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Court of Appeal agrees cargo liable to contribute in general average following ransom payment

Insights / / London

Herculito Maritime Ltd & others v. Gunvor International BV & others (Polar) [2021] EWCA Civ 1828

This was a dispute over whether cargo interests were obliged to contribute in general average in circumstances where the vessel had been seized by pirates and a ransom payment made. The judge at first instance found in the Owners’ favour. The Court of Appeal has now upheld that decision on the basis that the bill of lading terms, on their true construction, did not exclude the bill of lading holders’ liability to pay cargo's contribution in general average in the event the vessel encountered an insured peril. Clear words would be needed in the bills to exclude the Owners’ rights to such contributions from cargo even where the underlying charterparty effectively excluded those rights as against the Charterers.

The background facts

In 2010, whilst transiting the Gulf of Aden on a voyage from St Petersburg to Singapore carrying fuel oil, the vessel was seized by Somali pirates and held for ransom. The vessel was eventually released in August 2011, following the payment of a US$ 7.7 million ransom. General average (GA) was declared, cargo underwriters provided a GA guarantee, cargo owners provided a GA bond and subsequently a GA adjustment was issued. The vessel’s Owners made a claim for a GA contribution in respect of the ransom payment but the cargo interests refused to pay and the dispute went to arbitration.

The underlying voyage charterparty was on an amended BPVOY4 form with additional clauses. It contained a long War Risks clause, together with an additional War Risks clause (with additional premiums to be for charterers’ account) and an additional Gulf of Aden clause (with additional premiums for Kidnap & Ransom cover to be for charterers’ account up to a maximum of US$40,000). The terms of the charterparty, therefore, allocated responsibility for the payment of insurance premia as between the Owners and the Charterers. The bills of lading contained a wide and generally worded incorporation clause purporting to incorporate all terms and conditions, liberties and exceptions of the charterparty as identified on the bills. No charterparty was identified on the bills but it was common ground between the parties that the voyage charter terms were incorporated.

In arbitration, the tribunal held that the bills of lading excluded their holders’ liability in respect of a GA contribution because they incorporated the “exclusive insurance fund” found in the charterparty, with the result that the Owners could only look to their insurers where the losses they sought to recover were covered by the insurances.

The Commercial Court decision

The Commercial Court allowed the Owners’ appeal. The incorporation clause in the bills of lading was sufficiently widely worded as to incorporate the war risks and Gulf of Aden clauses. However, the component parts of the clauses needed to be dealt with separately as they would not all be “directly germane” to the carriage and delivery of the cargo and therefore incorporated.

The Court stated that whilst the obligation to pay for additional insurance premium to transit the Gulf of Aden was germane in this sense, it would not be appropriate to manipulate the relevant wording to substitute the “holders of the bills of lading” for “the Charterers”, making the bill of lading holders liable to pay the insurance premium. The bills expressly obliged the holders to pay freight as the price of the carriage of the goods to destination and it was unlikely that they would have accepted liability to pay additional, unlimited and unquantified sums. It was also uncertain how the liability to pay such additional expenses would be apportioned among different bill of lading holders where there was more than one. 

The Court further found that while the Owners and the Charterers might have agreed an insurance “code” pursuant to the terms of their charterparty, this agreement did not apply vis a vis the Owners and the bill of lading holders. Given that the bill of lading holders had not agreed to pay the additional insurance expenses, the bills could not be said to import an agreement that the Owners would not seek a contribution in GA from them. Clear words would have been needed to demonstrate the Owners’ agreement to abandon such rights.

The Court of Appeal decision

The Court of Appeal has dismissed the appeal. Although it did not determine the point, the Court of Appeal proceeded on the basis that, pursuant to the charterparty, the Owners had agreed not to seek a GA contribution from the Charterers. It also accepted that the incorporating words in the bills were extremely wide and sufficient to incorporate the Charterers’ obligation to pay for the additional war risks and K&R insurance. The issue, however, was whether the relevant wording should be “manipulated” so as to impose this obligation on the bill of lading holders.

Differing from the Commercial Court on this point, the Court of Appeal thought that such manipulation would not be inconsistent with the freight provisions in the bills. However, there was nothing in the bills or charter party to say how the premium would be apportioned between the different bill of lading holders. Furthermore, if the different bill of lading holders were jointly and severally liable for the premium, it was not clear what their rights of reimbursement would be as between each other. Consequently, the Court of Appeal concluded that it could not have been intended that the bill of lading holders should be liable for the premium. Such an outcome would not be practical or appropriate.

As to whether the bills excluded liability on the part of the bill of lading holders to pay cargo’s contribution in GA in the event of an insured peril, the Court of Appeal found that they did not. The risk of piracy and the potential need to pay a ransom were foreseeable events and had been dealt with by the parties to the bill of lading contracts. It would have been straightforward to state expressly that cargo interests were not liable to contribute in GA in the event of such a payment. In the absence of such clear words, the Court of Appeal concluded that the Owners did not intend to abandon their right to collect general average contributions from cargo.

Notwithstanding this conclusion, the Court of Appeal indicated that incorporation of these provisions served a useful purpose because it provided a record of the terms agreed between the Owners and the Charterers, specifically the basis on which the Owners had agreed in the bills that the voyage would be via Suez and the Gulf of Aden. That basis was that the Owners would have insurance against the risk of piracy, albeit paid for by the Charterers and not the bill of lading holders. Without the incorporation of these terms, the important issue of the vessel's route under the bill of lading contracts would at best be highly uncertain.

Comment

The Court of Appeal has highlighted the significance of the insurance position in such cases. This was a case where both parties were insured against the risk of piracy and where allowing the Owners to claim would mean that each set of insurers would bear its proper share of the risk which it had agreed to cover. In contrast, the effect of construing the bills of lading to exclude a claim by the Owners would mean that the loss was borne entirely by the Owners’ insurers and that the cargo owners' insurers would escape liability for a risk which they agreed to cover.

Christian Dwyer

Christian Dwyer Global Head of Admiralty

Rachel Bernie

Rachel Bernie Managing Associate

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