Valiant Insurance Company v Sealion Shipping Ltd & Toisa Horizon Inc

This is an appeal by the Appellant insurers (“insurers”) from part only of the judgment of Blair J, dated 20^th January, 2012 (“the judgment”). Before Blair J, the now Respondents, the owners and managers of the m.v. “TOISA PISCES” (“the vessel” and “owners” respectively), claimed for an indemnity under a loss of hire (“LOH”) policy of marine insurance (“the policy”) which gave cover in respect of the vessel for the year commencing 20^th May, 2008. The Judge held that owners were entitled to a full indemnity under the policy in the amount of US$2,100,000, the insured sum under the policy being US$70,000 per day, plus interest. At trial, insurers defended the claim on a variety of grounds. The appeal is confined to questions of aggregation and the operation of the policy excess clause.

Three grounds of appeal are pursued. The first two grounds relate to what may compendiously be called the “number of occurrences” point. The first raises a question of contractual construction (“Ground 1: Construction”). The second goes to questions of causation (“Ground 2: Causation”). The third ground (referred to throughout as “Ground 4”), as will become apparent, only arises if owners are confined to a claim in respect of the second occurrence (see below). If Ground 4 does arise, it involves what has been, for shorthand, described as “the Ferdinand Retzlaff point” (“The Ferdinand Retzlaff point”). Insurers were refused permission to appeal by the Single Lord Justice in respect of a further ground of appeal (“Ground 3: The backburner point”) which will require no more than very limited further reference.

For present purposes, the facts can be relatively shortly summarised. The vessel is a specialist well-drilling vessel, propelled by two azimuth thrusters. In very broad terms these are particularly sophisticated propellers, enabling the vessel’s position to be precisely controlled and the vessel to be kept stationary at sea, without the use of anchors. Each of the azimuth thrusters was driven by an electrical motor, one port motor (“PAM”) and one starboard motor (“SAM”).

The first occurrence: It is not in dispute that a machinery breakdown occurred on the 25^th February, 2009 (“the first occurrence”). At the time, the vessel was operating off the Mexican coast, under a long term charterparty with the Mexican oil company, Pemex. The breakdown concerned the PAM. As the Judge put it (judgment, at [33]):

“….There then commenced a continuous period of off-hire which lasted until 19 May 2009, and which has given rise to the present claim under the Loss of Hire policy.”

The vessel proceeded to Coatzacoalcos for repairs, arriving there on the 8^th March. At the time, the SAM was ashore, not in use and owners arranged for it to be shipped to Coatzacoalcos, where it arrived by the 10^th March. The (damaged) PAM was sent to Alabama for repair.

The second occurrence: Owners’ intention was now to re-install the SAM on the starboard side of the vessel (the only side on which it could operate) and to move the Louis Allis motor (which had been operating on the starboard side and could operate on either side) to the port side. Work to this effect proceeded accordingly.

At a time when the PAM had been removed for repairs and the Louis Allis motor was on deck, in the process of being moved from the vessel’s starboard to port side, maintenance work could be done for which there would not otherwise have been easy access. Unfortunately, in the course of undertaking this work, there was a failure of the starboard azimuth hydraulic system (“the hydraulics failure”) which resulted in the consequential failure of the starboard azimuth thruster. The Judge held that this incident occurred on the 11^th March, 2009 (“the second occurrence”): judgment, at [36] – [38]. Owners were advised that the vessel would have to be repaired in dry-dock; accordingly, she sailed from Coatzacoalcos on the 20^th March, 2009 and arrived in Mobile, Alabama, on or about the 26^th March.

The third occurrence: By the time the vessel arrived at Mobile (judgment, at [42]), she had gone about 2 years 9 months since her last dry-docking. In the event, owners used the occasion to undertake not only the requisite repairs but also an Intermediate General Survey (“IGS”) and other owners’ work, already scheduled for June or July 2009.

