Herculito Maritime Ltd and others v Gunvor International BV and others (the “POLAR”)  EWHC 3318 (Comm)
Oliver Caplin acted for the successful parties in this appeal under section 69 of the Arbitration Act 1996 concerning two novel points of law on (i) the incorporation of charterparty terms into bills of lading and (ii) the constitution of joint insurance funds in the context of war risks and kidnap & ransom (“K&R”) insurance, and the scope and applicability of the decision of the House of Lords in The Evia (No.2)  AC 736.
On Friday 4 December 2020 the Commercial Court, via Sir Nigel Teare, handed down judgment in this case. It is a rare example of a successful appeal under section 69 of the Arbitration Act 1996 on a point of law.
Background to the appeal
The case arose on an appeal from an award on two preliminary issues in a general average (“GA”) contribution claim advanced by Owners subrogated insurers against Cargo Interests’ subrogated insurers. The award was published by Timothy Young QC, Dominick Kendrick QC, and Simon Gault. The relevant GA event arose from the taking of the vessel, the POLAR, by Somali pirates in late 2010. The POLAR was eventually released after the payment of a US$7.7 million ransom. The owners declared GA. The ransom was covered by a combination of owners’ K&R and H&M war risks cover.
Cargo Interests’ subrogated insurers raised by way of defence to the claim that on a proper construction of the bills of lading issued in the case, which incorporated certain terms of a charterparty, the Owners had agreed only to look to their K&R and war risks insurers to recover any ransom paid – and not to their contractual counterparty. They relied in particular on terms as between Owners and their charterers which apportioned responsibility to pay for additional war risk and K&R premia for the POLAR on charterers, amongst other things. Cargo Interests argued that the agreement for an insurance fund in the charterparty had similar effect as between Owners and any bills of lading holders in situ in the bills. Thus, they said, no claim for a contribution in GA could lie from Owners to Cargo Interests. The defence was broken down into two preliminary issues – (i) what terms of the charterparty were incorporated into the bills of lading and (ii) did they, on their proper construction, create a joint insurance fund.
The Tribunal agreed with Cargo Interests, and Owners appealed on two points of law:
(i) Are agreements between a shipowner and a charterer in a charter party which delineate the responsibility for the payment of additional war risk or K&R premia between the shipowner and charterer, germane to the carriage of the vessel’s cargo in the context of a bill of lading?
(ii) Does an agreement between a shipowner and bill of lading holder concerning the allocation of responsibility for the payment of War Risks Hull & Machinery and K&R insurance premia give rise to an exclusive insurance fund precluding the shipowner from recovering in GA a contribution from cargo interests in respect of any losses suffered as a result of perils falling within the insurances?
The court answered this incorporation question “No”. The issues the court grappled with concerned in particular whether manipulation of “charterer” to “bill of lading holder” was appropriate, such that in effect the charterer’s obligation to pay additional war risk and K&R premia from the charterparty became, in the bill of lading, an obligation imposed on the lawful holder(s). Sir Nigel Teare decided that whilst an obligation to pay AWRP or K&R premia was in principle directly germane to the carriage of the cargo and thus capable of incorporation into a bill of lading, it was not appropriate to manipulate “charterer” to “bill of lading holder” because (i) the bill of lading holder had already agreed freight as its price for the carriage of its cargo and it would not be correct to impose additional costs upon it in the absence of clear words and (ii) it was not clear how the liability to pay the premia would be divided and apportioned between multiple potential bill of lading holders (a factor said to be important by Lord Diplock in The Miramar  1 AC 676).
Many of the cases concerning incorporation into bills of lading have focused on the incorporation of arbitration agreements, exclusive jurisdiction clauses, or demurrage provisions, so the issue was a novel one for the court.
The second question concerned whether in light of the terms of the bills of lading (including those terms found to be incorporated from the charterparty), was there an agreement to an exclusive insurance fund precluding a GA contribution from Cargo Interests in respect of any loss falling within the insurances. This was the first time a court has been required to consider the operation of joint insurance funds to claims in GA against bill of lading holders. The operation of joint insurance funds was considered in The Evia (No.2) and (albeit in the context of joint assureds, which was not this case) the The Ocean Victory cases.
The court again answered this question “No”. Whilst the court was persuaded that a joint insurance fund had been agreed between Owners and the charterers, it was not persuaded that any such agreement existed between Owners and bill of lading holders, here Cargo Interests. The effect of the court’s decision that “charterer” should not be manipulated to “bill of lading holder” was that in the bills, the holders had not been made liable to pay premium. That absence of an obligation to pay for the Owners’ relevant insurances removed the driving factor giving rise to the inference of a joint fund that had driven the House of Lords in The Evia (No.2) to reach its decision.
The decision of the court provides a welcome application of the rules concerning incorporation to a novel situation, and clarifies that the trigger for the creation of a joint insurance fund, and thus the preclusion of a subrogated right of claim, is the obligation on the insured’s counterparty to pay the insurance premium for the insurances in question.
Oliver Caplin is a co-author of the 4th Edition of Miller’s Marine War Risks, published in June 2020. He was instructed by Richard Neylon and Jenny Salmon of HFW for the Claimants, and was led by Guy Blackwood QC.