UK: Bunker Oil Pollution Liability Insurance and Iranian Sanctions

Islamic Republic of Iran Shipping Lines v. Steamship Mutual Underwriting Association (Bermuda) Ltd [2010]
Commercial Court 26 October 2010

Background

In common with many maritime States, the United Kingdom is party to the International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001 ("the Convention").

Under Article 7(1) of the Convention, shipowners are required to maintain insurance or other financial security to meet their liability for bunker oil pollution under the applicable local or international limitation regime. Evidence of satisfactory insurance must be presented to the ship's relevant State authority, who will in turn issue a certificate confirming that such insurance is in place. Certification issued by a State party is accepted by the authorities of all other States that are party to the Convention.

The Convention also makes provision for rights of direct action with respect to bunker pollution claims against the shipowner. Specifically, Article 7(10) of the Convention permits any such claim to be brought directly against the insurer, although the insurer may invoke all defences that would have been available to the shipowner. The insurer may also limit its liability to the amount of the insurance cover, but otherwise policy defences may not be asserted1.

In the present case, the insured Claimant ("IRISL"), an Iranian shipowner, was entered with the Defendant P&I Club ("the Club"), in respect of the 28 vessels then in its ownership, including the vessel "ZOORIK". In accordance with the normal procedure, the Club issued a "Blue Card" to the UK Maritime and Coastguard Agency, confirming that the relevant insurance was in place, in response to which the MCA duly issued an Article 7 Certificate for each of the entered vessels, including the ZOORIK.

During the period of the insurance, however, HM Treasury promulgated the Financial Restrictions (Iran) Order 2009, pursuant to the Counter-Terrorism Act 2008. That Order prohibited transactions and business relationships between relevant persons and designated Iranian entities, including IRISL, but always subject to derogation by licence where appropriate. In the present case, HM Treasury issued a licence permitting the club to "continue to provide insurance cover in accordance with the Blue Cards issued to IRISL for a period of three months starting on 30 October 2009".

Nevertheless the Club terminated cover in respect of IRISL's ships because it took the view that the terms of the licence meant that it was no longer permitted to provide insurance cover to IRISL. Soon afterwards, and during the three month licence extension, the ZOORIK suffered a casualty in Chinese waters, causing bunker oil pollution and rendering it a constructive total loss.

The club advanced two submissions:

1. on the correct interpretation of the licence issued by the MCA, it was not permitted to go on providing insurance in respect of claims brought against the shipowner. All that was permitted under the licence, argued the Club, was to meet claims brought directly against it (the Club) pursuant to Article 7(10) of the Convention;

2. whether or not it was correct about the above, the Club argued that the contract of insurance between it and IRISL had been discharged by frustration and/or supervening illegality when it became unlawful for the Club to insure IRISL in respect of all other P&I risks.

Terms of the Licence

The court noted that the language of Article 7(1) made no distinction between the position of third parties and that of the insured. Whether the claims were for losses suffered by third parties, or for the insured's own costs of preventative measures and reinstatement, they both fell within the compulsory insurance required by Article 7(1), and in respect of which the Blue Card had been issued. While it was true that the main purpose of the Convention was to protect third parties, the concept of "insurance cover in accordance with the Blue Cards" was not necessarily limited to third party claims brought by way of direct action. On its proper construction, therefore, the licence permitted the Club to continue to provide IRISL with insurance cover in respect of all of the risks required to be insured under the Convention, and to meet claims made in respect of those risks.

Frustration

As to frustration, the court referred to the leading authority of Lord Radcliffe in Davis Contractors Ltd v. Fareham UDC [1956]2, that frustration occurs when:

"without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would make it a thing radically different from that which was undertaken by the contract".

The court also cited the judgment of Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd [1981]3, referring to a supervening event "for which the contract makes no sufficient provision" which "so significantly changes the nature... of the outstanding contractual rights" from those contemplated that "it would be unjust to hold [the parties] to the literal sense of [the contract's] stipulations in the new circumstances...".

On the authorities, the Club submitted that the contract of insurance had to be viewed as a whole. Whatever may have been permitted by the licence, the fact remained that it had become unlawful for the Club to cover all of the other risks customarily insured as part of a shipowner's P&I Club entry. The entirety of the contract, save for one small part, had become illegal, such that the obligation had become "radically different" from that originally undertaken, a scenario for which the contract made no provision.

The court accepted that the scope of the cover had become much narrower than before, and that this scenario was not catered for in the contract. Nevertheless, adopting what it called a "multi-factorial" approach, it was possible to view the surviving bunker pollution coverage as a severable contractual obligation, unchanged from that previously undertaken. The Club's continued performance of its surviving obligations was not dependent upon other parts of the contract, and moreover a finding of frustration would provide the club with a windfall.

Since the contract of insurance was not discharged by reason of frustration, IRISL was entitled to be indemnified in respect of its costs and liabilities arising out of the casualty, and the Club could not seek reimbursement from IRISL in respect of the strict liabilities owed by the Club to third parties under Article 7(10) of the Convention.

Result: Judgment for the insured.

Footnotes

1. The proper course in pursuit of policy defences is for insurers to pay the third party's claim and then seek corresponding reimbursement from the insured.

2. [1956] AC 696.

3. [1981] AC 675.

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