A recent decision of the High Court has provided clarification on a question which had remained unanswered for many years – when assessing a constructive total loss (CTL) should the value of salvage services incurred prior to the issue of a Notice of Abandonment (NOA) be taken into account?

Facts

The "RENOS" was on a laden passage along the Egyptian coast when a fire broke out in the engine room. The vessel arrived at Suez on 31 August 2012 and, with remarkable speed, by 3 September the owners' independent surveyor indicated that the vessel could be a CTL. That was not, however, a view shared by two surveyors appointed by the insurers who considered that the damage to the vessel fell short of the level of damage required for a CTL.

By 8 October 2012, the classification society issued their report on the repairs they considered necessary. By 24 October 2012, within 2 months of the casualty, the owners provided a detailed repair specification which was sent to the insurers. In November 2012, the insurers sent their surveyors' comments back to the owners and commissioned a further survey together with a detailed repair specification. By the end of December a number of varying quotations from shipyards had been received, some based on the owners' repair specifications suggesting the strong possibility that the vessel was a CTL, others based on the insurers' surveyors' specifications suggesting the vessel was not a CTL. Unable to resolve the impasse, the owners gave NOA on 1 February 2013, 6 months after the casualty.

Timing of the NOA

The first issue that the Judge had to resolve was whether the Owners had lost the right to issue an NOA by 1 February 2013 given that section 62(3) of the Marine Insurance Act 1906 provides that a NOA "must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character, the assured is entitled to a reasonable time to make inquiry".

The judge, Knowles J, held that the NOA had been given in time when viewed in the context of a difficult and complex casualty and conflicting advice as to repair specifications: "Broadly speaking, it was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any one source into question. The assessment to be made was a major one for any person to make, if it was to be undertaken reasonably and responsibly. It is also important to keep in mind the difference between the calm of the courtroom some years later with the moving situation in Egypt at the time".

Interestingly, the insurers also argued that the owners could have given a "protective NOA" prior to incurring the costs of recovery and repair so that costs would fall after the NOA was provided, the implication being that there would be no difficulty in Owners issuing more than one NOA (each without prejudice to another) and/or subsequently deciding whether their original NOA was to be binding on them or not. The Judge could not support this approach given that, by section 62(2) of the Marine Insurance Act 1906, an NOA must be irrevocable. If a "protective NOA" were to be given, it might be open to challenge as the owners might still not have formed the view to abandon the ship, or if accepted, it could bind the owners in circumstances where they might not yet have reached a final decision on whether to call for a CTL.

Are pre-NOA costs to be included in a CTL calculation?

Having determined that NOA was valid, the Judge then had to consider whether its timing had any impact on the CTL calculation. In particular, the insurers argued that any costs of recovery or repair incurred prior to the NOA should be excluded, consistent with the authorities (The Medina Princess [1965] 1 Lloyd's Rep 361 and Hall v Hayman (1912) 17 Comm Cas 81), albeit that the editors of Arnould's Law of Marine Insurance and Average (18th Edition) considered these authorities to be wrong.

Knowles J adopted the approach advocated by the editors of Arnould. The starting point was that the policies incorporated the Institute Time Clauses – Hulls (1/10/83) and the Institute Time Clauses – Hulls Disbursement and Increased Value Clauses (1/10/83) and neither contained any express language limiting the cost of recovery or repair to costs incurred after the NOA had been tendered.

There was also no reason in principle to exclude such costs. Whilst section 60(2)(ii) of the Marine Insurance Act 1906 states that, in calculating a CTL, "future" salvage and general average costs are to be taken into account, it does not thereby exclude salvage and general average costs already accrued at the date of abandonment. Knowles J relied on an address of Donaldson LJ to the Average Adjusters Association in 1982 in which he made clear that the correct date for the purposes of assessment was the date of the casualty: to divide salvage costs by reference to the date of an NOA tendered at some date after the casualty would be artificial. That this approach departed from The Medina Princess and Hall v Hayman did not cause Knowles J any difficulty as, in his judgment, they were wrongly decided.

Approach to calculation of a CTL generally

Having addressed the above points of principle, the Judge then had to go through the process of assessing various items of repair to determine whether the vessel was a CTL. The Judge was able to do so with the benefit of a number of recent (and significant) cases on the issue and in particular the Irene EM (Venetico Marine SA v International General Insurance Company Limited and 19 others [2014] 1 Lloyd's Rep. 349) and The Brillante Virtuoso ((1) Suez Fortune Investments Ltd, (2) Piraeus Bank AE v Talbot Underwriting Ltd and others [2015] EWHC 42 (Comm) ). In these cases, owners had been able to establish CTLs against underwriters against the background of judicial endorsement of the concept of a "large margin" of contingency in Owners' favour.

Of particular interest in this case, however, was the approach to SCOPIC liability, which insurers argued could not properly be described as a "cost of repair" because it constituted additional compensation to encourage salvors to minimise the environmental impact of a casualty. Also, it was the P&I insurers who paid this liability, not the H&M insurers, and so they argued that it could not be the correct approach to allow costs which were not indemnifiable under the H&M policy as part of the calculation. The judge disagreed, holding that SCOPIC remuneration was "an indivisible" part of an item that insurers accept as a cost of repair, as were the (reasonable) legal costs of salvage arbitration.

This decision continues the recent trend of success by owners seeking to establish CTLs before the English courts, and builds upon those decisions by providing additional clarification that:

1. salvage and general average costs incurred prior to the issue of a NOA may be included in any CTL calculation, thereby confirming the view of the editors of Arnould at the expense of existing case law; and

2. SCOPIC is an integral part of necessary salvage operations, despite being paid for by different insurers, which confirms a view that many practitioners have taken over the years.