End of sea passage for “CMA CGM LIBRA”: UK Supreme Court upholds lower courts’ decisions

The long-awaited judgment from the UK Supreme Court in the “CMA CGM LIBRA” case was handed down on 10 November 2021, in which the 5-member panel of distinguished judges upheld the lower courts’ decisions that the vessel’s defective passage plan rendered the vessel unseaworthy. We expect that the decision will impact evidence collection and retention in general average and cargo claim litigation.  

 

Background

On 17 May 2011, M/V “CMA CGM LIBRA”, a 6,000 TEU container ship, grounded while leaving the port of Xiamen, China. The ship’s charts had failed to record a warning derived from a Notice to Mariners that depths shown on the chart outside the fairway were unreliable and waters were shallower than recorded on the chart. The grounding occurred when the master sailed the vessel outside of the fairway, expecting the waters to be deeper than they actually were.

Salvage costs in the sum of about USD 9.5 million were incurred, and owners claimed general average contributions totalling USD 13 million from the cargo interests. About 8% of those cargo interests refused to pay on the basis that the grounding arose out of actionable fault by the owners. This led the owners to initiate English Court proceedings to claim for about USD 800,000 in general average contributions.

The first instance judge found, as a matter of fact, that the vessel’s passage plan and working charts were defective due to the crew’s failure to record the warning required by the Notice to Mariners. He also found that the defective passage plan was causative of the grounding.

Issues on appeal

Notwithstanding the factual findings at first instance, the vessel owners maintained that they were not at fault pursuant to what is commonly referred to as the “navigation exception” at Article IV Rule 2(a) of the Hague Rules, which exempts a carrier from liability arising from the “act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship”. It is well-established under English law that the navigation exception does not excuse a carrier from liability if the carrier has failed to exercise due diligence to make the vessel seaworthy before and at the beginning of the voyage. Therefore, the issues at the core of the vessel owners’ appeal to the Supreme Court were:

1.     Did the defective passage plan render the vessel unseaworthy for the purposes of Article III Rule 1 of the Hague Rules?

2.     Did the failure of the master and second officer to exercise reasonable skill and care when preparing the passage plan constitute want of due diligence on the part of the carrier for the purposes of Article III Rule 2 of the Hague Rules?

The Supreme Court had no trouble in reaching the conclusion that the lower courts were right to find that in this particular case, the defective passage plan did make the vessel unseaworthy.

The Court found no force in the owners’ submissions that they had discharged their duty to exercise due diligence to make the vessel seaworthy by equipping the vessel with all that was necessary for her to be safely navigated. Owners had argued that they had provided all the equipment and instructions to allow the crew to create a proper passage plan, and thus the crew’s failure to annotate it was not caused by the carrier’s lack of due diligence. The Court rejected this argument and held that the obligation on the carrier to exercise due diligence to make the vessel seaworthy requires that due diligence be exercised in the work of making the vessel seaworthy, regardless of who is engaged to carry out that task. The carrier cannot escape from its seaworthiness responsibilities by delegating them to its servants or agents, such as navigators, managers, engineers or ship repairers. This is because the carrier’s responsibility to make the ship seaworthy at the commencement of the voyage is non-delegable, so it does not matter which agent or servant actually performs the work.

Supreme Court’s decision was based on the particular facts of the case

Notably, the Court pointed out at paragraph 82 of their judgment that a defective passage plan does not inevitably lead to the conclusion that the vessel is unseaworthy. It is still necessary to prove that: 1) the defect in the passage plan was sufficiently serious to render the vessel unseaworthy, and 2) the defect was causative of the loss or damage. In many cases, it will be the failure to properly and carefully navigate the vessel during the voyage that is the cause of the loss, rather than any prior defect in passage planning.

In the present case, the vessel was found to be unseaworthy because: 1) the defect in the passage plan was found to have a decisive influence on the master’s critical decision to leave the fairway, and 2) the danger was one which was not sufficiently visible or otherwise detectable to be avoided by the exercise of due navigational care.

