AdjiE Propeller - Fin Propeller

Fin Propeller is screw propeller which have been modified by enhancing two fin on each of back of propeller blade. Its purpose is to improve thrust power by the propeller performance. According to blade element and propeller momentum theory, adding of the fin could increase the fluid flow Va at the back of propeller blade so the pressure goes down. So theoretically, Fin propeller can produce thrust bigger than original screw propeller. Hence, the ship running faster. The basic function of this propeller is the ship’s owners can speed up their ship without changing the engine.

This propeller created by lecture of Marine Engineering Sepuluh Nopember Institute of Technology – Surabaya, Indonesia.
Together with his students, execute his first experiment in year 2004. The experiment result prove that using the fin propeller make the ship run up to 20% faster than using original screw propeller. However, this adding of the fins cause the fuel oil consumption of the ship increase because of propeller load. Because of that case, this research still being developed mathematically and computerized.

Blade Element Theory
Forces that happened at foil yielded by fluid flow phenomenon that is changing of kinetic energy and momentum. At foil, the velocity of fluid flow on backside is faster than on faceside. According to law of bernoully, that will cause pressure on face go up and pressure on back go down so that lift of force happened.

To Fin propeller, adding of fin will cause increasing fluid flow Va on backside so the pressure goes down.

Propeller Momentum Theory
According to this theory, thrust yielded by working of propeller in water caused by the existing of difference of momentum so propeller efficiency depend on blade loading. This drawing below show that a propeller moving forward in water where the water moveless.

So force reaction generated by the propeller to the fluid or Thrust (T) is proportion with increasing of the pressure (P) multiplied by surface of propeller discus (Ao):
T = P. Ao
P = P1 – P2
Where,
P1 = Pressure on face side
P2 = Pressure on back side

In Fin propeller, the pressure on backside (P1) goes down so the pressure difference between face and back (P’) increase.
P’ = P1-P’2

So
T’ = P’. Ao

And,
T’ > T

P’2 = Pressure on back side have decreased.
T’ = Thrust at Fin propeller

Summary,

Fin Propeller produce Thrust higher than Original Propeller.

Marine Insurance Knowledge

Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination.
Cargo insurance--discussed here--is a sub-branch of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.

Origins of Formal Marine Insurance
The modern origins of marine insurance law were in the law merchant, with the establishment in England in 1601 of a specialised chamber of assurance separate from the other Courts. Lord Mansfield, Lord Chief Justice in the mid-eighteenth century, began the merging of law merchant and common law principles. The establishment of Lloyd's of London, competitor insurance companies, a developing infrastructure of specialists (such as shipbrokers, admiralty lawyers, and bankers), and the growth of the British Empire gave English law a prominence in this area which it largely maintains and forms the basis of almost all modern practice. The growth of the London insurance market led to the standardisation of policies and judicial precedent further developed marine insurance law. In 1906 the Marine Insurance Act was passed which codified the previous common law; it is both an extremely thorough and concise piece of work. Although the title of the Act refers to marine insurance, the general principles have been applied to all non-life insurance.

In the 19th. century, Lloyd's and the Institute of London Underwriters (a grouping of London company insurers) developed between them standardised clauses for the use of marine insurance, and these have been maintained since. These are known as the Institute Clauses because the Institute covered the cost of their publication.
Within the overall guidance of the Marine Insurance Act and the Institute Clauses parties retain a considerable freedom to contract between themselves.

Marine insurance is the oldest type of insurance. Out of it grew non-marine insurance and reinsurance. It traditionally formed the majority of business underwritten at Lloyd's. Nowadays, Marine insurance is often grouped with Aviation and Transit (ie. cargo) risks, and in this form is known by the acronym 'MAT'.

Practice
The Marine Insurance Act includes, as a schedule, a standard policy (known as the 'SG form'), which parties were at liberty to use if they wished. Because each term in the policy had been tested through at least two centuries of judicial precedent, the policy was extremely thorough. However, it was also expressed in rather archaic terms. In 1991, the London market produced a new standard policy wording known as the MAR 91 form and using the Institute Clauses. The MAR form is simply a general statement of insurance; the Institute Clauses are used to set out the detail of the insurance cover. In practice, the policy document usually consists of the MAR form used as a cover, with the Clauses stapled to the inside. Typically each clause will be stamped, with the stamp overlapping both onto the inside cover and to other clauses; this practice is used to avoid the substitution or removal of clauses.

Because marine insurance is typically underwritten on a subscription basis, the MAR form begins: We, the Underwriters, agree to bind ourselves each for his own part and not one for another [...]. In legal terms, liability under the policy is several and not joint; ie. The underwriters are all liable together, but only for their share or proportion of the risk. If one underwriter should default, the remainder are not liable to pick his share of the claim.

Typically, marine insurance is split between the vessels and the cargo. Insurance of the vessels is generally known as 'Hull and Machinery' (H&M). A more restricted form of cover is 'Total Loss Only' (TLO), generally used as a reinsurance, which only covers the total loss of the vessel and not any partial loss.
Cover may be on either a 'voyage' or 'time' basis. The 'voyage' basis covers transit between the ports set out in the policy; the 'time' basis covers a period of time, typically one year, and is more common.

Protection and indemnity
A marine policy typically covered only three-quarter of the insured's liabilities towards third parties. The typical liabilities arise in respect of collision with another ship, known as 'running down' (collision with a fixed object is an 'allision'), and wreck removal (a wreck may serve to block a harbour, for example).

In the 19th century, shipowners banded together in mutual underwriting clubs known as Protection and Indemnity Clubs (P&I), to insure the remaining one-quarter liability amongst themselves. These Clubs are still in existence today and have become the model for other specialised and uncommercial marine and non-marine mutuals, for example in relation to oil pollution and nuclear risks.

Clubs work on the basis of agreeing to accept a shipowner as a member and levying an initial 'call' (premium). With the fund accumulated, reinsurance will be purchased; however, if the loss experience is unfavourable one or more 'supplementary calls' may be made. Clubs also typically try to build up reserves, but this puts them at odds with their mutual status.
Because liability regimes vary throughout the world, insurers are usually careful to limit or exclude American Jones Act liability.

Actual Total Loss and Constructive Total Loss
These two terms are used to differentiate the degree of proof where a vessel or cargo has been lost.
An Actual Total Loss refers to the situation where the position is clear and a Constructive Total Loss refers to the situation where a loss is inferred. In practice, a Constructive Total Loss might also be used to describe a loss where the cost of repair is not economic; ie a 'write-off'.

The different terms refer to the difficulties of proving a loss where there might be no evidence of such a loss. In this respect, marine insurance differs from non-marine insurance, where the insured is required to prove his loss. Traditionally, in law, marine insurance was seen as an insurance of 'the adventure', with insurers having a stake and an interest in the vessel and/ or the cargo rather than, simply, an interest in the financial consequences of the subject-matter's survival.

Average
The term 'Average' has two meanings:
(1) In marine insurance, in the case of a partial loss, or emergency repairs to the vessel, average may be declared. This covers situations, where, for example, a ship in a storm might have to jettison certain cargo to protect the ship and the remaining cargo. 'General Average' requires all cargo owners to contribute to compensate the losses caused to those whose cargo has been lost or damaged. 'Particular Average' is levied on a group of cargo owners and not all of the cargo owners.
(2) In the situation where an insured has under-insured, ie. insured an item for less than it is worth, average will apply to reduce the amount payable. There are different ways of calculating average, but generally the same proportion of under-insurance will be applied to any payout due.
An average adjuster is a marine claims specialist responsible for adjusting and providing the general average statement. He is usually appointed by the shipowner or insurer.

Excess, Deductible, Retention, Co-Insurance, and Franchise
An Excess is the amount payable by the insured and is usually expressed as the first amount falling due, up to a ceiling, in the event of a loss. An excess may or may not be applied. It may be expressed in either monetary or percentage terms. An excess is typically used to discourage moral hazard and to remove small claims, which are disproportionately expensive to handle. The equivalent term to 'excess' in marine insurance is 'deductible' or 'retention'.

A co-insurance, which is typically applied in non-proportional treaty reinsurance, is an excess expressed as a proportion of a claim, e.g. 5%, and applied to the entirety of a claim.
A franchise is a deductible below which nothing is payable and beyond which the entire amount of the sum insured is payable. It is typically used in reinsurance arbitrage arrangements.

Tonners and Chinamen
These are both obsolete forms of early reinsurance. Both are technically unlawful, as not having insurable interest, and so were unenforceable in law. Policies were typically marked P.P.I. (Policy is Proof of Interest). Their use continued into the 1970s before they were banned by Lloyd's, the main market, by which time, they had become nothing more than crude bets.
A 'tonner' was simply a 'policy' setting out the global gross tonnage loss for a year. If that loss was reached or exceeded, the policy paid out. A 'chinamen' applied the same principle but in reverse: thus, if the limit was not reached, the policy paid in

Specialist Policies
Various types of specialist policy exist, including:
Newbuilding risks: This covers the risk of damage to the hull whilst it is under construction.

