Court construes meaning of a war risks marine policy (including the term “malicious”)/whether a perverse foreign judgment breaks the chain of causation/sue and labour provisions

When the claimant’s vessel was being loaded in Venezuela, an underwater inspection revealed that  bags of cocaine had been strapped to its hull. The drugs had been affixed by persons unknown  (presumably a drug cartel). The vessel was detained and the crew arrested. The vessel was abandoned  by the owners two years later and eventually confiscated by the Venezuelan authorities following a  court order. The claimant owners  claimed under their war risks insurance policy. It was accepted  that the vessel was a constructive total loss.

The policy provided cover for “malicious damage” and “malicious mischief” and “loss of the  vessel…caused by…any person acting maliciously”. It was common ground between the parties that what  constituted “malice” was the criminal law definition, which includes recklessness. The decision of  Colman J’s decision in “The Grecia Express” (2002) was cited: “the words therefore cover casual or random vandalism and do  not require proof that the person concerned had the purpose of injuring the assured”.

However, the insurers sought to rely on two exclusions in the policy:

  1. Loss arising from “detainment, confiscation….by reason of infringement of any  customs…regulations”. Insurers made an important concession: namely, that the deliberate acts of  the Venezuelan authorities (in placing drugs on the hull in order to facilitate the confiscation of  the vessel) would not have triggered the exclusion. Flaux J held that this indicated that the  insurers accepted that there was an implied limitation to the scope of the exclusion. The judge saw  no reason to distinguish between that scenario and the present case where the malicious (albeit  there was recklessness here, rather than actual malice) acts of a drug smuggler   had led to the  vessel being detained. To conclude that the exclusion applied to this case would, he said, “not  accord with the spirit of the policy”. He concluded that “as a matter of construction of the policy  in this case, the exclusion does not apply where the infringement is brought about by the malicious  act of a third party”.
  2. Loss arising from “the operation of ordinary judicial process, failure to provide security….”  The insurers’ argument here failed because the claimant had taken reasonable steps to provide security (and it was likely that the Venezuelan authorities would have insisted on  security for the full value of the vessel, and that is unlikely to have been acceptable to either  the claimant or the insurers).

The insurers’ arguments therefore failed. Accordingly, the judge was not required to decide the  alternative case advanced by   the claimant: namely, that the exclusion did not apply because the  real cause of detainment of the vessel was the perverse   and wrong decisions of the Venezuelan  courts. He did however conclude that, in any event, the decisions of the Venezuelan courts had been  correct as a matter of Venezuelan law and there had been no unwarranted political interference. However, in considering this issue, Flaux J did conclude that, as a matter of principle, a decision of a foreign court which is clearly perverse and not even  reasonably arguable as a matter of foreign law would break the chain of causation, so that the  customs exclusion would no longer have applied. He held   that there was no additional requirement  that the decision be made in bad faith, or that the court knowingly acted without jurisdiction (and  said that comments to the contrary by the Court of Appeal in The Anita (1971) were obiter, since  that case had not been dealing with a perverse decision).

Furthermore, any political interference will only be of relevance if it leads to a wholly  unjustified decision.

Further arguments also arose as to the entitlement of the claimant to recover its sue and labour  expenses:

  1. When the claimant served its notice of abandonment, the leading underwriter declined the notice  but scratched it with the so-called “writ clause” (ie that insurers agreed to put the claimant in  the same position as if a writ had been issued  that day and thus, under marine insurance law, the  position between the insurer and the claimant was crystallised at that point). Rix J held in Kuwait  Airways v Kuwait Insurance (1996) that that meant that the obligation or right to sue and labour  ceases when a writ is issued (and so sue and labour expenses can no longer be recovered after that  date). Although Flaux J accepted that Rix J “may well be” right where a writ is issued, he also  held that the entitlement to sue and labour does not cease at the earlier date of the writ clause.
  2. Flaux J also said that it was wrong, as a matter of law, to argue that legal fees incurred for a  dual purpose (namely,  the release of the vessel and the defence of the crew) were not recoverable  as sue and labour: “Where expenses are incurred both for the purpose of extricating the vessel from  the insured peril and for some other purpose which is not sue and labour (here the defence of the  crew), there is no principled basis for apportioning the expenses between  those purposes, so they  are all to be properly regarded as sue and labour expenses”. The legal fees would therefore only  have been irrecoverable if they had been incurred solely in defence of the crew. Here, it was not  possible to separate the expenditure since “if all the crew had been released and acquitted, the vessel would have been  released”. Flaux J also held that voluntary funding provided by Gard should be disregarded when  assessing the recoverable loss.

Finally, Flaux J held that the costs of running the vessel during the period of detention were  recoverable under the terms of the policy (even though there was a current charterparty: the expenses were not incurred because  of any contractual commitment but because the claimant wanted to be ready to sail as and when the  opportunity arose).

COMMENT: Although apportionment in a marine policy context is possible where there is  underinsurance, Flaux J has confirmed here (citing the Court of Appeal decisions in Standard Life v Ace (see Weekly Update 46/12) and Royal Boskalis v Mountain (1997)) that there is no general  principle that there can be apportionment where at least one purpose was to safeguard or recover insured property.