The owners of the “MV RENOS” (represented by our Piraeus office) have won an important judgment in the Court of Appeal clarifying the law on constructive total loss and what should be included in owners' calculations when considering whether to tender a notice of abandonment (NOA).
The Court of Appeal’s decision in “MV RENOS”  EWCA Civ 230 clarifies some issues for owners when faced with the factually and legally complex situation of tendering a NOA in the context of a claim for a constructive total loss.
On 23 August 2012 the vessel sustained extensive engine room damage off the Red Sea coast shortly after having commenced a laden voyage from the Gulf of Suez to the Philippines with a cargo of fertilisers. The fire, which was an insured peril under the policies, caused extensive damage resulting in the vessel losing main engine power and requiring salvage assistance. LOF with SCOPIC was signed, and SCOPIC was invoked. The vessel was redelivered under the LOF after completing discharge locally.
Owners and hull and machinery underwriters commenced lengthy discussions regarding the next steps that had to be taken in order to assess the associated costs and examine whether the vessel was a constructive total loss (CTL). To this end, owners had employed the services of a standby tug for the period the vessel remained in the Gulf of Suez. On 5 October 2012, while discussions were underway, the underwriters invoked the tender clause including the right (if repairs were effected) of veto over the place of repairs and the repair yard.
In the meantime, both sides sent their own surveyors on board the vessel, prepared their own specifications which were sent to their own selection of yards, and quotations from these yards were received in December 2012 and January 2013, which differed substantially. On 21 January 2013, a meeting took place between the parties at which the repair quotations were discussed. On 25 January 2013, the owners received a report from an independent surveyor and marine engineer who had the benefit of considering the various conflicting repair quotations and who estimated the cost of repairs to be US$8,221,836 (for the vessel to be a CTL, it was agreed that the direct costs of repairs should exceed the US$8 million benchmark). This was sent to the underwriters who declined a further meeting, and on 30 January 2013 the underwriters released the owners from the tender clause.
On 1 February 2013, over five months after the casualty, the owners tendered a NOA which was declined by the underwriters, following which the vessel was taken to scrap.
The underwriters denied the vessel was a CTL as a matter of principle (as to what items counted) quantum and also argued that the NOA was served too late. The owners of the vessel brought proceedings in the High Court against the underwriters under the hull and machinery policies. The insured value was for US$12 million topped by an increased value policy of US$3 million.
The owners’ claim was successful in the High Court and the hull underwriters appealed to the Court of Appeal.
The Court of Appeal issued its judgment on 20 February 2018 and dismissed the appeal on all grounds. Lord Justice Hamblen considered the following issues and held:
The validity of the NOA
1.1 Did the owners receive ‘reliable information of the loss’? If not, did the owners exceed the ‘reasonable time’ allowed ‘to make inquiry?’
Section 62(3) of the Marine Insurance Act 1906 (MIA) provides that ‘notice of abandonment must be given with reasonable diligence after receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry’.
The Court of Appeal held that in the present case, reliable information of the loss required the owners to have reliable information as to (i) the extent of damage and the scope of repair, and (ii) the cost of such repair. In order to do so, given that this was a case requiring substantial and complex repairs as to which repair estimates were likely to vary substantially (as indeed they did), shipyard quotations were necessary in order to have reliable information of the loss.
The Court of Appeal emphasised that given the test is objective, the owner’s subjective belief is, at best, only some evidence of what a reasonable belief would be and that (contrary to the underwriters’ submissions) the apparently reliable expert information from the insurers contradicting that the vessel was a CTL, should be taken into consideration. As the first instance judge stated and the Court of Appeal accepted ‘it was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any source into question’ rendering the information of a ‘doubtful’ character.
The Court of Appeal also agreed with the first instance judge that this was a case where even following the receipt of shipyard quotations (which in the circumstances varied greatly), the owners did not have reliable information, until at best late January, of the loss when they tendered the NOA.
However, the Court of Appeal restricted the effect of their decision under this heading stating that it is unlikely that there will be many cases which will involve such a ‘stark and critical’ difference in the expert opinion. The Court of Appeal placed considerable emphasis on the underwriters’ conduct who carried out their own detailed surveys, produced their own specifications and received their own quotations from shipyard on the basis of which they relied upon to demonstrate that the vessel was not a CTL, a view which they shared with owners and insisted upon.
The Court of Appeal also agreed with the first instance judge who found that given the owners did not have reliable information of the loss, the owners ‘took no more than a reasonable time, using a reasonable process’ to make inquiries to determine if the vessel was a CTL. It should be noted that although the Court of Appeal recognised that a long time had passed from the date of the casualty until the tendering of the NOA, this time was reasonable when taking into consideration the nature of the casualty, the particular facts and the relatively unusual circumstances of this case. The policy reason for inserting an element of urgency in the tendering of the NOA was not applicable in the present case.
The decision under this heading reiterates the importance the courts will place on the particular facts of each case which should be taken as a whole and evaluated against a broad-brush test of reasonableness.
1.2 If the owners had reliable information of the loss on 25 January 2013, was the NOA given ‘with reasonable diligence’ thereafter?