Clarifications of legal principles

In the judgment, the Court restated a number of well-established legal principles which are widely accepted and should be familiar to most within the maritime industry.

Helpfully, the Court also offered numerous clarifications which will undoubtedly serve as useful guidance in disputes to come. We set out below several which are of particular interest:

1.     If the vessel is unseaworthy, it makes no difference whether negligent navigation or management is the cause of the unseaworthiness or is itself the unseaworthiness.

2.     The concept of unseaworthiness is not subject to an attribute threshold requiring there to be an attribute of the vessel which threatens the safety of the vessel or her cargo. It is not just physical defects in the vessel and her equipment that can potentially render a vessel unseaworthy. Seaworthiness extends to a wide variety of matters such as adequate and up-to-date charts, adequate piping plans, the mental abilities of the crew, the adequacy of the vessel’s systems in relation to engine maintenance, cargo stowage, residues of previous cargoes in the holds and the trading history of the vessel.

3.     The “prudent owner” test (i.e., would a prudent owner have required the relevant defect to be made good before sending he vessel to sea had he known of it?) is not a universal test of unseaworthiness. That said, the “prudent owner” test has withstood the test of time and is well suited to adapt to differing and changing standards. It is an appropriate test of seaworthiness save in exceptional cases at the boundaries of seaworthiness.

4.     The fact that a defect is remediable may mean, in some instances, that the vessel is not unseaworthy. This is likely to depend on whether it would reasonably be expected to be put right before any danger to the vessel or cargo arose.

5.     Given the essential importance of passage planning for the safety of navigation, applying the prudent owner test, a vessel is likely to be unseaworthy if she begins her voyage without a passage plan or if she does so with a defective passage plan which endangers the safety of the vessel.

6.     The fact that the defective passage plan involves neglect or default in “the navigation of the ship” within the meaning of the navigation exception at Article IV Rule 2(a) of the Hague Rules is no defence to a claim for loss or damage caused by unseaworthiness. In other words, the Article III obligation to exercise due diligence to make the ship seaworthy at the commencement of the voyage is an overriding obligation. Unless the carrier has met this obligation, the carrier cannot rely on the error in navigation defence.

Implications for the vessel owners – evidence collection and claims

Although the case relates to general average contributions, it is equally relevant for cargo claims where the vessel’s seaworthiness is called into question. Establishing a cargo claim is necessarily an exercise in 20-20 hindsight and one relatively certain effect of the “CMA CGMA Libra” judgment is that after a casualty involving loss or damage to cargo, documentary requests and disclosure requests will be expanded to involve all relevant documentation from the load port concerning the preparation of the vessel for the voyage.

To properly defend against potential cargo claims, owners will have to be even more meticulous when it comes to documenting their passage planning procedures and compliance with them including with all relevant guidelines (such as IMO Resolution A.893(21)). Owners will also have to ensure that this evidence trail is properly stored and preserved in hardcopy and/or electronic format. This is likely to increase the internal workload for Members and Clients and could also be a cost driver for P&I clubs when handling cargo claims.

At first glance, the Supreme Court’s decision in the “CMA CGM Libra” may appear unfavourable to vessel owners and cargo carriers. However, there are crucial nuances within the judgment which are based on factual findings specific to this case. In particular, the master accepted that the working charts had not been correctly annotated prior to sailing, and that this was causative of the grounding. He admitted that he was unaware of the shallow ground outside the fairway, and that he would not have chosen that route if he had known of it.

The vessel owners had submitted that the Hague Rules are aimed at spreading risk and allocating the cost of insurance between carriers and cargo interests. The Court did not disagree, but pointed out that most negligent navigation would occur during the voyage rather than before, so the main burden of resulting cargo damage or general average claims will likely continue to fall on cargo insurers anyway, not shipowners or their P&I clubs. It appears that for this reason, the Court saw no fundamental shift in the balance of risk between carriers and cargo interests by accepting the proposition that negligent passage planning can cause the vessel to be unseaworthy, which remains a risk against which carriers must insure themselves. Court's decision may be read at,

https://www.supremecourt.uk/cases/docs/uksc-2020-0071-judgment.pdf

Limitation of liability for maritime claims – an unbreakable limit?

