Claire Messer
Hill Dickinson, London

Reema Shour
Hill Dickinson, London

 

In Herculito Maritime Ltd v Gunvor International BV (the Polar) [2024] UKSC 2, the Supreme Court of the United Kingdom found that cargo interests were liable for a general average (GA) contribution relating to a ransom payment made to pirates following the vessel's hijacking in the Gulf of Aden in 2010. In doing so, the Supreme Court decided that there was no implied insurance fund or code in the underlying charterparty that prevented owners from claiming this GA contribution from charterers. Furthermore, even if such a code had existed and even if it had been validly incorporated into the bills of lading, it would not have applied to prevent owners claiming the GA contribution from the bill of lading holders, as opposed to charterers.

Significantly, also, the Supreme Court considered whether the owners could have relied on the war risks clauses in the charterparty to refuse voyage orders to transit the Gulf of Aden. It held that, in circumstances in which the charterparty specifically provided for the voyage to be 'via Suez' and where the charterparty was concluded at a time when the risk of piracy in the Gulf of Aden was well known, the owners would have been required to follow the contractual route. While piracy risks and vessel hijackings have receded since this dispute first arose, the Supreme Court's judgment remains highly relevant in light of the Red Sea attacks and the conflict in Ukraine.

It also confirms that the English courts will not readily imply such an insurance code into the contractual framework. If the parties wish to have joint insurance or co-insurance for war risks under their charterparty, they need to state this expressly and unambiguously. To imply such a term would fundamentally alter the agreed allocation of risk and liability under the charterparty and the court will not assume that a contracting party has voluntarily agreed to give up significant contractual rights, unless there is clear and unequivocal wording to this effect.

The background to the dispute

On 30 October 2010, a vessel was seized by Somali pirates while she was transiting the designated 'high-risk area' in the Gulf of Aden off the East Coast of Africa during a voyage from St Petersburg to Singapore laden with a cargo of fuel oil. The vessel was ultimately released ten months later after a ransom of $7,700,000 was paid by or on behalf of the owners.

The owners declared the GA, and a subsequent GA adjustment concluded that almost $6m was due to the owners from the respective cargo interests. The cargo interests denied GA liability for the ransom payment. They argued that, on the true construction of the bills of lading, the owners could only recover the ransom payment under the terms of additional insurance cover that had been taken out in relation to such risks pursuant to the terms of the governing voyage charterparty, the premium for which was payable by the charterers.

The contractual provisions

The charterparty incorporated the BPVOY 4 form, including clause 39 'war risks' as amended in the fixture recap and various additional clauses, including the 'war risks' clause and the 'Gulf of Aden' clause. Furthermore, the freight rates were agreed on the basis 'via Suez with the Suez costs to be for owners account'. The direct geographical route for the contractual voyage from St Petersburg to Singapore was via Suez and the Gulf of Aden. The Gulf of Aden was designated a 'high-risk area' for marine insurance purposes.

Before the vessel entered the Gulf of Aden, the owners took out kidnap and ransom (K&R) insurance for the voyage, which provided cover up to $5m. Pursuant to the Gulf of Aden clause, any additional insurance premiums, including in respect of the hull and machinery (H&M), protection and indemnity (P&I), kidnap risk and ransom, were for the charterers' account up to a maximum of $40,000. The owners also paid an additional premium to extend their H&M and war risks insurance to cover the proposed transit through a high-risk area. Pursuant to the war risks clause, such an additional premium was to be for the charterers' account.

The six bills of lading all contained a very wide incorporation clause on their reverse.

The principal issues

These were:

1. whether the war risks clauses and the additional Gulf of Aden clause in the charterparty precluded the owners from claiming against the charterers in respect of losses arising out of risks for which additional insurance had been obtained pursuant to those clauses;

2. whether all material parts of those clauses were incorporated into the bills of lading;
3. whether on the proper interpretation of those clauses in the bills of lading and/or by implication, the owners were similarly precluded from claiming for such losses against the bill of lading holders; and

4. if necessary, whether the wording of those clauses should be manipulated so as to substitute the words 'the charterers' with 'the holders of the bill of lading' in the parts of those clauses allocating responsibility for the payment of the additional insurance premiums.

Earlier proceedings

In brief, in arbitration proceedings, the tribunal found in the cargo interests' favour. On appeal, the Commercial Court disagreed with the arbitrators in certain respects and decided that cargo interests were liable for the GA contribution. In a further appeal, the Court of Appeal largely agreed with the Commercial Court and dismissed the appeal. Therefore, the cargo interests appealed to the Supreme Court.

