Key takeaways
Court upholds constructive total loss ruling
Vessel deemed uneconomical to repair under policy terms.
Strict compliance with notice requirements matters
Missing deadlines can invalidate otherwise valid claims.
Clear contract wording reduces dispute risk
Accurate drafting helps prevent costly marine litigation.
The Court of Appeal has agreed with the Commercial Court that vessel interests were entitled to make a constructive total loss claim under their insurance policy after their vessel was detained in Indonesian waters by the Indonesian authorities for a prolonged period of time.
The Court of Appeal has also upheld the Commercial Court judge’s findings that, on the facts, there was no breach of the insureds’ duty to make a fair presentation of the risk to the insurers before the insurance contract was entered into.
The background facts
Delos Shipholding S.A. (Delos), a Marshall Islands registered company, was the registered owner of the vessel and was part of the NGM Group of companies. Delos’ sole nominee director was a qualified Greek lawyer who provided legal services through his firm to the NGM Group as well as to other Greek shipowning clients. He was also the sole nominee director of a number of other SPVs within the NGM Group.
In February 2019, the vessel had been ordered to Singapore for bunkering. On 13 February 2019, after bunkering was completed, the vessel’s commercial managers ordered her to proceed to Singapore OPL, where she was to find a safe anchorage, drop anchor and await further instructions.
On 14 February 2019, the vessel left Singapore and dropped anchor in a position just inside Indonesian territorial waters. This was within an area, partly inside and partly outside Indonesian territorial waters, which had commonly been used for anchorage by countless vessels over the years without any problem. Indeed, at the time the WIN WIN arrived in this area, many other vessels were also anchored in the vicinity.
Prior to February 2019, there had been no known instances of vessels being detained by the Indonesian authorities simply for being anchored within territorial waters. However, as of about 8 February 2019, the Indonesian Navy arrested a number of vessels for anchoring within territorial waters without permission.
On 17 February, the WIN WIN was boarded by armed personnel from the Indonesian Navy and detained. On 18 February, the vessel shifted to a new location in the port of Batuampar on the orders of the Indonesian authorities and on threat of seizure of the vessel and arrest of the master.
Subsequent attempts to obtain the release of the vessel proved unsuccessful. The Indonesian authorities maintained the vessel had anchored illegally without permission. It became apparent that only a bribe would result in the release of the vessel. However, the vessel interests were not prepared to make an illicit payment of this nature.
Consequently, the vessel remained detained. The vessel’s war risks policy provided that she would be a constructive total loss (CTL) if detained for a continuous period of six months. Once this period expired, a series of notices of abandonment were given to the insurers, which they declined.
In October 2019, the Batam District Court gave the master a suspended sentence of seven months and a fine of Rp 1M (about US$7,000). The prosecutor lodged an appeal, which affirmed the first instance verdict. The fine was paid and the master released on 8 January 2020. On 9 January, the vessel was formally redelivered to the vessel interests but, partly due to Covid-19, the vessel did not leave Indonesian waters until 7 August 2020.
It was common ground between the parties that, while the vessel’s detention was unexpected and the result of an unheralded change in the practice of the Indonesian authorities, it was in fact lawful under Indonesian law. The vessel did not have the necessary clearance to anchor and, therefore, the master had committed a criminal offence under Indonesian law.
Insurance policy
The policy insured part of the NGM Group fleet (including the vessel) against war and political risks for the period 1 July 2018 to 30 June 2019. Delos, together with the vessel’s commercial and technical managers, were all named insureds in respect of the vessel.
The policy was governed by English law, but it expressly incorporated the American Institute Hull War Risks and Strikes Clauses dated 1 December 1977 and the Addendum thereto dated 1 April 1984. These effectively wrote back into the policy the war risk perils expressly excluded by the American Institute Hull Clauses. Thus, the policy covered “Capture, seizure, arrest, restraint or detainment, or any attempt threat.”
However, this was subject to certain exclusions from cover, the relevant exclusion in this case being exclusion 1(e), namely:
“Arrest, restraint or detainment under customs or quarantine regulations and similar arrests, restraints or detainments not arising from actual or impending hostilities…”
The dispute
Before the Commercial Court, the insurers resisted the insureds’ CTL claim under the policy on four grounds. They argued that:
The detainment lacked the necessary quality of fortuity, because it resulted from the voluntary conduct of the insureds.
The detainment fell within exclusion 1(e) of the policy.
There had been a causative breach of the duty to sue and labour.
There had been a breach of the duty of fair presentation entitling the insurers to avoid the policy or treat it as not insuring the vessel.
Insurance Act 2015
The Insurance Act 2015 (2015 Act) reformed the law concerned with disclosure of material facts. The relevant provisions of the 2015 Act, which provides for a duty of fair presentation, are as follows:
Pursuant to s.3, the insured must make a fair presentation of the risk to the insurer before the contract of insurance is entered into.
Pursuant to s.3(4)(a), disclosure is only required of material circumstances which the insured knows or ought to know.
Pursuant to s.4(3)(a), a corporate insured is taken to actually know what is known to the individuals who are part of its senior management.
As to constructive or deemed knowledge, s.4(6) states that the “… insured ought to know what should reasonably have been revealed by a reasonable search of information conducted by the insured (whether the search is conducted by making enquires or by other means.”
Section 4(8)(c) defines senior management as individuals “… who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
The Commercial Court decision
Fortuity
Mrs Justice Dias held that, on the facts, the loss was not deprived of its fortuitous character. Although the vessel was in Indonesian waters in breach of local law, the detention was not the ordinary consequence of voluntary conduct of the insureds arising out of the ordinary incidents of trading.
