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Overview

On 17 January 2024, the Supreme Court handed down  judgment in Herculito Maritime Ltd & Ors v Gunvor International BV & Ors unanimously dismissing the appeal. In this post David McKie, Partner at CMS, comments on that judgment.

The case concerned whether cargo owners who were receivers under bills of lading had to make to the shipowner carrier a contribution in General Average to a ransom payment paid to Somali pirates for the release of the ship.  Cargo owners had resisted contribution on the basis that  the terms of war risks clauses in a voyage charterparty, by which the charterer was responsible for paying additional war risks premium for a Gulf of Aden transit, were incorporated into the contracts of carriage for the cargo evidenced by bills of lading and constituted an “insurance code”, by which the parties had agreed that the shipowner would look only to insurers in the event of a loss.  

The cargo owners’ argument had succeeded before an arbitration tribunal, but was subsequently rejected by the Commercial Court, and by the Court of Appeal. The Supreme Court held that the war risks clauses did not meet the stringent requirements necessary to create an insurance code, so that the appeal fell at the first hurdle.

The case has significant implications for shipowners, charterers and bill of lading holders, and for insurers, as to the effect of insurance and premium payment clauses in contracts of carriage on subsequent rights of recourse in the event of an insured peril arising.  It reminds parties of the stringent requirements which will need to be satisfied before an insurance code arises by way of implication from contract terms, so if that is what parties to contracts wish to agree they should do so expressly.

Background

MT POLAR (“the Vessel”) was voyage chartered for the carriage of a cargo of 69,493.28 mts of fuel oil from St Petersburg to Singapore, a voyage which envisaged transit through the Gulf of Aden. The voyage charter was on an amended BPVOY 4 form. It included terms that any additional insurance premium payable in respect of war risks, including piracy, incurred by reason of the vessel trading to excluded areas not covered by the shipowner’s basic war risk insurance (such as the Gulf of Aden) were to be for charterer’s account subject to a US$40,000 limit.  The shipowners issued bills of lading which were stated to incorporate the terms of the voyage charterparty.  The shippers of the cargo, who were also the voyage charterers, paid the shipowners the additional premium for Kidnap & Ransom and War Risks insurance effected by the shipowners for the Gulf of Aden transit. 

The Vessel was seized by pirates in the Gulf of Aden on 30 October 2010 and released on 26 August 2011 after payment of a ransom of USD 7.7 million on behalf of the Vessel’s owners and/or their Kidnap & Ransom/War Risks insurers. The Vessel’s owners declared General Average (thereby allowing under maritime law and by contract the parties to apportion extraordinary expenses incurred for the preservation of ship and cargo).  Prior to discharge of the cargo a General Average Guarantee and Bond (both of which contained a London arbitration clause) were provided by cargo insurers and by the cargo receivers who were the lawful holders of the bills of lading (“cargo interests”).  A General Average adjustment was drawn up which determined that US$4,829,393.22 was due from the cargo interests to the Vessel’s owners.  

The cargo interests rejected the claim for a contribution on the ground that the Vessel’s owners’ only remedy was to recover under the terms of the insurance policies, the premium for which had been paid by the voyage charterer.  

The cargo interests argued that those provisions formed a complete insurance code or “insurance-based solution” which precluded the shipowners from recovering from cargo interests in General Average in the event of loss caused by a covered risk, based on the principles in  Gard Marine and Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) [2017] UKSC 35  and Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia (No 2)) [1983] 1 AC 736 [HL].

An arbitration tribunal determined two preliminary issues in favour of the cargo interests: (1) that the terms of the voyage charterparty were incorporated into the contracts of carriage evidenced by the bills of lading and (2) that further to The Evia (No 2) and The Ocean Victory the effect of the term as to payment of war risks insurance premium by the charterers was that the shipowners had implicitly agreed to look solely to their insurance cover and not to cargo interests in the event that they suffered a loss covered by that insurance. 

On an appeal to the Commercial Court under the Arbitration Act 1996, s 69, Sir Nigel Teare agreed with the arbitration tribunal on the first issue but disagreed on the second.  In light of the decisions of the House of Lords in The Evia (No 2) as explained by Longmore LJ in the Court of Appeal decision in The Ocean Victory, the charterparty provisions operated as a complete code by which the shipowners and the voyage charterers had agreed that the shipowners would look only to the insurance cover; this principle applied not just to cases of breach of charterparty but also to contributions in General Average.  However, the charterparty clause requiring the additional war risks premiums to be paid by the charterers could not be manipulated so as to place the obligation of payment on the holders of the bill of lading and so they could not take advantage of the insurance code incorporated into the bills of lading. The cargo interests’ defence therefore failed and they were liable to make the contribution which had been assessed.

The Court of Appeal unanimously dismissed the cargo interests’ appeal, upholding the reasoning of the Judge (although they questioned whether the position in The Evia (No 2) and The Ocean Victory was as wide or clear-cut as the Judge had accepted).

