In Sveriges Anfartygs Assurans Förening (The Swedish Club) v Connect Shipping Inc (The Renos) [2019] 2 Lloyd's Rep 78, the Supreme Court decided two points of importance in relation to constructive total loss (CTL), concerning the date at which Notice of Abandonment (NOA) is given and the admissibility of SCOPIC expenses to the assessment.

In August 2012, the Renos suffered an engine room fire in the course of a laden voyage. The shipowners engaged salvors on the terms of Lloyd's Form incorporating the SCOPIC clause. The Vessel was towed to one port for temporary repairs and another for final repairs. Broadly speaking, a ship is a CTL if the cost of repairing her after a casualty brought about by an insured peril exceeds her insured value. Generally, in order to recover on a CTL basis, the assured must give Notice of Abandonment timeously to the underwriters. (In this case it was held below that they had.)

Before the Supreme Court, the underwriters argued (i) that expenses of a salvage nature incurred before Notice of Abandonment was given did not count as part of the cost of repairs for the purpose of making the comparison between the cost of repairs and the insured value ("the time issue"); and (ii) that SCOPIC charges were not admissible as part of that assessment ("the SCOPIC issue").

The Court dismissed the insurers' appeal on the first ground but upheld it on the second, so that the shipowners were able to claim only for a partial loss.

The Time Issue

By section 60(1)(ii) of the Marine Insurance Act 1906 there is a constructive total loss of a damaged ship where the cost of repair "would exceed the value of the ship when repaired". A rider to that subsection provides that:

In estimating the cost of repairs .... account is to be taken of the expense of future salvage operations ....

Section 61 and 62 provide that to claim for a total loss in such a case, the shipowner must give notice of abandonment.

The salvage expenses were incurred before the notice of abandonment was given. The insurers contended that this meant that they could not count as costs for the purpose of establishing whether there had been a constructive total loss. Oddly, there was no authoritative decision on the point.

The insurers argued that the word "would" and the phrase "future salvage operations" meant ignoring expenses which had already occurred by the time of the NOA. The Court rejected this argument. Constructive total loss is a device for determining the measure of the indemnity. The assessment of whether or not a ship is a CTL "depends on the objective facts". The absence of an NOA prevents an assured from suing on the basis of a CTL; but it is a procedural bar: it neither gives rise to a cause of action nor affects the nature of the loss. As Lord Sumption pointed out, otherwise the costs of salvage operations would often be excluded from the computation, as these would often be the first chapter of the story.

The SCOPIC Issue

The underwriters sought to exclude SCOPIC from the cost of repairs to be set against the insured value. First, they said that Clause 15 of SCOPIC had the result of excluding such payments when taken in combination with section 1 of the Contract (Rights of Third Parties) Act 1999. The Supreme Court did not deal directly with this argument, which was rightly rejected by courts below: [2016] EWHC 1580 (Comm) (Knowles J); [2018] EWCA Civ 230 (CA). Secondly, it was argued that SCOPIC payments were not salvage costs but related to work directed to saving the shipowners from liability for failing to protecting the environment. The Supreme Court acceded to this argument. The decision of the Court is wrong in a number of respects: that of the Court of Appeal is to be preferred. An article by the present writer exposing the fallacies in the judgment of the Supreme Court appears in the August number of [2020] LMCLQ.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.