In Dornoch Ltd and others v Westminster International BV and others  EWHC 889 (Admlty) the court was asked to consider a number of issues arising out of a contract of marine insurance in the context of a constructive total loss following a collision.
The first Defendant was the owner of a mega-sized trailer hopper dredger which was declared a constructive total loss following a collision in China in March 2007. The dredger’s hull and machinery cover was written in two layers. The primary layer was underwritten by seven insurance companies up to an amount of €5m. The primary policy was governed by English law but also contained a Dutch exclusive jurisdiction clause. The excess policy was €145m in excess of the €5m and was written by fifteen underwriters, the Claimants in this action. This policy was also governed by English law.
Following the collision, the first Defendant tendered a notice of abandonment to the hull and machinery underwriters. The underwriters would not accept the notice of abandonment but agreed to place the first Defendant in the same position as if a claim form had been issued that day. This is a time honoured and common if not universal practice. Later in the year the dredger was towed to a naval dockyard in Thailand where she remains. By April 2008 all of the hull and machinery underwriters had each paid the amount due in respect of the constructive total loss of the dredger. In July 2008 all the hull and machinery underwriters paid the salvor in settlement of the salvage/wreck removal claim pursuant to the policies. A dispute then arose between the first Defendant and the underwriters in relation to the realisation of the value of the wreck. It was common ground that having paid for the constructive total loss and that having settled the salvor’s claims, the underwriters were entitled to the residual open market value of the dredger. The dispute between the underwriters and the first Defendant arose out a disagreement over the actual residual value of the dredger. The realisation of the value of the wreck is usually dealt with on a consensual basis and the fact that this had not proved possible in this instance brought into question the precise nature of the underwriters’ rights in this regard and, in particular, whether the underwriters were entitled to exercise control over the manner in which the residual value of the wreck was ascertained. The underwriters argued that the wreck was worth about €75m in 2008. The first Defendant argued that the wreck was worth around €25m which sum they offered to underwriters for the wreck. This offer was rejected by the underwriters who wished to put the wreck on the open market. The first Defendant was not prepared to cooperate with the open market sale arguing that allowing its competitors to inspect the wreck would allow those parties access to confidential information. The underwriters countered that the first Defendant would need to pay considerably more than €25m in order to prevent the vessel being sold to a competitor. The inability of the underwriters to place the wreck on the open market and allow potential buyers to inspect it meant that it was difficult to ascertain the wreck’s value on the open market. Eventually all of the Claimants, (excepting one), and nearly all of the primary underwriters elected to take over the interest of the first Defendant in the wreck. In response, the first Defendant attempted to sell the wreck without the underwriters’ consent and signed an MOA with a company in the same group, (the fourth Defendant in this action), with a contract price of €1,000.
The court had to consider: 1). Whether as a matter of English law, the Claimants upon payment of an amount in respect of the dredger’s constructive total loss had acquired a proprietary interest in the vessel in the form of an equitable lien; 2). whether the Claimants impliedly elected to take over the wreck for the purposes of section 63(1) and/or 79(1) of the Marine Insurance Act 1906 by paying the salvage/wreck removal claim; 3). whether as a matter of English law, the Claimants by virtue of their having paid the salvage/wreck removal claim acquired a proprietary interest in the wreck in the form of an equitable lien; 4). whether the election by 85% of the Claimants and 77.5% of the Primary Underwriters to take over the wreck, was effective for the purposes of section 63(1) and/or 79(1) of the Marine Insurance Act 1906; 5). if as a matter of English law, the Claimants by virtue of either an implied election as set out in (2) above or an express election as set out in (4) above acquired a proprietary interest in the wreck in the form of either an equitable lien or a beneficial interest under a trust; 6). as a matter of English law, what is the effect (if any) of 100% of the Claimants expressly electing to take over the wreck after the purported transfer of legal title to the wreck to the fourth Defendant on 9 January 2009; 7). assuming that the fourth Defendant has the legal ownership of the wreck but the Claimants have a proprietary interest in the form of an equitable lien or beneficial interest under a trust in the vessel, as a matter of English law, what rights do the Claimants have to take possession of or dispose of the wreck and, in particular, are the Claimants entitled to: (a) require the sale of the wreck; and/or (b) dictate in principle the manner of such sale; 8). what is (or are) the relevant system (or systems) of law for determining the incidence of proprietary interests in the wreck prior to, at the time of, and after the purported transfer of the wreck to the fourth Defendant, was it English law, as the law of the Excess Policy and of the Primary Policy or the lex fori, or was it the law of the lex situs; 9). if the answer to (8) was the lex situs, was the lex situs of the vessel Dutch law or Thai law.