Sue and Labour
The judge rejected the argument that the detention of the vessel was materially caused by the insureds unreasonably, and in breach of their duty to sue and labour, getting side-tracked into discussions with the Indonesian Navy regarding the release of the vessel, which ultimately led to a realisation that the Navy was seeking the payment of a bribe. The vessel interests had no intention of paying a bribe, and the insureds could not be criticised for pursuing all lines of enquiry to procure the release of the vessel.
Construction of the policy exclusion
In construing exclusion 1(e), the judge had regard to the broadly similar wording of clause 4.1.5 of the English Institute Clauses 1983, which exclusion refers to arrest etc. “… under quarantine regulations or by reason of infringement of any customs or trading regulations.”
On the authorities, the term “customs regulations” was to be construed broadly. Furthermore, the “and similar” wording in the American clause was intended to broaden the scope of the 1(e) exclusion so that it applied in the same way as the English clause.
Thus, the American wording should be construed to cover arrests etc. for breach of any regulation which in substance equated to a customs regulation as construed under English law. Having considered the object and terms of the relevant Indonesian laws, the judge concluded that the vessel’s arrest did not attract the operation of exclusion 1(e).
Duty of fair presentation
Some three months before the policy was renewed, criminal charges were brought against Delos’ sole director, which were not disclosed to the insurers when the policy was renewed. Whilst insurers did not allege that the sole director was guilty of those charges, they argued that the fact of the charges was a material circumstance that ought to have been disclosed to them and the failure to do so entitled them to avoid the policy or treat it as not insuring the vessel.
Those charges were not widely publicised, were denied by the sole director and were in due course discontinued. The sole director was a respected Greek lawyer and remained a registered member of the Piraeus Bar Association with a thriving legal practice.
On the evidence, the judge found that the sole director played no role at all, let alone a significant one, in the making of decisions about how the activities of Delos were to be managed or organised. Therefore, the sole director was not part of Delos’ senior management and as no one else whose knowledge mattered for the purposes of the 2015 Act knew about the criminal charges at the time, the insurers’ case on actual knowledge failed.
As to what the insured ought to have known, the judge found on the facts that the insurers had failed to prove that the insureds ought to have known about the criminal charges.
The Court of Appeal decision
The insurers were given permission to appeal on two grounds.
Construction of policy exclusion
The Court of Appeal stated that the wording of the relevant American and the English clauses differed, and each should be construed on its own terms. Nonetheless, the principles governing the interpretation of clauses in marine insurance policies were common to both provisions and the term “customs regulation” should not have a different and narrower meaning in the American clause as compared with the English clause. Therefore, the English authorities on clause 4.1.5 were relevant.
As to what was meant in exclusion 1(e) by “customs regulations,” on the authorities, what mattered was not whether the regulation in question was characterised as a customs regulation under the domestic law of the state in which the vessel was arrested, but whether it regulated matters which commercial people would regard as typically governed by customs regulations. Giving those words a businesslike interpretation, they referred to laws, however classified under domestic law, which regulated the import of goods into the territory of the state concerned, either by prohibiting such imports or by imposing a liability to make payment as a condition of importation.
As to “quarantine regulations”, the meaning of which had not been considered judicially, it was clear that the same approach had to be adopted. These were laws concerned with the protection of health, whether of people or animals.
The “and similar” wording referred to detentions under regulations which had a similar purpose to regulations concerning the import of goods (customs regulations) or the protection of health (quarantine regulations).
The detention of the vessel in this case occurred because, contrary to its previous practice, the Indonesian government decided to assert its sovereignty over its territorial waters by arresting and detaining vessels which had anchored without permission. This had no relevant similarity to an arrest or detention under customs or quarantine regulations. It was completely unconnected with the import of goods (the vessel was in ballast) and with health (there was no question of any cargo being infected, as there was none, and no suggestion of any member of the crew having any disease) and there was no suggestion that the crew was engaged in smuggling.
The Court of Appeal concluded that exclusion 1(e) did not apply.
Duty of fair presentation
The Court of Appeal upheld the judge’s findings to the effect that the sole Director was not part of Delos’ senior management. Therefore, actual knowledge of the criminal charges could not be imputed to Delos on that basis. In reaching this conclusion, the Court of Appeal rejected the submission that the sole director of a corporate insured with no employees will always be part of the company’s senior management. There was nothing in the Act that required this. A person may play a significant role in the making of decisions about how a company’s activities are to be managed or organised without holding any formal position in, or being an employee of, the company.
As to the insureds’ deemed knowledge, the Court of Appeal upheld the judge’s finding that the making of reasonable enquiries did not require the sole director to be asked whether he knew of any circumstances which might affect the risk. Having regard to the fact that the sole director had no operational role or function regarding the trading of the vessel and her insurance, the judge had considered that the sole director would not have known anything about the risk to be insured and that this would reasonably have been regarded as a pointless question.
What constitutes a reasonable search must be answered objectively but, it seems, would depend on the context and the type of business which the insured was conducting, and, in this case, there was no evidence that similar shipping groups made such enquiries of their nominee directors. It, therefore, follows that what was required by a reasonable search might be different in relation to a family owned and run shipping group and a different corporate structure such as a listed company.
Consequently, the insurers’ appeal was dismissed.
Comment
This is the first decision dealing with the construction of exclusion 1(e) in the American Institute Hull War Risks and Strikes Clauses and sheds further light on the proper approach to the construction of marine policy exclusion clauses generally. It is also one of the few reported cases dealing with the scope and effect of the duty of fair presentation of risk under the Insurance Act 2015.
The authors of this article acted for the successful vessel interests.
