Sea Glory Maritime Co & Anor v Al Sagr National Insurance Co & Anor

This is an insurance claim in respect of the First Claimant’s vessel Nancy (“the NANCY”), a 23,566 GRT Panamanian-flagged bulk carrier built in 1980. It arises out of a fire occurring at the Russian port of Nakhodka near the Sea of Japan on 14 to 15 February 2009 which rendered the vessel a constructive total loss.

The NANCY was insured against marine perils under a policy of marine insurance dated 2 December 2008 (the “Policy”) issued by the defendant, Al Sagr National Insurance Co (“Al Sagr”). Al Sagr is an insurance company headquartered in Dubai. The First Claimants, Sea Glory Maritime Co, and the Second Claimants, Swedish Management Co SA (both of which are based in Ajman in the UAE) were named as insureds in the Policy as the owner and manager of the vessel respectively.

Fire is an insured peril under the Policy, and the claimants claim an indemnity for the constructive total loss in the sum of US$6 million (with credit given for the net proceeds of sale amounting to US$1,412,275.70, plus premium returned of US$201,617.76) together with US$78,672.47 in respect of sue and labour expenses. The total claimed is US$4,464,779.21.

Quantum is not in issue. The defendant disputes liability on the following grounds:

The claim form was issued in 5 May 2009, and Particulars of Claim were served on 12 January 2010. There was originally a trial date set for 2012, which was vacated following amendments by the defendant to its defence raising the issue of illegality under US law.

There were a considerable number of trial bundles, but the documentary evidence was limited to the documents which were relied on by the parties during the hearing, and placed in the court’s supplementary core bundle.

The court heard evidence at trial from three witnesses of fact for the claimants, namely (1) Captain Abdul Kader Kassab, who is the principal of Kassab Inter-Shipping LLC which owns Swedish Management Co, (2) Mr Roy Khoury who is the managing director of companies called Blue Fleet Management Co Ltd and Blue Fleet Chartering SA, and (3) Mr Richard Medawar who was the relevant ISM “Designated Person Ashore” for the vessel from September 2007 to May 2010.

Al Sagr called a single witness of fact, namely Mr Kesava Moorthy, who was a member of Al Sagr’s underwriting team that underwrote the hull and machinery insurance for the NANCY.

Each of these witnesses on the whole gave their evidence well, and I have no hesitation in regarding them as honest witnesses of fact. I have not accepted all of their evidence however where the weight of other evidence including contemporary material is to the contrary. Any further comments I have on the witnesses are made in the course of the judgment.

Because of the volume of material, the parties agreed a reading list to avoid the reading of expert evidence which had been superseded or was otherwise peripheral. Expert witnesses gave evidence in three respects. Evidence as to underwriting issues was given by Mr Bernard Devereese for the claimants, and Mr M. D. A. Emblin for the defendant. Evidence on ISM issues was given by Mr Jon Gray for the claimants, and Captain Andrew Mitchell for the defendant. Evidence on US Law was given by Mr Peter Skoufalos for the claimants, and Mr Michael Gershberg for the defendant. The experts were all well qualified in their fields, and I deal with the substance of their evidence below.

Both parties produced detailed written submissions in opening and closing, for which I was grateful.

I shall have to deal further with the disputed facts when considering the defendant’s grounds of defence. I begin with a narrative summary of the facts as I find them on the evidence, and which were largely undisputed.

The First Claimant (“Sea Glory”) is a company incorporated in and registered pursuant to the laws of the Marshall Islands. Sea Glory purchased the NANCY in early 2005 and was the registered owner of the vessel.

The principal of the company is Captain Abdul Kader Kassab who is a Lebanese national now based in Ajman in the United Arab Emirates. He is extremely experienced in the shipping business. He is the decision-maker and principal of the Second Claimant (“Swedish Management”) and its parent company Kassab Inter Shipping LLC. These operate out of the same office in UAE.

An important issue in the case is as to the management of the NANCY. The claimants say that Swedish Management was the commercial and technical manager of the vessel, assuming responsibility for its operation from Sea Glory, and agreeing to take over all duties and responsibilities imposed by the International Safety Management Code known as the ISM Code.

The defendant does not admit that Swedish Management was the commercial and technical manager, or that the company assumed responsibility for the operation of the vessel. For reasons explained in due course, I am satisfied from the evidence that the claimants have proved their case in this respect. But there remains an important issue as to whether the defendant is correct to say that this is not the full picture. Its case is that Mr Roy Khoury and/or a company called Blue Fleet Management Company Ltd (“Blue Fleet”) participated in the vessel’s commercial and technical management to a material extent, which should have been disclosed/was misrepresented. This is at the heart of the defendant’s first ground of defence which I have to decide.

It is common ground that claimants used Blue Fleet as chartering brokers for the NANCY and other vessels in the fleet, and the real question is how much further the role of Blue Fleet went. It is a company which was set up in 1996, and which operates in Greece. In its written submissions, the defendant refers to Blue Fleet (and for that matter the claimants) as “serious international players”. Mr Roy Khoury (who like Captain Kassab is a Lebanese national) is the managing director of both Blue Fleet and of Blue Fleet Chartering SA. It is clear from the evidence that Mr Khoury and Captain Kassab are close friends as well close business acquaintances.

Some time in 2005, Blue Fleet applied to the Russian Register Classification Society (“Russian Register” or “Class” or “RS”) for entry of the NANCY. The Russian Register is a member of IACS (the International Association of Classification Societies). As from October 2005, the NANCY was classed with the Russian Register.

In the application, Blue Fleet was named as manager, and though the claimants’ case is that this was an error which they tried to get rectified, Blue Fleet was described in the Russian Register as the vessel’s manager. The defendant relies on this in support of its first ground of defence, namely that what it says was Blue Fleet’s participation in the management of the NANCY should have been disclosed.

Blue Fleet was also the manager of other vessels which are relevant on the evidence. As from 10 December 2007, the SANIE and the LADY BELINDA were insured by the defendant for hull and war risks cover. The SANIE was a Panamanian-flagged general cargo vessel built in 1973, and the LADY BELINDA was a North Korean flagged bulk carrier built in 1971. Both these vessels were beneficially owned by Dr Farid Alsaid.

Blue Fleet’s management of the LADY BELINDA is raised by the defendant in the context of its first ground of defence. Cover was suspended by the defendant on 13 February 2008 following a condition survey which revealed that the vessel was in such a poor condition that the surveyor found she presented “a high risk to Hull & Machinery underwriters”. The fate of the vessel is not altogether clear on the evidence, but it is not in dispute that she sank late in 2009. It is not part of the defendant’s case that Captain Kassab knew these facts, but they are relied on in support of its case as to materiality.

In relation to the third and fourth grounds of defence, which are both ISM related, the role of the vessel’s Designated Person Ashore (“DPA”) is important. Initially, Captain Kassab had employed an in-house DPA for ISM purposes, Mr Fadi Al Moujawer. Then from 20 September 2007, Mr Richard Medawar, who is a Lebanese national based in Beirut, was engaged as Swedish Management’s DPA, with Captain Kassab acting as the Deputy DPA for day-to-day matters. Swedish Management employed Mr Khaled Ismail as the in-house Technical Superintendent responsible for the technical management of the NANCY.

The defendant, Al Sagr, is an insurance company licensed to transact all types of insurance business including marine hull and machinery cover and war risks for a variety of vessels. Mr Kesava Moorthy was the member of Al Sagr’s underwriting team that underwrote the hull and machinery insurance for the NANCY and other vessels in Captain Kassab’s fleet. The number of vessels in the fleet varied over time, but at the material time consisted of five vessels (the four other vessels which were all smaller than the NANCY were the TINA 2, JOUDI, ORNA and ROZY).

The NANCY was insured for hull and machinery and war risks cover as part of the claimants’ fleet policy with the defendant from April 2006 onwards.

As regards insurance brokers, the earlier fleet policies were placed with the defendant by Colemont LLC. That changed on 26 June 2008, when Captain Kassab informed the defendant that the claimants’ brokers were to be Nick Little of PL Ferrari and Nick March/John O’Flaherty of AON Bahrain.

The Policy dated 2 December 2008 was on the MAR (91) form, and renewed cover for the NANCY and the four other vessels in the fleet for the period from noon UAE local time 3 December 2008 to noon UAE local time 3 December 2009.

The named insureds under the Policy were Swedish Management Co, SA, UAE, as “Commercial Managers” and Swedish Management Co, SA, Dubai, as “Technical Managers”, Sea Glory Maritime Co as owners of the NANCY, the companies which owned the other four ships within the Policy “and/or Affiliated and/or Subsidiary and/or Managed Companies and/or others as may be declared for their respective rights and/or interests”.

The NANCY was insured for 100% of the agreed values of US$4,800,000 for hull and machinery and US$1,200,000 for increased value with worldwide trading excluding Trans Atlantic and Trans Pacific North of the equator, subject to Institute Warranties Cl 26 of 1/7/76. It is common ground that this included Iran.

Hull and machinery cover was on the basis of Institute Time Clauses - Hulls - Cl 280 of 1/11/95 (“ITC-Hulls 1/11/95” terms) and increased value cover was on the basis of Institute Time Clauses - Hulls, Disbursements and Increased Value (Total Loss Only, including Excess Liabilities) - Cl 290 of 1/11/95 (“ITC-Increased Value 1/11/95” terms).

So far as relevant the ITC-Hulls 1/11/95 terms provide as follows:

“This insurance is subject to English law and practice

………….

4.

CLASSIFICATION

4.1

It is the duty of the Assured, Owners and managers at the inception of and throughout the period of this insurance to ensure that

4.1.1

the Vessel is classed with a Classification Society agreed by the Underwriters and that her class within that Society is maintained.

4.1.2

any recommendations requirements or restriction imposed by the Vessel’s Classification Society which relate to the Vessel’s seaworthiness or to her maintenance in a seaworthy condition are complied with by the dates required by that Society.

………………………….

4.4

Should the Underwriters wish to approach the Classification Society directly for information and/or documents, the Assured will provide the necessary documentation.

………………………….

6.

PERILS

6.1

This insurance covers loss of or damage to the subject-matter insured caused by

………………….

6.1.2

fire, explosion

…………………….

11.

DUTY OF ASSURED (SUE AND LABOUR)

11.1

In case of any loss or misfortune it is the duty of the Assured and their servants and agents to take such measures as may be reasonable for the purpose of averting or minimising a loss which would be recoverable under this insurance.

11.2

Subject to the provisions below and to Clause 12 the Underwriters will contribute to charges properly and reasonably incurred by the Assured their servants or agents for such measures…….

11.6

The sum recoverable under this Clause 11 shall be in addition to the loss otherwise recoverable under this insurance but shall in no circumstances exceed the amount insured under this insurance in respect of the Vessel.

………………………..

12.

DEDUCTIBLE

12.1

………..This Clause 12.1 shall not apply to a claim for total or constructive loss of the Vessel or, in the event of such claim, to any associated claim under Clause 11 arising from the same accident or occurrence.”

So far as relevant the ITC- Increased Value 1/11/95 terms as amended by agreement provide as follows:

“This insurance is subject to English law and practice

………….

4.

CLASSIFICATION

4.1

It is the duty of the Assured, Owners and Managers at the inception of and throughout the period of this insurance to ensure that

4.1.1

the Vessel is classed with a Classification Society agreed by the Underwriters and that her class within that Society is maintained.

4.1.2

any recommendations requirements or restriction imposed by the Vessel’s Classification Society which relate to the Vessel’s seaworthiness or to her maintenance in a seaworthy condition are complied with by the dates required by that Society.

………………………….

6.

PERILS

6.1

This insurance covers total loss (actual or constructive) to the subject-matter insured caused by

………………….

6.1.2

fire, explosion

…………………….”

The Policy also contained the following express warranties:

“Vessels classed and class maintained.

Vessels ISM Compliant.

In respect of the m/v ‘Joudi’ [another vessel in the fleet], Full satisfactory Hull & Machinery Condition Survey to be carried out by BMT Marine & Offshore Surveys and/or Noble Denton and/or Henderson International at Owners costs on or before 27/12/2008 and all recommendations complied with within the time stipulated by the attending surveyors and subject to defects warranty.

………..”

The Policy was subject to the laws of England and Wales and the exclusive jurisdiction of the courts of England and Wales.

At the time of the events which form the main subject of the litigation, the Master of the NANCY was Captain Ismail Riad, who gained his Master’s certificate in February 2007. Captain Riad joined the NANCY on 14 July 2008 having already served on another vessel in the fleet. There were twenty-three crew members on board, most employed via the crew agency office of Kassab Inter Shipping LLC based in Syria.

The issue of Port State Control (“PSC”) detentions forms the basis of Al Sagr’s second ground of defence. The NANCY was built in Bulgaria in 1980, and it was subject to a number of PSC detentions after its acquisition by Captain Kassab in 2005. The evidence is that this is not unusual in the case of an elderly vessel. In fact, Al Sagr’s underwriter, Mr Moorthy, said that “it is difficult to find a vessel that has no prior history of PSC inspections or detentions”.

After a period of over two years without detentions, the NANCY was detained at Suez from 7 to 9 October 2008. This detention in particular is the basis of the second ground of defence. I will look at the detail later, but it is to be noted that the defendant refers especially to fire prevention items identified by the PSC officer. The evidence is that the matters identified were rectified either then, or soon afterwards.

After leaving Suez, the vessel proceeded to Selaata in Lebanon, where between 21 and 23 October 2008, the Flag state annual safety inspection and a Class survey took place.

Also on 21 October 2008, the company’s ISM Document of Compliance was endorsed for annual verification in Dubai following a verification audit by a surveyor called Mr Ian Wilson on behalf of Panama Maritime Documentation Services Inc (“PMDS”). This features in the third of the issues raised by Al Sagr, which contends that there was a relationship between Mr Wilson, Mr Medawar and PMDS which gave rise to a conflict of interest.

As indicated above, the Policy was dated 2 December 2008 and renewed cover for the NANCY and the other vessels in the fleet from 3 December 2008 to 3 December 2009.

Emails exchanged between 17 and 19 December 2008 between Blue Fleet as the vessel’s chartering broker, and Trampline as the charterer’s broker, resulted in the conclusion of a voyage charter between Sea Glory and a Hong Kong company called Kin Ki International Industrial Ltd for the carriage of 30,000 mt (10% more or less) of crude sulphur in bulk from Bandar Imam Khomeini, Iran, to China.

