(4).jpg)
Arrested Vessel can still be Covered by War Risks Insurance
Liisa Lahti
This article by Liisa Lahti first appeared in Lloyd's List on 13 April 2011.
An important decision concerning both the insurers and the insured was handed down recently in a case involving a war risks insurance claim, an area rarely considered in the London Commercial Court.
The case clarifies that loss is not necessarily excluded from war risks cover simply because it results from acts taken by a foreign court. The decision is of particular relevance at the moment given the recent increase in international political instability and the ramifications which this may have for the workings of legal institutions.
The case, Melinda Holdings v Hellenic Mutual War Risks Association (Bermuda) concerned a claim by a Liberian company, Melinda Holdings, to enforce the war risks insurance it had with Hellenic Mutual War Risks Association.
In 1996 various defendants were found liable by the Port Said Court of First Instance in Egypt in respect of a pollution incident in 1989 when a vessel called the “Safir” grounded off the coast of Egypt causing its cargo of phosphate to spill into the sea. The owners and the managers of a vessel, the Safir were among the defendants.
The defendants were found jointly liable to the Egyptian Environmental Affairs Agency for a sum equivalent to about USD 51,650,000. In addition the unsuccessful defendants, were ordered to pay two forms of “court dues.” This entailed paying a sum of up to 7.5% (in the Safir’s case it was 5%) of the judgment debt for transmission to the Egyptian National Treasury (“proportional court dues”) and a further one half of the proportional court dues to the “Health and Social Services fund of the members of the Judicial Authorities” (“the Judges’ Fund”). Sums paid into the Judges’ Fund are used to pay for the health and welfare of judges and other “present and former members of the judicial corps”, state lawyers, and their families. No part of the judgment debt nor the court dues has ever been paid.
On 24 December 2008 the Port Suez Court ordered an executory arrest of Melinda’s vessel, the “Silva”. The arrest was said to be justified by reference to the 1996 judgment debt owed by the owners and the managers of the Safir in respect of the proportional court and Judges’ Fund dues.
The arrest automatically led to sale proceedings in the Port Said Court. In January 2009 the claimant challenged the arrest by issuing “nullification proceedings” which would have had the effect of suspending the sale proceedings.
The Egyptian Court of Execution dismissed the nullification proceedings on 26 April 2009, thus upholding the Silva’s arrest.
In June 2009 the claimant appealed. However after a number of adjournments, the appeal had still not been heard when judgment was given in the English proceedings. Therefore the Silva remained detained at Port Suez, with her master not permitted to leave the vessel.
Melinda made a claim under the policy it had with the Hellenic War Risks Association (Bermuda). The parties agreed that the vessel was a constructive total loss in accordance with the terms of the policy and Hellenic accepted that prima facie there was an insured cause of loss pursuant to Rule 2A.2.2 of the Policy which covered "capture, seizure, arrest, restraint or detainment, and the consequences thereof."
However Hellenic argued that the loss suffered by Melinda as a result of the acts of the Egyptian court was excluded from the Policy cover. In support of this Hellenic sought to rely on an exclusion clause providing that Melinda was not covered for “claims arising out of ordinary judicial process.”
It also relied on an exclusion clause providing that should Melinda fail to carry out its obligation to “take and to continue to take all such steps as may be reasonable for the purpose of averting or minimising any loss, damage, liability, cost or expense in respect whereof he may be insured by [Hellenic]” then Hellenic was entitled to reject or reduce any sum payable to Melinda under the Insurance (i.e. the sue and labour provision).
But in London, the Commercial court held that neither of these exclusions applied. Mr Justice Burton, who presided, made the following findings of fact (among others):
- There was no connection between the Safir and the Silva or their respective owners that would have justified the arrest.
- The Egyptian Ministry of Justice was eager to collect court dues, and the Presidents of the First Instance Courts were under pressure to pursue court dues aggressively.
- There was an improper financial arrangement between the Ministry of Justice and/or the Port Suez Court and an individual, a ship chandler acting as a “commission agent”, who would, in return for reward, assist the Ministry of Justice and the Claims Department of the Port Suez Court to collect court dues owing to the court. This individual had (a) a notorious reputation for fabricating invoices against ships for services and provisions and then seeking to obtain an arrest on the basis of such non-existent debts and (b) a number of criminal convictions prior to 2008 at the Suez Court for falsifying accounts and misappropriation. This was plainly known to the Ministry of Justice and the Suez Court.
- This “commission agent” had produced certain forged documents to support the arrest of the Silva. The case for arresting the Silva could only (if at all) be supported by these forgeries.
In these circumstances Burton J held that what had occurred to the Silva was “not an ordinary judicial process, but was an exercise of extortion from owners of an innocent and unconnected sea-going vessel of sums owed in respect of another entirely unconnected vessel… so that the court's purpose of recovering the monies could be achieved” (at para 43).
Furthermore Burton J held that there was no breach of the sue and labour clause given that there was nothing that the claimant could have done over and above, or in the alternative to, what it did do which would have made any difference. There was an exercise of continuing extortion, followed by unwillingness to let go and undo what had been done.
It is clear from the judgment that Burton J was reluctant to find that a foreign court had acted in a manner which cannot be described as “ordinary judicial process.”
Indeed Burton J was careful to point out that he “should not, in the interests of comity, lightly reach unfavourable conclusions as to the judicial decisions of another country (Agbaje v Agbaje [2010] 1 AC 628 at 671 per Lord Collins of Mapesbury)” (at para 41). Furthermore he suggested that a test which he had found helpful was to ask whether any reasonable Court could have acted as the Port Suez Court did (at para 44). He found that it could not have.
It should be noted that this approach is similarly cautious to the approach taken by the English courts in other areas of the law when it is asked to evaluate the propriety of a foreign court’s decision. For example, when an English court is asked to decide whether to recognise and/or enforce a foreign judgment, one of the reasons for refusing to do so is because the proceedings in which the judgment was obtained were opposed to natural justice. The threshold for finding that proceedings were opposed to natural justice is rather high. It is not enough that a foreign court for example admitted evidence that would have been inadmissible in English proceedings or followed a practice different from English law. Instead it is necessary to point to something more fundamental that offends English concepts of substantial justice.
Therefore it appears that, in the insurance context, as long as a foreign court has complied with its own procedures and formalities the English courts are very unlikely to reach an unfavourable conclusion about the foreign court’s decision and an insurer will be able to rely on a provision excluding claims arising out of ordinary judicial process (or other similar provisions).
However the decision does provide an important reminder of the fact that English courts are willing to apply some level of “quality control” when looking at the decision of a foreign court even if they are only willing to do so in very extreme circumstances.