PIRAEUS BANK AE v ANTARES UNDERWRITING LIMITED & Ors

THE ISSUE BEFORE THE COURT

This case concerns whether the prolonged detention of a vessel in Venezuela gave rise to a constructive total loss of that vessel under the owners’ war risks policy and if so, whether the mortgagees under a mortgagees’ interest policy of insurance can recover an indemnity in respect of their loss as assignees and loss payees under the owners’ war risks policy.

FACTUAL BACKGROUND TO THE DISPUTED LEGAL ISSUES

Piraeus Bank A.E. (“the Bank”) is a company incorporated in Greece, engaged in the business of providing banking and related services. It is the mortgagee of the vessel ‘ZouZou’ (“the Vessel”) and the assured under a Mortgagees’ Interest Insurance Policy bearing unique market reference B0618 B49016030 (“the MII Policy”).

The First to Twelfth Defendants are members of syndicates which underwrote insurance at Lloyd's for the 2014 year of account, and the Thirteenth Defendant is a U.S. insurance and reinsurance company, and they underwrote the MII Policy (collectively, “the Insurers”).

The managers of the Vessel were Opera S.A, the latter having entered into a Management Agreement on 14 May 2013 with the owner of the Vessel, Doran Navigation Inc (“the Owners”).

The Bank and the Owners entered into a first preferred mortgage dated 27 December 2013 (with addenda thereto dated 3 April 2014 and 22 August 2016) and a second preferred mortgage dated 27 December 2013 (with an addendum thereto dated 22 August 2016).

By a certificate of entry dated 22 December 2014 issued by the Hellenic Mutual War Risks Association (“the Club”), the Vessel was insured against war risks on the terms and conditions set out in the rules of the Club in force at the relevant time (“the Club Rules”), for the period 1 January 2015 to 31 December 2015 (“the War Risks Policy”). The War Risks Policy also incorporated, and was subject to, the terms of two notices of assignment dated 20 January 2010 in favour of the Bank (as first mortgagee and second mortgagee). The War Risks Policy and certificate of entry stated that the Club Rules and all contracts of insurance were subject to the Marine Insurance Act 1906 (“MIA”).

The War Risks Policy and certificate of entry also stated that a Letter of Undertaking dated 29 February 2012 from the Club to the Bank remained valid and in place. The Letter of Undertaking dated 29 February 2012 in respect of the first mortgage: (a) recognised and consented to the notice of assignment dated 20 January 2010 made by the Owners; (b) undertook to hold the benefits of the insurance and any renewal to the Bank’s order; and (c) incorporated into the certificate of entry a loss payable clause under which “claims payable hereunder exceeding USD 500,000 and those payable in respect of an actual, constructive, arranged, agreed or compromised total loss shall be payable to the First Mortgagee(s), and all other claims shall be paid to the shipowner unless and until the Association has received notice in writing from the First Mortgagee(s) of a default under the First Mortgage in which event all claims shall be payable to the First Mortgagee(s).” By a separate Letter of Undertaking dated 29 February 2012, references to the first mortgage were replaced by references to an identically-worded second mortgage.

The Bank was accordingly the assignee of the War Risks Policy, which had an agreed value in respect of hull and machinery of US$44,000,000 and an increased value of US$11,000,000. The Vessel was therefore insured for a total value of US$55,000,000.

The War Risks Policy insured the Owners of the Vessel against loss or damage caused by (inter alia):

The War Risks Policy contained a deeming provision under Rule 3.14.2, whereby if the Vessel was detained for more than 12 months, the Owners would be deemed to have been deprived of possession without any likelihood of recovery:

The War Risks Policy also included the following exclusions:

Pursuant to the terms of the MII Policy, the Insurers agreed to insure the Bank to cover all vessels mortgaged to and declared by it under the policy during the period from 1 July 2014 to 30 June 2015 inclusive. The MII Policy incorporated Mortgagees’ Interest Insurance Wording as per Master Cover no. B49001118 (“the MII Wording”).

The Bank made a declaration dated 23 January 2015 under the MII Policy in respect of the Vessel as well as another vessel, the Marios G, for the period of 12 months from 20 January 2015 inclusive, subject to specified sums insured. The sums insured were amended by endorsement no. 140 dated 23 August 2015 with effect from 4 July 2015, so as to read:

The MII Policy contained the following description of the type of insurance:

The MII Policy also contained the following definition of ‘Interests’:

Pursuant to Clause 1 of the MII Wording, the MII Policy was “to indemnify the Insured for loss of, or damage to, or liability arising in connection with the Vessel.

The measure of indemnity payable under the MII Policy, in the event of a valid claim, is calculated in accordance with Clause 4(i) of the MII Wording as follows:

Clauses 4(ii) and (iii) of the MII Wording then provide as follows:

I find the following facts as regards the detention of the Vessel in this case.

On 16 August 2015 the Vessel called at Puerto La Cruz, Venezuela, in order to load a cargo of high sulphur diesel oil (“HSDO”).

Pursuant to a time charterparty between the Owners and Transportes del Alba Inc (“Transalba”), that was entered into (or extended) on 8 May 2015, the Vessel was chartered for a period of approximately 24 months for the carriage of all lawful merchandise, including clean petroleum products. Transalba is understood to be a joint venture between Petróleos de Venezuela S.A. (“PDVSA”), through its affiliated company PDVSA Cuba S.A., and Internacional Maritima S.A., a Cuban entity.

Pursuant to a sub-charter between Transalba and PDVSA also entered into on 8 May 2015, Transalba sub-chartered the Vessel to PDVSA for a period of approximately 24 months for the carriage of all lawful merchandise, including clean petroleum products.

The Voyage Orders dated 19 August 2015 show that the orders were to load, in Puerto La Cruz, 80,000 barrels (+/- 10%) of HSDO and 40,000 barrels (+/- 10%) of ultra low sulphur diesel oil and to carry the cargo to PDVSA’s terminals at El Palito and Punta Cardon, Venezuela respectively. It was, therefore, a carriage to be performed internally within Venezuela.

After arrival at Puerto La Cruz, the Vessel discharged her previous cargo at the load port, and unloading operations were completed at 2030 hours local time on 20 August 2015, when the Vessel tendered notice of readiness.

At 0315 hours on 21 August 2015, the Vessel commenced loading the HSDO, which was completed by 0045 hours on 22 August 2015. However, during the loading operation, HSDO entered into the Vessel’s No. 6 cargo tanks. The Cargo Distribution Plan prepared on 20 August 2015 shows that only tanks numbers 1 and 2 were intended to have fuel cargo in them.

After the completion of loading, the Vessel’s Master sent an email to PDVSA and others, in which he stated, with reference to the HSDO, “pls find below ships/bl figures with applied [Vessel Experience Factor] after loading at Puerto La Cruz”. The figures were as follows (with “NBBLS” meaning net barrels): “SHIPS FIGURE: 88,563.05 NBBLS” and “B/L FIGURE: 80,158.0 NBBLS”, with the difference being “8,405.05 NBBLS” (which was in the order of a 10.486 percentage difference). The Master’s message concluded with the request: “Pls revert authorization / instructions to sign BL’s”. PDVSA did not reply to this message.

On 22 August 2015, during an inspection performed by an inspector for the Autonomous Service of Measurements and Hydrocarbons (“ASMH”), a body which is part of the Venezuelan Ministry of Oil and responsible for monitoring the procedure and operations relating to oil trading in Venezuelan shipping terminals and ports, it was noticed that the Vessel’s No. 6 tanks had been loaded, despite their not having been nominated for loading. The apparent irregularity was reported to the PDVSA Protection and Loss Control Office, East Refinery (“PLCO”). On or about 0730 hours local time, the PLCO reported the apparent irregularity to the Bolivarian National Guard.

Venezuelan law enforcement officials accordingly became aware that there was HSDO unaccountably present in the Vessel’s No. 6 tanks.

At 16:00 local time on 22 August 2015, ‘Irregularity Minutes’ (‘Acta de Irregularidad’) relating to “Irregularity in the final inspection of the M/T ZouZou”, were issued by the Co-ordinator of the Guaraguao Terminal, Eastern Region of the ASMH, which concluded that “an illegal loading is found on lateral tanks 6 with the volume of 12286 barrels”.

Later that day, Venezuelan law enforcement officials apprehended seven individuals in connection with the apparent irregularity in relation to the HSDO which had been loaded, comprising three employees of PDVSA who had been involved in the loading operation (Mr Victor Manuel La Rosa Vargas, Mr Miguel Jose Garcia Lopez and Mr Freddy Antonio Briceno Aguilera), the Vessel’s Master (Mr Don Bastian Tio) and three other crew members (Mr Eric Ortilla Cortez (Chief Officer), Mr Jerusalem Untaran Salcedo (Second Officer), and Mr Marlon Javier Cabrera (Bosun)) (collectively, “the Criminal Defendants”). On the same day (22 August 2015), the Vessel was detained by the Bolivarian National Guard in Guaraguao, Puerto La Cruz.

On or about the same date, Clyde & Co (Venezuela) was instructed by the Vessel’s P&I Club (the London Steamship Owners Mutual Insurance Association Ltd) to represent the Owners’ interests locally, and in particular to seek to secure the Vessel’s release.

The crew members’ phones were seized on 22 and 23 August 2015.

On 23 August 2015, a documentary and physical inspection of the Vessel was conducted on behalf of the Venezuelan prosecutors (“the Prosecutors”) and a technical report dated 24 August 2015 was prepared by a marine surveyor, Mr David Ramírez, for that purpose. This was “a report on the condition of cargo tanks”, which found that “a total volume of 75,347.19 barrels of high sulphur diesel product, and 11,861.35 barrels of the same product in port and starboard cargo tanks no. 6 were registered, which differs from the cargo distribution plan prepared before the start of operations”.

On 24 August 2015, Ms Osmarlenys Lopez, a surveyor from the ASMH, was interviewed at 1145 local time by Sub-Inspector Mario Bello of the Bolivarian Intelligence Service. Two other officers of the ASMH, “Rafael” and “Alfredo”, were interviewed on 25 August 2015. In an interview statement dated 24 August 2015, Ms Lopez stated that when she went to inspect the Vessel at about 0120 local time on 22 August 2015, she noticed that besides the Vessel’s No. 1 and 2 tanks, the Vessel’s No. 6 tanks were also loaded. She stated that when she sought to measure the Vessel’s No. 6 tanks, the officer of the Vessel asked her not to measure them, and subsequently, Mr Victor de La Rosa, the documentary supervisor and an employee of PDVSA, asked her not to say anything. She further stated that he said that his family had been threatened, and asked her to put the presence of HSDO in the No. 6 tanks down to being “an operational problem, due to an accident with a broken stitch in the diesel line”. Ms Lopez also stated that she understood that her colleagues, Leonardo Gamboa and José Alcala, had been offered bribes in connection with their investigation. This contrasts with the description given by the Master in his narrative statement of events dated 2 September 2015, where he notes that at 0306 local time on 22 August 2015, when asked by the chief officer if he could inspect the tanks, he told him that “it is not necessary because only 1 p/s & 2 p/s are loaded and the rest were empty. But if they insist then do so by all means.” (Footnote: ¹)

Following an arraignment hearing held between 25-27 August 2015, in the Court of Control No. 2 of the Criminal Judicial Circuit of the State of Anzoategui, Venezuela (“the Criminal Control Court”) Judge Molina ordered on 27 August 2015 (“the Detention Order”) that:

On 31 August 2015, the First Instance Criminal Control Court of Barcelona ordered that the Vessel be moved from berth No. 1 of the marine terminal of PDVSA Guaraguao, to No. 6 anchorage in Pozuelos Bay, where it would be anchored with the crew member defendants on board, under the custody of the Coast Guard.

On 4 September 2015, Clyde & Co (Venezuela) filed an appeal (on behalf of the accused Criminal Defendants) against the Detention Order to the Second Criminal Control Court of First Instance. Ms Cristina Mujica (“Ms Mujica”), an associate at Clyde & Co (Venezuela), gave evidence before this court that the focus of the appeal was upon the fact that there was a “total absence of criminality” on the part of the Criminal Defendants. Ms Mujica explained that, in respect of the criminal offence of smuggling, the “total absence of criminality” (no criminal intent) was demonstrated by the fact that the material that was supposed to be smuggled (i.e. fuel) had never left the country. The Vessel was only granted a special permission of cabotage and, therefore, could not have been engaged in smuggling fuel from Venezuela.

