The vessel MT POLAR was seized by Somali pirates in the Gulf of Aden. The shipowner claimed general average contribution from cargo interests for the ransom paid. Cargo interests argued charter insurance provisions created an 'insurance code' precluding such claims. The Supreme Court held no insurance code existed and cargo interests must contribute.
Background
On 30 October 2010, the vessel MT POLAR was seized by Somali pirates whilst transiting the designated ‘High Risk Area’ in the Gulf of Aden during a voyage from St Petersburg to Singapore, laden with a cargo of fuel oil. The vessel was held captive for ten months before being released on 26 August 2011 following the payment of a ransom of US$7,700,000 by or on behalf of the shipowner (Herculito Maritime Ltd and others, the respondents). General average was declared and an adjustment issued concluding that approximately US$4.8 million was due from the cargo interests (Gunvor International BV and others, the appellants).
The vessel had been chartered under a voyage charterparty incorporating the BPVOY 4 form, including a clause 39 dealing with ‘War Risks’, a separate ‘War Risk’ clause, and a ‘Gulf of Aden’ clause. The Gulf of Aden clause provided, among other things, that additional insurance premia (including those in respect of kidnap risks and ransoms) would be for the charterer’s account, subject to a cap of US$40,000. Six bills of lading were issued incorporating the charterparty terms by general words of incorporation.
Before transiting the Gulf of Aden, the shipowner obtained Kidnap and Ransom (K&R) insurance and extended its Hull & Machinery and War Risk insurance. The charterer was liable for additional premia pursuant to the Gulf of Aden clause.
The Issue(s)
The appeal raised four principal issues:
Issue 1
Whether, on the proper interpretation of the voyage charter, the shipowner was precluded from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained — i.e. whether an ‘insurance code’ or ‘insurance fund’ existed under the charter.
Issue 2
Whether all material parts of the war risk and Gulf of Aden clauses were incorporated into the bills of lading.
Issue 3
Whether, on the proper interpretation of those clauses as incorporated into the bills of lading, the shipowner was precluded from claiming against the bill of lading holders.
Issue 4
Whether the wording of the incorporated clauses should be manipulated to substitute references to ‘the Charterers’ with ‘the holders of the bill of lading’ in the insurance premium provisions.
The Court’s Reasoning
Issue 1: No insurance code in the charter
Lord Hamblen, delivering the sole substantive judgment with which all other Justices agreed, undertook a detailed analysis of the relevant authorities, principally Gard Marine and Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) [2017] UKSC 35 and Kodros Shipping Corp v Empresa Cubana de Fletes (The Evia (No 2)) [1983] 1 AC 736. Lord Hamblen noted that whether an insurance code exists is a matter of construction involving a high threshold akin to a necessarily implied term. He stated:
To establish that the parties have agreed an insurance code or fund it has to be shown that this is a necessary consequence of what has been agreed – that is a high threshold.
Lord Hamblen rejected the cargo interests’ contention that the war risks regime in the charter was materially indistinguishable from that in The Evia (No 2). Critically, he held that clause 39’s sweeping liberties could not be relied upon by the shipowner in relation to the known piracy risk of transiting the Gulf of Aden, because the parties had specifically agreed terms for that transit. He reasoned:
Having agreed the vessel’s route and the terms upon which the Gulf of Aden would be transited neither the shipowner nor the master could then turn round and say that they had changed their mind and were no longer willing to take on the known piracy risk of transiting the Gulf of Aden on the terms agreed.
Applying each of the four features of significance identified by Lord Roskill in The Evia (No 2), Lord Hamblen found them either absent or of little weight. In particular, there was no ‘unqualified right’ or ‘absolute veto’ comparable to clause 21 of the Baltime form, no joint names insurance, and no equivalent obligation on the charterer regarding hire during delay caused by war risks. The charterer obtained a real benefit from paying additional premia — the foregoing of the shipowner’s liberties under clause 39 — which was distinct from the insurance code scenario envisaged in The Evia (No 2).
