MOK Petro Energy v. Argo (No. 604) Limited – “damage” and breach of warranty under the Insurance Act 2015

The decision handed down on 26 July 2024 by Mrs. Justice Dias ­examines the requirement for physical “damage” in an average claim and touches upon the application of sections 10 and 11 of the Insurance Act 2015 in instances of breach of warranty.

Background 

The claimant (“MOK”) in MOK Petro Energy v. Argo (No. 604) Limited (The “F1”) [2024] EWHC 1935 (Comm) was an oil trading company insured under an all-risks marine cargo open cover on ICC(A) terms for shipments of gasoline ‘shore tank to shore tank’ with Cedar Insurance & Reinsurance Co. Ltd and brought a claim against reinsurers (the “Defendants”) directly via a “cut-through” clause. 

The claim arose out of an off-specification gasoline-methanol blend cargo (produced by combining gasoline and methanol blend stocks on board the carrying vessel) which was loaded at Sohar but rejected at the discharge port in Yemen and subsequently sold as a “distressed” cargo. The cargo was found to be prone to phase separation (whereby the blended cargo separates out into its constituent parts) when cooled, affecting its ability to meet specification and intended ­utility.  MOK argued that the deterioration in the cargo’s phase separation qualities was caused by a fortuitous water ingress on board the carrying vessel or, alternatively, that the proportions in which the blend stocks were loaded was a fortuity (i.e. that the final proportions of the blended product were not a certainty of the blending process) which caused damage to the cargo by resulting in the blended cargo having the propensity to phase separate at higher ambient temperatures than it should have done in accordance with its specification and that this fortuity was covered by the insurance policy.  

The Defendants primary defence was that the actual condition of the cargo pre-loading (and therefore the “sound” condition for calculating any loss) could never have been on-specification or marketable from the outset and therefore there was no ­recoverable loss. Both parties’ quantum experts had agreed that there was no material difference in the value of a gasoline-methanol cargo with phase separation temperature of 17°C (the likely temperature at the load port as established by the Defendants’ expert) and 29°C (the temperature at the discharge port). Secondly, the Defendants argued that even if the proportions in which the blend stocks were mixed could amount to a fortuity, the act of blending caused no damage.  Thirdly, in any event, MOK had breached the express warranty included in the insurance that required inspection and certification of the shore lines. Although arguably some kind of inspection had occurred, no certification was produced until 2023 (some years after the event). 

The Judgment 

The Judge rejected MOK’s principal claim on the basis that the cargo had not ­suffered “damage”, since “damage” requires a change in  physical state (Quorum AS v Schramm [2002] CLC 77) which would be economically harmful to the party (Pilkington United Kingdom Ltd v CGU Insurance plc [2004] LRIR 891). Accepting the Defendants’ evidence based principally on joint testing carried out in 2018, the Judge agreed that it was inevitable that the blend produced by the blending of the gasoline and methanol blend stocks in the proportions that were loaded onboard the vessel would undergo phase separation at relatively warm temperatures and would never have been able to pass the requisite specification tests, i.e. the product was ­inherently defective.  As a result, to the extent that there was any water ingress during the period of cover, it did not cause any loss. The Judge made reference to the Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] 2 Lloyd’s Rep 379 decision which, although not an insurance case, had application to the facts at hand. 

Additionally, the Judge noted that cargo as declared in the policy did not actually exist until it was blended on board, and that prior to that it was only in constituent parts. She found that MOK had failed to evidence that different blending proportions could ever have produced an on-specification cargo.
As to the warranty, the Judge agreed with the Defendants in finding that MOK had failed to comply with the survey ­warranty which required certification to be produced within a “reasonable time” of the ­inspection. MOK argued that this breach of warranty was immaterial to the re-insurers ­liability, relying on section 11 of the 2015 Act. This was also rejected by the judge  on the grounds that compliance with the warranty as a whole would have minimised the risk of water contamination, thus making this ­warranty relevant to the claim. 

This case has been widely reported in the industry as it contains important lessons for assureds under all-risk open cover for gasoline cargoes, especially those where blending is to take place onboard. The case also highlights the importance of well-documented and thorough joint testing at the time of (or as soon as possible) after cargo rejection. Permission to appeal was sought by MOK but refused.