Supreme Court: insuring clause is a 'comprehensive scheme' to protect parties' interests

Out-Law Legal Update | 01 Jun 2017 | 1:06 pm | 5 min. read

LEGAL UPDATE: A Supreme Court ruling in a shipping case means that insuring clauses that provide for insurance cover for loss or damage for parties' mutual benefit are likely to be interpreted as 'comprehensive' co-insurance schemes with no option for contracting parties to bring separate claims for damages, regardless of fault.

In January 2015 the Court of Appeal had found that the wording of an insurance clause in a demise charter shipping contract for the Ocean Victory vessel meant that neither the owners nor their insurers were entitled to bring an independent claim for the insured losses even if there had been a breach of a 'safe port' warranty in the contract. This was because the parties had already decided in favour of "an insurance funded result in the event of loss or damage to the vessel by marine risks." This precluded further litigation to recover damages for the losses. Insurer Gard Marine appealed the Court of Appeal decision on several grounds, including this one, to the Supreme Court.

Supreme Court verdict

'Comprehensive scheme'

The Supreme Court upheld the Court of Appeal finding by a majority of three to two. The three judges upholding the ruling were Lord Mance, Lord Hodge and Lord Toulson.

They said: "The scheme of clause 12 (and 13) [insurance clause] is clearly intended to be comprehensive. Whatever the causes, both repairs and total losses fall to be dealt with in accordance with its terms, rather than by litigation to establish who might otherwise be responsible for undertaking them, for bearing the risk of their occurrence or for making them good."

Lord Mance also expressed the strong view that he found it 'implausible' that the parties, having developed a careful scheme for protection of their respective interests, should intend that the owners could proceed to 'reopen' that scheme by bringing claims of breach against charters, a company in the same group and beneficial ownership.

Construction of the contract

The minority - Lord Clarke and Lord Sumption – said that because of the construction and wording of the demise charter shipping contract, in particular the insertion of a new 'safe port' warranty clause (clause 29) and the deletion of an alternative insuring clause (clause 13), the parties had intended that the charterer would be liable in damages to the owners in the event of a breach of the 'safe port' warranty.

This was notwithstanding that co-insured parties cannot claim against each other in respect of an insured loss, which is a well-established rule that was restated during the proceedings. Citing the reasoning of Judge Teare in the High Court, Lord Clarke said: "In the present case there was an express safe port warranty by the demise charterers, there was no code of rights and obligations in clause 12 with regard to insured losses caused by a breach of the safe port warranty and there was no express ouster of the right of subrogation in clause 12. Those features of the demise charterparty suggest to me that, construing the charter as a whole, it was intended that the demise charterer would be liable to the owner for breach of the safe port warranty, notwithstanding that there were joint assured and could take the benefit of the insurance in the manner set out in clause 12."

The majority however did not agree that the deletion of the alternative insuring clause from the demise charter made any significant difference because these clauses were both "two routes to the same substantive allocation of responsibilities for repairs and total loss, irrespective of fault."

Lord Mance said: "I conclude that the express exclusion of a right of recovery or subrogation in clause 13 was simply belt and braces in the context of insurances taken out by owners, and that the reason why no such express term appears in clause 12 was that it never occurred that there could be such claims in the context of insurances arranged by charters to cover their own as well as owners' interests."

The insertion of the new 'safe port' warranty clause similarly was not considered to have any impact on the overall effect on the insurance scheme agreed between the parties. Lord Mance said: "I do not consider that the substitution of printed clause 5 by typed clause 29 can have been intended to, or did, alter this basic scheme. In many respects clause 29 simply makes different provision for the same subject matter as clause 5 …most unlikely that the 'safe port' provision in clause 29 can have been meant to give rise to a system of recourse for the loss of the hull, by way of damages for breach of contract, separate from and potentially counteracting the no fault scheme of responsibility and insurance recovery for a hull loss introduced by clause 12."

Ocean Victory was a shipping vessel built in China in 2005 and owned by Ocean Victory Maritime Inc.; it was chartered in June 2005 via demise charter to Ocean Line Holdings Ltd.; then time-chartered in August 2006 by Ocean Line to China National Chartering Co. Ltd, and finally sub-chartered in September 2006 by Sinochart to Daiichi Chuo Kisen Kaisha. The vessel was wrecked shortly afterwards in October 2006 during a storm at Kashima port in Japan causing a total loss for its owners and insurers.

The demise charter contract entered into by the owners and Ocean Line was on the Barecon 89 form said to have become "the most commonly used form of bareboat charter world-wide." The insurance provisions of the Barecon 89 form are covered by clauses 12 or 13 and one of these clauses is selected by the parties. Both clauses provide that the insurance is to be arranged in the joint names of the owners and charterers, however clause 13 contains an express provision that prohibits rights of subrogation against the charters by the insurers. In the case of Ocean Victory, clause 13 was deleted. Another clause 29 was a 'safe port' warranty under which charters undertook not to trade between unsafe ports. This clause 29 had been inserted by the parties in place of the normal trading limits clause 5.

Gard Marine and Energy Limited was one of the insurers for Ocean Victory and, having taken assignments of the owners and Ocean Line's rights, it commenced proceedings against Sinochart, then Daiichi, for the breach of the 'safe port' warranty it alleged had led to the loss. It claimed that Kashima port was not, at the time the loss occurred, a 'safe port' therefore Daiichi, as responsible for the vessel at the time, was liable in damages.

Delivering judgment in the first set of proceedings in the High Court in July 2013, Justice Teare agreed that the loss had been caused by the unsafety of Kashima port and in breach of the 'safe port' warranty and he awarded a substantial sum of damages to Gard. However in January 2015, the Court of Appeal took a different stance setting aside the High Court judgment. Its view was that the conditions at Kashima port on the day of the storm were an 'abnormal occurrence', the port was not therefore unsafe, and Daiichi's actions in bringing the vessel into the port did not constitute a breach of the 'safe port' warranty. Separately, dealing with the insurance issue, the Court of Appeal found that, even if there had been a breach of the 'safe port' warranty, the insuring clause in the demise charter would have precluded recovery of damages by the insurer.