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Marine Insurance Case Update 3

29 January 2014

High Court, Court of Appeal and Supreme Court Cases, January 2013 to June 2013 Update 3

Welcome to the third of our HFW Marine Insurance Case Updates which are produced on a six monthly basis. The Marine Insurance Case Update aims to provide you with regular summaries of English Court cases relevant to the law of marine insurance including hull, war and cargo risks. We will also seek to include other cases which may be of interest in terms of procedural decisions, for example service out of the jurisdiction or anti-suit injunctions.

This third update includes three reported cases arising from the “DC MERWESTONE” litigation, an interesting discussion on the Court’s powers of sale in respect of arrested vessels and a reinsurance case which has been included due to its commentary on when settlement has been entered into by one underwriter which binds the followers.

We hope you find the update useful and should you have any questions, then please do not hesitate to contact us.

Metall Market OOO v Vitorio Shipping Ltd (The “LEHMANN TIMBER”) [2013] EWCA Civ 650

Court of Appeal: Lady Justice Arden, Lord Justice Patten and Sir Bernard Rix

Mr Chirag Karia QC (instructed by Clyde & Co) for the Appellant

Miss Claire Blanchard QC (instructed by Stephenson Harwood) for the Respondent

In update 1 we reported on the “LEHMANN TIMBER” case in which the High Court held that the Owners’ costs of exercising a lien over cargo to obtain general average security were not recoverable. That decision has now been overturned by the Court of Appeal in a decision which is beneficial to Owners in a GA situation.

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The “LEHMANN TIMBER” was captured by Somali pirates in May 2008 on her maiden voyage. The Owners paid a ransom to secure the release of the Vessel and she sailed for Oman as a port of refuge. En route the Vessel suffered an engine breakdown which resulted in her having to be towed into port.

Owners declared general average and appointed average adjusters who attempted to collect general average security from the cargo interests including the claimant Metal Market OOO (“MMO“). However MMO refused to provide a general average bond, general average guarantee or a cash deposit for all of the cargo and did not pay Owners their proportion of the general average. Only some of the cargo belonging to MMO was insured and an insurer’s general average guarantee was provided for part cargo only. However no bond was provided and Owners exercised their general average lien over all cargo onboard.

Owners therefore discharged the cargo into a warehouse which resulted in them incurring costs for storage and insurance of the cargo which accrued substantially over time to the extent they were likely in excess of the sum due from MMO as their GA contribution.

In London arbitration Owners sought to recover a contribution from MMO to both the general average adjustment and the costs incurred in the protection and storage of the cargo (the lien). MMO denied that it had any liability to contribute in general average and counterclaimed for conversion of the cargo.

The arbitration tribunal found in favour of the Owners and found MMO liable for their proportion of general average and the storage costs. All MMO’s counterclaims were dismissed.

MMO appealed to the Commercial Court on the grounds that the Owners should have to deliver the cargo for which the General Average Guarantee had been provided. Further, MMO stated that they should not be liable for the storage costs of the cargo.

Held at First Instance

Mr Justice Popplewell held.

  1. That is was possible for Owners to insist on provision of both a general average bond and general average guarantee.
  2. In relation to the costs of exercising that lien, that following the common law position, it is possible to recover expenses incurred in the preservation of goods from the owner of goods providing that the owner is not denied possession purely because there is a lien being exercised over the goods. Applying this to the facts of the case MMO were denied possession purely because of the lien. Following Moller v Jecks (1865) 19 C.B.N.S. 332, a person cannot recover damages which have been caused by their own acts. Owners had, through the exercise of a lien, had the choice to store the cargo either on board or in a warehouse. They should not receive the costs of storage in a warehouse. This is because this could not be construed as being reasonable mitigation for the greater cost of storing the goods on board the vessel.

The decision was appealed.

Held in the Court of Appeal

Sir Bernard Rix gave the leading judgment. He overturned the High Court’s decision and held as follows.

