Gard Marine & Energy Ltd v China National Chartering Co Ltd (Rev 1)

As Mr Kendrick submitted, at first sight the judge’s conclusion seems somewhat surprising. It has the result that a modern port, with a first-class safety record and with a large volume of ships and major industrial entities using it, was unsafe in 2006 and had been unsafe for 40 years previously, notwithstanding that there had been no previous casualty of a similar nature (Footnote: ²⁹). Since 1971 5,316 Capesize vessels had safely called at and departed the port, without relevant incident. No ship had ever broken free from her moorings at the port; there had never been an accident in the Fairway when vessels were departing. We agree with Mr Kendrick that the casualty could rightly be described not merely as “remarkable” (Footnote: ³⁰) but also as unprecedented.

Indeed on the judge’s conclusion, the port remains unsafe to date, since the changes to port procedures made since the casualty would not have prevented it had they been in place in 2006 (Footnote: ³¹). Yet no similar incidents to that befalling the Ocean Victory and the Ellida Ace as they sought to leave Kashima on 24th October 2006 have occurred subsequently.

Reduced to their bare minimum, the essential facts, whether as found by the judge or otherwise appearing from the evidence adduced at trial, can, we consider, usefully be summarised as follows:-

It was in that evidential context that the judge concluded that the casualty did not occur as a result of an abnormal occurrence. The core of his reasoning appears from paragraphs 127 to 129 of the judgment (which we have already summarised and quoted in paragraphs 42-43 above). On analysis his approach appears to have been that, in deciding whether the casualty resulted from an abnormal occurrence:-

We consider with all due respect that the logic of the judge’s approach to the issue of abnormal occurrence is flawed. Our reasons may be stated as follows.

The nature of a charterer’s safe port warranty is well established. As Lord Diplock said in The Evia (No. 2) [1983] 1 AC 736 at 149:-

“For my part, I would regard the nature of the contractual promise by the charterer that a chartered vessel shall be employed between safe ports ("the safe port clause") as having been well settled for a quarter of a century at the very least. It was correctly and concisely stated by Sellers L.J. in Leeds Shipping Co. Ltd. v. Société Francaise Bunge (The Eastern City) [1958] 2 Lloyd's Rep. 127 in a classic passage which, in its reference to "abnormal occurrence," reflects a previous statement in the judgment of Morris L.J. in Compania Naviera Maropan S.A. v. Bowaters Lloyd Pulp and Paper Mills Ltd. (The Stork) [1955] 2 Q.B. 68. Sellers L.J. said, at p. 131:-

“a port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship …”

It is with the prospective safety of the port at the time when the vessel will be there for the loading or unloading operation that the contractual promise is concerned and the contractual promise itself is given at the time when the charterer gives the order to the master or other agent of the shipowner to proceed to the loading or unloading port.”

Lord Roskill (in a speech to which Lord Brandon had contributed and with which the other members of the committee agreed) amplified the nature of the promise, and of the “abnormal occurrence” exception, in his speech at 757:

“In order to consider the scope of the contractual promise which these eight words impose upon a charterer, it must be determined how a charterer would exercise his undoubted right to require the shipowner to perform his contractual obligations to render services with his ship, his master, officers and crew, the consideration for the performance of their obligation being the charterer's regular payment of time charter hire. The answer must be that a charterer will exercise that undoubted contractual right by giving the shipowner orders to go to a particular port or place of loading or discharge. It is clearly at that point of time when that order is given that that contractual promise to the charterer regarding the safety of that intended port or place must be fulfilled. But that contractual promise cannot mean that that port or place must be safe when that order is given, for were that so, a charterer could not legitimately give orders to go to an ice-bound port which he and the owner both knew in all human probability would be ice-free by the time that vessel reached it. Nor, were that the nature of the promise, could a charterer order the ship to a port or place the approaches to which were at the time of the order blocked as a result of a collision or by some submerged wreck or other obstacles even though such obstacles would in all human probability be out of the way before the ship required to enter. The charterer's contractual promise must, I think, relate to the characteristics of the port or place in question and in my view means that when the order is given that port or place is prospectively safe for the ship to get to, stay at, so far as necessary, and in due course, leave. But if those characteristics are such as to make that port or place prospectively safe in this way, I cannot think that if, in spite of them, some unexpected and abnormal event thereafter suddenly occurs which creates conditions of unsafety where conditions of safety had previously existed and as a result the ship is delayed, damaged or destroyed, that contractual promise extends to making the charterer liable for any resulting loss or damage, physical or financial. So to hold would make the charterer the insurer of such unexpected and abnormal risks which in my view should properly fall upon the ship's insurers under the policies of insurance the effecting of which is the owner's responsibility under clause 3 unless, of course, the owner chooses to be his own insurer in these respects.” [Our emphasis.]

The import of these passages is clear. A charterer does not assume responsibility for unexpected and abnormal events which occur suddenly and which create conditions of unsafety after he has given the order to proceed to the relevant port. These are the responsibility of the ship’s hull insurers (if owners have insured) or of owners themselves. Moreover the concept of “safety” is necessarily not an absolute one. As the Court of Appeal said in The Saga Cob [1979] 1 Lloyd's Rep. 548 at 551, column 2, in the context of political risk:-

“In the latter case [the safe port warranty] one is considering whether the port should be regarded as unsafe by owners, charterers, or masters of vessels. It is accepted that this does not mean that it is unsafe, unless shown to be absolutely safe. It will not in circumstances such as the present be regarded as unsafe unless the “political” risk is sufficient for a reasonable shipowner or master to decline to send or sail his vessel there.”