Lord Justice Males pertinently and pithily observed as follows: “In reality this is a case where both parties were insured against the risk of piracy and where allowing the shipowner to claim will mean that each set of insurers will bear its proper share of the risk which it has agreed to cover. In contrast, the effect of construing the bills of lading to exclude a claim by the shipowner will mean that the loss is borne entirely by the shipowner’s insurers and that the cargo owners’ insurers escape liability for a risk which they agreed to cover. Standing back, therefore, in my judgment the judge’s conclusion accords with both legal principle and commercial sense”.

Permission to appeal to the Supreme Court was granted in the autumn of 2022, and the case was heard over 2 days in October 2023.

Decision

Lord Hamblen delivered the only judgment, with which all the other Lord Justices agreed.   Four issues arose for decision, of which the finding on the first was determinative of the appeal. 

Issue 1

The first issue was whether on the proper interpretation of the voyage charter and/or by implication the shipowner was precluded from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained.

The Court reviewed the relevant authorities on the implication of an insurance code. The issue was one of construction. The following general considerations were of relevance. 

(1)       For the shipowner to have given up a valuable right of a contribution in General Average in relation to well-known kidnap and ransom risks requires a clear agreement to that effect – Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 717.

(2)       In order to establish that the parties have agreed an insurance code or fund it has to be shown that this is a necessary consequence of what has been agreed.  This is a high threshold.

(3)       Where parties have contracted that there should be insurance in joint names, this normally implies a waiver of subrogation (although it was not a decisive factor in The Ocean Victory). This was not a case of joint names insurance.

(4)       There is no principle exempting charterers from liability for their breaches of contract or having to contribute in general average merely on the ground that they have directly or indirectly provided the funds whereby the owners insured themselves against the relevant loss or damage.

The Evia (No 2) was a decision on its own facts, could be distinguished, and did not establish any general principle (albeit the considerations applied in that case remained relevant to an assessment of whether or not there was an insurance code). 

The Supreme Court held that in view of the carefully agreed contractual regime in the voyage charter for the known piracy risks of transiting the Gulf of Aden it would not have been open to the shipowner to contend that such risks were “war risks” for the purposes of clause 39 of BPVOY4 (as amended).  Consequently, this was not a case in which the charterer would otherwise obtain no benefit from the payment of the additional premium, or was undertaking a significant additional burden.  There was therefore no insurance code or fund agreed in the voyage charter, so the appeal failed. 

The further three issues which arose were therefore addressed obiter on the assumption that there was such a code in the voyage charter.  They concern whether such a code was incorporated into contracts of carriage evidenced by the bills of lading, by virtue of incorporation clauses on the reverse of the bills. 

Issue 2

The second issue was whether all material parts of the war risks clauses in the voyage charter were incorporated into the contracts of carriage evidenced by the bills of lading. 

The Vessel owners argued that they were not incorporated because the obligation to pay insurance premium was not directly relevant to the loading, carriage, and discharge of the cargo, or the payment of freight. The Court disagreed.  The clauses related to the voyage route.  They were therefore directly relevant to carriage. The liberties given to the shipowner were also relevant to carriage.  Consequently, all material parts of the war risks clauses in the charter were incorporated into the bills of lading.

Issue 3

The third issue was whether on the proper interpretation of those war risks clauses in the bill of lading and/or by implication the shipowner was precluded from claiming for its losses against the cargo interests as bill of lading holders. 

Cargo interests argued that the voyage charterer should be regarded as paying the additional insurance premium on behalf of cargo interests, because it was the cargo interests rather than the charterer who would be most directly concerned in the event of a piratical seizure and would bear the principal liability to contribute in general average.

The Court disagreed. The obligation to pay was that of the voyage charterer.  It had its own interest in ensuring proper performance of the charter.  The bargain made is that the parties will not look to each other to make good an insured loss. That is a bilateral agreement.  No insurance code case extended any understanding to that effect beyond the parties to the relevant contract.

Issue 4

The final issue was whether the wording of the war risks clauses in the voyage charter allocating responsibility for the payment of the additional insurance premium could or should be manipulated so as to substitute the words “the Charterers” with “the holders of the bill of lading”. 

Manipulation of charterparty clauses incorporated by general words of incorporation may be permissible if it is necessary to do so to make the wording fit the bill of lading. There was no such need in this case. Allocation of responsibility for paying additional premium made sense in the context of the bills of lading as a record of the terms upon which the shipowner has agreed to transit the Gulf of Aden. As held at first instance and by the Court of Appeal, there were positive reasons why there should be no manipulation in this case. These included the uncertainty of how any premium should be apportioned between bill of lading holders and the implausibility of bill of lading holders accepting potential liability to pay unknown and unpredictable amounts.