Yacht Insurance: Insurance of pleasure craft is generally known as 'yacht insurance' and includes liability coverage. Smaller vessels, such as yachts and fishing vessels, are typically underwritten on a 'binding authority' or 'lineslip' basis.

War risks: Usual Hull insurance does not cover the risks of a vessel sailing into a war zone. A typical example is the risk to a tanker sailing in the Persian Gulf during the Gulf War. War risks cover protects, at an additional premium, against the danger of loss in a war zone. The war risks areas are established by the London-based Joint War Committee, which has recently moved to include the Malacca Straits as a war risks area due to piracy [1].

Increased Value (IV): Increased Value cover protects the shipowner against any difference between the insured value of the vessel and the market value of the vessel.

Overdue insurance: This is a form of insurance now largely obsolete due to advances in communications. It was an early form of reinsurance and was bought by an insurer when a ship was late at arriving at her destination port and there was a risk that she might have been lost (but, equally, might simply have been delayed). The overdue insurance of the Titanic was famously underwritten on the doorstep of Lloyd's.

Cargo insurance: Cargo insurance is underwritten on the Institute Cargo Clauses, with coverage on an A, B, or C basis, A having the widest cover and C the most restricted. Valuable cargo is known as specie.

Warranties and Conditions
A peculiarity of marine insurance, and insurance law generally, is the use of the terms condition and warranty. In English law, a condition typically describes a part of the contract that is fundamental to the performance of that contract, and, if breached, breaches the contract as a whole. By contrast, a warranty is not fundamental to the performance of the contract and breach of a warranty will not lead to a breach of the contract. The meaning of these terms is reversed in insurance law. Thus, the Marine Insurance Act 1906 refers to implied warranties, one of the most important of which is that the vessel is seaworthy.[1]

Salvage and Prizes
The term 'salvage' refers to the practice of rendering aid to a vessel in distress. Apart from the consideration that the sea is traditionally 'a place of safety', with sailors honour-bound to render assistance as required, it is obviously in underwriters' interests to encourage assistance to vessels in danger of being wrecked. A policy will usually include a 'sue and labour' clause which will cover the reasonable costs incurred by a shipowner in his avoiding a greater loss.

At sea, a ship in distress will typically agree to 'Lloyd's Open Form' with any potential salvor. The Lloyd's Open Form is the standard contract, although other forms exist. The Lloyd's Open Form is headed 'No cure - no pay'; the intention being that if the attempted salvage is unsuccessful, no award will be made. However, this principle has been weakened in recent years, and awards are now permitted in cases where, although the ship might have sunk, pollution has been avoided or mitigated. In other circumstances the "salvor" may envoke the SCOPIC terms (most recent and commonly used rendition is SCOPIC 2000) in contrast to the LOF (Lloyd's Open Form) these terms mean that the salvor will be paid even if the salvage attempt is unsuccessful. The amount the salvor receives is limited to cover the costs of the salavage attempt only. One of the main negative factors in envoking SCOPIC (on the salvors behalf) is if the salvage attempt is successful the amount at which the salvor can claim under article 13 of LOF is discounted.

The Lloyd's Open Form, once agreed, allows salvage attempts to begin immediately. The extent of any award is determined later; although the standard wording refers to the Chairman of Lloyd's arbitrating any award, in practice the role of arbitrator is passed to specialist admiralty QCs.
A ship captured in war is referred to as a prize, and the captors entitled to prize money. Again this risk is covered by standard policies.

Marine Insurance Act, 1906
The most important sections of this Act include:
s.4: a policy without insurable interest is void.
s.17: imposes a duty on the insured of uberrimae fides (as opposed to caveat emptor); ie. that questions must be answered honestly and the risk not misrepresented.
s.18: the proposer of the insurer has a duty to disclose all material facts relevant to the acceptance and rating of the risk. Failure to do so is known as non-disclosure or concealment (there are minor differences in the two terms) and renders the insurance voidable by the insurer.
s.33(3): If [a warranty] be not [exactly] complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.
s.34(2): where a warranty has been broken, it is no defence to the insured that the breach has been remedied, and the warranty complied with, prior to the loss.
s.34(3): a breach of warranty may be waived (ie. ignored) by the insurer.
s.50: a policy may be assigned. Typically, a shipowner might assign the benefit of a policy to the ship-mortgagor.
ss.60-63: deals with the issues of a constructive total loss. The insured can, by notice, claim for a constructive total loss with the insurer becoming entitled to the ship or cargo if it should later turn up. (By contrast an actual total loss describes the physical destruction of a vessel or cargo.)
s.79: deals with subrogation; ie. the rights of the insurer to stand in the shoes of an indemnified insured and recover salvage for his own benefit.
Schedule 1 of the Act contains a list of definitions; schedule 2 contains the model policy wording

Double Insurance
By Roger Miles of Elborne MitchellFirst published: Maritime Risk International - Vol 18 - Issue 4 [4th April 2004]

Roger Miles, Master Mariner and partner in the shipping and marine insurance department of City firm Elborne Mitchell, reviews a recent hull and machinery dispute in which he acted and considers some of its implications.

Double insurance causes practical and legal problems. It is expensive and can lead to delays in receiving payment from insurers. As policies begin to include several co-assureds, owners and operators may increasingly find themselves over insured by double insurance on hull. English law now offers some practical guidance as to what to do in those circumstances.
Double insurance exists where there are two or more policies on the same adventure and interest or any part of it, and the sums insured exceed the insurable value in the case of an unvalued policy or the value fixed by the policy in the case of a valued policy.
If there is double insurance then unless the policy says otherwise payment may be claimed from the insurers in any order. However despite paying two (or more) lots of premium the assured cannot recover more than the greatest insured value and must give credit for any sum received by him under any other policy. If he happens to be paid more, he is deemed to hold any excess in trust for the insurers.

Normally of course you would not knowingly insure the same risk twice. But double insurance is in fact quite common in many sectors of the insurance market; for example, cargoes are often sold several times during a voyage and each new owner may insure it as a precaution against its loss. You might think double insurance on hull and machinery was impossible. Not so, as the English High Court's decision in Chris O'Kane and Others v Jonathan Jones and Others [2003] shows.

In the spring of 1999 the sole director of the owners of the vessel "MARTIN P", and of her then managers, decided to transfer management of the vessel to new managers with whom he entered into a management agreement. On renewal of the vessel's hull and machinery policy with the first insurer (O'Kane) from 1st July 1999, the named assureds were the owners, the former managers, described as "operators", and the new managers described as "sub- managers/co-assureds". The insured value of the vessel under this policy was US$5 million.

The policy documents included a warranty from the assureds' brokers to the underwriter that the premium had been paid. However, no premium was paid, so in mid-November the brokers, without informing O'Kane, wrote to the mortgagee bank, with copies to the assureds, advising that unless the premium outstanding was paid by the end of the month they might be unable to continue their warranty. There was still no payment. The new managers insisted that owners pay the premium whilst the owners wanted the new managers to pay it.

The new managers assumed that the policy with O'Kane had been cancelled because of non-payment of premium. In mid-December, having told the owners of their intentions, the new managers took out hull and machinery insurance on the vessel with the second insurers (Jones). The named assureds in this second policy were the new managers "and/or affiliated and/or associated companies for their respective rights and interests". The insured value of the vessel under this policy was US$2.5 million.

In late December 1999 the "MARTIN P" became a constructive total loss. At the time of the loss both policies of insurance were in place. However, O'Kane was unaware of the Jones policy. Within a few days of the loss, when the assureds realised that the policy issued by O'Kane had not been cancelled, they agreed with Jones to cancel the second policy. An endorsement to the policy reading "it is hereby noted and agreed that this insurance is cancelled with effect from inception" was issued. The outstanding premium on the O'Kane policy was paid and a claim made against that policy for US$5 million.

O'Kane became aware of the Jones policy. After investigating the loss, O'Kane agreed to pay to the assureds the insured value of the vessel less the contribution that O'Kane claimed was due from Jones. The assureds challenged O'Kane's right to make any deduction so O'Kane paid the full insured value of US$5 million and sought a contribution from Jones.
The case raised some novel issues. Jones argued that it should not contribute because its policy had no legal effect under the Marine Insurance Act 1906 since the new managers had no legitimate insurable interest in the vessel. The Judge disagreed: the managers had an insurable interest by reason of their potential exposure to liability under the management agreement and their potential loss of income under the management agreement if the vessel were lost or damaged.

Jones also argued that no contribution was due because its policy had been cancelled as recorded in the endorsement. Both policies were of course in force at the time of the loss of the vessel, but O'Kane argued that later events (the cancellation) should be ignored in deciding whether a contribution was due. It was the situation at the time of the loss that was decisive.
The Judge in the O'Kane case agreed. Jones was bound by equity to contribute. At the time of the loss the assureds had the right to proceed against either of the insurers. They could not lose that right against one of the insurers, for example because it was a condition precedent to make a claim under that policy that notice of the loss was given within, say, 14 days, merely because they had chosen to pursue their claim against the other insurer.