A similarly realistic approach has in our view to be adopted to the determination of the essentially factual question whether the event giving rise to the particular casualty is to be characterised as an "abnormal occurrence" or as resulting from some “normal” characteristic of the particular port at the particular time of year. We emphasise the word “normal” in the term “normal characteristic”. It was used by Lord Diplock when he observed in The Evia (No. 2) at 749 that:-

“…it is not surprising that disputes should arise as to whether damage sustained by a particular vessel in a particular port on a particular occasion was caused by an "abnormal occurrence" rather than resulting from some normal characteristic of the particular port at the particular time of year.”

The term was also used in The Saga Cob at 550, column 2, to 551, column 1, in an illuminating passage which emphasises that the fact that an event (in that case a guerrilla attack) was theoretically foreseeable did not make it an “normal characteristic” of the port:-

“Be that as it may, there is no evidence whatever that the system introduced after the Omo Wonz had any defects until the attack on Saga Cob itself when at anchor four or five miles outside the port. This cannot in our judgment be regarded as other than an abnormal and unexpected event unless it is to be said that as from the Omo Wonz incident, any vessel proceeding to or from Assab or Massawa was proceeding to an unsafe port. This in our judgment is untenable. The situation in this case was drastically different from that in The Lucille when the Shatt-al-Arab had become the centre of hostilities. All that can be said in this case is that since a guerrilla attack may take place anywhere at any time and by any means, that the guerrillas had two boats and that they had made one seaborne attack 65 miles away, it was foreseeable that there could be a seaborne attack either en route from Assab to Massawa or in the anchorage at Massawa. If this were enough it would seem to follow that, if there were a seaborne guerrilla or terrorist attack in two small boats in the coastal waters of a country in which there had been sporadic guerrilla or terrorist activity on land and which had many ports, it would become a normal characteristic of every port in that country that such an attack in the port or whilst proceeding to it or departing from it was sufficiently likely to render the port unsafe. This we cannot accept. Omo Wonz was itself clearly an isolated abnormal incident and, until the order to proceed to Massawa almost three months later, nothing further had occurred to suggest that the risk of further attack on the Assab/Massawa voyage or in the anchorage at Massawa had not been contained. In such circumstances, to say that such an attack or even the risk of such an attack was a normal characteristic of the port, is in our view impossible.

As to the letter of the master immediately after the Omo Wonz incident we do not consider that it can be regarded as of any importance. The master was no doubt at the time alarmed but thereafter he visited Massawa on several occasions despite the provisions of the charter-party entitling him to refuse. The charterers expressly disclaim any arguments that by entering into the charter-party the owners accepted the risks but it appears to us that the master’s actions indicate clearly that whatever he may have thought immediately after the Omo Wonz incident he, like every one else, considered that Massawa was a safe port.

We further consider that what occurred subsequently is relevant on the question whether Massawa was a safe port.

We accordingly hold that on the Aug. 26. 1988 Massawa was a safe port.”

Likewise, Mustill J in the Mary Lou [1981] 2 Lloyd’s Reports 272, at 278, column 2, in his description of what constitutes an abnormal occurrence, implicitly recognised the need to approach the identification of an abnormal occurrence realistically and having regard to whether the event had occurred sufficiently frequently so as to become a characteristic of the port:-

“The abnormal nature of the occurrence which causes the loss is also relevant in a different way, in that it bears upon the question where there is a breach of warranty if the ship does comply with the order and suffers damage in the port. The mere happening of the casualty does not necessarily imply a breach. The warranty does not involve a guarantee that a properly navigated ship will be in all circumstances free from danger in the port. Certain accidents are due to misfortunes which are not the direct consequence of the order to the port, for instance, if a storm of unprecedented violence catches the ship in the nominated port and drives her ashore. The choice of port is an indirect cause of the loss for the ship would have escaped loss if she had not been ordered to some other port. But it is not the direct cause, for the choice of port does not involve a choice by the charterer of the risk of this unexpected event. In this context, also it is not easy to find a turn of phrase which accurately expresses the notion. It may be said that the loss is not recoverable unless events of this type and magnitude are sufficiently regular or at least foreseeable to say that their occurrence is an attribute or characteristic of a port, or it may be said that abnormal or casual events do not found a claim.” (Footnote: ³⁸)

In our view the judge went wrong in his analysis in a number of respects. First of all he failed to formulate the critical – and unitary – 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 at the Raw Materials Quay (because of the risk of damage or mooring break out) and (b) conditions in the Kashima Fairway being so severe because of gale force winds from the northerly/northeasterly quadrant), as to make navigation of the Fairway dangerous or impossible for Capesize vessels, was an abnormal occurrence or a normal characteristic of the port of Kashima? Or put even more simply, was it an abnormal occurrence or a normal characteristic of the port that a vessel might be in danger at her berth at the Raw Materials Quay but unable at the same time safely to leave because of navigation dangers in the Kashima Fairway arising from the combination of long waves and gale force northerly winds which, in fact, occurred.

On the contrary, instead of asking the unitary question directed at establishing the correct characterisation of the critical combination (abnormal occurrence or normal characteristic of the port), the judge merely addressed the respective constituent elements of the combination (swell from long waves making it dangerous for a vessel to remain at the Raw Materials Quay and gale force winds from the northerly/northeasterly quadrant making navigation of the Fairway dangerous or impossible for Capesize vessels) separately. He looked at each component and decided that, viewed on its own, neither could be said to be rare and both were attributes or characteristics of the port. That was the wrong approach; what mattered was not the nature of the individual component dangers that gave rise to the events on 24th October, but the nature of the event (i.e. the critical combination) which gave rise to the vessel (on the judge’s findings) effectively being trapped in port.

