Last Updated on December 9, 2020 by LawEuro
Neutral Citation Number: [2018] EWCA Civ 230
Case No: A3/2016/3253
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
THE QUEEN’S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE KNOWLES CBE
[2016] EWHC 1580 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 19/02/2018
Before :
SIR GEOFFREY VOS, CHANCELLOR OF THE HIGH COURT
LORD JUSTICE SIMON
and
LORD JUSTICE HAMBLEN
– – – – – – – – – – – – – – – – – – – – –
Between :
(1) SVERIGES ANGFARTYGS ASSURANS FORENING (THE
SWEDISH CLUB)
(2) REAAL SCHADEVERZEKERINGEN N.V.
(3) THE PEOPLE’S INSURANCE COMPANY OF CHINA (PICC) PROPERTY & CASUALTY CO LTD
(4) WARTA S.A. INSURANCE AND REINSURANCE COMPANY
Appellants
– and –
(1) CONNECT SHIPPING INC
(2) MACHRIMAR MANAGEMENT SA
Respondents
– – – – – – – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – – – – – – –
Michael Ashcroft QC and Luke Pearce (instructed by Thomas Cooper) for the Appellants
Steven Berry QC (instructed by Hill Dickinson) for the Respondents
Hearing dates : 30/31 January 2018
– – – – – – – – – – – – – – – – – – – – –
Judgment Approved
LORD JUSTICE HAMBLEN :
Introduction
1. In August 2012, the mv “Renos” (“the Vessel”) was on a laden voyage in the Red Sea when a fire broke out in the engine room causing extensive damage.
2. The Vessel was owned by the first Respondent and managed by the Second Respondent (“the Owners”). The Appellants (“the Insurers”) were the hull and machinery (“H&M”) insurers of the vessel (as to 85%). The first Appellant, the Swedish Club, was the lead insurer and also the insurer under an increased value policy. The insured value of the Vessel was US$12 million and the increased value insured was US$3 million. It was agreed that the fire was an insured peril.
3. On 1 February 2013, the Owners purported to give a Notice of Abandonment (“NOA”) of the Vessel to the Insurers and claimed that it was a constructive total loss (“CTL”) on the grounds that the cost of repairing the damage would exceed the insured value.
4. The Insurers contended that the Vessel was not a CTL and that in any event the Owners had lost the right to abandon the Vessel and claim CTL. The Insurers’ case was that the Owners could only claim on a partial loss basis, reflecting the diminution in the Vessel’s value as a result of the fire, which was agreed to be US$1,422,687.50. The Insurers also disputed the amount of sue and labour expenses to which the Owners were entitled.
5. After a trial lasting 11 days, Mr Justice Knowles CBE gave judgment for the Owners in a judgment dated 1 July 2016. The Insurers appeal against that decision.
6. The principal issues which arise on the appeal may be summarised as follows:
(1) Whether the judge was wrong to conclude that the Owners had not lost the right to abandon the Vessel and claim CTL pursuant to s.62(3) of the Marine Insurance Act 1906 (“the MIA”).
(2) Whether the judge was wrong to conclude that the Vessel was a CTL, and, in particular, to hold that (a) costs incurred prior to the date of the NOA and (b) SCOPIC costs could be counted as “costs of repairs” for the purposes of the CTL calculation.
(3) Whether the judge was wrong in his conclusion as to the amount of the recoverable sue and labour expenses.
7. The Owners have issued a Respondent’s Notice seeking, if necessary, to uphold the judge’s decision that the Vessel was a CTL on different or additional grounds, and a cross appeal seeking to increase the sue and labour award and, if the appeal succeeds, to contend that recovery can still be made under the increased value policy.
Factual background
8. It is necessary to describe this in some detail given the nature of Issue (1). The judge’s summary of the facts was brief and so I have drawn on the agreed Chronology and other documents and agreed evidence to which we have been referred in order to set out the relevant background. It should be noted that it was common ground that for the Vessel to be likely to be a CTL the damage repair costs would have had to be US$8 million or more.
9. On 23 August 2012, a fire broke out in the Vessel’s engine room, while the Vessel was off the Egyptian coast in the Red Sea, in the course of a voyage from Adabiya, Egypt, to the Philippines, carrying a cargo of rock phosphate. The parties were informed shortly thereafter.
10. The Owners appointed Five Oceans Salvage (the “Salvors”) under a Lloyds Open Form 2011 (“LOF”). The Salvors invoked the Special Compensation Protection and Indemnity Clause (“SCOPIC”) later that day.
11. On 25 August 2012, the Vessel was surveyed by Mr Moraitis (an independent surveyor and marine engineer) on behalf of the Owners while under the control of the Salvors.
12. On 28 August 2012, the salvage tug “Red Sea Fos” connected and commenced towage northwards towards the Suez Canal.
13. A preliminary report was received from the Salvors on the nature of the damage on 29 August 2012.
14. The Vessel arrived at Suez Canal Anchorage A early on 31 August 2012. She was then surveyed by representatives on behalf of all parties, including Mr Badran of El Hamamsy and Mr Sgourakis of Braemar Technical Services Ltd (“Braemar”) on behalf of the Insurers, Mr Moraitis and Mr Souras (the Owners’ technical superintendent) on behalf of the Owners, and Mr Poulson on behalf of the Owners’ Protection and Indemnity (“P&I”) Club (the “American Club”).
15. On 3 September 2012, Mr Moraitis sent to the Owners his preliminary estimate of the cost of repairs of US$8.85 million with a contingency, amounting to a total of about US$9.6 million (excluding certain items such as removal costs and salvage) which he said should be “verified once a detailed specification has been compiled”.
16. On 6 September 2012, El Hamamsy sent its report to the Insurers putting the cost of repairs at US$5.527 million (forwarded to the Owners on 11 September 2012) and Braemar produced its Advice No 1 estimating the costs of repairs at US$5 million and requested the preparation of a specification.
