Jean Koh, Partner
Scott Pilkington, Senior Associate
Holman Fenwick Willan LLP

The surprising and somewhat controversial finding in the first instance judgment of the "OCEAN VICTORY" that Kashima Port, a modern and sophisticated port with a first-class safety record, was unsafe, was overturned in a judgment handed down by the Court of Appeal on 22 January 2015.

Facts

In October 2006, the "OCEAN VICTORY" berthed at the Raw Materials Quay, Kashima. She began discharging a cargo of iron ore, but had to stop due to strong winds and heavy rain. Shortly afterwards the berth was affected by (i) severe swell from long waves; and (ii) in the exit fairway, there were severe gale force winds up to Force 9 on the Beaufort Scale from the northerly/north-easterly direction. The Master left the berth for open water, but lost control of the vessel while leaving the port, and was driven back onto the breakwater wall. The vessel became a total loss.

A claim in excess of US$135 million was brought against the time charterers (and was passed down the line to the sub-charterers) for breach of the safe port warranty contained in the respective charters. (The claim was in fact brought by the subrogated hull insurers of the vessel).

At first instance

The charterers raised 3 main defences:-

1. They denied that the port was unsafe on the basis that the conditions experienced at the port on 24 October were an abnormal occurrence.
2. The cause of the loss was the Master's negligent navigation and/or his navigational decision to leave the port, not the unsafety of the port.
3. A clause in the demise charter provided for joint insurance, which they argued excluded any right of recovery by the owners against the demise charterers. Accordingly, demise charterers, being under no liability to owners, had no liability to pass down the chartering chain to charterers, as they had themselves not suffered any loss.

At first instance, Teare J rejected all three defences and held that there had been a breach of the safe port warranty.

On Appeal

The charterers were granted permission to appeal on three points:-

1. whether there had been a breach of the safe port warranty ("the safe port issue");
2. whether the Master's navigational decision to put to sea in extreme conditions, rather than to stay at the berth broke the chain of causation ("the causation issue"); and
3. whether, on the true construction of the terms of the demise charter, the demise charterers, who had insured the vessel at their expense, had any liability to the owners in respect of insured losses, notwithstanding that such losses may have been caused by a breach of the safe port warranty ("the recoverability issue").

In relation to the "safe port issue", the Court of Appeal allowed the appeal and concluded that the conditions which affected Kashima on 24 October were an "abnormal occurrence". Hence, there was no breach by the charterers of the safe port warranty.

The "simultaneous coincidence" of (i) long waves at the berth and (ii) severe gale force winds at the exit fairway, in combination, was found to be not regular or even occasional. The storm was also found to be of an exceptional nature in terms of its rapid development, duration and severity. This led the Court to conclude that the conditions experienced at Kashima that day were not of sufficient frequency to be a characteristic of the port, and therefore were an "abnormal occurrence".

Given the finding that Kashima port was not unsafe, it was unnecessary to rule on the "causation issue". The Court did however rule on the "recoverability issue", on the basis that it raises an important issue of principle in relation to the construction of the relevant charterparties.

Clause 12 of the demise charter (on the BARECON 89 form) obliged the demise charterers to effect (and pay for) marine and war risks insurance in respect of the vessel. The Court held that such arrangements are to be construed as agreements to insure for the parties' joint benefit. This means that the parties will be taken as having agreed to look to the insurers for indemnification, rather than to each other. This also prevents insurers from making a subrogated claim against the co-insured, or the guilty party who paid for the insurance.

Here, the Court construed clause 12 as excluding a right of recovery by the owners from the demise charterers in respect of the insured losses, which accordingly precluded any rights of subrogation by the insurers against the demise charterers. Effectively, once the insurance monies were paid out, liability between the parties was discharged.

Comment

This will be a welcomed decision for charterers and charterers' liability insurers. The first instance judgment had set a worryingly high bar to defend an unsafe port claim on the grounds of "abnormal occurrence" which resulted in a modern and sophisticated port being found to be unsafe due to conditions which were, in reality, unprecedented, in the port's 35 year history. Following the Court of Appeal's guidance, charterers/insurers can now feel more assured that their warranty of safety will not impose on them responsibility for unexpected/abnormal events - these will remain the responsibility of the owners and their hull insurers.

The Court of Appeal's construction of the insurance clause in the demise charter, is also positive for charterers and sub-charterers in a chain of charterparties, where the demise charterer has paid for the insurance for the joint benefit of themselves and the owners. Effectively, they will get a "free ride" in the event of a breach of the safe port warranty, although there is still the possibility of the owners making a direct claim in tort (or bailment).

This appeal decision may be subject to further appeal to the Supreme Court, so the issues may have not yet reached their final conclusion.

(Contribution Date: 9 February 2015)