In the March 2010 edition of the Insurance and Reinsurance Review, we reported on the Court of Appeal’s decision in the Celandor MoPu (Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2009] EWCA Civ 1398), which overturned the first instance decision of Mr Justice Blair and significantly reduced the scope of inherent vice exclusions, found in many marine cargo and general property insurance contracts.

The case has recently come before the Supreme Court (Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2011] UKSC 5), which handed down its decision in February this year. The Supreme Court upheld the decision of the Court of Appeal and found for the insured, Global Process Systems (GPS), albeit for slightly different reasons. This article will briefly cover the decisions of the lower courts (which are covered in more detail in the earlier article in the March 2010 edition) before considering the decision of the Supreme Court.

Facts

GPS purchased an oil rig, the Celandor, in May 2005, with a view to converting it into a mobile offshore production unit. The rig was to be transported from Texas, around the Cape of Good Hope, to its new home off the coast of Malaysia. It was to be carried on a barge with its legs extended 300 feet in the air.

During the voyage, the starboard leg of the rig succumbed to fatigue cracking, caused by the repeated bending of the legs under the motion of the barge as it was towed. Within hours, the remaining two legs had also broken off, and all three fell to the bottom of the sea, leaving the rig in need of substantial and costly repairs. GPS claimed on its insurance with Syarikat Takaful Malaysia Berhad (Takaful). Incorporating Institute Cargo Clauses (A), the insurance was stated to cover “all risks of loss or damage” except that “caused by inherent vice or nature of the subject matter covered”.

A similar inherent vice exclusion is also included in s55(2) of the Marine Insurance Act 1906 (MIA), which states that “...the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice...”. There is no statutory definition of “inherent vice” in the MIA, but it was accepted by the parties that Lord Diplock’s statement in Soya GmbH Mainz KG v White (1983) 1 Lloyd’s Rep 122 HL represented the correct definition of inherent vice:

“...the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty.”

Therefore, the principal issue to be determined at first instance, the Court of Appeal and the Supreme Court was the same - whether the proximate cause of the loss was a “fortuitous external accident” (which in this case would be the weather conditions experienced on the voyage, i.e. a peril of the sea) or the inherent, internal characteristics of the rig itself.

Decision at First Instance

Mr Justice Blair held that the proximate cause of loss was inherent vice; the legs were, by their very nature, not capable of withstanding the normal incidents of the insured voyage from Texas to Lumut, including the weather “which was reasonably to be expected”.

As part of his judgment, Blair J found that although a single “leg-breaking wave” caused the final fracture to occur, that wave was part of the conditions which were reasonably to be expected on the voyage. As such, in the absence of an external fortuitous event, the proximate cause of the loss was inherent vice.

Decision of the Court of Appeal

GPS appealed to the Court of Appeal, which overturned the first instance judgment. It held that inherent vice could only be the sole and proximate cause of a loss where the weather conditions experienced (which were alternative causes of that loss) “would be bound to occur as the ordinary incidents on any normal voyage of the kind undertaken.” It was held that this was simply not the case on the present facts. Although with the benefit of hindsight, the “leg breaking wave” may have been highly probable, that “high probability was unknown to the insured and that was a risk against which the appellants insured.”

Decision of the Supreme Court

Takaful appealed to the Supreme Court, which ultimately upheld the decision of the Court of Appeal. Although four of the five justices (Lords Saville, Mance, Collins and Clarke) gave reasoned judgments, and each of their reasoning was slightly different, it is clear that the focus of the Supreme Court was not, as it had been at first instance and in the Court of Appeal, on the probability or severity of the weather experienced (whether it be “reasonably to be expected” or “bound to occur”), but was rather placed on whether some fortuitous external event could be identified as the cause of the loss.

As such, the relevant investigation to be made was whether there could be shown to be an external event which could be considered fortuitous, which caused the loss. If this was so, inherent vice could not be said to be the cause of the loss. In the words of Lord Saville:

“...all or virtually all goods are susceptible to loss or damage from the fortuities of the weather on a voyage; this does not mean that such loss or damage arises from the nature of the goods; it arises from the fact that the goods have encountered one of the perils of the seas.”

The Supreme Court, therefore, went on to consider whether the rig had encountered a “peril of the sea”, which is defined by Schedule 1 Rule 7 of the MIA as referring to “...fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.” The Supreme Court held that although the statutory definition of “a peril of the sea” in the MIA did not include “the ordinary action of the winds and waves”, the relevant question to be considered was whether the effect of the waves was extraordinary, rather than whether the waves were extraordinary in themselves.

Lord Clarke stated, “it is not the state of the sea itself which must be fortuitous but rather the occurrence of some accident or casualty due to the conditions of the sea”.

On the present facts, as determined by Blair J at first instance, there had been a single “leg breaking wave” which had caused the first leg to fracture. Lord Collins commented that “the sudden breakage of the first leg...occurred under the influence of a leg breaking wave of a direction and strength catching the first leg at just the right moment, leading to increased stress on and collapse of the other two legs in turn.” The Supreme Court held that this single wave constituted an external fortuitous event which caused the loss in question. Inherent vice, therefore, could not be said to be the cause of the loss.

Significance of the Decision

Although the reasoning of the Supreme Court differs somewhat from that used by the Court of Appeal, its ultimate decision has not altered in any significant way the message sent out by the Court of Appeal – the Celandor MoPu narrows the test for inherent vice and broadens the range of events which may be considered fortuitous external accidents. It is likely that the courts will now be reluctant to find that inherent vice is the proximate cause of a loss where there are other plausible external fortuitous events which may have caused the loss. It is also clear that a peril of the sea will be construed widely – the question will not be whether the waves or the weather were ordinary, or were those which were to be reasonably expected or bound to occur, but rather whether the effect of the waves and the weather was fortuitous. As such, the scope of weather conditions which may be considered to be “perils of the sea” may now be quite extensive.

The Supreme Court decision means that any insurers operating in markets where inherent vice exclusions are common (for example marine cargo and property insurance) should be cautious if they intend to rely on such exclusions. This is particularly so where, as in the Celandor MoPu, there are other external fortuitous events, whether they be perils of the sea or otherwise, that may have caused the loss.