Upon arrival in Iran, the NANCY was inspected by PSC at Bandar Imam Khomeini on 24 December 2008. Deficiencies were found by the PSC officer, some of which were identified as a ground for detention, and three of which related to her fire fighting systems. This is relevant to Al Sagr’s fourth ground of defence, namely breach of the ISM warranty in the Policy.

Again, the deficiencies were rectified and the NANCY was released from detention on 30 December 2008. She proceeded with the voyage to China via Fujairah. After her arrival at Nantong, rectification was confirmed by a Russian Register class surveyor on 5 February 2009.

The voyage between Iran and China is relevant to Al Sagr’s fifth ground of defence. This is based on an allegation of illegality under US law by reason of the issuance by Blue Fleet on behalf of the Claimants of US dollar denominated invoices for the payment by the charterers Kin Ki of the freight due under the charterparty.

The defendant contends that the issuance of these invoices to Kin Ki caused the New York correspondent bank nominated in the invoices to process payments that were unlawful as a matter of United States law. It is said that the claimants, by causing their correspondent bank in New York to process unlawful payments, violated US law.

There was no dispute at trial as to the circumstances of the loss of the vessel. Having discharged the cargo of sulphur in China, on 14 February 2009 the NANCY arrived at Nakhodka in Russia where she had been fixed to load a cargo of steel billets and wires for onward carriage to Taiwan and the Philippines.

Late that night, a fire broke out on the vessel. Despite the crew’s fire-fighting efforts, flames around the aft poopdeck reached up to the boat deck, and the Master ordered the crew forward of the accommodation.

Due to smoke and the fact that flames were now reaching up from the decks below and moving from aft to forward, the Master was unable to send any distress signal from the bridge. He used the mobile phone of one of the crew to send a text message to Swedish Management in Ajman which contacted the local agency in Nakhodka to arrange fire fighting assistance. The agency emailed Blue Fleet copying in Captain Kassab to report on what was happening.

There was a delay due to the fact that there was another vessel which sank outside Nakhodka that night. The first tug arrived at the NANCY at about 0600 hours on 15 February 2009, and began extinguishing the fire by foam. At about 0610 hours, a second tug arrived and evacuated the crew to shore. The Master however remained on board until about noon, when he was forced to leave by the authorities.

The fire was still burning the following day, and was not extinguished until 17 February 2009.

On 30 March 2009, the claimants gave notice of abandonment to the defendant via AON Bahrain and claimed a CTL. This notice was given following the claimants’ receipt of a fire damage survey carried out on 16-19 March 2009 which indicated that the cost of repairing the damage would exceed the insured value of the vessel.

There were then various communications between the parties. They culminated in an email of 26 May 2009 to AON Bahrain, by which the defendant avoided the Policy on the ground of a material misrepresentation that Swedish Management was the commercial and technical manager of the NANCY, and/or the non-disclosure of the involvement of Blue Fleet which was named as managers of the NANCY in the Russian Maritime Register and named as third party operators of the NANCY in the Lloyds Marine Intelligence Unit (Lloyds MIU) database.

Thanks to the businesslike approach of the parties, this was a relatively short trial. Nevertheless, the defendant raised a considerable number of factual and legal issues in its written submissions. Though it is not agreed, the following list of questions in the defendant’s closing submissions is a useful checklist of its main contentions:

Misrepresentation / non-disclosure in relation to the management of the vessel

Misrepresentation and/or non-disclosure in relation to the management of the vessel was the ground for avoidance relied on at the time. At trial, Al Sagr’s case has been that (1) Blue Fleet performed the commercial and technical management of the LADY BELINDA; (2) Blue Fleet was involved in a material extent in both the commercial and technical management of the NANCY, such that the representations that Swedish Management was commercial manager and technical manager were materially untrue; (3) A prudent underwriter would have considered the involvement of Blue Fleet in the management of the vessel as material to the risk; (4) The defendant was induced by the misrepresentation that Swedish Management was manager of the vessel and/or non-disclosure of Blue Fleet’s material involvement in management. All these points (except the first in part) are disputed by the claimants.

The applicable legal principles were not in dispute, though there were specific issues between the parties on which the law was not agreed, particularly as to the relevance of information available to underwriters on on-line databases.

As regards non-disclosure, s.18 Marine Insurance Act 1906 provides:

I was referred by Mr MacDonald Eggers QC for the claimants to Garnat Trading & Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation [2011] 1 Lloyd's Rep 589, where at [135] Christopher Clarke J adopted as accurate a number of general statements of the law proposed by counsel for the claimants in relation to non-disclosure. Mr Ravi Aswani for the defendant described it as a very useful summary. It is as follows:

I have not included the footnotes which set out the authority cited in support of these statements. On appeal, there was no dispute as to the law, Longmore and Aikens LJJ noting however at [2011] 2 Lloyd's Rep 492 at [9], that “…if there has not been a fair presentation of the risk, any underwriter should be entitled to avoid the contract of insurance”.

As regards misrepresentation, s.20 MIA deals with representations and provides in material part:

“(1)

Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.

(2)

A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

……………….

(4)

A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.

………………..

(7)

Whether a particular representation be material or not is, in each case, a question of fact.”

As with non-disclosure, if the misrepresentation of a material fact did not in fact induce the making of the contract, the underwriter is not entitled to rely on it as a ground for avoiding the contract (Pan Atlantic Insurance Ltd v Pine Top Ltd [1995] 1 AC 501 at 550C, Lord Mustill, Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642 at [59] and [62] where causation is discussed by Clarke, LJ, and Garnat, ibid, at [135(i)]).

Blue Fleet’s management role in relation to the LADY BELINDA

As stated above, cover on the LADY BELINDA was suspended by Al Sagr on 13 February 2008 following a condition survey which showed that the vessel was in such a poor condition that the surveyor found that she presented “a high risk to Hull & Machinery underwriters”, and was not SOLAS compliant. Although the defendant’s pleaded case is that the vessel was abandoned in May 2008, the evidence is that Blue Fleet withdrew from management on 9 June 2009. Mr Khoury said that she sank three or four months later.

The claimants accept that Blue Fleet was appointed by the owners of the LADY BELINDA as that vessel’s technical and commercial managers under a Management Agreement dated 8 March 2006, with full responsibility for its operation. They say that in practice, however, the technical management was delegated by Blue Fleet to and performed by Mr Majid Kachouh of Phoenician Marine Cargo LLC. This company was named as technical managers in the LADY BELINDA policy in addition to Blue Fleet.

So far as in dispute, the facts in relation to this vessel are largely covered by the evidence of Mr Khoury. Although the defendant criticises him as being vague and evasive, generally I considered that he was an honest witness. He accepted however that the case of the LADY BELINDA had adversely affected his reputation, and did not dispute that the vessel was in poor condition. According to him, that was because the owner failed to meet his payment obligations under the management agreement and provide funding.

Whilst the evidence may not support the defendant’s submission that Blue Fleet was “closely involved in a host of technical matters”, Mr Khoury accepted that there was not a clearly differentiated division of technical and commercial functions between Blue Fleet and Phoenician Marine. I am satisfied that there was an overlap between their roles, and I do not think that this was seriously disputed by the claimants.

More important, I accept the defendant’s submission that regardless of any delegation to Phoenician Marine, Blue Fleet was ultimately responsible and accountable for technical management. It is relevant to note that on 11 December 2007, Colemont contacted Al Sagr to amend its records to include Phoenician as an additional technical manager.

Further, I agree with the defendant that even if the cause of the problems that appear to have beset the vessel was that Blue Fleet was not kept in funds by the owner, the poor condition of the LADY BELINDA was a reflection on their management. It inevitably had that result, something Mr Khoury accepted, though he said it did not lose him any business. He did however lose a lot of money on the vessel (he said he was owed close to US$2.5m by the owner), and as he put it, from his point of view the experience was an “absolute disaster”.

The defendant does not contend that merely because Blue Fleet managed the LADY BELINDA, its managerial involvement in the NANCY (so far as proved) is material. But the materiality, it submits, is “significantly amplified” because of Blue Fleet’s management of the LADY BELINDA. I now therefore consider the position in relation to the management of the NANCY.

It is common ground that a representation was made to Al Sagr before the Policy was entered into that the commercial and technical manager of the NANCY was Swedish Management. As set out above, Swedish Management is included in the Policy as named insured and expressly described as the technical and commercial managers of the vessels in the fleet.

The defendant’s case is that giving the words their plain and ordinary meaning, the representation that Swedish Management was the commercial and technical manager of the vessel conveyed the fact that Swedish Management was the only commercial and technical manager of the vessel, alternatively, that no third party was materially involved in the commercial and/or technical management of the vessel. This representation was substantially incorrect because Blue Fleet was involved to a material extent in the technical or commercial management of the vessel.

The claimants say that Swedish Management retained ultimate authority, control and decision making powers, and the result is that the representation in the Policy that it was the technical and commercial manager was both literally true and at the very least “substantially correct” as defined in s. 20(4) Marine Insurance Act 1906. There was no difference between what was represented and what was actually correct because at all times Swedish Management was and remained the technical and commercial manager of the NANCY. Accordingly, the claimants submit that Al Sagr’s defence of misrepresentation falls at the first hurdle.

It is not in dispute that Blue Fleet was the exclusive chartering negotiator in respect of the vessel. But the claimants say that there can be no legitimate claim of misrepresentation or non-disclosure simply because some tasks were outsourced to Blue Fleet as agent. Not only is it common knowledge that a shipowner or manager will do so, they say, but Mr Moorthy accepted in cross examination that he was aware that it was common for ship managers to outsource to chartering brokers, port agents and insurance brokers at least.

Unlike in the case of the LADY BELINDA, there was no agreement appointing Blue Fleet manager in the case of the NANCY. Further, I accept the claimants’ evidence that Blue Fleet did not charge or receive management fees.

Nevertheless, as I have already explained, in 2005 Blue Fleet applied to the Russian Register for entry of the NANCY, and Blue Fleet was at all times described in the Russian Register as the vessel’s manager. A 2009 printout from the Lloyds Marine Intelligence Unit (MIU) seasearcher database showed Blue Fleet named as a third party operator of the NANCY.

Captain Kassab and Mr Khoury both gave evidence that there were “repeated attempts” to get the Russian Register to change the managers’ details of the NANCY. I agree with the defendant that their reference to “repeated attempts” should be treated with some scepticism given the paucity of documents in support. Nevertheless, there is some contemporaneous documentary evidence from emails of 15 October 2007 and 27 November 2008 which does show attempts to get the managers’ details changed to Swedish Management.

The claimants also say that Equasis was informed by Mr Khoury on 27 February 2008 that Swedish Management was the managers, and thereafter he corresponded with Lloyd’s Register Fairplay about this asking them to confirm the records were amended to show Swedish Management as the manager of the NANCY. The defendant accepted that Equasis deleted the reference to Blue Fleet as the vessel’s managers on or about 22 April 2008. When the defendant searched the database on 16 February 2009 (just after the fire) it showed Swedish Management as ship manager. A search on the same day of the Sea-web database (which unlike Equasis is a subscription service) showed the same information. It is reasonable to infer that a search at the time of renewal would have showed the same information.

To an appreciable extent, this evidence negatived the defendant’s reliance on the fact that Blue Fleet was described in the Russian Register as the vessel’s manager, a point which did not feature centrally in its closing submissions. The case it advanced was essentially a factual one, namely that Blue Fleet was involved in the management of the vessel to such an extent that many of the tasks it performed are included in/analogous to those included in the BIMCO Shipman 98 Standard Ship Management Agreement and/or the management agreement for the LADY BELINDA.

The claimants’ response is that the defendant’s approach has been to shoe-horn the activities undertaken by Blue Fleet into the functions listed in clause 3.2 or 3.3 of the BIMCO Shipman 98 form and to conclude from that that it was involved in management. This, they say, ignores the preamble to clause 3 which applies to each of the management functions enumerated in clause 3, including clauses 3.2 and 3.3, namely that:

“... The Managers shall have authority to take such actions as they may from time to time in their absolute discretion consider to be necessary to enable them to perform this Agreement in accordance with sound ship management practice”.

The claimants say that it is this authority and absolute discretion which characterises the true manager of a ship.

To meet this point, in closing the defendant qualified its reliance on the Shipman 98 form, saying that it is only applicable by analogy and of indicative value as to which types of tasks are management tasks: “Caution is needed against attempting literally to fit the Blue Fleet/C2 relationship into the Shipman form as this is not necessary for the defence on this point to succeed and is not what D is suggesting”. The defendant also says that having “absolute discretion” does not preclude ultimate authority lying elsewhere. They are, it submits, distinct concepts.

The burden of proving that Blue Fleet was involved in a material extent in the management of the vessel lay, of course, on the defendant. It sought to demonstrate its case by reference to the documents disclosed by the claimants. There was a dispute between the parties in this respect.

The claimants submit that there is no evidence whatsoever that Blue Fleet exercised any significant or substantial managerial role in relation to the NANCY or indeed any other ship in the Swedish Management fleet. There is no evidence that they made any strategic management decisions or any management decisions. There is no evidence that they exercised any judgment or skill in the management of the ship, deciding where the vessels were to trade, what types of cargo they would carry, where the vessels were to be repaired, where they were to be maintained, or when they were to be drydocked. If Blue Fleet was really carrying out the management functions alleged, the claimants submit, this would entail daily exchanges between Blue Fleet on the one hand and each of the vessels, or the NANCY in particular, maintenance of their technical and operations departments, accounts and commercial departments, third-party suppliers, port and customs agents, and third-party consultants. This would generate literally thousands of documents. All that Blue Fleet identifies in their submissions, the claimants say, are 28 documents on which they seek to make out their case.

The defendant responds that there is no serious documentation showing that Swedish Management was doing all these tasks either. This is, it submits, a neutral factor, and the fact that there are not many documents relating to Blue Fleet’s involvement does not lead to the conclusion that Blue Fleet was not involved.

I can see that there is some force in the defendant’s submission. Nevertheless, I cannot regard it as a neutral factor, since if disclosure was properly performed by the claimants, the fact that there are a limited number of documents showing that Blue Fleet performed a management function must be of some weight. The claimants would not necessarily disclose management documentation which did not feature Blue Fleet, and which Captain Kassab said was voluminous.