17. On 14 September 2012, Mr Souras advised Mr Christodoulakis of the Owners that the repairs would cost in the region of US$7-7.5 million, excluding certain additional items such as removal costs.
18. On 25 September 2012, the Vessel was towed to the port of Adabiya for the purpose of discharging the cargo. The local port authorities imposed a condition on the Vessel’s permission to discharge that the engine space be sealed during discharge operations. Discharge took place between 27 September and 6 October 2012.
19. On 27 September 2012, there was a meeting between Mr Christodoulakis and Mr Magkanaris (the Marine Claims Adjuster of the Swedish Club) in which Mr Christodoulakis stated that he would not consider an unrepaired damage claim and would either go for repairs or for CTL. Mr Magkanaris reported that he responded by stating that:
“He has to choose what to do with the ship. If he wants to follow the repair or CTL route then, the ship will be scrutinised to death in order to establish the reasonable cost of repairs and the cost of repairs will not remain in estimation levels but we will ask for binding quotations from shipyards and repair contractors. This is a long and laborious process.”
20. On the following day, the Insurers sent Braemar’s preliminary advice, estimating the cost of repairs as approximately US$5 million, to the Owners and informed them that the provisional estimate in the hull file was US$4 million.
21. On 2 October 2012, the Owners entered into a Towhire contract for the hire of the tug “Pegasus II”, at a rate of US$15,000 per day, subject to Board of Directors’ approval, which was given three days later.
22. On 4-5 October 2012, Mr Souras attended on board the Vessel with Mr Dimou (a consultant appointed by Mr Moraitis) with a view to supplementing the draft repair specification that Mr Souras had already started. A first draft of the repair specification was produced on 5 October 2012. Meanwhile the Insurers had instructed Braemar to produce its own specification.
23. On 5 October 2012, the Insurers asserted their rights under clause 10 of the policy conditions (“the tender clause”), including the right (if repairs were effected) of veto over the place of repairs and the repair firm. Mr Magkanaris sent an email to the Owners in the following terms:
“With regard to the inspection of the ship, requested by the underwriters in previous correspondence, with the view to draft repair specification and invite tenders to quote, this demand is maintained and arrangements are currently under way to dispatch the surveyor and shipyard to inspect the damage. Underwriters under the cl. 10 of the policy conditions are entitled not only to inspect the casualty to their satisfaction but also to choose the place/port where repairs should be effected. The inspection that took place by the underwriters’ surveyor when the ship was under LoF is not considered sufficient to draft a detailed quotation for such extensive damage.”
24. On 6-7 October 2012, the Vessel arrived back at Suez, following completion of cargo discharge. The LOF was terminated, the Vessel was redelivered to the Owners and the “Pegasus II” began her standby services.
25. On 7 October 2012, the Vessel was surveyed by Bureau Veritas (“BV”), her classification society. On 12 October 2012 BV sent a report to the Owners describing the nature of the damage and the repairs required.
26. On 13 October 2012, Mr Souras and Mr Dimou attended on board the Vessel for the purpose of drafting the repair specification and Mr Souras increased his estimate to at least US$8 million. A second draft of the repair specification was produced the following day and further revised specifications were sent by Mr Souras to the Owners on 17 and 21 October 2012.
27. On 24 October 2012, the Owners finalised their repair specification (117 pages) and arranged for it to be forwarded to various shipyards. It was sent to the Insurers the following day and they informed the Owners that it would be sent to Braemar. Braemer made various comments on the specification which were then sent to the Owners. They also requested a further attendance on the Vessel and between 13 and 16 November 2012 Mr Sgourakis and Mr Levantis of Braemar attended on board, together with Mr Badran from El Hamamsy and an electrical specialist from Scanel A/S.
28. On 29-30 November 2012, the Insurers sent to the Owners Braemar’s Addendum No. 1 dated 19 October 2012 and Addendum No. 2 dated 19 November 2012, Braemar’s version of the repair specification (52 pages) and Braemar’s Final Survey Report dated 28 September 2012.
29. In early December 2012 Mr Moraitis estimated the repair costs at around US$8m with contingency.
30. On 4 December 2012, the Owners sent Braemar a marked-up version of Braemar’s repair specification (70 pages) and on 6 December 2012 they sent this to various repair yards for quotations. On 7 December 2012, the Insurers sent Braemar’s version of the repair specification to various yards.
31. On 20 December 2012, the Owners suggested imposing a deadline for receipt of quotations but the Insurers responded that they considered this would be unwise as it would be likely to lead to a mark-up for contingencies.
32. Between 21 and 29 December 2012, the Owners received three quotations based on their repair specification: from ASRY in the sum of US$8,163,970; from Sefine Shipyard Turkey in the sum of US$8,006,928, and from Oman Drydock in the sum of US$8,013,293. They also received a quotation from Drydocks World, Dubai, based on Braemar’s specification, in the sum of US$2,838,370.
33. On 8 January 2013, the Insurers received a quotation from the Tuzla shipyard based on Braemar’s specification, in the sum of US$7,660,964. This was sent to the Owners the following day.
34. On 11 January 2013, a quotation was received from the Santierul Naval Constanta SA shipyard, based on the Braemar specification, in the sum of US$4,011,166. On 17 January 2013, the yard provided the Owners with a further quotation for the “additional jobs” requested, including the work in the Owners’ specification, in the total sum of US$6,341,102 less a 30% discount on the Final Commercial Invoice.
35. On 21 January 2013, an estimate was received by Braemar from the Gemak shipyard in Turkey in the sum of about US$9 million. On the same day, a meeting took place between the parties at which the repair quotations were discussed. At this meeting Braemar’s estimate of repair costs was now said to be in excess of US$7 million, an increase from their initial September estimate of US$5 million.
