Global Process Systems Inc. and Another v Syarikat Takaful Malaysia Berhad (The "Cendor MOPU")

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLORD SAVILLE,LORD MANCE,LORD COLLINS,LORD CLARKE,LORD DYSON
Judgment Date01 February 2011
Neutral Citation[2011] UKSC 5
Date01 February 2011

[2011] UKSC 5

THE SUPREME COURT

Hilary Term

On appeal from: [2009] EWCA Civ 1398

before

Lord Mance

Lord Collins

Lord Clarke

Lord Dyson

Lord Saville

Global Process Systems Inc and another
(Respondents)
and
Syarikat Takaful Malaysia Berhad
(Appellant)

Appellant

Steven Gee QC

Peter Stevenson

(Instructed by Hill Dickinson LLP)

Respondent

Gordon Pollock QC

Claire Blanchard QC

(Instructed by Watson, Farley & Williams LLP)

Heard on 28 and 29 July 2010

LORD SAVILLE
1

This case is concerned with a marine insurance policy on cargo dated 5 July 2005, which incorporated the Institute Cargo Clauses (A) of 1 January 1982. The policy covered "all risks of loss or damage to the subject-matter insured except as provided in Clauses 4, 5, 6 and 7…" Clause 4.4 excluded "loss, damage or expense caused by inherent vice or nature of the subject matter insured" from the cover provided by the policy.

2

The subject matter of the insurance was the oil rig "Cendor MOPU." This oil rig had been laid up in Galveston, Texas. In May 2005 it was purchased by the respondents (the assured under the policy) for conversion into a mobile offshore production unit ("MOPU") for use in the Cendor Field off the coast of East Malaysia. The insurance covered the loading, carriage and discharge of the oil rig on the towed barge "Boabarge 8" from Galveston in the United States to Lumut in Malaysia. The total sum covered was Malaysian Ringgits 38m (US$10m) with a deductible of US$1m. The premium was US$378,000.

3

The oil rig, originally called the "Odin Liberty", was built in Singapore in 1978. It is what is called a "self elevating mat supported jack-up rig," consisting of a watertight working platform called the jackhouse, which can be moved (jacked) up and down three legs extending to the seabed, according to the sea depth at the drilling location. There is a mat at the bottom of the legs that sits on the seabed when the rig is in operation.

4

The legs are massive tubular structures, made of welded steel cylindrically shaped, with an outside diameter of 12 feet and a length of 312 feet. Each weighed 404 tons. The jacking system worked by engaging steel pins into what were called pinholes in the legs. These pinholes were apertures some 16 inches wide and 10 inches high. Each leg had 45 sets of pinholes at 6 foot intervals.

5

The rig was carried on the barge with its legs in place above the jackhouse, so that the legs extended some 300 feet into the air.

6

The voyage began on 23 August 2005. On 10 October 2005 the tug and barge arrived at Saldanha Bay, just north of Cape Town. There some repairs were made to the legs and the voyage resumed on 28 October. North of Durban on the evening of 4 November 2005, the starboard leg broke off at the 30 foot level and fell into the sea. The following evening the forward leg broke off at the same level, and some 30 minutes later the port leg broke off at the 18 foot level. Both these legs also fell into the sea. It is the loss of the three legs that is the subject matter of the claim under the policy.

7

The loss resulted from metal fatigue in the three legs. Fatigue is a progressive cracking mechanism resulting from repeated or fluctuating (cyclic) stresses each at a level lower than that required to cause fracture of an uncracked component. Generally, there are three stages to the fatigue failure of any component, namely initial cracking, propagation of the cracking and finally complete fracture.

8

The initial cracking occurs in regions of stress raising features, such as corners or notches, where stresses are concentrated. In the present case, the corners of the pinholes were stress raising features. The initial fatigue cracks occurred there and then propagated until they reached a point where they were subjected to what was described as a "leg breaking" stress that completely fractured the weakened leg. Once the first leg had failed, the stresses on the remaining legs increased.

9

The stresses in the present case were generated from the effect that the height and direction of the waves had on the pitching and rolling motion of the barge and thus on the legs. It was common ground that what the barge experienced was within the range of weather that could reasonably have been contemplated for the voyage.

