In July 2013, Mr Justice Teare handed down a judgment in the “OCEAN VICTORY” that appeared to set a high threshold for charterers to reach in defending unsafe port claims on the grounds of abnormal occurrence. Facing a liability in excess of US$138 million, charterers brought an appeal, with the Court of Appeal handing down its judgment in January 2015.
By way of background, in October 2006, the “OCEAN VICTORY”, a Capesize bulk carrier, went aground and became a total loss as she was attempting to leave Kashima port where she had been ordered to discharge a cargo of iron ore. At the time of the incident, she had been demise chartered to an associated group company. The demise charterers had then time-chartered her to intermediate charterers, who in turn subtime chartered her to charterers. Each charterparty contained an undertaking to trade the vessel between safe ports.
Under the terms of the demise charter, the demise charterers had taken out hull insurance, at their expense, in the joint names of both the owners and themselves. The hull insurer took an assignment of the rights of the owners and demise charterers after paying the agreed value of the vessel. They then brought a claim for damages for breach of the safe port warranty against the intermediate charterers, which was passed down the charterparty chain to charterers. The claim succeeded in the Commercial Court (as reported in our September 2013 edition of trade advantage).
On appeal to the Court of Appeal, two legal issues fell for consideration. The first issue was whether there had been a breach of the safe port warranty. In the context of the case, this issue centred on whether the event leading to the vessel becoming a total loss was an abnormal occurrence. If it was, the charterers would not be in breach of the safe port warranty, the law stipulating that a charterer does not assume responsibility for unexpected and abnormal events which occurred suddenly and created unsafe conditions after giving the order to proceed to the port.
It was the charterers’ case that the abnormal occurrence that led to the vessel becoming a total loss was a combination of two factors: (a) swell from ‘long waves’ that made it dangerous for the vessel to remain at her berth due to a risk of damage or mooring break out; and (b) very severe gale force winds from the north, which made navigation of the fairway leading to the open sea dangerous for her.
In critiquing the Commercial Court decision, the Court of Appeal’s starting point was that whether an event giving rise to the casualty was to be characterised as an abnormal occurrence rather than the result of a normal characteristic of the port at the particular time, was a factual question that needed to be determined using a realistic approach.
It was observed that no evidence had been adduced of any previous incident in the port’s 35-year history where a vessel had been affected by the combination of the two factors described above or that it was a regular, periodic or even an occasional occurrence at the port. That said, it was recognised and accepted that the port was susceptible, at times, to either of the factors albeit not at the same time. According to the charterers’ weather expert (whose evidence, significantly, went unchallenged), the storm which had affected Kashima port on 24 October 2006 was ‘exceptional in terms of its rapid development, its duration and its severity’. In light of this evidence, the Court of Appeal concluded that the event which led to the casualty was an abnormal occurrence.
In overturning the first instance judgment, the Court of Appeal noted that the judge had failed to consider what should have been a unitary question of whether the combination of the two factors detailed above was an abnormal occurrence or a normal characteristic of the port. In particular, the judge at first instance had instead considered each factor in isolation first, deciding that neither factor on its own could be said to be an abnormal occurrence. It was a short step forward for the first instance judge to hold that a combination of these factors, while rare, was nevertheless borne from the attributes and characteristics of the port.
The first instance judge had also erred in concluding that an event that was theoretically foreseeable at a port because of its location was enough to qualify the event as a characteristic of the port. Citing the “MARY LOU” and the “SAGA COB” cases, the Court of Appeal stated that mere foreseeability was not sufficient to turn a rare event in the history of the port into a normal characteristic of the port. In approaching the question realistically, it was necessary to have regard to significant factors such as the actual evidence relating to the past history of the port, the frequency of the event, the degree of foreseeability of the occurrence of the swell from the long waves combined with the gale force northerly winds, and the very severe nature of the storm on the casualty date. According to the Court of Appeal ‘… one has to look at the reality of the particular situation in the context of all the evidence, to ascertain whether the particular event was sufficiently likely to occur to have become an attribute of the port, otherwise the consequences of a mere foreseeability test lead to wholly unreal and impractical results’.
The second issue that the Court of Appeal was asked to determine was whether the demise charterers had any liability towards the owners. If they did not, then they had not suffered any loss and had no liability to pass down the chartering chain. Although it was not necessary to decide this point given that there was no breach of the safe port warranty, the Court of Appeal considered it since it raised an important issue of principle in relation to the construction of the demise charter.
Given that the parties had agreed in clause 12 of the demise charter to be insured in joint names and that the demise charter would come to an end in the event of a total loss, this meant that the parties had agreed to look to the insurers for indemnification rather than to each other. Therefore, clause 12 was to be construed to exclude a right of recovery by the owners of the vessel from the demise charterers in respect of loss covered by the hull insurance.
In the context of short-term demise charters where the owners would already be insured and would be adding the demise charterers to the existing policy, the parties might wish specifically to provide that the owners and their insurers were to forgo rights of subrogation. However, the absence of an express exclusion of rights of recovery or subrogation did not mean that the exclusion had been negated where it was the demise charterers who had taken out and paid for the insurance.
The Court of Appeal concluded that even if there had been a breach of the safe port obligation, the demise charterers would have been under no liability to the owners for that breach. It followed that the demise charterers had suffered no loss and had no liability to pass down the chartering chain.
It is thought that the Court of Appeal decision has rebalanced the law on safety of ports. Had the first instance judgment been upheld, even the most extreme, unpredictable and rare events – provided they were theoretically foreseeable – would be categorised as a normal characteristic of the port, with the result that any damage caused to vessels from these events would involve a breach of the charterers’ safe port warranty. It would have made it extremely difficult for charterers to raise a successful defence of abnormal occurrence. The Court of Appeal’s assessment of whether an event is an ‘abnormal occurrence’ for the purposes of applying the classic definition of a safe port is more realistic and represents a welcome clarification of the law.