Requirement by Owners for a GA Bond in addition to the GA Guarantee

The average bond and average guarantee requested did not in terms promise delivery by the owner. Rather, unlike the position in Castle Insurance Co v Hong Kong Islands Shipping Co (The Potoi Chau) [1984] A.C. 226, the consideration was the delivery of the cargo.

MMO could not cite any authority for its contention that Owners’ acceptance of the insurer’s guarantee (for part cargo) discharged their lien. On the contrary, the authorities illustrated how the average bond supported by additional security, either in the form of a guarantee from insurers or in the form of a cash deposit, was the typical and long standing means by which a shipowner was entitled to stipulate for the terms on which he would be willing to forego his lien. Sir Bernard Rix found, whereas the long standing practice illustrated that the bond may not necessarily be accomplished by a guarantee, there was nothing in the authorities to suggest that a guarantee without a bond was sufficient, or that to require both was unreasonable. He stated as follows (para. 37):

“Where a shipowner requests both bond and insurers guarantee, it seems hard to imagine that the law will insist that the provision of the guarantee but the refusal of a bond will nevertheless amount to a waiver or automatic discharge of the lien”.

In the light of the authorities, the long standing practice and the arbitrators’ findings, Sir Bernard Rix found, that Owners were fully entitled to be unwilling to give up their lien in the absence of a bond from MMO, even though the bond might not have added in any practical way to the sources of the liability to the Owner. In his judgment, and in the light of The Potoi Chau, the clarity and certainty of MMO’s obligations under the bond were a sufficient justification for Owners continuing to request one.

Sir Bernard Rix stated, that the only possible way MMO could succeed, was if the law absolutely required that a shipowner who had reasonably requested both a bond and a guarantee, but had received only the insurer’s guarantee, must be regarded as having foregone his lien. However, he found no authority of any relevance which spoke in favour of such a conclusion.

Sir Bernard Rix did not derive great assistance from authorities on the loss of solicitors’ liens. He stated, that Owners had made it clear to MMO that they were not willing to discharge the cargo, unless MMO provided security for all the cargo, which involved providing both a bond and a guarantee or a cash deposit for every bit of the cargo. It was impossible to infer, that there had been any waver of the lien, or that Owners had acted inconsistently with the lien. Even if the cargo had to be considered entirely separately, because they were carried under a separate bill of lading, Owners’ request for a bond and an insurer’s guarantee was not met. However, in Sir Bernard Rix’s judgment, the cargo could not be considered separately. The requested bond referred to all four bills of lading and to the complete cargo.

In sum, Sir Bernard Rix found that Owners had been entitled to refuse to deliver the cargo for which the general average guarantee had been provided despite receiving and retaining the insurer’s guarantee; and that even if it was not so entitled, he found that there were no damages payable to MMO.

Recovery of lien/Storage Costs by Owners

With regard to recovery of the storage costs for the cargo, the principle in Somes (Joseph) v Director of British Empire Shipping Co 11 E.R. 459 applied at first instance, was, in Sir Bernard Rix’s judgment, a narrow one, applicable to an artificer’s lien but of doubtful status outside that context. In the usual case of an artificer’s lien considered in Somes there was no breach of contract involved in the lienor’s failure to remove his chattel from the artificer at the time due for payment, and it was not considered, that the lienee would incur expense as a result of exercising the lien.

Sir Bernard Rix found that the Somes principle was harsh and uncommercial in a highly commercial setting such as ship-building or ship-repairing. He found that there was no sign that the Somes principle was of wide application. It was subject to any express or implied contract for the payment of the expenses of retention. He found it significant that the examples of application of the Somes principle available to our Courts were few, and no case applying the Somes principle could be produced in the shipping context of carriage of goods by sea, having considered Great Northern Railway Co v Swaffield (1873-74) L.R. 9 Ex. 132, Lyle Shipping Co v Cardiff Corp [1900] 2 Q.B. 638 and Smailes v Hans Dessen and Co (1906) 12 Com. Cas. 117, and having applied Anglo-Polish Steamship Line Ltd v Vickers Ltd (No.1) (1924) 19 Ll. L. Rep. 9.