In fact, there was limited disagreement between the parties as to what the documents relied on by the defendant do show. The difference between the parties is as to the inference to be drawn from them. The defendant’s submissions as to Blue Fleet’s role were as follows.

Class This played the most important part in the defendant’s submissions, the allegation being that Blue Fleet effectively managed the vessel’s relations with Class, and that this is such an important aspect of technical management that it would be material in itself. The defendant says that Blue Fleet arranged Class surveys, and liaised with the Russian Register on Class matters, relayed information from the Russian Register in relation to statutory or other Class certification to the claimants and/or the Master, and generally gave advice and offered assistance to Swedish Management in relation to Class matters.

The claimants’ response is that the contents and the nature of the correspondence with which Blue Fleet was involved do not demonstrate a management role being performed. The documents show that Blue Fleet was largely involved in co-ordinating administrative arrangements for surveys, passing on the survey reports and messages from the Russian Register or assisting Swedish Management in properly drafting correspondence in English to be sent to the Russian Register. None of this required any technical input at all from Blue Fleet and the documents do not demonstrate any evidence of actual decision-making or managerial skill or judgment exercised by Blue Fleet.

As to the detail, the defendant’s points are as follows:

Other matters The defendant submits that the matters relating to Class are sufficient to prove its case, but other matters (as to which there is limited dispute) remain relevant it says. It relies on instances where Blue Fleet gave voyage instructions to and received operational information from the vessel, appointed port agents, initiated an enquiry in relation to the supply of an anchor chain for the vessel, acted as the claimants’ exclusive chartering negotiator, issued freight invoices for payment to Swedish Management or Fleet Management, calculated and collected outstanding demurrage, negotiated port disbursement accounts, liaised with the vessel as to the loading of cargoes and other commercial employment, provided “post fixture” type assistance, reminded the master about certificate renewal, and occasionally arranged crew transport.

In addition, Blue Fleet was described as commercial manager in the Kin Ki charterparty, something which the claimants say was a mistake. On the other hand, the defendant did not expressly refer to this in its closing submissions. This may be because of other evidence pointing the other way. In the claimants’ closing submissions, several other charters are cited which describe Swedish Management as managers. (It may also be noted that the NANCY’s ISM documentation all identifies Swedish Management as the Company for the purposes of the ISM Code.)

The claimants say that the list of functions with which Blue Fleet factually had some involvement with respect to the NANCY is largely agreed, in the sense that it is accepted that there is at least some evidence that it liaised with Class, arranged some surveys, purchased a few flight tickets for repatriation of the crew, initiated one enquiry for an anchor replacement, provided advice to Capt Kassab and Swedish Management, passed on some voyage instructions and received some operational information from the vessel during performance of charters which Blue Fleet had negotiated, liaised with port agents and acted as chartering broker including issuing freight invoices and calculating the monies due to the claimants.

Fundamentally, the claimants’ answer to the defendant’s case in this respect is that Blue Fleet’s involvement in such tasks was at the specific request or instruction of Captain Kassab or Swedish Management. These were all tasks which a manager or an agent of the manager could do. Thus the mere fact that Blue Fleet had involvement in these tasks is not of itself evidence of any participation in the management of the NANCY. Captain Kassab in the form of Swedish Management had overall authority and decision-making control.

The defendant’s case is that Blue Fleet’s role in relation to the commercial and/or technical management of the vessel meant that it participated to a material extent in the management of the vessel. Crucially, it says, Blue Fleet was responsible for the vessel’s Class and other statutory certification, which is a central aspect of technical management. This, it maintains, is an entirely separate case to that of authority.

Further, the defendant denies that “ultimate authority” rested with the claimants. It was Blue Fleet, it says, which was the decision-maker in relation to Class matters, whereas Swedish Management’s role was entirely passive and dependent on Blue Fleet’s initiative and skill.

In those circumstances, the defendant submits, given Blue Fleet’s extensive participation in management, the representation that Swedish Management was the manager of the vessel “presented, in effect and at its lowest, only a small part of the equation masquerading as the whole. It was substantially untrue, giving rise to a material misrepresentation”.

A conclusion on the above evidence depends in large part on my appraisal of the evidence of Captain Kassab and Mr Khoury. They both come from the same community in Lebanon, and it is plain that they had a close personal and professional relationship. Their evidence was that they spoke together on the phone every day, and despite the defendant’s criticism of the failure to produce phone records, I see no reason to disbelieve them.

As to Blue Fleet’s liaison with the Russian Register, Mr Khoury’s evidence was to the effect that he had a relationship with the representative of the Russian Register in Piraeus, where he himself is based. I accept this explanation. More generally, I am satisfied that Captain Kassab is a technical man, who rose to become a Captain before leaving the sea in 1988, and acquiring his own small fleet of vessels. He placed reliance on Mr Khoury’s skills in liaising with Class on his behalf.

Captain Kassab’s evidence was that Blue Fleet’s role was “minimal”. Mr Khoury’s evidence was to the same effect. Their main point was that where documents showed Blue Fleet performing what might be taken to be management roles, such as fixing surveys, this was something which only happened rarely.

Mr Khoury was asked as follows in cross-examination:

Captain Kassab also maintained that Swedish Management was both the commercial and technical manager of the NANCY:

“With all respect, sir. I started this company in 1991, and until now never happen that I give any of my vessels to any company to manage, as we are a professional manager and professional owner.”

He said that he had been:

“… doing this job since 32 years and I don’t need [a manager]. Sorry for that. Why should I let them manage one ship out of 67 vessels which I did in my life?”

These excerpts from the evidence could be multiplied. As to technical management, I agree with the claimants that the evidence shows that it is inconceivable that Capt Kassab with his expertise would have entrusted the technical management of the NANCY to Blue Fleet or Mr Khoury. He was perfectly capable in my view of doing this himself.

As to commercial management, I consider that the position is less clear. An email of 4 October 2008 was put to Mr Khoury from Blue Fleet to Swedish Management telling the Master that a surveyor was coming on board. The exchange is typical of his evidence in this regard:

In the case of the LADY BELINDA and the SANIE, Mr Khoury’s evidence was that the owner was a doctor, with no expertise as regards ships. The position of Captain Kassab’s fleet, he said, was different.

My conclusion is as follows. On the evidence, I find that Mr Khoury’s role was primarily that of chartering broker. I accept the defendant’s submission that Blue Fleet’s services went beyond that, and extended to various post-fixture services. I consider that the assistance rendered by Blue Fleet was more frequent than either man was prepared to admit. They were on the phone daily, and in particular Captain Kassab relied on Mr Khoury’s expertise in dealing with Class. But I reject the defendant’s submission that it was Blue Fleet which was the decision-maker in relation to Class matters, whereas Swedish Management’s role was entirely passive and dependent on Blue Fleet’s initiative and skill. I find that such services were in coordination with Swedish Management, were rendered as agent at Captain Kassab’s request, and for his convenience, and subject to his overall control.

On the evidence, I am satisfied that Captain Kassab through Swedish Management managed his own ships, including the NANCY. This is not a task which he would have delegated to Blue Fleet or anyone else. Both Captain Kassab and Mr Khoury were adamant that Blue Fleet had no authority. Despite some emails that appear to show Blue Fleet acting off its own bat, I find that Swedish Management at all times retained overall authority and decision-making control over all technical and commercial management functions. This was the consistent evidence of both men under extensive cross-examination, it is not displaced by the documentary record, it is consistent with the overall probabilities, and I accept it.

I agree with the defendant that the BIMCO Shipman 98 Standard Ship Management Agreement is only applicable by analogy (whilst noting that it was the defendant which sought to apply by way of analogy). There is however in my view some significance in the preamble to clause 3 to the effect that, “... The Managers shall have authority to take such actions as they may from time to time in their absolute discretion consider to be necessary to enable them to perform this Agreement in accordance with sound ship management practice”. I agree with the claimants that it is this authority and discretion which characterises the true manager of a ship.

The defendant says that having “absolute discretion” does not preclude ultimate authority lying elsewhere. They are, it submits, distinct concepts. In my view however in the present context they are linked concepts. In so far as Blue Fleet had any discretion, it was limited, because authority rested with Swedish Management.

It ultimately comes down to a matter of fact. I find that the considerable role that Mr Khoury played day by day did not constitute management of the vessel, and did not amount to participation in the management of the vessel. Further, I accept the claimants’ submission that the consequence of Swedish Management’s ultimate authority, control and decision-making powers is that the representation in the Policy that it was the technical and commercial manager was true. I am satisfied therefore that there was no misrepresentation in this respect.

On those findings of fact, I turn to the defendant’s case on material non-disclosure. As regards the underwriting evidence, both Mr Devereese for the claimants and Mr Emblin for the defendant were good witnesses. (I reject the defendant’s contention that Mr Devereese’s evidence should be given no weight because of what it says was his failure to distinguish between materiality and inducement.) Mr Emblin is no longer an active underwriter, whereas Mr Devereese still is. Although there was little between them, on balance I preferred the evidence of Mr Devereese primarily because of his more current practical experience.

The reports of both experts were commendably short. As Mr Emblin said, the extent of Blue Fleet participation in the management of the NANCY is a matter of fact for the court. His view was that at the very least, third party liaison with Classification Societies is the type of information that the prudent underwriter would wish to be informed about. In cross examination however, he accepted that if Swedish Management had retained all decision-making and all authority, any involvement which Blue Fleet had in liaising with class would not be material.

Mr Devereese explained in his report that the management of vessels is often undertaken by ship management companies on an owner’s behalf. He referred in that context to the BIMCO standard agreement. Both the commercial and the technical management roles are of importance to a prudent underwriter. Technical management is however the most important. In summary, the view he expressed both in his report and in cross examination was that if Blue Fleet did not have authority, its role was not material. If it did, then its previous management of the LADY BELINDA would add to materiality.

These respective positions are reflected in the joint statements that the experts agreed. They agreed that if the court finds on the facts of the case that Blue Fleet had been wholly responsible for the commercial and/or technical management of the vessel this would have been material to the judgment of a prudent underwriter. If Blue Fleet had been partially involved, then depending on such partial involvement it may have been material to the judgment of a prudent underwriter.

The first joint statement records Mr Devereese as being of the opinion that if the items relied on were ultimately the responsibility of Swedish Management, he did not believe that they would influence the judgment of the prudent underwriter in fixing the premium or determining if he would accept the risk. Mr Emblin is recorded as being of the opinion that he had seen nothing to suggest that Swedish Management had accepted any responsibility for any Blue Fleet operations. (For reasons set out above, I have however found on the facts to the contrary.)

In closing, the defendant submitted that “much the more realistic position is that C2’s retention of authority is not dispositive of materiality. A prudent insurer would potentially still be interested in the identity of the agent performing managerial tasks and the scope of their responsibility, depending on the nature of the decisions whose performance was outsourced, the number of decisions which were outsourced, and the competence with which those decisions were executed”.

In my view, this submission does not reflect the evidence of its own expert witness, or that of the claimants’ expert. Both Mr Emblin and Mr Devereese were of the view that if, as I have held, Swedish Management retained all decision making and all authority, any involvement Blue Fleet had in liaising with Class would not be material.

In the second joint statement made between the experts on 29 November 2012, Mr Devereese expressed the view that if the evidence and explanations that Swedish Management remained in overall charge of the management of the NANCY was accepted, the level of participation by Blue Fleet was not such as to have reached the threshold that it might influence the prudent underwriter’s assessment of the risk. The statement records that Mr Emblin had not been instructed on this question and was therefore unable to comment. For reasons I have explained, I consider that Swedish Management did remain in overall charge, and I accept the view expressed by Mr Devereese.

Taking the expert evidence as a whole, I am satisfied that the claimants are correct to submit that on the facts of this case there can be no finding of materiality of either (a) the difference between the position as represented in the Policy that Swedish Management was the technical and commercial manager of the NANCY and the correct position as it existed as at December 2008 or (b) of the participation of Blue Fleet in the management of the NANCY.

The evidence as to inducement was given by the defendant’s underwriter, Mr Moorthy. Since he gave evidence, I agree with the claimants that this is not a case for the drawing of inferences: Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2003] 1 Lloyd’s Rep IR 131. In oral submissions, Mr Aswani, counsel for the defendant, rightly accepted this.

Mr Moorthy said: “I already had a bad experience with Blue Fleet, where he manages the vessel in a very poor condition…I would rather think thousand times to accept a risk where I hear the name Blue Fleet”. The background, it will be recalled, is the BMT condition survey report on the LADY BELINDA of 13 February 2008, upon receipt of which the defendant suspended cover on the vessel. It is correct to say (as the claimants do) that evidence on inducement is not supported by documentary evidence. Mr Moorthy’s oral evidence was that no underwriting guidelines, policies or evaluation of the risks were retained.

The evidence is that the defendant was prepared to reinstate cover on the LADY BELINDA provided that there was a survey which confirmed that all defects had been rectified. Mr Moorthy was asked:

However, as Mr Moorthy accepted, the result of the BMT survey was that there would have been a breach of warranty, so that the defendant was discharged from liability from the date of the breach. As well as contemplating the reinstatement of cover, the defendant was also willing to consider providing towage cover.

The LADY BELINDA and the SANIE were insured by the defendant in 2007. The vessels were both non-IACS classed, and described by the claimants as “over age”. Although the defendant says that the willingness to reinstate cover was a commercial decision, this is not a case where there was a long-standing insurance arrangement which might otherwise explain a commercial underwriter adopting this approach.

In fact, the defendant did decline to renew cover on the SANIE. The reason given in its letter to Blue Fleet of 4 December 2008 was that “since the account has now shrinked to a singleton Non-IACS classed, MV ‘Sanie’, 1973 built, we prefer to abstain from submitting renewal quote”. Mr Moorthy said that “When I’m declining to quote, I cannot tell him that, ‘You are in my bad books’. I have to be polite with him”.

I have some sympathy with this answer. Nevertheless, the document speaks for itself, and is consistent with the other documentary evidence. The defendant says that Mr Moorthy’s overriding message was that he was not prepared to hold cover if Blue Fleet was involved “in any capacity”. Whilst this was what he said in evidence, I agree with the claimants that it is inconsistent with the contemporary material prior to the fire on the NANCY. This evidence contradicts the defendant’s case as to the unacceptability of Blue Fleet.