Work commenced on the 28^th March, 2009. On the 21^st April, 2009, the vessel departed Mobile and proceeded towards the oil field. A few days later (judgment, at [44]), she underwent her annual Dynamic Positioning System (“DPS”) survey, under classification society supervision. On the 25^th April, 2009, the SAM failed (“the third occurrence”).

As the Judge remarked (judgment, at [45]), the result was that the “whole process had to be gone through again”. The vessel proceeded to Brownsville and arrived there on the 2^nd May, 2009. The newly repaired PAM (see further, below) was received there on the 4^th May. The Louis Allis motor was moved back to the starboard side and the PAM was re-installed on the port side. The vessel departed Brownsville on the 11^th May and, after further sea trials, was accepted back into service by Pemex on the 19^th May.

For completeness, as already foreshadowed, the PAM had been sent to Alabama for repair. It was received by the Louis Allis facility and disassembly had commenced by the 23^rd March, 2009: judgment, at [43]. The Judge, ibid, rejected insurers’ submission that the repairs to the PAM had gone “on the backburner” (the backburner point) and, as will be recollected, insurers were refused permission to appeal on this ground. It follows that it is not open to insurers to criticise the period of time for which the PAM was not available to owners, viz., between the 25^th February (the first occurrence) and its return to the vessel on the 4^th May – and then subject to the further requisite works before service could be resumed on the 19^th May.

The policy provided, inter alia, as follows:

“ TYPE: Loss of Hire.

DAILY INSURED

SUM: USD 70,000

LIMITS: Limited to 30 days each accident or occurrence or series of accidents or occurrences arising out of one event and in all.

AGGREGATE LIMIT

PER ANNUM: USD 2,100,000

EXCESS: 14 days any one occurrence, 21 days in respect of Machinery claim.

……

Loss of Charter Hire Insurance

Including War

(ABS 1/10/83 Wording)

1.

If in consequence of any of the following events:

(a)

loss, damage or occurrence covered by Institute Time Clauses-Hulls (1/10/83)…..

(b)

breakdown of machinery, including electrical machinery or boilers, provided that such breakdown has not resulted from wear and tear or want of due diligence by the Assured

occurring during the period of this insurance the Vessel is prevented from earning hire for a period in excess of [21] days in respect of any accident, then this insurance shall pay [US$70,000] for each 24 hours after the expiration of the said days during which the Vessel is so prevented from earning hire for not exceeding a further [30] days in respect of any one accident or occurrence and not exceeding [30] days in all during the currency of this Insurance…..”

There was no dispute as to the figures inserted in bold in the square brackets.

Pausing here, as, with respect, pithily summarised by Mance J (as he then was), the “subject-matter” of this LOH policy was “loss of trading income”: The “Capricorn” [1995] 1 Lloyd’s Rep. 622, at p. 638.

I turn to the passages in the judgment, most relevant to this appeal. It should be appreciated that the Judge dealt briefly and at the end of a long judgment with these matters – much of the trial having been focused on issues of non-disclosure and the like. At [132], the Judge recorded the experts’ agreement that “…although there was a circumstantial link, there was no technical cause and effect between the three breakdowns occurring on 25 February, 11 March and 25 April 2009…”, viz., the first, second and third occurrences, respectively. Owners’ primary case was that the PAM breakdown had caused the full 82 days delay; subsequent “vicissitudes” had not affected the “critical path” of the loss of time flowing from the PAM breakdown: judgment, at [133]. Owners’ alternative case was based on the second occurrence (involving the hydraulics failure), producing a slight reduction in the claim.