10

That the legs of the rig were at risk of fatigue cracks during the voyage was known from the outset and the legs were inspected at Galveston by experts appointed by the assured and approved by the insurers. It was a condition of the policy that the appointed surveyors Noble Denton approved the arrangements for the tow. These surveyors issued a Certificate of Approval on 23 August 2005. In this certificate they required that the legs be reinspected when the barge reached Cape Town (roughly the half way point) for crack initiation in way of the six levels of pinholes above the mat; so that remedial work could be undertaken should it be found necessary.

11

When the rig was examined at Saldanha Bay it was found that there had occurred a considerable degree of fatigue cracking around the pinholes; and some repairs were made in order to reduce the stress concentrations in these areas. Self-evidently, however, the repairs did not prevent the final failure of the legs a few days later.

12

The insurers rejected the claim for the loss of the legs and the matter came for trial before the Commercial Court. At the trial one of the arguments advanced by the insurers was that the loss was the inevitable consequence of the voyage, and that since insurance was against risks, not certainties, they were under no liability for the loss of the legs. The judge, Blair J, [2009] 2 All ER (Comm) 795, rejected this argument, concluding at para 87 "that the failure of the legs as this rig was towed round the Cape was very probable, but it was not inevitable." As he put it:

"…a developed crack would not, on its own, have been sufficient to cause one of the legs to come off. That required in addition a 'leg breaking' or 'final straw' stress that finally fractured the weakened steel. As Mr Colman [one of the experts called at the trial] put it, 'you've got to catch it just right, if you want to make it actually fail all the way round.'"

13

The insurers do not challenge the judge's conclusion.

14

One of the arguments advanced by the assured at the trial was that the loss resulted from the failure to effect adequate repairs at Saldanha Bay. This argument too was rejected by the trial judge, on the grounds that the loss occurred despite the repairs and not because of them. The assured does not challenge this conclusion.

15

What Blair J decided was that the insurers had proved that "the proximate cause of the loss was the fact that the legs were not capable of withstanding the normal incidents of the insured voyage from Galveston to Lumut, including the weather reasonably to be expected." In his judgment this meant that the cause of the loss was inherent vice within the meaning of the policy and that accordingly the insurers were not liable for the claim.

16

The Court of Appeal [2010] 1 Lloyd's Rep 243, para 64 took a different view and concluded that the proximate cause of the loss was an insured peril in the form of the occurrence of a "leg breaking wave", which resulted in the starboard leg breaking off, leading to greater stresses on the remaining legs, which then also broke off. The insurers now appeal to the Supreme Court.

17

Both at first instance and in the Court of Appeal, the judges expressed their task as seeking to find the "proximate cause" of the loss. The reason for this is to be found in the Marine Insurance Act 1906, which was entitled "An Act to codify the Law relating to Marine Insurance." Section 55(1) of this Act provides that:

"Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against."

18

In general terms therefore, whether or not a loss is covered by a marine policy depends on ascertaining its proximate cause.

19

Although there were some authorities before the Marine Insurance Act 1906 that appeared to proceed upon the basis that the relevant cause was that closest in time to the loss, it is now well settled that this is not the test for proximate cause: Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350. The proximate cause is that which is proximate in efficiency; and, as Bingham LJ put it in T M Noten BV v Harding [1990] Lloyd's Rep 283, 286–287:

"Unchallenged and unchallengeable authority shows that this is a question to be answered applying the common sense of a business or seafaring man."

20

It was common ground between the parties that it was for the insurers to prove that the loss was proximately caused by inherent vice or nature of the subject matter insured. The central issue before this court was as to the meaning of this exception to the cover.

21

Although in the present case, as pointed out above, this exception is spelt out in the Institute Cargo Clauses, it also appears in section 55(2)(c) of the Marine Insurance Act 1906, which provides:

"Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils."

22

It is not suggested that the exception under consideration bears a different meaning from that in the Marine Insurance Act 1906, though if there are two proximate causes, one of which is covered and the other which is (as here) specifically excepted, it appears settled that the loss is not...

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