During the 45-day preliminary investigation period allowed under Venezuelan law after the Detention Order, Clyde & Co (Venezuela) submitted a total of seven requests to the Prosecutors for evidence under Article 287 of the Venezuelan Criminal Procedure Code 2012 (Footnote: ²). On 25 September 2015, Clyde & Co (Venezuela) issued Requests 1, 2 and 3, requesting the Prosecutors to pursue certain lines of inquiry. On 28 September 2015, a fourth request was issued by Clyde & Co (Venezuela), and on 30 September 2015, a fifth request was issued.

On 30 September 2015, Mr Rodolfo Mata of the Orinoco Surveying Group C.A. (“Orinoco”) conducted an inspection on board the Vessel, with assistance from the Vessel’s Master and Chief Officer, but in which the Prosecutors did not participate. Orinoco issued a report of its findings on the same date (“the Orinoco Report”), which remarked upon the deviation of the HSDO into the No. 6 tanks as follows:

On 1 October 2015, a sixth evidential request was submitted to the Prosecutors by Clyde & Co (Venezuela).

In an email dated 2 October 2015, it can be seen that the contemporaneous assessment of Clyde & Co (Venezuela) was that the Prosecutors were convinced that the crew had been involved in the smuggling of fuel.

On 5 October 2015, Clyde & Co (Venezuela) submitted a brief petitioning the Prosecutors for the release of the Vessel. However, Ms Mujica accepted in cross-examination that (as is also agreed by the expert witnesses) only the criminal judge (and not the Prosecutors) had the power to revoke, modify or lift a detention order, but that she was seeking to persuade the Prosecutors voluntarily to request the Court to release of the Vessel.

On 7 October 2015, a seventh evidential request was submitted by Clyde & Co (Venezuela) in order to file with the Prosecutors the Orinoco Report. On the same day, Clyde & Co (Venezuela) also submitted a brief requesting the dismissal of the case in respect of the accused crew members.

All seven of the requests for evidence submitted by Clyde & Co (Venezuela) refer to this phase being essentially of “research and investigation”. A number of the requests, or at least parts thereof, required investigation of the Vessel:

Other requests for evidence submitted by Clyde & Co (Venezuela) included the following:

Ms Mujica accepted that when she was making these requests, the view of Clyde & Co (Venezuela) was that the Vessel was essential to the investigation up to 9 October 2015:

On 9 October 2015, the Prosecutors issued a joint Accusation Brief (“the Accusation Brief”) which was filed on 10 October 2015, in which they formally charged the Criminal Defendants with the offences referred to in paragraph 35(i) above, and requested the Criminal Control Court to continue its preventive seizure of the Vessel. This was a “foreseeable outcome” to Clyde & Co (Venezuela), as noted in an email from Mr Fernandez-Concheso (a partner in the firm’s maritime team) dated 14 October 2015.

Before me, both parties called evidence from eminent professors of Venezuelan law. The Bank adduced evidence from Professor Gómez (Footnote: ⁴), and the Insurers adduced evidence from Professor Ortiz (Footnote: ⁵). I found both expert witnesses to be thoughtful and helpful. Both of the expert witnesses were agreed that no further order of the Criminal Control Court was required in order to continue the seizure of the Vessel. Rather, in the absence of any application to lift the detention, it would remain in place.

It is common ground that at the date of the filing of the Accusation Brief, the Owners had not been charged with any offence, and there was no mention of any connection between the Owners and the alleged criminal conduct. However, the Accusation Brief expressly left open the possibility of charging additional persons (which could include the Owners):

The Prosecutors also expressly made a reserve in the Accusation Brief, known as a ‘reserva fiscal’, informing the Court that “investigations continue to establish whether there is participation in the investigated facts”, and which the expert witnesses agreed would allow the Prosecutor to continue investigating in the criminal proceeding, to charge new persons (which could include the Owners) or to bring additional charges against those already accused.

In light of all these matters, it was put to Ms Mujica in cross-examination that, by the time of the issuance of the Accusation Brief on 9 October 2015, the Prosecutors could not possibly have carried out and concluded all of their investigations, including addressing all of the evidential requests submitted by Clyde & Co (Venezuela) and analysing the Orinoco Report (received just two days earlier), and that the Vessel must still have been considered essential to the investigation at this date.

Ms Mujica disagreed, stating that “some [of] this diligence of investigation can be performed in a couple of days or weeks”. In support of this, the Bank’s case was that:

Ms Mujica further observed in her evidence that (as per her email of 17 October 2015) Clyde & Co (Venezuela) could “file as many briefs as possible to the prosecutors and to the court to request the release of the Vessel since in strict legal terms the investigation is over and there shall be no need to maintain the detention of the Vessel”.

However, Ms Mujica conceded in cross-examination that the Prosecutors did pay attention to some of their requests, that Clyde & Co (Venezuela) did believe the Vessel was essential to the investigation when making the requests, and that the Vessel could be considered to still be essential to the investigation as at 9 October 2015 (Footnote: ⁶).

Professor Gómez also accepted in cross-examination that, in order for the Prosecutors to carry out the surveys and the simulated trans-shipment as requested in the requests submitted by Clyde & Co (Venezuela), the Prosecutors would need to have access to the Vessel.

In relation to the ‘reserva fiscal’ in the Accusation Brief, Professor Gómez gave evidence that this did not necessarily mean that the formal investigation was not closed. His evidence was that the filing of the Accusation Brief marked the conclusion of the preliminary investigation without establishing any connection between the Owners and the alleged crimes, since except for incidentally mentioning the Vessel as the place where the crime was committed (i.e. by using its tanks to store the alleged illicit fuel) and requesting the Court to use it as detention quarters for the arrested crew, the Accusation Brief said nothing about the possible involvement of the Owners in the alleged criminal activities or about the use of the Vessel for any illicit purpose. It was therefore his evidence and the Bank’s case that neither the Owners nor the Vessel had any further relevance to the investigation from that point onwards and that the Vessel should have been released, since neither of the two grounds for preventive seizure under Article 55 of the LAOC (i.e. investigation purposes and final confiscation) could be maintained, on the basis that the investigation phase had concluded, and the investigation could never turn into a final confiscation since the Owners were never to be tried.

However, as the Insurers point out, since the Prosecutors (i) themselves requested the continued detention of the Vessel; (ii) expressly left the investigation open; and (iii) had been requested shortly before the filing of their Accusation Brief to investigate a whole series of further matters by Clyde & Co (Venezuela), some of which related to the role of the Vessel in the alleged offence, I consider that it is difficult for the Bank to sustain the contention that at that point in time the detention of the Vessel was no longer essential to the investigation.

Aside from the fact that the Prosecutors were likely to have needed it in order to carry out at least some of the various evidential requests of the Owners (not least the trans-shipment simulation) and to consider the Orinoco Report (which raised fundamental new issues concerning the way in which the fuel got into the cargo no. 6 tanks and which required, no doubt, careful study even if it was only 5 pages in length), crucially, the Accusation Brief also expressly records the fact that, at this stage, the Prosecutors decided to “leave the investigation open in order to identify other possible perpetrators or participants” (which Professor Gómez accepted in cross-examination could have included the Owners). Yet further, the “reserva fiscal” expressly referred to the fact that “the investigations continue” in order to establish the participants in the investigated facts. It appears to me, therefore, that at this stage the Prosecutors had not yet finally determined whether to charge the Owners, and if that happened, the Vessel might also be required for confiscation purposes after trial.

In an email some 3 weeks later and dated 29 October 2015, Clyde & Co (Venezuela) explained to the Owners why the Prosecutors remained suspicious as to the involvement of other parties on board the Vessel at the relevant time:

The foregoing analysis must also be viewed in light of the fact that there has not been disclosure of the full Prosecutors’ file or all of the relevant documentation of Clyde & Co (Venezuela) concerning the merits (or demerits) of their various applications for the release of the Vessel.

Despite Professor Gómez’s assertion that it was not necessary to see the full Prosecutors’ file given they had the Accusation Brief “which is a very comprehensive document”, Mr Blackwood QC for the Insurers fairly made the point that the Accusation Brief is not “an encyclopaedic record of everything that the public prosecutors were doing” and pointed to an email from Ms Mujica dated 18 September 2015 where she notes that she had met the Prosecutors that day who “in the case of Zou Zou, have perform several surveys and gather most of the information… they are waiting for results from criminal labs, technical report, survey’s reports, phones, GPS and the master’s computer.” As these results are not referred to in the Accusation Brief (the only survey reports referred to are the Orinoco Survey and the report of Mr Ramirez – see paragraph 33 above), it appears that the results of those other surveys referred to by Ms Mujica were still being awaited at the time of issue of the Accusation Brief. Indeed, Professor Gómez accepted in cross-examination that the Accusation Brief “tells us nothing” about all of Clyde & Co (Venezuela)’s requests for further inspection and evidence, and whether and which surveys and tests were being performed.

In all the circumstances I find that it cannot be concluded that the Vessel was no longer essential for the investigation as at 9 October 2015 (and the same conclusion must apply to the Bank’s alternative, earlier date of 1 October 2015). Indeed, I consider that the Prosecutors justifiably considered that it remained essential to the investigation at that stage.

After the filing of the Accusation Brief, the next stage in the proceedings was for the Preliminary Hearing to take place before the court. However, on 29 October 2015, the Preliminary Hearing was deferred from 5 November 2015 until 25 November 2015. Subsequently, it appears to have been adjourned further to 12 February 2016.

On 2 November 2015, Clyde & Co (Venezuela) (acting on behalf of the accused crew members) submitted a response to the Accusation Brief (‘Submission on the Nullity of the Accusation’) to Judge Molina of the Criminal Control Court. The response also included a request for the preventive seizure order against the Vessel to be lifted.

On 13 November 2015, Mr Omar Franco Otavi (acting together with Clyde & Co (Venezuela) on behalf of the accused crew members) submitted an application to the Criminal Control Court for (i) the local reclusion of the accused crew members and (ii) the Vessel to be permitted to resume its cabotage operations, but this application was refused on 16 November 2015.

On 26 November 2015, Mr Idemaro Gonzalez Sulbaran (“Mr Idemaro Gonzalez”), Clyde & Co (Venezuela)’s local correspondent in Lake Maracaibo and head of the criminal team, filed with the Second Criminal Control Court of First Instance an appeal against the Detention Order on behalf of the Owners. In the Owners’ appeal, Mr Idemaro Gonzalez set out an analysis as to “the causes that demonstrate the lack of intentionality and non-participation of [the Owners] in the act which gave rise to the investigation”. In cross-examination, Mr Blackwood QC put to each of Ms Mujica and Professor Gómez that this analysis was not relevant to whether the Vessel was essential to the investigation, but that it was relevant to the factors concerning Owners’ intention to participate in the offence contained in Article 59 of the LAOC (Footnote: ⁷). Ms Mujica responded that “Article 59 has nothing to do with it” but at the same time accepted that, in this analysis, the Owners “took reference from certain aspects of Article 59”. Professor Gómez accepted that it “could be” relevant to the factors in Article 59 of the LAOC, but qualified this by emphasising that Venezuelan lawyers are often “carpet bombing the court by saying: by the way, I have nothing to do with this” to make clear their position that they have no criminal liability for what has happened. He suggested that one should not read too much into such statements. I do not agree: as will be seen below, the approach taken in this appeal is consistent with that taken in all relevant filings with the court in relation to the requested release of the Vessel.

On 17 December 2015, the Court of Appeals of the Criminal Judicial Circuit of the Anzoategui State dismissed the Owners’ appeal against the Detention Order.

On 12 February 2016, defence counsel for the Criminal Defendants attended the Criminal Control Court for the Preliminary Hearing, but the Prosecutors were not present. The preliminary hearing was accordingly postponed until 8 March 2016. On 8 March 2016, the preliminary hearing was postponed again because of the unavailability of the court file, it being located at the Appeals Court.

Between 11-13 March 2016, a partial crew change on board the Vessel – not including the Individual Defendants – took place. Six of the original crew members signed off, and two new crew members signed on. It is Ms Mujica’s evidence that “the crew’s presence on board was affecting the strategy for the release of the Vessel” and that “moving them was something that it was necessary to do for there to be any possibility of the Vessel being released”.

