casualty, even if the loss developed after the time of the casualty, unless a second casualty broke the chain of causation. It followed that the damage referred to in s.60(2)(ii) was in principle the entire damage arising from the casualty from the moment that it happened. The measure of such damage was its effect on the depreciation of the vessel, which was represented by the entire cost of recovering and repairing it. Accordingly, whether such costs were incurred before or after the date of notice of abandonment would not matter insofar as the calculation of the constructive total loss under s.60(2)(ii) was concerned.
On the other hand, the court was of the view that the SCOPIC costs did not form part of the “cost of repairing the damage” for the purpose of s.60(2)(ii) of the 1906 Act or the “cost of recovery and/or repair” for the purpose of clause 19.2 of the Institute Time Clauses – Hulls (which requires account to be taken of the “cost of recovery and/or repair”). Unlike salvage charges, which are included in the cost of repairs because the vessel must be salved in order to be repaired, SCOPIC costs were for a purpose unconnected with the damage to the hull or its hypothetical reinstatement, i.e. to protect the shipowner’s potential liability for environmental pollution. Therefore, SCOPIC costs would not qualify as a kind of cost of repairs and could not rank towards a constructive total loss calculation under s.60(2)(ii).
The Supreme Court remitted the matter back to the High Court for the judge to determine in light of the Supreme Court’s judgment, whether the vessel was a constructive total loss and the financial consequences thereof.
The Supreme Court has in this case clarified the definition of “cost of repairing the damage” under s.60(2)(ii) of the 1906 Act for the purpose of determining whether a vessel is a constructive total loss. The financial implications of the court’s decision on the second issue in relation to the categorization of SCOPIC costs are significant. Whilst the court’s decision in this respect may be controversial, the court has spelled out clearly the rationale behind its decision: the reason why s.60(2)(ii) requires a comparison between the cost of the repairs and the value of the ship when repaired, is to determine whether the ship is financially worth repairing; as such, where the purpose of an expenditure has nothing to do with the subject matter insured, namely the hull, it is no part of the measure of the damage of the ship, and has nothing to do with the possibility of repairing her.