Changes

DMC/INS/20/13

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

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.

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.

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.