Gard Marine and Energy Ltd & Anor v China National Chartering Company Ltd & Anor [2017] UKSC 35

The Capesize bulk carrier Ocean Victory was lost attempting to leave Kashima during a severe storm. Her insurers, as assignees, sued charterers for breach of safe port warranty. The Supreme Court held the storm was an abnormal occurrence, not unsafety.

Facts

The Ocean Victory, a Capesize bulk carrier, was demise chartered by her owners (OVM) to Ocean Line Holdings (OLH), who time chartered her to Sinochart, who sub-chartered her to Daiichi. Each charterparty contained a safe port undertaking. Daiichi instructed the vessel to discharge iron ore at the port of Kashima, Japan. On 24 October 2006, while attempting to leave the port during a severe storm, the vessel allided with the South Breakwater, grounded, and broke in two. The casualty arose from a combination of (i) long-wave swell at the Raw Materials Quay forcing the vessel to leave, and (ii) severe northerly gale-force winds making the Kashima Fairway impassable. Gard, one of the hull insurers, took an assignment of OVM’s and OLH’s rights and pursued the time charterers for breach of the safe port warranty.

Issues

Three issues were before the Supreme Court:

(1) Was Kashima unsafe within the meaning of the safe port undertaking, or did the casualty result from an ‘abnormal occurrence’?

(2) If there was breach, did the joint insurance provisions in clause 12 of the Barecon 89 demise charter preclude recovery (and subrogation) for losses covered by hull insurance?

(3) If there was breach, could Daiichi limit liability under section 185 and Schedule 7 of the Merchant Shipping Act 1995 (incorporating the 1976 Limitation Convention)?

Arguments

Charterers

The charterers argued that the safe port undertaking did not cover every foreseeable risk but only risks sufficiently regular or characteristic of the port. ‘Abnormal occurrence’ bears its ordinary meaning: an event well removed from the normal, out of the ordinary course and unexpected. The simultaneous combination of long waves and a severe northerly gale had apparently never occurred in 35 years and was an abnormal occurrence. On limitation, they contended The CMA Djakarta was wrongly decided and charterers could limit liability for loss of the chartered vessel itself.

Gard

Gard argued that ‘abnormal occurrence’ should be understood in contradistinction to occurrences resulting from the set-up or characteristics of the port. Both long waves and northerly gales were characteristic of Kashima, and their combination flowed from those characteristics. On joint insurance, Gard submitted clause 12 did not provide an exhaustive code excluding liability for breach of the safe port warranty in clause 29; clear words would be required.

Judgment

Safe port (unanimous)

The Supreme Court dismissed Gard’s appeal on the safe port issue. The classic test in The Eastern City [1958] 2 Lloyd’s Rep 127 was endorsed. ‘Abnormal occurrence’ is not a term of art; it bears its ordinary meaning of something well removed from the normal, out of the ordinary course and unexpected. Following The Evia (No 2) [1983] 1 AC 736, the safe port promise assumes normality and excludes danger caused by abnormal occurrences, which fall on hull insurers rather than charterers.

The trial judge erred by (i) failing to ask the unitary question of whether the critical combination of the two weather conditions was abnormal, instead analysing each component separately; (ii) treating mere theoretical foreseeability as sufficient to render an event a characteristic of the port; and (iii) concluding that, because each component flowed from features of the port, their rare combination must also be a characteristic. The Court of Appeal was correct: the simultaneous occurrence of severe long-wave swell trapping a vessel at the Raw Materials Quay and gale-force northerly winds preventing safe transit of the Fairway was, on the evidence (including Mr Lynagh’s unchallenged evidence as to the storm’s exceptional rapidity, duration and severity), an abnormal occurrence.

Joint insurance (majority: Lord Mance, Lord Hodge, Lord Toulson)

By majority, the Court held that clause 12 of the Barecon 89 form precluded recovery by owners against demise charterers for insured losses, including losses arising from breach of the safe port warranty in clause 29. The contractual scheme created an insurance-funded result whereby co-insured parties looked exclusively to the insurance proceeds rather than litigating between themselves. The substitution of clause 5 by clause 29 did not subvert that commercial purpose. Applying Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2002] 1 WLR 1419, joint insurance arrangements ordinarily preclude claims (including subrogated claims) between co-insureds for insured losses. Accordingly, the demise charterers had no liability to the owners that could be passed down the charterparty chain. Lord Clarke and Lord Sumption dissented, taking the view that clause 12 did not contain an exhaustive code excluding liability for breach of the express safe port warranty.

Limitation (unanimous)

The Court affirmed The CMA Djakarta [2004] 1 Lloyd’s Rep 460. Under article 2(1)(a) of the 1976 Convention, claims for loss of or damage to the very ship by reference to which the limitation fund is calculated do not fall within the categories of claims subject to limitation. Loss of the chartered vessel is not ‘loss of or damage to property occurring on board’ nor loss ‘occurring in direct connexion with the operation of the ship’, because the ship cannot be both perpetrator and victim. Charterers therefore could not limit liability for the loss of the Ocean Victory itself.

Implications

Safe port

The decision reaffirms and clarifies the orthodox test in The Eastern City and The Evia (No 2). The court emphasised that foreseeability is not the test; an abnormal occurrence is something unexpected, well removed from the normal, which the notional charterer would not have in mind. Where the dangerous event arises from the combination of features of a port, the correct question is whether the combination itself is a normal characteristic or an abnormal occurrence, requiring evaluation of past frequency and likelihood. The decision provides a coherent allocation of risk: charterers bear losses caused by dangers which were or should have been predictable as normal for the particular ship at the particular time; owners and their hull insurers bear losses caused by abnormal occurrences.

Joint insurance

The majority’s reasoning has significant implications for the operation of joint insurance clauses in standard bareboat charterparty forms such as Barecon 89. Where parties have agreed a comprehensive insurance scheme for their mutual benefit, the courts will construe the contract as precluding inter se litigation (including subrogated claims) in respect of insured losses, even where there is an express safe port warranty. This protects the commercial purpose of joint insurance: providing a fund and avoiding unnecessary disputes between co-insureds. The decision has a practical knock-on effect down charterparty chains: where the head demise charterer has no liability to the owner for an insured loss, there is no loss to pass down the chain on a contractual indemnity basis (though other routes, such as bailee claims under The Winkfield or transferred loss principles, were not argued and remain open).

Limitation

The affirmation of The CMA Djakarta settles at the highest level that a charterer cannot limit liability under the 1976 Convention for loss of or damage to the very vessel chartered. The Convention’s limitation regime is designed for third-party claims, not for claims relating to the limiting vessel itself.

Significance

The case is of substantial importance to shipowners, charterers, hull and P&I insurers, and the maritime industry generally. It restores a stricter and more orthodox approach to the safe port warranty, clarifies the interaction between joint insurance provisions and express contractual warranties in bareboat charters, and confirms the limits of tonnage limitation under the 1976 Convention.

Verdict: Appeal dismissed. The Supreme Court unanimously held that the conditions at Kashima on 24 October 2006 amounted to an abnormal occurrence and that there was no breach of the safe port undertaking. By majority (Lord Mance, Lord Hodge and Lord Toulson; Lord Clarke and Lord Sumption dissenting), the Court further held that, had there been a breach, clause 12 of the Barecon 89 demise charter would have precluded recovery by the owners against the demise charterers for insured losses. Unanimously, the Court held that charterers could not limit liability under the 1976 Convention for loss of the chartered vessel itself, affirming The CMA Djakarta.

Source: Gard Marine and Energy Ltd & Anor v China National Chartering Company Ltd & Anor [2017] UKSC 35