Court of Appeal reaffirms that rights of recovery and subrogation in situations of joint insurance will depend upon the terms of the underlying contractual relationship

In the recent cases of Gard Marine & Energy Ltd v China National Chartering Co Ltd and China National Chartering Co Ltd v Daiichi Chuo Kisen Kaishai [2015] EWCA Civ 16 (heard together) the Court of Appeal overturned the first instance decision of Mr Justice Teare, finding that there had been no breach of safe port warranties under separate contracts of charterparty. Although the Court of Appeal's decision was based upon the specific facts of the case as regards the alleged breach of warranty, the obiter comments of Lord Justice Longmore are of general interest in that they reaffirm that the availability of rights of subrogation as between composite insureds flows from an analysis of the underlying contract and suggest, in effect, a rebuttable presumption that an agreement to insure in joint names precludes subrogation as between composite insureds.

Background

The underlying claim involved a bulk carrier, the Ocean Victory, which was owned by Ocean Victory Maritime Ltd (OVM) and immediately demise chartered (on a long-term basis) to Ocean Line Holdings Ltd (OLH). It was a requirement of the charterparty between OVM and OLH that OLH would insure the vessel "in the joint names of the Owners [OVM] and the Charterers [OLH]". The vessel was then subject to an intermediate charter by OLH to China National Chartering (CNC) and sub-chartered to Daiichi Chuo Kisen Kaisha (DCKK).

The claimant, Gard Marine & Energy Ltd (Gard), provided marine and war risks insurance cover of US$70,000,000 for the vessel as required by the demise charter between OVM and OLH. In October 2006 the vessel ran aground whilst attempting to leave the port of Kashima, Japan, during a severe storm and was a total loss. Gard indemnified OVM and OLH up to the policy limit and in 2008 took an assignment of OVM/OLH's rights in relation to the loss of the vessel.

In 2010 Gard as assignee of the rights of OVM and OLH sued CNC for breach of a safe port warranty (in the intermediate charterparty between OLH and CNC) which provided that the vessel would only be used "between good and safe ports". CNC in turn brought a third party claim against DCKK for breach of a materially identical safe port warranty in the sub-charter between CNC and DCKK. The case was defended by DCKK (on whom the ultimate liability would fall at the end of the chain of charterparties) on behalf of CNC.

At first instance Teare J found that there had been a breach of the warranty as to the safety of the port of Kashima and gave judgment in favour of Gard (and CNC in the third party action). The judge rejected arguments from CNC and DCKK that the cause of the loss was not the breach of warranty but the Master's decision to leave the port in the adverse conditions and further that OLH had in fact suffered no loss as it was not liable to OVM. The Judge gave CNC and DCKK permission to appeal the question of the liability of OLH to OVM. The Court of Appeal gave permission to CNC and DCKK to appeal the findings on breach of the safe port warranty and the causation issue.

Longmore LJ handed down the judgment of the Court of Appeal reversing the first instance judgment.

Decision

No breach of Warranty

It was common ground between all the parties that a port would always be safe for the purposes of the relevant warranty if a ship could reach, use and leave it, in the absence of some abnormal occurrence, without being exposed to danger which could not be avoided by good seamanship and navigation. The Court of Appeal found that on the facts relating to the loss of the Ocean Victory, the circumstances on the date of the loss amounted to an "abnormal occurrence" such that the first instance Court was wrong to find that Kashima was not a safe port.

By virtue of its finding on the breach of warranty, the Court of Appeal did not need to consider the case-specific issues of causation and declined to do so. However, since the case had been fully argued on whether the owner, OLH, had a liability to the demise charterer, OVM, and the case gave rise to questions of general interest as to the effect of a contractual provision for insurance to be taken out in the joint names of the contracting parties, the Court of Appeal set out its analysis of the provisions of the charterparty.

OLH did not have a liability to OVM

The key contractual provision on this issue was clause 12 of the demise charterparty between OVM and OLH which provided for OLH to insure the vessel at its own expense and for "all insurance policies to be in the joint names of the owners [OVM] and the Charterers [OLH] as their interest may appear".

CNC alleged that the true construction of this clause was that OLH would have no liability to OVM for losses caused by breach of warranty where such losses were to be covered by insurance. Gard submitted that OVM and OLH had deliberately preserved the rights of OVM to recover from and bring subrogated claims against OLH by selecting clause 12 in preference to clause 13 of the contract. Clause 13 (which was omitted in its entirety) expressly excluded such recovery and any rights of subrogation.

