High Court: Mr Justice Smith

Mark Templemann QC and Jeremy Brier (instructed by Holman Fenwick Willan LLP) for the Claimant

Christopher Smith QC and Neil Hart (instructed by Clyde & Co LLP) for the Defendant

Michael Bools QC (instructed by Ross & Co Solicitors) for GL Noble Denton

Background

The Policy

The IRENE EM (the "Vessel") was insured for hull and machinery, increased value and anticipated costs of replacement under several fleet policies.

The hull and machinery policies comprised five policies subscribed by the first 18 defendants, and under them the hull and machinery of the Vessel and everything connected therewith were insured for an agreed value of US$12,000,000. The second, fifth to 10th and 19th defendants subscribed to the IV policy, which provided insurance for an increased value of US$3,000,000. The ACR policies were two policies subscribed by the 19th and 20th defendants, the sum insured being US$3,000,000.

The hull and machinery policy included the following provisions from the Institute Time Clauses – Hulls (the ITCH):

6. PERILS

6.1 This insurance covers loss of or damage to the subject-matter insured caused by . . .

6.1.1 perils of the seas rivers lakes or other navigable waters . . .

6.2 This insurance covers loss of or damage to the subject-matter insured caused by . . .

6.2.2 negligence of Master Officers Crew or Pilots . . .

provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners, Managers or Superintendents or any of their onshore management . . .

19. CONSTRUCTIVE TOTAL LOSS

19.1 In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.

19.2 No claim for constructive total loss based on the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value . . .”.

The IV policy and the ACR policies incorporated the Institute Time Clauses – Hulls Disbursement Increased Value (CL290) 1/11/95 (the ITCHDIV). The ITCHDIV included the same "perils" provision as the ITCH, and a similar Constructive Total Loss clause.

The Incident and Claim

On 30 October 2009, whilst on a voyage from Salalah in Oman to Dahej in India, the Vessel grounded in the Gulf of Khambhat. She had moved whilst at anchor, resulting in the anchor being dragged, and had grounded. Damage was discovered as a result of the grounding and the underwriters instructed their own experts GL Noble Denton to examine the Vessel. The circumstances of the grounding were never accepted by the underwriters.

On 9 December, after expert assessment of the Vessel, the Owners served on the Underwriters a notice of abandonment, stating that they considered that the cost of repairs to the hull or the hull and engine would exceed the insured value of the Vessel. The underwriters declined the notice, but agreed that the Owners should be treated as if proceedings had been issued from the date on which it was given.

On 11 December 2009, while the Vessel was lying in ballast at Bhavnagar anchorage, she was inspected by Mr George Sarbanis, a Senior Surveyor with Bureau Veritas who recommended that the Vessel's classification remain suspended.

In January 2010 Owners obtained a quote from the COSCO shipyard in Zhoushan for the repair of the Vessel based on Mr Sarbanis' report. This was in the amount of US$21,676,680. A separate quote was obtained from Jurong Shipyard Singapore in the amount of US$21,575,000. Including towage etc. the Owners worked on the basis that repairs would cost between US$28,000,000 and US$30,000,000.

On 16 July 2010, the Owners sold the Vessel scrap for around US$3,000,000 on a "as is where is basis" at Bhavnagar. On 2 August 2010 the new owners towed her to Alang for scrapping.

The Owners commenced proceedings against the Underwriters for US$18,000,000 on the basis that the Vessel was either an actual total loss (ATL) or a constructive total loss (CTL).

Noble Denton

After the casualty, on about 20 November 2009, the underwriters of the H&M policies retained GL Noble Denton ("Noble Denton") to inspect and report on the casualty. During the trial correspondence from Nobel Denton was disclosed. This correspondence showed that Nobel Denton's employees or representatives contemplated being party to arrangements that involved paying bribes to public officials in India. In the event no bribes were paid and presumably any bribes would have been paid by the Owners or underwriters rather than by or through Noble Denton, and that probably the proposed bribery was not initially suggested by Noble Denton's representatives. However the judge noted that those acting for Noble Denton discussed bribing officials and appear not to have regarded it as improper.

The judge accepted and was assured that Noble Denton's senior management knew nothing of this at the time and that Noble Denton have "anti-corruption" policies and procedures. However, the judge noted that"clearly the documents disclosed (to put it mildly) raise questions about whether they are adequate and effective. I trust that they will be reviewed".

Judgment

Causation

The Owners' primary case was that the damage to the Vessel was caused by a grounding which is itself a peril of the seas within the meaning of Schedule 1 to the Marine Insurance Act 1906:

"The term ‘perils of the seas' refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves."

Section 55(1) of the 1906 Act provides that: "Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against".