The Judge held that owners were entitled to succeed on their primary case. He said this:

“ 135. The difference between the parties was stated in simple causation terms, and no authority was cited by either party as to the correct approach to the question. The defendant relies on the lack of technical cause and effect between the three occurrences. But for the hydraulic breakdown….the vessel would have come back on hire within the excess period. The claimants say that there is nothing they could reasonably have done (additionally or differently) to have shortened the actual amount of time it took to get the vessel back on-hire after the first breakdown. The delay caused by the …[PAM]…breakdown….was the time it took the claimants, doing their reasonable best, to get it repaired, reinstalled and sea-tested. The failed attempts to mitigate by juggling engines did not fail due to the claimants’ fault, and are not relevant to the computation of time lost by the breakdown.

136.

On balance, I think that the claimants’ submission is correct. A practical approach must be taken to causation issues in this context. The reality is that after the failure of the …[PAM]…on 25 February 2009, one thing led to another. The claimants reasonably tried to deal with the problem by substituting the starboard motor. Had this succeeded, there would have been no claim for loss of hire at all. Unfortunately, the hydraulics failure frustrated that endeavour. When the starboard motor was eventually installed, it failed after a couple of days at sea. The process of substitution then had to be gone through all over again. So in my view, in principle the whole period counts.”

In the light of the Judge’s conclusion on owners’ primary case, strictly speaking, it was unnecessary for him to rule on their alternative case. The Judge, however, went on to decide in owners’ favour on their secondary case as well: judgment, at [137] – [142].

In a nutshell, insurers contended that insofar as owners’ case hinged on the hydraulics failure, no hire had been lost. Owners were no worse off in consequence of the second occurrence; had there been no hydraulics failure, owners would not have been in a position to earn hire during the period scheduled in June/July for the IGS and owners’ (other) repairs. In the event, by combining those works with the repairs consequent upon the hydraulics failure, owners had lost no more time than they would have lost in any event later in the year. For owners to recover in respect of this period amounted to a “windfall” and was contrary to business common sense.

The parties canvassed a number of authorities. These established that where owners took advantage of the fact that (casualty) repairs were being done to have owners’ work done at the same time and

Owners submitted that the same principle applied here and that no deduction was to be made in respect of the time spent undertaking the IGS and owners’ work. Insurers submitted that the authorities were distinguishable; until owners had established an insured loss of hire, insurers were not liable at all.

As already indicated, the Judge decided this issue in owners’ favour, holding that the principle in The “Ferdinand Retzlaff” [1972] 2 Lloyd’s Rep. 120 was equally applicable to a claim under the LOH policy. Had owners’ claim depended on the second occurrence, their claim was not to be reduced by reason of the concurrent performance of the IGS and owners’ repairs.

Without more ado, I turn to the extant grounds of appeal, for convenience, taking Ground 2 first.

(1) The rival cases: For insurers, Mr. Bright QC submitted that insofar as the matter was to be approached in terms of causation, the Judge’s key finding was at and limited to [136] of the judgment (set out above). The Judge had concluded that “one thing led to another” – but that finding “would not do” to establish that the first occurrence had caused owners’ loss. The true position was that the first occurrence had been overtaken by the second occurrence, which had broken the chain of causation. The hydraulics failure was a separate causative occurrence and could not be described as an unsuccessful attempt to mitigate on the part of owners. The upshot was that the indemnity payable to owners should be reduced from the US$2.1 million awarded by the Judge to that flowing from the second occurrence, namely US$1,945,548 (a sum agreed as a figure).

For owners, Mr. Berry QC submitted that this issue began and ended with the PAM. It had broken down on the 25^th February and was not returned to the vessel until the 4^th May. In the light of the refusal of permission to appeal on the backburner point, no criticism could be made of owners in this regard. It followed that the PAM was at least an operative and continuing cause of the entire period of the delay and, no less so, because the second occurrence (even if not properly characterised as a matter of mitigation) also comprised an operative cause for a substantial part of it. From the 12^th March onwards, the common sense explanation for why the vessel was not earning hire was (1) the PAM breakdown on the 25^th February and (2) the engine swap had failed. The explanation for the extended period of off-hire lay in, as it turned out, owners’ doomed attempts to mitigate. As to the Judge’s observation (at [136] of the judgment) that “Had this succeeded, there would have been no claim at all”, he was saying that successful mitigation would have eliminated the claim – not that the breakdown of the PAM had ceased to have causative effect. The Judge had been right; there was no basis for overturning his essentially factual – and practical – conclusion.