The Court of Appeal acknowledged that joint insurance has given rise to problems in relation to subrogation for a number of years and that those problems also arise in the absence of joint insurance where, in a commercial relationship, one party is required to pay premiums for cover for loss or damage to the insured property. The Court started its consideration from the position that it is generally thought that, where the party which has paid the premium is guilty of a breach of contract and is indemnified by the insurer, the insurer is not entitled to bring a subrogated claim in the name of the "innocent" party against the party which paid the insurance premium. To allow such subrogated claims would be to effectively deprive the "guilty" party of the insurance cover for which premium had been paid.

The Court considered the authorities on this issue both in the context of marine and other forms of insurance including The Evia (No.2) , Mark Rowlands Ltd v Berni Inns and Co-operative Retail Services v Taylor Young. In doing so the Court noted the now well-established principle that it is the underlying contract between the parties and not the resulting contract of insurance which is relevant to establish the existence of any liability. The Court also acknowledged that care must be taken in construing that underlying contract to establish whether the parties had in fact intended that the rights of recovery and subrogation were to be excluded by virtue of the insurance provisions. In this regard the Court noted the comments of Rix LJ in Tyco Fire v Rolls Royce to the effect that very clear words are required to exempt liability for negligence.

On the present facts the Court of Appeal observed that it would be nonsensical in a case in which it was agreed that the parties were to be "insured in joint names as their interest may appear" that either party could sue the other once the insurance monies had been paid and distributed as the interests may appear. Once the insurance had been paid and the insurers discharged from liability, the contractual scheme (in the demise charterparty) had been accomplished.

The general position was bolstered by the surrounding circumstances of the relationship between OVM and OLH. In particular that:

• the parties were part of the same corporate group; and
• the warranty was a contractual requirement that existed regardless of any negligence on the part of OLH.

The Court found OLH's arguments in relation to the deleted clause 13 of the contract persuasive, but concluded that clause 13 was likely to be directed to short-term charters (rather than the long-term demise charter which was granted to OLH) in which it would make commercial sense for the charterer to be added to the owner's existing insurance policy and for an express exclusion of subrogation rights to be incorporated. The Court drew assistance in this regard from material published by the Baltic and International Maritime Council (BIMCO) which provided guidance on the insurance position in cases of short-term charters.

The Court of Appeal agreed with Rix LJ in Tyco that it is necessary to construe carefully the underlying contract but added that the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurer for indemnification rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties' joint interest or if there are other relevant circumstances, as in the recent case of Rathbone Brothers v Novae Corporate, where the underlying contract consisted of an employer's indemnity granted to an employee.

The Court of Appeal concluded that if it had been required to decide on the issue of liability, it would have found that under the terms of the charterparty between the owner, OVM, and the demise charterer, OLH, the parties had agreed between themselves that OVM would look to insurers and not to OLH for recovery in the event of an insured loss. OLH could not therefore have a liability to OVM. As a result if no liability fell on OLH, there was in turn no liability to be passed on through the intermediate charter or the sub-charter to either CNC or to DCKK.

Comment

The Court of Appeal's findings on the application of the proper test for breach of a safe port warranty will be of interest to mariners and marine insurers. Of broader interest, however, are the Court of Appeal's obiter observations on the liability provisions and the effect of an obligation to take out insurance in joint names.

Given the Court's findings it is evident that if a contractual clause is silent on recovery and subrogation it should not be assumed that they remain available. On the contrary, the Court of Appeal have indicated that the primary position should be that where the parties agree that one of them is to take out insurance then the parties have agreed to look to the insurer rather than each other for indemnification. With this decision of the Court of Appeal following swiftly on the heels of the Court of Appeal's finding in Rathbone last year (in which the Court implied a term into the contractual indemnity granted by an employer to its employee that the indemnity granted supplemental protection only once the indemnity under the relevant professional indemnity policy was exhausted), the general direction of travel seems to be in favour of looking to the insurance contract purchased by the parties to make good the loss, rather than a technical dissection of the underlying contractual arrangements to ascertain if any cause of action is open to insurers by way of subrogation.

As ever the route to avoiding disputes of this nature lies in a greater focus pre-contract on the consequences of a major loss and clear words to leave no doubt whether a subrogation action is excluded absolutely or remains viable for a specific type of loss.