TT Talk - Legal eagle: general average bites
An interesting English law reminder of the reach of the ancient principles of general average (GA). In this instance the cause is piracy, but the case involved the interfaces between differing contracts and sharing risk – both by way of insurance and GA.
The ship “Polar” was chartered for a voyage from St Petersburg to Singapore laden with a cargo of fuel oil. Six bills of lading were issued to cargo owners, subject to “all terms and conditions, liberties and exceptions” of the charter party. The charter contained war risk provisions that included a liberty to deviate or continue the voyage, and an obligation on the charterer to pay both the additional costs of exercising this liberty and the cost of any additional insurance.
Whilst transiting the Gulf of Aden, the ship was seized by Somali pirates. She was released with her 23 crew after ten months on payment by ship owners of a ransom of US$7.7million, in respect of which General Average (GA) was declared. The amount due from cargo owners was adjusted at US$4,829,393.
The ship owner had purchased kidnap and ransom insurance. Once underwriters had settled the claim, they sought to recover in GA the adjusted amount from cargo owners and their insurers under subrogated rights.
At arbitration, the tribunal held that the charter contained a ”code”, under which the ship owner agreed to look solely to their insurers in the event of this risk, and not to the charterers. This code was incorporated into the bills of lading, and the ship owner could therefore also not look to the cargo owners; cargo owners were therefore not liable to pay GA. (It was not strictly necessary to prove incorporation, because the ship owner had agreed under the charter not to claim from cargo owners.)
The ship owner appealed to the Commercial Court.
The court agreed with the tribunal that the stipulation under the charter that charterers should pay the insurance premium implied that the ship owner had agreed to look to the insurers for indemnification. The ship owner (and subrogated underwriters) could therefore not recover from charterers in GA.
As far as concerns the bill of lading holders, it is familiar law that charter terms which are directly applicable to the carriage (or loading or discharge) are generally incorporated into the bills, but there is no presumption that this will happen. The court held that where “manipulation or substitution” is necessary for this purpose, incorporation will depend on the terms of the contract. In addition, precedent suggested that where one party agreed to look only to its underwriters for a particular loss, a key factor was a requirement that the other party should pay the relevant insurance premium.
In order, however, to establish an obligation on behalf of cargo owners to pay premium in this case, it would be necessary to resort to substitution by replacing “the charterers” in the charter by “the holders of the bills of lading”. Although the court found that the issue was germane to the carriage, it did not find that substitution was appropriate in this case. It would be inconsistent with the charterer’s express obligation to pay freight to increase the amount payable by an uncertain amount in this way, and the bill of lading holders would have been unlikely to agree to it. Further, there was no provision for apportionment of premium between the different bill of lading holders.
The ship owner was therefore not precluded by the existence of insurance from claiming a contribution in GA from the cargo owners and their appeal succeeded.
This case provides a fresh perspective on the long running list of cases where ship owners have contended that provisions of a charter are incorporated into bills of lading. It breaks new ground in highlighting the relationship between agreement to pay insurance premium and liability in GA.
It is rare example of a successful appeal on a point of law under Section 69 of the Arbitration Act 1996 on a point of law. The decision is being appealed.
HERCULITO MARITIME LTD & ORS v GUNVOR INTERNATIONAL BV & ORS (The “Polar”)
 EWHC 3318 (Comm)
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Risk Management Director, TT Club
TT Talk 272 Chinese Translation (653 KB)
Risk Management Director
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