MOK Petro Energy FZC v Argo (No. 604) Limited & Ors (The “F1”)
DMC/INS/24/02
England
MOK Petro Energy FZC v Argo (No. 604) Limited & Ors (The “F1”)
English Commercial Court: Dias J: [2024] EWHC 1935 (Comm): 26 July 2024
Judgment Available on BAILII @
https://www.bailii.org/ew/cases/EWHC/Comm/2024/1935.html
Guy Blackwood KC and David Walsh (instructed by HFW LLP) for the Claimant (Insured)
Simon Rainey KC and Benjamin Coffer (instructed by Wikborg Rein LLP) for the Defendants (Insurers)
MARINE CARGO INSURANCE: ALL RISKS MARINE CARGO OPEN COVER: BLENDED CARGO OF GASOLINE AND METHANOL: WHETHER CARGO SUFFERED PHYSICAL DAMAGE AS A RESULT OF PHASE SEPARATION (THAT IS, THE SEPARATION OUT OF ITS CONSTITUENT ELEMENTS) WHEN COOLED TO LOW TEMPERATURE AND/OR ITS PROPENSITY TO SEPARATE OUT WAS FORTUITOUS
Summary
In dismissing the Insured’s claim against its Insurers for damage to a blended cargo of gasoline and methanol (“Cargo”), the High Court found that the proportions of gasoline and methanol blended on board the motor tanker “F1” (“Vessel”) to make the Cargo had produced a cargo with a phase separation temperature (“PST”) of 17°C. That the Cargo had been contaminated during loading with water residues in the Vessel’s tanks and/or lines, increasing its PST to 29°C, was irrelevant. On these facts, the Court held that there had not been any physical damage to the Cargo, which had only ever existed as an inherently defective product when the Policy attached, that is, on its loading into the Vessel.
A PST of 17°C meant that phase separation would occur at any temperature below that point. As a result, the Cargo would have been unable to pass some of its standard quality tests, which required a temperature of 1°C. What had happened in this case was no more than the natural behaviour of a particular blended product, which reversed when the temperature gradient was reversed. There was, therefore, no damage to the Cargo, since there had been no physical change in the state of the Cargo. Further, there was no commercial difference between M15 gasoline with a phase separation temperature of 17°C (as it had on its blending on board the vessel) and 29°C (once contaminated with 9MT of water after shipment).
The Court held that the inspection and certification warranty in the Policy required the Insured both to inspect and to certify that the shore and vessel tanks and pipelines were clean. But, while the Insured had inspected as required, the Court held that it had breached the warranty by not complying with its certification obligation, within a reasonable time of the shipment. On section 11 of the relevant statute, the Insurance Act 2015 (fn.1), the Court accepted that it required a broad enquiry as to whether compliance with the warranty could have reduced the risk of the loss that actually occurred. The Court accepted that the Insured’s breach was not immaterial, and had affected the liability of the Insurers under the Policy, since it was not in dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination.
Case note contributed by Cyril Uchenna Amaefule, LLM (Maritime & Transport Law), LLM (International Law), LLB (Hons), Barrister & Solicitor of the Supreme Court of Nigeria, and PhD Student at City, St George’s University of London.
Background
The Claimant (“Insured”) was an oil trading company based in Dubai which had its cargoes insured by Cedar Insurance & Reinsurance Co. Ltd (“Cedar”) under an ICC(A) all-risks marine cargo open cover for shipments of petrochemical cargoes, on a “shore tank to shore tank” basis, as declared under the policy (“Policy”). The Defendants (“Insurers”) were London market insurance companies who reinsured Cedar on back-to-back terms and were directly liable to the Insured in respect of any valid claim under the Policy pursuant to a cut-through clause.
The Insured arranged for the shipment of a cargo of 11,800 MT (+/- 5%) of M15 gasoline consisting of gasoline and methanol pumped through shore lines from separate shore tanks and then blended on board the vessel “F1” (“Cargo”), to be carried from Sohar, Oman to (in the event) Hodeidah, Yemen. The insured value of the Cargo was US$7.5 million.
When the Cargo left Oman, it had been certified by Inspectorate Bureau Veritas to be on-specification. However, when the vessel arrived in Yemen, the Cargo was found to be off-specification due to ‘phase separation’, which is the temperature dependent separation of the gasoline blend stock from the methanol blend stock and water, respectively. The blended M15 gasoline had been contaminated with the water after shipment, most likely from tank washing residues in the vessel’s tanks and pipes, which had the result of raising the Cargo’s phase separation temperature to 29°C, rendering it off-specification and unmarketable.
That state of affairs had caused the purchasers/receivers to reject the Cargo at Hodeidah and, after investigations into remedial measures had proven unsuccessful, the Cargo was ultimately sold to salvage buyers.
