"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Saturday, April 2, 2011

Global Process Systems v. Syarikat Takaful Malaysia Berhad ( UK SC, 2011)- II

In the last post, we had discussed about rigs and their transportation on barges. In this post, we’ll discuss certain other technical aspects and also the judgement. The judgement, it may be noted, has a bearing on marine cargo insurance. We'll look into the judgement in this post.

But, to recap, during the voyage of the barge which carried the rig (see this picture), all the three legs of the rig broke of and fell into the sea. The owner of the rig , the insured, made a claim with its insurers for the loss caused. The insurers rejected the claim. The insured sued. The insurers argued that the insurer was not liable for the loss because the loss was caused due to inherent vice. The insurers contended that since the loss not caused by any an unexpected accident or casualty, therefore the loss was proximately caused by inherent vice. This ground of inherent vice was relied upon by the insurers as it was an exception to insurer liability under the contract. Section 55(2)(c) of the English Marine Insurance Act, 1906 also provided:
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.”
The Commercial Court determined that the loss was due to metal fatigue in the legs. As we discussed in the previous post, the legs in this rig were mat-type legs and therefore the legs were cylindrical structures.Fatigue occurs when there is repeated stress on the legs. According to the court, the stress in the legs were due to the pitching and rolling motion of the barge due to the height and direction of the waves.

An important aspect that had bearing on the case was that there was a risk of fatigue was well known to the insurers and the insured. Therefore, the insurers insisted that the rig be inspected again in Cape Town, South Africa and necessary remedial operations be conducted. On this condition, the insurers granted a certificate approving the voyage. Thus, both knew that the voyage was risky for the rig. Therefore, the insurers took the ground of inherent vice.

It was argued by the insurers that insurance was a contract aimed at protecting against risks and not certainties and since it was certain that the rigs would be affected by metal fatigue, they were not liable for the loss of the legs.

Inherent Vice: as the Proximate Cause
Loss due to Inherent vice means that the loss is caused due to the nature of the goods itself and not due to any external causes.

In Soya GmbH Mainz Kommanditgesellschaft v. White [1982] 1 Lloyd’s Rep 122, Soya beans were to be transported by ship. The goods were insured against the risk of heating, among other things. When the goods arrived to the port, it was in a heated condition. Relying on the ground of inherent vice, the insurers denied liability. Donaldson LJ held that a loss is proximately caused by inherent vice if the natural behavior of the goods is such that they suffer a loss in circumstances in which they are expected to be carried.

However, the House of Lords in the same case [1983] 1 Lloyd’s Rep 122, supplied a different definition. Lord Diplock held :
[Inherent vice] means the risk of deterioration of the goods shipped as a result of their natural behavior in ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty.”
Now, there is a subtle difference between the above two definitions. To clarify, we would take the soya bean example. If the subject matter, that is, soya beans was wet when it was loaded in the ship, then the insurer is not liable because the subject matter inherently suffers from vice, that is, wetness. The proximate consequence of the heatedness would be the wetness of the subject matter. It was the fault of the insured to not keep the goods away from moisture. Therefore, it is right that the insurers should not be liable.

However, the definition of Donaldson LJ seems to suggest the incapability of the subject matter to stand the expected events of voyage as inherent vice. The UKSC in the present case favoured Lord Diplock’s definition. In T M Noten BV v. Harding –[1989] 2 Lloyd’s Rep 283, Bingham LJ held that the proximate cause of the loss was inherent vice of the subject matter, that is, the goods were shipped wet.

Noting the above decisions and another, the UKSC held:
[T]hese cases do not provide authority for the proposition that inherent vice or nature of subject matter insured is established by showing that the goods in question were not capable of withstanding the normal incidents of the voyage, including weather reasonably expected. What they do establish is that where the only fortuity operating on the goods comes from the goods themselves, the proximate cause of the loss can be properly be said to be the inherent vice or the nature of the subject matter insured and so (in the absence of provisions to the contrary) falls outside the cover.”
The Court also disagreed with the decision in Mayban General Insurance v. Alstom Power Plants Ltd [2004] 2 Lloyd’s Rep 609, where a transformer, the cargo, was damaged due to the movement of the vessel due to wind and sea action. The court stated that the goods transported must be capable of withstanding the “forces” that could be reasonably expected during the voyage. The court stated that since there was no unusual cause which caused the damage.

This, according to the UKSC, would have the consequence of reducing “much of the purpose of cargo insurance, for the would then only extend to loss or damage caused by perils of the seas that were exceptional, unforeseen or unforeseeable, and not otherwise. This…would go far to frustrate the very purpose of all risks cargo insurance, which is to provide indemnity in respect of loss or damage caused by, among other things, perils of the seas.”


Section 55(2)(c) also states that insurer is not liable for ordinary wear and tear. In Mayban General Insurance, the court implied that insurers would not be liable if the cargo was unseaworthy. Seaworthiness is defined in Section 39 of the Act to mean “reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.” Perils of the seas is defined in the Act to only mean fortuitous accidents or casualties of the seas and does not include action of the winds and waves. Therefore the court implied that seaworthiness did not include the ability of the cargo to withstand wind and wave action.

Seaworthiness of the vessel is an implied warranty in the marine insurance policy. If the vessel is not seaworthy, the insured is not entitled to be indemnified by the insurers irrespective of whether the loss was proximately caused by the unseaworthiness.

The court held, by an analogy to the seaworthiness standard in Section 39, the mere fact that the goods are not reasonably fit in all respects to encounter ordinary perils of the seas of the adventure insured does not by the reason alone deprive the assured of the right to be indemnified.

But then, when the seaworthiness standard in the Act refers to a higher standard, that is, the ability to withstand “fortuitous accidents or casualties of the seas”, does it not mean that seaworthiness would also include a lesser standard, I.e., the ability to withstand wave and wind action would also be covered?

In any case, Section 39 dealt with seaworthiness of a vessel (hull insurance) while the present case dealt with cargo insurance.

Two Proximate Causes:

The insurers also argued, without prejudice, that the loss was caused by two proximate causes- inherence vice and perils of the sea. They relied on a decision that dealt with hull insurance- Miss Jay Jay [1987] 1 Lloyd’s Rep 32 where it was held that where there were two proximate causes, and where the policy excluded one cause from the cover, the assured would not be entitled to be indemnified. While Lord Saville rejected the argument for the reason that it was not the case where there were two proximate causes, Lord Mance did not wish to go into the question without hearing arguments.

In any case, the court held that the rolling and pitching of wave the barge in the sea conditions encountered caused the damage and the insurers were liable for the loss.
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