On 24 May 2016, Clyde & Co (Venezuela) filed a Third Party Motion on behalf of the Owners with the Criminal Control Court applying for the Vessel to be released from preventive seizure (“the Third Party Motion”).

The Third Party Motion is an important document. It expressly refers to Articles 293 and 294 of the OCCP (Footnote: ⁸) as the basis for the motion, and also referred to the Owners’ and charterer’s lack of knowledge, intent and participation in the alleged crime as follows:

The Third Party Motion also highlighted the Owners’ reputation and prestige, by stating that “my client maintained excellent commercial relations with the Venezuelan state enterprise (PDVSA)” and “The company I represent is a highly prestigious shipowner throughout the world and has not been involved in criminal acts of any kind; in Venezuela it has always maintained an impeccable conduct.”

In cross-examination, Professor Gómez accepted that such references to a lack of intent were not relevant to whether the Vessel was essential for the investigation but that they were relevant for the purposes of Article 59 of the LAOC (in particular, Articles 59.1, 59.2 and 59.4). However, he speculated that these references to lack of intent/participation might have been a strategic approach of the Owners to influence the court and he again said that Venezuelan lawyers commonly include statements in this type of application and that, therefore, one should not read too much into them. Once again, I do not agree: as will be seen below, the approach taken in the Third Party Motion is likewise consistent with that taken in all relevant filings with the court in relation to the requested release of the Vessel.

The Insurers raised questions as to why the Owners waited so long before filing its Third Party Motion on 24 May 2016, applying for the Vessel to be released from preventive seizure. The Bank’s response was as follows:

Although Ms Mujica asserts that the Third Party Motion was based primarily on Articles 293 and 294 of the OCCP rather than on Article 59 of the LAOC, the Third Party Motion was advanced on the basis that none of the investigative activities carried out by the Prosecutors involved the Owners, their shareholders, directors or legal representatives, and that there was a lack of evidence connecting the Owners and the crimes charged by the Prosecutors. It also contained three separate references to “lack of intent” of the Owners and their directors and alleged non-participation in the events that gave rise to the investigation, and specifically noted the “lack of intent in the execution of the fact that violated the regulation stipulated in the [LAOC]”. It was put to Ms Mujica that none of this was relevant to whether the Vessel was essential to the investigation. Ms Mujica conceded that that was so but that it “could be a part of an investigation for them to have proper knowledge of the reputation of the owners”.

I do not accept this attempted explanation. Indeed, the Third-Party Claim Ratification (“the Ratification Brief”) which was subsequently filed by the Owners (around the end of August 2016) (Footnote: ⁹) clearly demonstrates that the Owners’ Venezuelan lawyers had argued the Third Party Motion on the basis that release of the Vessel was governed by Article 59 of the LAOC. It is clear in my judgment and I find as a fact that, by their Third Party Motion, the Owners understood that it was necessary to satisfy the Court both of the criterion in Article 293 of the OCCP as well as any relevant criteria in Article 59 of the LAOC.

On 30 June 2016, the Owners made a claim for an indemnity under the War Risks Policy for the actual total loss (“ATL”) of the Vessel.

On 12 July 2016, the Club (acting by its solicitors, Norton Rose Fulbright LLP (“NRF”)) responded to the Owners’ letter, relying on a number of defences to the Owners’ claim, including the fact that:

The Club also reserved its right to avoid the variation of the War Risks Policy of 4 September 2015 (which was to cover calls by the Vessel and one other vessel in the same fleet as the Vessel to the Venezuelan Additional Premium Area) and the Vessel’s entry for 12 months at 1 January 2016 by reason of the failure to disclose the Vessel’s continued detention since August 2015.

On 19 July 2016, the Preliminary Hearing was deferred again, and re-scheduled for 10 August 2016 (although it did not ultimately take place on that date).

On 1 August 2016, the Owners (acting by their solicitors, Waterson Hicks) responded to the Club, stating (inter alia) that: “No action has been taken by the State or any public or local authority against Owners or the Vessel itself in respect of the prescribed Proceedings under Rule 3.5”. The Owners contended therefore that Rule 3.5 was of no application.

On 4 August 2016, the Club repeated its earlier defences per its letter of 12 July 2016 to the Owners.

On 16 August 2016, the Criminal Control Court ordered the commencement of the relevant proceedings relating to the Vessel. On the same day, the Criminal Control Court ordered that the Attorney General, the National Office Against Organised Crime (“ONCDOFT”) and PDVSA be invited to respond to the documents lodged by Owners in support of the Third Party Motion.

Shortly after this, the Ratification Brief was submitted by Mr Idemaro Gonzalez and Mr Fernandez-Concheso on behalf of the Owners. The Bank’s case is that this was filed with the court between 23 and 28 August 2016 or in any case around the end of August 2016 (which Ms Mujica inferred from emails which she said were sent during the time of drafting, although such emails were not disclosed). The Insurers’ case is that the Court’s Release Order dated 17 October 2016 suggests that the Ratification Brief was filed on 9 September 2016 (i.e. the same day on which the Prosecutor’s First Answer was filed) and that explains the change in the Prosecutor’s position between its First Answer (opposing the release of the Vessel) and its Second Answer (not opposing the release of the Vessel), by reason of the fact that the Owners had finally made the proper application satisfying the relevant factors set out in Article 59 of the LAOC. However, it does not appear that that is in fact correct as the reference in the Release Order to a document being filed on 9 September 2016 is rather, it appears, a reference to the Prosecutors’ First Answer to the Owners’ Third Party Motion.

I consider that there is no reliable documentary evidence as to when the Ratification Brief was filed. The most that can be said is that it appears, on balance, to have been filed sometime in late August/early September 2016.

In any case, what matters is what the Ratification Brief records. It is a critical document and it records the following:

It follows that the Owners specifically based their detailed application for release of the Vessel under Article 294 of the OCCP upon the criteria contained in Article 59 of the LAOC. Ms Mujica said in her evidence that this reference to the Article 59 “checklist” was a useful reference of considerations which lent weight to the return of the Vessel but that it was “just a reference”, and that it was known that this was not the procedure for obtaining the release of the Vessel. The Bank was likewise compelled to submit before me that whatever is said in the Third Party Motion or the Ratification Brief, these are “just arguments being put forward by the owners to try to get their vessel out… and they are marshalling such arguments as they can think of to achieve that end” and are not “of overwhelming relevance”.

I reject this submission and Ms Mujica’s evidence on this point. These contemporaneous documents are the best evidence as to how the Owners understood the law to operate in Venezuela. Clyde & Co (Venezuela), and Ms Mujica, are experienced practitioners in this area of the law (i.e. releasing vessels from preventative detention in Venezuela) and the way in which they articulated their case under Venezuelan law in the two most important documents which they put before the court (i.e. the Third Party Motion and the Ratification Brief) shows their understanding, and is a sound guide, as to how the law in Venezuela operates. I shall return to this below.

On 9 September 2016, the Prosecutors filed the First Answer to the Third Party Motion, in which they requested that the Court dismiss the Third Party Motion and ratify the preventive seizure of the Vessel. The First Answer suggests that investigations were still ongoing in respect of the role of the Owners about whose involvement in the alleged offence the Prosecutors still had suspicions. The Prosecutors made the following points:

Despite the foregoing, the Bank denies that the Prosecutors confirmed that the investigation was still ongoing and aver that, rather, the investigation had concluded by 9 October 2015 at the latest. I do not accept that contention. It is clear from the First Answer that the Prosecutors still considered the Vessel to be essential to the investigation, not least because they were still not convinced of the Owners’ innocence.

Indeed, although Professor Gómez resisted the proposition that detention of the Vessel was “essential” to the investigation by this stage, he accepted that the Vessel “may continue to be important to investigate” as “there could be evidence that could stem from the Vessel”. I consider that the distinction that Professor Gómez seeks to draw between the detention being “important” and being “essential” is unsustainable on the facts. I consider it to be perfectly clear that at the time when the Prosecutors filed their First Answer to the Third Party Motion, they were still investigating the Owners’ involvement in the alleged crime which they had by no means ruled out, and it could not be said at that stage that the Vessel was no longer essential to the investigation.

On 12 September 2016, Clyde & Co (Venezuela) made an application on behalf of the Owners requesting ratification of the notification of the Third Party Motion to ONCDOFT. The Owners must therefore have considered ONCDOFT’s opinion to be important.

On 14 September 2016, Hill Dickinson LLP (“Hill Dickinson”), the solicitors acting for the Bank at the time, notified the Insurers by way of a letter (c/o the broker, Bankserve) of “a potential claim under the MII Policy in respect of the [Vessel]” on behalf of the Bank. The letter stated that it “seems likely ... that War Risks Underwriters will decline liability”.

On 19 September 2016:

On 29 September 2016, ONCDOFT filed its “non-binding opinion” (“the ONCDOFT Opinion”) in relation to the Owners’ Third Party Motion. This opinion also confirms that any request seeking the release of the Vessel needed to comply with the criteria contained in Article 59 of the LAOC:

The ONCDOFT opinion noted that no responsibility was attributed to the Owners in the Accusation Brief: “the … practice … to require from the Public Prosecutor’s Office a pronouncement on whether the ZouZou tanker is essential for the investigation or for the culmination of the criminal process (Footnote: ¹²), since in the conclusive act, it is not indicated, nor is any responsibility attributed to the applicant”. This statement also appears to recognise that the issue of the return of the Vessel falls to be considered both at the stage when it is no longer essential to the investigation and also at the end of the trial (but only if the owner of the asset is charged, and that was not the case here) when the issue of its confiscation arises.

The ONCDOFT opinion concluded by stating that the preventive seizure did not infringe the Owners’ right to property given that it is “of a preventive nature and therefore does not prejudge the ownership of the right to property, so that it will be at the end of the investigation phase or, failing that, through the final judgment that it will be determined to whom the property belongs, if it was an object linked to the commission of the crime, and if it belongs to the person or persons found criminally responsible.”

As regards the express references to Article 59 of the LAOC in the ONCDOFT opinion, Ms Mujica suggested in her evidence that such references are simply to the considerations but not to the appropriate procedure in Article 59 of the LAOC for the return of the Vessel, which she maintains is afforded only under Articles 293 and 294 of the OCCP. I do not accept that evidence. It is clear that ONCDOFT, consistently with the Owners’ own Third Party Motion and Ratification Brief, considered that the criteria set out in both Article 293 of the OCCP and Article 59 of the LAOC were the relevant criteria which the Court had to consider in determining whether or not to return the Vessel. I further consider that the appropriate procedure for applying for the release of the Vessel is contained in Article 294 of the OCCP, as discussed below.

Ms Mujica further suggested that it is irrelevant that the ONCDOFT opinion relied on Article 59 of the LAOC in its analysis given that ONCDOFT had no standing “in the procedures or the process of the detention or any of the criminal procedure itself”, it being simply an administrative entity charged with custody of detained assets. The expert witnesses likewise agreed that the opinions or briefs filed by ONCDOFT are not binding on the Court. Indeed, the ONCDOFT non-binding opinion itself also notes that as ONCDOFT is not a party to the present case, it cannot respond, much less provide evidence, since its only function is the custody, safekeeping, maintenance, conservation, administration and use of all assets seized preventively.

However, despite being non-binding, firstly the ONCDOFT opinion appears to have been taken into account by the Court in reaching its decision on the Release Order (which contained a discussion of the ONCDOFT opinion – see infra); and secondly, (per Professor Ortiz’s evidence) the opinion of ONCDOFT is significant as it is the highest governmental agency connected to the custody of those assets. Indeed, it is clear that the Owners themselves were keen to ensure that ONCDOFT’s opinion was obtained, and the ONCDOFT opinion is directly responsive to the Owners’ own Third Party Motion which (together with the Ratification Brief) itself analyses the law in the same way.

On the same day (29 September 2016) and three weeks after it had filed its First Answer opposing the release of the Vessel, the Prosecutors filed a Second Answer (“the Second Answer”) in which they stated that they were no longer opposed to the release of the Vessel back to the Owners due to the following factors, which is suggestive of an Article 59 LAOC analysis:

On 3 October 2016, the Owners tendered their Notice of Abandonment to the Club (“First NOA”), claiming an indemnity for a constructive total loss (“CTL”) of the Vessel under the War Risks Policy, without prejudice to the validity of their contention that the Vessel was already an ATL. They referred to the fact that the Vessel had been detained “since on or around 28 August 2015”. As is frequently the case, the First NOA sought to align the date of the First NOA with the date of the commencement of proceedings against the underwriters, by asking that the Club “confirm that you agree as customary to the Owners being placed in the same position as if a Claim Form had been issued this day”.

