The “Ocean Victory”: clarification for charterers and those insuring their liabilities

In upholding the decision of the Court of Appeal, the Supreme Court considered issues in three important areas:

• The test to determinate the safety of a port for the purpose of charter party warranties.
• Rights and liabilities as between co-insureds under an insurance policy.
• Rights given to a charterer to limit liability under the 1976 Limitation Convention.

Safe port warranty

When chartering a vessel, charterers typically warrant that they will only order a vessel to ports that are safe.

The classic test as to what constitutes a safe port was set down in The “Eastern City” case [1958] as follows:

“… a port will not be safe unless in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good seamanship and navigation…”.

The question considered in the Ocean Victory was whether there had been an “abnormal occurrence”.

The facts of the case

Kashima is a large, modern port in Japan. It has a limited access channel and, on occasions, suffers from heavy swell caused by ‘long waves’. In late October 2006, the port experienced a combination of swell due to the onset of long waves and severe northerly gales. The Ocean Victory and another vessel sought to leave the port. During passage through the channel leading to the open sea both vessels foundered.

The judge at first instance held that the port was unsafe since the weather conditions were characteristic of the port. Whilst the combination of such conditions was rare, they were not abnormal.

The Court of Appeal took a different view. It decided that the “simultaneous coincidence of the two critical factors” (swell and winds) was unprecedented and represented an abnormal occurrence. Therefore, there was no breach by charterers of the safe port obligations.

The Supreme Court unanimously agreed with the Court of Appeal: the test had to be whether the combination of all the factors was such that the event could properly be regarded as abnormal. In this case, the rare coincidence of the long waves and a severe storm satisfied the test as abnormal. No doubt, the absence of any previous similar loss influenced the decision that there was a clear indication of abnormality.

Having decided the port was safe; the other issues did not require a decision. However, the Supreme Court still considered them due to their general importance.

The effect of joint insurance on recoverability of loss

The arrangements for the financing of the Ocean Victory involved the head owners granting a bareboat charter to the bareboat charterers, who had in turn, time chartered the vessel to Sinochart, who then sub time chartered the vessel to Daiichi. The bareboat charter required the bareboat charterer to take out insurances on the vessel for the benefit of both themselves and head owners. In the absence of insurance, the loss of the vessel would have given rise to a claim by the head owners against the bareboat charters for breach of the safe port warranty. A similar claim would have then been passed down the charter chain to Sinochart and then Daiichi.

The judge at first instance considered the role of the insurance – could insurers advance a claim for breach of the safe port warranty against the bareboat charterers, which in turn could be passed down to the time charterers?

The judge decided that the existence of the insurance did not preclude the safe port claims and the charterers were liable for the unsafe port. The Court of Appeal disagreed, deciding that the existence of the insurance precluded the claim by the subrogated insurers against the bareboat charterers.

The Supreme Court agreed with the Court of Appeal – adding that, not only had the bareboat charterers taken out the insurance, they were also a named assured with the benefit of the policy. The bareboat charterers could not therefore have a liability to the head owners (or to the insurers through subrogation). Therefore, insurance did change the contractual position.

Limitation of charterers’ liabilities

Under the 1976 Limitation Convention, ship owners and salvors have the right to limit their liability for maritime casualties. The term ‘ship owner’ includes charterers as well as managers and operators. However, the regime left unanswered whether charterers could limit their liability to the ship owner for loss of, or damage to, the vessel.

In The CMA Djakarta [2004], the Court of Appeal decided that charterers could not limit their liability to the owners for damage to their vessel. The correctness of that decision remained unresolved until unanimously endorsed by the Supreme Court.

Comment

The judgment provides clarification for charterers and those insuring their liabilities. Knowing that the risk of a series of largely unremarkable features combining in a port to create an unsafe situation is a risk ordinarily to be borne by the ship owner will be welcomed. Even if the position had been otherwise, charterers would have been handed a ‘get out of jail free’ card, insofar as the bareboat charterers’ contractual liability would have been displaced by the joint insurance taken out, such that there would have been no liability (or loss) for them to pass to the charterers down the chain.