The claimants also place reliance on what happened after the fire. In short, they submit that having seen from the Russian Register in mid-February 2009 that Blue Fleet was shown in the Register as the manager of the NANCY, further vessels were added to the Policy. However, I do not consider that this advances the claimants’ case, since the reference to Blue Fleet prompted the defendant to ask for more information. I infer that from the time of the fire, the defendant was considering its position under the Policy, though I do not need to make a finding on Captain Kassab’s evidence that he understood from the start that it was not going to pay.

It is the evidence as to what happened earlier which appears to me to be decisive. It is not in dispute that it is a prerequisite to the right of avoidance for material non-disclosure that the underwriter concerned must have been induced thereby to enter into the contract, or to do so on the terms to which he agreed. I do not accept Mr Moorthy’s evidence or the defendant’s case as to inducement, and find that the non-disclosure of Blue Fleet’s involvement would have made no difference to him.

The claimants have also argued that the defendant is to be presumed to know about Blue Fleet’s involvement because of the entry on the Lloyd’s MIU database that I mentioned above. I reject this submission, which was not strongly pursued in this context in oral closings. In any case, the position as stated in the databases was not consistent, since the Sea-web and Equasis databases showed Swedish Management as ship manager, not Blue Fleet (see above). The evidence is that whilst the defendant had access to the latter databases at the material time, it did not have access to Lloyd’s MIU seasearcher. For the same reason, I reject the claimants’ waiver submission based on s. 18(3)(c) MIA 1906 in relation to this aspect of non-disclosure.

By a late amendment, the claimants pleaded affirmation. This was based on an email of 20 May 2009 from Mr Moorthy to the brokers to the effect that H & M cover was in place, but did not include Blue Fleet in any capacity. The claimants say that since by this time the defendant knew about Blue Fleet, this email thereby affirmed the Policy. However I agree with the defendant that in the circumstances this was not an election to affirm by way of an unequivocal communication, which is what is required (see the “WD Fairway” (No 3) [2009] 2 Lloyd’s Rep 420, at [19], Tomlinson J). An insurer is entitled to a reasonable time to conduct its enquiries, and six days later, on 26 May 2009, the defendant avoided the Policy. That was a reasonable period of time, and I reject the claimants’ affirmation case.

Non disclosure in relation to PSC detentions

I do not understand there to be any dispute as to the following summary in the claimants’ opening submissions taken from the expert evidence as to the background.

Port State Control (“PSC”) is the inspection of foreign vessels in national ports to verify that the condition of the vessel and its equipment comply with the requirements of international regulations and that the vessel is manned and operated in compliance with those rules. Regional PSC regions have been established and MOUs signed to cover the world’s oceans and each MOU publishes regular statistics from the PSC inspections. These statistics are used to score the flag states of vessels and recognised organisations.

PSC inspections of vessels use a coding system to identify any deficiency by a PSC category and deficiency action codes are applied to each based on the nature of the deficiency and the action to be taken. PSC inspections are carried out by a PSC officer and it is effectively his assessment as to whether a particular deficiency exists and the nature of it, both of which determine which action code is applied and in particular whether the deficiency warrants detention of the vessel.

Depending on the action code applied, the vessel’s flag state/consul can be informed or consulted and the vessel’s classification society can be informed about any PSC inspection. The flag state and classification society can then take whatever steps are considered appropriate.

In the four year period from January 2005 when the claimants acquired the vessel to the date of the Policy (December 2008), the NANCY had been detained on PSC inspections four times.

The first three such PSC detentions were all in China where the NANCY was detained in October 2005 at Shanghai (there were three deficiencies relating to fire safety measures), and in November 2005 at Rizhao (there were two deficiencies relating to fire safety measures). There are only details available in relation to the third which was in March 2006 at Nantong, where there were four detention items. In this instance, there was a deficiency relating to a fire pump, but I do not think it is in dispute that this was not itself a detention item.

The next detention came some two and a half years later when the NANCY was inspected by PSC at Suez on 7-9 October 2008 and fourteen deficiencies were found by the PSC officer, some of which were SOLAS related, and three of which related to her fire fighting systems and/or availability of fire-fighting equipment. I will describe these further shortly.

The deficiencies were rectified at Suez to the satisfaction of the PSC officer (save for a deficiency relating to the echo sounder) and the NANCY ceased to be detained on 9 October 2008.

The vessel proceeded to Selaata, Lebanon, where she was inspected by a Russian Register class surveyor on 23 October 2008. The Class survey goes through the list of the Suez deficiencies, noting in each case that they had been “rectified completely” (including the echo sounder).

The vessel was detained again at Bandar Imam Khomeini in Iran on 24 December 2008, and again there were fire related deficiencies. This detention occurred after inception, and so is not directly relevant to the non-disclosure defence. I am satisfied from the survey evidence from inspections in Iran and subsequently China that the deficiencies were rectified.

There are some other general points to note. First, the evidence is that it is not unusual for a vessel of the age of the NANCY built in 1980 to have a PSC detention history. In fact, Mr Moorthy, the defendant’s underwriter, says quite strikingly that, “it is difficult to find a vessel that has no prior history of PSC inspections or detentions”.

Second, information as to the detention of vessels is available online. I have described these databases above. The defence is based on information taken from Lloyd’s MIU seasearcher, the relevant pages being attached to the defence, though the defendant says that it was provided by its solicitors, and not as Mr Moorthy said in his evidence, in early May 2009 along with other claims documents.

Though initially the defendant said that back in 2007-2009 it did not subscribe to on-line databases, it now accepts that it had a subscription to Sea-web from 2007. This database refers to the vessel’s detentions, though without the detail given in the Lloyd’s MIU database.

Reference to the detentions was also contained in the vessel’s entry in Russian Register. This was not available to the defendant on line or otherwise (though it had a contractual right under the Policy to require it – see above). However, the entry was sent to the defendant on 17 February 2009 (that is, when the claimants were notifying the defendant about the fire at Nakhodka). It states that, “the vessel has been detained 2 time(s) within previous 36 months: EGYPT – Suez 07.10.2008 IRAN – Bandar Khomeini -24.12.2008”. Detentions were not mentioned in the defendant’s letter of 26 May 2009 avoiding the Policy.

In its closing submissions, the defendant says that, “It scarcely needs to be pointed out that the fact that the Vessel had a history of detentions due among other things to deficiencies in its fire-fighting systems was material”. However, the expert evidence in respect to the materiality of PSC detention information does not in my view support a proposition in these terms. Both experts took a fact-specific approach, and Mr Emblin (the defendant’s underwriting expert) acknowledged in cross-examination the relevance of the nature of the deficiencies and whether or nor they had been rectified to the materiality question.

I have stated above my views as to the parties’ respective experts. Mr Devereese (the claimants’ underwriting expert) emphasised that the underwriter’s practice is to look for reasons for detentions shown in the MIU database, and if rectified, would not regard the detentions themselves as being material.

Mr Emblin looked at the matter more in the round. A serious deficiency in his view was one that could (for example) affect the seaworthiness of the vessel. He did however accept in cross-examination that if a deficiency was minor and had been rectified, then of itself it would not be material.

Further, Mr Moorthy’s evidence in cross-examination is important in this respect. He was asked:

“Q…In your witness statement, you refer only to the firefighting deficiencies?

A. Yes, sir.

Q. So the other deficiencies weren’t relevant to your underwriting the risk? It was just the firefighting deficiencies which were relevant?

A. In this case, of course, all deficiencies are relevant. And with fire being a major peril, we would definitely be seriously concerned.

Q. But in this case, just the firefighting ones were ones which you regard as material?

A. Which is very important, so I regarded it as material, yes.

Q. Yes, I see, but they are the only ones that you regarded as material?

A. They’re the only ones in this case.”

As the claimants submit, the effect of this evidence is that it was fire-fighting deficiencies which the underwriter himself considered material to the risk he was asked to write.

The defendant’s case is that when considering the vessel’s PSC detentions, there is no reason to impose an arbitrary cut-off point in respect of the vessel’s history. It submits that there is no inherent reason why a prudent underwriter would only be interested in a vessel’s recent detention history. If a vessel’s history discloses repeated detentions due to the same or similar deficiencies, the longer the history of those detentions, the greater the likelihood that those detentions point to endemic, deep-seated issues which have not been satisfactorily addressed, and the more likely those deficiencies will recur, thus affecting risk.

However though it is correct that the experts did not assert an arbitrary cut-off date, the proposition that the entire history of a vessel’s PSC detentions is material is not supported by the expert evidence.

In that regard, the claimants rely on Mr Emblin’s evidence to the effect that on a renewal, a prudent underwriter would only be concerned with detentions in the previous year:

“Q. So you are saying, as I understand it, that it is only detentions in the previous year which are possibly material? Is that right?

A. Well the underwriter would presumably have his records up to date on past detentions or considered them. So if nothing had happened in the previous – in the current year of expiry, and it was up for renewal, and it was a renewal that was expiring, there would no need for the underwriter to consider any further action.

Q. So all the prudent underwriter could expect to be told possibly, as I understand it, is of detentions which have occurred in the past 12 months?

A. Yes, if he has that information. That does beg the question, of course, if there is a history of certain detentions. For example, underwriters tend to look at matters in trends. And if an underwriter has noticed that there is a certain trend over the period that he has held the business, he might have been much more interested in finding out.

Q. If he really was interested, he could check that information, either by asking questions or by checking the database?

A. Correct.

Thus Mr Emblin qualified his answer by saying that if an underwriter noticed that there was a trend over the period that he has held the business, he might want to make further enquiries by asking questions or by checking the electronic database. He was asked:

In the case of the NANCY, the defendant submits that there were demonstrable systemic problems with the safety culture of the vessel which were not solved by repeated rectifications. It submits that the very existence of detainable deficiencies is material, because this is evidence of poor maintenance and/or a tendency to unseaworthiness and/or poor safety culture. The more frequently detainable deficiencies arise, the more likely they are to recur during the life of the Policy, and the more indicative they are of systemic problems.

The claimants submit that if the defendant was to advance a case as to trends, it would have needed the evidence of marine surveyors. They also submit that a post-policy detention, in the present case the detention in Iran, is irrelevant. As to the more general point, they submit that the materiality of a non-disclosed circumstance must be judged by reference to that circumstance alone, not by reference to any suspicions it gives rise to, particularly where the defendant has not pleaded or sought to prove a case of poor maintenance, poor management or unseaworthiness. If it had been raised, the claimants would, they say, have advanced expert evidence and further factual evidence to meet it.

In this regard, reliance is placed by the claimants on O’Kane v Jones [2004] 1 Lloyd's Rep 389 at [230]-[232]). The facts, as the defendant points out, are different from this case. However in terms of principle, it was said at [231] (applying The Grecia Express [2002] 2 Lloyd’s Rep 88, Colman J): “The proposer is only obliged to disclose material circumstances known to him (or of which he has imputed knowledge). If he has every intention and expectation that the vessel will be properly maintained, he cannot, it seems to me, be under an obligation to disclose a circumstance which might raise a question mark in the mind of an underwriter but which the proposer knows to be of no relevance to the vessel’s continuing maintenance”. It was said that there was no pleaded allegation that the vessel would or might not be properly maintained by reason of the circumstances in question (which related to financial problems).

The defendant points out that in cross-examination, Mr Medawar appeared to accept that the vessel had a history of detentions for deficiencies, including in relation to fire safety. In support of its submission that there was a deficit in the vessel’s safety culture, it also refers to Mr Medawar’s evidence that “… the root cause of these deficiencies was a lack of thoroughness by the Master and I would question whether he was sufficiently exercising his authority on board with the crew”. It is to be noted however that, as stated in the factual narrative, the Master only joined the NANCY in July 2008, and this could not apply to the earlier detentions.

In my view, applying O’Kane v Jones, had the defendant wished to advance a case to the above effect, it should have pleaded it and adduced evidence in support. I accept the claimants’ submissions in this respect. In any event, given the period between them, and such explanations as there are as to the nature of the deficiencies, the PSC detentions do not in my view support any finding or provide any real evidence of a trend or a pattern, or a tendency to unseaworthiness. They are more consistent with an elderly vessel having problems which were rectified as and when they occurred.

In terms of evidence, Mr Devereese’s opinion is that a prudent underwriter would only be concerned with detentions in the recent past, which he said was the period 12-18 months before the inception date of a policy. The thrust of Mr Emblin’s evidence is that, at least on a renewal, it is detentions in the previous twelve months that are relevant. Insofar as there was a dispute between the experts at all, I accept Mr Devereese’s opinion. I reject the defendant’s contention that the vessel’s five detentions in the four years prior to the date of the Policy were material and should have been disclosed.

In the light of the evidence, including that of Mr Moorthy, the most significant issue on this part of the defendant’s non-disclosure case is as to the materiality of the deficiencies shown on the Suez detention of 7-9 October 2008, and particularly the fire-fighting deficiencies.

In relation to PSC detentions, I consider that Mr Devereese’s more current underwriting experience is a significant advantage. In his reports, he expressed the view that as regards the deficiencies noted at Suez, he did not consider there was sufficient information in the Lloyds MIU report to be of material value to a prudent insurer, although he was of the view that some items could be ruled out at that stage as being material from that list. As regards the others, in his opinion a reasonably prudent underwriter would seek more detailed explanations. On the basis of the explanations given in the claimants’ witness evidence, he did not consider the deficiencies noted at Suez in October 2008 of themselves to be material. He accepted that some fire-fighting systems and/or fire-fighting safety deficiencies if they are of a nature such as to endanger the safety of the seafarers, environment, cargo or the vessel would be material. Even then, however, he considered that a prudent underwriter would only consider them material if such deficiencies were left un-rectified. In this case, all of the deficiencies had been rectified.

In cross-examination, Mr Emblin was taken through all fourteen deficiencies noted by the PSC officer at Suez. In respect of most of them, his view was that if rectified, they were not serious in themselves. Like the parties in their closing submissions, I shall concentrate on those related to fire safety. As the defendant rightly submits, fire-safety related deficiencies are a matter of concern. The facts in respect of the three fire-safety related deficiencies found at Suez are as follows:

Of those, items (1) and (2) were required to be rectified before the NANCY left Suez and only item (3) was identified by the PSC officer as a ground for her detention. As noted already, the Russian Register surveyor recorded that the deficiencies had been “rectified completely” when he surveyed the vessel at Selaata a few days later.