On 5 October 2016, the Court set a new date, of 20 October 2016, for the holding of the Preliminary Hearing.

On 10 October 2016, Clyde & Co (Venezuela) submitted an evidence brief on behalf of the Owners in support of the Third Party Motion.

On the same day (10 October 2016), the Club rejected the First NOA but agreed to place the Owners in the same position as if a claim form had been issued on 3 October 2016, subject to certain caveats, including reserving its position as to (i) the application of Rule 3.14.2 of the Club Rules (relating to whether there was a deemed CTL) and the Owners’ entitlement to rely on the same; and (ii) whether the NOA was given “with reasonable diligence after the receipt of reliable information” in accordance with section 62(3) of the MIA. The Club also denied that, by reason of the above agreement, it had any greater exposure to claims for interests and costs (if any) at or from 3 October 2016, than it would otherwise have had.

On 17 October 2016, the Criminal Control Court granted the Third Party Motion for the release of the Vessel (“the Release Order”), and ordered that the preventive seizure be lifted. The expert witnesses agreed that the Release Order did not state that the preventive detention of the Vessel was incorrect or unlawful ab initio; nor did the Release Order declare unlawful the detention or continued detention of the Vessel, but simply released it from detention. The Release Order did not contain any suggestion of any breach of duty by the Prosecutor. Nor did the Release Order contain any analysis of when the Vessel no longer became essential to the investigation, although it did say (as is formally the position) that the investigation phase concluded with the filing of the Accusation Brief by the Prosecutor (and the Owners were not charged in the Accusation Brief). There was also no express reference to Article 293 of the OCCP.

Whilst drafted in a somewhat convoluted manner, when one looks to the substance of the Release Order, particularly in the context of the submissions made to the court, it is tolerably clear in my judgement that in deciding to release the Vessel the court relied upon the criteria in Article 293 of the OCCP and Articles 55 and 59 of the LAOC. I find that that is so by reason of the following.

At the outset, the Release Order refers to the chronology of events and significant documents, notably, the ONCDOFT opinion (which in turn refers to Articles 55 and 59 of the LAOC), the Prosecutor’s Second Answer (which in turn refers to Article 294 of the OCCP), and the Accusation Brief (which in turn refers to Article 55 of the LAOC).

The Bank accepts in paragraph 204 of its written closing submissions, as it must, that the Court did not need to refer to Article 293 of the OCCP because together with Article 294 of the OCCP, that was the basis on which the Third Party Motion was expressed to be made. The Release Order noted the following in its discussion of the Accusation Brief:

This analysis appears to contain elements within it of the criteria contained in both Articles 55 and 59 of the LAOC.

The Release Order expressly referred to, and addressed, the criteria of Article 55 of the LAOC, adopting the Article 55 terminology of “illicit origin” in noting that:

Whilst there is no express reference in the Release Order to Article 59 of the LAOC (other than when referring to the ONCDOFT non-binding opinion which in turn refers to this article) and instead there are references to Article 58 of the LAOC (Footnote: ¹⁵), it is clear to me when considering the substance of the Court’s analysis that Article 58 is an erroneous reference for Article 59.

In particular, the Release Order stated that:

These are Article 59 references.

Professor Gómez agreed in cross-examination that the references in the Release Order to Article 58 (rather than Article 59) “doesn’t seem to flow”. I therefore accept the Insurers’ contention that the references to Article 58 in the Release Order are erroneous and that the court intended to refer to Article 59 for the following further reasons:

Whilst the Bank accepts that the Release Order refers to the intent of the Owners, it argues that the Release Order does not say that that was the reason for its decision. The Bank argues that the Release Order does not rely on, or consider, Article 59 of the LAOC and that the Court only gives two reasons for the release of the Vessel – firstly, that there would be no charge brought against the owner, and secondly, the investigation had come to an end with the Accusation Brief – and that it relies upon Article 115 of the Venezuelan Constitution as a constitutional reason for why this property should be returned. I do not accept this submission. I agree with Professor Ortiz that it is implicit in the Release Order that the court is considering the application of Article 59 of the LAOC, and that the court considered many other factors beyond the Vessel no longer being required for an investigation by the Prosecutor, and the lack of an allegation against the Owners.

It was put to Professor Ortiz by the Bank that, in the Release Order, the Control Court indirectly or implicitly found that the continued detention of the Vessel was unlawful and an infringement of Article 115 of the Venezuelan Constitution, given the failure by the Prosecutors to identify any reasons for the continued detention of the Vessel in circumstances where the investigation had been completed and where there was a lack of an allegation of criminal wrongdoing against the Owners. In rejecting this suggestion, Professor Ortiz pointed out that there is no concept of a declaration of illegality or unconstitutionality by implication under Venezuelan law and that was not what the Court was doing in its Release Order; rather, it was applying the Article 59 criteria. I accept Professor Ortiz’s evidence on this.

I also accept the Insurers’ case that the release of the seized asset in this case was relatively speedy for Venezuela, as the case had not yet even reached a preliminary hearing (which was not held until February 2017), and that in this case – which concerned the alleged smuggling of a small amount of fuel (i.e. 12,000 metric tonnes), with the Vessel being released from detention relatively quickly – there is insufficient evidence to suggest that the Vessel was being detained for political reasons as Ms Mujica tentatively suggested in her evidence, and even less to suggest that the detention was upon the orders of the President of Venezuela.

On 7 November 2016, the Criminal Control Court notified ONCDOFT of the order for the Vessel’s release.

On 12 November 2016, port clearance for the Vessel was obtained and a Certificate of Delivery (confirming the delivery of the Vessel to Mr Idemaro Gonzalez on behalf of the Owners) was issued by the Regional Coordinator of ONCDOFT, and the Vessel was returned to her Owners.

On 16 November 2016, the Owners served a further Notice of Abandonment to the Club (“Second NOA”), claiming an ATL or alternatively a CTL, without prejudice to the validity of their contention that the Vessel was already an ATL or CTL. The Second NOA also notified the Club that the Vessel had been released and had sailed from Venezuela on 13 November 2016. The cover message to the Second NOA stated (inter alia) that:

On 23 November 2016, the Club rejected the Second NOA, agreeing to place the Owners in the same position as if a claim form had been issued on 16 November 2016 (subject to the same caveats as set out in its letter of 10 October 2016). Describing “a clear pattern of non-compliance with Rule 25.1”, the letter stated that this raised not simply a question as to whether the Directors of the Club should exercise their discretion to pay the claim, but also an issue as to whether the Owners’ cover was liable to be avoided for material non-disclosure.

On 24 November 2016, Hill Dickinson wrote again to Kennedys informing them that the Vessel had been released on 13 November 2016, but that the Vessel's Owners were still pursuing their claim for the actual and/or constructive total loss of the Vessel. The letter stated “we remain of the view that cover will likely be declined”.

On 16 December 2016, it having become apparent from correspondence between Waterson Hicks and NRF (that the writer had obtained) that “War Risks Underwriters will deny liability for Owners' claim for an actual/constructive total loss”, Hill Dickinson formally presented the Bank’s claim under the MII Policy in respect of the Vessel to the Defendants.

By a letter dated 16 March 2017, the Club gave notice that they were avoiding (inter alia) the War Risks Policy owing to the Owners' alleged non-disclosure of the Vessel's calls into an Additional Premium Area (and the Owners’ lack of a satisfactory explanation relating thereto) which amounted to “repeated breaches, over a substantial period of time, of Rule 25”, and it accordingly declined the Owners' claim under the War Risks Policy. The letter stated that the “pattern of non-declarations was a material circumstance which should have been disclosed to [the Club] prior to renewal into 2015 and into 2016, and that, had disclosure been made, cover would not have been permitted to renew into 2015 nor into 2016”.

Subsequently, on 30 August 2019, the Trial Court of Barcelona issued a judgment, acquitting the Criminal Defendants of both alleged crimes. The Trial Court found that the evidence offered by the Prosecution fell short of providing sufficient certainty to the Court of the culpability of the accused, stating that “it was possible to determine the lack of culpability of the accused, which tips the balance in their favour”.

The claim form in these proceedings was issued by the Bank on 22 May 2020 and served on 11 June 2020.

DETENTION OF VESSEL FALLS WITHIN THE WAR RISKS EXCLUSION

In my judgment, the starting point in the analysis of the issues in dispute is, as the Insurers suggest, to determine whether there would have been cover under the War Risks Policy for the detention of the Vessel.

The Insurers’ submission is that any loss caused by the detention of the Vessel would have been excluded by Rule 3.5 of the Club Rules. I accept that submission for the reasons which follow.

In The B Atlantic (No. 1) [2012] Lloyd's Rep IR 363, [22]-[25], Hamblen J (as he then was) considered exclusion 4.1.5 in the Institute War and Strikes Clauses 1.10.83 (“This insurance excludes loss, damage, liability or expense arising from arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations”). The case concerned the detainment of a vessel by the Venezuelan authorities after the discovery of three large bags of cocaine weighing 132kg which had been strapped to the hull of the vessel below the waterline. It was common ground that the claimant-shipowners knew nothing about the drugs which had been strapped to the vessel as a result of a malicious act by a third party. The underwriters accepted that the vessel was a CTL but relied upon exclusion 4.1.5 (by reason of the infringement of customs regulations). The claimant took issue with that and also alleged that the detention of the vessel following investigation was contrary to local law and that this broke the chain of causation between the infringement of the customs regulations and the detention of the vessel.

Hamblen J first set out a number of general principles derived from the authorities in which similar exclusions in the Institute War and Strikes Clauses had been considered, which general principles I consider also apply in the present case:

I shall return to the facts of the B Atlantic below.

In the present case, the relevant exclusion, Rule 3.5 of the Club Rules, provides as follows:

The “action” out of which the detention arose was the Detention Order of the Venezuelan Control Court made on 27 August 2015.

The detention of the Vessel was made by the Control Court under Articles 4.4 and 55 of the LAOC. The Vessel was accordingly detained by an order of a Venezuelan criminal court applying what it considered to be Venezuelan law. On an ordinary and business-like interpretation of Rule 3.5.1 of the Club Rules, it would therefore appear that that the Detention Order was made “under” the criminal law of Venezuela within the meaning of the Rule.

The Bank submits, however, that the Vessel was not detained “under the criminal law of” Venezuela under Rule 3.5.1 of the Club Rules. Rather, it contends, its detention was made pursuant to two provisions of the LAOC (Articles 4.4 and 55) which did not legislate as to what constituted an offence and which permitted preventive seizure of assets owned by parties “without participation in [offences under the Act]”. Accordingly, the Bank submits, the detention was not under but incidental to that criminal law.

I do not accept that submission. The preventive seizure of the Vessel under Article 55 of the LAOC occurred because it was alleged that the Vessel had been “used in the commission of the offence investigated in accordance with this Law” (i.e. a conspiracy to smuggle fuel), the law being the criminal law, viz the LAOC. The purpose of the LAOC is to “prevent, investigate, prosecute, classify and sanction crimes related to organised crime and the financing of terrorism”. The seizure was accordingly made by a criminal court under and in accordance with the criminal law of Venezuela, within the meaning of Rule 3.5.1 of the Club Rules.

Furthermore, the action was taken on the grounds of an alleged contravention of the laws of Venezuela, namely Article 37 of the LAOC (Footnote: ¹⁶), by four members of the crew and three employees of PDVSA, thereby also engaging Rule 3.5.2 of the Club Rules. I do not accept the Bank’s submission that Rule 3.5.2 is not engaged because there was no allegation that any non-criminal law had been contravened. Adopting the approach to the construction of the exclusions described by Hamblen J, I do not consider that Rule 3.5.2 requires to be read narrowly as limited to non-criminal laws. Whilst, depending on the facts of a particular case, there may be some degree of overlap between Rules 3.5.1 and 3.5.2 if the Insurers’ construction of this rule is to be preferred, equally there will be areas where the provisions do not overlap. There is a sensible distinction to be made between action taken under the criminal law (for example, seizure of property used in the commission of a crime under a criminal law) and action taken on the grounds of an alleged contravention of criminal law but not under the criminal law (for example, a civil injunction to restrain a breach of the criminal law).