Comment

There has been a growing trend of parties to contracts seeking to escape liability for breach of contract (or in this case a contribution) who have increasingly resorted to arguing for an implied waiver of subrogation – often with some success (as the finding of the arbitral tribunal in this case shows).  This decision is therefore a welcome one which accords both with legal principle and commercial sense and is likely to restrict the situations in which an insurance code is found to exist as a matter of implication. 

Contractual parties may agree that specified loss or damage is to be covered by insurance and that in the event of such loss or damage occurring the parties will seek recourse only against insurers rather than their contractual counterparty creating an ‘insurance fund’ or ‘insurance code’ as the sole mechanism for recoupment of loss. 

They can do so expressly.  Such an intention can also be implied.  Previously, such a code has been held to exist (by way of implication) under a demise charter (as in The Ocean Victory) and under a time charter (as in The Evia (No 2)), both of which involved alleged breach of contract causing a loss which was covered by insurance in the name of the shipowner but paid for by the charterer.   

This was said to be the first case to consider judicially whether there is an insurance code or fund in a voyage charter and, if so, whether that code is applicable to contracts of carriage evidenced by bills of lading which incorporate the terms of the voyage charter. Unsurprisingly, it is now clear that in principle it is possible  for parties to  create (by implication) a code within a voyage charter.  It is however unlikely that such a code will be incorporated by reference into contracts of carriage evidenced by bills of lading. As always whether either of these things happens is dependent on the proper interpretation of the contracts on the facts of the case.

The judgment of Longmore LJ in the Court of Appeal in The Ocean Victory offers some general statements as to when there may be held to be an insurance code or fund even in the absence of joint names insurance, including “…the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other”.

Contrary to the cargo interests’ submissions, this was not endorsed by the Supreme Court in The Ocean Victory.  Even in a joint names insurance case the court both looked for and relied upon other contractual indicia to support the conclusion that there was an insurance fund arrangement. There is no prima facie position. It always depends upon the construction of the contract terms as a whole and the necessary consequences of what has been agreed in relation to insurance.

The Supreme Court emphasised that tribunals should be cautious before following the reasoning of The Evia (No 2) because the search for an insurance code introduces uncertainty.  If parties wish subrogation rights to be waived they should clearly state this in their contract. The mere existence of a requirement to insure or a contractual obligation to pay for the other party’s insurance cover should now be insufficient without more to imply an intention to create an insurance code or a waiver of subrogation.

Although the context was claims under a contract of carriage, it is pleasing to see that the Supreme Court actually considered this issue from insurers’ perspective, even if only in passing.  Lord Hamblen said this:

“The practical difficulties which may arise are illustrated by a consideration of the position of insurers. Whether or not they are to have rights of subrogation is likely to be material to their rating of the risk as it increases the risk of loss borne by them. Disclosure may, however, give rise to difficult issues. For example, it may be very unclear whether the subrogation position is known to the insured in circumstances where it all depends upon implications to be drawn from the terms of the charter. Similarly, if disclosure is sought to be met by providing a copy of the charter, whether that is full and fair disclosure must be questionable in circumstances where it says nothing expressly about subrogation rights. If no effective insurance cover were provided then issues would arise as to whether in such a case there is any code, and difficult questions might also arise if the insurance did not fully cover the losses suffered by the shipowner”.

The existence of loss of subrogation rights is usually fundamental to a calculation of premium (it is unlikely to increase the risk of a loss, but it will increase the amount of the loss the insurer has to bear) and the loss of subrogation rights may make the risk uneconomic to insure. 

Ordinarily all parties to a marine adventure would expect to contribute their proper share in general average, and they insure against that risk.  Commercially, it is perfectly reasonable for shipowners to require charterers to reimburse additional war risks premium for transiting high risk areas, the benefit for charterers being that the cargo can be carried on a more direct route for less freight.  In the context of a charterparty this is probably primarily intended to be an accounting exercise, and allocates a specific part of the additional cost of performing the voyage to the charterers, not included within freight, for obvious reasons. Voyage charterers, if they are sellers or buyers of cargo, will in that capacity insure the cargo against war risks (including piracy) both for physical loss of or damage to cargo and cargo’s proportion of General Average. The argument run by cargo interests, if correct, would have provided a windfall and forced parts of the hull and P&I insurance market to bear an expense which has not been priced in to their cover, but which cargo insurers have already priced into theirs.  

The subsidiary issues involved the application of established principles to the incorporation of terms from charterparties into bills of lading of interest in the shipping law context. The Supreme Court took the opportunity to reiterate several of the relevant principles, and to reject cargo interests’ argument that these approaches (and the language used) were outdated.   It is now clear that war risks clauses which relate to a voyage route or provide liberties to the shipowner as to how carriage is to be performed will in principle be capable of incorporation into contracts of carriage evidenced by the bills of lading on the basis that these can be considered as germane (or, in more modern language, directly relevant).