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May shipowners claim general average from cargo owners when the loss is covered by insurance?

2021-02-01

Introduction

In the unfortunate event that a ship is detained by pirates, payment of a ransom to pirates may be required for the vessel to be released so that the vessel may continue its voyage. In the recent English case of Herculito Maritime Ltd v Gunvor International BV [2020] EWHC 3318 (Comm), the Commercial Court (the “Court”) considered 2 issues, namely a novel issue on the incorporation of war risks clauses to bills of lading; and whether shipowners can recover their loss in general average contribution from cargo owners when the bill of lading has incorporated insurance policy found in the charterparty.


Background

Herculito Maritime Limited (the “Shipowner”) chartered the vessel, POLAR (the “Vessel”) to Clearlake Shipping Limited (the “Charterer”). The Vessel carried a cargo of around 69,000 m.t. of fuel oil. The agreement between the Shipowner and the Charterer (the “Charterparty”) included a War Risk clause in an amended BPVOY4 form, an additional war risk clause and a Gulf of Aden clause (together, “Clauses in Issue”). The Shipowner had an annual hull & machinery and war risk insurance which covered piracy. The terms of the Charterparty were incorporated into the bills of lading (the “Bills of Lading”) by the incorporation clause in the Bills of Lading. During the voyage, the Vessel was seized by Somali pirates in the Gulf of Aden and held for ransom. The Vessel was released after a ransom of US$7,700,000 was paid. Subsequently, the Shipowner claim general average of US$4,800,000 against the Gunvor International BV (the “Cargo Owner”). The Cargo Owner refused to pay and the Shipowner commenced arbitration against the Cargo Owner.

At arbitration, the Tribunal held that since the Clauses in Issue in the Charterparty were incorporated into the Bills of Lading, the Cargo Owner was not liable to pay general average in respect of the ransom payment as the Shipowner had agreed to seek compensation from the insurer. The Shipowner then appealed against the Tribunal’s decision. On appeal, the Shipowner brought 2 questions of law to the Court, namely:-

1.        whether the terms of the Charterparty are incorporated into the Bills of Lading; and

2.        whether the Shipowner agreed to only recover general average from her insurer but not from the Cargo Owner under the Bills of Lading.


Decision

First issue

Following the rule regarding incorporating clauses into a bill of lading in The Miramar [1984] 1 AC 676, the Court held that there was no presumption for clauses to be incorporated in a bill of lading even when the clauses are directly germane to the shipment, carriage or delivery of goods and impose obligations upon the charterer under that designation. Particularly, the Court noted that contractual terms should be studied with care to see whether manipulations or substitutions are required. The Court also stated that it would refrain from mechanically incorporating a term which is inconsistent with a bill of lading.

In this case, while the wordings in the incorporation clause are wide enough to encompass all Clauses in Issue, the Court held that the only Clauses in Issue which is binding towards parties of the Bills of Lading is the liberties conferred to the Shipowner, namely the Shipowner’s liberty to not complete the voyage or to depart from the usual or expected route. Other Clauses in Issue which required Cargo Owner to pay more than the agreed freight if certain liberties were exercised by the Shipowner would not be binding as the amount would be unknown and unlimited. This would be inconsistent with the obligation of the Cargo Owner to pay freight according to the Charterparty and therefore it was unlikely that the Cargo Owner would agree to such liability. Hence, the Court reached a different conclusion from the Tribunal in terms of incorporation of clauses.

Second issue

According to Longmore LJ in Ocean Victory [2017] 1 WLR 1793, where a contract required a party to insure, both contracting parties have agreed to look to the insurers for indemnification rather than to seek indemnification from each other. The Court held that the rule in Ocean Victory was also applicable in terms of general average contribution.

Construing the Charterparty, the Shipowner had agreed to insure against war risks and the Charterer had agreed to pay the insurance premium. Unless there are sufficient countervailing reasons, it is presumed that the parties had agreed to only recover general average from the insurer. Therefore, the Shipowner was precluded from seeking recovery of the general average from the Charterer.

However, the position of the Cargo Owner is different from that of the Charterer. The Cargo Owner is not a party to the Charterparty. Furthermore, the Bills of Lading did not contain an agreement by the Cargo Owner to pay the insurance premium. Therefore, it cannot be said that the Cargo Owner has paid the premium in insurance in order to shed their liability to contribute to the general average. Hence, the Court held that the Cargo Owner can be liable under a claim of general average by the Shipowner and the decision of the Tribunal was reversed.


Takeaways

While it is unlikely that this judgment will bring about a significant amount of cases claiming general average as piracy in shipping is less prevalent nowadays, the judgment is expected to have a wide application in relation to the incorporation of clauses and right to claim damages. It is common for clauses in a charterparty to be incorporated into a bill of lading. This judgment serves as a reminder to drafters of charterparty and bill of lading that while the incorporation of clauses seems straightforward, one should always be mindful of any inconsistencies between the two. Moreover, it should be warned that holders of a bill of lading, unlike charterers, are not being protected by insurance premiums paid.




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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.

Published by ONC Lawyers © 2021


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