Sir Bernard Rix stated that shipping is performed on the basis that time is money and that a ship is a travelling warehouse for which the cargo owner must pay either in the form of agreed freight or hire, or by way of damages for any breach of contract. If the ship is delayed by the cargo owner’s failure to arrange timely discharge then the contractual arrangement contemplates that either by the means of demurrage or general damages for detention, the cargo owner must pay. Sir Bernard Rix stated that the exercise of a lien must be reasonable and there must be no failure to mitigate damages. Furthermore the exercise of a lien was no excuse from contractual liability. Even if the Somes principle were prima facie capable of applying, he found, the contractual context, as contemplated in Somes itself, would take the case out of it.

Sir Bernard Rix did not accept the reasoning from the first instance. He stated as follows (para. 129):

“A shipowner should not be required to abandon his lien because the only other choices facing him were the disastrous ones of turning his ship into a floating warehouse for an indefinite period, or throwing the cargo into the sea, or storing them on land at his own expense”.

Furthermore he observed as follows (para.133):

“If the expenses of exercising a lien may be claimed in a post-contractual situation of bailment, there should be all the more reason for reaching the same result in a contractual bailment”.

Sir Bernard Rix found no reason why the lien for general average should be subject to a strict but narrow principle deriving from the English common law’s artificer’s lien, referring to The Prins Knud [1942] AC 667 (PC) (at 689-690). Thus he allowed the appeal concerning the applicability of the Somes principle, and as a result, the appeal from the arbitrators’ award failed and the award was upheld.

Les sociétés de droit Allemand Vega Reederei Freidrich Dauber Gmbh & Co KG (Hambourg) Partenreedererei M/S Heidberg (Hambourg) v La SAS Société des Pétroles Shell Assurances Mutuelles Agricoles Groupama

Court of Appeal in Bordeaux

Holman Fenwick Willan for the Applicants

Factual Background

During the night of 8/9 March 1991, “HEIDBERG“, when leaving Bordeaux laden with a full cargo of grain, failed to negotiate a bend in the river estuary as a result of a navigational error and struck an oil jetty, partially destroying it, and causing some heat and wet damage to the cargo of grain resulting from the fire and the efforts to extinguish it.

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Despite a limitation fund being constituted within days of the incident, the French courts refused to order the release of the Vessel from arrest and it took two and a half years, diplomatic exchanges between the German and French governments and three decisions of the French Supreme Court, the Cour de cassation, before decisions refusing to order her release were finally overturned.

By that time, however, the first instance court had determined the case on the merits, determining that the shipowner should be deprived of its right to limit liability on the basis of alleged under manning, and finding the shipowner liable to pay to the claimants a sum which proved to be some 25 times greater than the amount of the limitation fund. The Vessel continued to be held pending enforcement of the judgment, notwithstanding appeal in France and hotly contested enforcement proceedings in Germany.

The Vessel was finally released, some four years after the incident, against payment of the sums awarded. Perhaps ironically, given the allegations of under manning, the Vessel was authorised by the German authorities, and without intervention from the French authorities, to depart from Bordeaux with a complement of crew identical to that which was aboard at the time of the incident.

In order to bolster their allegations in the civil action, a criminal complaint was filed by the claimants and, in June 1995, the investigating magistrate decided to pursue charges against the directors of the owning company in connection with alleged forgery and the use of forged documents in respect of the use in the civil proceedings of the Vessel’s crewing and tonnage documentation. The documents were alleged, although recognised as being true copies of the documents issued, either to have been obtained fraudulently and/or not to reflect the true position (according to the claimants). Unusually, a senior official from the German authorities agreed to give evidence before the French criminal court, and in June 1999 all criminal charges were dismissed by the first instance criminal court, with the criminal action finally being concluded by a decision of the criminal court of appeal in September 2003.

The appeal which had been commenced by the shipowner and its insurers in the civil action was, however, stayed for a period of more than eight years as a result of the criminal proceedings. Findings of fact by the criminal courts in relation to the manning of the Vessel were however to become important to the outcome of the civil claims.