He then compounded his previous error by concluding that, even if the critical combination was rare, nonetheless it was a characteristic of the port, apparently for two reasons:-

The first reason (“nobody at the port could, I consider, be surprised if they did.”) appears to based on the idea that, provided an event is theoretically foreseeable as possibly occurring at the relevant port, because of the port’s location, then that is enough to qualify the event as a “characteristic of the port”. The judge appears to have derived this test from dicta from the judgment of Mustill J in The Mary Lou at 278, column 2 (Footnote: ⁴¹), which the judge selectively quotes in paragraph 129 of the judgment, where he refers to long waves and northerly gale winds as being “at least foreseeable”. But satisfaction of the test of mere “foreseeability” is per se clearly not sufficient to turn what the judge himself described as “a rare event in the history of the port” into a normal characteristic or attribute of the port. The error of the judge, in our view, was to pick up on the words “at least foreseeable” in his citation from Mustill J’s judgment, and to use minimum foreseeability, without more, as some sort of litmus test for establishing whether an event was a characteristic of a port, without having any regard to significant factors such as the actual evidence relating to the past history of the port, the frequency (if any) of the event, the degree of forseeability of the critical combination and the very severe nature of the storm on the casualty date. In doing so, the judge departed from the orthodox and practical approach by Mustill J, as set out in the full passage of his judgment quoted above, and indeed that of Lords Diplock and Roskill in The Evia (No.2), to the question of whether an event was abnormal, which necessarily includes an examination of the past history of the port and whether, in that evidential context, the event was unexpected, but also took the phrase “at least foreseeable” as used by Mustill J out of context. In our view it is clear, when the passage is read in context, that Mustill J certainly was not suggesting that mere, theoretical, forseeability on its own was sufficient. Whether or not, as Mr Kendrick suggested, Mustill J intended the adverb “sufficiently” to modify the word “foreseeable”, Mustill J was not setting up some sort of alternate test which excluded considerations of questions such as the frequency of past occurrences of the particular event, or the degree of likelihood that the event was to occur in the future.

Moreover, as the Court of Appeal emphasised in The Saga Cob in the passage cited above (Footnote: ⁴²), one has to look at the reality of the particular situation in the context of all the evidence, to ascertain whether the particular event was sufficiently likely to occur to have become an attribute of the port, otherwise the consequences of a mere foreseeability test lead to wholly unreal and impractical results. That point may be illustrated by examples given by charterers in their written argument: does the mere fact that it is “foreseeable” from the location of San Francisco that earthquakes may occur in its vicinity, or from the location of Syracuse, beneath Mount Etna, that there may be volcanic explosions in its vicinity, predicate that any damage caused to vessels in those ports from such events, were they to occur in the future, would flow from the “normal characteristics or attributes” of those ports, and therefore necessarily involve a breach of any safe port warranty? The answer is obviously not; whether, in such circumstances, there would be a breach of the safe port warranty, or the event would be a characterised as an abnormal occurrence, would necessarily depend on an evidential evaluation of the particular event giving rise to the damage and the relevant history of the port.

Perhaps most significantly under this head, the judge provides no evidential basis for his apparent factual conclusion that “nobody at the port could, I consider, be surprised” if the crucial combination occurred, or for the conclusion reached earlier in paragraph 110 of the judgment that “there must have been… a clear risk of gale force winds from the northerly quadrant in the Kashima Fairway at the same time as long waves were affecting the Raw Materials Quay.”

In the light of the evidence to the effect that no vessel in the port’s history had been dangerously trapped at the Raw Materials Quay, with a risk of damage or mooring break out, at the same time as the Kashima Channel was not navigable because of gale force winds, it is difficult to see how he reached this conclusion. This may be because he did not adequately focus evidentially on the particular situation which he had to consider, namely one where a vessel was effectively trapped, because the swell from long waves affecting vessels berthed at the Raw Materials Quay was so severe that it was dangerous for a vessel to remain there (as opposed to merely a situation where long waves caused swell and a vessel decided to leave the Raw Materials Quay) and the Kashima Channel not being navigable because of gale force winds. It may also be because he did not give adequate weight to the evidence of Mr. Lynagh (which he gives no cogent reason for rejecting) that the storm which occurred on 24th October was exceptional in terms of its rapid development, its duration and its severity (see para 48 (ix) above).

The second reason given by the judge (“Even if the concurrent occurrence of those events is a rare event in the history of the port such an event flows from characteristics or features of the port”) is, in our view, equally flawed. As we have already stated in paragraphs 55 and 56 above, what the judge had to decide was whether “the concurrent occurrence of those events” (i.e. the critical combination) was itself a normal characteristic of the port or an abnormal occurrence. That was the relevant event which the judge had to characterise. It simply did not follow, logically or otherwise, from the fact that that event arose from (or, as the judge said, “flow[ed] from”) the combination of two individual dangers, which he had held were normal characteristics or attributes of the port, that the “concurrent occurrence of those events” was also a normal characteristic or attribute of the port.

In deciding whether the critical combination was itself a normal characteristic of the port or an abnormal occurrence, what the judge should have done was to evaluate the evidence relating to the past frequency of such an event occurring and the likelihood of it occurring again. He should have also, in our view, have taken into account what appears to have been the unchallenged evidence of Mr Lynagh referred to above relating to the exceptional nature of the storm that affected Kashima on 24th October 2006 in terms of its rapid development, its duration and its severity. Had he done so, then, on the basis of his own finding that “the concurrent occurrence of those events was rare”, and on the basis of the evidence which we have summarised above, there would, in our view, have been only one conclusion which he could have reached – namely that the event which occurred on 24th October 2006 was indeed an abnormal occurrence.

For the above reasons we conclude that the conditions which affected Kashima on 24th October 2006 were an abnormal occurrence, that there was no breach by the charterers of the safe port obligation, and accordingly that the appeal should be allowed on this ground.

