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.