In a recent case the Supreme Court considered three questions relating to the total loss of the vessel Ocean Victory during a storm at the port of Kashima, Japan.

Determination of abnormal occurrence

The first (and main) question was whether the weather conditions in question constituted an 'abnormal occurrence', in which case the port would not be unsafe, or a normal feature of the port, in which case the port was unsafe.

The five Supreme Court judges unanimously agreed with the Court of Appeal that the event was an abnormal occurrence. According to the Supreme Court, the first-instance court had mistakenly segmented its approach by analysing two events separately. The loss was caused by a combination of extreme long-wave swell and strong winds. As both were features of the port, the first-instance court had found that the combination of these features was also a normal feature of the port, making it unsafe.

The Court of Appeal (whose analysis was endorsed by the Supreme Court) held that a unitary approach was needed and consideration must be given to whether the event itself was abnormal, even if composed of factors that ordinarily would be features of the port.

In this case, among other factors, given that the event was rare (there had been no comparable event in the 35-year history of the port) and the unchallenged expert evidence showed that the storm was of exceptional severity, it constituted an abnormal occurrence; but for the event, the port was prospectively safe when the order had been given to proceed there and the charterers were not in breach of their safe port warranty given in the charterparty.

While the finding that the port was safe decided the case in the charterers' favour without the need to consider the remaining points, the Supreme Court nonetheless did so.

Limitation of liability to demise charterers

The second point was whether (if the port was unsafe) the charterers could limit their liability to the demise charterers under the Convention on Limitation of Liability for Maritime Claims 1976 – principally Section 2(1)(a), which provides that a charterer (among others) can limit liability for "claims in respect of… loss of or damage to property… in direct connexion with the operation of the ship".

The Supreme Court unanimously decided that the charterers could not limit their liability under the convention. It endorsed the reasoning of the Court of Appeal in another case (The CMA Djakarta [2004]) that the wording of the convention did not permit limitation of loss by reference to the subject ship, as the wording envisaged loss related to something other than that ship.

Subrogation rights

The third point was the most controversial and was decided in the charterers' favour by a three-to-two majority of the Supreme Court. The question was whether the terms of the insurance clause in the bareboat charterparty between the shipowners and demise charterers provided an exclusive regime for compensation for loss of the vessel that precluded hull insurers' subrogation rights. The court found that it did.

Essentially, Clause 12 (and Clause 13, if it had applied) of the BARECON 89 form – which sets out the terms on which joint insurance would be put in place – was intended to be a comprehensive regime for dealing with repairs and losses irrespective of fault. Also, the commercial purpose of joint insurance was to avoid litigation between joint assureds and any related subrogated claims. As such, any insurance proceeds paid under Clause 12 did not discharge the liability of one party to the other (which may permit a subrogated claim to be brought against sub-charterers), but that liability between the parties does not arise at all where such a comprehensive scheme as provided for in Clause 12 exists. Therefore, no liability arose and the demise charterers were unable to pass on any liability that they may have had to the shipowners under the safe port warranty and so the vessel insurers were unable to bring a subrogated claim against the charterers to recover the insurance payments made (amounting to around $100 million).

Comment

It may seem incongruous that the insurers would have been able to pursue a subrogated claim against the charterers but for the existence of the joint insurance and Clause 12 in the demise charterparty. However, the court pointed out that there may have been two alternative methods of claiming against the charterers which had not been pursued earlier in the proceedings:

  • that the demise charterer had possessory title to the vessel and could pursue a claim itself; or
  • under the 'transferred loss' principle, that a contracting party can in certain circumstances claim for losses suffered by a third party.

Unfortunately, these alternatives were not explored, as the insurers had limited their claim to the basis that the demise charterer was liable to the shipowner under the charterparty. However, the alternative methods of bringing a claim may provide a means of circumventing this Clause 12 issue in future.

For further information on this topic please contact Jonathan Wood or Danyel White at RPC by telephone (+44 20 3060 6000) or email (jonathan.wood@rpc.co.uk or danyel.white@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

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