36. On 25 January 2013, the Owners received a report from Mr Costouros (an independent surveyor and marine engineer) estimating the cost of repairs to be US$8,221,836. This was sent to the Insurers but they declined a further meeting to discuss technical matters following the 21 January meeting and Mr Costouros’ report.
37. On 30 January 2013, the Mr Magkanaris informed the Owners as follows:
“It is ultimately a matter for owners if, where and when the vessel is to be repaired. To date no such decision has been made. Underwriters have already stated, during the technical meeting of 21st January 2013, that if the Vessel is to be repaired their preferred choice of shipyard is either Constanta shipyard to the North or Dubai shipyard to the South depending on whether Owners decide to go North or South. Underwriters do not consider any further technical discussion on the repair specification to be necessary. However and for the avoidance of doubt, Underwriters reserve their rights in relation to Mr Costouros’ report and to the contents of the repair specification generally.
Underwriters have provided their input in accordance with tender clause and Clause 10.2 of the ITC and have nothing further to add at this stage. The decision of whether and when to repair the vessel lies with Owners and Underwriters urge Owners to make a prompt decision as to what to do with their vessel. In this respect, Underwriters’ note that the quotations received from Constanta and Dubai have already expired (25th and 26th January 2013). As to where the vessel should be repaired, ultimately this is a matter for Owners, but Underwriters have expressed their preferred choice as above.”
38. On 1 February 2013, the Owners served a NOA. This was rejected by Insurers the following day on the ground that it was “given far too late”.
Issue (1) – Whether the judge was wrong to conclude that the Owners had not lost the right to abandon the Vessel and claim CTL.
The law
39. The MIA provides as follows:
“60. (1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
(2) In particular, there is a constructive total loss—
(i) Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered; or
(ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired.
In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired; or
(iii) In the case of damage to goods, where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival.
61. Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.
62. (1) Subject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.
(2) Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer.
(3) Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry.
(4) Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.
(5) The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer after notice is not an acceptance.
(6) Where notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice.
(7) Notice of abandonment is unnecessary where, at the time when the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him.
(8) Notice of abandonment may be waived by the insurer.
(9) Where an insurer has re-insured his risk, no notice of abandonment need be given by him.
63. (1) Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever may remain of the subject-matter insured, and all proprietary rights incidental thereto.
(2) Upon the abandonment of a ship, the insurer thereof is entitled to any freight in course of being earned, and which is earned by her subsequent to the casualty causing the loss, less the expenses of earning it incurred after the casualty; and, where the ship is carrying the owner’s goods, the insurer is entitled to a reasonable remuneration for the carriage of them subsequent to the casualty causing the loss.
….
88. Where by this Act any reference is made to reasonable time, reasonable premium, or reasonable diligence, the question of what is reasonable is a question of fact.”
40. Of particular importance to Issue (1) is s.62(3). This requires consideration of the following questions:
(1) Did the Owners receive “reliable information of the loss”?
(2) If so, was the NOA given “with reasonable diligence” thereafter?
(3) If not, and the information was of doubtful character, did the Owners exceed the “reasonable time” allowed “to make inquiry”.
41. These questions involve consideration and application of the statutory wording, as the judge correctly recognised. Both parties sought to gloss the statutory wording by relying on judicial observations made in various cases, many of which pre-dated the MIA. I did not find this helpful. The test to be applied is that set out in the MIA and its application will be fact dependent.
42. For example, what is to be regarded as being “reliable information of the loss” will vary greatly according to the circumstances. Many of the older cases involved reports of the loss or capture of a vessel at a time when it was difficult to obtain clear or up to date information. That is a very different context to evaluating whether the costs of repairs of a vessel will exceed its value. Equally, cost of repair cases will not involve a uniform approach. There will be some cases, for example, where a ball-park figure for the cost of repairs will suffice, once the scope of repair is known. There will be others, such as the present case, where the vessel is close to the cusp of being a CTL and therefore greater detail and accuracy is likely to be needed for there to be reliable information of the scope and cost of repair. As to the meaning of “reliable”, the statutory contrast is made with “doubtful” information. So long as the requisite information remains “doubtful” it will not be “reliable”.
43. I accept that it is relevant to have regard to the rationale of requiring NOA to be given and its effect. This is explained as follows in Arnould on Marine Insurance (17th edition) at 30-15:
“As the effect of a valid notice of abandonment, if accepted, is to give the underwriters a title to the abandoned property (or salvage), and as the ultimate value of such property may be considerably affected by the promptitude with which measures are taken to effect either its sale or recovery, it is obviously just that the assured, if he means to abandon, and thereby throw upon the underwriters the ownership of the thing insured, should give them notice of his intention to do so within a reasonable time after receiving intelligence of the loss, in order that they may take immediate steps for turning the property thus cast upon their hands to the best account.”
See Roux v Salvador (1836) 3 Bing N.C. at 281 (Lord Abinger); see also Kaltenbach v Mackenzie (1878) 3 CPD 467, at 479 (Cotton LJ).
44. There will be many cases in which these considerations will mean that it is important that a NOA is given promptly. Under s.62(3) time constraints are imposed within which the election whether or not to give NOA must be made. If there is “reliable information of the loss” then the NOA must be given with “reasonable diligence”, which in many cases may be a short period of time. If the information of the loss remains of “doubtful character” then the NOA still has to be given within a “reasonable time to make inquiry”. What is “reasonable” is a question of fact (see s.88) and will depend on the circumstances of the case.
