In the ‘MV Renos’ the Court of Appeal had to determine whether the Respondents (“Owners”) had lost the right to abandon the vessel and claim that it was a constructive total loss (“CTL”). Further issues arose as to:

(1) Whether – for the purposes of determining if the vessel was indeed a CTL – Owners were entitled to bring into account costs incurred prior to the date of the Notice of Abandonment (“NOA”); and

(2) The quantum of recoverable sue and labour expenses.

The Court of Appeal’s decision is considered by David Turner QC of 4 New Square.

THE FACTS

The MV Renos (“the Vessel”) was owned by the first Respondent and managed by the Second Respondent. The Appellants (“Insurers”) insured the hull and machinery of the Vessel (as to 85%) on Institute Time Clauses Hulls 1.10.83. The insured value of the Vessel was $12m and the increased value insured was $3m. Fire was an insured peril.

On 23 August 2012, the Vessel suffered a fire in her engine room while she was in the Red Sea. Salvors were appointed the same day under a Lloyds Open Form 2011, and they promptly invoked the Special Compensation Protection and Indemnity Clause (“SCOPIC”), paragraph 15 of which provided that:

“any liability to pay … SCOPIC remuneration shall be that of the Shipowner alone and no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 14 Award shall be made in General Average or under the vessel’s Hull and Machinery Policy by the owners of the vessel”.

On 25 August 2012, while she was under the control of the salvors, the Vessel was surveyed by a Mr Moraitis, an independent surveyor appointed by Owners. On 28 August a salvage tug connected and started towing the Vessel towards the Suez Canal. A preliminary report as to the nature of the damage was received on 29 August.

On 31 August 2012 the Vessel arrived at anchorage close to Suez, where she was surveyed by representatives of all parties; the surveyors appointed by Insurers included El Hamasy and also Braemar Technical Services.

On 3 September, Mr Moraitis produced a preliminary estimate for the cost of repairs of US$8.85m plus a contingency. On 6 September, El Hamasy reported to Insurers that the cost of repairs would be $5.527m and a copy of their report was subsequently forwarded to Owners. On 14 September, Owners’ technical representative advised them that the repairs would cost in the region of $7-7.75m.

At a meeting on 27 September, Owners indicated that they would either seek to repair the vessel or declare a CTL; Insurers responded by stating that if Owners declared a CTL then Insurers would undertake a laborious process to establish the true cost of repairs. The following day Insurers sent Owners Braemar’s preliminary advice, estimating the cost of repairs at approximately $5m.

In early October the Vessel was towed to allow her cargo to be discharged, thereafter being returned to Suez. By mid-October Owners’ technical representative had revised his estimate of repair costs to at least $8m. Thereafter both Owners’ and Insurers’ surveyors worked to finalise their respective repair specifications, with Insurers’ specification being sent out by both Owners and Insurers to various repair yards for quotations in early December. At around the same time Mr Moraitis estimated that repairs would cost around $8m with a contingency.

In late December quotations based on their own surveyors’ specification were received by Owners from three shipyards: all were for more than $8m. However, at the same time they received a fourth quotation – based on Braemar’s specification – for just under $3m. During January 2013 further quotations and estimates were received, varying from $4m to $9m, and Braemar’s own estimate of the costs of repair increased to more than $7m. On 25 January 2013 Owners received a report from Mr Costouros, a further marine surveyor, who estimated the costs of repairs would exceed $8.2m. This report was sent to Insurers who reacted by purporting to “reserve their rights in relation to [the] report and to the contents of the repair specification generally”.

On 1 February 2013, Owners issued a NOA. The following day the NOA was rejected by Insurers on the grounds that it had been “given far too late”.

The sums ultimately payable to the salvors comprised (i) $1.248m in respect of Owners’ apportionment of the notional award pursuant to Article 13 of the Salvage Convention, and (ii) $1.428m in respect of SCOPIC remuneration payable over and above the notional Article 13 award.