In the light of our conclusion that there was no breach by the charterers of the safe port obligation, it is strictly unnecessary for this court to consider the causation issue (namely whether the loss of the vessel was caused not by the unsafety of the port but by the Master’s “wrong” decision to leave the port) and we do not propose to do so. Although we heard argument on the point, we do not consider it is an appropriate use of resources for this court to express any views on the issue. The judge reached his conclusion after a very careful consideration of the evidence and the arguments put forward by charterers that the chain of causation had been broken. His conclusion was clearly critically dependent upon his various factual findings including, in particular, that it had not been safe for the vessel to remain alongside the berth (against which there was no appeal) and on his conclusion that there had been a breach of the safe port warranty. In the circumstances (including our conclusion as set out below in relation to the recoverability issue) there is little utility in this court reviewing the judge’s findings on the counter-factual hypothesis that there was a breach of the safe port warranty.

In the light of our conclusion that there was no breach by charterers of the safe port obligation, it is also strictly unnecessary to consider whether the terms of the demise charter prevent any recovery for breach of that obligation. But the point was fully argued and, like the judge, we should decide it. Unlike the causation issue it raises an important issue of principle in relation to the construction of the relevant charterparties.

For the purpose of this issue it is necessary to bear in mind that the claimant is Gard, suing as assignee of both the registered owners, and the demise charterers of the vessel. The question raised by the charterers is whether Gard, as assignee of the demise charterers, can claim the loss of the vessel from Sinochart, the intermediate charterers, so that Sinochart can in turn claim the loss from Daiichi, the sub-time charterers. This depends upon whether, assuming a breach of the safe port warranty, OLH, the demise charterers, are liable to OVM, the registered owners, in respect of the loss of the vessel. If the demise charterers are not so liable then they have suffered no loss in respect of the loss of the vessel and have no claim to pass on to the intermediate charterers. The case of both charterers (Sinochart and Daiichi) is that on the true construction of the terms of the demise charterparty it was not intended that the demise charterers, who had insured the vessel at their expense, should have any liability to the registered owners in respect of insured losses, notwithstanding that such losses may have been caused by a breach of the safe port warranty. The case of Gard is that the demise charterers were liable to the registered owner in respect of the loss of the vessel, whether for breach of the safe port obligation or, indeed, the redelivery obligation.

It is first necessary to set out the relevant terms of the demise charterparty between the registered owners and the demise charterers. This was on the form of an amended Barecon 89 Standard Bareboat Charter. Part I was in box form and Part II contained certain terms.

Part II Clause 5, Trading Limits, was deleted and replaced by additional clauses 29 and 30. Clause 29 provided that the vessel was to be employed “only between good and safe ports”. Thus the demise charterer warranted the safety of the ports to which the vessel was sent.

Part I box 27 provided for the Insured Value of the vessel to be stated and for the parties to state whether clause 13 (by inference, of Part II) applied. Clauses 12 and 13 of Part II were alternative “Insurance and Repairs” terms. Part I box 27 stated US$70,000,000 and did not state that clause 13 applied. Since Part II clause 13 stated that it (clause 13) was optional and only applied if expressly agreed and stated in Box 27, in which event clause 12 should be considered deleted, it follows that clause 13 did not apply and that clause 12 did. The essential difference between the two clauses was that under clause 12 the demise charterers were to effect marine and war risks (as well as P and I risks) insurance whereas under clause 13 it was for the owners to effect insurance against marine and war risks. Clause 12, entitled “Insurance and Repairs”, provided as follows:-

“12.

Insurance and Repairs

(a)

During the Charter period the Vessel shall be kept insured by the Charterers at their expense against marine, war and Protection and Indemnity risks in such form as the Owners shall in writing approve, which approval shall not be unreasonably withheld. Such marine war and P. and I. insurances shall be arranged by the Charterers to protect the interests of both the Owners ands the Charterers and mortgagees (if any), and the Charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear.

If the Charterers fail to arrange and keep any of the insurances provided for under the provisions of sub-clause (a) above in the manner described therein, the Owners shall notify the Charterers whereupon the Charterers shall rectify the position within seven running days, failing which Owners shall have the right to withdraw the Vessel from the service of the Charterers without prejudice to any claim the Owners may otherwise have against the Charterers.

The Charterers shall, subject to the approval of the Owners and the Underwriters, effect all insured repairs and shall undertake settlement of all costs in connection with such repairs as well as insured charges, expenses and liability (reimbursement to be secured by the Charterers from the Underwriters) to the extent of coverage under the insurance herein provided for.

The Charterers also to remain responsible for and to effect repairs and settlement of costs and expenses incurred thereby in respect of all other repairs not covered by the insurance and/or not exceeding any possible franchise(s) or deductibles provided for in the insurances.

All time used for repairs under the provisions of sub-clause (a) of this Clause and for repairs of latent defects according to Clause 2 above including any deviation shall count as time on hire and shall form part of the Charter period.

(b)

If the conditions of the above insurances permit additional insurance to be placed by the parties, such cover shall be limited to the amount for each party set out in Box 28 and Box 29, respectively. The Owners or the Charterers as the case may be shall immediately furnish the other party with particulars of any additional insurance effected, including copies of any cover notes or policies and the written consent of the insurers of any such required insurance in any case where the consent of such insurers is necessary.

(c)

Should the Vessel become an actual, constructive, compromised or agreed total loss under the insurances required under sub-clause (a) of Clause 12, all insurance payments for such loss shall be paid to the Mortgagee, if any, in the manner described in the Deed(s) of Covenant, who shall distribute the moneys between themselves, the Owners and the Charterers according to their respective interests. The Charterers undertake to notify the Owners and the Mortgagee, if any, of any occurrences in consequence of which the Vessel is likely to become a Total Loss as defined in this clause.

(d)

If the Vessel becomes an actual, constructive, compromised or agreed total loss under the insurances arranged by the Charterers in accordance with sub-clause (a) of this Clause, this Charter shall terminate as of the date of such loss.

(e)

The Owners shall upon the request of the Charterers, promptly execute such documents as may be required to enable the Charterers to abandon the Vessel to insurers and claim constructive total loss.

