Due diligence: what is the standard expected of owners?

MT “Cape Bonny” Tankschiffarhts GmbH & Co KG v. Ping An Property and Casualty Insurance Company of China Limited, Beijing Branch (Cape Bonny) [2017] EWHC 3036 (Comm)

The Commercial Court has considered whether the Owners in this case had exercised due diligence to make the vessel seaworthy in circumstances where the vessel suffered an engine breakdown mid-voyage from uncertain causes.

The background facts

On 14 July 2011, on the course of a laden voyage from Argentina to China and while seeking to avoid tropical storm Ma-On, the Cape Bonny suffered an engine breakdown. The cause of the breakdown was discovered on inspection to be damage to main bearing no. 1, which was not repairable at sea and so towage assistance was required.

On 18 July 2011, the vessel was taken in tow by Koyo Maru. The vessel was not permitted to enter a Japanese port of refuge or to discharge her cargo in the Chinese port of discharge, and so proceeded to Yosu, South Korea where her cargo was transferred into another vessel on 2 and 3 August 2011. The port authorities then required the vessel to be taken back out to sea in view of the approach of another tropical storm (Muifa). The vessel returned to Yosu on 9 August 2011, following which Koyo Maru was released and the vessel was berthed for repairs.

General average (GA) was declared and, on 28 July 2011 cargo insurers provided a guarantee by which they promised to pay any contribution to GA “which may hereafter be ascertained to be properly due”. Cargo’s contribution to GA was assessed at about US$2.1 million in the average adjustment published on 13 March 2013.

Cargo underwriters denied any liability under the guarantee, alleging that no amount was ‘properly due’ from cargo. Alternatively, in the event that a contribution was properly due, cargo underwriters disputed the quantum of the claim.

The Commercial Court decision

Liability

Cargo’s basis for denying liability to contribute in GA was Rule D of the York-Antwerp Rules, which provides as follows:

“Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure, but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault”.

There was no dispute as to the true construction of Rule D and how it operates: both parties accepted the effect of Rule D is that a loss, which is in principle allowable in GA, will not be recoverable if it arises from the actionable fault of the party claiming contributions. In this case, the actionable fault alleged by cargo was a failure by the Owners to exercise due diligence to make the vessel seaworthy.

Cargo’s case was that the damage to main bearing no.1 was caused by the presence of metal particles in the luboil system, which had been generated by spark erosion or by damage to the vessel’s chain drive gear or had been permitted to enter the engine by poor procedures when the crew were cleaning the filters. In addition, cargo argued that there was progressive wear to the no.1 bearing shells caused by damaged luboil filters failing to remove these particles from the luboil, and that crankshaft deflection readings taken by the ship’s crew about a month prior to the voyage indicated “abnormal wear” of the bearing which, in turn, should have resulted in the bearing being opened up such that the existing wear would have been detected prior to the commencement of the voyage.

The Owners accepted that the vessel was unseaworthy at the commencement of the voyage by reason of the metal particles present in the luboil system, but denied that there had been any failure to exercise due diligence because (on their case) the foreign particles were weld slag, which had been present in the luboil piping from the date of build and had broken off during the voyage in a period of bad weather.

The Court ruled that the bearing suffered from abnormal wear; that the luboil filters were damaged and that foreign particles were present in the luboil: the presence of all three rendered the vessel unseaworthy at the beginning of the voyage. The Court then went on to consider whether the Owners had nevertheless exercised due diligence to make the vessel seaworthy.

The Court was unable to reach any firm conclusions on the source of the metal particles in the luboil. Regarding the damaged luboil filters, the Court found that this could have been discovered by examination of the candles inside the filters, and that “a skilled and prudent chief engineer would have ensured that a proper visual check was made of at least a representative sample of the candles”. The Owners had not carried out such a check last time the candles were examined, and were, therefore, unable to prove that they exercised due diligence to make the filters seaworthy. However, as only a proportion of candles were found to be damaged, the damage would not necessarily have been detected by such an inspection, and the failure to exercise due diligence was not causative (it is possible that the representative sample of candles inspected may not have included any of the damaged candles).

In relation to the worn bearing, this should have been detectable from the crankweb deflection readings taken shortly before the voyage, which showed a -0.14mm increase from the readings taken six months earlier. A prudent engineer or superintendent would have decided, in the light of these readings, that bearing clearing measurements should be taken (which would likely have revealed abnormal wear to the bearings). The failure to do so was a failure to exercise due diligence and was causative of the engine breakdown.

Therefore, the GA expenditure was incurred by the Owners due to an actionable fault, and cargo were not liable to make a GA contribution.

Quantum

Cargo interests advanced arguments that various items of expenditure had not been reasonably incurred, including: the hire of the Koyo Maru (rather than a less expensive vessel); the diversion to Korea and transhipment of the cargo, and the continued hire of the Koyo Maru after arrival in Korea.

Although it was not necessary for the Court to make any ruling on quantum given its findings on liability, it nevertheless considered cargo’s arguments on this point, and found that the expenditure had been reasonably incurred in each case. The Court stressed that, while the burden of proving that expenditure was reasonably incurred lies upon owners, owners and managers when making such expenditure are also entitled to the benefit of the doubt if the circumstances are such that a prompt decision is required: there is no reason why hindsight should be taken into account in such circumstances.

Comment

This case emphasises the high standard that owners must meet in order to show that due diligence has been exercised to make a vessel seaworthy, especially in relation to incidents arising out of engine breakdowns/machinery malfunctions. Owners must not only carry out appropriate inspections on a regular basis, but must also ensure that the results of those inspections are subject to sufficient scrutiny to identify any problems that may be brewing.