Posted: 29/01/2024
This article was co-authored with Mio Takemoto of Amemiya Law Office.
The Red Sea is currently the subject of seemingly indiscriminate missile and drone attacks on commercial vessels while the war in Ukraine is nearing the end of its second year. Amid multiple global crises, maritime parties must increasingly apply their minds to war risks considerations, and charter party clauses stipulating that charterers must meet the cost of additional cover are a common occurrence.
It is a convenient fortuity therefore that a recent decision of the Supreme Court in Herculito Maritime Ltd and others v Gunvor International BV and others (The Polar) [2024] UKSC 2 deals with whether such clauses affect the insurer’s ability to bring subrogated rights of action against the charterers or bill of lading holders. The Supreme Court clarified whether, merely by virtue of the charterers funding the additional cover, shipowners must rely solely on that insurance to indemnify their insured losses, and give up all rights of subrogation against their charterers and bill of lading holders.
The vessel, named The Polar, was chartered by a fixture recap dated 20 September 2010, for a voyage from St Petersburg to Singapore. The Gulf of Aden was within the ‘high risk area’ for piracy when the charter was agreed. The charter included a Gulf of Aden clause and war risks clause, pursuant to which the owners took out additional kidnap and ransom insurance at the charterers’ expense.
The master issued bills of lading for the carriage of a total of 69,493.28 mt fuel oil. The bills incorporated the charter terms and included clauses settling general average according to the York-Antwerp Rules.
On 30 October 2010, Somali pirates seized the vessel while it was passing through the Gulf of Aden. The vessel was held captive for 10 months until it was released on 26 August 2011 in exchange for a ransom of US$7,700,000, paid on behalf of the shipowner. The shipowner declared general average, and the assessment determined that it was owed US$5,914,560.75 from cargo interests under the bills of lading.
The cargo interests denied any liability to contribute in general average, arguing that the shipowner's only recourse for recovering the ransom payment should be through the additional insurance cover obtained pursuant to the charter terms, for which the premium was paid by the charterer.
The disputes were referred to arbitration and the award favoured the cargo interests. On appeal, however, the shipowner succeeded before both the High Court and Court of Appeal.
The Supreme Court has now also dismissed the cargo interests’ appeal. In doing so, their lordships observed that there is no principle exempting charterers from liability for their breaches of contract or in general average, simply because they have provided funds for the owners to insure themselves against the relevant loss or damage.
Furthermore, although general average is regulated by contract, it is a legal right under common law. For the shipowner to have given up this valuable right in relation to well-known kidnap and ransom risks, there must be a clear intention to that effect.
English law recognises the importance of certainty and predictability, and the search for an insurance code or fund in a charterparty, where none is clearly expressed, has the potential to introduce uncertainty. Where no insurance code or fund is expressed, it is a question of inferring it from the charterparty terms as a whole, which demands a high threshold of conviction, akin to implying a term on grounds of necessity.
Their lordships considered the only two shipping cases in which an insurance code or fund has been found to exist.
Firstly, the Supreme Court’s decision in the Ocean Victory [2015] 1 Lloyd's Rep 381 did not avail the cargo interests. In that case, the bareboat charter required insurance to be taken out in the names of owners and charterers as co-assureds, and it is a principle of insurance law to disallow an action between two persons who are insured against the same risk under the same policy. Contrastingly, the owners, charterers, and cargo interests in The Polar were not co-assureds.
Furthermore, other factors in the Ocean Victory charter indicated that the insurance provisions were intended to serve as a complete code, including the fact that charterers had to pay for all insured repairs before being reimbursed by insurers, and that in the event of a total loss, insurance monies were to be split between the mortgagee, owners, and bareboat charterers, in accordance with their interests.
The Supreme Court also considered the House of Lords’ decision in The Evia (No 2) [1983] 1 AC 736, which remains the only time charter case in which there was held to be an insurance code. However, distinguishably from the present case, the shipowner in The Evia (No 2) had an unqualified right to reject the charterers’ orders to the dangerous place in question. Furthermore, if the orders were accepted and the charterers paid the insurance cost, the charterers would also take on an additional burden, as the charter terms would disapply the off-hire clause.
Within this context, Lord Roskill determined in The Evia (No 2) that it would be a ‘remarkable result’ if the time charterers had to repay to the owners the premium for the extra war risk insurance, only to find that if the insured risks materialise and cause damage, then the war risk insurers, upon payment of the claim, became subrogated to the owners' rights of action against the charterers.
Contrastingly, in The Polar, the owners had agreed the vessel's route and the terms upon which the Gulf of Aden would be transited, and did not have an unqualified right to refuse to take on the piracy risk, which was known to them when they agreed the charter. The charterers were also not taking on any additional burden. Accordingly, an outcome whereby the insurer’s subrogated rights of action survived was not so remarkable on the facts.
Their lordships observed that The Evia (No 2) turned on its particular terms, did not establish any general principle, and should not be followed in relation to differently worded charters.
Having concluded that the charter did not include any insurance code or fund, implicitly or otherwise, it logically followed that there was no insurance code in the bill of lading contracts which incorporated the charter terms. Cargo interests accordingly had no defence to their obligation to contribute in general average.
The Supreme Court was clear in emphasising that if parties wish to provide that there can be no right of recovery or subrogation in respect of loss or damage covered by insurance, that it can easily be stated in the express terms of the charter. Owners and their insurers will no doubt be happy that the law is now clear. Chartering interests may seek to include clauses expressly waiving rights of subrogation. If they do, owners should check that such clauses do not result in a breach of the insurance terms before accepting them.
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