(f)

For the purpose of insurance coverage against marine and war risks under the provisions of sub-clause (a) of this Clause, the value of the vessel is the sum indicated in Box 27.”

It is to be noted that (the unused) clause 13 provided in sub-clause (a) that when the owners insured the vessel, neither owners nor the insurers were to have any right of recovery or subrogation against the demise charterers:-

“13.

Insurance, Repairs and Classification

(Optional, only to apply if expressly agreed and stated in Box 27, in which event Clause 12 shall be considered deleted).

(a)

During the Charter period the Vessel shall be kept insured by the Owners at their expense against marine and war risks under the form of policy or policies attached hereto. The Owners and/or insurers shall not have any right of recovery or subrogation against the Charterers on account of loss of or any damage to the vessel or her machinery or appurtenances covered by such insurance, or on account of payments made to discharge claims against or liabilities of the Vessel or the Owners covered by such insurance. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear.

(b)

During the Charter period the Vessel shall be kept insured by the Charterers at their expense against Protection and indemnity risks in such form as the Owners shall in writing approve which approval shall not be unreasonably withheld. If the Charterers fail to arrange and keep any of the Insurances provided for under the provisions of sub-clause (b) in the manner described therein, the Owners shall notify the Charterers whereupon the Charterers shall rectify the position within seven running days, failing which the Owners shall have the right to withdraw the Vessel from the service of the Charterers without prejudice to any claim the Owners may otherwise have against the Charterers.

(c)

In the event that any act of negligence of the Charterers shall vitiate any of the insurance herein provided, the Charterers shall pay to the Owners all losses and indemnify the Owners against all claims and demands which would otherwise have been covered by such insurance.

(d)

The Charterers shall, subject to the approval of the Owners or Owners’ Underwriters, effect all insured repairs, and the Charterers shall undertake settlement of all miscellaneous expenses in connection with such repairs as well as all insured charges, expenses and liabilities, to the extent of coverage under the insurances provided for under the provisions of sub-clause (a) of this Clause. The Charterers to be secured reimbursement through the Owners’ Underwriters for such expenditures upon presentation of accounts.

(e)

The Charterers to remain responsible for and to effect repairs and settlement of costs and expenses incurred thereby in respect of all other repairs not covered by the insurances and/or not exceeding any possible franchise(s) or deductibles provided for in the insurances.

(f)

All time used for repairs under the provisions of sub-clause (d) and (e) of this Clause and for repairs of latent defects according to Clause 2 above, including any deviation, shall count as time on hire and shall form part of the Charter period.

The Owners shall not be responsible for any expenses as are incident to the use and operation of the Vessel for such time as may be required to make such repairs.

(g)

If the conditions of the above insurances permit additional insurance to be placed by the parties such cover shall be limited to the amount for each party set out in Box 28 and Box 29, respectively. The Owners or the Charterers as the case may be shall immediately furnish the other party with particulars of any additional insurance effected, including copies of any cover notes or policies and the written consent of the Insurers of any such required insurance in any case where the consent of such Insurers is necessary.

(h)

Should the Vessel become an actual, constructive, compromised or agreed total loss under the insurances required under sub-clause (a) of this Clause, all insurance payments for such loss shall be paid to the Owners, who shall distribute the moneys between themselves and the Charterers according to their respective interests.

(i)

If the Vessel becomes an actual, constructive, compromised or agreed total loss under the insurances arranged by the Owners in accordance with sub-clause (a) of this Clause, this Charter shall terminate as of the date of such loss.

(j)

The Charterers shall upon the request of the Owners, promptly execute such documents as may be required to enable the Owners to abandon the Vessel to Insurers and claim a constructive total loss.

(k)

For the purpose of insurance coverage against marine and war risk under the provisions of sub-clause (a) of this Clause, the value of the Vessel is the sum indicated in Box 27.

(l)

Notwithstanding anything contained in Clause 9 (a), it is agreed that under the provisions of Clause 13, if applicable, the Owners shall keep the Vessel with unexpired classification in force at all times during the Charter period.”

Mr Kendrick for the time charterers submitted that clause 12 of the demise charterparty contained a complete code for the treatment of insured losses as between the parties in the event of a total loss. Against that background, the parties cannot have intended that the demise charterers would have been liable to the registered owners for breach of the safe port warranty in respect of losses covered by the hull insurance taken out by the demise charterers at their expense in the joint names of both the registered owners and demise charterers. It was accepted, however, that SCOPIC and wreck removal costs, not being covered by hull and machinery insurance, would be recoverable.

Mr Russell on behalf of Gard submitted that the charterers’ suggested construction of the charterparty was contrary to the express terms of the charterparty. There was an undoubted safe port warranty for breach of which the demise charterers would, all things being equal, be liable in damages. The parties, having expressly chosen to delete clause 13 which provided expressly that registered owners and/or insurers shall not have any right of recovery or subrogation against the demise charterers in respect of hull risks, cannot have intended that the registered owners and/or insurers should have no right of subrogation against the demise charterers, for there was no bar on subrogation in clause 12. Further, the suggested construction would mean that the safe port warranty in additional clause 29 would be ineffective.

We were not shown the terms of the actual insurance contract made between the demise charterers and the insurers but were invited to assume that a contract had been made in joint names in conformity with clause 12. Such contracts have been giving rise to problems in relation to subrogation for a number of years. Similar problems can also arise, in the absence of joint insurance, if one party to a commercial relationship is required to pay premiums for an insurance against loss or damage to the property insured. If a loss occurs as a result of a breach of contract or negligent conduct on the part of the party who pays the premium, can the insurer use the name of the “innocent” party to sue the “guilty” party once the insurer has paid for the loss? Since insurance is usually intended to cover an insured for any breach of contract or duty on his part, it is generally thought that the answer to this question must be “No”; otherwise the party paying the premium has not secured the insurance cover he was entitled to expect.