The judge made the following comments:

  1. A proximate cause is one which is proximate to the loss in terms of "efficiency", not the cause that is the last (or a cause that is late) in time before the loss: Global Process Systems Inc v Syarikat Takaful Malaysia Berhad (The Cendor MOPU) [2011] 1 Lloyd's Rep 560.
  2. The question whether a cause is a proximate cause is “to be answered applying the common sense of a business or seafaring man” (Bingham LJ per T M Noten BV v Harding [1990] 2 Lloyd's Rep 283, page 286 col 2).
  3. It does not matter whether the current was to be expected since in the schedule to the 1906 Act the adjective "ordinary" qualifies "action" and not "winds and waves", the action of wind and waves can be a "peril of the seas" whether or not the conditions could reasonably have been anticipated: J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (the MISS JAY JAY) [1985] 1 Lloyd's Rep 264 at page 271.
  4. The Owners did not have to prove that the alleged grounding probably occurred how, when and where they say it did. In order to discharge their burden of proof, the Owners had to show that the grounding was fortuitous (and so a peril of the seas) and whether it was a proximate cause of the damage to the Vessel.
  5. The fact that the Vessel may have dragged anchor and through her own inherent inability to stem the (predictable and predicted) tidal currents, does not mean that the loss must also be dissociated from any peril of the wind or water.
  6. The debility of the Vessel does not displace the operation of a peril of the seas: Mountain v Whittle [1921] AC 615.
  7. Whether or not the crew of Master were negligent only arises if the proximate cause of the loss was not caused by perils of the sea.

It was held on the evidence, that the Owners had established that the grounding had been a fortuity and that, as a matter of common sense, the grounding or the fact that the current grounded the Vessel as it had done, was a proximate cause of the damage. The damage to the Vessel had therefore been caused by a peril of the seas covered by the policies.

Actual Total Loss

Under section 57 of the Marine Insurance Act 1906, a vessel is an ATL if she is "destroyed, or so damaged as to cease to be a thing of the kind assured, or where the assured is irretrievably deprived thereof". The Owners pleaded that Vessel was an ATL because she had ceased to be "an operational vessel, and had become a dead ship, in that she could not be operated or restored to an operational condition".

The Vessel would have been an ATL if it had been physically or legally impossible to carry out repairs that would have made it an operating vessel. On the other hand, the Vessel would not have been an ATL if it had been physically and legally possible to repair the damage, even if it would have been prohibitively expensive to do so (Masefield AG v Amlin Corporate Member Ltd (the BUNGA MELATI DUA) [2011] Lloyd's Rep IR 338).

To this end the crucial question was whether the Vessel could have been safely towed to Mumbai for underwater inspection and any necessary repairs. It was impossible to accurately calculate how the Vessel would have reacted to a sea voyage based on its condition at anchor. Further, it had clearly been capable of operating without incident after the grounding, since it had moved to port. With regard to whether it had been legally impossible to move the Vessel for repairs, the evidence did not show whether it would have been legally possible for the Vessel to be towed from Bhavnagar to Mumbai, and it would be inappropriate to rule on it. Further, the evidence did not support the claim that the port authorities in Mumbai would not have accepted the vessel.

Therefore, Owners had not shown that the vessel had been an ATL.

Constructive Total Loss

Under section 60(1) of the 1906 Act: "Subject to any express provision of the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from [actual] total loss without an expenditure that would exceed its value when the expenditure had been incurred".

Section 60(2) provides that, "In particular, there is a constructive total loss – . . . (ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed [the] value of the ship when repaired. In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship is liable if repaired".

The Owners' case was that the cost of repairing the damage would have exceeded US$12,000,000, her agreed value: they did not rely on the first limb of section 60(1) or contend that the Vessel was a CTL because she was abandoned on account of her ATL appearing to be unavoidable. The underwriters disputed that repairs would have cost US$12,000,000 but (subject of course to issues of liability) accepted that, if they would have done so, the Owners were entitled to recover on the basis that Vessel was a CTL: they raised no other answer to the CTL claim.

The Owners' pleaded case on the costs of the repairs that would have been necessary were around US$28,845,000 had been exaggerated, and the costs would have been closer to US$12,000,000.

However, it could not be credibly argued, on the evidence, that the quotation from COSCO had not been honestly sought and honestly provided. Taking into account the estimate from COSCO, and making conservative assumptions in the underwriters' favour throughout, the cost of repairing the Vessel would have exceeded US$12,000,000. That figure did not include the cost of other expenses such as temporary repairs and towage. The Vessel would have been a CTL if the costs were little more than a third of the price quoted.

The underwriters' evidence about the cost of repairs was simply not of a quality to undermine the evidence of the quotation, and the cost of the repairs would be greater than the value of the Vessel.

Conclusion

The judge concluded that the damage to the Vessel resulting from the grounding on 30 October 2009 was covered by the insurance and that the Vessel was a CTL. He rejected the alternative argument that she was an ATL. The claim therefore succeeded, and the Owners were entitled to judgments against the appropriate defendants in a total of US$18,000,000 together with statutory interest, subject to the Owners giving credit to the underwriters for the sale proceeds.

The decision is not being appealed.