The issues may be summarised as follows:
1. The Insured argued that at the port of loading, the Cargo was on-specification but was fortuitously contaminated with water during the loading process. The Insured, therefore, claimed an indemnity under the Policy for the difference between the sound value of the Cargo and its actual value under the Policy (together with associated costs and expenses). The difference in value was USD29,79bbl. The Insurers argued that the Cargo could never have been on-specification as certified at the loading port. So, it was always off-specification and commercially unmarketable, irrespective of any subsequent water contamination.
2. Flowing from the above was a dispute as to the accuracy of the loading port certificates, in relation to the Cargo’s quality at the time of loading. These Certificates stated that the Cargo was on-specification before loading and after loading into the Vessel’s tanks
3. The Insured argued that should the Cargo be off-specification as argued by the Insurers, it raises an alternative argument of fortuity in the blending of the Cargo which the Policy covered.
4. In turn, the Insurers argued that they were precluded from providing cover under the Policy due to the Insured’s breach of a warranty, which read:
“Quantitative/Qualitative survey carried out by internationally recognized marine surveyor at loading port/discharge port at owners cost, including inspection/certification of the cleanliness of the vessel tanks at load port and the shore tanks at discharge port and the connecting pipelines between the vessel and the shore tanks at both load and discharge port.
Failure to comply with a warranty will, in normal circumstances, void this insurance policy.”
Judgment
Having dealt with the background, the facts, the issues in dispute between the parties, evidence and submissions, the Judge held as follows, based on the discussion and analysis of the case.
Although the loading port certification showed that the Cargo was on-specification, the Judge agreed with the Insurers in rejecting the Insured’s claim, when she held that there were indeed doubts as to the accuracy of the certificates, thereby affecting their reliability. What happened to the Cargo was merely phase separation. The Cargo was off-specification at the time of shipment. On that basis, the Insured’s argument failed.
The Judge rejected the Insured’s alternative argument of fortuity. In the Judge’s view it only arose once the Court had concluded that the certificates could not be relied upon as accurate. According to the Judge, the details given of the shipment identified a cargo of 11,800 MT +/- 5% which was to be carried on the vessel “F1”. Therefore, even though the blend stocks from which the Cargo was made up existed in bulk in the shore tanks, it was impossible to say that there was any “shipment” as defined (and thus any insured cargo) at least until the appropriate quantities had been pumped out of the shore tanks and appropriated to the shipment in the vessel’s cargo tanks. What the Judge was saying, in essence, was that the Cargo, for the purposes of the Policy, did not yet exist as at the time the “damage” occurred.
The Judge reasoned that there was no way the Cargo could have been damaged when the methanol and gasoline were blended so as to produce a product that had a propensity to separate at temperatures below 17°C. As such, the mere fact of blending caused no relevant “damage”.
The individual blend stocks merely combined to form an end-product with a particular attribute which made it unmarketable, namely an excessively high PST. However, the cover under the Policy was for all risks of loss and damage to the Cargo itself, not for economic loss due to the Cargo being defective.
The Judge concluded that there was no evidence that a cargo with a PST below 17°C would be any different in value from one with a PST of 17°C or 29°C. Therefore, the fortuity claim failed.
With respect to the defence of breach of warranty, as put forward by the Insurers, the Judge found in favour of them, albeit obiter (i.e. a finding that was not necessary to determine the case). The Judge did not dwell on this but did reason that the Insurers were within their right to argue that non-certification breached an express warranty.
The warranty required two things: firstly, inspection, and, secondly, certification. The Insured carried out the first part, i.e. inspection, which the Judge accepted. As such, the Insured was not in breach of that part of the warranty. However, the Judge held that the Insured failed to perform the second part, i.e. certification.
The Judge reasoned that certification was an independent and discrete part of the survey as required by the warranty. Even though a certificate was issued later by the Insured, the Judge held that it was not issued within a reasonable time. It was issued six years after the loss had occurred and at a time when the proceedings were well underway. Thus, the Judge rejected the purposed certification as not being in compliance with the warranty, having been issued far too late.
Comment
In this case, the Judge essentially determined that there was no claim under the marine insurance policy on the cargo, since the cargo never sustained damage by an insured fortuity. By the time the cargo came into existence, at the point where the blending of its two components was completed on board the Vessel, it already had a PST of 17◦C, rather than that of 1◦C, which its quality criteria required.
The grounds on which the Judge held that the Insured’s claim failed could be perceived by some as harsh to policyholders who might find themselves in the shoes of the Insured. They might do well to pay attention to the drafting of their policies so as to ensure that they reflect their true intentions as to the nature of the risks insured.
Footnote 1: Insurance Act 2015:-
“11 Terms not relevant to the actual loss
(1) This section applies to a term (express or implied) of a contract of insurance, other than a term defining the risk as a whole, if compliance with it would tend to reduce the risk of one or more of the following—
(a) loss of a particular kind,
(b) loss at a particular location,
(c) loss at a particular time...
(3) The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