Thus in The Evia (No. 2) [1983] 1 A.C. 736 clause 21 of the charter (the war risks clause) provided that if the vessel was ordered into a war risk zone, the owners were entitled to insure against the risk of loss or damage to the vessel and recover the premiums from the charterer. On the assumption (in fact rejected by the House of Lords) that there was a breach of the safe port obligation (in clause 2 of the charter), the question was whether the charterers, having paid for the extra war risk insurance, were freed from any liability that they had for breach of that obligation. The House held that they were. Lord Roskill, in a speech to which Lord Brandon had contributed and with which the other members of the committee agreed, said at 766C- 767D:-

“My Lords, whether clause 21 is a complete code and thus exhaustive of the owners’ rights depends upon the construction of the time charterparty as a whole. But if the owners are right that clause 21 leaves the time charterers’ obligations under clause 2 in full force and effect, one remarkable result follows. The time charterers are to repay to the owners the premiums for the extra insurance, including extra war risk insurance premiums. But if the dangers, against the risks on which they have paid those premiums, materialise and cause loss or damage to the ship, then war risk insurers, upon payment of the relevant claim, become subrogated to the owners’ rights against the time charterers for the assumed breach of clause 2. My Lords, this result would no doubt be highly attractive to war risk insurers but the less fortunate time charterers would have paid the premiums not only for no benefit for themselves but without shedding any of the liabilities which clause 2 would, apart from clause 21, impose upon them. Of course, duplication of rights of recovery is not unknown. Indeed it is because of such duplication that subrogation rights can be enforced.

…

In the instant case clause 21 gives the owners an absolute veto upon employment which will imperil the ship in the various circumstances for which clause 21(A) provides. They can impose their own terms. Clause 21(B) also protects the owners in circumstances in which, as in the present case, they have not been able to impose a veto because the dangers have arisen too late for the consent to be required and given or refused. On this matter I respectfully and entirely agree with Lord Denning MR and Sir Sebag Shaw, and equally respectfully disagree with Ackner LJ and Robert Goff J. I should add that I regret that I am unable to follow the reasoning in the last sentence of paragraph 3 of the judgment of Ackner LJ [1982] 1 Lloyd’s Rep. 334, 349, which deals with this issue, where he says that in construing clause 2 the insurance position must be ignored. This suggests that clause 21 is to be construed in isolation from clause 2. But clause 2 and any other relevant clause must be construed together, and with all respect to the learned Lord Justice, it is not the conditions of any insurance policy which matter but the fact that clause 21 makes provision for the effecting of extra insurance, including war risks insurance, at the time charterers’ expense which is the relevant consideration.”

Mark Rowlands Ltd v Berni Inns [1986] QB 211 was a rather similar case between landlord and tenant. The lease required the tenant to pay rent and “insurance rent” equal to the sum paid by the landlord to insure the premises pursuant to a landlord’s covenant to insure. The premises were destroyed by fire caused by the tenant’s negligence. The insurers paid the landlord and then brought an action against the tenant in the name of the landlord claiming damage for the tenant’s negligence. Kerr LJ held that the insurance was effected for the benefit of both the tenant and the landlord and said (228E):-

“However, in my view this does not decide the real issue between the parties. This is whether the terms of the lease, and the full indemnification of the plaintiff by its receipt of the insurance moneys, preclude it from recovering damages in negligence from the defendant, or whether the plaintiff’s right to recover such damages remains unaffected. In the former case the plaintiff’s insurer would obviously be equally precluded from bringing the present action in the name of the plaintiff by virtue of its rights of subrogation. The only English authority cited to the judge in this connection was the decision of Lloyd J in Petrofina (U.K.) Ltd v Magnaload Ltd [1984] Q.B. 127. That decision is of considerable importance to insurances in the field of the construction industry, but for present purposes it is at most only of indirect relevance and distinguishable on its facts. In that case Lloyd J followed with approval a decision of the Supreme Court of Canada in Commonwealth Construction Co. Ltd v Imperial Oil Ltd (1976) 69 D.L.R. (3d) 558 which he regarded as indistinguishable. The feature which distinguishes those cases from the present case and from the Canadian and American cases mentioned below is that the defendants were co-insured with the plaintiffs under the same policy. They were accordingly not restricted to the contention that the insurance had been effected in part for their benefit, as the defendant is in the present case. Being co-insured with the plaintiff under the same policy, it necessarily followed that the plaintiff’s insurers in these two cases were unable to assert any right of subrogation.”

He thus regarded it as axiomatic that in a case of co-insurance, insurers could not exercise rights of subrogation.

He then dealt with an argument that contracts should not be construed to exclude negligence unless clear words were used saying (232G):-

“I would not accept this line of argument. An essential feature of insurance against fire is that it covers fires caused by accident as well as by negligence. This was what the plaintiff agreed to provide in consideration of, inter alia, the insurance rent paid by the defendant. The intention of the parties, sensibly construed, must therefore have been that in the event of damage by fire, whether due to accident of negligence, the landlord’s loss was to be recouped from the insurance moneys and that in that event they were to have no further claim against the tenant for damages in negligence. Another way of reaching the same conclusion, on which Mr Harvey also relied, is that in situations such as the present the tenant is entitled to say that the landlord has been fully indemnified in the manner envisaged by the provisions of the lease and that he cannot therefore recover damages from the tenant in addition, so as to provide himself with what in effect be a double indemnity. Although the receipt of insurance moneys by an innocent party is of course normally no defence to a wrongdoer (see Bradburn v Great Western Railway Co. (1874) L.R. 10 Ex. 1), Mr Harvey relied on a number of passengers in Parry v Cleaver [1970] A.C. 1, 13 to show that considerations of “justice, reasonableness and public policy” (per Lord Reid) may require exceptions to this general principle. I do not think it necessary to elaborate upon this line of argument in the present case save to say that I accept it and regard it as complementary to the conclusion which is to be derived from the construction and effect of the terms of the lease itself, as indicated above.”