Mr Emblin’s evidence was that while the fire extinguishers on their own might not be material, the multiple deficiencies “emphasise[d] a pattern of fire-protection questions”, and “taken in the round one gets a potentially different perspective”. In re-examination, he stated “underwriters, one of the things that they are keen on looking at are trends. And what I was getting at in my answers is that, whilst an item might not necessarily, of itself, be disclosable, it could give rise to a trend which might alert the prudent underwriter to a certain type of issue as regards the management of the vessel”. I have dealt with the question of trends above.

Mr Devereese’s evidence was to the effect that an underwriter would have available the Lloyd’s MIU electronic report of the detention. From the MIU information, the underwriter would be looking at the reasons for the detention. If he was concerned about them, the underwriter would ask for further details. He said:

“The experience of an active underwriter over the time since port state controls become more prevalent in the mid 90s, was to understand more of the reasons that brought about the type of lists that we are seeing here, because at face value from the underwriter’s perspective they look quite horrendous.”

I accept his evidence in this respect in so far as it differs from that of Mr Emblin. However, it is important to note that there appears little or no difference between them as to whether databases are in practice consulted. In an addendum to his report dated 10 April 2013, Mr Emblin was asked whether as at 2008 it had become a custom of the marine insurance market that underwriters are deemed to know what is published in on-line resources such as Lloyd’s Marine intelligence. He answered:

“Considering this question from the point of view of London Market customs and practice, it would be usual for a prudent marine underwriter to be aware of the market information that was available on line, particularly subscription based services.

What is in the public knowledge arena is usually taken as being known to the prudent underwriter. The insured need not mention what the underwriter ought to know or what he takes upon himself the knowledge of.

Whilst it is not obligatory for an underwriter to check for such available information from this restricted public domain, it would be none the less desirable. Whether an underwriter is deemed to have consulted a particular source is a factual matter for the attention of the Court.”

On the facts, I am satisfied that the deficiencies identified at Suez were completely rectified shortly afterwards. In closing submissions, there was a difference between the claimants and the defendant as to the consequence of this. The defendant submitted that when the court considers materiality or inducement in the context of disclosure, it needs only to consider whether or not the non-disclosure (here of the fact of the PSC detentions for stated deficiencies) is or is not material, or has or has not induced the contract. The court should not also assume, the defendant submits, that disclosure of other facts related to those detentions would also have been made.

The claimants’ case is that if those detentions had been disclosed by them, they would also have disclosed the fact that the deficiencies in question had been rectified, that some were not serious in nature, and some were not factually justified. To the contrary, the defendant says that you just look at the deficiencies alone, and the fact the vessel was detained.

On the facts of the present case, I consider that had the claimants disclosed the PSC detentions at Suez, they would have been bound to include the outcome. I do not see this as a disclosure of other matters, in addition to material ones. It would have been meaningless and inaccurate simply to disclose the fact of the PSC detentions without saying what was done about them.

In any case, there is authority (albeit obiter) which supports the claimants’ contention. In Drake Insurance plc v Provident Insurance plc [2004] QB 601, the question was whether account could be taken of the overall position on a motor insurer’s points system, where the policy holder had failed to disclose a speeding conviction, but where disclosure would have made no difference. Rix LJ said at [75]

“However, if upon the true facts the speeding conviction could not have lead to a higher rating, I do not see why the speeding conviction would ultimately be material, even though its disclosure was required. In any event, it could not be said to have induced the contract for, on the true facts at the time of renewal, the contract could not have been made on terms other than the terms on which it was in fact made”.

Clarke LJ at [138] was “inclined to agree”, whilst Pill LJ disagreed at [163]. The defendant points out that Arnould’s Law of Marine Insurance and Average (18^th ed. 2013) at para 15-116 prefers the views of Pill LJ. However, it also says that the weight of Court of Appeal dicta is the other way. I consider that I should follow the majority approach.

In the present case, I consider that the issue is best viewed from the perspective of inducement. The defendant’s evidence was not consistent in this respect. In his first witness statement, Mr Moorthy said that the PSC detentions would have ruled out the defendant insuring the NANCY. After the defendant’s practice as regards the detention history of other vessels had been the subject of an analysis by the claimants’ solicitors, he said that he would have imposed a condition survey warranty had he been aware of the position. In answers in cross-examination, he appeared to accept that if the class surveyor had checked the deficiencies and confirmed that they were rectified before 1 December 2008 (which is in fact what happened), he would have been satisfied and would have written the Policy on the same terms. Although in its closing submissions, the defendant suggested that this did not cover historical or recurring deficiencies, and point out that Mr Moorthy later in his evidence mentioned imposing an exclusions warranty, I consider that these answers in cross-examination are in fact the true position.

The defendant was well aware that this was an elderly vessel. Its underwriter frankly said that it is difficult to find a vessel that has no prior history of PSC inspections or detentions. The NANCY on this basis was almost certain to have had detentions. The material ones, as I have held, were those in October 2008, the policy being renewed at the beginning of December 2008. It may be of some significance that although in February 2009 the defendant was sent the Russian Register survey referring to the detentions, so knew about the detention history, there was no reference to non-disclosure of detentions in the letter of avoidance sent on 26 May 2009.

On the facts, I find that had the claimants disclosed these detentions, when informed that the class surveyor had checked the deficiencies and confirmed that they were rectified, the defendant would have proceeded to renew cover on the same terms. I find therefore that the defendant was not induced to agree the Policy by reason of any non-disclosure concerning the vessel’s detention history.

The claimants’ contentions on Marine Insurance Act 1906 ss 18(3)(b) (presumed knowledge) and 18(3)(c) (waiver) raise essentially the same point, which is that the information about the detentions, though not disclosed, was available on-line, and that the expert evidence is that it is market practice for insurers to access such information on renewal. As stated above, by the ITC terms, the insurance was subject to English law and practice. It has not been suggested that Al Sagr, which is one of the largest insurers in the UAE, lacks any means of access, and it plainly does not.

The claimants say that it should have accessed information subscription services such as Sea-web or Lloyds MIU. Had it done so, it would have seen at least the summary of detentions on Sea-web (to which it subscribed at the time of renewal) and could have raised enquiries on any detentions which had occurred since the last renewal. In response, the claimants would have provided the information I have described above as to the deficiencies at Suez. Hence, it is submitted, the defendant is presumed to have knowledge of them, alternatively a waiver arises because the on-line information was such as to prompt a reasonably careful insurer to make further inquiries.

The defendant submitted however that as a matter of law, there is no presumption of knowledge of the facts concerning particular ships merely on the ground that they have been published in Lloyd’s List or any other newspaper (it cited Arnould, ibid, at 16-194). It submitted that electronic databases such as Lloyd’s MIU and Sea-web are to be treated in the same way as newspapers.

I do not think that it is correct to say that electronic databases should be treated as equivalent to information in hard copy such as newspapers. The rationale for taking a restrictive view as to the latter is to be found in Morrison v Universal Marine Insurance Co (1872-73) L.R. 8 Ex. 40. At page 54, Baron Bramwell said that to hold that the underwriter is bound to carry in his head all that is contained in Lloyd’s List relating to a ship in which he has no interest, rather than to hold the owner of the ship bound to disclose it, would be to put a difficult and needless burden on the underwriter.

That reflected the commercial realities of the day. However, an underwriter does not have to carry the information in an electronic database in his head. On-line information is available to be called up when required, and the evidence of the expert underwriters in the present case is that the usual practice in the market is to do so.

A reasonable underwriter is presumed to know matters which he should have known from the facts in his possession or matters which he had means of learning from the sources available to him (see Garnat, ibid, at [135(f)]). However, I agree with the defendant that the fact that information is available to an underwriter on-line does not necessarily give rise to a presumption of knowledge. As the editors of Arnould put it in their discussion of this subject, the question ultimately reduces to whether there has been a fair presentation of the risk in all the circumstances (ibid at 16-181). Whilst the circumstances may include the availability of on-line information, whether the insurer should be treated as having knowledge of it is something which has to be judged on the particular facts (ibid at 16-194).

In the present case, I have described the relevant databases above. The evidence is that the defendant did not subscribe to Lloyd’s MIU at the time of renewal, but that it did subscribe to Sea-web, and had access to Equasis, which is a non-subscription service.

The evidence is that Lloyd’s MIU was where the details of the vessel’s detentions were most clearly expressed. As regards Suez, this source made express reference to “fire safety measures” and “SOLAS related operational deficiencies”. Sea-web on the other hand refers only to “detentions” without giving details. Further, the entry printed out by the defendant on 16 February 2009 appears to be inaccurate because it refers to “Detentions 3” in the “Last 12 months”, whereas it is not in dispute that at this time there were only two (at Suez and Bandar Imam Khomeini). The Equasis entry printed out by the defendant on the same date does not refer to detentions.

The implication of the claimants’ submissions is that the defendant should be treated as though it subscribed to Lloyd’s MIU. Whilst there is some attraction in this approach, I do not think that the factual or expert evidence I have heard is sufficiently specific to support a finding to this effect. In this case, I would treat the fact that detention information was available on on-line sources as part of the background circumstances, but I would not base my decision on it. For reasons I have already stated, I am satisfied that the defendant was not induced to agree the Policy by reason of any non-disclosure concerning the vessel’s detention history.

For completeness, I should add that I reject the claimants’ case as to affirmation for the same reasons as given in relation to disclosure of the vessel’s management. I do not need to decide the claimants’ argument that disclosure of the PSC detentions was superfluous in view of the class maintained warranty. In the result, I find in favour of the claimants on the PSC detentions issue.

Non-disclosure in relation to conflict of interest

This defence has to do with the role of Mr Richard Medawar who as I have explained above was the relevant ISM “Designated Person Ashore” for the vessel from September 2007 to May 2010. Mr Medawar was employed by a Beirut company called Zervos Shipping Agency. The defendant’s conflict of interest argument is based on the fact that the company’s website says that it offers certification services in collaboration with a number of Recognised Organisations (“ROs”).

The certifying authority under the ISM Code is the Flag State Administration, but many Flag States delegate their auditing and certificating to certification societies such as ROs. In this case, the vessel flew the Panamanian flag and the relevant flag state is the Panama Maritime Authority. An RO of the Panama Maritime Authority is Panama Maritime Documentation Services Inc (“PMDS”). PMDS conducted the vessel’s ISM audits in 2007 and 2008 and Swedish Management’s ISM audit in 2008. PMDS is one of the five ROs listed on the Zervos website.

It is fair to say, as the claimants do, that the defendant has recast its case on this point. In its written opening, it said that PMDS had “sub-contracted” certification duties to Zervos, and that since Mr Medawar was general manager of Zervos, the fact that he was Swedish Management’s DPA created a “stark conflict of interest”. But the suggestion that PMDS subcontracted certification duties to Zervos was effectively withdrawn in oral openings.

In closing submissions, the defendant submits that Zervos had a commercial association with PMDS in a way which enabled it to obtain certificates. The court is asked to find that Zervos in fact did have authorisation from PMDS to issue flag state documents including ISM certification.

However Mr Medawar’s evidence to the contrary is effectively uncontradicted. He said that Zervos offers a variety of services to shipowners, one of which is that it will act on behalf of the owners to arrange and co-ordinate ISM certification from the flag state. However Zervos has no accreditation or authority from PMDS. I accept his evidence on this point. This is not a conflict of interest situation, in my view, and both parties’ ISM experts confirmed this in their evidence.

The defendant sought to draw a link on the basis that Mr Ian Wilson, who conducted the vessel’s ISM audits in 2007 and 2008 on behalf of PMDS, was the surveyor of another RO of the Panama Maritime Authority called International Naval Survey Bureau (“INSB”). The 2006 INSB directory shows that INSB was based in the same Beirut office as Zervos, and shared contact details. However, I accept the evidence of Mr Devereese that in some parts of the world surveyors do share offices, and that this does not lead to an assumption of a conflict of interest. In any case, Mr Medawar said that they both worked in Beirut in the shipping industry, and so knew each other, but that Mr Wilson had a separate office elsewhere in the city. I accept this evidence. I agree with the claimants that the link is tenuous, and does not compromise the independence of Mr Wilson in conducting the surveys.

The defendant also relies on the fact that there are copies of the vessel’s Safety Management Certificate and Swedish Management’s Document of Compliance stamped “TRUE COPY” next to the PMDS stamp over which Mr Medawar has signed. It is important to note however that they are copies. The evidence is that copies of such documents are needed (for example to keep on board vessels). The defendant submits that it is more likely than not that Mr Medawar simply stamped the copies with a PMDS stamp to which he had access and then signed across it.

That is certainly a possible explanation in my view. However, he said it was Mr Wilson’s stamp, and on balance I accept this. There is force in the defendant’s point that Mr Medawar had no very satisfactory explanation as to why he should have signed the documents, albeit copies, at all. But taken with the rest of the evidence, I do not think that this goes very far to make good the defendant’s case as to the relationship between Zervos and PMDS which founds the alleged conflict.

There were some faint suggestions (the claimants called them insinuations) made by the defendant as to the competence of Mr Wilson the surveyor, the implication being that this gave support to its case on conflict of interest. However, as the claimants say, there is no evidence to show that Mr Wilson acted other than as a competent ISM auditor who was fully aware of his own professional duties and obligations. The defendant cannot advance any argument to the contrary, because it was refused permission to amend to plead the point by Andrew Smith J shortly before trial.

The defendant’s expert underwriter effectively accepted in cross-examination that if Zervos did not act as sub-contractors for PMDS (which as explained above was not maintained by the defendant at the trial), there would be no conflict of interest and thus nothing material to disclose. The defendant has failed factually to prove a conflict of interest. Further, I am satisfied from his evidence that Captain Kassab had no actual or deemed knowledge of any conflict of interest arising out of Mr Medawar’s role as DPA and his role with Zervos Shipping Agency, which is a necessary precondition to the defence. This ground of defence fails therefore.

The ISM warranty defence

The defendant’s fourth ground of defence concerns the warranty in the Policy which reads, “Vessels ISM Compliant”. The defendant’s case is that (1) no risk attached under the Policy due to the breach of the ISM Warranty at the date of the Policy, and the defendant has no liability to the claimants under it; (2) Further or alternatively, as the vessel ceased to be ISM-compliant by no later than 24 December 2008 (the date of the PSC detention at Bandar Imam Khomeini), and the claimants breached the ISM Warranty by no later than that date.