The appeal in the civil action resumed in late 2003 and judgment was pronounced in May 2005, unexpectedly finding in favour of the claimants and continuing to deprive the shipowner of its right to limitation on the basis of an argument which had not even been raised by the claimants in any of the pleadings – that although the Vessel was properly manned in accordance with all applicable regulations (as had already been determined by the criminal court), the shipowner had nevertheless committed a fault sufficient to deprive it of its right to limit in failing to ensure that there existed as between the Master and the crew “the confidence and cohesion indispensable to permit them to overcome difficulties which whilst unforeseen were not unforeseeable”.

By its decision pronounced in October 2007, the Cour de cassation overturned this decision, ostensibly on the basis of a point of procedure: that the Court of Appeal had failed to grant the shipowner a proper opportunity to address the relevant issue, and sent the case back for a full re-hearing.


On 14 January 2013, the Court of Appeal in Bordeaux finally set the record straight, finding that there was no evidence to support the allegations of under manning, that the accident was the result of a clear and simple error of navigation, that the claimants have failed to demonstrate any fault sufficient to deprive the shipowner of its right to limit and that the owners are accordingly entitled to limit their liability.

The decision, adopting a strict application of the terms of the 1976 London Convention, is likely to be of great significance in the development of the law relating to the limitation of liability for maritime claims, notably in civil law jurisdictions, including in particular in those jurisdictions which look to French law as its source of law.

The decision, adopting a strict application of the terms of the 1976 London Convention, is likely to be of great significance in the development of the law relating to the limitation of liability for maritime claims, notably in civil law jurisdictions, including in particular in those jurisdictions which look to French law as its source of law.

A further appeal still remains possible to the Cour de cassation.

Bank of Scotland Plc v Owners of the M/V “UNION GOLD”; Owners of the M/V “UNION SILVER”; Owners of the M/V “UNION EMERALD”; Owners of the M/V “UNION PLUTO” [2013] EWHC 1696

High Court: Mr Justice Christopher Teare

Sandra Healy (instructed by Stephenson Harwood) for the Claimants


Union Transport Group Plc is the owner of four small cargo ships “UNION EMERALD”, “UNION SILVER” and “UNION GOLD” built in 2008. The fourth, “UNION PLUTO” was built in 1984. Bank of Scotland provided finance for the construction and purchase of three of the vessels built in 2008 which was secured across all four vessels along with a debt for the “UNION BRONZE“. From late 2011 Union Transport was in default of these finance arrangements with the relevant notices being served by the Bank thereafter. The Bank’s case is that approximately €13,000,000 is secured by mortgages across the four vessels.

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In addition to the Bank there are other creditors of Union Transport with claims in rem against the vessels. The largest such claim is a claim by A&P Tees Limited for £211,405 in respect of repair work to the “UNION PLUTO“. Other claims in rem are in respect of bunkers supplied to the vessels by various bunker companies, one of whom entered cautions against the release of the vessels on 5 June 2013.

In June 2013 the Bank of Scotland applied to the Court for an order that the 4 vessels be sold before judgment, or pendents lite, and that they be sold to a certain buyer at a certain price. They had received offers to purchase:

  1. The “UNION SILVER, ” and “UNION GOLD” from the original shipyard that built them for €4,700,000 against a combined valuation of €3,000,000 for sale at public auction or maximum €5,500,000 for private sale.
  2. The “UNION EMERALD” from an existing client of the bank for €2,700,000 against a combined valuation of €3,250,000 for sale at public auction or maximum €2,750,000 for private sale.
  3. The “UNION PLUTO” from a new entity started by the managing director of Union Transport for €329,000 against a combined valuation of €225,000 for sale at public auction or maximum €315,000 for private sale.