The judgment
45. The judge found that the requirements of s.62(3) were met. Although the precise basis upon which this conclusion was reached is not entirely clear, my understanding of the judgment is that the primary basis of the judge’s decision was that the Owners did not have reliable information of the loss at the time of the NOA and “took no more than a reasonable time, using a reasonable process, to try to get that” [26]. Alternatively, the Owners had reliable information of the loss following the provision of Mr Costouros’ report on 25 January 2013 and the NOA was given with “reasonable diligence” thereafter [20].
46. In support of that conclusion the judge’s findings included the following:
(1) The nature of the casualty was such that achieving reliable information of the loss would be a complex task and take time [10].
(2) Throughout the period from the casualty to the giving of NOA, the Owners were in receipt of conflicting information from experienced sources on the estimated cost of repairs [10].
(3) It was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any one source into question [11].
(4) The assessment to be made was a major one for any person to make, if it was to be undertaken reasonably and responsibly [11].
(5) This was a case where repair quotations from shipyards were required in order to achieve reliable information of the loss, given the conflicting estimates from experienced sources [17].
(6) The task was made more complex and slower because of the approach taken on behalf of the Insurers, putting forward figures that would not support a CTL, creating a competing specification, and emphasising that there would be adverse financial consequences for the Owners if the Owners chose a yard for repairs that was not agreed. This made it harder to get to a reliable picture of true costs of repair and caused things to take longer [23-24].
(1) Did the Owners receive “reliable information of the loss”?
47. The Insurers contended that if the judge had applied the correct approach to this question, and had had proper regard to the rationale and policy considerations underpinning s.62(3) of the MIA, he would have been bound to hold, on the facts of this case, that the Owners had reliable information of the loss well in advance of 1 February 2013.
48. The Insurers’ case was that the Owners had reliable information of the loss by early December 2012; alternatively, by the end of December 2012; alternatively, by 25 January 2013.
49. In support of the early December date, the Insurers stressed that by this time the Owners’ surveyors had spent more than three months investigating the damage to the Vessel; had finalised an extremely detailed repair specification (117 pages) which took into account BV’s report and expert advice from a naval architect, electrical engineers, and an engine manufacturer; had considered Braemar’s contrary opinions but been advised by Mr Souras and Mr Moraitis that they were unfounded, and had received a carefully considered estimate of the costs of repairs from Mr Moraitis of around US$8 million, which bore out the initial estimates that had been provided by Mr Moraitis and Mr Souras in September 2012.
50. In the present case, reliable information of the loss required the Owners to have reliable information as to (i) the extent of the damage and the scope of repair and (ii) the cost of such repair. As the judge found, this was a case in which shipyard quotations were required in order to have reliable information of the loss. This was a substantial and complex repair as to which repair estimates were likely to vary substantially, as indeed they did. Both the Owners and the Insurers were proceeding on the basis that the repair specifications would be sent to shipyards to obtain quotations, as they were. The judge was entitled to conclude that there could be no reliable information of the loss until such quotations had been received, which they had not been in early December 2012.
51. More fundamentally, although the Owners’ repair specification was credible and apparently reliable information as to the scope of repair, so was Braemar’s repair specification. The Owners were faced with two apparently reliable but starkly conflicting repair specifications. Braemar were independent Salvage Association surveyors who had particular experience in assessing damage repairs. They had made detailed surveys of the vessel, including over a period of 4 days in November 2012, assisted by specialists. They had produced their own detailed repair specification which was being sent to shipyards to obtain quotations. The scope of repairs required under the Braemar repair specification was substantially less than under the Owners’ specification and it was likely to mean the vessel was not a CTL. Although Mr Moraitis and Mr Souras disagreed with the Braemar specification, objectively it was and remained reliable information as to the scope of the repairs. Indeed, it was so relied upon by the Insurers up to and at the trial.
52. A striking feature of the Insurers’ case on reliable information is that it requires the Owners to disregard or reject the Insurers’ own expert assessment at the time as to the scope of repairs, an assessment that the Insurers insisted was correct. In the circumstances of the present case, the judge was entitled to conclude that the Owners could properly take into account apparently reliable expert information from the Insurers’ side contradicting CTL. As the Owners submitted, it cannot be right to look at information on one side only, which would be reliable if uncontradicted, if it is in fact contradicted. As the judge found at [11], in the circumstances of the present case, “it was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any one source into question.” This conflicting information meant that the information of loss remained “doubtful”.
53. The Insurers submitted that this was to confuse objective facts with opinions as to the proper conclusions to be drawn from those facts and that the objective facts were known by early December 2012. They relied on the comments made by Roche J in George Cohen v Standard Marine Insurance (1925) 21 LLR 30, 35: “It is quite true … that the assured cannot postpone his election, if all the facts are known, merely because opinions may fluctuate at all events as to the results or proper conclusion to be drawn from the facts.” In the present case, the essential facts in issue were the extent of damage, the scope of repair and the cost of repair. These were the relevant objective facts, even though they involved expert opinion. In this case, for the purpose of obtaining reliable information, they are properly to be regarded as factual matters, as the judge justifiably found.
54. For all these reasons, I consider that the judge was entitled to conclude that the Owners did not have reliable information of the loss in early December 2012.
55. If that be so, the Insurers first alternative case was that the Owners did have reliable information by the end of December 2012. The essential basis of that submission was that by that time the Owners had received three shipyard quotations based on their repair specification, all of which exceeded US$8 million. Had the only missing reliable information been that relating to the cost of repair, this submission would have some force. For reasons already explained, however, there remained no reliable information as to the proper scope of repair in the light of the conflict between the experts’ repair specifications. In any event, the Owners had received an estimate which cast doubt on the US$8 million repair quotations and suggested that repairs could be carried out significantly cheaper elsewhere. This was the quotation from Drydocks World, Dubai in the sum of US$2,838,370. Although this was based on the Braemar specification, it was most unlikely that the difference in cost between the Braemar and the Owners’ specifications would be anything approaching US$5 million. In these circumstances, I consider that the judge was entitled to conclude that the Owners did not have reliable information of the loss by the end of December 2012.