Working out the amount of the contribution due from Jones was also complicated. The Marine Insurance Act 1906 says only that the insurers contribute to the overall loss in proportion based on the amount for which each is liable under his own contract.

In cargo insurance, where the insured values under the policies are different, a sensible and practical method for determining the contribution between insurers has evolved outside the courts. This is sometimes referred to as the "common liability" method. Under it there is deemed only to be double insurance up to the lower insured value. The insurers bear the loss equally up to that insured value and the higher insured value policy bears the remainder.
There was no direct case precedent for double insurance on hull and machinery. Other forms of insurance have used the "maximum liability" method whereby the insurers' respective contributions are proportionate to their respective maximum liabilities under the policies; or the "independent liability" method whereby the respective contributions are adjusted proportionately to the amount that each insurer would, independently, be liable to pay to the assured in respect of the loss sustained.

If the loss is equal to or in excess of the maximum sums insured under both policies, the contributions are the same whichever method is used. But if the loss is less, the methods produce significantly different contributions.
The US Courts tend to favour the maximum liability basis for determining contributions between the insurers but in England the trend has been to prefer the independent liability method. The Court in O'Kane followed that trend - although because the vessel was a total loss the same result would have been arrived at using the maximum liability method. The US$5 million loss was to be borne by the first insurer and the second insurer in the ratio 2:1. The contribution due to O'Kane from Jones was therefore US$1.67 million.

So, what lessons can be learned from this case?
Double insurance is expensive for all concerned. For owners and operators it means paying twice over for the same thing - which makes no commercial sense; even though in this case, the assureds between them recovered US$5 million overall rather than just the US$2.5 million under the Jones policy they still had to pay the premium to O'Kane. Moreover they were brought into the dispute about the contribution due from Jones, so they had to incur legal costs not all of which Jones was ordered to pay.

The problem would never have arisen had the new managers checked with their brokers whether the O'Kane policy had been cancelled before taking out the Jones policy themselves. Owners and operators should take care to try to ensure they are fully aware of the cover they have in place before seeking further insurance. This was an unusual case, but simple things like checking whether policy periods overlap can easily be overlooked, especially if it is not clear who within any ownership structure has responsibility for insurance coverage.

Despite everyone's best efforts, however, double insurance will still occur. Once a loss happens there is no going back - unless an exclusion applies the insurers will have to contribute. Working out the contribution due from each insurer should be easier, however, as insurers and assureds now have authoritative guidance, so hopefully this will speed up payments to assureds.

Does Fraud Pay?
By Roger Miles of Elborne MitchellFirst published: Shipping & Trade Law - Vol 2, No 5 [1st September 2002]

The simple answer is possibly "yes" if you can get away with it but definitely "no" if you are found out. There is perhaps no better illustration of this than the recent Judgment of Mr Justice Moore-Bick in Agapitos & Another -v- Agnew & Others (the "AEGEON") and the Order on Judgment made by Mr Justice Morison in the same case.

In February 1996 the Claimants' vessel "AEGEON" was moored undergoing conversion from a roll-on roll-off car ferry to a passenger cruise ship. On the 19th February sparks from hot work set fire to upholstered seating which was stored nearby and the Port Authority ordered the vessel to be towed from her berth and beached. Whilst that manoeuvre was being carried out, the "AEGEON" struck a wreck and subsequently capsized and sank. The vessel was insured by the Defendants and it was common ground that the vessel was lost by an insured peril. However, Underwriters declined liability on the grounds that the Owners were in breach of one or more of the policy warranties.

When the insurance was initially placed, the terms of cover included:
"Warranted London Salvage Association approval of location, fire fighting and mooring arrangements and all recommendations complied with."

"Warranted no hot work".

When they were advised that the vessel was to be moved to a new location, Underwriters required the Salvage Association Certificate to be up-dated and on the 12th January 1996 Underwriters were informed that hot works would commence soon. On the same day, Underwriters scratched an endorsement wherein they agreed to cover such hot work on condition that it was warranted that the Salvage Association Certificate was updated and all recommendations complied with prior to the commencement of hot work. When they were requested to extend the period of cover on the 6th February 1996, Underwriters agreed but the endorsement scratched on that day read "Warranted London Salvage Association Certificate updated".

In their defence to the claim brought by the Owners of the "AEGEON" Underwriters pleaded several breaches of warranty including breach of the warranty of 6th February 1996. It was Owners' case that they had spoken on the telephone with the Salvage Association surveyor who they said told them that provided the fire extinguishers were overhauled and bilge alarms were fitted, then they could commence hot work. They further claimed that the hot work did not commence until 12th February 1996 by which time the requirements of the Salvage Association surveyor had been carried out. However, two sworn statements taken from workmen immediately after the casualty, averred that hot works of a substantial nature had been carried out from the 1st February. At this stage, Underwriters sought to amend their Defence to allege fraud.

The matter came before a Judge who refused leave to amend the Defence on the grounds that if the Defence of breach of warranty was good then any continuing duty on the Claimants not to deceive Underwriters was discharged by the breach and that anyway a plea of breach of such continuing duty would be superfluous. If Underwriters could not make out the Defence a breach of warranty then any alleged lies by the Claimants would only be material where the truth would have provided Underwriters with a Defence. In the circumstances of this case, the Judge held that the lies could not be material. The Judge also refused to equate lying to promote an otherwise valid claim with fraudulently pursuing an exaggerated claim and tender to the view that the duty of good faith is superseded by the rules governing litigation once litigation has commenced.

The Court of Appeal dismissed Underwriters' Appeal but, in doing so, conducted an exhaustive and interesting review of the relationship with the common law rule on fraudulent claims and Section 17 of the Marine Insurance Act 1906.

The common law rule, which is applicable even where there is no express clause in the Policy, is that an Assured who has made a fraudulent claim forfeits any lesser claim that he could have properly have made. Thus an insured will be unable to recover if he has in fact suffered no loss, if he has wilfully caused the loss, if he has exaggerated the amount of the loss by a significant degree or if he knowingly seeks to suppress evidence which would provide the defence to the claim. Lord Hobhouse, in The Star Sea, summarised the effect of the common law rule when saying "The fraudulent insured must not be allowed to think that if the fraud is successful, then I will gain, but if it is unsuccessful, I will lose nothing". So, if for example, the Assured has a valid claim for, say, US$100,000 but fraudulently presents his claim in the sum of, say, US$200,000 and the fraud is discovered, the Assured will recover nothing. This would also be true if, when making his claim, the Assured genuinely believed he had a valid claim for US$200,000 but fraudulently continued to pursue a claim in that amount after he had discovered that his true loss was in fact only US$100,000.

Section 17 of the Marine Insurance Act 1906 provides:
"A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party".

The Courts have long considered Section 17 to be draconian and have sought ways to limit its applicability whilst not diminishing the effect of the common law rule. In The Star Sea in which it was alleged that the Assured had deliberately withheld from disclosure two experts' reports which Underwriters considered might have assisted them in defending the claim, the House of Lords held that once litigation commences the rules of Court replace the rules of contract of which Section 17 is one. However, The Star Sea did not involve alleged fraud or the use of a fraudulent device by the Assured in pursuing the litigation. The Agapitos case did, and Underwriters argued that even if the Section 17 duty only applied to the pre-litigation stage, the common law rule should continue to apply during the litigation stage. The Court of Appeal, however, could see no reason for there to be a different duration of impact for the Section 17 duty and the common law fraud rule.

So does this mean an Assured can pursue his claim in litigation with impunity if his claim is based on fraudulent evidence? The answer is clearly no. If the fraud is discovered, then the Assured's evidence as a whole is likely to be viewed with the utmost suspicion, and in all probability the Assured will lose his case and be ordered to pay costs on an indemnity basis.

The trial of the main action lasted for some 10 days. Amongst those giving evidence at the trial were the Owner, one of his managers and the surveyor appointed by the Salvage Association.

There was an obvious conflict of evidence as to the conversations which took place between the Owner and his staff and the Salvage Association surveyor. The Judge considered the Salvage Association surveyor to be an excellent witness who listened carefully to the questions put to him, answered them fairly and intelligently and who was quite willing to give ground where it was appropriate to do so. He preferred the surveyor's evidence to that from Owners' side. He found that it would be very unusual and quite out of character for the surveyor to have given any kind of approval for hot work to commence without first having visited the vessel to satisfy himself that everything was in order and to consider what ongoing recommendations were required. The Judge held that there had been five breaches of warranty by Owners although it was only necessary to find one breach of warranty for Owners' claim to fail.

The question of costs came before Mr Justice Morison and in his Order on Judgment he ordered that the Claimants' claims be dismissed and Judgment entered for the Defendants, that the First and Second Claimants should be jointly and severally liable for the costs of the Defendants, that they should pay interest on any costs already paid by the Defendants and that the Defendants' costs should be paid on an indemnity basis. Further, he ordered that the First and Second Claimants should make a payment on account of the Defendants' costs in the sum of £600,000 within 14 days. The Claimants' Application for Leave to Appeal was refused.

