The B Atlantic case: will the Supreme Court hear an appeal?
War risk underwriters in the marine insurance market are anxiously waiting to learn if the Supreme Court will grant permission for a shipowner to appeal in the long-running B Atlantic case. It is expected to be early 2017 before the Supreme Court decides whether there can be a re-run of the main issue – almost 10 years after the dry bulker was detained in Venezuela as a result of a drugs swoop (in which the owner is said to have been an innocent party).
Members of the International Maritime Industries Forum heard at a luncheon meeting on November 16 2016 an update from lawyers at Stephenson Harwood, who represented underwriters in the tussle over interpretation of exclusion clauses.
The Court of Appeal found in favour of underwriters, saying they were justified in refusing to pay a claim by the owner. That court dismissed the owner’s application for permission to appeal to the Supreme Court, and the owner is asking the higher court itself to let it go ahead.
Simon Moore, a partner in the marine and international trade team, and Paul Hofmeyr, an associate, detailed the Stephenson Harwood view of the ongoing B Atlantic case (Atlasnavios-Navegação v Navigators  EWHC 4133 Comm) which brought into focus standard war risks clauses. The issue was whether an owner is covered for detentions and confiscations of a vessel where the loss arises from a detention in connection with drug smuggling.
Stephenson Harwood is representing the underwriters.
The 24-year-old, 38,500 dwt dry bulk carrier B Atlantic was held in August 2007 and the crew charged with complicity in drug smuggling. The B Atlantic loaded a cargo of coal at Lake Maracaibo, meant for discharge in Italy. During loading, two underwater inspections were carried out. In the first, divers found a grappling hook, a saw, a rope and other tools behind a grille that was loose on the hull. A second Inspection found 132kg of cocaine strapped to the hull near the rudder.
Most of the crew were released within a few days but the master and second officer were charged with complicity in drug trafficking. (Capt Volodymyr Ustymenko and second officer Yuriy Datchenko, citizens of Ukraine, were held in Venezuela until their trial in August 2010, and sentenced to nine years in prison, although returned to their home country after a short while – where they faced further imprisonment.) Mr Moore believed that had the trial been in London, the two would not have been convicted.
The owner tried to get the Venezuelan court to release the vessel: at the time of the incident it was insured for $18m, although on the collapse of the freight market its presumed value fell to $10m or perhaps as low as $5m, said Mr Moore. . Because of its continued detention (and the freight market still being terrible) the owner abandoned the vessel to the court in September 2009.
The owner presented a claim to underwriters for constructive total loss under London Institute War and Strikes Clause 1 October 1983, highlighting wording that “this insurance covers loss of or damage to the vessel caused by…capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat…any person acting maliciously or from a political motive…confiscation or expropriation.”
Underwriters relied heavily upon the following: “This insurance excludes… loss damage liability or expense arising from arrest, restraint, detainment, confiscation or expropriation by reason of infringement of any customs… regulations.”
In a trial of preliminary issues Mr Justice Hamblen (who has been since 2015 a Lord Justice of Appeal) determined that underwriters did not need to show that the owner or its servants or agents were privy to or complicit in any infringement of customs regulations in order to be able to rely on the exclusion. It was also capable of applying to loss caused by any person acting maliciously.
Mr Hofmeyr said that when the case came before Mr Justice Flaux in December 2014 he ruled in favour of the owner and ordered that underwriters pay “the substantial sum” of $23m (the value of the vessel, plus interest, plus costs). Mr Justice Flaux said that the exclusion did not apply because underwriters conceded that in a scenario where there was a “put up job” – such as that the authorities could have arranged for drugs to be attached to the hull to facilitate confiscation – the exclusion would not be triggered. This was said to point to the fact that underwriters accepted there was an implied limitation to the scope of the exclusion.
Mr Justice Flaux granted underwriters permission to appeal, but not a stay of execution as the owner was, at that time, a substantial trading company, which owned other bulk carriers against which a Court of Appeal judgment could be enforced.
Following the transfer of the judgment sums, though, all three of the owner’s bulk carriers were sold, one by one. In March 2015 the owner and underwriters agreed – said Mr Hofmeyr – that the judgment sums would be paid into escrow (as security for the appeal) in return for interest being waived. Eventually the owner’s lawyers sent a message denying the existence of the escrow agreement.
In June 2015 on behalf of the underwriters, Stephenson Harwood won a worldwide freezing injunction as a result of which $23m in the owner’s bank account was seized, and the money paid into escrow.
Mr Moore said that in August 2016, the Court of Appeal reversed the decision of the lower court, ruling that insurers were not liable for the loss. This was significant as the legal principles on the correct interpretation of insurance contracts were of broad application. Underwriters received their money back.
The Court of Appeal reasoned that the structure of the clauses is that the risks covered are the perils “subject always to the exclusions.” The exclusion was meant to target detention by Customs, as supported by previous cases such as the Kleouvoulous of Rhodes and the Anita.
The court, it said, should be reluctant to read words into policies which are not there, especially in respect of those clauses which are for use in insurance contracts throughout the world.
Mr Moore said that in order to obtain Supreme Court permission to proceed further, the owner would need to demonstrate that there is a sufficiently arguable point of law; and that there is a point of general public importance at stake. Underwriters say there is no basis for such points.
What has become clear, he said, is that the smuggling of drugs or contraband is not a war risk, and not covered by standard policies. Owners should purchase additional cover in the market if they wanted to protect themselves against such a risk
He underlined that the courts continued to sway towards a more literal reading of contracts between two commercial parties –the principle being that a contract means what it says and says what it means even if it leads to disastrous consequences for one of the parties.
Finally, if the proximate cause of the loss is an excluded peril the loss is excluded.
On behalf of the IMIF audience, and of Jim Davis, the organisation’s long-time chairman who stepped down from the post a year earlier and who was unable to be present, Victoria Mott thanked Mr Moore and Mr Hofmeyr for their presentation; and expressed appreciation to Stephenson Harwood partner Julie Clegg and her colleagues at the law firm for their hospitality.