Introduction

In June 2019, the UK Supreme Court released a judgment (Sveriges Angfartygs Assurans Forening (The Swedish Club) v Connect Shipping Inc and another [2019] UKSC 29), clarifying which type of costs incurred in the salvage of a damaged vessel should take into account when assessing whether such vessel is a constructive total loss or not. Section 60(2)(ii) of the Marine Insurance Act 1906 (“MIA”) provides that in the case of damage to a vessel, there is constructive total loss where “she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired”.

On 23 August 2012, a vessel under the name “Renos” was seriously damaged by an engine room fire while on a voyage in the Red Sea. Salvors were appointed under Lloyds Open Form 2011. The vessel was towed by the salvors to Adabiya, where her cargo was discharged, and subsequently to Suez, where the salvage services ended. Notice of abandonment was served on the insurers on 1 February 2013, while the vessel was at Suez. The Renos was insured at an agreed value of US$12m under a hull and machinery policy subscribed by the appellants (among others). The lead hull and machinery insurer was the first appellant, the Swedish Club.

The Proceedings

In the High Court, it was agreed by both sides that there had been an insured loss. Although the insurer acknowledged liability for a partial loss, they did not accept the notice of abandonment or a constructive total loss. The High Court held in favour of the owners of the vessel that there was a constructive total loss and the Court of Appeal concurred with the High Court upon the insurer’s appeal.

The Judgment

The Issues

The insurers then appealed to the Supreme Court based on the following two issues:

1.       Issue 1: Whether “the cost of repairing the damage” to the vessel under s.60(2)(ii) of MIA includes expenditure already incurred before the service of notice of abandonment;

2.       Issue 2: whether the relevant costs include charges payable to the salvors under the SCOPIC (Special Compensation, Protection and Indemnity) clause of Lloyd’s Open Form.

Issue 1: Expenditure incurred before notice of abandonment

The Supreme Court did not accept the insurers’ argument that expenditure incurred before the service of the notice of abandonment fell outside the scope of costs under s.60(2)(ii) of MIA.

The Supreme Court held that firstly, as a matter of language, the references in the MIA in relation to expenditure which “would” be incurred reflect the hypothetical character of the calculation and not the chronology of the expenditure. Secondly, as a general rule, the loss under a hull and machinery policy occurs at the time of the casualty and not when the measure of indemnity is ascertained. This rule applies even if the loss developed after the time of the casualty. Constructive total loss is a partial loss which is financially equivalent to a total loss, however, whether there has been such loss would depend on the objective facts. It therefore follows from this objective approach and the fact that the loss is suffered at the time of the casualty, that the damage referred to in s.60(2)(ii) MIA is in principle the entire damage arising from the casualty from the moment that it happens. The measure of that damage is its effect on the depreciation of the vessel, represented by the entire cost of recovering and repairing it. Thus, it cannot make any difference when that cost was incurred, where the service of a notice of abandonment is thus irrelevant.

Therefore applying such approach, together with the prospective cost of repairing the vessel, “the cost of repairing the damage” would include all reasonable costs of salving and safeguarding the vessel from the time of the casualty onwards.

Issue 2: SCOPIC Charges

Under the International Salvage Convention 1989, Article 8(1)(b) provides that in performing salvage services, a salvor had a duty to “exercise due care to prevent or minimise damage to the environment”; and article 14(1) entitles the salvors to “special compensation” from the shipowner in performing their duty under article 8(1)(b). Pursuant to the Lloyds Open Form, it is the liability of the shipowner to avoid environmental damage. It is well settled that “the cost of repairing the damage” includes certain costs not spent directly on the actual repair of the vessel, for example the cost of preliminary steps when their objective purpose was to enable the ship to be repaired.  The Supreme Court held that the cost of repairing the damage would generally include salvage charges, the cost of temporary repairs, towage and other steps plainly preliminary to carrying out permanent repairs of the vessel.  However, given that the purpose of SCOPIC charges was to protect the potential liability of the shipowner for environmental pollution and had nothing to do with the measure of the damage to the vessel and the possibility of repairing her, the Supreme Court held that the SCOPIC charges cannot be taken into account when deciding whether the vessel is constructive total loss or partial loss. 

The Supreme Court thus unanimously allowed the appeal in part, dismissing issue (1) but allowing it on issue (2), and remitted the case back to the High Court to determine whether there was a constructive total loss.

Conclusion

Under this judgment, the Supreme Court has clarified the position on which type of costs should be counted under s.60(2)(ii) of MIA in determining whether there has been a constructive or partial loss of a vessel.  In particular, the Supreme Court has overturned the decision of the lower courts, holding that, contrary to the widely held view, that SCOPIC charges were not part of the salvage costs which would counted towards the “repair of the damage” and could not be taken into account for the purposes of the MIA.

Shipowners and insurers should be aware of the potential significant financial consequences of this distinction, as Lloyd’s Open Form is a world-standard for salvage contracts and the SCOPIC clause is included by most parties as a matter of course.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.