Thus even in a case where there was no provision for joint insurance but the insurance was paid for by the “guilty” party, the insurance was held to cover the liability of that party and no rights of subrogation existed. Clear words to exclude that possibility were not required, once it was evident that the insurance was intended to be for the joint benefit of the parties.

Later cases have made it clear that it is vital to construe the underlying contract between the parties in order to see if there is truly an intention that the insurance is for the joint benefit of the parties. But if there is an agreement that the insurance is to be “in joint names as their interest may appear” the agreement is likely to be construed as being an agreement to insure for the parties’ joint benefit. This will normally mean that the parties have agreed on an insurance solution without any rights of subrogation.

Although there has been discussion in the authorities about the basis of this principle of construction there is now no doubt that it exists. Some earlier cases favoured circuity of action or the true construction of the policy of insurance as being the basis of the principle but it is now clear that it ultimately depends on the underlying contract of the parties rather than on the terms of the insurance policy made pursuant to that contract. As Dillon LJ said in Surrey Heath Borough Council v Lovell Construction Ltd (1990) 48 BLR 108, 121:-

“The effect of the contractual agreement must always be a matter of construction. Parties are free to contract as they like. It may be the true construction that a provision for insurance is to be taken as satisfying or curtailing a contractual obligation, or it may be the true construction that a contractual obligation is to be backed be insurance with the result that the contractual obligation stands or is enforceable even if for some reason the insurance fails or proves inadequate.”

In Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] 1 Lloyd’s Rep 448 the defendants provided engineering services to the claimant contractors in relation to the construction of a power station in the Philippines. The claimants had taken out a contractors’ all risks policy pursuant to its obligations under the construction contract and the question was whether the defendants were co-insured under that policy with the claimants and the other contractors and sub-contractors on site. Mr Recorder Jackson QC (as he then was) decided that the defendants were not co-insured under the policy but, if they had been, he had no doubt that a subrogated claim in the name of the claimants could not be brought. He said (page 458):-

“… it would be nonsensical if those parties who were jointly insured under the CAR policy could make claims against one another in respect of damage to the contract works. Such a result could not possibly have been intended by those parties. I have little doubt that they would have said so to the officious by-stander. If, therefore, I were wrong on the co-insurance point, I would have held that there was an implied term …”

This approach was resoundingly approved by the House of Lords in Co-operative Retail Services v Taylor Young Partnership [2002] 1 WLR 1419 (where, however, the underlying construction contract expressly excluded liability in the part of the contractor and its sub-contractors beyond the requirement of reinstatement); see paragraph 65 of the speech of Lord Hope of Craighead who prefaced that approval by saying that the true basis of the rule was to be found in the contract between the parties. The other members of the committee agreed with Lord Hope.

How therefore is clause 12 of the demise charter to be construed in this case? There is no express exclusion of the right of subrogation but it seems to us (as it seemed to Mr Recorder Jackson QC) that it would be nonsensical, in a case in which it was agreed that the parties were to be insured “in joint names as their interest may appear” and they further agreed that in the event of a total loss the demise charter would come to an end, that they envisaged that either party could sue the other for breach of contract, at any rate once the insurance money was paid and distributed in accordance with the interest of the parties as they appeared. Once, as has happened in this case, the insurance is paid and the insurers are discharged from liability, the contractual scheme has been accomplished.

In a recent authority touching on this issue Rix LJ (obiter) sounded an important note of caution. He said in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls Royce Motor Cars Ltd [2008] 2 All E.R. (Comm) 584 at paragraph 76:-

“… I can well see that a provision for joint names insurance may influence, perhaps even strongly, the construction of the contract in which it appears. It may lead to the carving out of an exception from the underlying regime so far as specified perils are concerned. But an implied term cannot withstand express language to the contrary. Moreover, if the underlying contract envisages that one co-assured may be liable to another for negligence even within the sphere of the cover provided by the policy, I am inclined to think that there is nothing in the doctrine of subrogation to prevent the insurer suing in the name of the employer to recover the insurance proceeds which the insurer has paid in the absence of any express ouster of the right of subrogation, either generally or at least in cases where the joint names insurance is really a bundle of composite insurance policies which insure each insured for his respective interest.”

Rix LJ is no doubt referring to the principle of construction that clear words are needed to exclude liability for negligence and a provision for insurance in joint names may not be sufficiently clear for that purpose. There is, of course, no claim for negligence in the present case which is concerned only with the (contractual) safe port obligation in the demise charter. Nevertheless it must be remembered that one of the main reasons why parties take out insurance is that they need to be covered for the consequences of their own negligence and that the principle of construction, alluded to by Rix LJ, did not deter this court in Mark Rowlands v Berni Inns from holding that a negligent lessee who has paid the insurance premiums by way of insurance rent could not be sued for negligence by his landlord in a subrogated claim.

Although, therefore, we would not disagree with Rix LJ about the need carefully to construe the underlying contract between the parties making agreements about insurance, we would, like this court in GD Construction (St Albans) Ltd v Scottish & New Castle Plc [2003] EWCA Civ 16 at paragraphs 39 and 59, say that the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties’ joint interest or if there are other relevant circumstances, as in the recent case of Rathbone Brothers v Novae Corporate [2014] EWCA Civ 1464, where the underlying contract consisted of an employer’s indemnity granted to an employee.

In the present case there are the additional circumstances that the owners and demise charterers were associated companies in the same group of companies and, also, that the safe port obligation is a contractual obligation which exists regardless of any negligence on the part of the demise charterers. There is therefore no reason for the application of the principle that clear words are required to exempt liability for negligence.