On 26 May 2021, the Maltese Court of Appeal delivered a judgment in Mare Blu Tuna Farm Limited v Dr Ann Fenech as special mandatory for the vessel MV Coral Water.

Facts

In 2006, the MV Coral Water departed from Porto Torres, Sardinia for Tuzla, Turkey and stopped at Malta to take bunkers. Shortly after taking bunkers and setting sail – at night and in winds of five to six on the Beaufort scale – the vessel's propeller got caught in the mooring ropes of an aquaculture zone (which was not visible on the navigational chart that the master was using at the time).

The fish farm owners alleged that as a direct consequence of this collision, the vessel had torn the netting around one of its tuna cages, causing approximately 207 gross tonnes of blue fin tuna to escape. The claimant alleged that this amounted to a catastrophic loss of nearly €2 million on top of the claim for physical damage suffered to the cage, which the owners quantified at approximately €70,000.

The owners commenced an action for damages and requested the court to declare that the alleged loss had occurred as a result of gross recklessness and with the knowledge that the incident was likely to occur. The first court dismissed the claim on the ground that the claimant had failed to prove that the MV Coral Water was solely responsible for the incident due to gross negligence and, at the same time, had acted with the knowledge that an incident of this sort was likely to occur.

Decision

The plaintiff company appealed. In May 2021, the Court of Appeal determined that the master's failure to use the appropriate charts amounted to gross negligence on his part. The Court thus went on to partially overturn the first-instance court's findings, determining that the claimant's first request was merited.

However, in delivering its decision, the Court of Appeal found that this was largely a "fictitious claim", dismissing the majority of the plaintiff's claim and throwing out its €2 million claim for the alleged loss of tuna. The Court relied upon the extensive evidence produced by the defendant vessel that proved that at the time of the incident, the relevant tuna cage was in fact empty and therefore no tuna could have been lost. Nonetheless, the Court ordered the defendant vessel to pay the sum of €15,000 in damages caused, to replace the damaged equipment and cover the cost of labor. The Court found that the incident was caused due to negligent passage planning by the MV Coral Water's captain.

Analysis – limitation of liability

In this instance, the amount of damages awarded was minimal and did not trigger the vessel's need to limit its liability. Accordingly, the Court made no findings on the issue of limitation of liability. However, by accepting the claimant's first request, the Court appears to have, perhaps inadvertently, equated gross negligence with the requirements to break the limitation found under article 4 of the Convention on Limitation of Liability for Maritime Claims (LLMC). This gives rise to the question of if the damages awarded had been greater, could the Court's finding of gross negligence have led to the inability of the ship owner to limit its liability?

As stated by Lord Denning in The Bramley Moore, the limitation of liability "is not a matter of justice, it is a rule of public policy which has its origin in history and its justification in convenience". It has also been described as a concept whereby "the principle of limited liability is that full indemnity, the natural rights of justice, shall be abridged for political reasons".

Indeed, limitation of liability provisions are:

expressly designed for the purpose of encouraging shipping and affording protection to shipowners against bearing the full impact of heavy and perhaps crippling pecuniary damage sustained by reason of the negligent navigation of their ships on the part of their servants or agents.

Malta is a party to the LLMC, which was incorporated into Maltese legislation by means of Schedule 4 into Subsidiary Legislation 234.16, entitled "Limitation of Liability for Maritime Claims Regulations" (the regulations).

Article 1 of the regulations defines which persons may be entitled to limit liability. It refers to:

• ship owners – defined as "the owner, charterer, manager and operator of a seagoing ship";
• salvors; and
• persons for whose act, neglect or default the shipowner or salvor are responsible ("relevant persons").

Article 2 of the regulations states that a person entitled to limit liability may do so in respect of:

• loss of life;
• personal injury; or
• loss resulting in damage to property that occurs on board or in direct connection with the operation of the ship, and consequential loss resulting therefrom.

The regulations specify that the limit of liability for a claim arising on any distinct occasion shall be calculated according to a sliding scale based on the vessel's tonnage as measured in units of accounts, which is then converted into a monetary figure by reference to special drawing rights, as established by the International Monetary Fund.