As can be seen, the Award on Costs was quite draconian, the reason for this being the manner in which the Claimants had pursued their claim. Ordinarily, the success of the Defendant Underwriters in the main action may well have turned out to be a pyrrhic victory. The Claimants in this type of case are generally a single ship owning company and Underwriters would find it difficult, if not impossible, to enforce any Costs Order in their favour. However, in this case, the Second Claimant was the mortgagee bank and, as can be seen above, both the Owner and the bank were made jointly and severally liable for Underwriters' costs. As no bank could afford to fail to honour a Judgment against them, Underwriters' recovery was assured. Had the Claimants not pursued their claim fraudulently, then probably, whilst they would still have been ordered to pay the Defendants' costs, they would only have been ordered to pay these on the standard basis and the Order on Judgment would have been far less draconian.

Withdrawing Vessels From Time Charter

First published: P&I International [1st February 2003]

In a strong market, owners may be tempted to withdraw the vessel from service when charterers fail to pay hire, particularly if she is locked into a long-term charter fixed when the market was low. In practice, this course of action can be fraught with danger. Getting it wrong can cost millions of dollars. Common mistakes made by owners are withdrawing the vessel when hire is not yet due or owing and failing to give proper notice under an anti-technicality clause.

Owners should remember that charterers have right up to the last minute to make their payment. In The Afovos [1] hire had not been received by 1900 hours on the day payment was due. The owners withdrew the vessel. Even though hire could not have been credited to the owners' bank account until the opening of business the next day, the withdrawal was held to be unlawful. The court ruled that when payment had to be made on a certain day, it could be made at any time up to midnight. Until that time had passed charterers were not actually in default of their payment obligation.

Owners should also bear in mind that while the charterparty will frequently permit charterers to make deductions from hire, obvious examples being commissions and disbursements advanced to the vessel, the right to deduct may be wider. In The Nanfri [2] , charterers made deductions in respect of a speed and consumption claim. The charter was on the Baltime form. The court held (by reference to Clause 11 of that form) that charterers could deduct off-hire from subsequent hire payments, together with the cost of fuel consumed. It rejected owners' argument that deductions could not be made unless the amount had either been determined by arbitrators or agreed with owners. Lord Denning stated that a charterer "is entitled to quantify his loss by reasonable assessment made in good faith, and deduct the sum so quantified from hire".

Furthermore, charterers may also be entitled at law (and not just by agreement) to deduct claims for damages in respect of owners' breach of charter, again provided their assessment of their claim is made in good faith. The case law on this subject could do with clarification but it appears that this right is limited to situations in which charterers have been deprived of the use of the vessel by owners' breach. The court has allowed deductions for claims for breach of a speed warranty and a failure by owners to load a full cargo. But, in The Nanfri, a deduction in respect of a claim for cargo damage was held to be impermissible.

The fact that charterers may be acting in good faith in making a deduction will not help them if the deduction is not of a type permitted under the charterparty or recognised by law. Consequently charterers make deductions for damages claims very much at their own risk. A recent award illustrates this.

In London Arbitration 17/2002 [3] , the charterers failed to pay hire, claiming damages for loss of profits and for freight withheld by subcharterers as a result of the owners' failure to make the vessel fit for passage through ice to the intended loadport. The owners withdrew the vessel. The Tribunal held that there was no right under the charter or in law to deduct for these types of claim, and upheld the withdrawal.

In that same arbitration, the charterers also argued that if some of their deductions had been made on a premise that was later shown to be false or improper they could still defeat the owners' right to withdraw if they could now show that they were entitled to withhold hire on other grounds. The Tribunal rejected this submission stating that, were it to be accepted, it would mean that no owner could ever withdraw safe in the knowledge that he was acting justifiably; when seeking to justify a deduction from hire in the context of a withdrawal, a charterer could not go beyond what he had declared at the time to be his basis for withholding hire.

The harshness of the obligation upon charterers, especially in situations where hire is paid on time but is short because of the unexpected deduction of bank charges, led to the use of anti-technicality clauses, such as Clause 11(a) in NPYE 1993. These provide for a grace period (expressed in either days or hours) within which charterers, upon notice, can rectify a default in the payment of hire before owners can withdraw the vessel. But anti-technicality clauses can create problems for owners.

Just as with the notice of withdrawal itself, the notice under an anti-technicality clause must be clear and unequivocal. It must make it clear that hire has not been paid punctually and that the owners are giving an ultimatum that unless it is paid within a set period of time (as specified in the charter) they will withdraw the ship. In The Afovos, the notice given stated "Owners have instructed us that in case we do not receive the hire which is due today, to give charterers notice as per clause 31 of the charterparty for withdrawal of the vessel from their service". This was held not to be good notice because it was conditional. Equally, simply drawing the charterers' attention to the relevant clause may not be enough. The notice must leave the recipient in no doubt that unless hire is paid within the specified time allowed under the clause the vessel will be withdrawn.

Furthermore, the notice will be ineffective if it is premature; that is, if it is sent before charterers are actually in default of their payment obligation (although in theory the anti-technicality clause could be worded to permit this). A recent arbitration decision (reported in the context of an application for leave to appeal) dealt with the situation where notice under an anti-technicality clause was sent by email. It was sent before the charterers were in default but received in the charterers' inbox after the deadline for payment had passed. Applying The Afovos, the Tribunal held that the notice was invalid because it was premature [4]. Service of premature notices is a particular danger where the place for payment of hire instalments is in a different time zone to that operating at the owners or their brokers' offices.

In this context, it has been held [5] that a notice telexed by owners shortly before midnight on the day for payment (a Friday) was not premature because it would only be read by the charterers on the following Monday. However, it would be unwise to rely too much on this authority; it is widely felt to be wrong as it appears to conflict with House of Lords' authority in The Afovos.

If the charterers fail to pay hire in time, they are in default. Subsequent tender does not alter that. The danger here for the owners is that if they accept late payment without qualification or delay too long in giving notice of withdrawal they are quite likely to lose the right to withdraw. Owners are given a reasonable time to decide whether to exercise their right to withdraw or to let the charter continue. More time is likely to be allowed for the owners to take this decision where there is an underpayment of hire and they need to investigate whether the charterers have made proper deductions.

If the owners withdraw the vessel unlawfully they will face substantial damages claims. But if there is a silver lining here it seems that charterers have no right to demand that owners account for any additional or wrongful profits they have made by re-fixing the vessel at a higher rate. In another recent arbitration [6], the Tribunal rejected the charterers' argument that they were entitled to an account of the owners' profits, holding that the law did not and should not recognise such a remedy. The charterers were limited to recovering losses that were provable and reasonably foreseeable. So, in the right circumstances, it may still pay owners to withdraw the vessel (even where they suspect that the withdrawal is wrongful) if they have lucrative business for her up their sleeve.

The right of withdrawal remains a very useful way to extricate the vessel from the hands of a difficult charterer or to exploit new opportunities - provided the owners follow the rules. Whenever there is a wrongful withdrawal it is usually because the owners have failed to take simple steps or make checks to ensure that hire is owing, that payment deadlines have actually passed, and that clear notice is given. As a result, entirely avoidable mistakes can negate the intended financial benefits of getting the vessel back. Any owners considering withdrawal should therefore take extra care and, for those in any doubt, their Club or lawyers are there for advice. Using them could save a lot of time and money.

1. [1983] 1 Lloyds Rep, 335
2. [1979] 1 Lloyd's Rep, 201
3. LMLN 600, 14th November 2002
4. The Western Triumph [2002] 2 Lloyd's Rep, 1
5. The Pamela [1995] 2 Lloyd's Rep, 249
6. The reasoned award was, somewhat unusually, reported as The Sine Nomine [2002] 1 Lloyd's Rep, 806

What price a breach?
By Roger Miles of Elborne MitchellFirst published: Shipping & Trade Law [1st February 2007]

The Facts
The vessel involved was the ACHILLEAS, a 1994-built bulk carrier of about 36,000 gt, managed by the not insubstantial Danaos Shipping Co Limited of Piraeus, Greece. On 22 January 2003 she was chartered on amended NYPE 1946 Form to Transfield Shipping Inc, a major charterer in the dry bulk sector operating out of Hong Kong and specialising in Chinese business. Initially the charter period was for about five to seven months (exact period at charterer’s option) and in which the word “about” was defined to mean plus or minus 15 days. The hire rate was US$13,500 per day and the charterer had to give the owner approximate notice of the re-delivery date and port of re-delivery at 20 and 15 days and definite notice of the re-delivery date and port at 10, 5 and 3 days.

An addendum made on 12 September 2003 fixed the vessel in direct continuation of the charterparty for a further period of a minimum five months; maximum seven months – the exact period again being at the charterers’ option. The further period commenced on 2 October 2003 which meant that even if the charterer opted for the maximum period, the extended charterparty must end by 2 May 2004. The hire rate under the addendum was increased to US$16,750 per day.

