Inherent Vice & Perils of the Seas

February 2010

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Background

In May 2005 an oil rig laid up in Galveston, Texas was purchased by the appellants Global Process Systems Inc & Anr for conversion into a mobile offshore production unit (MOPU) for use in an oil field off the east coast of Malaysia. As the rig would have to be towed from Galveston to Malaysia with its three legs elevated above deck, the appellants appointed experts, Proceanic Engineering Services Pte Ltd to plan and organise the transit. In November 2005, whilst the tow was underway around the Cape of Good Hope, the legs broke off one at a time as a result of the repeated bending motion in the prevalent sea conditions. The appellants claimed under the “All Risks” policy which expressly excluded inherent vice.

In the first instance Blair J held that as the prevailing weather was within the parameters which could be reasonably expected for the time of the year around the Cape of Good Hope, the loss was not due to perils of the seas but was in fact due to inherent vice and therefore the loss would not be covered by the policy. In doing so Blair J had followed the approach of Moore-Bick J in the “Mayban” [1].  Permission to appeal was subsequently granted.

In the Court of Appeal it was accepted that the appellants had taken all necessary measures to assess the structural integrity of the tow bearing in mind the stresses to which the suspended legs would be subject by virtue of the motion of the waves. The surveying company Noble Denton issued a certificate of approval for the voyage based on the condition that the tow be re-inspected at Cape Town. On 10 October the tow arrived at Cape Town. During tests it was found that cracks had occurred and repairs were carried out. The appellants and the insurers again relied on the surveying company’s approval. There was no suggestion that the appellants had acted other than prudently and had taken all precautions to ensure the sea-worthiness of the tow.

The Court of Appeal had to decide whether the proximate cause of the loss was inherent vice or perils of the seas or in fact a combination of both.

Submissions

The appellants argued that if there was any indication that the action of the wind and waves was responsible for the loss then the loss could not be attributed to inherent vice. Further, they submitted that it is not necessary for the sea conditions to have been worse than reasonably expected to attribute the loss to “Perils of the Seas”[2]. They argued that the inherent vice policy defence was limited to a loss caused solely by the inherent qualities of the subject matter insured.[3]Therefore, if any external fortuity had been a cause of the loss the exception should not apply. This external fortuity was the wave that broke the legs after they had been weakened by cracks that had developed during the voyage as a consequence of the prevailing stresses of the voyage. It was accepted by the appellants that before the start of the adventure “fatigue cracking” would occur. That the conditions would be so bad as to cause the legs to break was the very risk against which the respondents had insured.

The respondents argued that the weather conditions were within expected limits and therefore there was no peril and, more importantly, nothing fortuitous had occurred. Their argument was that a distinction had to be drawn between incursion of water due to the “ordinary action of the wind and waves”, such as from an aperture that had been wrongly left open, which is fortuitous, and the rolling and pitching of a vessel in expected sea conditions that does not have any element of fortuity. Therefore, the loss was attributable to inherent vice.

Case Law

In the course of deciding the merits of the appeal, substantial case law on both Inherent Vice and Perils of the Seas was considered.

Although inherent vice is not defined in the Marine Insurance Act 1906, Lord Diplock’s definition in Soya Gmbh v White[4] was accepted by both parties. He said: “It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty.”

Therefore, the dispute turned on the interpretation of the phrase (in this instance) “intervention of any fortuitous external accident or casualty”. Could the sea condition have amounted to “intervention of any fortuitous external accident or casualty” even when within expected limits?

At first instance Blair J decided the loss could be attributed to Inherent Vice and followed Moore-Bick J’s approach in the “Mayban”[5]. In the “Mayban” a cargo consisting of a large electrical transformer was seriously damaged during a voyage from Liverpool to Malaysia. The damage was caused by the straining of joints caused by the motion of the carrying vessels in heavy seas. This type of weather occurred on average one year in every two and a half years. Moore-Bick J gave a much broader effect to the “Diplock formulation” of inherent vice in that the inherent vice required the insured cargo to be able to withstand the forces that they would ordinarily be expected to experience in the course of a particular voyage. Prof. Howard Bennet summarised the effect of the judgement by saying that “The controversial result is that cover under the Institute Cargo Clauses (A), the most generous standard cargo cover, is confined in respect of bad weather damage to wholly exceptional adverse conditions.” [6]

“Perils of the Seas” on the other hand refers only to fortuitous accidents or casualties of the sea. This requirement of fortuity therefore excludes the ordinary action of the wind and the waves.

The appellants argued that if the weather had played a part in the loss then it could not be caused by inherent vice as that would not then have been the sole cause of the loss. Interestingly, the appellants used Tucker J’s obiter dictum comments in the Neter (NE) & Co Ltd v Licenses & General Insurance Co Ltd[7] as support for the argument that it was wrong to say that just because the weather conditions were such as might reasonably be anticipated there could not be a “Perils of the Sea” defence. In the Neter (NE), while sailing around the Cape of Good Hope the vessel encountered weather that was anticipated for that time of the year. The claim against the underwriters failed due to lack of proof that damage to the cargo had been caused by the weather. That is, the proximate cause of the loss did not amount to a “Perils of the Seas”.  

Judgement

Lord Justice Waller held the view that it was clear that the appellants had taken all necessary precautions to ensure that the adventure was successful. The legs of the rig had not failed solely because of cracking caused by stress during the voyage but by a wave that was not bound to occur and that caused the starboard leg of the rig to break; that is a fortuity. This led to the other legs breaking off. It was not inevitable and this risk was a risk the insurers covered.

Conclusion

When a loss at sea occurs due to a combination of the inherent properties of a particular object and the prevailing weather conditions it is extremely difficult to identify the proximate cause of that loss. When considering damage to a hull it is perhaps arguable that the courts have been more lenient in their consideration of weather conditions. In contrast, in cases of cargo damage, the test as to what amounts to adverse weather is more stringent when applied to claims made under a cargo insurance policy.

[1] General Insurance v Alston Power Plants [2004] 2 Lloyd’s Rep 609

[2] NE Neter & Co Ltd. V Licenses and General Insurance Co. Ltd. [1944] 4 All ER 341

[3] Arnoulds’ 16^th edn, para 782

[4] [1983] 1 Lloyd’s Rep 122

[5] General Assurance Bhd v Alstom Power Plants Ltd [2004] EWHC 1038 (Comm), [2004] 2 Lloyd’s Rep 609

[6] H.W.Bennet, “ The Laws of Marine Insurance”; 2^nd Edition 2006 ; pg 473

[7] (1944) 77 L1LRep 202