(2) Discussion: As already observed, allowance must be made for the Judge, understandably, dealing with this issue briefly. Such allowance, however, can only go so far and I must confess to some initial concern whether the wording (at [136]), “…one thing led to another..” formed a proper basis for a conclusion that the first occurrence remained of causative potency. That said, after some reflection and having anxiously weighed the rival submissions, I have a clear preference for those of Mr. Berry. At all events, I am not at all persuaded that the Judge was wrong in the essentially factual conclusion he reached and I would not be minded to interfere.

My reasons are these:

Accordingly, I would be minded to dismiss the appeal on Ground 2. I add only that, for my part and contrary to Mr. Bright’s submission, I can see no flaw in the Judge having approached the matter in terms of a causation analysis – subject, of course, to the true construction of the LOH policy requiring some different conclusion. In that regard, I turn next to Ground 1.

I propose to take this Ground very shortly. Mr. Bright’s submission was that, as a matter of construction of the LOH policy, the fact of multiple occurrences called for the application of three excess periods of 21 days each, applied to each occurrence. So far as concerned the Hull & Machinery (“H&M”) insurance, the three occurrences were treated as three separate insured events. The LOH cover was closely associated with the H&M cover, as illustrated by the same loss adjusters reporting to both the H&M and LOH underwriters. It would be odd if the treatment of the three occurrences differed as between the H&M and LOH insurance cover.

With respect, I am unable to accept Mr. Bright’s submission. The matter can be expressed shortly and without elaboration, by reference to the wording of the LOH cover. Focusing on the first occurrence and as I have already held, there was a breakdown of machinery, causing the vessel to be prevented from earning hire for a period in excess of 21 days. Allowing for the excess of 21 days and confining the claim to the policy maximum of 30 days, owners are entitled to the indemnity awarded by the Judge. Owners having satisfied the contractual threshold in respect of the first occurrence are entitled to be indemnified, subject of course to the policy excess and limits. That is an end of the matter. As a matter of construction, it seems to me that the policy wording neither permits nor obliges me to take into account the excess which would have been applicable to the second and third occurrences, had owners’ claims hinged on those occurrences. Assuming (without deciding) that the H&M insurance position would be different, I regard that as, at most, anomalous but not nearly a sufficient reason to compel a conclusion in Mr. Bright’s favour under the LOH policy. I would therefore dismiss the appeal on Ground 1. In parting with this issue, I would simply observe that circumstances cannot be ruled out where the factual relationship between occurrences is such that multiple excesses might come into play; they would, however, come into play as a matter of fact or, perhaps, causation – not construction.

It follows, in my view, that the appeal should be dismissed.

The nature of the rival contentions in respect of Ground 4 was outlined (above) when summarising the judgment. As already observed, Ground 4 only arises if owners are confined to a claim in respect of the second occurrence – as Ground 4 turns on the loss of hire flowing (as owners allege) from that occurrence. In the light of my conclusion in owners’ favour on both Grounds 1 and 2, so that owners are entitled to a full indemnity in respect of the first occurrence (the PAM breakdown), Ground 4 is academic, as it was before the Judge. However, like the Judge, I will express my conclusion on Ground 4, albeit briefly, as, in the event, we were in no doubt that the appeal on this Ground must fail and did not call on Mr. Berry.

In a nutshell, before this Court, Mr. Bright submitted that insurers were under no liability in respect of the second occurrence because owners had suffered no loss of hire, given that they undertook their own work and the IGS at the same time (thus saving time and earning capacity later). It was not a question of giving credit for time saved; there was no loss of hire and thus no liability under the LOH policy. On this footing, a decision in favour of owners on Ground 4 conferred a windfall. A construction of the LOH policy which produced such a result was “uncommercial” and could not be supported. Nor was such an outcome required by the authorities, properly considered; if The “Ferdinand Retzlaff”(supra) was indistinguishable it was in any event not binding on this Court.