It was common ground between the parties that the diminution in the Vessel’s value as a result of the fire was $1.423m. It was also common ground that for the Vessel to be likely to be a CTL the damage repair costs would have had to be $8m or more.

ISSUE 1 – WHETHER OWNERS HAD LOST THE RIGHT TO ABANDON THE VESSEL AND CLAIM CTL

(1) Relevant provisions of the Marine Insurance Act 1906

The MIA 1906 provides as follows:

60. (1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned … because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.

(2) In particular, there is a constructive total loss—

(i) …

(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;

(iii) …

61. Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.

62. (1) Subject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.

(2) …

(3)Notice of abandonment must be given with reasonable diligence after the 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.

(4)Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.

88. Where by this Act any reference is made to reasonable time, reasonable premium, or reasonable diligence, the question of what is reasonable is a question of fact”

(2) The judgment below

In his judgment at first instance ([2016] EWHC 1580 (Comm)), Knowles J considered that Owners had not received reliable information as to the loss prior to issuing their NOA, and that they had taken no more than a reasonable time, using a reasonable process, to try to get that. In the alternative, he considered that they did not have reliable information as to the loss prior to receipt of Mr Costouros’s report on 25 January 2013, following which the NOA had been issued with reasonable diligence. Accordingly, he found that Owners were still entitled to issue a NOA on 1 February 2013.

(3) The Appellants’ Arguments

Insurers argued that Owners had reliable information as to the loss well in advance of 1 February 2013, contending that the correct dates were (in the alternative to each other) early December 2012, late December 2012 or 25 January 2013. As to those alternatives:

  • The first date was advanced on the basis that, by early December, Owners’ surveyors had spent more than three months investigating the damage to the Vessel, had finalised a detailed repair specification and had obtained a carefully considered estimate from Mr Moraitis of around US$8m.
  • Insurers contended that by late December Owners had received three quotations for the repair works which exceeded $8m.
  • Alternatively, Owners had reliable information as to the loss on receipt of Mr Costouros’s report but had not issued their NOA with reasonable diligence following its receipt

Insurers also asserted that, viewed overall, Owners had exceeded the “reasonable time” allowed by s.62(3) to “make inquiry”.

Insurers went on to argue that the logic of Owners’ position was that existence of a bona fide dispute as to whether or not a vessel was a CTL would postpone the time for service of a NOA indefinitely, but such a conclusion would be contrary to the rationale and policy considerations behind s.62(3) of the MIA.

(4) The Court of Appeal’s decision

Hamblen LJ (with whom Sir Geoffrey Vos and Simon LJ agreed) rejected the Appellants’ arguments in relatively short order:

  • The repairs required were likely to be substantial and complex, with substantial variation in repair estimates. In such circumstances, Knowles J had rightly concluded that there could be no reliable information as to loss until shipyard quotations had been received, which they had not been in early December.
  • While Owners’ repair specification was credible and “apparently” reliable information as to the scope of the necessary repairs, the same could also be said about Braemar’s specification (which was far more restricted in scope and had been relied upon by Insurers right up to trial).
  • It was striking that Insurers’ case as to the reliability of the information available to Owners required Owners to disregard Insurers’ own expert assessment as to the necessary scope of the repairs, at a time when Insurers were insistent that the lesser scope was correct.
  • Even after receipt of Mr Costouros’s report, there remained a critical conflict of reliable expert opinion as to the scope and cost of repair.
  • Insurers were wrong to argue that Owners’ case was tantamount to a suggestion that a bona fide dispute could operate to postpone time indefinitely for service of a NOA:
    • It was unlikely that there would be many cases involving such a stark and critical difference in expert opinion;
    • Having chosen to carry out their own detailed surveys and produce their own repair specification and quotations and insisted that they demonstrated that the Vessel was not a CTL, Insurers could scarcely complain if such information was taken into account by Owners;
    • Even if information as to a loss remained doubtful, s.62(3) only allowed Owners “a reasonable time” for making enquiry before making their election.
  • What reasonable diligence requires in any given case depends on the factual context. The present case did not require particular urgency (in contrast to a case where there was a danger to the vessel or some other need for immediate decisions to be made). Owners had acted with reasonable diligence on receipt of Mr Costouros’s report.
  • Although, in the abstract, there was a lengthy period between the casualty and the NOA, the nature of the casualty meant that obtaining reliable information about the loss would inevitably be complex and take time. The process could not start in earnest before the cargo had been discharged, and had been complicated thereafter by the production of a conflicting repair specification by Braemar.

