Introduction

It is well established that contractual parties may agree that some specified loss and damage that may be suffered by certain risk is to be covered by insurance and in the event of such loss and damage parties will only seek recourse against the insurers but not the contractual counterparty. Parties are said to have created an “insurance code” in such case.

In the shipping context, there are case authorities ruling that an insurance code exists under a demise charter and under a time charter. The recent UK Supreme Court’s decision in Herculito Maritime Ltd and others (Respondents) v Gunvor International BV and others (Appellants) [2024] UKSC 2 is the first instance where the UK Court is asked to determine, among others, whether an insurance code also exists under a voyage charter.

Background

By a voyage charter dated 20 September 2010 (the “Charterparty”), MT Polar (the “Vessel”) was chartered to the charterer for a voyage from St. Petersburg to Fujairah or, in the charterer’s option, to Singapore.

The direct geographical route from St. Petersburg to Singapore was via the Gulf of Aden, which was designated as a “High Risk Area” for the purpose of marine insurance. Before the Vessel entered the Gulf of Aden, the shipowner took out Kidnap and Ransom insurance and also paid an additional premium to extend the annual Hull & Machinery and War Risk Insurance to cover the Vessel’s transit through the Gulf of Aden.

On 30 October 2010, during the voyage the Vessel was seized by Somali pirates while transiting the Gulf of Aden. The Vessel was eventually released following payment of a ransom of US$7,700,000 by the shipowner.

General average was declared by the shipowner and before discharge of the cargo at Singapore a general average guarantee was provided by cargo underwriters and a general average bond was provided by the holder of the bills of lading. Subsequently, a general average adjustment was issued concluding that US$4,829,393.22 was due to the shipowner from the respective cargo interests. Cargo interests denied that they were under any liability in general average in respect of the ransom payment. Hence, the shipowner commenced arbitration against the cargo interests and the case is appealed all the way to the UK Supreme Court.

Relevant contractual provisions

The Charterparty provided “GA Arb London. English law” and set out various additional clauses, including the Gulf of Aden clause and the war risk clause.

Clause 39 of the Charterparty gave the shipowner the right to cancel the Charterparty before loading or, at any stage of the voyage, direct the Vessel to take a longer route if it appeared to the shipowner that the performance of the Charterparty would expose the Vessel to war risks. This clause also defined war risks as including “acts of piracy”.

The third paragraph of the Gulf of Aden clause provided, among others, that any additional insurance premia including but not limited to P&I kidnap risks and ransoms shall be for the charterer’s account.

The war risk clause provided that any additional premiums payable in respect of war risks incurred by reason of the Vessel trading to excluded areas not covered by the shipowner’s basic war risk insurance were to be for the charterer’s account.

Applicable legal principles

In respect of the claim against the charterer, the issue to be determined by the Court is that whether on the proper interpretation of the Charterparty, in particular the Gulf of Aden clause and the war risk clause and/or by implication the shipowner was precluded from claiming against the charterer in respect of losses arising out of risks covered by additional insurance obtained pursuant to those clauses. The Court observed that general average is a common law right, albeit one regulated by contract. For the shipowner to be held to have given up such a valuable right in relation to well-known kidnap and ransom risk, a clear agreement to that effect is required.

As mentioned above, there may be an “insurance code” in the contract under which parties agree that in the event any damage arising from insured risk parties shall only seek recourse against the insurers rather than their contractual counterparty. The issue is whether such an “insurance code” existed in the Charterparty which precluded the present claim by the shipowner against the charterer.

The Court observed that most cases in which there has been held to be an insurance code involved joint names’ insurance, largely due to the rule that the law does not allow an action between two or more persons who are insured under the same policy against the same risk. Where the parties agree to insurance arrangements which have such legal consequence, it is understandable that they are intending to have an insurance code under their contract.

However, in the present case, there was no joint names’ insurance. The Court noted that the argument for the existence of an insurance code has been rejected in a number of previous cases involving time charters, which make it clear that the mere fact that charterers pay an extra insurance premium is not enough to create an insurance code or fund.

The Kodros Shipping Corp of Manrovia v Empresa Cubana de Fletes (The Evia (No 2)) [1983] 1 AC 736 is the only time charter case in which there has in effect been held to be an insurance code. The Court therein ruled in favour of the existence of such a code because a ruling otherwise would mean the charterer pay additional premium for additional insurance for no consideration in return without shedding any onerous liabilities imposed on it.

The Court distinguished the present case from the The Evia (No 2) case since the charterer’s agreement to pay additional premium under the Gulf of Aden clause got real benefit in return as the shipowner in effect forewent its unqualified right under clause 39 to object to a voyage transiting through the Gulf of Aden. In addition, the charterer in the present case did not bear obligations as onerous as those falling on the charterer in the The Evia (No 2) case.

The Court further set out the following considerations:

1.       English commercial law, in particular shipping law, recognises the importance of certainty and predictability and foster it as far as it can.

2.       Leaving aside joint names’ insurance case, the search for an implied insurance code necessarily introduces uncertainty since it is a question of seeking inference from a consideration of the charterparty terms as a whole.

3.       If parties wish to provide that there be no right of recovery or subrogation in respect of insured loss or damage, they can easily do so by express agreement.

4.       Practical difficulties may arise for the insurers because whether or not they are to have rights of subrogation is likely to be material for their rating of risks. However, if the existence of an insurance code depends upon implication to be drawn from the terms of the charterparty, the subrogation position may be very unclear.

Based on the reasons above, the Court held that there was no insurance code agreed in the Charterparty.

Key takeaways

The above case reflects that in the absence of joint names’ insurance arrangement, the Court is reluctant to find an implied insurance code in a charter. In case parties wishes to insert an insurance code into a contract, an express provision is likely to provide greater certainty.