As is quite normal, Transfield sub-chartered the vessel to others and the final sub-charterparty during the charter period concerned the carriage of about 67,000 gt of coal from Quingdao, China to Tobata and Oita, Japan. On 8 April 2004 Transfield gave the owner 20 days’ notice of re-delivery, with re-delivery to take place between 30 April and 2 May. On 15 April it gave 15 days’ notice, again with re-delivery to take place between the same dates. On 20 April, it gave 10 days’ definite notice of re-delivery between the same dates and seven days’ definite notice three days later; again with re-delivery between the same dates and this time expressing the intention to re-deliver at Oita.

In any event, the owners, no doubt in reliance upon the 20, 15 and 10 days’ notices of re-delivery fixed its vessel with Cargill International SA. for a period of about four to six months, on or about 21 April. The laycan under this fixture was from 28 April to 8 May 2004, therefore enabling actual delivery to take place up to six days after the Transfield charter should have come to an end and at least six days after the date for which Transfield had given notice of re-delivery.

The vessel completed loading at Quingdao under the final sub-charterparty on 24 April and on 26 April Transfield indicated to the owner that discharge at Oita was unlikely to be completed before the 6 or 7 May. The next day it revised the notice of re-delivery to 4/5 May. The vessel arrived at Oita on 30 April, having already discharged part of her cargo at Tobata, but once there she experienced delay. The charterer again revised the re-delivery notice, this time to 8/9 May.

By 5 May, the owner had realised that the vessel would be likely to miss the laycan under the Cargill charter and sought re-negotiation of the laycan period. Cargill agreed to extend the laycan until 11 May but only if the daily rate of hire was reduced from US$39,500 to US$31,500. The owner agreed to these terms. The vessel was re-delivered to them by Transfield on the morning of 11 May and at the same time they delivered the vessel to Cargill.

The Claim
It was not in dispute that the actual net loss suffered by the owner as a result of the charterer’s breach of the charterparty – its failure to re-deliver the vessel by 2 May 2004 – amounted to US$1,364,584.37. This sum was calculated by taking the difference between the daily rate of US$39,500 originally agreed with Cargill and the daily rate of US$31,500, subsequently agreed with the extension of the laycan for whole of the Cargill charter period less the additional hire earned by the owner under the Transfield charter during the period from 2 May up to actual re-delivery. In the alternative, the owner claimed US$158,301.17, being the difference between the charterparty hire rate and the market rate for the period from 2 May until actual re-delivery. The charterer contended that the lower alternative calculation was the correct measure of damages.

The Law
That the owner’s alternative claim was argued by the charterer to be correct is hardly surprising. Any marine reference book would have supported it at first sight. For example, Scrutton, Charterparties and Bills of Lading (20th ed.) states, having dealt with the marginal tolerance allowed at common law for completion of the final voyage:
“if, through no fault of either side, the voyage does not finish within the tolerance, hire continues payable at the charter rate until the end of the period of express or implied tolerance and, in the absence of an exonerating clause, damages representing the market rate for the period thereafter.”

The editors rely upon Hyundai Merchant Marine Co Limited v. Gesuri Chartering Co Limited (The “Peonia”) [1991] 1 Lloyd’s Rep. 100 and Chiswell Shipping v. National Iranian Tanker Co, (The World Symphony and The World Renown) [1992] 2 Lloyd’s Rep. 115. However, neither of these cases involved a situation where a subsequent charter was either lost or had to be compromised as a result of the late delivery.

In English law the general rule on the quantification of damages, whether those damages are sought in tort or in contract, is that they should put the injured party in the same position as he would have been in but for the tort or breach of contract. This rule was first espoused by Lord Blackburn in Livingston v. Rawyards Coal Co [1880] 5 App. Cas. 25, 39 and it has been either cited with approval or re-stated in a similar form consistently ever since. Were this general rule to be the only rule applicable to the quantification of damages then, as the net loss suffered by the owner as a result of charterer’s breach of contract was agreed to amount to US$1,364,584.37, that would have been the end of the matter. But life, and legal life in particular, is never that simple. It was felt that in certain circumstances application of the general rule without limitation would be unjust to the paying party. Insofar as damages arising out of a breach of contract are concerned, the most important case to seek to impose a limit on the recovery was Hadley v. Baxendale [1854] 9 Ex 341 and it was the interpretation of the rule in this case which exercised the minds of the arbitrators and then of the High Court.

The first limb of the rule laid down in Hadley v. Baxendale was that the damages recoverable by one party following a breach of contract by the other:
“… should be such as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things, from such a breach itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it …”.

The second limb of the rule, to the effect that if the damages are not covered by the first limb but arise from some special circumstances, the Defendant must have had actual or implied knowledge of those special circumstances for the damages to be recoverable, does not concern us here, it not being the case that Transfield had actual knowledge of the terms of the Cargill charter. Although the judgment and the rule in Hadley v. Baxendale remain good law, Courts have subsequently struggled with the language in which it is expressed and there have been attempts to re-state the rule, notably by the Court of Appeal in Victoria Laundry v. Newman [1949] 2 KB 52. In that case, Asquith LJ introduced the “reasonably foreseeable” test but, in 1969, the House of Lords and Lord Reid in particular were critical of this. In Czarnikow v Koufos (The Heron II) [1969] 1 AC Lord Reid expressed the view that the proper test is whether the loss suffered is
‘ … of a kind which the Defendant, when he made the contract, ought to have realised was not unlikely to result from the breach … the words “not unlikely” denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.”

The Award and Appeal
The three arbitrators forming the tribunal were Mr Bruce Buchan, Mr. David Farrington and Mr Christopher Moss. The tribunal reached a majority award that the owner’s claim fell within the first limb of rule in Hadley v. Baxendale and succeeded in full. Mr. Christopher Moss dissented. In arriving at the majority award, the tribunal considered that in today’s market with its ease of communication and a much higher emphasis in trying to keep a vessel in continuous employment, the loss of or the need to renegotiate a future fixture was a not unlikely result of late delivery which was known and accepted by those participating in the charter market. The parties to this charter would have had it in mind as they are active in the shipping market. It was not disputed that the market rates for tonnage go up as well as down, sometimes quite rapidly, and this was market knowledge. They went on to say that the type of loss actually suffered by the owner was within the contemplation of the parties as a not unlikely result of the breach, and the fact that the loss was greater than anticipated was irrelevant. The type of loss was foreseeable.

The period of the Cargill charter was not unusual but had it been regarded as an extravagant or an unusual bargain, this may have had an effect on the quantum of the recoverable claim. Relying upon Lord Reid’s judgment in The Heron II, they concluded that the type of loss claimed must be taken to have been in the parties’ contemplation at the time when the addendum to the charter was agreed and that therefore the claim fell within the first limb of the rule in Hadley v. Baxendale. Had they not reached this conclusion they added that, as there was not any actual or implied knowledge of the Cargill fixture by the charterer at the date of the addendum, the claim could not have been brought within the second limb of Hadley v. Baxendale.

The charterer appealed to the High Court and the matter came before Christopher Clarke J. The charterer submitted that there had never been a case where damages had been awarded in respect of loss of profits caused by late delivery; that it was an established principle that the measure of damages should be based upon the difference between market rate and the charter rate in such circumstances and that it was only such damages that fell under the first limb in Hadley v. Baxendale, loss of profits falling under the second limb. The owner contended that its actual loss was US$1,364,584.37; that it should be put in the same position as if no breach had occurred; that the loss of profit suffered was contemplated by the parties as a type of loss which was a not unlikely consequence of the charterer’s breach; and that there was no rule that only the difference between the market and the charter rates could be recovered under the first limb of the rule in Hadley v. Baxendale.

In his judgment, Christopher Clarke J reviewed the authorities on late re-delivery, the text books and the rule in Hadley v. Baxendale, including the modern approach to the rule expounded by Lord Reid in The Heron II, in which he had said that he did not think it was intended that there should be two rules or that two different standards should apply. The Judge concluded that on the basis of the facts found by the majority of the arbitrators the owner’s claim was not too remote; that the possibility of missing the cancelling date for a future fixture as a result of late re-delivery was not very unusual; and that the kind of loss suffered by the owner was in the contemplation of the parties. He went on to hold that, contrary to the submissions by the charterer, the majority of the arbitrators had applied the correct test on foreseeability and were plainly concerned with a result that was or ought to have been foreseen as not unlikely. A further submission on behalf of the charterer was that for it to be held liable for the owner’s claim, it was necessary to show that it had accepted responsibility for a loss of profit on a subsequent charter. In light of this submission, the Judge considered that if a type of loss for which recovery is sought is a type which the parties, as experienced persons in the charter market, would, if they thought about it, realise was a not unlikely consequence of the breach, then the charterer must have accepted the risk of being liable to compensate the owner if that loss occurred. Further submissions made by the charterers were: first, where there is an available market for vessels such as the ACHILLEAS to be chartered in and out, then, unless there are special circumstances, the owner’s damages are restricted to the market/charterparty rate difference during the overrun period; and, second, the law does not concern itself with contracts made between owners and third parties and what the owner chooses to do with his vessel after re-delivery is a matter for him and can neither increase nor reduce his claim.

