Case: Herculito Maritime Ltd and others v Gunvor International BV and others (The Polar)
Overview
In The Polar, the UK Supreme Court considered whether cargo interests were required to contribute in general average towards a ransom paid following the seizure of a vessel by Somali pirates.
The central question was whether provisions in the voyage charterparty requiring the charterer to pay additional war-risk and kidnap-and-ransom insurance premiums created an exclusive insurance regime. Cargo interests argued that the shipowner had agreed to look exclusively to its insurers and was therefore prevented from recovering the ransom expenditure through general average.
The Supreme Court rejected that argument and dismissed the cargo interests’ appeal. It held that the charterparty did not establish an exclusive insurance code and that the shipowner remained entitled to recover general average contributions from the bill of lading holders.
Background
The MT Polar was chartered for a voyage from St Petersburg to Singapore. The agreed voyage was expressly stated to be “via Suez”, which necessarily involved transiting the Gulf of Aden, an area then widely recognised as presenting a significant risk of piracy.
The charterparty incorporated the BPVOY 4 form and contained:
- a standard war-risks clause;
- an additional war-risk clause; and
- a specific Gulf of Aden clause.
The contractual arrangements allocated certain security costs between the shipowner and charterer. They also required the charterer to pay additional insurance premiums and crew bonuses, subject to agreed financial limits.
On 30 October 2010, Somali pirates seized the vessel while she was transiting the designated High Risk Area in the Gulf of Aden. The vessel and crew were detained for approximately ten months and released after payment of a ransom of USD 7.7 million.
The shipowner subsequently declared general average and sought contributions from the cargo interests. The cargo interests denied liability, arguing that the insurance arrangements in the charterparty provided the shipowner’s exclusive remedy for losses arising from piracy.
The issues before the Supreme Court
The Supreme Court considered four principal issues:
- Whether the charterparty created an insurance code preventing the shipowner from claiming against the charterer for insured losses.
- Whether the relevant war-risk and Gulf of Aden provisions were incorporated into the bills of lading.
- Whether those incorporated provisions prevented claims against the bill of lading holders.
- Whether references to the “Charterers” in the incorporated clauses should be replaced or adapted so that the insurance-payment obligations applied to the bill of lading holders.
Decision
The Supreme Court unanimously dismissed the appeal.
It held that:
- the charterparty did not create an exclusive insurance code;
- the material parts of the war-risk clauses were incorporated into the bills of lading;
- the shipowner was not prevented from recovering against the bill of lading holders; and
- the wording of the incorporated clauses should not be manipulated to transfer the charterer’s obligation to pay insurance premiums to the bill of lading holders.
The cargo interests therefore remained liable to contribute in general average.
No exclusive insurance code
The Court emphasised that the existence of an insurance code is a matter of contractual construction. The question is whether the contract necessarily shows that the parties intended insurance to be the sole source of recovery for the relevant loss.
This is a high threshold. The mere fact that one party is contractually required to fund additional insurance does not, without more, prevent the insured party from exercising its ordinary contractual or general average rights.
The insurance in The Polar was not joint-names insurance, and the charterparty did not expressly exclude rights of recovery or subrogation. The Court found no necessary implication that the shipowner had agreed to abandon its right to claim a general average contribution.
The judgment confirms that there is no general presumption that a party paying an additional premium automatically receives immunity from claims relating to the insured risk. Each charterparty must be interpreted by reference to its particular wording and contractual structure.
The effect of agreeing to transit a known-risk area
Although the shipowner succeeded on the general average issue, the judgment contains important observations concerning an owner’s right to rely on a war-risks clause.
The voyage was expressly agreed to be performed via Suez, and the parties had negotiated a detailed regime governing the known piracy risks associated with the Gulf of Aden. Against that contractual background, the Court held that the shipowner could not rely on the general war-risks clause simply to refuse the agreed transit on the basis of the same piracy risk that existed when the charterparty was concluded.
The position might have been different if:
- a different war risk had materialised;
- the nature of the piracy risk had changed; or
- the degree of risk had increased sufficiently to become qualitatively different.
There was, however, no finding that the piracy risk had materially changed after the charterparty was agreed.
This aspect of the decision demonstrates that even broadly drafted war-risk discretions must be interpreted in their contractual and factual context. An owner cannot necessarily rely on a general war-risks clause to avoid a voyage through an area whose risks were expressly known, contemplated and allocated when the fixture was concluded.
Incorporation into the bills of lading
The Court also addressed the principles governing the incorporation of charterparty terms into bills of lading.
General words of incorporation ordinarily bring into the bill of lading those charterparty provisions that directly relate to the shipment, carriage or delivery of the cargo, or to the payment of freight.
The relevant war-risk clauses affected the vessel’s route and the manner in which the voyage could be performed. They were therefore directly relevant to the carriage of the cargo and were incorporated into the bills of lading.
The Court considered it necessary to incorporate the contractual regime as a whole, including both the liberties granted to the shipowner and the provisions limiting or qualifying those liberties.
No transfer of the premium obligation to cargo interests
The obligation to pay the additional premiums rested expressly on the charterer. The bill of lading holders were not parties to that payment arrangement and had not undertaken to fund the insurance.
The Court declined to replace references to the charterer with references to the bill of lading holders. Such a substitution was neither necessary nor commercially workable. It would have created uncertainty as to whether each bill of lading holder was liable for the entire premium or only for a proportion calculated according to cargo quantity, value or the period during which the bill was held.
Consequently, the incorporation of the war-risk provisions did not give cargo interests the benefit of an exclusive insurance arrangement or relieve them of their general average obligations.
Practical significance
The Polar provides several important drafting and risk-allocation lessons.
Parties wishing insurance to operate as the exclusive remedy should say so expressly. A requirement that the charterer pay additional insurance premiums will not normally be sufficient, by itself, to exclude general average, contractual claims or insurers’ subrogation rights.
Owners should also be cautious when relying on general war-risk clauses after expressly agreeing to trade through a known-risk area. Where the route and the relevant risks were contemplated and specifically allocated at the time of contracting, the owner may need to establish a new or materially aggravated risk before refusing performance.
Finally, charterparty clauses incorporated into bills of lading will be interpreted in the context of the bill of lading contract. Obligations applying specifically to charterers will not automatically be rewritten so that they bind cargo interests.
Conclusion
The Supreme Court confirmed that the allocation of insurance costs and the allocation of legal liability are separate questions. Requiring a charterer to fund additional war-risk insurance does not necessarily mean that the owner has agreed to look exclusively to insurers.
At the same time, the judgment limits the ability of owners to use general war-risk wording to avoid a specifically agreed voyage based solely on risks that were already known and contractually addressed when the fixture was concluded.
This case note is intended for general information only and does not constitute legal advice.
Arizon Abogados S.L.P
www.arizon.es