Sales by the Admiralty Marshall

Justice Teare summarised the procedure for the sale of a vessel which has been arrested in rem. He noted that a claimant may seek an order that the vessel be sold in advance of obtaining judgment. However, even in such circumstances the vessel must be sold for the best possible price so that all claimants against the vessel may be satisfied to the greatest extent possible. In order to ensure that the best sale price is obtained, the Admiralty Marshall will have the vessel appraised by an experienced ship broker, tender adverts and await bids. The Admiralty Marshall is not permitted to sell the vessel for less than the appraised value without leave of the Court. This process is internationally recognised as conferring on the purchaser of the vessel title which is free of liens and encumbrances. As a result any interference with the Admiralty Marshall’s duties is contempt of Court.

A Mortgagee’s Power of Sale

A mortgagee’s power of sale exists to the extent that there is no contrary Court Order for the sale of the same vessel. However, that does not preclude a mortgagee from selling the vessel whilst under arrest, as long as there is no Court Order for a sale. However, such a sale while under arrest would not confer a title free of liens and encumbrances and, if under arrest, the vessel will still be under arrest. In addition anybody with a maritime lien against the vessel would still be able to enforce that lien after the mortgagee sale.


The question in this case arises as to whether it is appropriate for the Court to depart from its usual procedure in circumstances where the Bank has identified a purchaser for the vessels at or above market price.

Justice Teare’s concern was that the proposal by the Bank would not provide for any appraisement by the Admiralty Marshall. Whilst the valuations which had been put forward by the Bank were for the most part in accordance with the offers being made, the Court had not undertaken an independent assessment process.

Justice Teare noted that the Admiralty Marshall has considerable experience in such matters and has access to knowledge and information that the Court, looking at bland valuations, does not have. For example the Court notes that it is sensible to keep the valuation of the vessel to be sold confidential as making it public knowledge is likely to affect the amount bidders are likely bid. In addition, removing the advertisement system is also likely to depress the price that is obtained by the sale. The Court has previously discussed this in the case of APJ Shalin [1991] 2 Lloyd’s Rep. 62 when Sheen J noted that private negotiations could adversely affect the market because they could have the result that potential bids would be withheld. In Halcyon the Great (2) [1975] 1 Lloyd’s Rep. 525 Brandon J noted:

“It seems to me important that there should be no doubts in anybody’s mind that when the ship is re-offered for sale she is re-offered freely to the whole world and not just for the purposes enabling any particular person who has in mind to make a particular bid to do so. If there is some particular person who has in mind to make a particular bid he will be free to compete with all other bidders.”

Therefore Justice Teare concluded that it is wrong in principle for the Court to depart from the usual order that the Admiralty Marshall sell the vessel by appraisement, advertisement and inviting bids to purchase the vessel. To do otherwise would give the impression that the Admiralty Marshall is acting for a particular claimant in rem rather than an officer of the Court – he must have regard to the interests of all claimants in rem. On this basis the Judge refused the application in respect of the “UNION GOLD“, “UNION SILVER” and “UNION EMERALD“.

Justice Teare noted however that there were special circumstances in relation to the “UNION PLUTO“. Those circumstances were that if the vessel was not sold by 7 June 2013 a long term contract would be lost risking the jobs of 42 people. The presence of this long term contract on such an elderly vessel (25 years older than the other 3 vessels) is of considerable attraction to the purchaser that has been identified and put forward by the Bank. Indeed if the contract had been lost Justice Teare thought it unlikely that this purchaser would be willing to buy the vessel. The purchaser was willing to buy the vessel for €329,000 against a value of €315,000. This particular fact or circumstance convinced the Judge that it was exceptionally appropriate to permit the Marshall to sell the vessel to Angel Shipping Ltd. In these circumstances, departing from the conventional and regular sale by the Admiralty Marshall does not give rise to any real risk of the Court’s reputation for impartiality being tarnished.

