MOK Petro Energy v. Argo (No. 604) Limited (The "F1") [2024] EWHC 1935 (Comm)
The judgment of Mrs Justice Dias in MOK Petro Energy v. Argo (No. 604) Limited (The "F1") [2024] EWHC 1935 (Comm) contains an important analysis of the requirement of physical "damage" in a particular average claim. It is also one of the first reported decisions to analyse the operation of the Insurance Act 2015 where there has been a breach of warranty.
Simon Rainey KC and Benjamin Coffer appeared for the successful London market reinsurers. Guy Blackwood KC appeared for the Claimant.
The claim was in respect of a blended cargo produced by combining gasoline and methanol blend stocks on board the carrying vessel. The cargo produced by this blending process was prone to separating out into its constituent parts when cooled. This propensity to separate affected its utility and value: samples could not be cooled to the temperatures required by standard gasoline quality tests.
On the facts found by the judge, it was inevitable that the blend produced by the blending of the gasoline and methanol blend stocks in the proportions in which they were actually loaded would undergo phase separation at relatively warm temperatures and therefore would not be able to pass standard quality tests.
The Claimant argued that it nevertheless had a valid claim against its insurers: it argued that the decision by the seller as to the proportions in which the blend stocks should be loaded was a fortuity which was covered by the policy. The result of that fortuity, argued the Claimant, was to cause the blend to suffer physical damage by phase separating when cooled to low temperatures and/or by having a propensity to do so.
The Judge rejected the Claimant's claim. She found that there had been no "damage" to the cargo. "Damage" requires a physical change in state which is economically harmful. Where a blended product is defective from the outset because of the nature of the raw materials from which it is produced, there is no "damage".
The cargo had only ever existed in its defective condition: until the gasoline and methanol blend stocks were loaded, there was nothing which could be said to constitute the cargo, and therefore nothing to which the insurance could attach. The individual blend stocks were not damaged; they were merely combined to form an inherently defective product. The blended product never existed in any other state.
The claim would have failed in any event because there had been a breach of a warranty which required certification of the shore lines at the load port. The Claimant sought to rely on a certificate issued retrospectively by the survey company several years later, but the Judge held that the retrospective certification was insufficient: the certificate was required to be produced as part of the survey at the load port.
The Claimant sought to rely on section 11 of the 2015 Act to argue that a failure to comply with the certification requirement was not a breach which could affect the liability of the insurers because it was immaterial. The Judge accepted the reinsurers' argument that section 11 requires a broad enquiry as to whether compliance with the term in question could have reduced the risk of the loss which actually occurred. In this case, there was no dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination.
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Originally published 18 December 2024
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