Australia: Subrogation - did it sink with the Ocean Victory?

Last Updated: 3 August 2017
Article by Geoff Farnsworth
Most Read Contributor in Australia, December 2018

Most of us are aware of the concept of subrogation, under which an insurer who pays a claim "stands in the shoes" of the insured in pursuing any recovery action against a third party. This extends to commencing legal proceedings and suing in the name of the insured, even though the insured (strictly speaking) hasn't suffered a loss because its claim has been paid.

The "Ocean Victory" grounded during a terrible storm at Kashima, Japan on 24 October 2006. The Supreme Court in London published its judgment on the final appeal on 10 May 2017.

While the Supreme Court held that the port of Kashima was not at the relevant time an unsafe port (despite the judge at first instance finding otherwise) it is another aspect of this marathon litigation which is the subject of this article.

Like most commercial vessels, "Ocean Victory" was the subject of a chain of charterparties.

Her Owners, Ocean Victory Maritime Inc (OVM) bareboat chartered her to a related entity, Ocean Line Holdings (OLH) (collectively Owners) on a standard BIMCO form of charter.

OLH then time-chartered her to Sinochart who sub-time chartered her to Daiichi (collectively Charterers).

Each charter contained a "safe port" warranty, so (in effect) when the vessel was lost OVM claimed against OLH who claimed against Sinochart who claimed against Daiichi.

As is common, the vessel was covered by a Hull policy, in this case with Gard Marine and Energy Limited (Gard).

Gard took an assignment of OVM's and OLH's unsafe port claims against Sinochart and Daiichi and pursued the recovery action in its own name.

But this is where matters took an interesting turn.

In its defence Sinochart alleged that even if the port was unsafe the Owners and particularly OVM had not sustained any loss because the demise charter between the Owners contained a provision requiring OLH to take out hull insurance (which it had, with Gard) and have OVM named as a party on that policy.

Gard was in effect OLH's insurer and it made no sense that OLH's own insurer could sue it for recovery.

Charterers argued that the effect of the insurance clause in the demise charter was that the parties had agreed a code for the apportionment of liability between themselves which would be by way of insurances rather than claims for breach of contract. In this they relied on a similar argument which had succeeded in another case, The Evia.

Clauses like the insurance clause in the demise charter are common in commercial contracts particularly those that involve the leasing of property where the owner of the property gives possession and commercial control of the property to a third party.

At first instance

The Trial Judge, Justice Teare concluded that the port was unsafe and found against the Charterers. He did not however accept the Charterer's argument in respect of the insurances.

In considering the demise-charter contract he observed that there were two proforma insurance clauses.

Under clause 12 (which the parties adopted) the Charterers were required to insure the vessel and name the Owner on the policy.

The alternative clause 13 provided that the Owners would insure the vessel in which case the Owners would have no right of recovery or subrogation against the Charterers.

He felt that the mere fact that OLH paid for the insurance was not enough to exempt it from liability for breach of the contract by sending the vessel to an unsafe port.

He felt that clear words would be needed in the contract to preclude the Owner (and its underwriters) from pursuing an action for breach of the safe port warranty.

The Court of Appeal

The Court of Appeal overturned the Trial Judge both on the "safe port" question but also in respect of the insurance.

The Court of Appeal accepted that contracts of joint insurance "have been giving rise to problems in relation to subrogation for a number of years."

The problem according to the Court of Appeal arose where a party buys insurance, but is then the subject of a claim by or though that insurer.

The Court of Appeal held that clear words were not required, once it was evident the insurance was intended to be for the joint benefit of both parties.

Put simply, it would be odd if having purchased insurance in respect of a potential loss, the insurer could then sue you in respect of the same loss.

The Court of Appeal said that:

"Later cases have made it clear that it is vital to construe the underlying contract between the parties in order to see if there is truly an intention that the insurance is for the joint benefit of both parties. But if there is an agreement that the insurance is to be "in their joint names as their interest may appear" the agreement is likely to be construed as being an agreement to insure for the parties' joint benefit."

The Supreme Court

While they agreed with the Court of Appeal on the safe port issue, the insurance issue divided the five Law Lords in the Supreme Court.

The minority (Lords Clarke and Sumption) agreed with the Trial Judge that the insurer's recovery rights were not compromised by the joint insurance provision of the demise charter.

The majority (Lords Toulson, Hodge and Mance) agreed with the Court of Appeal, largely for the same reasons given by the Court of Appeal.

The majority construed the provisions of the demise charter as creating an insured scheme which would provide compensation for loss or damage to the vessel, without recourse to litigation between the parties. According to Lord Mance, the scheme was intended to be comprehensive.

"Whatever the causes, both repairs and total losses fall to be dealt with in accordance with its terms, rather than by litigation to establish who might otherwise be responsible for undertaking them, for bearing the risk of their occurrence or for making them good."

What are the implications of this decision?

The following points may be drawn from the decision;

  1. Beware joint insurances

I have long been wary of joint insurance precisely because of its interaction with normal rights of subrogation and this case provides ample justification for my concern.

The result appears to be either that an insured pays for insurance, but can still be the subject of a subrogated claim, or that the insurer is in effect deprived of rights of subrogation. Query how that might sit with an insured's obligation to preserve an insurers rights of recovery.

  1. Subrogation is not dead

"Normal" rights of subrogation are not affected. In a common cargo claim (for example) the carrier and insured are not joint assureds. Nothing in the bill of lading contract (for example) suggests an intention by the parties to provide for an insurance-based compensation scheme to override the liability scheme of the Hague or Hague Visby Rules.

  1. What should underwriters do?

One might expect that the London Insurance Market will be making submissions to BIMCO requiring amendments to their standard form clauses to specify that the joint insurance clauses do not compromise the insurer's ability to pursue recovery.

Absent provisions in standard form contracts it is hard to see why the parties might care whether the indemnity comes from a claim under an insurance contract or from a claim under the primary contract.

It will be up to underwriters to try to educate their insureds about appropriate wording in contracts.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Geoff Farnsworth
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