Counsel also argued that sale of goods cases were analogous. The Judge, in order to consider these submissions, reviewed the authorities on premature termination of the charterparty, on non-delivery of goods, on supply of defective goods, on delayed delivery of goods and on damaged goods. Having done so, he did not consider that they affected the conclusion he had already reached. Finally, it was submitted on behalf of the charterer that if the majority award was allowed to stand, then the assessment of damages would become very complicated, and if the owner’s claim for loss of profits fell under the first limb of the rule in Hadley v. Baxendale, then the second limb of the rule in that case would become redundant. The Judge considered that problems in assessing damages under the award in other circumstances was not a good reason to deprive the owner of recovery for its loss. With regard to the second limb of the rule in Hadley v. Baxendale, the learned Judge found that this would still come into play in a case where the rate under the subsequent charter was not the market rate, where the period was unusual or where its terms were very special. He concluded that the claim was not too remote, that it was foreseeable and that the majority of arbitrators were not wrong in law. He therefore dismissed the appeal. It is understood that a further appeal has now been lodged with the Court of Appeal.

Conclusion
The question “what price a breach?” has never previously been considered by arbitrators or the High Court in connection with a breach by a charterer of a re-delivery clause in a charterparty where such breach resulted in the loss of or need to re-negotiate the terms of a subsequent charterparty between the owner and a third party.

I would submit that, on the facts as found, the majority of the arbitrators and the learned Judge were right. Before the owner negotiated the subsequent charter with Cargill, Transfield had given three notices of re-delivery. The original cancelling date negotiated between the owner and Cargill provided a six-day cushion in the event that Transfield re-delivered the vessel late.

The period of the Cargill charter was similar to and, in fact, slightly shorter than that of the original Transfield charter and of the further period agreed by the addendum. Transfield charter is a major charterer in the dry bulk field, is mentioned almost daily in the fixture reports and, as such, probably have a better knowledge than most of the charter market and of the fluctuation in hire rates in that market. For all of these reasons, it ought to have foreseen as not unlikely that the owner would arrange a subsequent fixture and that the owner might need to renegotiate that fixture if it breached the re-delivery clause.

If the facts as found had been a little different, then the arbitrators and the Court may have arrived at another decision. If Transfield’s notices of re-delivery had indicated that it was unlikely to meet the re-delivery date or if the owner had negotiated a cancelling date with Cargill on or only slightly later than the re-delivery date in the Transfield charter, would that fixture still have been foreseeable? Similarly, if the period of the Cargill charter had been, say, 12 months, or even longer, when most fixtures were being made for shorter periods, would that have been foreseeable? Finally if, rather than being Transfield, the charterer had been a relative novice in the charter market, would the fixture to Cargill have been foreseeable as not unlikely?

The charterer has obtained leave to appeal to the Court of Appeal and it would not be surprising if a case of this importance ultimately reaches the House of Lords.

Guidance on causation where there may be more than one potential cause of loss
By Peter Tribe of Elborne MitchellFirst published: Shipping & Trade Law - Jan/Feb 2002 [1st January 2002]

Causation is an essential but an often problematic element of any claim. This recent case saw shipowners run a rather unusual defence to a cargo claim, and the judgment of Tomlinson J offers useful guidance on causation where there may be more than one potential 'cause' of the loss.

The facts
The claimants were the American purchasers of a cargo of ethylene being produced in Mexico, which the claimants intended to sell in the European market. They were buying the cargo on CFR terms from the Mexican producers. The nominated carrying vessel was The Atrice which was a vessel demise chartered by the defendants.
Cargo was loaded to the vessel in stages. Upon loading the initial cargo parcel, high levels of contamination were detected. After deliberation, and after verifying that the cargo in the shore tanks was pure, the cargo owners decided to continue loading cargo in the expectation that any contamination resulting from the condition of the ship's tanks would diminish as more clean cargo was loaded.

That decision by cargo owners was taken without the active involvement of the Master who, although aware of the possibility that the vessel might be the cause of the contamination, (although rejecting that possibility), had not prevented further loading of cargo, had not taken any steps to investigate whether the cargo tanks themselves were contamination and had, indeed, paid an essentially passive role in the loading process. In the event, analysis of the fully loaded cargo showed it to be within specification.

The vessel sailed from the load port, the master having issued a clean bill of lading for the whole cargo. On arrival at the discharge port, however, the entire cargo was found to be contaminated to very high levels and ultimately was sold for a heavily discounted price.
The cargo owners claimed damages against the shipowners alleging that the vessel was unfit to carry the cargo in question and that the owners had failed in their duty to exercise due diligence, before and at the beginning of the voyage, to make the vessel's tanks and lines fit to carry the cargo. The shipowners admitted that the contamination had resulted, initially, from the unclean condition of the ship. Controversially, however, they argued that once the contamination had become apparent, the cargo owners should have appreciated that the vessel was unfit and should have ceased loading. They said that the subsequent damage was in fact therefore the fault of the cargo interests and not of the ship because the unreasonable decision to continue loading broke the chain of causation.

The matter came before Mr Justice Tomlinson. Tomlinson J opened his judgment with the recognition that this was a 'cargo claim of a somewhat unusual nature'. He noted the defendants' admission of breach of contract and observed that their breach must have been particularly gross since according to their own expert witness, the extent of the contamination observed during sampling at the initial stage of loading was likely to have exceeded anything which the attending surveyor had previously experienced. However, the judge said, 'the owners seek to pray in aid the grossness of the contamination then observed in support of their contention that the bulk of the loss sustained by cargo interests is to be regarded as having been caused by their own decision to continue loading. That was, say the defendants, a decision for which there was no rational basis and which they even characterise as reckless .... That decision was, say the defendants, so aberrant that it must be regarded as breaking the causal link between the owners' admitted breach and the ensuing contamination of the balance of the ethylene parcel thereafter loaded.'

The judge acknowledged that any conduct of the claimants could not be regarded as breaking the chain of causation between the admitted breach of contract and the loss unless that conduct could be regarded as the sole cause of the loss to the exclusion of any efficacy of the breach. The court here following the decision in Heskell -v- Continental Express (1950) 1 AER. The judgment therefore proceeded on the basis that the contract breaker would be liable so long as his breach remained an effective cause of the loss, the court not being required to choose which cause was the most effective.

The shipowners argued that the decision to continue loading cargo was made by the claimants and that their master played no active part in that decision. The owners also argued that the master was effectively under the orders of charterers (not represented in the litigation) to load the cargo and that the master could therefore do nothing without the instruction or cooperation of the charterers. Tomlinson J, however, did not find himself persuaded by the owners' arguments. He said:
'A shipowner cannot in my judgement abdicate responsibility in this manner. It is no answer to an allegation of breach of the contract contained in or evidenced by the bill of lading to say that it was consequent upon performance of an inconsistent contractual obligation owed to others.'

The judge ruled that cargo damage was a matter in which a master was obliged to take an active interest. The master should not have allowed further cargo to be loaded unless confident that no further damage would result or that cargo interests would accept responsibility. The shipowners were therefore also in breach of their duty to properly and carefully load the cargo; that breach remained an effective cause of the loss notwithstanding the quality of the cargo owners' decision to continue loading.

That failure by the master and the consequent breach by shipowners meant that the cargo owners could not, in the circumstances, face criticism by the owners that they had undertaken an independent course of action which led to the damage to the cargo. But even had that not been the case, said the judge, the shipowners' argument would still fail.

The shipowners had argued that the cargo owners' decision to load beyond the coolant parcel of cargo lacked any rational basis and was negligently made. The judge characterised the cargo owners' decision to continue loading in the face of only limited analysis evidence as being no more scientific than that they decided to see what happened and to hope for the best, although, in the event, the analysis results seemed to vindicate their decision. The judge acknowledged, however, that the cargo owners faced a dilemma when cargo contamination was discovered. There was no obvious way of returning the contaminated cargo to the shore. Disposal at sea remained a theoretical, but expensive, option. The shipowners did not undertake to accept responsibility for any of this potential cost. The judge decided that the cargo owners' decision could be approached in terms of whether, on the one hand, it was a sufficiently unreasonable decision to effect a break in the chain of causation or, on the other hand, whether it should be regarded as something reasonably done in mitigation of the consequences flowing from the admitted breach of contract by the shipowners. However one looked at it, the judge concluded, the standard of reasonableness to be imposed upon the cargo owners' decision, was not a high one in view of the fact that the defendant was an admitted wrongdoer. The Judge quoted with approval the words of Lord Macmillan in Banco de Portugal -v- Waterlow (1932) AC 452:
'Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty ... the law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures.'

The judge also found the approach of Lord Hoffmann in South Australia Asset Management Corporation -v- York Montague Limited (1997) AC 191 helpful. Lord Hoffmann had put the question in terms of whether the loss could be said to be a reasonably foreseeable consequence of the plaintiff having been placed by the defendants' breach of duty in the predicament which he found himself. The judge found that the decision to continue loading cargo was not sufficiently aberrant as wholly to supplant the unfitness of the vessel as the effective cause of the contamination. In the circumstances, the cargo owners' decision was one which could reasonably be anticipated might be made consequent upon creation by the owners of the dilemma which confronted those cargo owners. The judge found therefore that the shipowners' breach of contract remained an effective cause of the contamination of the entire cargo. Two things emerge from this judgment.

