Background

M/T Polar ("the Vessel") was voyage chartered by way of a fixture recap incorporating an amended BPVOY 4 form ("the Charterparty").

The Charterparty included the following clauses:

• The "Gulf of Aden Clause" which provides, inter alia, that Charterers are to pay for additional insurance premiums "including but not limited to, those in respect of H&M, crew, P&I kidnap risks and ransoms)..." up to a maximum of USD 40,000 and crew bonuses up to a maximum of USD 20,000.
• The War Risk Clause which provides, inter alia, that if Charterers choose to trade the Vessel in an area not covered by Owners' basic war risk insurance, then any additional premiums to insure the Vessel in the excluded areas are to be for Charterers' account.
• Clause 39 of the BPVOY 4 (as amended in the recap), which provided that "acts of piracy" were to be treated as war risks for these purposes, and gave Owners wide liberties to cancel, cease performance or alter the route if it appeared that the Vessel would be exposed to war risks.

The Vessel loaded a cargo of fuel oil at St Petersburg under six bills of lading for discharge at Singapore. Each bill of lading sought to incorporate the terms and conditions of the voyage charterparty and stated on the front "…pursuant and subject to all terms and conditions, liberties and exceptions as per TANKER VOYAGE CHARTER PARTY indicated hereunder, including provisions overleaf". The contractual voyage route from St Petersburg to Singapore was via the Suez Canal and the Gulf of Aden. Prior to entering the Gulf of Aden, Owners took out additional insurance in the form of Kidnap & Ransom, as well as an extension to their annual Hull and Machinery and War Risk insurance to cover the Vessel whilst transiting the Gulf of Aden.

On 30 October 2010, whilst the Vessel was transiting the "High Risk Area" of the Gulf of Aden she was captured by Somalian pirates. The ransom of USD 7,700,000 was paid by or on behalf of Owners and the Vessel was released on 26 August 2011. Owners declared general average ("GA"). The GA adjustment calculated that Cargo Interests' contribution to Owners was USD 5,914,560.75.

Cargo Interests refused to pay their contribution. They argued that they had no liability to contribute in GA, on the basis that Owners' sole remedy was to claim the ransom payment from the additional insurance cover taken out by Owners, for which the premium had been paid by Charterers.  

The issues central to this case were:

Issue 1: Whether Owners were prevented from claiming against Charterers those losses arising from risks falling with the additional insurance for which Charterers had paid premium under the charterparty terms.

Issue 2: Whether the material parts of those same clauses had been incorporated into the bills of lading.

Issue 3: Whether the interpretation of the relevant clauses incorporated into the bills of lading precluded Owners from claiming such losses as against the bill of lading holders.

Issue 4: Whether it was necessary to manipulate the wording of the relevant clauses regarding the payment of insurance premiums by substituting the words "the Charterers" with "the holders of the bill of lading".

Appeal History

The case had initially gone to LMAA Arbitration, in which the Tribunal had found for cargo interests on all four issues, holding that they were not liable to contribute in GA.  On appeal, the High Court agreed with the Tribunal on points (1) and (2), but allowed the appeal on points (3) & (4).

Supreme Court Judgment

The Supreme Court found in favour of Owners in respect of Issue 1, and accordingly dismissed the cargo interests' appeal. As such, cargo interests failed to clear the first hurdle but nevertheless went on to consider the remaining issues.

Issue 1

It is well established that contractual parties may agree that a specified loss or damage is to be covered by insurance, and that the parties' only recourse in the event of such loss or damage shall be against the insurer.    In such cases, the parties cannot sue each other, and by the same token where the loss has been indemnified by the insurer the latter cannot pursue a claim against the other party by way of subrogation.

In the shipping context, such an agreement is referred to as an 'insurance code' or 'insurance fund', such as was found to exist in the demise charter in Gard Marine and Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) [2017][2], and in the time charter in Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia (No 2)) [1983][3].