However, the right to limit liability is not absolute. Article 4 of the regulations, which replicates ad verbatim the provisions of article 4 of the LLMC, reads as follows:

A person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result.

The threshold to break limitation is necessarily a high one, as it would otherwise defeat the purpose of such a limitation. The following elements must exist:

• a person liable;
• a personal act or omission by the liable person;
• a loss caused by the personal act or omission; and
• an intent or recklessness by the liable person, with the knowledge that the action would likely cause such loss.

Article 4 of the regulations refers to the persons who are entitled to limit liability – namely, the relevant persons mentioned under article 1 of the regulations. This would include persons for whose act, neglect or default the shipowner is liable. Under article 347 of the Merchant Shipping Act, Chapter 234 of the Laws of Malta, the shipowner is responsible "for any damages caused by acts or omissions in the navigation or management of the ship". Thus, the act or omission by a vessel's captain to conduct an adequate appraisal of a passage plan could satisfy the first two criteria listed above.

With respect to the third requirement, the Court of Appeal dismissed the claimant's allegations that it suffered a loss of €2 million as false. That said, technically, the Court did conclude that a loss was caused by the incident, albeit a minimal one of approximately €15,000. Thus, while the damages sustained fell way short of any sum that would trigger the limitation of liability, it could be argued that the third element of loss also existed.

It is the fourth element, that the claimant would have had difficulty proving. In the case of the MV Coral Water, no specific intent to cause the loss was ever alleged. However, the claimants had accused the vessel of gross negligence, and the Court of Appeal had agreed. However, the regulations provide for recklessness with knowledge to cause such loss, rather than gross negligence – are the ramifications the same?

Under Maltese law, gross negligence is interpreted as being more than just negligence on a higher degree. Maltese courts have held that "gross negligence" is equivalent to culpa lata (ie, denoting an absence of any degree of care and acting with reckless disregard to the safety or property of another).

The Maltese concept of gross negligence thus goes somewhat beyond the common law concept of "recklessly", which:

connotes either carelessness or utter heedlessness of consequences with the result that the perpetrator is deemed to have considered neither the probability nor even the possibility of a likely result.⁽⁴⁾

Nevertheless, gross negligence should not in itself mean that there was specific knowledge to cause a particular loss, as is required to break the right of limitation of liability.

The wording in article 4 of the regulations suggests that the right to limit liability is barred only if the "the type of loss intended or envisaged by the person liable is the actual loss suffered by the claimant".

Comment

It is arguable that gross negligence alone is insufficient to break a ship owner's right to limitation under article 4 of the LLMC. It would be reasonable to argue that a Maltese court would need to ascertain that the defendant not only acted or failed to act in a manner that disregarded the consequences, or in a manner where it could be reasonable to expect a particular type of damage to be suffered, but that said defendant had specific knowledge that the actual damage that was suffered would occur. In this case, the master did not know or realise that there was an aquaculture zone in the vicinity. Therefore, it would seem unreasonable to argue that his conduct could be said to satisfy the requirement of article 4 of the LLMC, triggering the exclusion of the right to limit liability.

Supreme Court Decision on the “CMA CGM LIBRA” – GA Defence - Legal Development 10 November 2021

The Supreme Court has upheld the decisions of both the High Court and the Court of Appeal had confirmed that a defective passage plan will render a vessel unseaworthy. All nine judges involved in the High Court, Court of Appeal and the Supreme Court have therefore determined that the claims for General Average pursued against our clients by the Shipowners of the “CMA CGM LIBRA” failed.

This decision reinforces the view that in principle there is no conceptual limit on a shipowner’s obligation to exercise due diligence before and at the commencement of the voyage to make the vessel seaworthy.

It also clarifies that a shipowner will be liable for a causative error of navigation (and thus unable to rely on the error of navigation or management defence in the Hague and Hague-Visby Rules), provided the error occurred before or at the commencement of the voyage. 