Contrary to the Bank’s submission, the heading of the clause “Exclusion of claims arising out of criminal and other proceedings” is perfectly consistent with this construction and, in any event, “other proceedings” also naturally refer to proceedings where (the separate and different) Rules 3.5.3 and 3.5.4 are engaged.

The Bank further submits that Rules 3.5.1 and 3.5.2 presuppose that the owner of the insured vessel must be guilty or alleged to be guilty of an offence under the relevant criminal law in order for those rules to apply. Since the Owners were not (ultimately) accused by the Prosecutors in this case of having committed a criminal offence, the Bank maintains that the exclusions do not apply. Similarly the Bank submits, the only relevant contravention under Rule 3.5.2 is an alleged contravention by the Owners themselves; but it was not alleged at the time of the initial detention of the Vessel, or at any subsequent time, that the Owners had contravened any law.

I do not accept these submissions. There is nothing in the language of Rules 3.5.1 and 3.5.2 to suggest that they should be read as only applying when the Owners are themselves accused of a crime or contravention of the law. Indeed, where a vessel is preventatively seized, it may not be possible in any particular case to determine whether the owner, or indeed someone else, is guilty of the offence. Preventive seizure is necessary where it is believed that the property has been used in the commission of an offence being investigated under the LAOC, regardless of the issue of ownership.

The Bank’s proposed limitation would also be inconsistent with the approach adopted in The B Atlantic (No. 1) at [34]-[47] where Hamblen J rejected a similar argument in connection with the meaning of clause 4.1.5 of the Institute War and Strikes Clauses 1.10.83 (applying The Kleovoulos of Rhodes [2003] 1 Lloyd's Rep 138), stating (at [36]) that “Clause 4.1.5 does not say that the “infringement of … customs … regulations” is one to which owners, their servants or agents must be privy, or in which they must be complicit”. The decision was not appealed on this point, but in the Supreme Court, Lord Mance stated that he agreed with Hamblen J: see [2019] AC 136 at [51].

The Bank submits that the B Atlantic does not provide a helpful analogy because, as Hamblen J noted, “the starting point must be the words of the exclusion” (at paragraph 35), and here – unlike in The B Atlantic – the word “owner” actually appears in the exclusion (which provides that “An owner … is not insured for any loss” on the relevant grounds). However, I do not consider this to be a material point of distinction. The reference in Rule 3.5 to “[a]n Owner” is merely descriptive of the assured (“the Owner of an Entered Ship”). The clause is making clear that the insurance which is afforded to that owner-assured excludes loss, damage, liability, cost and expense arising out of action taken by any state under the criminal law of any state. The clause does not state that the owner is not insured for action taken against it under the criminal law of that state, or for an alleged contravention of the law by it. Indeed, this is confirmed by the fact that every exclusion in the Club Rules (Rules 3.1 to 3.9) begins “An Owner of an Entered Ship is not insured…”.

It is common ground between the parties that the making of the Detention Order itself was lawful (Footnote: ¹⁷) and that no further order of the Court was required to maintain the detention of the Vessel, which remained in effect until it was lifted, modified or revoked by the court itself (Footnote: ¹⁸). In the circumstances, I find that the loss would have fallen within Rules 3.5.1 and 3.5.2 of the Club Rules (with the Detention Order being the proximate cause of the detention of the Vessel) unless the Bank was able to show that from a certain point in time the Vessel became unlawfully detained by the law of Venezuela. If the Bank is able to show that, then it will be open to it to argue that any period of detention thereafter does not fall within the scope of the exclusion (Footnote: ¹⁹) because it did not take place under the criminal law of Venezuela or on the ground of any alleged contravention of the laws of Venezuela. However, even then the Insurers maintain that a bona fide error in applying the law would not break the chain of causation absent perversity. I address these arguments below.

PROPER CONSTRUCTION OF VENEZUELAN LAW PROVISIONS

Before considering this issue by reference to the facts (which are set out above), it is necessary first to consider the proper construction and application of the relevant provisions of Venezuelan law under the LAOC and the OCCP.

As has been explained, Article 55 of the (2012) LAOC was the legal basis on which the Control Court detained the Vessel on 27 August 2015. This provision provides:

Further, Articles 58 and 59 of the LAOC provide as follows:

“Assets” are referred to in Article 4(4) and defined in Article 4(6) of the LAOC as follows:

Articles 293 and 294 of the OCCP provide as follows:

Article 111 of the OCCP further provides as follows:

The predecessor to Article 55 of the (2012) LAOC, namely Article 20 of the 2005 LAOC, provided as follows:

Article 312 of the 2001 Organic Code of Criminal Procedure contained materially identical wording to Article 294 of the current (2012) OCCP (Article 311 was also materially identical to what is now Article 293). It follows that under the predecessor statute to the (2012) LAOC, a vessel which was preventatively seized could be returned to its owners if it was demonstrated that they did not have the necessary intent to commit the offence. That question would be resolved in accordance with what is now Article 294 of the OCCP, that is, the Owners would have to bring a third party motion before the control court for the restitution of the vessel and the court was obliged to return it unless it deemed its preservation to be indispensable.

Article 55 of the (2012) LAOC no longer contains the sentence: “[t]he owner will be exonerated from such measure when there are circumstances that demonstrate their lack of intent”. However, the (2012) LAOC does contain the new Article 59 (the terms of which were not contained within the 2005 LAOC), which contains a number of criteria which have a bearing upon the owners’ intent, namely:

These factors lead the Insurers to submit as follows.

Whilst it is true that there is no express reference in Article 55 of the LAOC to any decision as to whether to release the seized vessel, where an asset has been detained under such Article 55 of the LAOC, the release of the asset is governed by the matters set out in Article 59 of the LAOC.

The factors identified in Article 59 of the LAOC reflect the traditional principle of “lack of intention” which was contained in the predecessor Article 20 of the 2005 LAOC. “Lack of intention” is a term of art. It does not mean simply criminal intent. It is a much broader concept referring to all of the factors set out in Article 59 of the LAOC.

Procedurally, an application by a party for the release of the asset is made under Article 294 of the OCCP, but the question of whether the asset is “indispensable” for the purposes of Article 294 of the OCCP will be answered by reference to the factors set out in Article 59 of the LAOC (Footnote: ²⁰). That is the answer to the Bank’s argument that there is no express reference in Article 55 of the LAOC to any decision whether to release the Vessel: there is always a right for an interested party (namely a third party claiming to be interested in the goods) to apply for the release of an asset under Article 294 of the OCCP.

The application of Article 294 of the OCCP to Article 55 of the LAOC is illustrated by Article 20 of the previous 2005 LAOC, which specifically provided that an application to relieve the owner from preventive detention of its asset on the grounds of lack of intent would be resolved in accordance with Article 312 of the (then) 2001 Criminal Procedure Code (equivalent to Article 294 of the OCCP).

Whilst release of the asset is governed by the matters set out in Article 59 of the LAOC, nevertheless the principle that an asset may continue to be detained when it is essential for investigative purposes, which is reflected in Article 293 of the OCCP, is relevant when considering any application for the release of an asset. The Court will not order the release of an asset merely because it is no longer essential for investigative purposes; the owner must also establish lack of intent under Article 59 of the LAOC. But if the asset is still essential for the investigation it will not be released, regardless of the owner’s lack of intent.

This is what Professor Ortiz meant when he said that Article 293 of the OCCP applied “in conjunction with” Article 59 of the LAOC (Footnote: ²¹):

The Bank, on the other hand, submits that the Insurers’ construction is wrong as a matter of Venezuelan law. The Bank submits that a Venezuelan court would apply the first sentence of Article 4 of the Civil Code, which provides that:

The Bank submits that the proper meaning of the statutory provisions is clear and the provisions contain no textual ambiguity. The Insurers’ construction of Articles 55, 58 and 59 of the LAOC is impossible to sustain on the basis of a “plain meaning” interpretation of those provisions alone.

The plain meaning of the provisions is that Article 59 of the LAOC is only engaged when Article 58 (‘Special procedure for the confiscation of assets’) of the LAOC applies. Specifically:

Further, the first factor in Article 59 refers to the property “the object of the confiscation proceedings”, further confirming its dependency on Article 58. Furthermore, factors 1, 2, 3 and 4 of Article 59 make repeated reference to “the interested party”, and in Article 58 there are four references to “the interested party”. By contrast, Article 55 uses the word “interested third parties” only once, but in a very different context, in the second paragraph of that provision in a section dealing with foodstuffs, drinks and perishables, which goes on to address taking an inventory of them. Article 58, on the other hand, refers to confiscation proceedings and interested third parties, and that is precisely what is being referred to in Article 59.

Whilst Professor Ortiz maintains that Venezuelan law permits and requires an “intertwined textual, purposive, systematic and/or progressive interpretations of laws … [which] thus are the correct approach when the legislation of detention of assets, such as in the organized crime and the similar drug trafficking field is being construed” (Footnote: ²³), Professor Gómez considers that only when the language used is not precise, may judges apply analogy. When the language of the law is clear and contains no textual ambiguity – as the Bank contends is so in the present case regarding Articles 55, 58 and Article 59 of the LAOC – then any statutory construction other than the one suggested by the opening sentence of Article 4 of the Civil Code is not permissible and much less required. (Footnote: ²⁴) In any event, Professor Gómez is of the view that none of the legal interpretive methods relied on by Professor Ortiz justify ignoring the plain introductory words of Article 59 and widening the application of the provision to situations disconnected from Article 58. (Footnote: ²⁵)

Accordingly, the Bank submits that neither Article 58 nor Article 59 is relevant in this case.

The Bank also points out that the 2010 Anti-Drug Law contains in Article 183 thereof its equivalent of the sentence in Article 20 of the 2005 LAOC (“the owner will be exonerated from such measure where there are circumstances that demonstrate their lack of intent, which will be resolved at the preliminary hearing”) but also contains Article 186 which is in materially identical terms to Article 59 of the (2012) LAOC and therefore contains the checklist. This might suggest, the Bank submits, that the sentence which appeared in Article 20 of the 2005 LAOC but which was omitted from the (2012) LAOC was deliberately omitted (namely, “[t]he owner will be exonerated from such measure when there are circumstances that demonstrate their lack of intent”).

Article 4 of the Civil Code in fact provides that the Law must be given the meaning which is evident from the meaning of the words according to their connection with each other and the intent of the legislator. Professor Gómez agreed that this means that it is necessary to make the meaning “harmonious between the grammatical meaning and the teleological meaning” (Footnote: ²⁶). In this case, this requires consideration of the interaction between Articles 55, 58, and 59 of the LAOC, as well as Articles 293 and 294 of the OCCP.

The procedure by which a third party may seek the restitution of preventatively seized objects is contained in Article 294 of the OCCP. That provides that the court shall return the objects unless it deems their preservation to be indispensable. That immediately raises the question as to how the court determines whether the object is indispensable. If it is not essential to the investigation (Article 293 of the OCCP) it might not be indispensable. But that might not be the end of the inquiry: the object may need to be detained in case it requires to be confiscated, having been used in the commission of the offence or having had an illicit origin.

In order to determine the approach that the Venezuelan courts would adopt upon an application for the return of property which has been preventively seized under Article 55 of the LAOC, it is helpful to look at any Venezuelan case law. Whilst the Venezuelan courts do not operate a doctrine of binding precedent, Professor Gómez accepted that criminal courts may follow what other criminal courts have decided and typically cite earlier decisions. A body of case law may grow in this way, which sets the trend of case law in a particular direction (Footnote: ²⁷).

There is only one case before the Court in which the application of these principles to the current LAOC has been directly considered: Inversiones Delta Sierra case of 2014-2018. The judgment shows that in that case an aircraft had been detained under Article 55 of the LAOC. The owner of the aircraft was not charged with any crime. Certain individuals were charged with “Criminal Association” under Article 37 of the LAOC, and of being “witting accomplices in the crime of attempted seizure of an aircraft”. No drug crimes were alleged.

An application was made for the release of the aircraft (which must have been under Article 294 of the OCCP). The first instance judge granted the application, applying Article 59 of the LAOC in conjunction with Article 293 of the OCCP, the provisions of which the court considered the owners had satisfied, and the court accordingly gave effect to the owners’ right to property under Article 115 of the Venezuelan Constitution. The court’s judgment involved a careful analysis of the five Article 59 factors, and it concluded that there had been “strict and concurrent compliance with what is stated in article 59 of the [LAOC]” and therefore the order should be lifted “on account of [the owner’s] legitimate ownership over it having been established”. The court’s reasoning was as follows:

It is clear that the decision in Delta Sierra provides strong support for the Insurers’ case. The owner applied to the court for the release of the aircraft and having satisfied the criteria in both Article 59 of the LAOC and Article 293 of the OCCP, the aircraft was then released.

