Gard Marine and Energy Ltd v China National Chartering Company Ltd and another

Heard on 1, 2 and 3 November 2016

( with whomLord Sumptionagrees. Lord Mance, Lord HodgeandLord Toulsonagree on the first and third issues only)

This appeal arises out of the grounding of the OCEAN VICTORY ("the vessel") in the port of Kashima in Japan on 24 October 2006. She was a Capesize bulk carrier, built in China in 2005. By a demise charterparty dated 8 June 2005, the vessel's owners, Ocean Victory Maritime Inc ("OVM" or "the owners"), chartered the vessel to Ocean Line Holdings Ltd ("OLH"), which is or was a related company, on the widely used Barecon 89 as amended. On 2 August 2006, OLH time chartered the vessel to China National Chartering Co Ltd ("Sinochart") and on 13 September 2006, Sinochart in turn sub-chartered her to Daiichi Chuo Kisen Kaisha ("Daiichi" or "the charterers") for a time charter trip.

The demise charterparty and both time charterparties contained an undertaking (on materially identical terms) to trade the vessel between safe ports. On 12/13 September 2006, Daiichi (and thus Sinochart) gave the vessel instructions to load at Saldanha Bay in South Africa and to discharge at Kashima. Between 19 and 21 September she loaded 170,000 tonnes of iron ore. She arrived off Kashima on 20 October and discharge began that afternoon.

The port of Kashima is entered from the sea through the northern end of a specially constructed channel known as the Kashima Fairway, which runs almost due north south, and is the only route into and out of the port. The Kashima Fairway is bounded on one side (to the east) by the South Breakwater and on the other (to the west) by the land.

On 24 October the vessel sought to leave the port during a storm. However, she allided with the northern end of the South Breakwater and grounded. Shortly thereafter another Capesize vessel, the ELIDA ACE, also grounded in the Kashima Fairway while attempting to leave the port. Salvors were engaged but the OCEAN VICTORY eventually broke in two. Her wreck was subsequently removed in the course of a lengthy wreck removal operation.

Some two years later, on 15 October 2008, Gard Marine & Energy Ltd ("Gard"), one of the vessel's hull insurers at the time of her loss, took assignments of the rights of OLH and OVM in respect of the grounding and total loss of the vessel. In its capacity as assignee of those rights, Gard subsequently brought a claim against Sinochart (which Sinochart passed on to Daiichi) for damages for breach of the charterers' undertaking to trade only between safe ports.

On 30 July 2013, Teare J ("the judge") held that the casualty was caused by the unsafety of the port in breach of the safe port undertaking in the time charters. He awarded Gard substantial damages, namely the agreed value of the vessel (US$88.5m), damages in respect of liability for SCOPIC expenses (US$12m), damages for wreck removal expenses (US$34.5m) and damages for loss of hire (US$2.7m).

Permission to appeal to the Court of Appeal on certain specific issues was granted. On 22 January 2015, the Court of Appeal (Longmore, Gloster and Underhill LJJ) allowed the appeal and set aside the judgment of the judge on the grounds that the conditions which affected Kashima were an abnormal occurrence and that there was no breach of the safe port undertaking on the part of the charterers. The Court of Appeal also held that, in the light of the insurance provisions of the demise charterparty, OVM and OLH (and Gard as their assignee) were not entitled to claim in respect of losses covered by the hull insurers. On 20 May 2015 Gard were granted permission to appeal to this Court.

The parties agreed the issues in this appeal as follows.

1. Was there a breach of the safe port undertaking? In particular the following specific questions were agreed: (1) was the port unsafe within the meaning of the safe port undertaking, so that the charterers were in breach; or (2) was there an "abnormal occurrence" within the context of the safe port undertaking, which was no breach of the undertaking?

2. If there was a breach of the safe port undertaking, do the provisions for joint insurance in clause 12 of the Barecon 89 form preclude rights of subrogation of hull insurers and the right of owners to recover in respect of losses covered by hull insurers against the demise charterer for breach of an express safe port undertaking.

3. If there was a breach of the safe port undertaking, is Daiichi entitled to limit its liability for Gard's losses or any (and, if so, which) of them as against Sinochart (and Sinochart in turn against Gard) pursuant to section 185 and Schedule 7 article 2(1) of the Merchant Shipping Act 1995?

It was agreed that in the event that the appeal succeeds (that is that the answer to issue 1(1) is "yes"), issues of time-bar and causation should be remitted to the Court of Appeal. In this judgment I will focus first on the safe port issue.

The events which led to the grounding and subsequent loss of the vessel are summarised in paras 127 and 128 of the judge's judgment as follows:

"127. The danger facing OCEAN VICTORY was one which was related to the prevailing characteristics of Kashima. The danger flowed from two characteristics of the port, the vulnerability of the Raw Materials Quay to long swell and the vulnerability of the Kashima Fairway to northerly gales caused by a local depression. It may well be a rare event for these two events to occur at the same time but nobody at the port could, I consider, be surprised if they did. There is no meteorological reason why they should not occur at the same time. Long waves were clearly a feature of the port (as they must be of any port facing the Pacific) and low pressure systems generating gale force winds cannot, in my judgment, be regarded as abnormal. I do not consider that the juxtaposition of long waves and a low pressure system generating gale force winds from the north amounts to an abnormal occurrence unrelated to the characteristics of Kashima. Long waves may give rise to a need for a vessel to leave the port. It may be a matter of chance whether at that time there is also a low pressure system generating gale force winds from the north but I am unable to accept that such winds are so rare that they cannot be said to be a feature of the port. It is not without significance that the Guide to Port Entry notes that during periods of northerly swell the entry channel is fully exposed and that vessels at low speed generally have difficulty in steering.

128. It may be that the storm which affected the port on 24 October 2006 was one of the most severe storms to have affected Kashima in terms of severity, speed of deterioration and duration as suggested by Mr Lynagh's analysis of its characteristics. But the relevant characteristics are those which give rise to the danger, namely the occurrence of long waves and northerly gales. Neither long waves nor northerly gales can be described as rare. Even if the concurrent occurrence of those events is a rare event in the history of the port such an event flows from characteristics or features of the port."

In the Court of Appeal Longmore LJ (giving the judgment of the court) noted in para 14 that it was common ground between the parties that, if the damage sustained by the vessel at Kashima on 24 October 2006 was caused by an "abnormal occurrence", then the charterers would not have been in breach of the safe port warranty. That common ground was based on the classic dictum of Sellers LJ in The Eastern City [1958] 2 Lloyd's Rep 127, 131 that:

"A port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship …"

Longmore LJ added in para 15 that what was in dispute between the parties on the appeal in relation to this issue was (i) what, as a matter of law, was the correct test for an abnormal occurrence; (ii) in particular, was the judge correct to hold (in paras 110, 127–128, 132 and 134 of his judgment) that the combination of two weather conditions on the casualty date (namely the phenomenon of swell from "long waves", which might have forced the vessel to leave the berth, and a very severe northerly gale which meant that the vessel could not safely exit the port) was not to be characterised as an abnormal occurrence, notwithstanding that the coincidence of the two conditions was "rare", because both conditions were physical characteristics or attributes of the port; and (iii) on the facts as found by, or undisputed before, the judge, did the weather conditions on the casualty date amount to an abnormal occurrence? It is important to note that it was not submitted that the relevant test could or should be other than that described by Sellers LJ in The Eastern City. In any event that test has stood...