56. The Insurers submitted that this is to ignore the evidence as to the Owners’ subjective belief at the time, which was to the effect that their specification was correct and that there was a strong possibility that the Vessel was a CTL. As Insurers accepted, however, whether there is reliable information of loss is an objective question. The Owners’ subjective belief is at best some evidence of what a reasonable belief would be and, in any event, the judge was justified in placing greater weight on Braemar’s expert opinion than Owners’ views of that opinion. Further, as was pointed out, if the parties’ subjective conclusions matter, the Insurers had the very same information as the Owners and there was evidence that their view was that “there was never any reliable information that the ship was a CTL”.
57. The Insurers’ second alternative case was that the Owners had reliable information of the loss by 25 January 2013. The significance of this date was that it was when the Owners received the report from Mr Costouros estimating the cost of repairs to be US$8,221,836. This was an independent expert assessment of the scope of the repairs and their cost which supported the Owners’ repair specification rather than that of Braemar. The fact remained, however, that Braemar’s expert opinion as to the scope of repairs was substantially unchanged. There had been a meeting of 21 January between the parties to discuss the quotations. At this meeting Braemar had indicated a revised repair cost estimate of around US$7 million, but that remained well below the level of cost required for a CTL. Despite meetings and discussion, there remained a critical conflict of reliable expert opinion as to the scope and cost of repair. Further, there was now a quotation of US$6,341,102 less a discount, based on the Owners’ specification, from the Insurers’ preferred repairer, the Santierul yard, which was well below the CTL level of US$8 million. In these circumstances, I consider that the judge was entitled to conclude that the Owners still did not have reliable information of the loss and that this remained the position when NOA was given on 1 February 2013.
58. The Insurers objected that the logic of such a conclusion is that in any case where there is a bona fide dispute about whether a vessel is a CTL it would be impossible to obtain reliable information of the loss, so that the time for serving NOA would in many cases be postponed infinitely, a conclusion which would be contrary to the rationale and policy considerations behind s.62(3). There are, however, unlikely to be many cases which involve such a stark and critical difference in expert opinion. This was a case in which the Insurers chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the Vessel was not a CTL. They shared that information with the Owners, insisted on its correctness, and can hardly complain if it is taken into account in considering whether there was reliable information of the loss. Nor does this mean that the time for electing whether to give a NOA is postponed indefinitely. Under section 62(3), in cases where information of loss remains doubtful, the Owners are only allowed a reasonable time for making inquiry before being required to make their election.
(2) If the Owners had reliable information of the loss on 25 January 2013, was the NOA given “with reasonable diligence” thereafter?
59. This is a question of fact, as expressly stated in s.88 of the MIA.
60. The judge found that the Owners were entitled to time to consider the report of Mr Costouros and take a decision and that, having regard also to the complexity and history of the matter, the NOA was given “with reasonable diligence” thereafter.
61. The Insurers relied on cases in which it has been found that reasonable diligence required the NOA to be given almost immediately. Reference was made to Kaltenbach v Mackenzie (1878) 3 CPD 467 (CA), 473, 481, 483, 488-9, and expressions such as “immediately”, or “at the earliest possible moment”, or “speedily”, as were used in that case, and to The Galatea [2015] EWHC 2225 (Comm), [263] in which Leggatt J noted that there are “a number of cases in which delays of only a few days or weeks in giving notice of abandonment were held to be fatal to the insured”.
62. What reasonable diligence requires in any particular case will depend on the factual context and circumstances. This was not a case involving urgency, danger to the vessel or where there was a need for immediate decisions to be made. Nor is it a case in which the Owners had made a decision to abandon, but had not communicated it to the Insurers.
63. In the circumstances of the present case, I consider that the judge was entitled to find that the Owners had acted with reasonable diligence. In particular, there was, as the judge observed, a long and complex history. Mr Costouros’ report provided further material to evaluate, but it was not obviously decisive or determinative. It was reasonable to consider that further material with Mr Souras and Mr Moraitis and to take legal advice on the evolving situation. It was also reasonable to seek Insurers’ views on the report. They declined a meeting to discuss it and on 30 January 2012 informed the Owners that they were no longer relying on the tender clause and that repairs were solely a matter for the Owners to decide upon.
(3) If there was no reliable information of the loss did the Owners exceed the “reasonable time” allowed “to make inquiry”.
64. Again, this is a question of fact, as stated in s.88 of the MIA.
65. The judge found that the Owners “took no more than a reasonable time, using a reasonable process, to try to get” reliable information of the loss, commenting that “when the information continued to be contradictory, they reasonably attempted to resolve the contradictions”.
66. As the judge found, the nature of the casualty meant that achieving reliable information of the loss would be a complex task and take time. The task could not begin in earnest before the cargo had been discharged in early October 2012. Thereafter, the Owners took reasonable steps to produce a repair specification, and indeed less time than was taken by Braemar. They then promptly sought quotations, and offered to chase these up before being advised by Insurers not to do so. Faced with the conflicting repair specification produced by Braemar they commented on the differences and sought meetings to narrow or eliminate them. This continued up to and following Mr Costouros’ report. As the judge found at [23-24], the Owners’ “task was made more complex and slower because of the approach taken on behalf of the Insurers, putting forward figures that would not support a CTL, creating a competing specification”, making it “harder to get to a reliable picture of true costs of repair”.
67. Whilst, viewed in the abstract, it was a long time before NOA was given, in the particular and relatively unusual circumstances of this case, I consider that the judge was entitled to find that no more than a reasonable time was taken.
Conclusion on Issue (1)
68. For the reasons outlined above, in my judgment the judge was entitled to conclude that the Owners had not lost the right to abandon the Vessel and claim CTL and I would dismiss the appeal on this issue.