Shipowners informed us that all of the cargo interests not represented by Clyde & Co settled the claims for General Average at between 98.5% and 100% of the sums claimed.

Factual background

On 17 May 2011, the 11,356 TEU “CMA CGM LIBRA” sailed from Xiamen laden with 5,983 containers. Shortly after departure from Xiamen, on 18 May 2011, the vessel deviated from her intended course, navigating out of the buoyed fairway and grounded shortly thereafter.

The vessel grounded in a position immediately adjacent to a shoal with a depth of 1.2 meters, the existence of which had been the subject of a Notice to Mariners promulgated by the United Kingdom Hydrographic Office (UKHO) several weeks before the incident.

In addition to the paper chart BA 3449 said to have been in use on board the vessel at the material time, the vessel was also equipped with an “unofficial” electronic chart on which the shoal on which the vessel grounded was not shown.

A further Notice to Mariners (6274(P)/10) had also been issued by UKHO in December 2010, warning mariners that depths shown on the chart beyond the confines of the buoyed fairway in the approaches to Xiamen were unreliable and that the waters were shallower than recorded on the chart.

The paper chart did not indicate the full extent of the shoal on which the vessel grounded, and it had not been updated with the warning contained in 6274(P)/10.

The vessel was subsequently refloated by professional salvors. The Shipowners are said to have incurred expenditure in the sum of approximately US$13 million and declared General Average to recover around $9m of this from cargo interests.

Approximately 92% of cargo interests agreed to pay either 98.5% or 100% of their proportion of General Average, resulting in approximately US$8 million being paid by cargo insurers to the Shipowners and/or their insurers.

The remaining cargo interests declined and maintained that they were not liable to pay contributions in General Average on the basis that (amongst other things) a defective passage plan, rendering the vessel unseaworthy, caused the grounding, giving rise to a defense to the Shipowners’ claim.

High Court

The Shipowners asserted that the effective cause of the grounding was the existence of a shoal not shown on either the paper chart BA 3449 or the vessel’s electronic chart and that all charts had been fully corrected prior to the vessel’s departure from Xiamen. That view was not shared by the High Court. The Admiralty Judge at first instance held that there was an error of navigation but that the absence of an adequate passage plan, which is a requirement under the 1999 IMO Guidelines for Voyage Planning, was causative of the grounding. It was also held that the Shipowners were in breach of their obligation to exercise due diligence to make the vessel seaworthy as required by Article III Rule 1 of the Hague (or Hague-Visby) Rules. Consequently, the Cargo Interests were not liable to contribute in General Average.

Court of Appeal Decision

The Shipowners appealed to the Court of Appeal on two questions of law.

1.   Does a defective passage plan render a ship unseaworthy for the purposes of Article III Rule 1 of the Hague Rules?

2.   Can the actions of a ship’s master or crew which are carried out in their capacity as navigators be treated as (attempted) performance by the shipowner of its duty as carrier to exercise due diligence to make the ship seaworthy under Article III Rule 1 of the Hague Rules?

The Court of Appeal found that the Admiralty Judge at first instance correctly applied long established principles of English law to the facts of this case.

It also held that attempts to draw a distinction between acts of the master and crew qua carrier (for which the shipowners are responsible) and their acts qua navigator (for which the shipowners are not responsible) were misconceived. Any failure by the master and crew in preparing an adequate passage plan amounted to unseaworthiness provided that the failure arose before the voyage commenced.

Accordingly, both grounds of appeal failed, and the appeal was dismissed. The Shipowners appealed to the Supreme Court on the same two questions of law.

Supreme Court

The first question: The five Supreme Court Judges unanimously found that the Admiralty Judge at first instance and the Court of Appeal Judges (all of whom were experienced maritime lawyers) directed themselves properly in law, and the findings made support the conclusion reached that the defective passage plan resulted from the Shipowners’ failure to exercise due diligence to make the vessel seaworthy.

Given the importance of passage planning for the safety of navigation, a vessel is likely to be unseaworthy if she begins her voyage with a defective passage plan.

