The Supreme Court decision in the Ocean Victory

by Reed Smith
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The Supreme Court decision in the Ocean Victory was handed down this morning. We will prepare a detailed client alert on the implications of the decision, but for now can report that:

(1) Unsafe ports

The Supreme Court upheld the decision of the Court of Appeal that there was no breach of the safe port undertaking: it was held that it was wrong to extrapolate from the fact that there were two weather conditions which were characteristic of the port, namely swells from “long waves” and severe northerly gales, that the port was unsafe because they could occur together. The mere possibility of those two weather conditions coinciding ( when they had not done so in the previous 35 years, albeit there was no meteorological reason why they should not do so) was not sufficiently regular or sufficiently foreseeable to amount to an attribute or feature of the port – it was unexpected.

The Supreme Court confirmed that the question in such cases is whether the event (or in this case the combination of natural events) which led to the casualty was an abnormal and unexpected occurrence or not. It held that “abnormal occurrence” has its ordinary meaning and is not a term of art: it just means something “out of the ordinary course and unexpected“, and that the Court of Appeal was entitled to reach the decision that it did, namely that the port was not unsafe.

(2) Clause 12 of Barecon 89 form

As to the question of whether, if there was a breach of the safe port undertaking, the provisions for joint insurance in clause 12 of the Barecon 89 Form preclude rights of subrogation of hull insurers and the right of owners to recover in respect of losses by hull insurers against the demise charterer for breach of an express safe port undertaking, the Court was split. By a 3:2 majority, it was held that in accordance with the general rule that an insurer cannot exercise rights of subrogation to pursue a claim in the name of one co-insured against another, and notwithstanding an amendment to the Barecon Form in this case to refer to employment in lawful trades for the carriage of lawful merchandises “only between good and safe berths, ports or areas where the [vessel] can safely lie always afloat etc“., the critical question of whether the contractual scheme between the owners and the demise charterer precluded any claim by the former against the latter for the insured loss of the vessel, was a matter of construction. It was held that the scheme in this contract was for there to be an insurance fund and that if demise charterers were in breach of the safe port clause they would be under no liability to the owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation. The commercial purpose of maintaining the joint insurance in such circumstances was said to be “not only to provide a fund to make good the loss but to avoid litigation between them, or the bringing of a subrogation claim in the name of one against the other“.

It is notable that the position in the case of an insolvent insurer, not being relevant in this case, was left open.

(3) Limitation

On the question of whether, assuming a breach of the safe port undertaking, the charterer is entitled to limit its liability for the insurer’s losses pursuant to section 185 and Schedule 7 Article 2(1) of the Merchant Shipping Act 1995, it was held that the CMA Djakarta [2004] 1 Lloyd’s Rep 460 was correctly decided: the ordinary meaning of Article 2(1)(a) does not extend the right to limit to a claim for damage to the vessel by reference to the tonnage of which limitation is to be calculated: the charterer is therefore not entitled to limit its liability in accordance with the limitation fund calculated by reference to the vessel.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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