Issue (2)(a): Whether the judge was wrong to hold that costs incurred prior to the date of the NOA could be counted as “cost of repairs” for the purposes of the CTL calculation.
69. Under s.60(2)(ii) of the MIA, in the case of damage to a ship, there is a CTL “where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired”. S.60 further provides that:
“In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired…”
70. The H&M policies incorporated the Institute Time Clauses – Hulls (1/10/83) and the increased value policy incorporated the Institute Time Clauses – Hulls Disbursement and Increased Value (Total Loss only) Clauses (1/10/83). Clause 19.2 and clause 9.2 respectively of the two sets of Clauses provide:
“No claim for constructive total loss based upon the cost of recovery and/ or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value …”
71. The Insurers rightly accepted that the cost of repair under s.60(2)(ii) includes costs of recovering the vessel so that she may be repaired, such as the costs of salvage. They contended, however, that it is only post NOA costs of recovery and repair which rank towards whether a vessel is a CTL. Their grounds for so contending were as follows:
(1) It is supported by the only two authorities in which this question had previously arisen – Hall v Hayman (1912) 17 Comm Cas 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361.
(2) As a matter of principle and logic, because whether a vessel is a CTL for the purposes of s.60(2)(ii) can be tested by asking at the date of the NOA whether a prudent uninsured shipowner would choose to repair the vessel rather than leaving her where she lies (the “prudent uninsured shipowner test”) – see, for example, Sailing Ship ‘Blairmore’ Co v Macredie [1898] AC 593, 603 (Lord Watson).
(3) S.60(2)(ii) makes it clear that only “future” salvage and general average costs can be counted towards the CTL calculation. This shows that past salvage and general average costs do not count and there is no logical reason to treat other types of expenses any differently.
72. Considering first the wording of s.60(2)(ii), it focuses on the damage caused by the peril insured against. That occurs at the time of damage. The cost of repair under s.60(2)(ii) is the cost of repairing that damage. The repairs required to do so will be the same whether all or part of them are carried out before or after the giving of NOA. As the judge observed at [39], “section 60(2)(ii) refers to the ‘cost of repairing the damage’, being the ‘damage to a ship’ ‘by a peril insured against’, and not some part of that cost or that cost for a period commencing other than when the ship is damaged.”
73. S.60(2)(ii) makes no mention of the giving of NOA and draws no distinction between the time at which the cost of repair may be incurred. Nor is there any principled reason for drawing such a distinction. If, for example, it is necessary to carry out temporary repairs in order later to carry out permanent repairs, they are both part of the “cost of repairing the damage”. The fact that the temporary repairs are carried out before NOA is given does not change that. The same is true of recovery costs such as salvage, which may often be incurred before NOA is given in a repair damage case. Recovery costs which are necessarily incurred in order to repair the vessel are part of the “cost of repairing the damage”. Again, the fact that salvage liability is incurred before NOA is given does not change that.
74. In many cases an insured has to expend substantial salvage costs before it can be ascertained whether the vessel was a CTL and be in a position to give a NOA. CTL is a state of objective fact relating back to the date of the casualty – see Robertson v Petros M Nomikos [1939] AC 371, 381. It is independent of the right to abandon the vessel and to claim for CTL. As the Owners pointed out, the logic of the Insurers’ case is that a vessel which is in fact, albeit then unknown, a CTL on day one, when prospective ongoing salvage costs are included, would un-become a CTL as time went by, and the salvage costs were incurred and fell out of the calculation, all before the insured could properly give NOA. It would be surprising and indeed unjust to find that such salvage costs could not be counted.
75. That pre-NOA expenses are recoverable has been stated in successive editions of Arnould, including those edited by Lord Mustill. Paragraph 29-23 of the current edition states as follows:
“… The practice is to allow such expenses to rank towards a constructive total loss, and it appears that the United States’ courts have uniformly followed the same course. It is submitted that in principle the rule must be that the assured should not be penalised by having incurred some expense before he gives notice, which may indeed be essential if he is to form a judgment as to whether the facts justify abandonment, and that he is entitled when deciding whether to abandon to have regard to the totality of the repairing cost, not merely to those costs which have yet to be incurred.”
76. This view was endorsed by Lord Donaldson in an address given as Chairman of the Association of Average Adjusters in 1982 in which he stated that:
“This brings me to a further problem in relation to salvage operations, namely the inclusion of the word “future” in the section. Future from what time base? In Hall v Hayman (1912) 17 Comm. Cases 81 it was conceded and assumed that the moment for categorising a salvage operation as “future” was when notice of abandonment was given. But this cannot be right because it ignores the distinction between the factual situation of a vessel being a constructive total loss and an election to treat her as a total loss for purposes of a claim on underwriters. The owner has to do his sums and take account of future salvage operations before he elects to treat the vessel as a total loss. It is only after he elects that he gives notice of abandonment. In my view, which is shared by the learned editors of Arnold (16th edition, para 1203) the relevant date is the date of the casualty.”
77. As to the authorities relied upon by the Insurers, in Hall v Hayman a ship suffered a casualty on 16 November 1908, when she was driven ashore on to rocks. On 9 December 1908, the owners gave NOA to their insurers, claiming that the vessel was a CTL. In that context, a question arose as to whether failed salvage expenses incurred before the NOA was served could rank towards the CTL calculation. It was conceded that if they had been incurred by the shipowner they could not be claimed as they were not future salvage operations, but it was contended that there was no such bar if they were incurred by underwriters, as they had been. Bray J rejected that argument, stating (at p90) that:
“In estimating the cost of repairs I do not think I have anything to do with the underwriters. It is all upon the assumption as to what a prudent uninsured owner would do, and I have to see whether on December 9 the cost of the repairs, as stated in the Act, including those items which are mentioned in the Act, would or would not exceed the value when repaired. I cannot take into consideration anything that was done before, which, as a matter of fact, neither improved the position nor worsened it. Therefore I cannot allow this item.”
