Wrongful Arrest and War Risks Policies - Obligation to Sue and Labour?

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In 1989 the vessel “Safir” grounded on a coral reef off the coast of Egypt.  Considerable environmental damage resulted.  In 1996 various defendants, including the owners and managers of the “Safir”, were found jointly liable to the Egyptian Environmental Affairs Agency for a sum equivalent to about US$ 51,650,000.  In addition, the defendants were ordered to pay two forms of “court dues.”  The first, a sum of 5% of the judgment debt to the Egyptian National Treasury (“proportional court dues”) and the second, a sum of 2.5% to the “Health and Social Services fund of the members of the Judicial Authorities” (“the Judges’ Fund”). Sums paid into the Judges’ Fund are used to pay for the health and welfare of judges and other state lawyers, and their families.  No part of the judgment debt nor the court dues has ever been paid.

On 24 December 2008 the Port Suez Court ordered an executory arrest of the Melinda Holdings’ (Melinda) vessel, the “Silvia”. The arrest was said to be by reference to the 1996 judgment debt owed by the “Safir” defendants in respect of the proportional court and Judges’ Fund dues. The ex parte arrest automatically led to sale proceedings in the Port Said Court. 

In January 2009 Melinda challenged the arrest by issuing “nullification proceedings” which would have had the effect of suspending the sale proceedings. The Egyptian Court of Execution dismissed the nullification proceedings on 26 April 2009, thus upholding the arrest.  Melinda lodged a further appeal.  However, after a number of adjournments, the appeal had still not been heard when this case came before the Commercial Court.  “Silvia” remained at Port Suez, with her Master not permitted to leave the vessel.

Melinda made a claim under the policy it had with the Hellenic War Risks Association (Bermuda).  The parties agreed that the vessel was a constructive total loss in accordance with the terms of the policy and Hellenic accepted that prima facie there was an insured cause of loss pursuant to Rule 2A.2.2 of the Policy which covered "capture, seizure, arrest, restraint or detainment, and the consequences thereof." 

However Hellenic argued that the loss suffered by Melinda as a result of the acts of the Egyptian court was excluded from the Policy cover.  In support of this Hellenic sought to rely on an exclusion clause providing that Melinda was not covered for “claims arising out of ordinary judicial process.”

It also relied on an exclusion clause providing that should Melinda or its agents fail to carry out its obligation to “take and to continue to take all such steps as may be reasonable for the purpose of averting or minimising any loss, damage, liability, cost or expense in respect whereof he may be insured by [Hellenic]” then Hellenic was entitled to reject or reduce any sum payable to Melinda under the Insurance (i.e. the sue and labour provision).

On the basis of evidence, both documentary and expert (and too voluminous to discuss here), Mr Justice Burton in the Commercial Court found without any hesitation that there was no connection between the “Safir” and “Silvia” or their respective interests whatsoever to justify the arrest.  He accepted that there was “a real eagerness” to collect Court dues and this was achieved by way of a financial arrangement between the Ministry of Justice and/or the Port Suez Court and a ship chandler who, in return for reward, supplied false documents on which the arrest was based.  This chandler had  a “notorious reputation for fabricating invoices against ships for services and provisions and then seeking to obtain an arrest on the basis of such non-existent debts” and a number of criminal convictions prior to 2008 at the Suez Court for falsifying accounts and misappropriation.  This was plainly known.

In light of those findings of fact, Burton J held that the arrest of the “Silvia” was “not an ordinary judicial process, but was an exercise of extortion from owners of an innocent and unconnected sea-going vessel of sums owed in respect of another entirely unconnected vessel…”.

Burton J, whilst recognising that he must not lightly reach unfavourable conclusions of another country’s judiciary, utilising the test of whether any reasonable court could have acted as the Port Suez Court did, concluded they would not and that this arrest was effectively “extortion by the State under a veneer of court process.”

As to the second issue, the alleged breach was that Melinda’s Egyptian lawyers had not acted with necessary diligence.  The relevant test to be applied laid down by the House of Lords in “The Talisman” 247 LMLN 1989 was whether “any ordinary competent skipper would have acted differently.” Burton J had no difficulty in holding that there was no breach of the sue and labour clause as there was nothing Melinda could have done over and above, or in the alternative to, what it had done which would have made any difference.  No ordinarily competent Egyptian lawyer would have acted differently.

Both parties adduced testimony from experts in Egyptian law.  The Judge was impressed by the expert for Melinda (who was in fact it’s leading lawyer in the Egyptian proceedings) and preferred his evidence to that of the expert for Hellenic.  The Judge considered each course of action that Hellenic’s expert asserted ought to have been taken (an offer of Club security to release the vessel from arrest; a claim for wrongful arrest; an application for recusal) and dismissed each on various grounds taking into account that Melinda and its team were responding to an extraordinary and unexpected non-judicial process, said he had difficulty accepting Hellenic’s expert would indeed have acted before the Egyptian courts as he asserted the Melinda legal team should have done.

Finally, and although unnecessary in light of the above, Burton J was unpersuaded by an argument that "agents" did not include lawyers but, instead, meant only the Master and crew.

Melinda Holdings SA v Hellenic Mutual War Risks Association (Bermuda) Ltd [2011] EWHC 181 (Comm)