Terms of contracts prevail over rights of subrogation

The law has long recognised that where an insurer has indemnified an insured for loss caused by a third party, the insurer can sue the third party in the insured’s name to recover the amount paid.  However, two recent UK decisions have discussed the question of when the terms of a contract entered into by the insured might impact on rights of recovery. 

Gard Marine & Energy v China National Chartering [2017] UKSC 35

This UK Supreme Court decision concerned a subrogated claim made by the insurers of joint insureds.

A vessel owned by Ocean Victory Maritime (OVM) was demise chartered to Ocean Line Holdings (OLH), a related entity.  OLH then time chartered the vessel to China National Chartering, which in turn let her on a further time charter to Daiichi Chuo Kisen Kaisha.  The demise charterparty and both time charterparties contained more or less identical undertakings requiring the vessel to be traded between safe ports.  In addition, the demise charterparty required the vessel to be insured in the names of both OVM and OLH.

The vessel grounded and became a total loss.  OVM was indemnified by its insurer, which then issued proceedings in the name of OLH against the time charterers, for breach of the safe port warranty.

The UK Supreme Court upheld the Court of Appeal’s finding that because OVM and OLH had agreed to be jointly insured, the time charterers’ liability was excluded.  It held that because of the joint insurance, OLH was not liable to OVM.  Hence there was no claim that could be passed on to the time charterers, and the insurers therefore had no subrogation rights against the time charterers. 

The position would have been different if, instead of indemnifying OVM, the insurer had indemnified OLH in respect of the time charterers’ wrongdoing.  In that case, the right of subrogation would have been able to be exercised in the name of OLH against the time charterers. 

Herculito Maritime v Gunvor International BV [2020] EWHC 3318

This more recent decision is also an example of contractual terms prevailing over subrogation rights.

A voyage chartered vessel was seized by pirates in the Gulf of Aden and released upon payment of a ransom of US$7,700,000.  General average was declared in respect of the same, with cargo owners providing a guarantee and bond to secure the release of their cargo.  A general average adjustment found the cargo owners’ share to be just under US $4.9m.

The voyage charter contained provisions which required the charterer to pay any extra costs incurred by the owner for insurance should the owners decide to transit the Gulf of Aden, an area known for piracy and which was not a permissible route under the owner’s standard insurance coverage.  The bills of lading issued by the owner incorporated the terms of the charterparty.

In a claim by the owners (or, more likely, their insurers suing in the owners’ name) against the cargo owners for recovery of their share of the general average, one of the issues was as to the effect of the insurance provisions.  Cargo owners argued that because the charterparty required the charterer to meet the additional insurance cost, the insurance clauses amounted to an agreement that the owner would only seek recovery from its insurer and not from the charterer in respect of any losses falling within the scope of the cover paid for by the charterer.  Then, by extension, the fact that the charterparty was incorporated into the bills of lading meant that there could be no recovery against cargo owners either.

That argument succeeded at arbitration, but the ruling was appealed to the Commercial Court.  It held that where there is an agreement by a charterer to pay an insurance premium, the usual construction would be for the charterer to have no liability for the losses arising from events covered by the insurance policy.

However, the Court held that the insurance provisions did not require the cargo owners, as bill of lading holders, to meet the additional insurance cost, and there were no other provisions between those parties which required the ship owner to look only to its underwriters for recovery of losses.  Hence, cargo owners should meet the general average claim in the usual way.

It is understood that this decision has been further appealed to the UK Court of Appeal.

Comment (Pauline Davies)

These decisions make clear that parties should give careful consideration when drafting their contracts to the intended effect of the insurance clauses, and to draft them clearly to give effect to that intention, so as to ensure that losses lie where the parties expect them to lie.  While these are shipping cases, the principles will apply equally to contracts in other fields of activity.

It is also worth pointing out that all standard cargo insurance wordings provide cover for general average contributions (a good enough reason, on its own, to have cargo insurance), meaning that in Herculito, the major part of the ransom cost will ultimately, if the appeal fails, fall on the cargo insurers.

Pauline Davies is a Partner at Fee Langstone