The Court of Appeal held that the meaning of ‘reasonable diligence’ in any particular case will depend on the factual context. As a matter of fact, the Court of Appeal agreed with the first instance judge that there was a long and complex history and the report of 25 January 2013 was not obviously decisive or determinative. Given the underwriters’ active involvement in the preparation of specifications and receipt of quotations, and the fact that the underwriters had invoked the tender clause, the Court of Appeal also held that it was reasonable in the circumstances to seek the underwriters’ views on the report.
Should pre-NOA expenses count towards the calculation of a CTL?
Section 60(2)(ii) of the MIA provides:
‘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 would be liable if repaired…’
The issue of whether pre-NOA expenses should count towards a CTL has attracted a lot of attention from the legal and insurance market as previous case law had not explicitly dealt with it in detail.
The Court of Appeal held that section 60(2)(ii) of the MIA makes no mention of the giving of NOA, draws no distinction between the time at which the cost of repair may be incurred and nor is there any principled reason for drawing such a distinction. The same logic also applies to recovery costs such as salvage, which may often be incurred before NOA is given in a repair damage case as recovery costs which are necessarily incurred in order to repair a vessel are part of the ‘cost of repairing the damage’.
The Court of Appeal also stated that the application of the prudent uninsured shipowner test does not require that in choosing whether to repair the vessel, one leaves out of consideration all existing damage repair costs as they are still costs of repair and logically should be taken into account in assessing the overall cost of repair. In dealing with the problematic insertion of the word ‘future’ in section 60(2)(ii), the Court of Appeal determined that this is a word of inclusion rather than exclusion, making it clear that such future salvage costs can be (also) taken into account.
The Court of Appeal held that the authoritative weight of previous case law on this matter was slight as the point was either conceded (Hall –v- Hayman (1912) 17 Comm Cases 81) or the previous court’s conclusion was unreasoned and it was not clear what, if any, argument there was on the point (“THE MEDINA PRINCESS”  1 Lloyd’s Rep 361]) and preferred the reasons given by academic commentators such as Arnould and Lord Donaldson in a 1982 lecture in favour of the inclusion of pre-NOA expenses in the CTL calculation.
It should be noted that the same conclusion would follow on the application of clause 19.2 of the Institute Time Clauses – Hulls (1/10/83) and 9.2 of the Institute Time Clauses – Hulls Disbursement and Increased Value (Total Loss only) Clauses (1/10/83).
Specifically amongst pre-NOA expenses, should SCOPIC remuneration (after Article 13 payments have been taken into account) count towards a CTL calculation?
This is the aspect of the case that has provoked most comment hitherto.
The SCOPIC remuneration payable to the salvors over and above the notional Article 13 award was in the present case US$1,427,867.2.
The Court of Appeal held that the ‘costs of repairs’ include the ‘costs of recovery’. In the present case, in order to recover and repair the vessel the owners had to pay the entirety of the salvage remuneration to the salvors, both owners’ apportionment of the notional award made to the salvors pursuant to Article 13, and the SCOPIC remuneration. The cost of recovery was the total amount paid and the fact that the salvage remuneration comprised two distinct elements does not alter that fact. The salvage remuneration element was an unavoidable and indivisible part of what had to be paid to recover the vessel and therefore, could be ranked for the purposes of the CTL claim as ‘costs of recovery’.
The Court of Appeal also rejected the underwriters’ defence who relied on paragraph 15 of the SCOPIC clauses under section 1 of the Contracts (Rights of Third Parties) Act 1999 to argue that the inclusion of SCOPIC as a ‘cost of repair’ is a ‘claim, whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration… under the vessel’s hull and machinery policy’. The Court of Appeal held that the owners were not making a claim for an indemnity or recourse or otherwise relating to SCOPIC remuneration, and its only relevance was as part of the cost of repairs to rank for the purpose of determining whether the vessel is a CTL. The Court of Appeal drew a distinction between the computation of amounts under the prudent uninsured test, and a claim (direct or indirect) under a hull policy. Analogous to amounts such as hull deductibles not being claimable under a policy, but counting towards a CTL, the SCOPIC amount counted even if not claimable under the hull policy.
Points of note
- A NOA tendered five and a half months after the casualty is not necessarily late considering the fact sensitive nature of the legal right exercised by the owner of abandoning his vessel to his underwriters. In determining whether a NOA is late, all the surrounding circumstances will be taken under consideration including the underwriters’ conduct
- Pre-NOA expenses, including salvage costs, owners’ share of SCOPIC, and all reasonable expenditure incurred to support the vessel following a casualty will count in a CTL calculation
This case clarifies a number of important points of law surrounding what can reasonably be included as ‘cost of repairs’ for the purposes of counting in a CTL calculation. Most notably the Court of Appeal found that reasonable expenditure incurred before tendering a NOA can be included in this calculation as well as the Owners’ share of SCOPIC.
Note: The underwriters have been refused by the Court of Appeal permission to appeal to the Supreme Court. However, the underwriters have indicated that an application for permission to appeal will be submitted directly to the Supreme Court.