The High Court recently held that the “Brillante Virtuoso” (the “Vessel”) was a constructive total loss (“CTL”) following an attack by pirates in July 20111. Mr Justice Flaux made important key findings in the CTL claim, which totalled over US$80m. This case has been closely followed and widely discussed by the London insurance market.

The claim is pursued by the Owners (Suez Fortune Investments Ltd) and their Bank (Piraeus Bank AE). The Defendants in the case are a panel of ten Lloyd’s of London insurers led by Talbot Underwriting.

The Vessel had hull insurance for US$55m, with US$22m of increased value cover on top. She was sailing from the Ukraine to China with a cargo of fuel oil when the Vessel was boarded by pirates off Aden who approached the Vessel under the guise of being the port authorities. The armed gang overpowered the crew, ordered the master to sail to Somalia and after the engine stopped and could not be restarted set off an explosion that engulfed the engine room and accommodation.

Matters at issue

The trial has been split into two stages. Judgment in relation to the first stage of the trial was handed down by Mr Justice Flaux on Thursday 15 January. The main issue in relation to the first stage of the trial Claimants’ case was whether the Vessel had been a CTL. The further issue arose of whether, by selling the Vessel, the owners had acted inconsistently with a continued intention to abandon the Vessel to the insurers and had thereby lost the right to claim for a CTL. The defences of the insurers have been reserved for determination at a second stage of the trial.

Mr Justice Flaux’s rulings

In relation to this first stage of the trial, Mr Justice Flaux has made the following crucial rulings in favour of the Claimants.

  • On the evidence, taking into account the cost of repairs, the Vessel was a CTL. Further, in selling the Vessel the owners had been acting in the interests of both themselves and the insurers, so that no question of revocation of the notice of abandonment or of loss of the right to claim for a CTL could arise.
  • Subject to the defences of the insurers, the Claimants were entitled to an indemnity on that basis, as well as an indemnity in respect of salvage and in respect of standby tug costs and agents' fees until the date of issue of the claim form.

Issues of note addressed in Mr Justice Flaux’s judgment

Cost of repairs in the Middle East vs. China 
The appropriate place of repair will not necessarily be the cheapest

Notably, in this case, Mr Justice Flaux found that although he considered that the cost of repairing in Dubai would have been US $11. 4 million (or 17.5%) more expensive than repairing in China, the prudent uninsured owner would still, on balance, have favoured a repair in Dubai.

Mr Justice Flaux noted at paragraphs 124 – 142 of his judgment, that it is always a question of fact dependent upon all the circumstances of the case, where the prudent uninsured owner would have carried out the repairs. He noted that whilst cost is an important factor, it is not determinative, particularly where the price differential between a more expensive quotation from a shipyard close to the casualty and a cheaper quotation from a shipyard at a much greater distance from the casualty is not enormous.

He considered that the prudent uninsured owner would consider all the other factors which might well make the more expensive but closer yard the proper and appropriate place for repair, namely:

  1. The risk to the tug and Vessel and to the environment of a long tow to a distant repair yard, such as would be the tow from Khor Fakkan to a Chinese yard;
  2. The cost of the tow and of insurance for the tow;
  3. The reputation of the respective yards, not just as regards the quality of the workmanship but the accuracy of costs estimates and the risk of delay;
  4. Loss of income during the repair period; and
  5. The relative location of the yards in question to the Vessel’s next employment after repair.

Application of a contingency figure to repair cost estimates 
Mr Justice Flaux allowed for a 10% margin

One of the issues faced by Mr Justice Flaux in this case was the appropriate contingency figure to be applied to repair cost estimates. Mr Justice Flaux was guided by the judgment of Vaughan Williams LJ in Angel v Merchants Marine Insurance Co2 who refers to the fact that a “a large margin ought to be added to the figures of cost of repair to cover risks of this sort”.

Mr Justice Flaux held that, given the extent to which there were limitations in inspecting the Vessel to ascertain the extent of damage and machinery and equipment could not be opened up and tested, he was very firmly of the view that the applicable contingency should be 10%.

Issues when considering claim for “Sue and Labour” expenses

In relation to the other expenses of standby tugs and agency fees, the owners sought to recover those pursuant to clause 13 of the Institute War and Strikes Clauses - Hulls - Time (1983), the sue and labour clause and/or under section 78 of the Marine Insurance Act 1906.

The insurers resisted liability raising two issues of principle:

  • Whether upon the completion of the salvage services on 7 October 2011, it can be said that the peril covered by the war risks policy was still operating;
  • Whether any sue and labour expenses are recoverable at all after the NOA on 7 December 2011 or once the claim form was issued on 8 February 2012.

When does the original peril cease to operate?

In relation to the first issue, the insurers argued that the cover under the war risks policy was in respect of specified perils including violent theft, piracy, vandalism, sabotage and malicious mischief. They submitted that once the Vessel had been redelivered by the salvors, whichever peril had been operating ceased to operate. Whilst the Vessel was a dead ship, as a consequence of the peril but not because the peril was still operating. The relevant expenses would have been incurred whether the Vessel was insured or not and were not incurred for the benefit of the insurers.

Mr Justice Flaux considers the issue at some length in paragraphs 283 – 297 of his judgment referring to the authorities raised by Counsel. He ultimately concluded that the Claimants were correct in their submission because, when the salvors redelivered the Vessel on 7 October 2011, the Vessel was not in a place of safety as she was a dead and disabled ship anchored in international waters, the original peril of piracy or vandalism or malicious mischief continued to operate. In his judgment, Mr Justice Flaux goes on to say that a completely dead and disabled ship anchored in international waters without any tug assistance posed a serious and obvious danger not only to itself but to other shipping. If there were rough weather it was highly likely that the Vessel would drag her anchor and run aground or collide with another Vessel. Anything of that kind which endangered the structural integrity of the Vessel would lead to pollution.

What is the effect of the issuance of a claim form on a claim for sue and labour expenses?

The insurers contended that the entitlement to recover sue and labour expenses came to an end either once the notice of abandonment was served on 7 December 2011 or once the claim form was issued on 8 February 2012.

Mr Justice Flaux gave the matter due consideration at paragraphs and acknowledged that there may be valid grounds for reaching a different conclusion to that reached by Mr Justice Rix in Kuwait Airways v Kuwait Insurance3. However, he applied a principle recognised and applied in the earlier cases that the issue of the writ or claim form crystallises the rights and obligations of the parties to the contract of insurance. Once the claim form is issued, the relations between the parties are governed by the Civil Procedure Rules rather than the contract of insurance. Hence, the duty of utmost good faith comes to an end once proceedings are issued. He referred to the decision of the House of Lords in The Star Sea4as authority for this point. Mr Justice Flaux therefore found that the owners’ entitlement to claim for sue and labour expenses ceased when the claim form was issued on 8 February 2012.

N.B. Mr Justice Flaux denied the Defendants permission to appeal on the “sue and labour” points raised.