The fact that the defective passage plan, which by definition must be prepared before sailing, involved neglect or default on the part of the master and/or crew (and which was characterized by the Shipowners to be an error in navigation as per the Article IV Rule 2(a) exception) was no defense to a claim for loss or damage caused by unseaworthiness.

The second question: The essence of the Shipowners’ case on this point was that they had provided the vessel (and the master/crew) with the necessary instructions, charts and nautical publications etc. to enable an adequate passage plan to be drawn up prior to the commencement of the voyage, on which basis they had discharged their burden of exercising due diligence.

The Supreme Court rejected the Shipowners’ case on due diligence, branding it novel and unsound. A carrier cannot escape its Article III Rule 1 obligations by delegating them to its servants or agents and the carrier is responsible for any causative failure by the crew to exercise due diligence. It makes no difference if those obligations include elements that involve navigation.

Therefore, both grounds of appeal failed, and the appeal was dismissed. The claim for General Average contributions from the Cargo Interests failed entirely.

Impact on the Industry

The International Group of P&I Clubs expect the decision to have a wide-ranging impact. As set out in the submissions made by Shipowners, the decision has “clearly caused a lot of consternation. It has been relied on with considerable frequency. In March this year, the Group estimated that the total value of claims concerning passage planning that had been received by the IG member clubs since the decision of the Admiralty Court in this case is in excess of $116 million.”

Conclusion

This is a significant decision. It confirms that the well-established legal principles of due diligence and seaworthiness apply to passage planning in the same way as they do to any other aspect of seaworthiness.

Further, the argument that an error in planning the passage prior to the commencement of the voyage should be characterized as an error of navigation rather than unseaworthiness has also been resoundingly rejected.

In practice, this judgment also underlines the need to ensure that charts are kept fully up to date (including the application of Temporary and Preliminary Notices to Mariners) and that careful accurate passage planning is carried out before departure.

The judgment further highlights the importance for Cargo Interests to give careful consideration to any request for payment of contributions in General Average, as considerable savings can be made.

The Supreme Court has reiterated that the carrier’s obligation under the Hague Rules to make the vessel seaworthy is non-delegable, “The carrier cannot escape from its responsibilities under article III rule 1 of the Hague Rules by delegating them to its servants or agents qua navigators, or qua managers, or qua engineers or qua ship repairers.”

However, the carrier may not be liable for lack of due diligence which occurs before he has responsibility for the vessel or the cargo. The carrier cannot be held responsible if the failure to exercise due diligence was, for example that of the shipbuilder prior to the carrier’s acquisition of the vessel, or of a shipper prior to the carrier’s acquisition of control over the cargo.

The fact that a defect is remediable may also mean that a vessel is not unseaworthy. This however is likely to depend on whether it would be reasonable to expect that the defect is remedied before any danger to vessel or cargo arose.

The owners had submitted that the risk of cargo damage or GA expenses arising from a failure to exercise due diligence to make the vessel seaworthy is borne by shipowners and their insurers, and a decision that negligent passage planning may render the vessel unseaworthy will lead to more cargo damage or GA claims being made against shipowners and their insurers. While this may be the result, it would still be necessary for claimants to prove in  each case that the defect in the passage plan was sufficiently serious to render the vessel unseaworthy, and that it was causative of the loss or damage.

Can maritime insurance contracts be terminated before the insurance period ends?

Introduction

Providers of maritime transport, warehousing and other logistics services ("transport providers") will often purchase liability insurance with a fixed insurance period (e.g. one or two years) to insure potential risks and liabilities that may occur during the course of service.

However, if several incidents that result in large losses occur, some insurers may unilaterally terminate such insurance contracts in advance of the expiration of the insurance period.

It is important for transport providers to know whether insurers are entitled to unilaterally terminate insurance contracts in advance without their consent. This article summarizes insurers' termination rights under Chinese law.

Insurers may terminate insurance contracts on the basis of statutory termination rights or agreed termination rights.

Statutory termination rights

There are relevant provisions about insurers' statutory termination rights in:

• the Insurance Law;
• the Maritime Law; and
• some judicial interpretations of the Supreme People's Court.

