MT Polar - UK Supreme Court - implying an insurance code or fund into a charterparty
Published: February 22, 2024
The ‘normal’ rule is that a defendant should not be able to benefit from a claimant's decision to take out insurance. Accordingly, insurers are able to pursue subrogated claims against third parties. However, contractual parties may agree for specified losses or damages to be covered by insurance with both parties benefiting from the “protection” afforded by that insurance such that there are no subrogated rights for their insurer to pursue to mitigate the exposure. Such an “insurance code” or “insurance fund” was held to exist under a demise charter in The Ocean Victory [2017] UKSC 35 as well as under a time charter in The Evia (No. 2) [1983] 1 AC 736 [HL].
The question of whether an insurance code or fund existed in the context of a voyage charter was recently considered in Herculito Maritime Limited v. Gunvor International BV [2024] UKSC 2 (the “MT Polar”).
The case is discussed in two other articles by the Club, one in the context of War Risks Clauses, the other on the incorporation of terms from a voyage charter into bills of lading. This article focuses on another aspect of The Polar; the insurance code question, and the argument by the cargo interests that they were not liable to contribute by way of general average to a ransom paid to pirates. Their argument was that because:
Under the charterparty additional insurance premia incurred for transit through the Gulf of Aden were to be paid by the charterer;
That this amounted to an insurance code so that the owner could not claim against the charterer in respect of losses arising out of risks for which additional insurance had been obtained; and
That because the charterparty clauses – in particular the war risk clauses and the additional Gulf of Aden clause – were incorporated into the bills of lading;
The insurance code extended to cargo interests thereby also precluding owners from claiming general average contributions from the bill of lading holders.
The vessel had been seized by Somali pirates whilst transiting the Gulf of Aden and was only released some 10 months later after a ransom of US$7.7 million was paid by or on behalf of the vessel owner. The owner had K&R insurance which had been paid by the charterer, and declared general average with cargo interests proportion of the general average being US$4.8 million.
When cargo interests refused to contribute in general average the K&R insurer’s subrogated claim to recover cargoes proportion of general average was arbitrated in London. The tribunal concluded that the charterparty clauses were incorporated into the bills of lading, and as such, the insurance code extended not only to owners and charterers but also for the benefit of the lawful holders of the bill of lading.
On appeal both the Commercial Court and Court of Appeal disagreed. Whilst the relevant charter clauses – in particular the war risk clauses and the additional Gulf of Aden clause – precluded the owner from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained1, and that these clauses were incorporated into the bills of lading, they did not agree that this meant the owner was precluded from claiming against the bill of lading holders. They therefore held that the cargo interests did have to contribute to general average.
The case was appealed to the Supreme Court. In a judgment given on 17 January 2024, the Supreme Court noted that:
most cases in which there has been held to be an insurance code or fund have involved insurance in the joint names of the contracting parties, most notably The Ocean Victory; and
Such insurance arrangements not only provide a fund which inures to the benefit of both parties, but also brings into play 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.
While an agreement to joint names insurance is a “powerful factor in favour of there being an insurance code or fund”, this is not the only decisive factor when deciding if such an arrangement exists. This is a matter of construing the contract as a whole and if not expressly addressed in the charterparty a question of whether it is the necessary consequence of the contractual scheme that has been agreed in the charter, which the Supreme Court stressed was “akin to a necessarily implied term and involves a similarly high threshold”. In The Ocean Victory, various other factors were also taken into account and relied upon, such as the fact that charterers were to effect all insured repairs and pay for them, and then be reimbursed by insurers; that time used for repairs was to remain on hire and form part of the charter period; that if the vessel was to become a total loss, the insurance monies were to be split between the mortgagee, owners and charterers, in accordance with their interests; and that the insurers’ rights of recovery or subrogation were expressly excluded.
On the other hand, where owners and charterers are not co-insureds, a high threshold would need to be satisfied before implying an insurance code or fund as a necessary consequence of what was agreed between the parties. The only shipping case where an insurance code was successfully implied in the context of a non-joint names insurance is The Evia (No. 2), but the Supreme Court cautioned against relying on that decision unless the particular features as identified by Lord Roskill in that case can similarly be established:
Does the charterparty confer on owners an “unqualified right” or “absolute veto” to refuse employment orders that would imperil the ship? In contrast re the MT Polar, the contractual voyage was described as “via Suez”, the charterparty contained clauses setting out the terms on which the Gulf of Aden could be transited, and the risks of attacks by pirates in that area were well known at the time of contracting.
Are charterers obliged to pay additional war risk premium? The Supreme Court however stressed that payment of premium in itself is not determinative, and noted there could have been cost sharing in the MT Polar since there was a cap on the amount of premium payable by charterers.
Do additional obligations fall on charterers if owners are found to have – and do exercise – their war risk liberties? In general, the standard form charterparty clauses provide for a vessel to be off-hire if war risks materialise and the vessel is delayed as a result, but in The Evia (No. 2) hire remained payable for all time lost owing to loss or injury to the crew or their actions in refusing to proceed to such zone or be exposed to such risks.
Do the clauses making up the war risks regime bear rubrics like “war risks” or “Gulf of Aden”? This may highlight a special agreement reached between the parties in relation to the specific known risks of transiting that war risk area, albeit the Supreme Court did not consider this factor to carry much weight.
If an insurance code or fund is not implied, would this lead to a “remarkable result” that (i) charterers would otherwise obtain no benefit from the payment of additional premium and (ii) do so in circumstances where they were undertaking a significant additional burden (in relation to the disapplication of the off-hire clause)? In contrast re the MT Polar, charterers benefited in being entitled to transit the Gulf of Aden (which they would not otherwise be able to) and did not assume additional obligations equivalent to the on-hire provisions found in The Evia (No. 2).
For the above reasons, the Supreme Court found that there was no insurance code or fund agreed in The Polar charter, and therefore there was no insurance code to incorporate into any bills of lading. Whether the charterparty clauses were incorporated into the bills of lading is addressed in a separate Club article.
This decision brings clarification that there is no principle exempting charterers from liability for their breaches of contract or in general average merely on the ground that they have directly or indirectly provided the funds to pay insurance premia. However, where there is an intention to establish an insurance “code” or “fund” to benefit contractual parties – whether in the context of piracy or war clauses or other risks – clear and unambiguous language is required before an owner can be considered to have agreed to give up valuable general rights - in the case of The Polar in relation to general average contributions from cargo owners in circumstances where cargo owners would have been expected to insure such a risk in the cargo insurance market.
1 The Court of Appeal expressed no concluded view on whether the owner was precluded from claiming against the charterer.
