On May 10 2017 the Supreme Court handed down a judgment addressing three issues of importance to shipowners, charterers and insurers alike, defining:
- the parameters of the safe port undertakings;
- the rights of subrogation of insurers where vessels are operated under bareboat charter; and
- the right of charterers to limit their liability under the 1976 Convention on the Limitation of Liability of Shipowners.
The principal issue in the insurers' appeal was the safety of the port. The insurers brought their claim as assignees of the shipowners' and demise charterers' rights; this led to the court considering the extent of the insurers' rights to pursue subrogated claims where a bareboat charter was in place. The Court of Appeal had found that the sub-charterers had not breached the safe port undertaking in their charter by ordering the vessel to the port of Kashima, Japan in October 2006. The Supreme Court clarified the meaning of the famous phrase 'abnormal occurrence' from the leading case on unsafe ports, Eastern City [1958] 2 Lloyd's Rep 217. This decision sets out the test for safety of a port and provides that a "port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship".
Despite closely examining the features of the port, the lower courts disagreed with each other as to whether the events which led to the loss of the Ocean Victory constituted an abnormal occurrence. In this decision the Supreme Court confirmed the Court of Appeal's finding in favour of the sub-charterers, which was to apply an ordinary interpretation to the phrase 'abnormal occurrence' − that is, "something well removed from the normal", being exceptional in nature.
The Capesize bulk carrier Ocean Victory was in the process of discharging a cargo of iron ore at the port of Kashima, Japan on October 24 2006 when an incoming storm led to a decision to leave the berth and sail to open waters. In the event, the vessel sailed up the port's fairway and collided with the breakwater, eventually grounding nearby. Despite attempts by salvors to save the vessel, it later broke in two and was declared a total loss.
Safe port undertakings
The principal argument throughout the litigation was the safety of the port in question − in particular, the notion that the phenomena experienced that particular day could be described as so unusual as to amount to an abnormal occurrence. The owners also put forward various submissions that the port was unsafe due to its safety systems, but this part of the claim was not central to the appeal.
In relation to the conditions at the port, the first-instance judge examined the features separately (ie, long waves and strong northerly gales) to decide whether they were individually foreseeable. Following this logic, since each event was known to have occurred previously at the port, these constituted ordinary characteristics of that port, and the fact that they could occur (whether individually or concurrently) was sufficient to render the port unsafe. He did not consider whether the combination of the two events at the same time was unusual. Under this interpretation, the port of Kashima was found to be unsafe despite the fact that no significant casualties had occurred in its 35-year history. This created a great deal of uncertainty for charterers, as it considerably widened their assumption of responsibility under the safe port undertaking.
In overturning the High Court decision, the Court of Appeal looked at the history of the port and found that the simultaneous occurrence of the specific winds and wave patterns was so highly unusual as to be considered an abnormal occurrence. The Supreme Court confirmed the approach taken by the Court of Appeal, agreeing that the storm was sufficiently exceptional that the port was ordinarily safe and accordingly dismissing the appeal.
Given that there was no breach of safe port warranty, the court was not bound to address the other issues in the litigation:
- insurance arrangements between the hull insurers and the shipowners/demise charterers; and
- limitation funds under the 1976 convention.
However, the judges considered these questions to be of general importance and provided useful guidance − albeit obiter (ie, in passing) − in response.
Insurance provisions – third-party claims
The Court of Appeal accepted the sub-charterers' submission that the allocation of risk between the demise charterers and the shipowners was regulated as a complete code under Clause 12 of the Barecon 89 charter. Under this clause, the demise charterers were responsible for insuring the vessel against marine losses and the shipowners were named as co-insureds. In the event of a total loss, the shipowners would look to the hull insurers for recovery regardless of whether the loss resulted from the negligence or fault of the demise charterers. This effectively precluded the right of subrogation by the insurers, which could not look to the charterers (or sub-charterers) for indemnification.
By a three-to-two majority, the Supreme Court accepted the Court of Appeal's interpretation of Clause 12 and found that there was no loss which could be passed down to the sub-charterers. The minority were not persuaded by this argument, as rights of subrogation are a generally accepted feature in insurance claims.
Scope of limitation fund
The Supreme Court considered whether a charterer can rely on the 1976 convention to limit its liability against a shipowner for loss of the vessel. Under Article 2(1)(a) of the convention, charterers may limit their liability in relation to events "occurring on board or in direct connexion with the operation of the ship". It was unanimously found that, had the charterers been found to have breached the safe port undertaking, they would not have been entitled to limit their liability against the shipowners under the 1976 convention. This affirms the earlier Court of Appeal decision in The CMA Djakarta [2004] 1 Lloyd's Rep 460 (which settled before reaching the then House of Lords).
If any doubt remained as to the correct construction of the phrase 'abnormal occurrence', the comprehensive review of safe port authorities by both appeal courts has laid this to rest. There is therefore no departure from the accepted understanding of safe port obligations. Charterers will be reassured by this decision, which balances the ordinary trading risks that they take in the course of their business with unusual phenomena occurring in their ports of call.
Arguably, the more interesting issue arising out of this decision is the potential curtailment of the rights of insurers to recover against third parties. Insurers of bareboat chartered vessels will be especially mindful of this decision which − although issued obiter − could leave them significantly out of pocket in the event of total loss.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Chris Grieveson or Joanna Kinross at Wikborg Rein by telephone (+44 20 7367 0300) or email ([email protected] or [email protected]). The Wikborg Rein website can be accessed at www.wr.no.