Firstly, a contending cause of damage will not necessarily arise when a primary breach prompts a particular response by the injured party.
Secondly, where that response is one which might be contemplated, or is, in itself, not an unreasonable response to the primary breach, responsibility will usually remain with the person originating the primary breach.

Falling markets, redelivery and notice

First published: Elborne Mitchell website [16th August 2005]

The recent dramatic fall in the Handymax and Panamax markets is likely to lead to more disputes over redelivery. Hire rates have dropped to as little as US$10,000 from a US$40,000 peak just a few months ago, and losses on breaches of existing charters could be substantial following such a steep decline. Indeed, it was reported last week that a Swiss-based company redelivered three panamaxes early, with one of the vessels now earning less than half the hire it previously commanded.

And it is not only these markets that are suffering - most size brackets have seen a decline recently. The Baltic Dry, Handymax, Panamax and Capesize indices all showed a fall in rates at the approximately the same time last year and then recovered throughout the later part of the year. However, the dip over recent months has been steeper, and gone lower, than that in 2004.
This decline is likely to lead to friction between owners - looking to maintain high value deals for as long as possible - and charterers who, tied into high hire rates, may well want to escape existing commitments in favour of lower hire rates and greater profits. Rapid changes in the market often trigger disputes related to redelivery or breach of charter and the frictions that arise are understandable when operators could easily be looking at losses in excess of US$20,000 per day.

In the current market the parties most likely to default will be charterers looking to escape punishing losses or to take advantage of more favourable rates of hire elsewhere. Whilst many deals will no doubt be renegotiated on commercial bases, there is generally no obligation on an owner to do so and this is where disputes as to redelivery may arise. Size matters, of course: larger operators may be able to pressure owners into accepting early redelivery using the promise of future business; smaller operators are less likely to be able to do so and many may seek to redeliver vessels early, or as early as they are permitted under the charter.

The difficulty for charterers is that redelivery provisions are usually very explicit. The charterparty will stipulate when the charterer may redeliver, where he may redeliver and how he is to do so (such as on proper notice, in like good order and condition etc.). Any redelivery earlier than the stated provisions will almost undoubtedly give rise to claims against the charterer and the owner will be able to recover hire from him - at the full charter rate - until such time as proper redelivery takes place.

Further, while the time and place of redelivery are usually plain enough on the face of the agreement, charterers should bear in mind the notice provisions for redelivery. These are more than just guidelines; they are binding terms of the contract and must be adhered to. Failure to give adequate notice may result in a claim for lost hire. If a charterer fails to comply with the notice obligation it may well continue to be responsible for the payment of such hire as would have been payable up to the proper time of redelivery, i.e. as if notice had been given correctly. In certain circumstances a charterer may even find himself liable for losses in excess of hire.
The need to give notice is often overlooked but failure to do so according to the terms of the charterparty can lead to substantial claims against the unwary operator.

Shipping

By Jonathan Steer of Elborne Mitchell

First published: Maritime Risk International [1st January 2007]

Due diligence and the new vessel under the Hague and Hague Visby Rules.
It is of course well known that, under the Hague and Hague-Visby Rules, a carrier has a non-delegable duty to exercise due diligence, before and at the beginning of the voyage, to make the vessel seaworthy. In the past, this duty has been held not to stretch back to defects originating from a time before the new vessel came into the carrier's 'orbit'. This year, however, that principle has been somewhat shaken [1]. The Happy Ranger, a heavy-lift vessel, was built for her unfortunate owners by various experienced and well-reputed contractors. Approved manufacturers were used and, with one notable exception, as it turned out, the contractors carried out the required tests on the ship's gear.

During loading of the vessel for her maiden voyage, one of the hooks on the vessel's cranes broke and the cargo fell to the quayside, suffering around $2m of damage. It was accepted that the vessel was not seaworthy, it having been established that there was a serious casting defect in the broken hook. The hook had not undergone a load test during construction.
The question was whether the owners had exercised due diligence; the Commercial Court in England held that they had not. The owners were found liable for the damage because, although the problem was pre-existing on delivery of the new vessel, they knew which tests had been carried out on the hooks and should have realised, in light of their expertise and involvement in the vessel's construction, that the load test (which was required by the classification society and would have revealed the defect) was not amongst them.

This case should serve both as a wake up call for those commissioning newbuildings and a reminder for carriers in general of the non-delegable nature of the due diligence obligation. It cannot be assumed that a newly built vessel will be seaworthy, nor can it be assumed that those involved in its construction have jumped through all the necessary hoops, no matter how experienced and respected those contractors may be.
Negligent stowage and unseaworthiness under NYPE 1946
Clause 8 of NYPE 1946 ("Charterers are to load, stow and trim the cargo at their expense under the supervision of the captain") imposes responsibility for stowage on the charterer. There are two exceptions to this: i) where the master actually supervises stowage and loss is attributable to that supervison, or ii) where loss is attributable to a lack of care "in matters pertaining to the ship of which the master was (or should have been) aware but the charterers were not...". The issue may be complicated where the charterparty also incorporates the Hague Rules.

The Commercial Court in England this year considered the position where the stowage was so negligent as to render the ship unseaworthy [2]. The facts were that a cargo of calcium hypochlorite, an unstable compound, was stored next to the ship's bunker tank in accordance with a stowage plan prepared on behalf of charterers. The tank was overheated during the voyage, resulting in an explosion. The owners claimed for loss of hire and damage to the ship. The second issue was whether, given that the bunker tank had been heated excessively, owners could rule on the Hague Rules Article 4 Rule 2 defence relating to acts, neglects or defaults in the management of the ship.

The Court held that clause 8 responsibility for stowage only reverted from the charterers to the owners where there had been actual intervention in the stowage by the master (which there had not been in this case). Mere review of the stowage plan was held not to constitute actual intervention. The court rejected the argument by the charterers that the master was under a duty to intervene where the stowage was so bad as to render the vessel unseaworthy on the basis that the issue here was the allocation of responsibility for stowage as between the shipowner and the charterer. Responsibility for stowage remained, therefore, even in these circumstances, with the charterer. The second point was also decided in favour of the shipowner. Despite the fact that it should have been obvious that overheating of the bunker tank would pose a risk to the cargo, the action of heating was done entirely for the ship's purposes and had nothing to do with the care of the cargo. Accordingly, the shipowner was entitled to rely on the Hague-Visby Rules Article 4 Rule 2 defence.

Charterers will wish always to consider whether it is feasible to amend the stowage clause to read "Charterers are to load, stow and trim the cargo at their expense under the supervision and responsibility of the captain" in order to shift responsibility for the consequences of negligent stowage back to the owners.

Frustration of charterparties
Two English High Court decisions this year illustrate the difference between what is and what is not a frustrating event. A contract is frustrated where something happens, through no fault of either party and in circumstances not provided for in the contract, which fundamentally changes the nature of the contract and renders performance impossible without drastic changes to the parties' agreed obligations. Thus, in one case [3] the unlawful 3-month detention, by the Karachi Port Trust, of a vessel chartered in by the salvors in connection with the grounding of the Tasman Spirit, was not a frustrating event, primarily because delay was in this case one of the commercial risks undertaken by the parties. By contrast, a contract for the carriage of vegetable oil to Lagos, Nigeria, was frustrated by the Nigerian government banning importation of the cargo prior to loading, which would have made performance of the contract illegal [4].

Marine Insurance
The English Court of Appeal's judgment in Bolton MBC v Municipal Mutual Insurance Ltd and Commercial Union Insurance Company Ltd [5], whilst not related to marine insurance, has clarified the principle of waiver by election and is of relevance to, and will be welcomed by, insurers generally. The insurers had rejected an asbestos claim for coverage reasons, there being a disagreement as to when the illness arose and, accordingly, which of the insurers was liable to indemnify the assured.

The key issue for these purposes, however, was whether, in taking a coverage point, an insurer thereby elected to waive any right to rely on other policy defences. In this case, the assured was in breach of the 'condition precedent' obligation to notify the insurer immediately of any accident or claim.
The Court of Appeal ruled that, for the principle of waiver by election to apply, the insurer must have exercised a choice, with knowledge of the relevant facts, between inconsistent courses of action, e.g. between affirming or denying cover. An insurer's decision to raise one policy defence over another does not satisfy this test - here, there was no inconsistency since both policy defences went to the same end, i.e. rejection of the claim.

False allegations and the assured's duty of disclosure
In another Court of Appeal judgment that will be heartening for insurers, it was held that allegations of dishonesty in pending Greek criminal proceedings, unresolved on placement of the war risks policy, were material facts and should have been disclosed [6]. This was despite the fact that the allegations were unrelated to the assured risk and, by the time of the trial of the insurance dispute, had been dismissed by the Greek Court.