78. The point in issue was accordingly conceded and the only argument was as to whether it made any difference that the costs were incurred by the underwriters rather than the shipowner. Unsurprisingly that argument was rejected. In these circumstances, although Bray J did not question the concession made, the authoritative weight of the decision is slight.
79. In The Medina Princess [1965] 1 Lloyd’s Rep 361, a vessel was damaged during a voyage from Bremen to China, and the shipowner sued for a CTL. One of the items sought to rank towards the claim was the sum of £420, which had been incurred prior to the notice of abandonment for the purposes of repairing the steering engine. It was held by Roskill J, in one paragraph of a 138 page judgment, that this sum did not count, “because the work was done before the date of the notice of abandonment.” (p429, rhc). This conclusion is, however, unreasoned and it is unclear what, if any, argument there was on the point. Again, its authoritative weight is slight.
80. As to principle and logic, for the reasons outlined above, and those given by Arnould and Lord Donaldson, these favour the inclusion of pre-NOA expenses.
81. It is correct that the prudent uninsured shipowner test is often used to determine whether or not a vessel is a CTL and that this involves considering whether a prudent uninsured shipowner would choose to repair the vessel rather than leaving her where she lies. The application of the test does not, however, require that in choosing whether to repair the vessel one leaves out of consideration all existing damage repair costs. They are still costs of repair and logically should be taken into account in assessing the overall cost of repair.
82. It is also correct that to claim CTL it is necessary to show that the vessel is a CTL at the time of the NOA and indeed at the time (or deemed time) of commencement of proceedings. Again, however, that does not answer the question of what repair costs are to be taken into account for that purpose.
83. As to the reference in s.60(2)(ii) to “future salvage operations and of any future general average contributions to which the ship would be liable if repaired” (emphasis added), this wording is also problematic on Insurers’ suggested construction. For example, it is difficult to see how there can be a liability to future general average contributions given that the casualty giving rise to rights to general average will have already occurred. It is also difficult to understand the justification for singling out salvage and general average expenses. Further, on the wording there is no “future” restriction in relation to other expenses. In my judgment, the best explanation of this problematic wording is that given by the judge and in the latest supplement to Arnould, namely that these are words of inclusion rather than exclusion, making it clear that such future costs can be taken into account.
84. As the judge held at [40]:
“the part of section 60(ii) that contains the word ‘future’ simply provides that account is to be taken of the expense of salvage operations and of any general average contributions to which the ship would be liable where they are in the future. It does not exclude from the account the expense of such operations and contributions where they are not in the future. As Donaldson LJ said, extra-judicially, in an address to the 113th General Meeting of the Association of Average Adjusters in 1982: ‘All that section 60(ii) is concerned with is whether the cost of repairing the damage would exceed a certain figure and we are bidden, in estimating the cost of those repairs, to take account of the expense of future salvage operations’.
85. For the reasons outlined above, and those given by the judge, I consider that the judge was correct to hold that costs incurred prior to the date of the NOA could be counted as “cost of repairs” for the purpose of the CTL calculation under s.60(2)(ii) of the MIA. In those circumstances, it is not necessary to consider the Owners’ alternative argument under clause 19.2 and clause 9.2, but the same conclusion must follow on the application of those provisions.
Issue (2)(b): Whether the judge was wrong to hold that SCOPIC costs could be counted as “cost of repairs” for the purposes of the CTL calculation.
86. The amounts payable to the Salvors in respect of their salvage operations in the present case comprised (i) US$1,248,391.40, in respect of the Owners’ apportionment of the notional award made to the salvors pursuant to Article 13 of the Salvage Convention; and (ii) US$1,427,867.20, in respect of the SCOPIC remuneration payable to the Salvors over and above the notional Article 13 award.
87. The purpose of SCOPIC remuneration is to protect P&I clubs from liability they might otherwise incur in relation to environmental damage caused by a casualty. It replaces the regime for special compensation under Article 14 of the Salvage Convention 1989. In effect, it gives salvors the right to additional compensation, beyond the basic Article 13 award, in order to encourage them to take steps to minimise the environmental damage following a casualty.
88. The Insurers contended that the judge was wrong to hold that the SCOPIC element of the salvage costs could be ranked towards the CTL calculation for either or both of two reasons:
(1) SCOPIC costs are not, properly understood, a “cost of repair” for the purpose of s.60(2)(ii) of the MIA and/or clauses 19.2 and 9.2.
(2) The Owners are contractually precluded, by paragraph 15 of the SCOPIC clause, from counting SCOPIC costs as part of the CTL calculation.
89. As to (1), the Insurers submitted that SCOPIC remuneration is conceptually distinct from the Article 13 award payable to salvors as the reasonable cost of their services in saving the vessel. This is reflected by the fact that the SCOPIC element of the payment to salvors is in practice always payable (and was in fact paid in the present case) by the vessel’s P&I insurers. This is because it is paid to protect the owners (and in turn the P&I insurers) from what might otherwise be a substantial liability in relation to environmental damage or other liabilities. It is not payable under the vessel’s H&M insurance policy. As such, the payment should not rank for the purpose of a CTL claim under the H&M policy and is not a “cost of repair”.
90. The difficulty with this argument is that the Insurers correctly accept that costs of recovery are part of the cost of repair. In the present case, in order to recover the Vessel the Owners had to pay the entirety of the salvage remuneration to the Salvors. The cost of recovery was the total amount paid and that the remuneration comprised two distinct elements does not alter that fact. The salvage remuneration element was an unavoidable part of what had to be paid to recover the Vessel. As the judge stated at [53], “it is an indivisible part of an item the balance of which the Insurers accept is a “cost of repair””.
