Article: English High Court finds cargo owners liable to pay contribution in general average in respect of ransom payment to pirates
08 February 2021
Herculito Maritime Ltd and Others v Gunvor International BV and Others (The 'Polar') – QBD (Comm Ct) (Sir Nigel Teare sitting as a Judge of the High Court)  EWHC 3318 (Comm)
In one of his first judgments since formally retiring from the High Court, Sir Nigel Teare (as he will now be known when sitting as a Judge of the High Court) handed down judgment in the above case, that followed a section 69 appeal from an earlier arbitration award. The case will be of interest to those with an interest in marine war risks and kidnap and ransom ('K&R') insurance because this was the first time the Court has considered whether, and to what extent, war risks clauses contained in charterparties which determine responsibility to pay insurance premium for these kinds of policies are likely to be incorporated into a bill of lading. It is also an important judgment in the developing area of so-called insurance funds or insurance arrangements (outside of classical joint insurance policies).
In 2010, the Polar (the 'ship') was hijacked by Somali pirates whilst transiting the Gulf of Aden. The ship was at the time en route from St Petersburg to Singapore with a cargo of fuel oil pursuant to a voyage charter (the 'Charterparty') between Herculito (as 'Owners') and Clearlake Shipping Ltd (as 'Charterers'). The ship was eventually released in August 2011 following payment of a ransom. General average (GA) was declared and cargo underwriters provided a GA guarantee and cargo interests provided a GA bond.
Owner’s underwriters brought a subrogated claim against cargo interests under the GA bond and against the cargo underwriters under the guarantees. Cargo interests refused to pay and the dispute went to arbitration. The tribunal was tasked with considering the inter-related charterparty and bills of lading, whereby the charterparty included several relevant clauses including:
- a long War Risks clause
- an additional War Risks clause (with additional premiums to be for Charterers’ account)
- an additional Gulf of Aden clause (with additional premiums for Kidnap & Ransom (K&R) cover to be for Charterers’ account up to a certain maximum amount)
The bills of lading provided that freight was payable as per the charterparty. The bills of lading contained general words of incorporation which purported to incorporate 'terms and conditions, liberties and exceptions' of the charterparty. No charterparty was identified on the bills but it was common ground between the parties that the voyage charter terms were incorporated.
The case concerned two key points of law:
1. Are clauses, such as war risks clauses, which apportion the responsibility for paying additional war risk premium or K&R premium on a charterer, amenable to incorporation into a bill of lading, with the effect that the bill of lading holder then becomes liable to pay the premium?
2. Whether an agreement between a shipowner and a charterer in a charterparty to create an exclusive insurance fund for war risks and K&R losses means that a shipowner cannot sue cargo interests in GA for a proportion of those losses under a bill of lading?
The cargo owners argued that Owner’s remedy was to recover the ransom sum from the insurers under the terms of the K&R insurance policy and the War Risks policy, the premium for which was, pursuant to the incorporated charterparty, payable by the Charterers.
The tribunal held that the bills of lading gave rise to an 'exclusive insurance fund' or 'code' precluding the Owners from recovering a GA contribution from cargo interests in respect of any losses suffered as a result of perils falling within the insurance arrangements. The tribunal found in favour of cargo interests. The Owners appealed.
Commercial Court decision
The court identified three issues which were to be determined:
1. Incorporation, ie were the provisions of the charterparty relating to payment of insurance premiums incorporated into the bills of lading by the general words of incorporation?
The short answer was, yes, but with no incorporation imposing payment
obligations on the holders.
The Court held that the words of incorporation in the bills of lading were wide enough to incorporate the above charterparty provisions. In principle, charterparty terms that were directly germane to the loading, carriage and/or discharge of the cargo would be incorporated, but there was no presumption of incorporation and, whilst the obligation to pay for additional insurance premiums to transit the Gulf of Aden was directly germane to the carriage and delivery of the cargo, the particular terms of the contract had to be studied intelligently and not mechanically to see whether manipulation or substitution (ie substituting 'charterers' with 'bill of lading holders') was appropriate.
The Court concluded that it was not appropriate to substitute the words 'holder of the bill of lading' for 'charterers' so as to make the bill of lading holders liable under the bills to pay the insurance premium for the following two reasons. Firstly, the bill of lading holders had agreed to pay freight 'as per Charter Party' as the price for performance of the contract of carriage by the Owners and had not agreed to pay sums in addition to the freight rate. Clear words would be needed to impose such an obligation on them.
Secondly, there was no indication in the bills of lading as to how much of the premium each holder was to pay or how apportionment of the premium between the holders was to be assessed and therefore substitution was not appropriate, when reading into those bills of lading the terms of the additional War Risks and Gulf of Aden clauses.
2. Did the insurance provisions prevent the Owners making a claim for cargo interests’ contribution to GA under the charterparty?
The short answer was, yes.
The Court then considered the consequences of the insurance provisions in the charterparty both as between the Owners and the Charterers and also as between the Owners and the bill of lading holders. The Court agreed with the tribunal that the terms of the charterparty meant that the Owners and Charterers had agreed to an arrangement whereby the Charterers paid the additional insurance premiums and, in return, the Owners agreed to look solely to their insurers in respect of losses covered by the insurances, including their claim in GA. This was a logical conclusion given that otherwise there would be no benefit to the Charterers in agreeing to pay the additional premiums.
3. Did the insurance provisions in the Charterparty prevent the Owners from making a claim for GA under the Bills of Lading against the cargo interests?
The short answer was, no.
Since the bill of lading holders had not agreed to pay additional insurance expenses, it could not be said that the bills of lading imported an agreement that the Owners would not seek a contribution in GA from the holders. Therefore, as a matter of construction, the bills of lading did not exclude the holders’ liability in GA or in respect of other losses covered by the additional insurances.
This decision is being appealed.
The case serves as a useful reminder that parties should ensure that their contractual arrangements accurately reflect the way in which the parties intend risk to be allocated for piracy losses.
Whilst the threat of piracy off the East African coast has decreased in recent years, the situation off West Africa has deteriorated significantly in recent months. Members are advised to not only consider their contracting arrangements but also security and insurance provisions. K&R cover for shipowner members transiting high risk piracy zones is available in the market and members are strongly encouraged to consider taking out K&R cover where appropriate. For more information on maritime security issues, please see the club’s dedicated maritime security page that includes a recent news item on the increased piracy and kidnap threat in the Gulf of Guinea.