Newsletter - The "Ocean Victory"
- The judgment provides important clarifications on safe port undertakings, co-insurance and charterers' right to limit their liability.
The UK Supreme Court handed down a long awaited judgment in May 2017, regarding the following issues:
- 1. The meaning of “abnormal occurrence” in the context of a safe port warranty;
- 2. The right of subrogation of the hull insurers where the vessel is operated under a bareboat charter; and
- 3. The charterers’ right to limit liability under the 1976 convention of Limitation of Liability of Shipowners
Facts of the case
Ocean Victory, a capesize bulk carrier, was discharging a cargo of iron ore at the port of Kashima, Japan, in October 2006. During the discharge operation, an incoming storm led the vessel to leave the port for open waters. The vessel sailed up the fairway of the port, where it collided with the breakwater. The vessel subsequently grounded. Despite various attempts made to salvage the vessel, the vessel broke in two and was thus declared as a total loss.
At the time of the casualty, the vessel was on a bareboat charter (Barecon 89). The demise charterer had sub-chartered the vessel to a time-charterer, who in turn had sub-chartered the vessel. The safe port warranties in all the charter parties were on materially identical terms.
The legal issues addressed by the UK supreme court
1. The safe port undertaking
The principal question for the Supreme Court was whether the port was unsafe within the meaning of the safe port undertaking, so that the charterers were in breach; or whether there was an "abnormal occurrence" within the context of a safe port undertaking, which was no breach of the undertaking.
In the first instance, Mr Justice Teare decided that the port was unsafe. Long waves and strong gale wins were both characteristics and attributes of the port and were both foreseeable. While the two events occurring together would be uncommon, it was considered as foreseeable and was therefore a characteristic of the port. The Commercial Court held that there was a breach of the safe port undertaking.
In the Court of Appeal case, the decision from the Commercial Court was reversed. The Court of Appeal held that Mr Justice Teare had failed to "formulate the critical … question which he had to answer: namely, whether the simultaneous coincidence of the two critical features, viz (a) such severe swell from long waves that it was dangerous for a vessel to remain at her berth … and (b) conditions in the Kashima Fairway being so severe because of gale force winds…, as to make the navigation of the Fairway dangerous or impossible…, was an abnormal occurrence or a normal characteristic of the port?"
In the Court of Appeal, the court looked at the history of the port and found that the occurrence of specific winds, combined with the wave pattern at the same time was so unusual that it had to be considered as an abnormal occurrence. The Supreme Court confirmed this approach, and concluded that the critical combination of the two events effectively trapped the vessel in the port.
The Supreme Court held that the port was prospectively safe for the particular ship, and the appeal was therefore dismissed.
As the Court held that there was no breach of the safe port warranty, it was strictly speaking no need to address to the other issues. However, these questions were considered to be of some general importance, and thus the Supreme Court provided further guidance, albeit as an obiter.
2. Co-insurance – third party claims
The issue of co-insurance was decided by a majority of three, with two judges dissenting.
In the Barecon 89, the parties have two alternatives for insurance provisions. In this case, the parties had opted to apply clause 12, which requires the demise charterers to take out insurance in their name and in the name of the owners. In addition, the charter also had the safe port warranty, in rider clause 29.
The majority held that the introduction of a safe port undertaking in rider clause 29 did not alter the way in which clause 12 should operate. The clause, upon its proper construction, provided for an insurance funded result in the event of loss or damage to the vessel due to a marine risk. This meant that if the demise charter had been in breach of its safe port warranty, it would have been under no liability towards the owners for the amount of the insured loss, as they had made provision for looking to the insurance proceeds for compensation. The Owners would therefore have to look to the hull insurers for recovery, regardless of whether a loss had resulted from negligence by the demise charterer.
The minority was not convinced by this argument.
3. Limitation of liability
The Supreme Court also considered whether the Charterer could rely upon the 1976 Convention to limit its liability towards an owner in the case of the loss of the vessel. The court found unanimously in favor of the hull insurers on this point.
The Court confirmed the CMA Djakarta and held that, if there was a breach of a safe port warranty, the Charterers would not be entitled to limit their liability under the 1976 Convention. The phrase used in the Convention is "loss or damage to property … in direct connection with the operation of the ship", which was not intended to include loss or damage to the vessel.
While the clarification of the phrase "abnormal occurrence" has been of great importance, arguably the more intriguing question is the one about the right of subrogation for the hull insurers. It will be interesting to see whether the Supreme Courts consideration of the co-insurance issue, can lead to a change of the standard insurance provisions in the Barecon form.