There was no suggestion in Delta Sierra that the detention by the court was impermissible solely because the owner of the aircraft had not been charged with an offence (rather, the court analysed each of the relevant Article 59 criteria), or that the only relevant question was whether the detention was “essential” to the investigation. Nor was there any suggestion that there had been any breach of duty by the public prosecutors in their not seeking the return of the aircraft. Moreover, the court clearly did not consider that the Article 59 criteria only applied for the purposes of deciding on the return of assets under Article 58. This strongly suggests that, contrary to the submissions of the Bank, the language of these provisions, and how they interrelate, is not as clear as the Bank suggests.

The prosecutors appealed against the decision to release the aircraft on the basis that the aircraft might have been acquired with the proceeds of drug crime (that is why the judgment contains references to Articles 183 and 186 of the Anti-Drug Law, notwithstanding that the aircraft had been detained under Article 55 of the LAOC and nobody had been charged with any drug related offence). The prosecutors argued that, because there was “uncertainty regarding the origin of the funds and the ownership of the asset”, “the requirements for the asset to be returned” (i.e. the Article 59 requirements) were not met.

In dismissing the prosecutors’ appeal, the Court of Appeal specifically recorded the following:

The Court of Appeal then recorded the fact that the first instance judge had found the Article 59 criteria to be satisfied, including the fact that the interested party was the owner of the aircraft and it did not acquire the asset or any right over it in circumstances that reasonably enable one to conclude that the rights had been transferred in order to avoid a possible preventive seizure, since the asset was acquired prior to the date on which the events which form the object of the proceedings took place (a fact which could also be seen from the aeronautical registration of the acquisition of the asset). Likewise, it could be seen that the interested party did everything reasonable to prevent the illegal use of the assets. It did not consent to any illegal use of the asset; on the contrary, it turned out to be the affected party. This was the “reasoned manner” in which the court found that the preservation of the asset was not indispensable.

The Court of Appeal accordingly concluded as follows in dismissing the appeal:

The Supreme Court upheld the Court of Appeal’s decision, holding that it had in turn given adequate reasons for upholding the first instance judge’s decision.

Whilst Professor Gómez suggested in his supplementary report that the Court of Appeal did not itself engage in an independent analysis of the applicability of Article 59 of the LAOC, he rightly accepted that the Court of Appeal’s decision should indeed be read as supporting the Judge’s analysis that Article 59 was applicable, in conjunction with Article 293 of the OCCP:

It is the Bank’s case that, regardless of Delta Sierra, the LAOC does not permit the confiscation of assets where the Owner of the assets is not charged with an offence, by reason of Article 115 of the Venezuelan Constitution; and Article 293 of the OCCP requires the release of an asset which has been the subject of preventive seizure under Article 55 of the LAOC where the asset is no longer essential to the investigation. (Footnote: ³⁴)

Accordingly, the Bank submitted that once it had become clear in the present case that no causal connection existed between the Owners and the crimes charged by the Prosecutors and/or that the Vessel was not essential to the criminal investigation, the Prosecutor had a duty under Article 293 of the OCCP to request the immediate release of the Vessel to its Owners. (Footnote: ³⁵) The Prosecutor did not have to wait until the Owners or other interested third party had applied under Article 293 and/or 294 of the OCCP to recover the asset.

This analysis led the Bank to contend that the Vessel could no longer be regarded as essential to the investigation and should therefore have been released no later than the date of the latest investigative activity referred to in the Joint Accusation Brief, which it says was 1 October 2015, alternatively not later than the conclusion of the preliminary investigation on or about 9 October 2015 (when the Accusation Brief was issued). (Footnote: ³⁶) The continued seizure of the Vessel after this time therefore violated the Owners’ rights under the Venezuelan Constitution (Footnote: ³⁷).

I do not accept the Bank’s submissions. Consistently with Professor Ortiz’s evidence, I consider the proper construction of the relevant provisions of Venezuelan law, particularly in light of Delta Sierra, to be as follows:

I consider that Article 293 of the OCCP fulfils a dual purpose. So far as assets held by the prosecutor which are not subject to any court order are concerned, but which are detained by him under Article 111(12) of the OCCP, then if they are no longer essential to his investigation, they must be returned by him without unjustified delay (which he can do as the assets are not then subject to any court order). But once the assets are subject to a court order for preventive seizure under Article 55 of the LAOC, then it is the court which must determine whether they should be returned upon application of the third party under Article 294 of the OCCP, by applying the test under Article 293 of the OCCP of whether they are essential to the investigation, in conjunction with the application of any relevant criteria under Article 59 of the LAOC. The prosecutor is unable in such a case to return the assets until the court has determined whether or not it is appropriate to do so. Until that moment in time, there can accordingly be no duty upon the prosecutor to return the assets (and no duty to request their return), and the prosecutor cannot be guilty of any unjustified delay in returning the assets (leading to potential civil, administrative and disciplinary liability on their part). This analysis is consistent with the fact that: (i) it is only the court which can make an order for the preventive seizure of assets under Article 55 of the LAOC (Footnote: ⁴¹); (ii) accordingly, only the judge can revoke, modify or lift an order of preventive detention or seizure of assets (Footnote: ⁴²); and (iii) the opinions or requests of the prosecutor are not binding on the judge (Footnote: ⁴³).

I further find, as a matter of Venezuelan law, that assets can be detained under Article 55 of the LAOC whether or not the owner is guilty, or alleged to be guilty, of a crime. Article 55 enables the Court to order the detention of assets used in the commission of the offence. “Assets” are defined in Article 4(6) of the LAOC to include assets “even if they are in the possession or property of interposed persons or third parties not involved in these offences”. Preventive detention under Article 55 is defined in Article 4(4) of the LAOC to mean “the temporary prohibition to transfer, covert, encumber, alienate or mobilize assets, or the temporary custody or control of assets, by order of the competent court”, and is an interim order which ensures that the relevant assets remain available to the Court for confiscation if the Court ultimately decides after trial to make a confiscation order (Footnote: ⁴⁴).

I accordingly agree with the Insurers that it would therefore be illogical for Article 293 of the OCCP to require the release of an asset which has been preventively detained under Article 55 of the LAOC simply because the asset is no longer essential for the investigation. Preventive detention under the LAOC can be ordered and continued whether the asset is essential to the investigation or not, unless the owner also satisfies the court of the relevant criteria under Article 59 of the LAOC.

I also draw comfort in this analysis from the fact that it is consistent with the position adopted by the Venezuelan courts under the anti-drug legislation, where it is open to an interested party to apply to the court for the return of a detained asset by demonstrating “lack of intention”. There is a dispute between the experts as to whether cases under the anti-drugs legislation are analogous or not. I consider that Professor Ortiz’s evidence was persuasive in this regard, and that whilst the two types of case may require some differences in approach depending upon the particular crime charged, contrary to paragraph 187 of the Bank’s closing submissions, the anti-drugs cases do provide a reasonable indication at least, as to how a Venezuelan court would likely approach this issue in the context of serious (or “grave”) crimes such as smuggling and conspiracy (the crime of association), not least because the approach in the anti-drugs cases is consistent with the approach of the court in Delta Sierra.

Thus, in The B Atlantic (No 2) [2015] 1 Lloyd’s Rep 117, where the Venezuelan anti-drug legislation and case law was considered by Flaux J (as he then was), the Judge concluded that the burden was on the owner to make an application to have the vessel released, and that to do so the owner had to demonstrate “lack of intention”. The court held at [295] that the matters that the Venezuelan court would have considered in assessing “lack of intention” were reflected in Article 186 of the 2010 Anti-Drug Law, which is in materially identical terms to Article 59 of the LAOC, and which reflected the previous position under the 2005 LAOC as to what needed to be proved by the owners to establish “lack of intention”:

Flaux J also concluded at [283] that:

I consider that the same reasoning applies in the case of Articles 55 and 59 of the (2012) LAOC. True it is that the sentence concerning lack of intention (which appeared in Article 20 of the 2005 LAOC) has been removed from Article 55 of the LAOC. However, I accept Professor Ortiz’s evidence that the old “lack of intention” wording was thought unnecessary because the relevant factors were now spelled out by Article 59 (and that the burden is upon the interested party to establish compliance with those factors). This derives support from ONCDOFT’s Non-Binding Opinion in response to the Owners’ Third Party Motion in this case, in which it stated:

This analysis also derives support generally from the Venezuelan case law in drugs cases. There are numerous examples of the seizure of property belonging to a third party who is not charged with any offence, but whose property is determined to have been used in the commission of the crime being investigated. For example, in Franey Maritza Sosa (2009), the Supreme Court of Justice stated as follows:

It should be added that, exceptionally in the drugs cases, confiscation of an innocent owner’s property has been allowed but that was on the ground of Article 116 of the Venezuelan Constitution, which expressly refers to confiscation of property derived from business or activities connected with unlawful trafficking in psychotropic and narcotic substances (Footnote: ⁴⁶).

Significantly, as can be seen from the summary of the factual background set out above, the foregoing analysis of Articles 55 and 59 of the LAOC and Articles 293/294 of the OCCP is also consistent with the way in which the relevant parties argued their cases before the Venezuelan Control Court in the present case, see in particular:

It follows that whilst it is plainly the case that, as a matter of Venezuelan law, the Venezuelan court takes Article 59 of the LAOC into account in deciding whether to return assets of the type referred to in Article 58 of the LAOC, I find that that is not exclusively so and that it also takes Article 59 of the LAOC into account in determining, under Article 294 of the OCCP, an interested party’s application for the return of an asset seized under Article 55 of the LAOC.

DID THE VESSEL BECOME UNLAWFULLY DETAINED AT ANY POINT IN TIME?

In light of my findings as to Venezuelan law set out above, I turn next to consider how Venezuelan law applies to the facts of this case in determining whether the ongoing detention of the Vessel became unlawful at any point in time.

The starting point is first, as set out above, that it is common ground between the parties that the Detention Order was lawful (Footnote: ⁴⁷) and that no further order of the Court was required to maintain the detention of the Vessel, which remained in effect until it was lifted, modified or revoked by the Court (Footnote: ⁴⁸). Only the court could release the Vessel.

Second, the application to release the Vessel from detention had to be made by the Owners (as an interested party) under Article 294 of the OCCP. In order for it to be released, the Owners needed to persuade the court of the satisfaction of the criteria contained in Article 293 of the OCCP and Article 59 of the LAOC.

There was no duty resting upon the Prosecutors to apply to the court for the release of the Vessel which the court had preventatively detained if they considered that it was no longer essential to the investigation. The Vessel was not unlawfully detained and would only become unlawfully detained should it not be released after the court had ruled that it should be.

The Owners’ petitioning of the Prosecutors to release the Vessel (which was subject to a court order of detention) on 5 October 2015 was accordingly of no legal effect. No doubt the Owners did this because they wanted to get the Prosecutors “on side” since if that occurred, and the Prosecutors then supported their motion to release the Vessel, the court would be likely to grant its release (as ultimately happened in this case). Indeed, Ms Mujica expressly accepted in cross-examination that what she was trying to persuade the Prosecutors to do by her request of 5 October 2015 was to “voluntarily” request the release of the Vessel (Footnote: ⁴⁹). The Owners themselves could equally have applied to the court for the release of the Vessel (as they ultimately did). But the Prosecutors had no power themselves to release the Vessel which had been detained by court order under Article 55 of the LAOC.

The Detention Order could only be discharged by the court and it was discharged by it on 17 October 2016 because the investigation was at an end, and the Article 59 criteria were established by the Owners (in their Third Party Motion dated 24 May 2016 and in their Ratification Brief filed around the end of August/beginning of September 2016). Any alleged delay in the court hearing the application to lift the detention (until 17 October 2016) did not make the Prosecutors’ conduct unlawful: they had to await the court’s ruling on whether the detention should be lifted.