In the context of maritime insurance, if these laws have different provisions on the same specific issue, the provisions of the Maritime Law will take precedence over the Insurance Law and other laws.

The provisions of the above laws provide that insurers are entitled to exercise statutory termination rights in the following circumstances.

Where transport providers do not pay premiums in time
Where transport providers fail to pay their insurance premiums to the insurer in time, the insurer will have the right to terminate the insurance contract before the insurance liability begins, except where the insurer has already issued insurance documents.

However, after the commencement of the insurance liability, Chinese courts will not support insurers' requests for termination of the contract on the ground that the transport provider has not paid the premium.

Where transport providers fail to inform insurers of material circumstances
According to the Maritime Law, before a maritime insurance contract is concluded, a transport provider must truthfully inform the insurer of the material circumstances of which it has knowledge or ought to have knowledge in its ordinary business practice and which may have a bearing on the insurer in deciding on the premium or whether it agrees to insure.

Upon the intentional failure of the insured to truthfully inform the insurer of such circumstances, the insurer has the right to terminate the contract without refunding the premium. The insurer will not be liable for any losses arising from the perils insured against before the contract is terminated.

Where transport providers do not comply with warranties under insurance contract
According to the Maritime Law, a transport provider must notify the insurer in writing immediately where the transport provider has not complied with the warranties under the contract. The insurer may, upon receipt of the notice, terminate the contract or demand an amendment to the terms and conditions of the insurance coverage or an increase in the premium.

Where degree of peril of subject matter insured greatly increases
Where the degree of risk to the subject matter of insurance increases appreciably during the term of the insurance contract, a transport provider must notify the insurer in accordance with the contract in a timely manner. The insurer may, in accordance with the contract, increase the insurance premium or terminate the contract.

Where transport providers intentionally cause an insured incident
Where a transport provider intentionally causes an insured incident, the insurer will have the right to terminate the insurance contract, not to pay indemnity and not refund the premium.

Where the insured fails to maintain safety of subject matter
Where a transport provider fails to perform the obligation of maintaining the safety of the subject matter insured as agreed upon, the insurer will have the right to increase the insurance premium or terminate the contract.

Agreed termination rights

In addition to the aforementioned statutory termination rights, generally speaking, neither an insurer nor a transport provider may terminate a contract after the commencement of the insurance liability. However, both the Maritime Law and the Insurance Law respect contract freedom and enable both parties to agree on specific termination circumstances in an insurance contract.

Insurers will usually put in some specific termination circumstances in their general standard insurance clauses and the issued policy. Some insurers add termination-at-will rights in their standard insurance clauses or policies to protect their own rights and interests. However, Chinese law places some restrictions on insurer termination rights. For example, cargo insurance contracts and voyage insurance contracts may not be terminated by the parties once the insurance liability has commenced.

One case that exemplifies this is that of a transport provider that had bought liability insurance for one year. However, after several large payments, the insurer notified the client that the insurance contract would be terminated. The client argued that the insurance period had not expired. Upon reviewing the insurance contract's clauses, a clause was found that provided for the following:

Unless otherwise agreed, the insurer may terminate this insurance contract by sending a notice of termination to the insured 15 days in advance. After the termination of this insurance contract, the insurer will charge the actual premium based on the actual operating income during the period from the commencement of the insurance liability to the termination of the contract.

Therefore, the client was advised to find another insurance company to cover the potential risk in the future as soon as possible, instead of filing a lawsuit which could have an adverse effect.

Comment

Insurers may legally terminate maritime insurance contracts in advance of the expiration of the insurance period, provided that this termination right has been clearly agreed in the contract. Under such circumstances, transport providers will have to seek the services of another insurance company quickly to insure any subsequent potential risks and liabilities. This may be inconvenient for the transport provider and may result in them taking on uninsured liability.

It is therefore suggested that, as well as avoiding the occurrence of the statutory termination circumstances, transport providers should pay more attention to the relevant provisions of insurance clauses and policies. They should carefully consider whether to accept clauses that enable the insurer to unilaterally terminate the insurance contract in advance of the expiration of the insurance period.