91. As to (2), paragraph 15 of the SCOPIC clause provides as follows:
“any liability to pay such SCOPIC remuneration shall be that of the Shipowner alone and no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 14 Award shall be made in General Average or under the vessel’s Hull and Machinery Policy by the owners of the vessel.”
92. Although the Insurers were not a party to the salvage agreement, they relied on paragraph 15 under s.1 of the Contracts (Rights of Third Parties) Act 1999 by way of defence to the claim. The Insurers contended that a claim against hull underwriters for a CTL, in which it is contended that the SCOPIC remuneration paid to salvors should be included as a ‘cost of repair’, is a “claim, whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration … under the vessel’s Hull and Machinery Policy.” They emphasised that the wording of that clause is extremely wide and that its aim is to capture any claim directly or indirectly connected or concerned in the broadest sense with SCOPIC remuneration.
93. The claim in the present case is for the total loss of the Vessel. No claim for an indemnity or recourse or otherwise is made relating to SCOPIC remuneration. Its only relevance is as part of the cost of repair which is to rank for the purpose of determining whether the Vessel is a CTL. Ranking costs for the purpose of a CTL do not have to be incurred. They may be future or hypothetical. No indemnity or recourse is sought in relation to such costs. They are simply costs to be taken into account for the purpose of determining whether an indemnity for a total loss can be claimed. Despite the wide wording of paragraph 15, I consider that the judge was correct to conclude that it does not apply here. As the judge observed at [53], “its inclusion in the assessment of whether there is or is not a CTL does not amount to a “claim by way of indemnity or recourse or otherwise relating to SCOPIC remuneration”.
94. In my judgment, the judge was therefore correct to hold that SCOPIC costs could be counted as “cost of repairs” for the purposes of the CTL calculation.
Conclusion on Issue (2)
95. For the reasons outlined above, I would reject both grounds of challenge to the judge’s decision that the Vessel was a CTL and would dismiss the appeal on this issue.
Issue (3) – Whether the judge was wrong in his conclusion as to the amount of the recoverable sue and labour expenses.
96. The tug engaged by the Owners was “Pegasus II”. This was a large tug of 6000 bhp which was expensive, costing US$15,000 per day. At trial, the Insurers contended that it was not reasonable or necessary to engage a tug of that size, at that rate or for as long as they did. The judge found that it was reasonable and necessary to engage such a tug initially, but that as time went on and there was less urgency another smaller and cheaper tug should have been used. For the purpose of the CTL claim he accordingly only allowed the “Pegasus II” costs for half of the period for which she was engaged and reduced the allowable cost figure to US$1.2 million. He further held that this sum could be recovered as a sue and labour expense.
97. In considering this issue the Insurers accepted that the judge directed himself correctly in law. As the judge stated at [94]:
“It was not in dispute that to the extent that costs were reasonably and properly incurred for the purposes of averting or minimizing a loss which would have been recoverable under the hull and machinery policies, the Insurers are liable to indemnify in relation to such costs.”
98. The Insurers contended that the judge erred in his application of that test in that he appears to have concluded that the mere fact that he was satisfied that the costs of the “Pegasus II” were reasonable for the purposes of the CTL calculation was sufficient to demonstrate that those costs were reasonable for the purposes of sue and labour.
99. The judge did, however, expressly address the question of whether the US$1.2 million tug costs were recoverable as sue and labour expenses and found as a fact in [96] that they were so recoverable. As he there stated:
“I am satisfied that those (reduced) costs of attendance of a tug that I have identified above, in the total sum of US$1.2 million, were reasonably and properly incurred to avert or minimise loss which would have been recoverable under the policies”.
100. It is correct that he does not there set out his reasons for so concluding, but there is ample reasoning in the earlier part of his judgment to support that conclusion. In support of his finding that it was reasonable and necessary to hire a tug of this size during the initial period the judge found at [57] that a tug of a size which could do more than standby was needed; that some capacity to be of some assistance in emergencies was required; that salvors would require a tug of sufficient capacity for delivery, and that what was needed was a tug “that could accomplish anything that transpired next”. He also found at [58] that at the time there were few available options and that these were not normal market circumstances. In short, there was evidence and there were findings to support the factual conclusion reached by the judge on this issue.
101. The Owners cross appeal seeking to increase the sue and labour award by some US$225,000. They contended that the judge was wrong to disallow certain costs and fees under the general description of “agency costs” on the grounds that they were insufficiently evidenced. It was submitted that the relevant costs were either agreed or evidenced by the Owners and not disputed by the Insurers.
102. The judge found at [97] that “the Insurers fairly say that the Owners have not fully explained what part of those costs were reasonably and properly incurred” for the purpose of averting or minimizing a loss which would have been recoverable. This reflected the general submission made by the Insurers that “the burden of proof in this regard is, of course, on the Claimants and to date they have done very little indeed to engage with this issue”. Although the Insurers made admissions in the Scott Schedule relating to which expenses ranked towards the CTL calculation, these were not admissions as to what expenses could properly be claimed as sue and labour costs. There was a general challenge made in relation to such expenses requiring proof and explanation. In my judgment, the judge was plainly entitled to reach the conclusion he did on this factual issue.
Conclusion on Issue (3)
103. In my judgment, it has not been shown that the judge was wrong in his conclusion as to the amount of the recoverable sue and labour expenses and I would dismiss both appeal and cross-appeal on this issue.
Conclusion
104. For the reasons outlined above, I would dismiss both the appeal and the cross-appeal. In those circumstances, it is not necessary to consider the further issues raised by the Respondent’s Notice.
LORD JUSTICE SIMON:
105. I agree.
SIR GEOFFREY VOS, CHANCELLOR OF THE HIGH COURT:
106. I also agree.
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