In any event, it cannot sensibly be said that the Prosecutors’ (or indeed the Court’s) acts or omissions in respect of the detention of the Vessel were anything other than bona fide. A bona fide error in applying the law does not break the chain of causation (see The Anita [1971] 1 Lloyds Rep 487 at 493-494 and The Silva [2011] 2 Lloyds Rep IR 470 at [41]), absent perversity (see the B Atlantic [2015] 1 Lloyds Rep 117 at p. 162 (per Flaux J)), which the Bank cannot possibly establish on the evidence in the present case (and for which it did not contend). As I have stated in paragraph 118 above, there is certainly insufficient evidence to suggest that the Vessel was being detained for political reasons as Ms Mujica speculated in her evidence, and even less to suggest that the detention was made and/or continued upon the orders of the President of Venezuela.

But even if the Bank were right that there was a duty on the Prosecutors to request the release of the Vessel once the detention of the Vessel was no longer essential for the investigation, I conclude in the light of my factual findings above that the Bank has failed to establish any breach of that duty (Footnote: ⁵⁰).

The Bank’s case is that the detention ceased to be essential from 9 October 2015 (alternatively, 1 October 2015). However, my findings of fact above demonstrate that as late as September and October 2015, Clyde & Co (Venezuela) (on behalf of the Owners) made their seven requests for the Prosecutors to carry out further investigations, many of which directly concerned the Vessel, including asking for the appointment of a naval inspector to survey the tanks and other equipment and requesting that the Prosecutors carry out a simulated trans-shipment. Ms Mujica accepted that when she was making these requests, the view of Clyde & Co (Venezuela) was that the Vessel was essential to the investigation.

In addition to these many evidential requests, the Orinoco survey report was only provided to the Prosecutors on 7 October 2015. It is therefore unsurprising that on 9 October 2015 the Prosecutors stated in the Accusation Brief that the investigations were continuing, and that they included the reserva fiscal. I reject Ms Mujica’s suggestion that the Prosecutors should have carried out their investigation more quickly.

Indeed, it was only when the Owners submitted their Ratification Brief in late August/early September 2016 that they established a legal basis – under the Article 59 criteria – for the release of the Vessel (explaining, amongst other things, their lack of intention and participation in the offence) and the Prosecutors then acted swiftly after that submission by explaining in their Second Answer dated 29 September 2016 that they did not oppose the Vessel’s release. I consider that there is an insufficient evidential basis for this court to conclude that the time taken by the Prosecutors to carry out their investigation rendered the detention unlawful.

I therefore accept the Insurers’ submission that there is no factual basis for concluding that the Vessel was no longer “essential” to the investigation at the time of the Accusation Brief or at any point prior to the Prosecutor’s Second Answer. Whilst the court refers in its Release Order to the fact that the investigation phase typically concludes with the filing of the Accusation Brief, the Prosecutors made clear in the Accusation Brief that their investigations were continuing after that date. If the Owners considered that the detention of the Vessel after that date was unlawful, there was nothing stopping them from making an application to the court under Article 294 of the OCCP for the release of the Vessel, but they chose not to do so until 24 May 2016.

It follows that the detention of the Vessel was not unlawful and the Detention Order falls within the exclusion clause in Rules 3.5.1 and 3.5.2 of the Club Rules. There would therefore not have been cover under the War Risks Policy in any event.

WAS THERE A CONSTRUCTIVE TOTAL LOSS UNDER THE DETAINMENT CLAUSE?

The detainment clause contained in Rule 3.14.2 of the War Risks Policy (“the Detainment Clause”) provides that:

By reason of the fact that the loss in the present case would have fallen within the exclusion in Rule 3.5 of the Club Rules, I accept the Insurers’ submission that there was not in this case a continuous period of 12 months during which the deprivation was not caused by an excluded peril.

In The Aliza Glacial [2002] Lloyd’s Law Reports 421, the claimants were a Norwegian bank which claimed as mortgagees of Aliza Glacial under a mortgagees’ interest insurance policy issued by the defendant underwriters. The policy contained the following exclusions:

The vessel was detained for some 14 months by the Australian fisheries department (“AFMA”) by reason of alleged illegal fishing. It was not in issue that, if the vessel was detained for an infringement of trading regulations, then any claim under the War Risks Policy would be excluded and there would therefore be no prima facie coverage in relation to the seizure of the Vessel by AFMA (although on the facts the court held that it was detained for illegal fishing rather than for trading illegally).

In particular, Potter LJ stated at 433ff:

Applying this analysis to the facts of the present case, the loss falls within the exclusion and the Bank cannot show that the full 12 months period of the detainment was caused by an insured peril.

In any event, the Owners tendered the First NOA to the Club on 3 October 2016, claiming an indemnity for a CTL. The Club rejected the First NOA, but agreed to place the Owners in the same position as if a claim form had been issued on 3 October 2016. Thus, even if the Bank could establish that the detention ceased to be lawful on 9 October 2015 (Footnote: ⁵¹) because (the Bank alleges) it should have been clear to the Prosecutor by that date that the Vessel was not essential to the investigation, then the Bank still cannot show a continuous period of 12 months during which the detainment was not caused by an excluded peril.

WAS THERE A CONSTRUCTIVE TOTAL LOSS UNDER SECTION 60(2)(i) OF THE MARINE INSURANCE ACT 1906?

Section 60 of the 1906 Act provides as follows:

If (contrary to the Bank’s primary argument) the existence of a CTL must be established under section 60(2)(i) of the 1906 Act, then I consider that the Owners would not have been able to establish a CTL under that section either. As between the Owners and the Club, the relevant date would have been the date of the First NOA, 3 October 2016. The Owners would therefore have had to show that on 3 October 2016 it was unlikely that the Vessel would be recovered within a reasonable time.

Section 60(2) of the 1906 Act applies independently of section 60(1) and is not, as might appear at first sight, a mere illustration of a CTL falling within section 60(1). Accordingly, the assured does not have to show that “there is a constructive total loss where the subject-matter insured is reasonably abandoned …” to establish a CTL under section 60(2). (Footnote: ⁵²) In Rickards v Forestal Land, Timber and Railways Co Ltd [1942] AC 50, Lord Wright stated at page 84 that:

Similarly, HHJ Mackie QC stated in Clothing Management Technology Ltd v Beazley Solutions Ltd [2012] EWHC 727 (QB); [2012] 1 Lloyd’s Rep 571, at paragraph 36:

It follows that to establish that the Vessel was a CTL as a matter of fact under section 60(2)(i) of the 1906 Act, it suffices for the Bank to show that as at 3 October 2016, when the NOA was tendered, it was unlikely that the Owners could recover the Vessel within a reasonable time.

However, I accept the Insurers’ submission that, if this is to be considered the relevant date for assessing a CTL as between the Owners and the Club, there is no CTL since, by this date, it was likely that possession of the Vessel would be recovered within a reasonable time. The Owners had already filed their Third Party Motion asking for the Vessel to be released (on 24 May 2016), and the Prosecutor had already filed its Second Answer stating that it consented to the release of the Vessel (on 29 September 2016). It was common ground that once the Prosecutors did that, the court would be likely to release the Vessel (albeit it was not obliged to do so). The Release Order was in fact issued just two weeks later (on 17 October 2016).

Whilst the test for assessing unlikelihood of recovery is to be applied prospectively, on the true facts existing at the relevant time with regard to the prospects of recovery as they would have appeared to an informed observer, (Footnote: ⁵³) as Sir Raymond Evershed MR also observed in Atlantic Maritime v Gibbon [1954] 1 QB 88 at p. 113 (cited in The Bamburi [1982] 1 Lloyd’s Rep 312 at 316 per Staughton J):

Ms Mujica’s evidence was that once the Prosecutors had indicated in their Second Answer that they did not oppose the release of the Vessel, she thought it was “almost guaranteed” that the Vessel would be released and Clyde & Co (Venezuela) were “very positive at that point” (although she said that there are “no warranties” and nothing is certain):

Ms Mujica also confirmed in her evidence that Clyde & Co (Venezuela) had probably communicated to the Owners that they had “good chances” of securing the release of the Vessel following the Prosecutor’s Second Answer. The Insurers suggest that the inference is that the Owners tendered their First NOA shortly following receipt of the Prosecutor’s Second Answer because they appreciated that the release of the Vessel was imminent, and therefore sought to preserve their claim for a CTL before the Vessel was actually released. That may be correct; however, it is not necessary for me to make a finding either way in this regard and I decline to do so in the absence of sufficient evidence on the point (there being a lack of disclosure of the Owners’ email traffic around this time).

It is sufficient for present purposes for me to find on the evidence, and I do find as a fact, that it was likely by 3 October 2016 that the Vessel would be recovered within a reasonable time.

CONCLUSION ON WAR RISKS COVERAGE ISSUES

It follows that the detention of the Vessel fell within Rules 3.5.1 and 3.5.2 of the Club Rules and it did not give rise to an insured loss. The Owners would not have been able to establish a CTL of the Vessel. Accordingly, subject to the outcome of the arguments under the MII Policy which follow (in particular in respect of Clause 1(ii) of the MII Policy), the Bank has no entitlement to an indemnity as assignee and loss payee under the War Risks Policy.

IS THERE COVER UNDER THE MII POLICY?

By the MII Policy, the Insurers agreed to insure the Bank so as to cover all vessels mortgaged to the Bank and declared by the Bank under the MII Policy, which included the Vessel. (Footnote: ⁵⁶)

The “Interest” insured under the MII Policy was as “Mortgagee and/or Lessors and/or Innocent Owners Interest as Assignees and Loss Payees under the owners Policies …” and the War Risks Policy incorporated and was subject to the terms of notices of assignment dated 20 January 2020 in favour of the Bank. Thus, had a recovery been made under the War Risks Policy, the indemnity would have been paid to the Bank.

Clause 1 of the MII wording provides as follows:

If there is cover under Clause 1, then the indemnity which is payable is contained in Clause 4 as follows:

I consider that the following sets out the correct approach to the coverage arguments in this case:

The MII Policy is not intended to, and does not, cover losses which would not have given rise to a loss covered by the Owners’ Policies, because, for example, there was no CTL under the Owners’ Policies or the loss was excluded thereunder. The latter point is reinforced by the wording at the end of Clause 1(v) of the MII Policy: “and is not otherwise excluded from payment by any exclusion or other provision therein” (as it is never envisaged that the MII Policy will pay out if the loss is excluded under the Owners’ Policies).

Consistently with this analysis, the editors of Marine Insurance Clauses (Hudson, Madge and Sturges, 5^th Edition), Part V, paragraph 4, state in respect of the Institute Mortgagees’ Interest Clauses Hulls 1/3/97 (Footnote: ⁶²):

The Bank’s contention is that it can bring its claim within Clauses 1(i) and 1(ii) of the ‘Coverages’ section of the MII Policy, although it is fair to say that the main focus of Mr MacDonald Eggers QC’s submissions was based upon Clause 1(ii) and so I address that first. The Bank’s argument is that Clause 1(ii) affords cover whenever there is any loss or damage to the Vessel as a consequence of any act or omission by any of the crew or any other servant or agent of the owners or charterers or by any allegation of such an act or omission.

The Bank submits that the cover available under Clause 1(ii), in contrast to Clause 1(i), makes no reference to coverage under “the Owners’ Policies and/or Club Entries” and is not expressed to be contingent on establishing the existence of prima facie cover thereunder. Thus, it contends, the alleged deliberate, negligent and/or accidental acts or omissions of Relevant Parties do not need to be the cause of a lack of cover under the War Risks Policy for Clause 1(ii) to be triggered.

The Bank suggests that because the MII Policy is to “indemnify the Insured for loss of, or damage to, … the vessel … Which occurs by virtue of any alleged deliberate, negligent or accidental act or omission”, Clause 1(ii) looks not at the cause of a lack of cover for a loss which would otherwise be covered under the War Risks Policy, but at the cause of the Vessel’s loss.

If this argument is correct, then Clause 1(ii) is different to each of the other provisions in Clause 1 (sub-paragraphs (i), (iii), (iv), (v) and (vi)). However, I do not consider that it is correct.