The background was admirably explained by Captain Andrew Mitchell, the defendant’s expert, as follows. The ISM Code was developed by the IMO (International Maritime Organisation) and provides for the development and implementation of a Safety Management System by shipping companies to identify and minimise risk in ship operations. Since its introduction in 1998, it has been amended and reissued twice. The objectives are to ensure safety of life at sea, prevention of human injury or loss of life, and avoidance of damage to the environment, in particular the marine environment, and to property.

The ISM Code is not prescriptive, the preamble stating that it is “…expressed in broad terms so that it can have widespread interpretations” and “recognising that no two shipping companies are the same … the Code is based on general principles and objectives”.

The Code applies to all commercial vessels of 500 gross tons or more. The 2002 version of the Code was the version which was in force at the times relevant to this dispute.

The following particular points are relevant to this ground of defence, with some of the key terms italicised. In order to operate a vessel covered by the Code (which of course included the NANCY), the owner or manager (defined as the “Company”) has to hold a Document of Compliance (“DOC”). The DOC is issued by the vessel’s flag state following an initial verification of the Company’s Safety Management System (“SMS”) carried out by the flag state. It is valid for up to five years, subject to annual verification.

In the present case, Swedish Management had in place a documented SMS in the form of a manual which ran to 326 pages. In oral evidence, Captain Mitchell said that there was no average size, though he would have expected to see something longer. Mr Gray said that the length varied, and he had seen 23 volumes, and manuals which were smaller than this one. It tended, he said, to depend on the size of the company.

That is the position as to the owner/manager. The vessel has to hold a Safety Management Certificate (“SMC”). The SMC is issued by the vessel’s flag state following an initial verification of the vessel carried out by the flag state. The SMC is valid for up to five years, subject to at least one intermediate verification.

In the present case, as explained above, the NANCY’s flag state, Panama Maritime Authority, recognised a company called Panama Maritime Documentation Services Inc (“PMDS”) as a recognised organisation (RO) authorised to issue the ISM certification and carry out the initial and subsequent verification audits on its behalf.

Swedish Management was issued with a full term DOC by PMDS on 25 September 2007 following a survey carried out by Mr Ian Wilson on 10 August 2007. That DOC was subsequently endorsed for annual verification on 21 October 2008 in Dubai by Mr Ian Wilson on behalf of PMDS following the verification audit. It was held at the date of the casualty.

The NANCY was issued with a full-term SMC by PMDS on 5 October 2007 following a survey also carried out by Mr Ian Wilson on 10 August 2007. When the original SMC was misplaced, PMDS issued a further original certificate on 26 January 2009. Like the DOC, the SMC was also held at the date of the casualty. Captain Mitchell accepted that unless the Flag State withdraws them, the certificates remain valid.

The warranty in the Policy only consists of three words, “Vessels ISM Compliant”. (I was told that the wording of the International Hull Clauses changed in 2003 making it clear that under that wording it is a documentary requirement, but this does not affect the question I have to decide.) As explained above, the Policy covered Captain Kassab’s fleet of five vessels, of which the NANCY was one. The parties’ cases as to the construction of the warranty are as follows.

The claimants’ primary case is that the warranty requires documentary compliance, and that ISM compliance is achieved if a valid Ship Management Certificate (SMC) has been issued in respect of the insured vessels. Although the warranty refers to “Vessels”, a valid SMC presupposes that a valid Document of Compliance (DOC) has been issued for the owner or manager of the vessels, and the claimants accept that for practical purposes it is also required. They submit that the court should construe the warranty as applying only at the time of inception.

The defendant’s case is that the ISM warranty was a warranty of compliance with the ISM Code at the inception of the Policy and throughout the period of the Policy. It submits that the words “Vessels ISM Compliant” warranted that the Vessel would comply with the ISM Code at the time of inception and at all times during the Policy. It says that there is no ambiguity in the warranty, which, though terse, has only one natural construction: what is required is actual compliance with the ISM Code by the Vessel.

The defendant submits that there is no room for confusing the ISM warranty with one requiring purely documentary compliance, since it contains no reference to the DOC, SMC or ISM certification more generally. The claimants’ contention that the warranty only warrants documentary compliance of the contra proferentem canon of construction (which it submits has no role to play here), but rather from disregarding the language of the ISM warranty.

Whilst its original case was that there had to be actual compliance in all respects with the Code, in oral submissions the defendant made it clear that its case was a narrower one, saying that compliance for the purposes of the warranty means compliance with the ISM code in such a manner that no outstanding major nonconformity arises. This reflects the fact that non-compliance with the ISM Code 2002 has been defined by the experts in their joint memorandum to mean that there is no “outstanding major non-conformity”.

The defendant also contends that as a matter of construction and/or by necessary implication, the claimants warranted that any DOC and SMC issued to evidence ISM compliance would be independently produced following an audit process which constituted a systematic and independent verification of ISM compliance. The conflict of interest which it argues resulted from the role of Mr Medawar resulted (it submits) in a breach of the ISM warranty at the date of inception, which breach continued throughout the life of the Policy.

The claimants’ dispute this construction, saying among other things that the effect of any irregularity with respect to the audit process on the verification of ISM compliance is a matter for the Flag State or the Recognised Organisation.

I agree with the defendant as to the importance of independence in the ISM audit process. But since I have decided the conflict of interest point against the defendant on the facts, I need not determine whether (as it submits) the warranty was to the effect that any DOC and SMC issued to evidence ISM compliance would be independently produced.

The issue for decision is whether documentary compliance sufficed. In essence, the defendant’s case is that the terms of the warranty are clear, and actual compliance with the ISM Code is required, and that the claimants’ documentary construction is antithetical to the purpose of the Code, which is to ensure implementation of its provisions, not a merely (as it is put) a “paper exercise”.

As against that, the claimants submit that the defendant’s construction is unworkable, cannot have been what the parties intended, and that their construction is the commercially sensible one.

The first point is as follows. It is important, in my view, to distinguish between compliance with the ISM Code, and compliance with the Policy’s ISM warranty. In argument, the claimants said (rightly in my view) that the defendant tended to elide these points. The legal commentary which it cites had to do with compliance with the Code, rather than compliance with an insurance warranty. Nothing was cited to me that settles the question that I have to decide, and in particular, it is common ground that there is no case law which does so, either from England or elsewhere.

It is also common ground that any ambiguity in the wording of a promissory warranty in an insurance policy is to be construed against the insurer. However, whilst the claimants rely on this principle, the defendant maintains that the interpretation of the warranty is clear. In any case, there was no dispute about the applicable principles of construction.

In my view, among the relevant factors in deciding the issue are the following:

Though there is no direct authority, against that background there is authority which I consider provides guidance as to the correct interpretation of the clause. In The Rowan [2012] 1 Lloyd’s Rep 564, the court was concerned with the effect of a warranty in an oil tanker voyage charterparty about approvals given by certain major oil companies. It read, “Owner warrants that the Vessel is approved by the following companies and will remain so throughout the duration of this charterparty”. A question was whether the vessel had to remain approved as the judge had held.

Longmore LJ at [23] refers to counsel’s argument that “… that warranties as to "approval" letters should be treated in the same way as warranties about Class. It is well settled that a warranty that a vessel is in Class is not a warranty that she is rightly in Class, see French v Newgass (1878) 3 CPD 163 and Scrutton, Charterparties 22nd Edition (2011) page 112; it is probably not even a warranty that an owner does not know anything that would cause a vessel to lose her Class or have a recommendation imposed on her”.

At [24], Longmore LJ said that though it was not necessary to express any final view, he saw considerable force in the view that the clause should be treated as a warranty in relation to documentation not a warranty as to the underlying condition of the vessel:

“I can see considerable force in Mr. Kendrick's argument on the construction of the unamended clause 18 of the Vitol terms. If the judge were right, an owner would find himself in breach of the clause, if any fact existed which would cause the approval letters to be amended or withdrawn whether or not he knew of that fact and whether or not he had had any opportunity to put right the defect which would have caused the letters to be amended or withdrawn. That is a very far reaching warranty which would indeed cut across the warranty of seaworthiness in the Asbatankvoy form. The only way to avoid that conclusion would be to treat clause 18 as a warranty in relation to documentation not a warranty as to the underlying condition of the vessel.”

The defendant responds that this was an obiter observation, and that TheRowan does not illustrate some sort of general principle that an owner should know when it is in breach of the warranty. Both those points are correct.

However, the case does provide confirmation that warranties concerning class have been construed as requiring documentary compliance alone. As the claimants say, a similar construction is supported by Arnould, ibid, para 19-33 as to the first part of the Classification warranty in the Institute Time Clauses – Hulls. This does not amount to a warranty that the vessel is or will continue to be rightly entitled to be so classed. French v Newgass, ibid, and Marina Offshore Pte Ltd v China Ins Co (Singapore) Pte Ltd [2007] 1 Lloyd’s Rep 66, 84, Prakash J, Singapore CA, are cited in support.

My conclusion is as follows. I fully accept that compliance with the Code is of the utmost importance, and that the emergence of an international standard for safety and pollution prevention is a development of great significance. For a good explanation of the background put into context, see B. Soyer, Potential legal implications of the ISM code for marine insurance, the International Journal of Insurance Law, 1998, 4, at p.279. Nevertheless, there is a legitimate issue as to the breadth of this warranty in the insurance policy, given that “… the breach of such a warranty produces an automatic cancellation of the cover, and the fact that a loss may have no connection at all with that breach is simply irrelevant” (Hussain v Brown [1996] 1 Lloyd’s Rep 627, Saville LJ at page 630). Saville LJ went on to say that, “In my view, if underwriters want such protection, then it is up to them to stipulate for it in clear terms”.

The evidence in this case satisfies me that, even in the more limited form proposed by the defendant referable to outstanding major non-conformities, the defendant’s construction of the warranty would be difficult to apply, difficult to evaluate, and would give rise to commercial uncertainty. I do not think that this is what the parties intended. I consider that the claimants are correct to contend that the warranty in these terms should be construed in the same way as the class warranty, and that it requires documentary compliance. There is no dispute that on this basis there is no breach of warranty.

However, I reject the claimants’ further contention that it applies only at the date of inception of the Policy, and is not a continuing warranty. The parties cannot in my view have intended that the warranty would continue to be satisfied if the Safety Management Certificate was withdrawn after the inception of cover (see by analogy The Game Boy [2004] 1 Lloyd’s Rep 138 at [139], Simon J).

Introduction

Because of my conclusion on the construction point, the question whether the defendant can prove a breach of warranty based on its interpretation of the clause does not arise. However, it was argued, and I should deal with it.

The defendant’s case is that the ISM warranty was breached on the date of the Policy, or on 24 December 2008. It contends that Swedish Management’s Safety Management System (“SMS”) suffered from six areas of major non-conformity with the ISM Code. If the court is satisfied that there was even one outstanding major non-conformity, it says, then the ISM Warranty will have been breached.

The position under the ISM Code 2002 is as follows. A major non-conformity is defined in section 1.1.10 as: “Major non-conformity” means an identifiable deviation that poses a serious threat to the safety of personnel or the ship or a serious risk to the environment that requires immediate corrective action and includes the lack of effective and systematic implementation of a requirement of this Code”.

The experts set out their agreement as regards compliance with the Code in their joint statement:

“A ship can comply with the ISM Code even if one or more non-conformities exist.

A ship does not comply with the ISM Code if there is an outstanding major non-conformity. That is, a major non-conformity that has not been down-graded.

Failure of the SMS to address a section of the Code (e.g. section 3.2) constitutes a major non-conformity at the document review stage of an audit or at any audit if not previously identified and corrected.

A section of the Code addressed in the SMS but which has not been implemented such that it poses a serious threat to the safety of personnel or the ship or a serious risk to the environment constitutes a major non-conformity.”

The experts agree that: “The IMO having recognised the need for procedures concerning the handling of observed ISM Code major non-conformities ... [A] Circular defines the process for downgrading a major non-conformity to allow the ship to sail and the subsequent follow action”.

The experts agree that if at an audit a qualified and experienced ISM Code auditor has raised a major non-conformity and recommended withdrawal of the SMC, that would be a measure of non-compliance, but it was agreed that “only the Flag State can withdraw an SMC” and that “the recommendation for withdrawal would only be made if no immediate corrective action was possible to remove the serious threat”.

The claimants maintain that aside from the particular facts relating to the six alleged major non-conformities, the defendant’s case must fail for two reasons. The first is that in order to determine whether there has been a major non-conformity, there would have to be a full audit of the insured vessel, and without it, no major non-conformity can be found to exist. The second is that whether a major non-conformity is or is not outstanding, or has or has not been downgraded, presupposes that it has been identified at an ISM audit or elsewhere.

Accordingly, the claimants maintain that because no major non-conformities were identified or raised at an ISM audit or elsewhere in respect of the vessel NANCY, it necessarily means that there were no outstanding major non-conformities. It follows that the vessel remained in compliance with the ISM Code 2002 on the experts’ agreed interpretation.

In fact, in relation to each of the six major non-conformities alleged by the defendant, I agree that Captain Mitchell appeared to accept in cross examination that the non-conformity had not been identified, and therefore could not be outstanding.

In response, the defendant points to another part of the experts’ joint statement as follows. Captain Mitchell agreed that the following questions proposed by Mr Gray were a measure of ISM compliance:

Consequently, the defendant submits, the exercise for ascertaining ISM compliance is hypothetical. The question is not whether a major non-conformity was actually identified during one of the audits, but whether, firstly, a major non-conformity would have been identified on 2 December 2008 and/or 24 December 2008, the dates when the defendant says there were breaches of the ISM warranty, and secondly, whether the major non-conformity was outstanding, in the sense that it pre-dated the hypothetical audit but had yet to be rectified because it was incapable of immediate correction, and could not be immediately rectified after the audit.

My conclusion on this point is as follows. Of course, the claimants are correct to say that there were no outstanding major non-conformities in relation to the vessel in the sense that none had been identified as a matter of fact. But I am inclined to agree with the defendant’s contentions so far as they follow the text of Mr Gray’s second question. Unless the question of compliance can be gauged hypothetically by reference to some such test, it is difficult to see how non-compliance with the Code could ever be demonstrated unless a major non-conformity has in fact been identified with regard to the vessel in question, and not downgraded within the time allowed in the Code. Whilst it may be difficult to prove non-compliance unless this has happened, if it can be proved that a qualified and experienced ISM Code auditor would have raised a major non-conformity and recommended suspension/withdrawal at the material time, I see no reason why it should not follow that a breach of the Code has been proved.