Lord Hamblen noted that The Evia (No. 2) was the only time charter case in which there had been held to be such an insurance code or fund, a case in which notably the insurance was not in the parties' joint names.  The Supreme Court distinguished The Evia (No.2) on the basis that the terms of the Charterparty were materially different to the terms of the time charter in that case. The charter made no express provision for the establishment of an insurance code or fund and it lacked the clear words that would be needed to oust Owners' common law right to GA in relation to a well-known kidnap and ransom risk.

In the same way, there was no general principle that charterers would be exempted from their breaches, or their obligation to contribute in GA, merely because they had contributed (directly or indirectly) to the costs of insurance for the loss in question. From an insurers' point of view, an insurance code would negate any subrogation rights and likely lead to the risk attracting a higher rate. There would also be practical difficulties in disclosure to insurers if an insurance code could be inferred from the terms of the charterparty, though not express.

As there was no insurance code in the charterparty, it followed that there was no such code to be incorporated into the bills of lading.

Issue 2

The Supreme Court endorsed the summary of case law on the incorporation of charterparty terms into bills of lading at paras 6-016 to 6-018 of Scrutton on Charterparties 24^th ed (2020).

The High Court and the Court of Appeal, with which the Supreme Court agreed, had rejected an argument that the relevant parts of the war clauses which dealt with the payment of the additional insurance premiums were not directly relevant to the loading, carriage and discharge of the cargo and therefore could not be incorporated into the bills of lading by general words. They were, as the Supreme Court held, directly relevant to the carriage of the cargo as they could effect the voyage route. Clause 39 was also directly relevant to the carriage of the cargo as it afforded Owners wide liberties as to war risks on the contractual voyage, and as such was germane to the loading, carriage or discharge of the cargo. As the war clauses placed limitations on Owners' liberties under Clause 39, these too were incorporated on the basis that the contractual regime as agreed in the Charterparty needed to be read as a whole, rather than only partially incorporated into the bills of lading.

Issue 3

Even assuming that charterparty provided had provided for an insurance fund (contrary to Court's decision on issue 1), and on the basis that the relevant provisions were incorporated and effective in the bills of lading, could the cargo interests rely upon the same argument to defeat Owners' claim for GA contributions?    

On this point the cargo interests argued that the charterers should be viewed as having paid the additional insurance premiums on behalf of cargo interests, noting that it was cargo interests who would be liable to pay the largest part of the contributions in GA and who would be directly concerned with a kidnap and ransom event.

The Supreme Court noted that there was no express term or construction that supported this contention.  Only charterers were liable to pay the additional insurance premiums and so the insurance code or fund (even if one existed) could only have benefitted charterers, and would not extend to third parties.  

Issue 4

The Supreme Court rejected the argument that, the relevant clause clauses having been incorporated into the bills of lading, they should also be manipulated so as to substitute the words “the charterers” with “the holders of the bill of lading” in the parts of those clauses allocating responsibility for the payment of the additional insurance premia.

The court held that it was not necessary, as the wording in the relevant clauses still made sense and was relevant in the context of the bill of lading. Indeed, there were positive reasons not to manipulate the wording in the manner suggested.  The notion of bill of lading holders accepting a potential liability to pay unknown and unpredictable amounts was implausible. Moreover, if the holders of the bills of lading were liable to pay the insurance premia what was the basis of that liability?  Was each bill of lading holder liable for the full amount?  If not, was its liability proportionate and, if so, was it proportionate to the quantity of the cargo covered by the bill of lading or its value? If a bill of lading holder paid the insurance premia what would be its recourse rights against other bill of lading holders and how would they be enforced?  Faced with all of these issues, the court held that manipulation was neither necessary nor appropriate.

[1] [2024] UKSC 2

[2] [2017] UKSC 35, [2017] 1 WLR 1793

[3] [1983] 1 AC 736 [HL]