The assured argued that, in light of these facts, the allegations were immaterial to the insurance and therefore not disclosable. The Court of Appeal reaffirmed the established principle that the test of materiality involves establishing as a matter of fact those details which a prudent underwriter would expect to be told when considering his underwriting decision. The judge at first instance had considered expert underwriting evidence on that subject and had concluded that the allegations were indeed material. Accordingly, the insurers were entitled to avoid the policy for non-disclosure.

Although the facts of this case are somewhat unusual [7], the principle is of wider importance: it is well-established the assured is under a duty to disclose all matters which a prudent underwriter would want to know. This case, however, further confirms that this duty extends to unsubstantiated or untrue allegations ("moral hazards"), and that there is no need for the insurer to show that the allegations are actually true.

"Warranted fully crewed at all times" - what does this really mean?
A fire occurred on a berthed vessel [8]. The crew members had all been dismissed and the master had temporarily gone home, 30 minutes' drive away. The insurers denied cover on the grounds of breach of the above warranty. It was accepted that, in the circumstances, the presence of the master alone would have been sufficient to satisfy the warranty. The English Admiralty Court gave short shrift to the assured's argument that the court should look to the employment of the crew rather than their actual location at any particular time. It was held that the warranty obliged the assured to have at least one crew member on board 24 hours a day subject to i) emergencies and (ii) the performance of necessary duties requiring temporary departure from the vessel.

Insurance Broker's Regulation

Insurers and reinsurers have been receiving letters from brokers telling them to agree to the terms of their TOBAs or the brokers won’t be able to do businesswith them. Brokers do notwant to run the risk of non-compliance with the FSA rules particularly in the light of the ‘Dear CEO’ letter. In many cases, no consideration has been given to individual business relationships and no negotiation has been entered into.
Amidst all the confusion, it has been forgotten that in order to understand the rules, you must go back to basics.

The basics
A broker acts as the agent of its client, the insured, and the law of agency governs the relationship under which the broker acts as the insured’s agent. It follows that where a broker holds premiums and claims monies, it does so as the agent of the insured. The insured bears the credit risk of the insolvency of the broker. For example, if an insured pays premium to its agent, the broker, and the broker becomes insolvent before the money is passed on to the insurer, the insured may not be on cover and may bear the loss of premium itself (depending, of course, on the terms of the policy). Unless the policy provides otherwise, the insurer bears no loss and
provides no cover to the insured. However, in respect of marine insurance, the broker is directly responsible to the insurer for the premium (section 53 of the Marine Insurance Act 1906 (MIA)).

Similarly, if an insurer pays a claim to a broker, the insured will be deemed to have received the claims monies once they have been paid to its agent, the broker (again, depending on the terms of the policy). The insured bears the credit risk of the broker becoming insolvent before it passes on the claims monies. The insurer has no further liability once it has paid the claim to the broker. However, in respect ofmarine insurance, the insurer is directly responsible to the insured for payment of losses or returnable premium (section 53 MIA). Some intermediary clauses, particularly in reinsurance treaties, seek to reverse the credit risk by treating payment to the broker by the reinsured as payment to the reinsurer.

The Client Money Rules
The Client Money Rules, which are set out in chapter 5 of the Client Assets Sourcebook (CASS), have been designed to provide insureds with a much greater degree of protection than that
provided under the law of agency set out above. The FSA’s General Principles for Business (Principle 10) require firms to arrange adequate protection for clients’ assets when the firm is
responsible for them. Such protection includes the proper accounting and handling of client money. In line with Principle 10, a broker who holds client money must do so in accordance with
the Client Money Rules (subject to certain exceptions, most notably for reinsurance contracts).

The Client Money Rules provide two options:
— money held by the broker on behalf of its principal, the insured, ie premiums and claims money, is client money and must be segregated into a Client Account (which is either a statutory trust account or a non-statutory trust account maintained in accordance with the Client Money Rules), and cannot be used to reimburse other creditors in the event of the broker’s insolvency (CASS 5.3 and 5.4),

— money held by the broker on behalf of the insurer is not client money and does not have to be held in a Client Account (see further below).

Money held of behalf of the insurer
The Client Money Rules permit an insurer and an intermediary to agree that the broker holds money as agent of the insurer (CASS 5.2). This money can include premiums and claims monies as well as other money, such as professional fees. Before a broker can hold any money (whether premiums, claims or other money) as agent of the insurer, a written agreement must be entered into to that effect in accordance with the Client Money Rules. If a broker does not have such written agreement in place with an insurer, it cannot hold any money as agent of that insurer.
If the written agreement provides that the broker holds premiums and/or claims money as agent of the insurer, the insurer (rather than the insured) bears the credit risk of the broker’s insolvency.

This is known as ‘risk transfer’.
The effect of risk transfer is that money held by the broker pursuant to the written agreement are treated as being held by the insurer. This gives the insured protection. For example, it pays
premium to the broker where the broker has agreed risk transfer with the insurer, the premium is deemed to be received by the insurer when it is paid to the broker. Similarly, when the insurer pays a claim to the broker, where risk transfer has been agreed, the claim will not be deemed to be paid to the insured until the broker actually does so. If there is no written agreement in place, the premiums and claims money will be held by the broker in accordance with option A above. In addition, the broker will not be able to hold any other money, eg professional fees, as agent of the insurer.

Money held by a broker as agent of an insurer is not client money (CASS 5.1.5R) and therefore does not have to be placed in a segregated account in accordance with the Client Money Rules.
Thismeans, in essence, that the broker is not restricted in the manner in which it can use money held pursuant to the risk transfer agreement and can use the money to meet its other liabilities or to finance its business. Whilstmany insurers have accepted the principle of risk transfer,
they also require that money held by a broker on their behalf are protected from the broker’s other creditors.

In respect of money held by a broker on its behalf, an insurer can apply one of the following options:
— impose no protective measures on the broker and bear the credit risk in the event of the broker’s insolvency or misuse of the money.
— require that money held on its behalf are held in a separate trust accountmaintained for its benefit.
— permit the money to be ‘co-mingled’ in the Client Account maintained by the intermediary in accordance with the Client Money Rules (CASS 5.1.5AR).

Co-mingling
Co-mingling is only an issue if an insurer and a broker have entered into a written agreement providing that the broker holds money on behalf of the insurer. The Client Money Rules permit a broker and an insurer to agree that money held by the broker on behalf of the insurer is to be treated as client money and to be kept in the Client Account (alongside the money held by the broker on behalf of insureds). If an insurer agrees or wishes that money held by the broker on its behalf is kept in the Client Account, the insurer must agree to this arrangement in writing and must also agree that its interests in the Client Account are subordinated to the interests of the intermediary’s other clients. Other than as set out above, an insurer (when acting as such) with whom a broker conducts insurance mediation activities is not to be treated as a client of the intermediary (CASS 5.1.6R).

In entering into a co-mingling arrangement the insurer is still bearing the credit risk rather than the insured but is simply taking steps to protect its own interests. In agreeing to subordinate its
interests to those of the intermediary’s other ‘clients’, an insurer must be careful to ensure that ‘clients’ do not include other insurers whose fundsmay also be held in a Client Account pursuant to a risk transfer agreement. The insurer’s interests should be subordinated only to those of insureds.

Client Account
The holding of client money in segregated accounts means that money in the account are protected in the event of the insolvency of the intermediary. The Client Money Rules set out particular requirements relating to the establishment and maintenance of these Client Accounts.

Reinsurance
The Client Money Rules permit brokers to make an election to apply the Client Money Rules to their reinsurance business. The issues outlined in this article are therefore relevant to reinsurers carrying on business with brokers in those circumstances.

Misconceptions corrected
To clarify some common misconceptions in relation to the Client Money Rules:
— There is no FSA requirement for firms to enter into TOBAs, although clearly good business practice dictates that firms should set out in writing the terms of their business relationships.
— It is not correct that insurers and brokers cannot do business with each other unless they have entered into a risk transfer agreement, permitting the broker to hold money as the agent
of the insurer.
— There is no obligation on an insurer to agree that a broker holds money as its agent (subject to certain exceptions, eg marine insurance). The policy wording may also affect the position of the parties in relation to certain policies.
— If an insurer has not entered into a risk transfer agreement permitting a broker to hold money as its agent, the issues of co-mingling and subordination are not relevant. The broker
will hold premiums and claims money as agent of the insured. However, insurers and reinsurers must note that, in the absence of a risk transfer agreement, the brokers cannot hold other money, eg professional fees, on their behalf.
— The FSA’s 14 July deadline related only to the requirement that insurers agreed to the subordination of their interests in the Client Account and was only relevant where the insurer had already entered into a written agreement permitting the broker to hold money on its behalf and for that money to be comingled in the Client Account.
— Where an insurer has agreed risk transfer, the broker can be restricted to holding only one category of money, eg one (or more) of premiums, claims or professional fees. There is no
requirement that all money must be held as the agent of the insurer.
— The Lloyd’s Model TOBAs are just models. They do not fit all circumstances and should be adapted to the business relationship between the insurer and broker entering into the chosen model.