However, I need not reach a conclusion on this point, because I am satisfied that the defendant has not made good its case as to major non-conformities on the facts. I now set out my reasons in this regard.

The issue turns on the expert evidence. Both Captain Mitchell and Mr Gray were well qualified to express a view on the ISM Code. But whilst Captain Mitchell has had a senior role in the development of the Code, and gave valuable assistance in his evidence in this regard, the last audit he carried out was in 1996. Mr Gray on the other hand carried out an audit shortly before trial on board a BP tanker, and on the subject of breach, I consider that his ongoing audit experience gives his evidence particular strength on this issue. On the subject of the breach, I prefer his evidence.

There is a further point to mention in this regard. As I have said, the defendant’s case is that there were six major non-conformities, and that the detention in Iran supports their case in this respect. These are identified in Captain Mitchell’s first report, and all six go to the SMS as set out in Swedish Management’s manual. I referred above to this manual.

The claimants point out that the analysis of non-conformity in his report does little more than assert the alleged non-conformities. Whilst the detentions are dealt with separately, these are also dealt with briefly. Mr Gray set out in some detail his response in a supplementary report. When the experts met to produce their joint statement, however, Captain Mitchell had not seen this.

The result was that an explanation of his views was not available in advance. The claimants say that the lack of particulars either in the defence or in Captain Mitchell’s reports meant that in the course of cross-examination un-pleaded cases were advanced. Various provisions of the ISM Code and guidelines were referred to in evidence, though not in the reports.

In these circumstances, the claimants say that the evidence they adduced could not fully address each of the alleged non-compliances as advanced in the defendant’s oral evidence. This was unfair, and the defendant should not be permitted to go beyond its pleaded case (a particular example raised goes to “permits to work” an issue which is pleaded only in relation to hot work but advanced on a more general basis).

In my view, there is substance in the claimants’ complaints about the specificity with which these matters were advanced in the defendant’s pleadings and reports. Notwithstanding, the ambit of the points is in fact quite limited, and my conclusions on the evidence are as follows.

The defendant’s case is that if an audit had been performed on 2 or 24 December 2008, these six major non-conformities would have been identified, could only have been remedied by a complete overhaul of the SMS (and a fundamental change of culture so far as Swedish Management is concerned), rather than by immediate corrective action, and so would have been outstanding for a significant period of time. In this regard, it refers to Mr Gray’s evidence that if a major non-conformity was raised and was not immediately corrected, “it is likely the auditor will recommend…that the certificate, whichever certificate it is, is withdrawn”. Such a recommendation would have been made in this case due to any one of the six major non-conformities, the defendant says, giving rise to non-compliance with the ISM Code, and hence breach of warranty.

The question turns on the expert evidence, and I have to choose between that of Captain Mitchell and Mr Gray. Overall, I am satisfied from the evidence of Mr Gray that whilst the claimants’ manual (which as I have said extended to 326 pages) could have been more detailed in parts, and there is room for a greater focus on how the Code is to be implemented in practice, given the nature of Captain Kassab’s operation, and the code’s rubric that “that no two shipping companies or ship owners are the same”, none of the matters asserted by the defendant amounted to major non-conformities. Specifically:

As the claimants say, there was no real factual basis underpinning the allegations. The claimants are entitled to obtain at least some support from the fact that no major non-conformity was identified during the ISM audits in 2007 or 2008. I find that even if these matters were identified as major non-conformities, they could have been remedied. The experts’ definition of a major non-conformity is one that has not been downgraded, and I am satisfied that it is very unlikely that these matters even if made out would have led to the withdrawal of the vessel’s SMC.

Although the defendant relies on the PSC detentions as giving rise to a further major non-conformity, Captain Mitchell’s evidence was to the effect that the major non-conformities he was focusing on were the six set out above, and that the PSC detentions were referred to in support of his conclusions in that regard. It is right to say, as the claimants do, that the defendant’s expert evidence did not provide any depth of analysis as to the PSC inspections. Whilst he accepted that they showed a partial failure of the company’s system of maintenance, Mr Gray did not accept that the deficiencies identified in the PSC detentions amounted to major non-conformities within the definition in the Code. In this respect, there is some limited significance to be attached to the fact that the PSC inspectors at Suez and Bandar Imam Khomeini did not code any deficiency by reference to non-compliance with the ISM Code (“18” is the code for non-conformity and “19” is the code for major non-conformity). In any case, as explained above, the deficiencies were rectified. I accept Mr Gray’s evidence in this regard.

It follows that the defendant has not shown that there was any major non-conformity, or that any major non-conformity was outstanding, and has not established its fifth ground of defence either on the construction of the warranty, or on the facts.

The defence of illegality under US law

The defendant’s sixth and final defence is illegality under US law. The defence has changed in formulation since it was added by amendment causing the vacation of the original trial date in 2012. The case is now much narrower than it was as pleaded, or even in the written opening. It has to do with the assertion that the issuance of freight invoices in respect of the sulphur shipped from Iran to China (which I have described above) caused the New York correspondent bank nominated by the claimants to process freight payments in US dollars. This is said to have been unlawful as a matter of United States law. It is also the defendant’s case that the claimants, by causing their correspondent bank in New York to process the unlawful payments, themselves violated US law.

However, US law is not the governing law of the insurance policy, and it is not immediately plain why the lawfulness or otherwise under US law of the payment of freight in respect of a charter of the vessel should have any legal impact on the defendant’s liability to indemnify the claimants under a policy which insured the vessel’s hull and machinery. It is not suggested that it was unlawful under US law as it was at the time for the claimants to trade with Iran, since they are not US persons. Further, it is common ground that trading with Iran was covered by the Policy.

The defendant has advanced a number of bases for its contentions. The claimants say (with some force) that it has not been straightforward to meet the defendant’s case because it has changed. In closing, however, the defendant’s list of issues makes its position clear. It submits that if it proves a case of illegality under US law, its three principal contentions are (1) that there was a breach of the warranty of legality under s.41 MIA, (2) that the claim under the Policy was vitiated at common law by reason of illegality under foreign law (which is the most generally expressed issue), and (3) that the claimants failed to disclose matters which they ought to have known about in relation to illegality.

An allegation that the claimants agreed to the issue of false bills of lading to circumvent the Iranian sanctions regime was withdrawn by the defendant, though it was maintained up to trial (and dealt with the claimants in their written opening submissions). The basic facts are not now substantially in dispute. I have already outlined them, and my further findings are as follows.

On 17 December 2008, a voyage charter for the carriage of about 30,000 mt of prilled crude sulphur in bulk from Bandar Imam Khomeini, Iran, to China was concluded between the first claimant and a Hong Kong company called Kin Ki. This charterparty (which was negotiated by Blue Fleet) contained an agreement by Kin Ki to pay freight at an agreed rate in US dollars.

Pursuant to the charterparty, the vessel proceeded to Bandar Imam Khomeini, Iran, where 32,898.747 mt of sulphur was loaded. Two bills of lading were issued on completion of loading in Tehran by Marine Bar Shipping on behalf of the Master of the vessel in which the shipper was identified as “IRAN PETROCHEMICAL COMMERCIAL CO (IPCC) NO. 1339”. It is not in dispute therefore that the bills of lading clearly identified the shipper as Iranian.

On behalf of the claimants, Blue Fleet issued four US dollar denominated invoices to Kin Ki with instructions for freight to be remitted in US dollars to a bank account held at Marfin Egnatia Bank in Greece by Fleet Shipmanagement Inc, which is a company controlled by Captain Kassab. The invoices identified Standard Chartered Bank, USA, in one case and Wachovia Bank NA, USA, in the others as the correspondent bank. Wachovia appears to have been substituted for Standard Chartered, so that it is the only relevant US bank for present purposes.

Payments were initiated by the Shanghai Pudong Development Bank and made through New York to Marfin Egnatia Bank on 8 January 2009, 21 January 2009, and 11 February 2009. A sum of US$20,000 was paid without being routed through New York by payment into an account at Bank of China Nantong branch.

Although the freight was denominated in the freight invoices in US dollars and in the event paid in US dollars, it could as a matter of fact have been paid in a different currency. Captain Kassab said that it was common to receive freight in dirhams paid in the UAE, even if the freight was denominated in US dollars. I accept this evidence, which was confirmed by the defendant’s underwriter, Mr Moorthy.

Evidence on US Law was given by Mr Peter Skoufalos for the claimants, and Mr Michael Gershberg for the defendant. Both were good witnesses though I felt that Mr Gershberg was more convincing on the detail since US sanctions against Iran are within his special expertise. It is however to be noted that he was asked to advise on the basis that the claimants had substituted false bills of lading to mask the Iranian origin of the underlying transaction, an allegation which the defendant has abandoned. In the event, there was little difference between the experts in the substance of their evidence. My findings in this respect are as follows.

US economic sanctions against Iran for present purposes are found in the Iranian Transactions Regulations 31 CFR Part 560, now known as the Iranian Transactions & Sanctions Regulations (the “ITR”). The ITR were issued pursuant to the International Emergency Economic Powers Act (“IEEPA”), 50 USC sections 1701-1707, and impose a trade, investment and financial transaction embargo on Iran, placing restrictions on “US persons” doing business with Iran. The regulations are administered by the Office of Foreign Assets Control (“OFAC”), which is an agency of the US Department of the Treasury.

As the US has tightened sanctions against Iran, these provisions have been extended from time to time. It is the state of US law at the end of 2008 and the beginning of 2009 which is mainly relevant for present purposes. As explained shortly, there was a significant extension as of 10 November 2008 to bring the processing of US dollar payments through the United States through correspondent banks (a standard transaction in international commerce) within the sanctions regime.

It is common ground that for the provisions of IEEPA and the ITR to be applicable to the facts of this case requires the processing of the payment of freight to be made by a US person or through the US. It is also common ground that the claimants can be found to have committed an unlawful act within the meaning of section 1705(a) of IEEPA if they have “caused” a violation of the ITR by the issuance of the invoices for freight. As amended in October 2007, this section provides that:

The section differentiates between civil penalties, and criminal penalties which apply to a person who “wilfully” commits an unlawful act described in subsection (a). The defendant’s case is limited to alleged civil violations. It does not allege any criminal violation.

Where the experts differ in approach is how to interpret this “causing” offence under IEEPA and the relevant sections of the ITR, namely sections 560.204, 560.206 and 560.208.

As to these provisions:

Up until 10 November 2008, where the only link with the United States (as in the present case) was that an Iran-related dollar payment was to be processed in the US, a provision colloquially known as the “U-turn authorisation” enabled the transaction to take place. It is not in dispute that this would have covered the freight payments in issue in this case, had it still been in force.

As of 10 November 2008 however, the authorisation for US persons to process US dollar payments to or from Iran, or for the direct or indirect benefit of persons in Iran or the Government of Iran, was revoked following an amendment to section 560.516. From then, it was illegal for US banks to engage in fund transfers involving non-Iranian banks and transactions outside Iran, where the funds would (a) in any way facilitate a non-US person transporting goods to or from Iran (section 560.208); (b) relate to a transaction involving Iranian-origin goods (section 560.206); or (c) provide any benefit, direct or indirect, to the government of Iran or a person in Iran (sections 560.204 and 560.410, which latter provision elaborates on the definition of a service). (Following a concession by Mr Skoufalos in oral evidence, there is no longer a dispute as to this.)

Against this backdrop, the defendant raises three questions:

As regards section 560.204, Wachovia Bank processed freight payments made by Kin Ki to Fleet Shipmanagement, and it is not in dispute that processing these payments amounted to the export of a service.

Mr Gershberg’s evidence is that the service violated section 560.204 because it was supplied indirectly to an Iranian entity, in that it was for the benefit of Iran Petrochemical, because it paid for the carriage of the goods supplied by Iran Petrochemical from Iran to the discharge port in China.

The claimants’ answer rests on the fact that the freight did not go to Iran or any Iranian entity. It was paid after shipment from Iran, and it submits that it did not benefit the Iranian shipper directly or indirectly. Some support for this approach is to be found in Metawise Group v Brazil Amazon Trading (2006 US Dist LEXIS 22704).

However, in cross examination Mr Skoufalos agreed that giving the term “indirect” its broadest possible interpretation, “you might say that at some point there was a benefit that flowed to Iran at the end of the day”. He said that it was certainly possible that OFAC would take that position.

Whilst the claimants’ interpretation is an arguable one, I prefer Mr Gershberg’s evidence on this point, and am satisfied that Wachovia Bank violated section 560.204. A US court would find that the Iranian shipper benefited from the service indirectly, in my view. It is likely that this is the kind of payment that the revocation of the U-turn authorisation was intended to catch.

As regards section 560.206, the defendant’s case is that the freight processed by Wachovia Bank paid for the transportation of goods of Iranian origin, and Mr Gersberg’s view is that this constituted “facilitating” which is included in the list of meanings ascribed to the term “transaction or dealing” in section 560.206(b).

As regards section 560.208, the defendant’s case is that Wachovia Bank was in violation by facilitating a transaction by a foreign person that would otherwise be unlawful if performed by a US person, in that a US person could not transport or arrange for the transportation of Iranian-origin goods to another person without an OFAC license.

The difference between the experts in the case of both provisions goes to the meaning of the word “facilitating”. Mr Gershberg’s view was that it should be construed purposively: “I don’t think facilitation is construed as a but-for causation requirement. Facilitation is interpreted broadly by the agency, by OFAC, and I believe that OFAC would interpret facilitation to include any support or contribution to a transaction occurring. And of course facilitation is only one item on a non-exclusive list”.

Mr Skoufalos took a narrower view. Facilitation, he considered, is an act that “actively abets the underlying transaction”. The transaction which Wachovia Bank facilitated was “the satisfaction of the freight invoice … not a direct abetting of the transportation or movement of the Iranian sulphur to China”.