Tomlinson J noted that an equitable lien conferred a charge upon property and arose by operation of equity from the relationship between the parties. An equitable lien exists independently of possession and confers positive rights enforceable by means of an order for sale. The right conferred is a proprietary right in the property which is the subject of the lien. It cannot be used against a bona fide purchaser for value of a legal estate without notice of it. He did not think that in this case, equity imposed an equitable lien. Equity would only secure the position of insurers who prior to payment for a constructive total loss, conclusively admitted liability for the constructive total loss and irrevocably elected to take over the interest of the assured in the wreck. After payment for a constructive total loss, the obligation upon an insured to cede to underwriters his interest in the wreck is contingent upon underwriters agreeing to assume the heavy burdens of ownership to which the insured is immediately exposed. He could see no reason why equity should intervene to secure the position of insurers whilst they take further time to decide whether they wish to assume those burdens. The Marine Insurance Act 1906 did not provide for an insured who had been paid for a constructive total loss to dispose of his interest in the wreck without the underwriters’ consent. This would be the effect of an equitable lien and would impose a significant obligation on the insured which is not contemplated by the Act.
On the matter of the second question, the Claimants conceded that no implied election arose on the grounds that a form incorporated into the primary policy provided "that no acts of the insurer or insured in recovering, saving, or preserving the property insured, shall be considered as a waiver or acceptance of abandonment".
In relation to question three, the Claimants submitted that even if no equitable lien was obtained by payment for the constructive total loss, it would be unconscionable for the first Defendant to retain the benefit constituted by the preservation of the value of the vessel by salvage and the discharge of the salvor’s lien. Tomlinson J did not consider there to be anything unconscionable in that result as it was simply the consequence of (a) the insurers not electing to take over the wreck and (b) it being an incident of the policy that the underwriters are obliged to pay for salvage. The Claimants did not acquire an equitable lien by virtue of having paid the salvage/wreck removal claim.
The judge considered issues four and five together and concluded that as a matter of principle it was irrelevant to the rights of one insurer what another insurer decided to do on the grounds that each insurer had a separate contract with the insured, and the Act was concerned with the incidents covered by each contract. Provided that any one underwriter has paid his proportion of a total loss of the ship, or his proportion of a total loss of an apportionable part of or of the whole of the goods, he has a right of election. The electing underwriters simply become co-owners of the vessel together with the first Defendants in their respective proportions.
Considering issue six, the judge took the view, that on the assumption that the fourth Defendant was a bona fide purchaser for value without notice of the equitable rights of those underwriters who elected to take over the vessel in December 2008, and on the further assumption that the legal title to the vessel was validly and effectively transferred to the fourth Defendant, those underwriters' equitable rights were extinguished. The subsequent election by the remaining underwriters would on these assumptions be ineffective, since the assured would at the time of the election have no interest in the wreck which could be ceded or assumed.
Addressing issue seven, it was common ground that on the assumption that the legal title to the vessel was validly transferred, the underwriters’ equitable rights would be extinguished where the fourth Defendant had been a bone fide purchaser for value without notice of the equitable rights of the underwriters who had elected to take over the vessel in December 2008. If the fourth Defendant had not been a bona fide purchaser for value, without notice of the insurers’ equitable rights, those rights would survive the sale. The judge on the basis of his conclusions that the Claimants, if they had a beneficial interest, collectively had a beneficial interest of less than 100% questioned how the Claimants could achieve the sale of the vessel.
In relation to issue eight, the parties were in agreement that the relevant law for determining proprietary interests in the vessel was the lex situs. Tomlinson J did not think that English law had crystallized to the point where a different answer was impermissible. He referred to Dicey and expressed support for a cautious and issue-based approach citing Mance LJ in Raffeisen Zentralbank v. Five Star Trading LLC  QB 825. As to issue nine, Tomlinson J could see no reason for creating an exception to the general rule that the lex situs was the physical situs of the vessel at the time when such rights are created and grant an exception on the grounds that the lex situs of a registered ship should be the place of registration.