With respect to Mr. Bright, I disagree. My reasons for concluding that owners were entitled to succeed on Ground 4 (had it mattered) are as follows:

Accordingly, had it not been academic, I would have been minded to dismiss the appeal on Ground 4 – and, for the reasons already given, I am of the view that the appeal must be dismissed.

I entirely agree. Like Gross LJ I was at first doubtful whether use of the expression “one thing led to another” amounted to a proper analysis of the question whether the causative effect of the PAM breakdown was spent after 11 March. However I was persuaded by Mr Berry that the judge’s shorthand is readily explicable in the light of his earlier findings.

At [37] of his judgment the judge set out his findings in relation to the second occurrence:-

“37.

. . . I accept the description of the incident in the evidence of Mr Murray as follows: “With both motors out of the way (the port motor removed for repair and Louis Allis motor on deck waiting for the starboard ABB motor to be installed), maintenance work could be done on an unused cooler which had a small oil leak but which could not be easily accessed with the motors in place. Taking the opportunity to gain access to the cooler, the crew blanked it off in order to stop the leak. But unknown to the crew, the configuration of the valves was incorrect. (This was an issue that pre-dated our acquisition of the vessel but did not become apparent until after the cooler had been blanked off because the cooler had not been in use.) The incorrect seating of one of the valves meant that when the starboard hydraulic propeller pitch control pump was re-started after blanking off, the system became over-pressurised and a hydraulic pipe ruptured”. He adds, “Without the port motor breakdown, the motor would never have been removed and the maintenance work to the cooler would never have been done.””

The critical finding is that but for the PAM breakdown, the Louis Allis motor on the starboard side would never have been removed and the maintenance work to the hitherto unused cooler would not have been done. In the light of that finding, the judge was in my view entitled to find that the decision to take the opportunity to repair the unused cooler did not break the chain of causation flowing from the PAM breakdown. It was not an unreasonable decision – indeed I share the view of Gross LJ that it was “axiomatic” to take the opportunity presented. Seen in this way, far from breaking the chain of causation the decision to repair the cooler can probably be regarded as itself caused by the PAM breakdown.

In his reply, Mr Bright was I think inclined to characterise the decision to repair the cooler, rather than the hydraulic failure to which it gave rise, as breaking the chain of causation. It follows that I would reject that way of looking at the matter. Whether the unfortunate consequences of the decision to repair the cooler could equally be regarded as caused by the PAM breakdown is a more difficult question and Mr Berry did not go that far. In agreement with Gross LJ however, it is sufficient to conclude that the hydraulics failure was simply an incidental vicissitude of the events set in train by the PAM breakdown. The causative effect of the PAM breakdown was not spent.

The fallacy in Mr Bright’s argument is I think that he assumes that because, absent the hydraulics failure, the causative effect of the PAM breakdown would have been spent shortly after 11 March, because of the successful mitigation, therefore the hydraulics failure must be regarded as bringing to an end that causative potency and as, after its occurrence, the sole cause of the inability to earn hire. However once the context in which the hydraulics failure occurred is understood, it is plain to my mind that the causative effect of the PAM breakdown was far from spent. Properly analysed, the hydraulics failure became thereafter an equally effective cause of the inability to earn hire, without detracting in any way from the continuing effect of the PAM breakdown.

On the other points argued there is nothing which I wish to add, save to observe that the attempt to suggest that a claim based upon the occurrence of a single insured peril should attract the application of multiple excess periods referable to the occurrence of different insured perils is to say the least unorthodox.

I agree that the appeal should be dismissed.

I agree that the appeal should be dismissed for the reasons given by Gross LJ.