Beazley Underwriting Ltd and others v Al Ahleia Insurance Company and other companies [2013] EWHC 677 (Comm)

Commercial Court: Eder J

N Calver QC (instructed by Morgan Lewis & Bockius LLP) for the Claimants

P Melwani QC and B Coffer (instructed by Ince & Co LLP) for the Defendants

Facts – The Insurance Policy

In 2005 the Kuwait underwriter Al Ahleia Insurance Company (the “Insurer“) entered into an open cover construction all risk and third party liability insurance policy with the Kuwaiti Oil Company (the “Assured“). The Assured had commissioned the construction of 15 new crude oil storage tanks in Kuwait by Hyundai Heavy Industries. Under the insurance policy, the Insurer wrote 35% of the risk with the balance being provided by other local insurers Warba Insurance Company, Bahrain Kuwait Insurance Company, Gulf Insurance Company, First Takaful Insurance Company and Wethaq Takaful Insurance Company.

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The policy contained the LEG2 exclusion which prevents any coverage under the insurance policy on the basis of a defective design. This point had been made clear to the Assured via the brokers, Aon. It was also drawn to the attention of the local underwriters when the reinsurance contract was entered into.

In March 2007, one of these tanks was found to be defective due to its installation and use of rubbish in the foundations. Estimates of the repair costs were in the region of $28,000,000.

Facts – The Re-Insurance Contract

The Insurer was acting as a local cedent underwriter of the London reinsurers which included AIG/Chartis, Beazley, Swiss Re, Transatlantic, Millennium, Liberty and XL as London underwriters (the “Reinsurers“) .

Under the reinsurance contract the Insurer retained 7.5% of the risk and two of the following Insurers retained 1.5%. AIG reinsured 20% of the insurance contract which made them joint slip leaders with Beazley. Together with Millennium the three underwriters were claims agreement parties under the reinsurance contract. It was common ground that each of AIG, Beazley, Trans Re and Millennium, would be deemed to amount to the agreement of all reinsurers for the purposes of controlling and agreeing claims; and that it was not sufficient that only AIG’s prior approval to any settlement between the Insurer and Assured was obtained by the Insurer, nor was only AIG given the right to control the negotiations which led up to the attempted settlement.

Both the insurance contract and the reinsurance contract were broked by AON.

The reinsurance contract included a claims control clause:

“Notwithstanding anything contained in the Reinsurance Agreement and/or the Original Policy Wording to the contrary, it is a condition precedent to any liability under this Reinsurance that:

  • the Reinsured shall upon knowledge of any loss or losses which may give rise to a claim under this Policy, advise the Reinsurers thereof as soon as reasonably practicable;
  • The Reinsured shall furnish the Reinsurers with all information available respecting such loss or losses and the Reinsurers shall have the right to appoint adjusters, assessors, surveyors or other experts and to control all negotiations, adjustments, and settlements in connection with such loss or losses.
  • No settlement and/or compromise shall be made and no liability admitted without the prior approval of Reinsurers.

In the event of a claim under the Original Policy Wording Reinsurers hereon agree that settlement shall take place at the same time as settlement or advance of funds under the said Original Policy Wording.”

Facts – The Dispute

The claim was effectively negotiated directly between the Reinsurers and the Assured without any input from the Insurers who did not seek to rely on any defences in the underlying policy. They took this position because of their view that the reinsurance policy and the underlying policy were effectively back to back. The Reinsurers rejected the claim on the basis of the LEG2 exclusion.

In May 2009 the account for Kuwaiti Petroleum Company was coming up for renewal with Aon. Aon were anxious to retain the account and AIG/Chartis were anxious to maintain a commercial relationship with the Kuwaiti Petroleum Company. Aon therefore decided to try and agree the claim with AIG/Chartis alone. This resulted in some exchange of correspondence between Aon and AIG/Chartis direct which was subsequently forwarded to Beazleys who up until that point had not been consulted in any potential suggested claim settlements. Aon continued to negotiate with AIG/Chartis alone until such point that AIG made an offer to settle after the application of LEG2. At the time AIG/Chartis were expressly aware that it may take some time for the market to follow such settlement.

By October 2009 AIG/Chartis had agreed to pay their proportion (20%) of a settlement in the amount of US$19,163,173. They expressly noted that this was a settlement only as between AIG and the Insurer. In November 2009 AIG/Chartis paid their proportion of this settlement figure. The Insurers also paid their proportion of the retained risk under the insurance policy. Shortly

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