The wording of Clause 1(ii) is not so broad. In particular, it is limited by the word “alleged”. The clause requires loss or damage “which occurs by virtue of any alleged deliberate, negligent or accidental act or omission … of any of the Relevant Parties”. There must therefore have been an allegation that a Relevant Party caused the loss. On any sensible commercial construction, it is clear that the allegation must be an allegation which is made by the Owners’ insurers, and that the purpose of Clause 1(ii) is to indemnify the Bank where the Owners’ insurers decline cover on the basis of their allegation that the loss of or damage to the Vessel was caused by the Relevant Parties. It is only where an allegation as to the involvement of a Relevant Party is made by the Owners’ insurers that there will (potentially) be damage to the Bank’s insured interest, and a loss which can be indemnified by the MII Policy. I reject the Bank’s submission that the allegation by the Prosecutors of deliberate conduct is sufficient for this purpose (that is, that the Individual Defendants were alleged to have committed crimes under the Organised Crime Act and the Anti-Smuggling Act, which the Bank contends resulted in the detention of the vessel, and ultimately its loss).

This construction is reinforced by the fact that the other parts of Clause 1 use the term “alleged” and “allegedly” to refer to allegations by the Owners’ insurers. Clause 1(iii) refers to “any breach or alleged breach of warranty”, which must refer to an allegation by the Owners’ insurers. Similarly, the losses which are “allegedly not recoverable” in Clauses 1(iv) and 1(v) must be losses which the Owners’ insurers allege are not recoverable.

The Bank also argues, in the alternative, that the cause of the detention was actual (not alleged) conduct on the part of the crew or PDVSA, in the crew accidentally or negligently allowing HSDO into the no. 6 tanks (so that it appeared to the Venezuelan authorities that crimes had been committed), alternatively in either or both of the crew or PDVSA committing the alleged crimes (Footnote: ⁶⁴).

I reject this argument, as it ignores the word “alleged” altogether: it reads the clause as though it applied to any actual or alleged deliberate, negligent or accidental act or omission.

If Clause 1(ii) did not require even the making of an allegation, its scope would be extremely broad. It is difficult to think of any act or omission which would not be deliberate or negligent or accidental. Clause 1(ii) would therefore apply whenever there was any loss or damage to the Vessel caused by any act or omission by the Relevant Parties. That cannot be correct.

So how does Clause 1(ii) operate? On the proper construction of the MII Policy, I consider that Clause 1, including Clause 1(ii), must be read together with Clauses 4(i) and 4(ii), and that these clauses operate in the following way.

Pursuant to Clause 4(i)(a), the indemnity payable under the MII Policy is limited to the amount not paid under the Owners’ Policies by reason of the “circumstances” specified in Clause 1.

For a claim under Clause 1(ii), the relevant “circumstances” are that the loss or damage occurred by virtue of an alleged deliberate, negligent or accidental act or omission by a Relevant Party. The indemnity is therefore the sum which would have been payable under the Owners’ Policies had it not been for the allegation of the involvement of the Relevant Party.

In that way, Clauses 1(ii) and 4(i)(a) are consistent and work in tandem. There is cover where the Owners’ insurers have alleged that the loss or damage was caused by a Relevant Party, and by reason of the alleged involvement of the Relevant Party there is an amount not paid by the insurers under the Owners’ insurance. This is not to allow “the tail to wag the dog”, as the Bank suggested.

Under Clause 4(ii), the Insured shall formally present its claim under the MII Policy when it has become apparent to the Insured that the Owners’ Underwriters have denied liability or failed to pay. Clause 4(ii) then further provides that, for the purposes of the MII Policy, there shall be deemed to be a non-payment by the Underwriters on the Owners' Policies/Club Entries after a reasonable period not exceeding 365 days has elapsed from the date on which the Owners or the Insured has demanded payment under the Owners’ Policies and/or Club Entries.

Together, Clauses 1(ii) and 4(i)(a) and 4(ii) ensure that the MII Policy functions as a contract of indemnity. As Clause 1 makes clear, the policy is to “indemnify the Insured” (i.e. the Bank) in respect of loss caused to the insured interest (i.e. the Bank’s interest in the Owners’ Policies) as a result of physical loss of or damage to the Vessel. Where such physical loss or damage is not covered by the Owners’ Policies by reason of the circumstances described in Clause 1, then if the Bank suffers a loss, the policy indemnifies it for that loss.

Clause 4(ii), like Clause 4(i)(a), is expressed to be applicable generally; there is no suggestion that these clauses do not apply in the case of Clause 1(ii). Clause 4(i)(a) and Clause 4(ii) also work in tandem. Thus, in the event of the circumstances under Clause 1(ii) arising, there are three possibilities:

I agree with the Insurers’ submission that whilst Clause 1(ii) may not expressly refer to non-payment by the Owners’ Underwriters, it describes circumstances which are likely to result in a claim under the Owners’ Policies not being paid. Indeed, non-payment is an express requirement of Clause 1(i) only. It follows that if the Bank is correct that Clause 4(i)(a) must be “left out of account” when there is cover under Clause 1(ii) because non-payment is not a pre-condition under Clause 1(ii) then it must presumably also be left out of account in cases other than Clause 1(i), which again would be wholly uncommercial.

The purpose of MII Insurance is to protect the Bank against the risk of non-payment under the Owners’ policy. The coverages in Clause 1 are typical of the types of cover that a mortgagee seeks under mortgagees’ interest insurance in protecting itself against the Owners’ insurers denying liability by reason of the Owners’ misconduct in regard to the loss; non-disclosure of material facts; breach of the duty of utmost good faith; breach of warranty; failure to prove that the loss was caused by an insured peril, and so forth (Footnote: ⁶⁵). Clause 1(ii) is of the same type in that it expressly includes misconduct such as scuttling and barratry as a result of Samuel v Dumas [1924] AC 431, which established that a loss by sea water which has been deliberately let into a ship is not a loss by perils of the sea, on account of the absence of the element of fortuity.

The Bank argues that although there is no express limitation on the wording of Clause 4(i)(a) – the amount not paid under the Owners’ Policies / Club Entries by reason of the circumstances specified in Clause 1 of the MII wording – where there is no amount “not paid” by reason of the circumstances specified in Clause 1 of the MII Wording (it says when there is cover under Clause 1(ii)), Clause 4(i)(a) does not apply. In other words, it must be limited to cases where there is in fact an amount not paid under the Owners’ Policies / Club Entries by reason of the circumstances specified in Clause 1 of the MII Wording, i.e. where Clause 1(i) applies.

But that is to turn the ordinary commercial construction of this clause on its head. Clause 4(i)(a) is one of three expressly stated bases for determining the amount of indemnity payable (depending on “whichever is the least” in amount), in circumstances where coverage is established under one of the coverage clauses in 1(i)-(vi). Each of sub-clauses 4(i)(a), (b) and (c) have to be applied to the claim in order to determine which is the least in amount. It is implicit in Clause 4(i) that if non-payment under the Owners’ Policies (which leads to the claim under the MII Policy) is not made by reason of any of the circumstances specified in Clause 1, then there will not be any claim for an indemnity and there will be no need to carry out the calculation exercise in Clause 4(i).

Yet further, if there were no requirement under Clause 1(ii) of the MII Policy of non-payment by War Risks insurers in order for the Bank to recover, then as the Insurers point out, the consequences would be uncommercial and contrary to the purpose of MII cover, namely:

Without Clause 4(i)(a), any loss of or damage to the Vessel would trigger an obligation to pay either the total indebtedness or the full sum insured.

But if Clause 4(i)(a) applies, the result is as one would expect: the indemnity is limited to the amount not paid under the Owners’ Policies. The Bank is therefore indemnified for the damage to the interest insured by the MII Policy, i.e. its interest as assignee and loss payee under the Owners’ Policies.

I accordingly conclude that, since Owners’ War Risks underwriters did not allege that the detention had occurred by virtue of any deliberate, negligent or accidental act or omission or any knowledge or privity of any of the Relevant Parties, Clause 1(ii) of the MII Policy is inapplicable and there is no cover under that clause (Footnote: ⁶⁷).

In any event, the measure of indemnity for any claim under Clause 1(ii) would be nil by virtue of Clause 4(i)(a). There would have been no cover under the War Risks Policy in respect of the detention of the Vessel regardless of whether the detention occurred by virtue of any alleged deliberate, negligent or accidental act or omission by reason of the fact that: (i) the War Risks Policy was avoided by the Club – and the Club refused to pay any sum under the Owners’ Policies as a result – on grounds entirely unrelated to the detention (Footnote: ⁶⁸); (ii) there was no CTL, and therefore no loss which occurred by virtue of the circumstances in Clause 1(ii) of the MII Policy; and (iii) the alleged loss occurred by virtue of action falling within the terms of the exclusion clause in Rule 3.5 of the Club Rules.

I can deal with the Bank’s secondary case under Clause 1(i) of the MII Policy more shortly because there is a simple answer to it.

Clause 1(i) provides cover if there is “prima facie” cover under the Owners’ Policies/Club Entries, but there is subsequent non-payment by the Underwriters of the Owners’ Policies and/or Club Entries, resulting from any act or omission of any one or more of the “Relevant Parties”, including any breach of warranty or condition or any misrepresentation or non-disclosure or alleged non-disclosure of any fact or circumstances.

The Bank submits that, in this case, the cover under Clause 1(i) is engaged because:

These submissions fall at the first hurdle because there has been no CTL of the Vessel, for the reasons given above.

But, in any event, there was no prima facie cover for the loss under the War Risks Policy for the purposes of Clause 1(i) of the MII Policy, because regardless of the Owners’ non-disclosure and the resulting avoidance of the War Risks Policy, the detention of the Vessel would not have been covered: cover would have been excluded by Rule 3.5.1 and/or 3.5.2 of the Club Rules.

The Bank suggested that “prima facie covered” refers to the loss having been caused by an insured peril, without regard or subject to any policy exclusions, including Rule 3.5; in other words, whether or not there is prima facie cover is a matter of the application of the insuring provision (of the War Risks Policy, specifically Rule 2A.2.2). However, the meaning of the words “prima facie” must be considered in their context. The clause refers to loss, damage or liability “…which is prima facie covered by the Owners’ Policies and/or Club Entries … but in respect of which, there is subsequent non-payment… resulting from any act or omission of [the Relevant Parties]”. The words “prima facie” in that context identify loss, damage or liability which would have been covered by the Owners’ Policies – taking into account both the insured perils and the policy exclusions (Footnote: ⁷⁰) – but in respect of which there is no cover, or cover has been lost, because of the conduct of a Relevant Party (by reason of non-disclosure, misrepresentation, breach of warranty etc). If it were otherwise, then the MII Policy would be providing primary insurance in respect of loss of or damage to the Vessel as it would be providing cover where there would have been no cover under the War Risks Policy due to the exclusion, and yet both the Bank and the Insurers are agreed that the MII Policy provides secondary insurance (Footnote: ⁷¹).

I therefore do not consider that the “absurd result” referred to by Purchas LJ on the differently worded MII Policy in The Alexion Hope [1988] 1 Lloyd’s Rep 311 at 322 affects my conclusion as to the proper construction of the particular wording of Clause 1(i) of the MII Policy in this case (Clause 1(i) is the only coverage clause in the MII Policy which uses the particular expression “prima facie covered”) (Footnote: ⁷²). I do not consider that The Alexion Hope lays down a general principle which applies to all MII cover regardless of its wording, to the effect that it would defeat the purpose of MII cover if the rights of recovery under a MII policy were subject to the exclusions in an underlying hull policy (Footnote: ⁷³).

Additionally, in its Reply, the Bank also suggested that “prima facie covered” meant “arguably covered (by reference both to the insuring provision and exclusions)” (Reply, paragraph 15.2(a)). Mr MacDonald Eggers QC rightly did not press this point orally, although the point is briefly mentioned in paragraph 121 of the Bank’s written closing submissions. The words “prima facie” in the context of Clause 1(i) clearly do not mean “arguably”. They mean that cover was prima facie available (with the claim not being excluded) but the insurers subsequently refused to pay by reason of the assured’s conduct. In other words, cover would have been available but for subsequent events.

Furthermore, Clause 1(i) requires “non-payment…resulting from…” the act or omission of the Relevant Party. That is, the act or omission must be the cause of the non-payment. If (as the Bank suggests) Clause 1(i) covered loss, damage or liability which was excluded by the Owners’ Policies, the matters specified in the second part of the clause (breach of warranty or condition, misrepresentation, non-disclosure, missed time-bar) would never have causative effect. There would have been no cover in any event (regardless of the misrepresentation etc.) because the loss would not have been payable by reason of the exclusion.

In view of my findings, the Bank’s claim fails. I do not consider it is necessary therefore to go on to make findings on the subsidiary issues of quantum (namely, the residual value of the Vessel and interest).