Lord Hamblen further endorsed the principle from The Concordia Fjord [1984] 1 Lloyd’s Rep 385:
I am not aware of any principle exempting the Charterers from liability for their breaches of contract merely on the ground that they have directly or indirectly provided the funds whereby the Owners insured themselves against such damage.
He also offered important general guidance, counselling caution before extending The Evia (No 2) to differently termed charters:
The decision in The Evia (No 2) turned on the particular terms of the charter in that case. It did not purport to establish any general principle, nor did it do so. In my judgment tribunals should be cautious before concluding that the reasoning and decision in The Evia (No 2) should be followed in relation to differently termed charters.
Issue 2: Incorporation into bills of lading
Lord Hamblen affirmed that clause 39 and the Gulf of Aden and War Risk clauses were all incorporated into the bills of lading by general words. He endorsed the summary of the applicable principles in Scrutton on Charterparties (24th ed) and emphasised that general words incorporate provisions which are ‘germane’ (or ‘directly relate’) to the shipment, carriage, and delivery of the cargo. The clauses related to the route to be taken and were therefore directly relevant to carriage. Importantly, the insurance premium provisions were integral to the contractual regime governing the Gulf of Aden transit and qualified the liberties under clause 39:
The intention must surely be to incorporate the entirety of the relevant contractual regime set out in the charter rather than to do so partially or incompletely.
Lord Hamblen also clarified that what matters are the incorporating words in the bill of lading, not provisions in the charterparty regarding incorporation, preferring the approach in The Varenna and The Federal Bulker.
Issue 3: No insurance code in the bills of lading
Even assuming (contrary to the finding on Issue 1) that the charter contained an insurance code, Lord Hamblen held it could not operate in the bills of lading without manipulation. The obligation to pay the insurance premia rested on the charterer alone, and no such obligation was imposed on the bill of lading holder. An essential reason for any insurance code — that the counterparty pays for the insurance — was therefore absent:
If there is no manipulation of the wording of the incorporated clauses, then the obligation to pay the insurance premia rests on the charterer alone. There is no such obligation on the bill of lading holder. If so, then an essential reason for holding there is an insurance code or fund is inapplicable.
Issue 4: No manipulation warranted
Lord Hamblen held that manipulation was neither necessary nor appropriate. The clauses made good sense in the bill of lading context as a record of the shipowner’s agreed terms for transiting the Gulf of Aden. Substituting ‘bill of lading holders’ for ‘charterers’ would give rise to serious practical difficulties concerning the basis and allocation of liability among multiple holders, which would be ‘wholly unclear’.
Practical Significance
This decision is the first in which the Supreme Court has considered the existence of an insurance code or fund in the context of a voyage charterparty and bills of lading incorporating voyage charter terms. It clarifies several important points of shipping and commercial law:
- The existence of an insurance code is a matter of construction requiring a high threshold akin to a necessarily implied term; there is no ‘prima facie position’ that requiring a party to insure means recourse must be limited to insurance.
- The mere payment of additional insurance premia by a charterer does not create an insurance code precluding recovery by the shipowner.
- Where a charterparty specifically contemplates a voyage through a known risk area and provides terms for doing so, the shipowner cannot rely on general war risk liberties to refuse performance on account of those known risks.
- The principles governing incorporation of charterparty terms into bills of lading were restated and refined, including the primacy of the bill of lading’s own incorporating words.
- The decision confirms the continuing authority and limitations of The Evia (No 2), confining it strictly to its own particular terms.
Verdict: The appeal was dismissed. The Supreme Court held that (1) no insurance code or fund existed under the voyage charter precluding the shipowner’s claim; (2) all material parts of the war risk and Gulf of Aden clauses were incorporated into the bills of lading; (3) even assuming an insurance code existed in the charter, the shipowner was not precluded from claiming against the bill of lading holders; and (4) the wording of the incorporated clauses should not be manipulated to substitute ‘the Charterers’ with ‘the holders of the bill of lading’. Accordingly, the cargo interests were liable to contribute in general average in respect of the ransom payment.
