Introduction
On May 10 2017
the Supreme Court handed down a judgment addressing three issues of importance
to ship owners, charterers and insurers alike, defining:
·
the parameters
of the safe port undertakings;
·
the rights of
subrogation of insurers where vessels are operated under bareboat charter; and
·
the right of
charterers to limit their liability under the 1976 Convention on the Limitation
of Liability of Ship owners.
The principal
issue in the insurers' appeal was the safety of the port. The insurers brought
their claim as assignees of the ship owners' and demise charterers' rights;
this led to the court considering the extent of the insurers' rights to pursue
subrogated claims where a bareboat charter was in place. The Court of Appeal
had found that the sub-charterers had not breached the safe port undertaking in
their charter by ordering the vessel to the port of Kashima, Japan in October
2006. The Supreme Court clarified the meaning of the famous phrase 'abnormal
occurrence' from the leading case on unsafe ports, Eastern City [1958] 2
Lloyd's Rep 217. This decision sets out the test for safety of a port and
provides that a "port will not be safe unless, in the relevant period of
time, the particular ship can reach it, use it and return from it without, in
the absence of some abnormal occurrence, being exposed to danger which cannot
be avoided by good navigation and seamanship".
Despite
closely examining the features of the port, the lower courts disagreed with
each other as to whether the events which led to the loss of the Ocean Victory
constituted an abnormal occurrence. In this decision the Supreme Court
confirmed the Court of Appeal's finding in favor of the sub-charterers, which
was to apply an ordinary interpretation to the phrase 'abnormal occurrence' −
that is, "something well removed from the normal", being exceptional
in nature.
The Capesize
bulk carrier Ocean Victory was in the process of discharging a cargo of iron
ore at the port of Kashima, Japan on October 24 2006 when an incoming storm led
to a decision to leave the berth and sail to open waters. In the event, the
vessel sailed up the port's fairway and collided with the breakwater,
eventually grounding nearby. Despite attempts by salvors to save the vessel, it
later broke in two and was declared a total loss.
Safe port undertakings
The principal
argument throughout the litigation was the safety of the port in question − in
particular, the notion that the phenomena experienced that particular day could
be described as so unusual as to amount to an abnormal occurrence. The owners
also put forward various submissions that the port was unsafe due to its safety
systems, but this part of the claim was not central to the appeal.
In relation to
the conditions at the port, the first-instance judge examined the features
separately (i.e., long waves and strong northerly gales) to decide whether they
were individually foreseeable. Following this logic, since each event was known
to have occurred previously at the port, these constituted ordinary
characteristics of that port, and the fact that they could occur (whether
individually or concurrently) was sufficient to render the port unsafe. He did
not consider whether the combination of the two events at the same time was
unusual. Under this interpretation, the port of Kashima was found to be unsafe
despite the fact that no significant casualties had occurred in its 35-year
history. This created a great deal of uncertainty for charterers, as it
considerably widened their assumption of responsibility under the safe port
undertaking.
In overturning
the High Court decision, the Court of Appeal looked at the history of the port
and found that the simultaneous occurrence of the specific winds and wave
patterns was so highly unusual as to be considered an abnormal occurrence. The
Supreme Court confirmed the approach taken by the Court of Appeal, agreeing
that the storm was sufficiently exceptional that the port was ordinarily safe and
accordingly dismissing the appeal.
Given that
there was no breach of safe port warranty, the court was not bound to address
the other issues in the litigation:
·
insurance
arrangements between the hull insurers and the ship owners/demise charterers;
and
·
Limitation
funds under the 1976 convention.
However, the
judges considered these questions to be of general importance and provided
useful guidance − albeit obiter (i.e., in passing) − in response.
Insurance provisions – third-party claims
The Court of
Appeal accepted the sub-charterers' submission that the allocation of risk
between the demise charterers and the ship owners was regulated as a complete
code under Clause 12 of the Barecon 89 charter. Under this clause, the demise
charterers were responsible for insuring the vessel against marine losses and
the ship owners were named as co-insureds. In the event of a total loss, the
ship owners would look to the hull insurers for recovery regardless of whether
the loss resulted from the negligence or fault of the demise charterers. This
effectively precluded the right of subrogation by the insurers, which could not
look to the charterers (or sub-charterers) for indemnification.
By a
three-to-two majority, the Supreme Court accepted the Court of Appeal's interpretation
of Clause 12 and found that there was no loss which could be passed down to the
sub-charterers. The minority were not persuaded by this argument, as rights of
subrogation are a generally accepted feature in insurance claims.
Scope of limitation fund
The Supreme
Court considered whether a charterer can rely on the 1976 convention to limit
its liability against a ship owner for loss of the vessel. Under Article
2(1)(a) of the convention, charterers may limit their liability in relation to
events "occurring on board or in direct connection with the operation of
the ship". It was unanimously found that, had the charterers been found to
have breached the safe port undertaking, they would not have been entitled to
limit their liability against the ship owners under the 1976 convention. This
affirms the earlier Court of Appeal decision in The CMA Djakarta [2004]
1 Lloyd's Rep 460 (which settled before reaching the then House of Lords).
If any doubt
remained as to the correct construction of the phrase 'abnormal occurrence',
the comprehensive review of safe port authorities by both appeal courts has
laid this to rest. There is therefore no departure from the accepted
understanding of safe port obligations. Charterers will be reassured by this decision,
which balances the ordinary trading risks that they take in the course of their
business with unusual phenomena occurring in their ports of call.
Arguably, the
more interesting issue arising out of this decision is the potential
curtailment of the rights of insurers to recover against third parties.
Insurers of bareboat chartered vessels will be especially mindful of this
decision which − although issued obiter − could leave them significantly
out of pocket in the event of total loss.
Additional input in regards to the safe port may be found at,