If, therefore, clause 12 had stood alone in the demise charter we would have construed it as excluding a right of recovery by the registered owners of the vessel from the demise charterers in respect of loss covered by marine or war risks insurance. The judge, in coming to the contrary conclusion, was much influenced by the fact that in clause 13 of the charter, applying to the antithetical case of the owners (rather than the demise charterers) taking out the insurance, there was an express exclusion of the right of subrogation while in clause 12 there was no such exclusion.

This is an undoubtedly weighty consideration. But one has to remember that in long-term demise charters the chief interest in the vessel is usually that of the demise charterers and it is therefore natural that they should be the ones to insure. The instances when an owner will want to insure the vessel will be somewhat less frequent and may well arise in the context of shorter term charters when the owner is already insured. In such circumstances the demise charterers will be added to the existing policy of the owner and it might well be deemed necessary for it to be specifically provided in the demise charter that the owners and their insurers are to forgo rights of subrogation. That does not mean that it is not obvious that that is the position when the demise charterers take out and pays for the insurance.

This approach may sound speculative but it gains support from the BIMCO documentation preceding the introduction of the Barecon charter form in 1989. It is, in the first place, clear from Box 27 and clause 12(f) of the Barecon forms that the insured value of the vessel is to be inserted in Box 27; that box also provides that if clause 13 is to be used that must be stated in Box 27. No such statement was made in the OCEAN VICTORY charter, so clause 12 was the applicable clause. Clause 13 of Part II was in fact deleted in the document signed by the parties.

The sixth BIMCO bulletin published in December 1989 gives an account of how the Barecon 89 form came into existence, being an amalgamation of two previous forms, Barecon A for chartering of commissioned vessels (with or without mortgage) and Barecon B to be used especially for new buildings financed by mortgage. The new form contained clause 12 relating to insurance and repairs which was expected to be widely used. Clause 13 is described as “optional” and the bulletin then states:-

“It has been felt that it may be useful to cover also the possibility which is believed may arise from time to time that a vessel is bareboat chartered for a short period, say, four to six months. This may sometimes happen, for instance, with passenger vessels bareboat chartered for a short cruise or for ferries hired just for a short summer season. It is believed that in such cases it is normal practice that the Owners carry on with the insurances for their own account.”

In these circumstances one can well understand that an owner’s current insurance, taken out before any question of bareboat chartering arises, will not at that stage be in joint names and will not either expressly or impliedly exclude rights of subrogation. The drafting committee would, however, naturally wish to exclude that right in the demise charter for the contemplated short period, by providing that owners are to have no right of recovery or subrogation against the charterers, even though owners have paid the premiums. So understood, the exclusion of rights of recovery or subrogation in clause 13 is, in our view, a confirmation rather than a negation of such exclusion in the more usually adopted clause 12 for the longer term charters when it is the charterers who pay the premium.

We conclude, therefore, differing from paragraph 201 of the judgment, that the right construction of clause 12 is that the parties intended there to be an insurance funded result in the event of loss or damage to the vessel by marine risks (and war risks); or, to use Mr Kendrick’s phrase, that clause 12 provides a code for what is to happen. This is partly because we have had regard to the BIMCO material which was not before the judge but also because the opposite conclusion would be, as Mr Recorder Jackson QC called it in Hopewell, nonsensical.

Mr Russell for the owners raised the question. What will happen if insurers do not pay? Surely, he submitted, the underlying right of the owners to sue for breach of the safe port obligation must still subsist and have always subsisted. The judge (in paragraph 202) thought that the reason why clause 13 differed from clause 12 may have been to cater for the risk of insolvency on the part of the insurers, that risk being intended to be on the charterers in clause 12 and on the owners in clause 13.

For our part we do not think that the clauses can be construed by reference to the possibility of insurers becoming insolvent or refusing to pay. In the first place, any insolvency before loss would result in the vessel being partly uninsured. Such lack of insurance would, in any event, constitute a breach of contract on the part of the party who had promised that the vessel “shall be kept insured” in sub-clause (a) of both clauses. Insolvency after a loss which has brought the demise charter to an end raises separate problems to which the answer will probably be that the loss stays where it falls. Delay in payment raises different problems again to which the answer will be that either party is at liberty to sue the insurers to judgment. But none of these considerations can, in our judgment, affect the right construction of the charter which has to be construed at the time when it is made and neither party contemplates insolvency or refusal to pay.

We would accordingly hold that, even if the demise charterers had been in breach of the safe port obligation in the charter, they were under no liability to the owners for that breach because the owners had agreed to look to the insurance proceeds rather than to the demise charterers for compensation. The demise charterers cannot therefore show that they have suffered any loss as a result of the time charterers’ breach of their safe port obligation in the time charter and the time charterers have no liability to the demise charterers which they can pass on the sub-time charterers, to whom we have more usually been referring as “the charterers”.

On one view the time charterers have thus escaped liability for the loss of the vessel on the technicality of an agreement between the owners and the demise charterers with which they (the time charterers) have nothing to do. But the result is not as unmeritorious as it might appear at first glance. Gard took an assignment of the rights of both owners and demise charterers. Those rights include rights in both tort and contract in respect of the vessel. A claim in bailment was originally formulated against the time charterers but was not pursued, no doubt because it would require proof of negligence. A contractual claim down a chain of charters does require that there should be a good contractual claim at the first stage so that it can then be passed down the chain. If there is no claim in contract at that first stage there is nothing to pass down. The fact, however, that one can have potentially different results depending on whether a claim is brought in contract or in tort does not justify treating such claims as if they are one and the same so as to produce what some might think was a more meritorious result.

We do not therefore need to consider the further argument advanced by Mr Goldstone QC for the charterers that, in any event, any claim by the owners against the demise charterers became time barred 6 years after the casualty since no claim form seeking recovery from the demise charterers had been issued.

As it is, we would allow this appeal and set aside the judge’s order.