In Global Process Systems v Syarikat Takaful Malaysia Berhad [2011] UKSC 5, 1 February 2011, the Supreme Court considered the interrelationship between a loss proximately caused by perils of the sea and inherent vice. In a decision which is significant for marine cargo insurance – but is of interest to property insurance more generally – the Supreme Court held that the loss of the legs of a jack-up rig during a tow was proximately caused by a leg-breaking wave, being a peril of the sea. Where any external fortuity acted to cause the loss, inherent vice could not be the proximate cause.

Background

Global Process Systems (GPS) purchased a jack-up rig that they required to be towed from Texas to East Malaysia. The principal anticipated issue with the tow was the risk of metal fatigue to the legs, which extended 300 feet vertically, caused by the action of the waves. The structural integrity of the legs was calculated and the tow certified by the marine surveyor. GPS did not know the legs were unfit for the tow nor were they reckless as to the fitness of the legs. After repairs in South Africa, the tow around the Cape of Good Hope commenced on 28 October 2005. On 4 November 2005, the starboard leg broke off followed the next day by the forward leg and the port leg.

It was common ground that the loss of the legs was as a result of fatigue cracks that had developed and propagated as a result of the motion of the sea. Once the cracks had reached a critical size, the application of a final stress from a leg breaking wave led to the failure of the starboard leg with the other legs more exposed to failure thereafter. The expert evidence was that the cracks themselves would not have been enough to cause the loss of the legs, which would only have failed as a result of a leg breaking final stress.

First instance decision

The policy incorporating the Institute Cargo Clauses covered "all risks of loss of or damage to the subject matter insured" but excluded "loss damage or expense caused by inherent vice or nature of the subject matter covered".

Blair J had to determine whether the proximate cause of the loss was the perils of the sea or inherent vice, the burden being on insurers to prove damage resulting from inherent vice if they wished to rely upon that exclusion. Blair J held that the legs failed because they had an inherent inability to withstand the normal incidents of the voyage, including the weather reasonably to be expected, and the damage was accordingly excluded.

Decision of the Court of Appeal

The Court of Appeal unanimously overturned Blair J’s judgment. Waller LJ held that inherent vice could not be a proximate cause of loss if there was an external accident that caused the loss. The relevant test for inherent vice was not whether the weather was in the range that could reasonably be anticipated; rather the ordinary incidents of the voyage were defined by reference to wind or wave which, it would be the common understanding, would be bound to occur as the ordinary incidents on any normal voyage of the kind being undertaken. The leg breaking wave that caused the damage was not bound to occur therefore inherent vice was not the proximate cause of the loss.

Decision of the Supreme Court

The Supreme Court’s task, required by section 55 of the Marine Insurance Act 1906, was to ascertain the proximate cause of the loss, meaning the cause proximate in efficiency rather than time. It was common ground that the inherent vice exclusion in the policy bore no different meaning to the exclusion of inherent vice in section 55(2)(c) of the 1906 Act.

The crux of the argument concerned the application of Lord Diplock’s classic definition of inherent vice in Soya GmbH Mainz KG v White (1983) 1 Lloyd's Rep 122 HL: “the risk of deterioration of the goods ... as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident...”. In the Supreme Court Lord Mance made clear that the “ordinary course of the contemplated voyage” was not intended to open up an assessment of the weather conditions encountered; rather it was simply in contrast to a voyage on which a fortuitous external accident occurred. Further, there was no apparent limitation to the requirement that there be no intervention of any fortuitous external accident.

Lord Saville and Lord Clarke concluded that Mayban General Insurance v Alstom Power Plants Ltd [2004] 2 Lloyd's Rep 609 was wrongly decided. In that case Moore-Bick J (as he then was) held that if goods were damaged during a voyage in which the vessel carrying those goods encountered conditions no more severe than could reasonably have been expected, the real cause of the loss was the inherent inability of the goods to withstand the ordinary incidents of the voyage. Applying the test in Mayban would frustrate the purpose of cargo insurance which would then respond to damage caused by perils of the sea only where those perils of the sea were exceptional, unforeseen or unforeseeable.

The Supreme Court held that the proximate cause of the loss was a question of fact to be determined applying the common sense of a business or seafaring man. In the present case, the proximate cause was an external fortuitous accident in the form of the sea conditions encountered that caused the first leg to be caught at just the right moment to break off. As a result of the failure of the first leg, stresses increased on the remaining legs and they subsequently failed. Lord Mance commented that the loss had many obvious characteristics that one would associate with a fortuitous marine accident or casualty, and that was how the loss should be viewed.

Comment

The Supreme Court’s narrow construction of inherent vice in the context of marine insurance is generally helpful to policyholders. The Supreme Court sought to avoid the inherent uncertainty in attempting to define inherent vice by reference to gradations of adverse weather conditions to be expected during the voyage, preferring the simplicity of the analysis that an external fortuity, a peril of the sea, foreclosed the possibility of inherent vice as the proximate cause.

The decision is of wider interest in the property insurance context. Lord Mance, obiter, proffers a tentative definition of “ordinary wear and tear” as covering loss or damage resulting from the ordinary vicissitudes of use (in the case of a vessel), or of handling or carriage (in the case of cargo), while inherent vice covers the inherent characteristics or defects (in the hull or cargo) leading it to cause damage to itself. Since these concepts appear together in section 55(2)(c) of the 1906 Act, it may be inferred that the occurrence of any fortuitous external accident or casualty precludes either of them from being the proximate cause of a loss, which will be of interest in the non-marine context where such concepts are commonly excluded in all risks policies.