THE "OCEAN VICTORY": The Supreme Court judgment


On 10 May 2017, the UK Supreme Court handed down a judgment addressing three issues of importance to ship owners, charterers and insurers alike:
  1. defining the parameters of the safe port undertakings,
  2. the rights of subrogation of insurers where vessels are operated under bareboat charter; and
  3. the right of a charterer to limit its liability under the 1976 Convention on the Limitation of Liability of Shipowners.

The principal issue in the insurers appeal was the issue of the safety of the port. The insurers brought their claim as assignees of owners and demise charterers' rights, this led to the court considering the extent of the insurers rights to pursue subrogated claims where a bareboat charter was in place. The Court of Appeal had found that the sub-charterers did not breach the safe port undertaking in their charter by ordering the vessel to the port of Kashima, Japan in October 2006. The Supreme Court clarified the meaning of the famous phrase 'abnormal occurrence' from the leading case on unsafe ports, Eastern City [1958] 2 Lloyd's Rep 217. This case sets out the test for safety of a port and provides that a 'port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship'

Despite closely examining the features the port, the lower courts disagreed with each other as to whether the events which led to the loss of the Ocean Victory constituted an abnormal occurrence. In this decision, the Supreme Court confirms the Court of Appeal's finding in favour of sub-charterers which was to apply an ordinary interpretation to the phrase "abnormal occurrence", that is to say "something well removed from the normal", being exceptional in nature.

Background

The casualty

The Capesize bulk carrier Ocean Victory was in the process of discharging a cargo of iron ore at the port of Kashima, Japan on 24 October 2006 when an incoming storm led to a decision to leave the berth and sail to open waters. In the event, the vessel sailed up the port's fairway and collided with the breakwater, eventually grounding nearby. Despite attempts by salvors to save the vessel, she later broke in two and was declared a total loss.

The legal issues

Safe port undertakings

The principal argument throughout the litigation was the safety of the port in question, in particular the notion that the phenomena experienced that particular day could be described at so unusual as to amount to an abnormal occurrence. There were in addition various submissions put forward by Owners that the port was not safe due to its safety systems, but this part of the claim is not central to the appeal.

In relation to the conditions at the port, the approach by the first instance judge, was to examine the features separately (i.e. long waves and strong northerly gales) and to decide whether they were individually foreseeable. Following this logic, since each event was known to have occurred previously at the port, then they were ordinary characteristics of that port and the fact that they could occur (whether individually or concurrently) was sufficient to render the port unsafe. He did not consider whether the combination of the two events at the same time was unusual. Under this interpretation, the port of Kashima was found to be unsafe despite the fact that no significant casualties had occurred in its 35 year history. This left a great deal of uncertainty for charterers, as it widened their assumption of responsibility under the safe port undertaking considerably.

In overturning the High Court decision, the Court of Appeal did look at the history of the port and found that the occurrence of the specific winds and wave patterns at the same time was so highly unusual as to be considered an abnormal occurrence. In this judgment, the Supreme Court confirmed the approach taken by the Court of Appeal, agreeing that the storm was sufficiently exceptional that the port was ordinarily safe and accordingly dismissed the appeal.

Given the finding that there was no breach of safe port warranty, the Court was not bound to address the other issues in the litigation, namely (1) insurance arrangements between hull insurers and owners /demise charterers; and (2) limitation funds under the 1976 Convention. However, the judges considered these questions to be of general importance and provided useful (albeit obiter) guidance in response.

Insurance provisions – third party claims 

The Court of Appeal accepted the sub-charterers' submission that the allocation of risk between demise charterers and owners was regulated as a complete code under Clause 12 of the Barecon 89 charter. Under this clause, demise charterers were responsible for insuring the Vessel against marine losses and owners were named as co-insured. In the event of a total loss, owners would have look to the hull insurers for recovery regardless of whether the loss resulted from negligence or fault of the demise charterer. This effectively precluded the right of subrogation by insurers, who could not look to charterers (or sub-charterers) for indemnification. By a 3:2 majority, the Supreme Court accepted the Court of Appeal's interpretation of clause 12 and found that there was no loss which could be passed down to sub-charterers. The minority were not persuaded by this argument as rights of subrogation are a generally accepted feature in insurance claims.

Scope of the limitation fund

The Supreme Court considered whether the 1976 Convention could be relied upon by a charterer to limit its liability against an owner for the loss of the vessel. Under Article 2(1)(a) of the Convention, charterers may limit their liability in relation to events "occurring on board or in direct connexion with the operation of the ship". It was unanimously found that, had the Charterers been found to have breached the safe port undertaking, then they would not be entitled to limit their liability against owners under the 1976 Convention. This affirms the earlier Court of Appeal decision in the CMA Djakarta [2004] 1 Lloyd's Rep 460 (which settled before reaching the then House of Lords).

Conclusion

If any doubt remained as to the correct construction of the phrase "abnormal occurrence", the comprehensive review of safe port authorities by both appeal courts has laid any uncertainty to rest. There is therefore no departure from the accepted understanding of safe port obligations. Charterers will be reassured by this decision which balances the ordinary trading risks that they take in the course of their business with unusual phenomena occurring in their ports of call.

Arguably, the more interesting issue arising out of this decision is the potential curtailment of the rights of insurers to recover against third parties. Insurers of bareboat chartered vessels will be especially mindful of this decision which, although obiter, could leave them significantly out of pocket in the event of total loss.