Again the view of Mr Skoufalos is arguable in my opinion, and again it has the support of the Metawise case. However, I accept Mr Gershberg’s evidence that this was a case decided on its particular facts. The issue was whether a loan of US$600,000 was an illegal agreement on the assumption that the loan was paid directly to Iranian shipowners. It was held that it was not. However, I agree that the case is distinguishable, because the court was clearly influenced by the fact that the payment of US$600,000 was intended to secure the release of the payee’s goods, which were about to be auctioned off by the Iranian shipowners. Further, as a summary judgment decision of the District Court for the Middle District of Florida, Mr Gershberg’s evidence is that it would not carry great weight as precedent.

I accept the claimants’ submission that the issue is the interpretation of the word “facilitating” by a US court, not by OFAC, as Mr Gershberg seemed from time to time to suggest. However, I am satisfied that a US court would adopt a similarly broad view, and that his is the proper interpretation as a matter of US law.

It follows that I find that the processing of freight constituted a violation of the ITR by a US bank, namely Wachovia Bank, in the three respects alleged by the defendant.

The defendant’s second and third points go to the position of the claimants as opposed to the bank, and can be taken together.

The defendant’s case is that the claimants acted unlawfully by issuing dollar denominated invoices for payment which required processing by a US bank and which caused Wachovia Bank to perform this processing which was (as I have found) in violation of the ITR. This “caused a violation” of the ITR and was an unlawful act on the part of claimants under section 1705(a) of IEEPA (which I have set out above).

The issue between the experts goes to causation. Mr Gershberg’s view is that, “The causation began with the claimants’ conduct, which caused the charterer to initiate the wire transfer, which caused the US correspondent bank to process the payment”. The fact that there were intermediate actors between the issuance of the invoice and the processing of freight did not eclipse the causative efficacy of the freight invoices.

The claimants point to the fact that there were a chain of entities involved in the invoicing and freight payment process, and that the claimants were not involved in giving instructions to Shanghai Pudong Development Bank. The freight could have been paid in dirhams, and payment was not required to be made through the United States. On that basis, Mr Skoufalos considered that there were breaks in the chain of causation.

Again, I consider his position to be arguable. Nevertheless, I prefer the evidence of Mr Gershberg. It is correct that payment could have been made in dirhams in the UAE, but as a matter of fact the freight invoices directed payment in US dollars through a correspondent bank in the United States. Albeit indirectly, I agree with Mr Gershberg that the claimants committed civil violations of section 1705(a) IEEPA.

The issue on the ITR is whether the wording of section 560.204 can be directly applied to conduct by the claimants. As Mr Skoufalos pointed out, the claimants themselves were not exporting the “service” of funds transfer from the United States. On balance however, I prefer Mr Gershberg’s view which is that conduct by foreign persons that causes a violation of this provision can be made out when it results in a US correspondent bank processing a payment that was unauthorised.

It follows that I accept the defendant’s case on the second and third questions, whilst reiterating that the defendant’s case is that there was a civil violation of the relevant provisions, not a criminal violation.

I have found that, although the law is arguable both ways, the bank processing the US dollar freight payments in respect of the shipment of sulphur from Iran to China committed a civil violation of the applicable US legislation. In “causing” the bank to process the payments, the claimants also committed a civil violation. No criminal violation is alleged by the defendant, and it is common ground that a civil violation can occur even if it happens inadvertently.

The question now is what the effect of these conclusions is as regards the defendant’s liability under the insurance policy, which was governed by English law. The first question is as to the factual position.

The defendant submits that at the time of entering the charterparty for the Iran-China voyage, the claimants intended to perform it illegally, as they intended to receive US dollar freight payments via a US correspondent bank when the processing of such payments by a US bank is contrary to US law. The defendant says that at the time of entering into the Policy, the court should be satisfied that the claimants intended to perform unlawful conduct during the Policy as (a) Iran was within the trading limits of the Policy; (b) the trading pattern of the claimants’ fleet of vessels involved voyages to and from Iran and (c) it was therefore likely that such a voyage would take place during the currency of the Policy. The intended illegality did in fact materialise.

My factual findings in this regard are as follows. The payment of freight under the charterparty was arranged by Blue Fleet as chartering broker, and it was Blue Fleet that issued the freight invoices. There is no indication in any of the evidence that the transaction was a surreptitious one, and the defendant no longer advances a case to this effect. The freight invoices and bills of lading accurately reflected the fact that the shipper was Iranian.

The contract could have been performed lawfully as a matter of US law, but for the processing of the freight payments through a correspondent bank in the United States. In fact, a few weeks previously, performance of the entire charter including payment through the United States would have been lawful. It was the revocation of the U-turn authorisation on 10 November 2008 that resulted in the civil violations. It will be noted that though this was before the renewal of the Policy on 2 December 2008, and the shipment from Iran on 24 December 2008, it was only shortly before.

In cross-examination Captain Kassab was asked:

I am satisfied from his evidence that Captain Kassab did not know about the U-turn authorisation, did not know about its revocation, and did not know that the processing of freight in US dollars had become unlawful under US law as of 10 November 2008. There is no evidence of any intention at the time of entering into the Policy or the shipment of the sulphur to perform this or other charters illegally (on his part or that of Mr Khoury). Nor was there any evidence of a predisposition to this effect as the defendant suggested. As Captain Kassab put it, “I’m technical person, I’m owner. I’m experienced Captain maintaining my ships and having different consultants in the fields to make safe operation to my ships. I’m not into academical answer”. I accept that evidence.

The defendant’s case is that the violations by the claimants of section 1705(a) of IEEPA and the ITR which I have found proved amounted to a breach of the warranty of legality under s. 41 Marine Insurance Act 1906 discharging the defendant from liability as from the date of issue of the first freight invoice on 30 December 2008 and/or by issuing further invoices on 15 January and/or 23 January and/or 11 February 2009.

Section 41 MIA provides that, “There is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner”.

This has to be read with s. 3(1), which provides that, “Every lawful marine adventure may be the subject of a contract of marine insurance”. The section goes on to set out instances of a “marine adventure”.

I agree with the claimants that the “adventure” insured under a hull policy like the present Policy is that the ship is exposed to maritime perils (see s. 3(2)(a) MIA). The payment of freight is not within the insured adventure, and the defendant’s contention fails for that reason.

Further, there is authority that the implied warranty under s. 41 is that the adventure shall be performed lawfully according to English law, not foreign law. In Royal Boskalis Westminster NV v Mountain [1997] Lloyd’s Reinsurance LR 523, Rix, J said at pages 589-590:

“Moreover, the warranty contained in s. 41, if it applied to foreign law would be extremely wide. Suppose that, unknown to an assured, some ingredient in a cargo which he was exporting to a foreign country could not by reason of a law of that country of which he was also unaware lawfully be present in that cargo. The adventure would be unlawful. Suppose that, in ignorance of some foreign law, an assured directs that a vessel does something which turns out to be illegal. He would be in breach of warranty and lose from that moment the protection of his policy. In the latter case no principle of common law would, I think, render a claim unenforceable, unless it be the Beresford principle: but that would require the commission of a crime (and thus in most, albeit not all, cases the existence of mens rea) and a (direct) causative connection between crime and claim under the policy. In such a case, however, there would be no need of a warranty. The point of a warranty is that it reflects the definition of the risk undertaken by the insurer, so that there need be no causative link between breach and loss. The statutory warranty is nevertheless implied by law. It seems to me to be odd to imply by way a term with the strength of a warranty to a situation not reflected in cases before the Act or even to the common law relating to foreign illegality as it has now developed. In sum, I think that Mr. Justice Staughton’s considerable doubt [in Euro-Diam Ltd v Bathurst [1990] 1 QB 1, 13-14] was well founded and hold that “lawful” in s. 41 (and thus in s. 3(1) as well) is a reference to lawfulness under English law. The consequences for a policy of marine insurance of unlawfulness under foreign law are therefore a matter for the common law.”

On appeal, Phillips, LJ was the only judge to consider this point, saying that the s. 41 warranty “probably refers to English law, not foreign law”, but not expressing a final view ([1999] QB 674 at 736F). These dicta may not be technically binding on me, but I consider that I should follow them, and in any case there are good practical reasons to do so.

The defendant’s next point is that the claim under the Policy was vitiated at common law by reason of illegality under foreign law. This (as I have said) is an issue expressed in general terms.

By way of introduction, the leading English authority on the effect of illegality under US law on US dollar payments is Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728. That case concerned the effect of US sanctions on the repayment of US dollar deposits booked in London, which were English law contracts directly impacted by the sanctions. The court in the present case is not directly concerned with the effect of US sanctions on the insurance policy. The issue arises in respect a different contract, namely the payment of freight under a charter—it is not suggested that it is unlawful under US law for the defendant to indemnify the claimants under the insurance Policy, which is their claim in these proceedings.

It is not in dispute however, that the court may treat insurance in respect of an adventure that is illegal by foreign law as unenforceable on similar principles that apply in the case of illegality by domestic law. So the court may refuse to enforce a claim on a policy where the assured, in order to advance it, has to rely on (“plead and prove”) his own unlawful conduct (Bowmakers v Barnet Instruments Ltd [1945] KB 65), at least in the case of major transgressions (see Parkingeye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338 at [69]). Similarly, a claim under a contract of insurance will not be enforced where the effect of enforcing the claim would be to enable the assured to profit from his own crime and/or to be indemnified against the adverse consequences of his own wrongdoing (Beresford v Royal Insurance Co Ltd [1938] AC 586).

The application of these principles to the case of illegality under foreign law was explained in Euro-Diam Ltd v Bathurst [1990] 1 QB 1 (affirmed by the Court of Appeal at p.30), where a claim was made under a policy in the context of the issuance of a false invoice which was a criminal offence under German law. The approach of Staughton J was to ask whether the contract of insurance was sufficiently connected with the illegal acts in Germany to render it tainted and unenforceable in proceedings in this country (p.15F).

But insofar as the defendant is relying on them, these principles appear to me to have no application in this case. The claimants do not have to rely on the processing of the freight payments (unlawful under US law) in order to claim an indemnity under the Policy, nor are they seeking to profit in these proceedings from the unlawful processing of the freight payments.

In fact, as the claimants say, the claim under the policy is entirely unconnected with the breach of US law. The claim under the policy arises because the vessel was lost in an unconnected incident. The Iranian sulphur charter had been completed by the time of the vessel’s loss. At the time of the fire, she was at Nakhodka in Russia where she had been fixed to load a cargo of steel for onward carriage to Taiwan and the Philippines. I agree with the claimants that there is no causative connection between the illegality and the claim for an indemnity.

It would be different in my view if at the time of entering into the policy, the assured intended to perform the adventure in a manner which involved a breach of US law. However it was accepted on behalf of the defendant in oral closing submissions that insofar as unlawful intent refers to knowledge of the illegality, a case based on knowledge of the illegality was not being pursued. This reflected the evidence in the case.

The defendant’s case ultimately rested on an invocation of the principle ex turpi causa non oritur action, which has to do with the idea that the court will not lend its assistance to the enforcement of a wrongful act (see the recent discussion in Gray v Thames Trains Ltd [2009] 1 AC 1139 at 1370 et seq). But it is not clear what this adds to the insurance cases—the Bowmakers and Beresford cases can be seen as examples of the same or at least a similar principle. More importantly, the ex turpi causa cases show that where, as here, the illegality arises because of an inadvertent breach of the law (in this case both on the part of the bank processing the payment in the United States, and on the part of the ship owner stipulating for payment of freight through that bank as correspondent) there is no “turpitude” such as to bring the doctrine into play (Stones & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 at [24]). In such circumstances, an ex turpi causa defence does not arise (Les Laboratoires Servier v Apotex Inc [2012] EWCA Civ 593 at [73-74] and [94]).

The defendant also invoked a general principle of public policy referring to the importance of “international sanctions measures … where sanctions of various types have also been implemented by the UN, EU and the UK against the same state, and where there is in the background a very well-known nuclear threat, is a relevant illegality for present purposes, even if committed without knowledge of the illegality”.

I agree that this is an important policy issue. However, it may be noted that had there been a breach of international sanctions, the question at issue would not have arisen. The UK has itself implemented such measures in its own law. The issue would have been as to the effect of illegality under the governing law of the contract, namely English law. Further, the timing in this case is important, the payments having been made just after they became unlawful under US law. A case of inadvertence is very different from a case of deliberate unlawful conduct. Finally, there is no reason why public policy should be applied so as to give insurers a defence to a claim under an insurance policy which is completely unconnected with the breach of US law.

Arising from the above discussion, the defendant’s case is that the claimants ought to have known and therefore should have disclosed that (1) they sometimes went to Iran; (2) notwithstanding the revocation of the U-turn authorisation as of 10 November 2008 they would issue US dollar invoices in respect of voyages from Iran; (3) that this could give rise to the commission of both civil and criminal offences in the United States (this last point is not vital to the analysis, the defendant says, though it adds to the materiality).

As to “deemed knowledge,” s. 18(1) Marine Insurance Act states that the “… assured is deemed to know, every circumstance which, in the ordinary course of business, ought to be known by him.” I agree with the claimants that, as shipowners and ship managers, the question of their deemed knowledge can only be determined by considering the ordinary course of business in which they are involved. The defendant has adduced no evidence as to what a shipowner or manager ought to have known as at 1 December 2008 about the laws of the United States and whether the processing of a freight invoice issued in US dollars in the circumstances on this case would be unlawful. Evidence from witnesses who are not in the business of ship owning and managers cannot fill this gap.

In cross examination the claimants’ underwriting expert, Mr Devereese, was asked whether, on the premise that the claimants ought to have known that the freight invoices could not lawfully be processed through a New York bank, the claimants ought to have disclosed that they would seek to do so during the course of the policy. He agreed that they should, but given the premise of the question, the answer, in my view, does not support the defendant’s case.

Taken as a whole, his evidence on this point supports the conclusion that the illegality was not something the claimants should have known about. Mr Devereese said that the rules were changing so much, and it was so difficult for underwriters to understand them, that in the latter part of 2010 the Lloyd’s market introduced exclusions putting Iran off limits altogether for vessels. I am inclined to agree with the claimants that, as a major insurer, the defendant had at least as much opportunity to appraise the effect of the US rules as they did as shipowners. In any event, I find that this part of the defendant’s non-disclosure case is not made out.

For the reasons set out above, the claimants are entitled to succeed in their claim. I am grateful to the parties for their assistance, and will hear them as to any orders consequential on this judgment.