The Supreme Court decision

For the reasons discussed below, the Supreme Court concluded that the cargo interests' liability for the GA contribution was not precluded by the contractual terms.

Insurance code

The Supreme Court held that there was no implied insurance code in this case. Whether the parties had agreed such an insurance fund was a matter of the construction of the contract. The construction of each charterparty turned on the consideration of its own detailed terms. Previous cases in which the English court had found that there was such an insurance fund could be distinguished because the charterparty terms were different to those agreed between the parties here. They were also principally cases that involved joint names' insurance, which was not the case here.

The court added that GA was a common law right, albeit a right regulated by contract. To conclude that the owners gave up such a valuable right in relation to well-known K&R risks required clear agreement to that effect. Furthermore, there was no principle exempting the charterers from liability for their breaches of contract or in GA merely because they directly or indirectly provided the insurance funds covering the relevant loss or damage.

The Supreme Court also stated that searching for an insurance fund in a charterparty introduced unwelcome uncertainty and unpredictability into English shipping law. If the parties wished to preclude any right of recovery or subrogation in respect of loss or damage covered by insurance, they could state this expressly in their charterparty.

Right to refuse voyage orders

Against the background of the specially agreed contractual regime for the known piracy risks of transiting the Gulf of Aden, the court did not think that the owners could have successfully argued that such risks were 'war risks' for the purposes of the war risks clause. They had agreed the vessel's route and the terms on which the Gulf of Aden would be transited, consequently they could not subsequently refuse to take on the known piracy risk of transiting the Gulf of Aden on the terms agreed.

The Supreme Court did, however, note that if different war risks had materialised in the Gulf of Aden or there had been a change in the nature of the piracy risk, or a change in the degree of risk sufficient to make it qualitatively different, then the owners might have been able to rely on the war risks clause, but not otherwise. In this case, it had not been argued that there was any change in the risk of piracy between the time that the charterparty was concluded and the time when it transited the Gulf of Aden.

In Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) [1993] 1 Lloyd's Rep 397, the owners refused to proceed to load at a port in the Arabian Gulf at the time of the Iran/Iraq War. Under the time charterparty, an extra premium for trading in the Arabian Gulf was for the charterers' account, but the owners had discretion to refuse to proceed to a port of loading if it was considered dangerous to do so. The Court of Appeal held that, at the time when the charterparty was concluded, the Arabian Gulf was a war zone and the owners were accepting that, in the circumstances prevailing at the date of the charterparty, the risks of proceeding there were not such as would render their discretion exercisable.

In Taokos Navigation SA v Komrowski Bulk Shipping KG (The Paiwan Wisdom) [2012] 2 Lloyd's Rep 416, the time charterparty incorporated the CONWARTIME 2004 clause, which provides that the owners might refuse to proceed to a place that was dangerous on account of a war risk, and a trading limits clause, which states that 'Passing Gulf of Aden always allowed with H&M insurance authorisation'. The court held obiter that the owners were not entitled to refuse to pass through the Gulf of Aden in reliance on their rights under the CONWARTIME 2004 clause because they had expressly agreed to pass through the Gulf of Aden. The CONWARTIME 2004 clause had to be read in the context of the charterparty as a whole.

In the instant case, the owners, in the context of well-known piracy risks, had agreed to pass through the Gulf of Aden on the terms set out in the Gulf of Aden clause. It would similarly be inconsistent with that express agreement to construe the war risks clause in such a way as to permit them to refuse to transit the Gulf of Aden on account of such piracy risks.

Incorporation

The Supreme Court held that the material parts of the war risks clauses that concerned obligations for the payment of insurance premiums were directly relevant to the carriage of cargo and were, therefore, effectively incorporated into the bills of lading. However, even if the charterparty had contained an insurance code, the obligation to pay the additional insurance premiums rested on the charterers alone. There would be no such obligation on the bill of lading holder, and so the insurance code would be inapplicable in the context of the bills of lading.

It was also not necessary or justifiable to manipulate the wording of the charterparty clauses in order to make the wording fit the bills of lading. The Gulf of Aden and the war risks clause made perfectly good sense in the context of the bills of lading as a record of the terms on which the owners had agreed to transit the Gulf of Aden. It was also implausible that the bill of lading holders would have accepted a potential liability to pay unknown and unpredictable amounts.

Comment

The Supreme Court has provided useful guidance on the interpretation of war risks provisions. It is particularly timely in view of ongoing geopolitical risks around the world.

In the context of the Red Sea attacks, issues to consider will be whether the charterparty contains an agreement to proceed via Suez and the Gulf of Aden/Red Sea, and whether there has been a material change of circumstances/risk since the charterparty was concluded.