Accordingly, Hamblen LJ rejected Insurers’ appeal on the first issue.

ISSUE 2 – WHETHER PRE-NOA COSTS COULD BE INCLUDED IN THE CTL CALCULATION

Hamblen LJ noted with approval that successive editions of Arnould had considered that salvage costs incurred prior to a NOA could rank towards the calculation of a CTL, on the basis that the assured should not be penalised by having incurred some expense before he gives notice, which may indeed be essential if he is to form a judgment as to whether the facts justify abandonment”.

Although s.60(2)(ii) referred to future salvage operations and … future general average contributions”, Hamblen LJ considered that they were words of inclusion rather than exclusion, making it clear that such future costs could be taken into account. He therefore concluded that, as a matter of principle, costs incurred prior to the NOA could be brought into account for the purposes of determining whether there had been a CTL.

Insurers also argued that the SCOPIC costs of $1.428m (which are payable to protect a ship’s owners (and in turn the P&I insurers) from what might otherwise be a substantial liability in relation to environmental damage or other liabilities) could not rank towards the CTL calculation because (1) they were not costs of repair and/or (2) such costs could not be laid at Insurers’ door due to the terms of paragraph 15 of SCOPIC. Hamblen LJ rejected these arguments too:

  • Insurers had accepted that costs of recovering the Vessel formed part of the cost of repair. The SCOPIC costs were an unavoidable part of what Owners had to pay in order to recover the vessel;
  • The fact that there could be no claim under the policy for the SCOPIC costs did not mean that they could not be taken into account for the purposes of determining whether an indemnity for a CTL could be claimed.

ISSUE 3 – SUE & LABOUR EXPENSES

Owners had engaged a tug of 6000 bhp costing $15k per day. Insurers appealed Knowles J’s conclusion that it had been reasonable to engage such a powerful and expensive tug. This element of the appeal also failed: the judge’s conclusion was supported by his findings that a tug needed to be capable of more than standby and to be able to deal with anything which subsequently transpired; there were also few alternative options available.

Hamblen LJ also rejected a cross-appeal against the disallowance of certain asserted sue and labour expenses, on the grounds that such expenses had needed proof and explanation.

COMMENTARY

The Court of Appeal’s conclusion on Issues 1 could be of enduring importance in CTL cases involving disputed Notices of Abandonment. Given (per s.88 of the MIA) the fact-sensitivity of what constitutes a “reasonable time” for the making of inquiry and/or an election, it might be dangerous to try to apply findings in one case to the different facts of another. However, the overarching message in relation to the first issue is that Insurers cannot expect an outpouring of judicial sympathy if they object to a NOA against a background of their having made a persistent and detailed challenge to any suggestion that a CTL has occurred.

However, and as Hamblen LJ was also careful to make clear, even where there is a dispute as to the occurrence of a CTL and/or a lack of reliable information as to the loss, the terms of s.62(3) of the MIA mean that an assured cannot indefinitely delay the making of its election as to whether to claim a CTL.

Unless appealed, the Court’s decision on Issue 2 could also be of enduring importance in cases involving English hull conditions (other conditions may result in a different outcome as to the permissibility of bringing past costs into account for the purposes of a CTL calculation). The Court of Appeal’s view that SCOPIC costs could rank towards a CTL calculation may well be controversial: if such costs could not fall for indemnity under the hull and machinery policy then there is no obvious reason why they should be taken into consideration for the purposes of determining whether a total loss under that policy has arisen. Hamblen LJ’s judgment does not really explain why such a potentially counter-intuitive outcome is justified.