In Gard Marine & Energy Ltd v China National Chartering Co Ltd (the OCEAN VICTORY)1 , the Court of Appeal examined whether an insurer can have a subrogation action against a co-assured, a point of great general significance. It was held in the judgment that the underlying contract must be scrutinised to identify whether or not there is an intention that the insurance is for the joint benefit of the parties.

A vessel, the OCEAN VICTORY, was demise chartered by its owners, OVM, to OLH (demise charterers), a company in the same group. The vessel was time-chartered to China National Chartering Co (CNCC, intermediate charterers), and sub-time-chartered to Daiichi Chou Kisen Kaisha (DCKK, sub-charterers). All the charterparties contained a safe port warranty (that the vessel would only trade between safe ports). The vessel was insured for US$70 million with a number of insurers, including Gard, and covered both OVM and OLH (as co-assureds) for their respective rights and interests.

During adverse weather conditions in the port of Kashima, Japan, to where the vessel had been ordered by sub-charterers, the Master navigated the vessel from her berth out to open sea where she was driven onto a breakwater wall and became a total loss, for which the insurers paid. Gard took an assignment of the rights of both OLH and OVM in respect of the total loss and commenced proceedings against intermediate charterers for breach of the safe port warranty. Intermediate charterers in turn brought third-party proceedings against sub-charterers.

The first instance judgment in the High Court held that, due to the breach of the safe port warranties in the chain of charterparties, the sub-charterers were liable in damages to the intermediate charterers, and that intermediate charterers were in turn liable to Gard (who had taken an assignment of the demise charterers’ rights). Further, it was held that the charterparty between OVM and OLH had not provided for OVM to be able to waive any claims against OLH in favour of a claim against insurers only. Sub-charterers and intermediate charterers appealed the decision.

In the appeal hearing, there were three principal issues for determination:

  1. Whether, as a matter of law, there had been a breach of the safe port warranty.
  2. Whether, even if there had been a breach of the safe port warranty, the cause of the casualty was not the breach but rather the Master’s decision to navigate out to sea in extreme conditions, rather than stay at the berth.
  3. Whether, on a true construction of the terms of the demise charterparty, the demise charterers, who had insured the vessel at their expense, had any liability to the owners in respect of insured losses, notwithstanding that such losses may have been caused by a breach of the safe port warranty (the recoverability issue).

The Court of Appeal reversed the first instance judgment and held that Kashima was not an unsafe port and that the sub-charterers were therefore not in breach of the relevant safe port warranty. As such, it was unnecessary for the Court to determine the recoverability issue, but the Court chose to deal with it anyway as it raised an important issue of principle, in relation to the construction of the demise charter, and subrogation rights in general.

OVM had demise chartered the vessel to OLH on an amended BARECON 89 form, and Clause 12 contained terms providing for the demise charterers to take out insurance on behalf of themselves and owners. Sub-charterers had argued in the first instance that Clause 12 provided for an insurance-funded solution between owners and demise charterers for the insured losses. If this had been the case, then on breach of the safe port warranty, owners would claim on the insurance, for the joint benefit of owners and demise charterers, with Gard unable to pursue a subrogated claim against their insured. The Court of Appeal held that the BARECON demise charter excluded rights of recourse between owners and demise charterers, in favour of an insurancefunded solution, and that the parties to the demise charter had agreed to look to the required hull insurance and not to each other in the event of a total loss.

In the judgment, Lord Justice Longmore stated that, “it would be nonsensical, in a case in which it was agreed that the parties were to be insured ‘in joint names as their interest may appear’ and they further agreed that in the event of a total loss the demise charter would come to an end, that they envisaged that either party could sue the other for breach of contract, at any rate once the insurance money was paid and distributed in accordance with the interest of the parties as they appeared”.

As such, even had the demise charterers been in breach of the safe port warranty, they would not have been liable to Gard for the loss of the vessel, as demise charterers had no liability to owners to pass down the chain to sub-charterers. The effect was such that once the insurance monies had been paid out, liability between the parties was discharged.