TT Talk - Legal eagle: general average bites (again)
An update, following appeal, concerning the ancient principles of general average (GA). In this instance the cause was piracy, but the case involved the interfaces between differing contracts and sharing risk - both by way of insurance and GA. The English Court of Appeal decides…
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 Commercial 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. The bill of lading holders appealed to the Court of Appeal.
The Court of Appeal disagreed with the Commercial Court that “substitution” was necessarily inconsistent with the charterer’s obligation to pay freight, holding that this was a matter of construction. But it was more persuaded by the point that there was no provision for apportionment of premium between the different bill of lading holders (cargo owners). Resort to joint and several liability was not the answer, because the bill of lading holders did not necessarily know each other’s identity. Substitution would therefore have been impractical and could not have been intended by the parties.
The risk of piracy during this voyage was foreseeable and foreseen. The incorporation of the terms of the charter into the bills of lading basically defined the terms on which the route of the voyage was agreed. Explicit provisions could easily have been included in the bills of lading, exempting the holders from GA contributions. Since they were not, the Court of Appeal found no evidence that the owners had abandoned their right to claim from the bill of lading holders in GA, and saw no commercial imperative to find this. The appeal was dismissed.
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.
Both parties were insured against the risk of piracy. If this appeal had been allowed the loss would have been borne entirely by the owners’ insurers and the cargo insurers would have escaped payment for a risk which they had agreed to cover.
The judge on appeal characterised his decision as standing back from the issues and testing his analysis of them against the terms of the contract and business common sense. In the jargon, this is sometimes known as an “iterative” approach.
Finally, this was a rare example of a successful appeal on a point of law under section 69 of the Arbitration Act 1996.
HERCULITO MARITIME LTD & ORS v GUNVOR INTERNATIONAL BV & ORS (The "Polar")
 EWCA Civ 1828
If you would like further information, or have any comments, please email us, or take this opportunity to forward to any others who you may feel would be interested.
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Risk Management Director
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