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UK Supreme Court guidance on application of war risks clauses

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Owen Fry

Published: January 18, 2024

For owners and operators seeking some guidance on the exercise of rights to avoid the Suez Canal and Red Sea in the wake of attacks and threats by Houthi militia, comments in a Supreme Court judgment recently handed down offer a timely reminder on the limits of some war risks provisions.

Suez Canal

Herculito Maritime Limited v Gunvor International BV [2024] UKSC 2 involved claims for general average contributions following the seizure of the MT Polar by pirates when transiting the designated High-Risk Area in the Gulf of Aden in 2010. The vessel was released against payment of a ransom, a contribution to which owners sought to recover in general average from cargo interests. The main argument raised by the cargo interests was that the relevant voyage charter (which they said had been incorporated into the bills of lading) included various insurance provisions which created a complete code for the recovery of losses arising from certain risks that had been insured against. According to this complete code, owners could look only to their insurers for recovery. If correct, this would preclude owners from claiming GA contributions from cargo interests for losses arising from piracy, which was a risk covered by insurance which had been taken out in accordance with the charterparty clauses. 

Cargo interests cited previous cases in which it had been held that such an arrangement had arisen, most of which had no bearing on the present case except for The Evia (No. 2) [1982] 2 Lloyd’s Rep 307, where it was held by the House of Lords that the war risks regime in the charterparty did create a complete code. The time charter in that case was based on the Baltime form, which included a clause giving owners extensive rights, including an absolute veto on employment which would expose the ship to danger from war risks under the clause. It also included rights to obtain additional insurance and charge premiums to charterers. These and other features led to the conclusion that the clause was a complete code which was exhaustive of owners’ rights in this situation.

It was submitted on behalf of cargo interests that the war risks regime in the MT Polar charterparty was indistinguishable from that in The Evia (No. 2), and that on this basis owners’ rights were limited to the complete code set out therein, so they were not entitled to recover their losses by a claim in GA. Of the significant features highlighted by counsel, the most relevant to the current discussion was that the clause also “provided the shipowner with sweeping rights and liberties to cancel, or substantially vary performance of, the charter (and hence the bills of lading) if faced with war risks at any point during the various phases of the contractual voyage.” 

The question was whether it was correct to say that the clause gave owners an unqualified right or absolute veto, similar to that held to apply in The Evia (No. 2)

Cargo interests argued that it did, but the difficulty they faced was that when the war risks clause was read together with other clauses in the charterparty, and construed against the background of circumstances existing at the time of fixing, it became clear that owners’ rights were not quite as extensive as the wording of the clause would suggest. Those circumstances included: that the contractual voyage was described as one that would be “via Suez” which necessarily involved transit through the Gulf of Aden; there were various other clauses setting out the terms on which the Gulf of Aden could be transited; and that the risk of attacks by pirates in that area was well known at the time.

With these points in mind, could it really be said that owners had an absolute right to refuse orders to proceed via the Suez / Gulf of Aden to avoid the risk of the vessel being seized by pirates?

In deciding that owners could not have relied on the war risks clause in these circumstances, the Supreme Court approved the decision in The Product Star [1993] 1 Lloyd’s Rep 397, and comments made by the judge in The Paiwan Wisdom [2012] 2 Lloyd’s Rep 416. 

In The Product Star, a time charter was agreed at a time when it was well known that the Arabian Gulf was an area of high risk due to the war between Iran and Iraq. The charter was for worldwide trading but excluded some areas which did not apply here. It included a right to refuse orders to proceed to an area if considered dangerous to do so, and a term that any increased premiums required for trading in the Arabian Gulf were to be paid by charterers. Owners refused orders to load in the Arabian Gulf on grounds that they considered the area to be too dangerous, which might have been allowed had the wording of war risks clause been read in isolation. However, the question of whether owners had been reasonable in concluding that the area had become too dangerous had to be considered in light of the charterparty as a whole, and in particular owners’ agreement at the time of fixing to proceed to the Arabian Gulf. The judge found (in a decision upheld by the Court of Appeal) that it was necessary to look at the facts and circumstances which existed at the date of fixing, and that owners could not refuse orders to proceed unless the risks of doing so had increased or were different in kind. Whilst the Arabian Gulf was dangerous, it was no more dangerous than when the charterparty had been agreed, so owners could not exercise their right to refuse orders to load there and were in breach of the charterparty for doing so.

A similar approach was suggested in obiter comments by Teare J in The Paiwan Wisdom [2012] 2 Lloyd’s Rep 416. That case involved a time charter with a standard form war risks clause giving owners a right to refuse orders to proceed to an area which is dangerous, and a trading limits clause which said “Passing Gulf of Aden always allowed with H&M insurance authorisation.” When reading the war risks clause in light of the charterparty as a whole, it was found that it could not be construed as a right to refuse orders to proceed via a route which owners had expressly agreed. That was the same limitation as applied in The Product Star, although the owners in this case were allowed to refuse orders to proceed to Kenya, which had not been expressly agreed and for which the risk was materially different given the absence of a military convoy which was found to be an important factor in owners’ agreement to sail via the Gulf of Aden. 

These decisions / dicta, together with the recent endorsement by the Supreme Court in Herculito v Gunvor, show that the right of owners to exercise their rights under a war risk clause to, for example, avoid the Red Sea and instead proceed via the Cape of Good Hope, will be limited by other terms in the contract demonstrating an intention to proceed via the shorter route, and the facts and circumstances which existed at the time of contracting. Wherever there is an agreement to sail via the Suez Canal / Red Sea, whether this is an express part of the voyage description or implied by the presence of other clauses indicating that it would be a permissible route, it is unlikely that owners could refuse (on the basis of war risks alone) to proceed by that route unless the risks of doing so had become more extensive than they were at the date of the charter. 

Whilst the principle may be most relevant to a voyage charter where the voyage is described as one which requires transit through the Suez Canal / Red Sea, as The Product Star and The Paiwan Wisdom show, it can also apply with similar force in a case involving a time charter for worldwide trading where risks exist at the time of contracting. 

It will therefore be important for owners to consider all of the terms of their chartering agreements, not just war risks clauses in isolation, and to base any decision on clear evidence that the area has become more dangerous, or presents risks of a different kind to those that existed at the time of agreeing to sail via the Suez Canal.

Further articles on other aspects of this decision will also be published.
 

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