Ultimate Scope of Vice in Marine Casualties

Article by Ishfaq Ahmed. This article first appeared in Lloyd's List on 27 October 2010.

In December 2009 the Court of Appeal (“CA”) handed down its judgment in Global Process Systems v Syriakat Takaful (The Cendor Mopu) [2009] EWCA 1398. There are few commercial cases for which permission to appeal to the Supreme Court (“SC”) is granted. This is one of them. The argument was at the end of July and judgment is expected imminently.

Steven Gee QC and Peter Stevenson acted for the insurers in the Supreme Court.

The facts and the commercial court's decision

The "Cendor MOPU", an oil rig, was being carried on a barge round the Cape of Good Hope with its legs jacked up above the deck. Marine surveyors had approved the method of tow. Fatigue cracking, caused by the repeated bending of the legs under the motion of the barge as it was towed, caused first the starboard leg and then the other two legs to break and be lost.

The weather experienced was within the range that could reasonably have been contemplated for the voyage. The insured owners claimed on the All Risks policy incorporating the Institute Cargo Clauses A. The risks covered did not include "inherent vice" which in the absence of contrary provision is not covered by an All Risks policy. The policy here  specifically excluded loss caused by inherent vice.  

Mr Justice Blair found that the legs had insufficient fatigue life to have withstood the voyage. However as the insured's burden to show fortuity of loss was low, the judge found that loss was not inevitable and therefore rejected the insurer's argument on this. The risks of loss on shipment appear to have been in excess of 99.6% but there was still a risk and not a certainty. The assured argued that inadequate repairs off South Africa whilst the rig was en route were a cause of the loss but this was rejected by the judge because there had been no attempt to reset the fatigue life of the legs. Following Mayban General Insurance Bhd v Alstom Power Plants Ltd [2004] 2 Lloyd's Rep 609 the judge held that the ordinary incidents of the voyage included such weather encountered as was reasonably to be expected on the voyage. He found that given the inherent susceptibility of the steel legs to crack and fracture from metal fatigue the proximate cause of the loss was inherent vice as they were not capable of withstanding such normal incidents.

The Court of Appeal

The insured appealed to the Court of Appeal on whether the judge had applied the correct test in distinguishing between inherent vice and perils of the sea. Argument focused on the proper interpretation of the Soya v White [1983] 1 Lloyd's Rep 122 definition of "inherent vice" as "the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty".  

Lord Justice Waller gave the main judgment with the rest of the Court of Appeal agreeing. In doing so, he set out a lengthy criticism of Mayban by Professor Howard Bennett (see e.g. 2007 LMCLQ 315) that that decision required wholly exceptional weather to defeat a defence of inherent vice. Professor Bennett's argument was that much of the point of cargo insurance then disappears and confines loss to damage occasioned only by wholly unusual perils of the sea.

The Court of Appeal confirmed that an evidential rule stating that, absent exceptional weather being shown to have occurred, the loss must be attributed to inherent vice, would be incorrect. In this case a leg breaking wave, not "bound to occur" in the way it did on any normal voyage round the Cape of Good Hope, caused the starboard leg to break off. That led to the others being at greater risk and then breaking off. It was not certain that that would happen and although with the benefit of hindsight it was known that it was highly probable, that high probability was unknown to the insured and that was a risk insured against.

The Court of Appeal therefore considered that if weather that had caused the loss  was outside that weather which was "bound to occur", even though it was weather reasonably to be expected, then this gave rise to loss by "perils of the sea" (which is covered by the All Risks policy) and not loss caused by inherent vice (which was excluded). The judge had applied an incorrect test.

The Supreme Court

The insurers appealed to the Supreme Court. The insurers argued that the risk which was the sole proximate cause was inherent vice and there was no intervention of fortuitous external accident or casualty. The ordinary incidents of the voyage were not a new intervening external cause. They were a description of what the rig had to be fit to encounter.

Even if "the action of the sea" had been a necessary trigger this without more would not have sufficed to dictate the conclusion about causation.

In addition, there could be two concurrent causes and provided that inherent vice was a concurrent cause, the claim failed because of the exclusion in the policy. The insurers relied on the words of the policy which referred to "..caused by inherent vice...", and not "solely caused by"- it was sufficient for the exclusion to apply if inherent vice was one of two causes.

The insurers supported Mayban which they said applied the established legal meaning of "inherent vice" which was the same in a contract of marine insurance as in a contract of carriage. Regarding Professor Bennett's criticisms they argued the issue was not the severity of the weather conditions in which the loss occurred, but whether the inherent vice or perils of the sea or both had caused the loss of the legs. What result was found on causation depended on all the evidence before the court relevant to this issue. In any particular case weather conditions may well be relevant but it did not follow that they were the only relevant evidence or would be determinative of the causation issue.

In addition, the need for certainty in the insurance market required that the legal definition of inherent vice in the case law including Mayban be re-affirmed. They argued the "bound to occur test" used by the Court of Appeal was a new uncertain test, no-one could say what weather was "bound to occur", and it was inconsistent with authority and legal principle.

Even if this test was endorsed then the insurers argued that there should be a new trial because neither party had contended at first instance for this test and the judge had not made the relevant fact findings.

The insured on the other hand argued that the only "vice" relied upon by the insurer was an inability of the legs to withstand wind and wave that was within a reasonably contemplated range. They argued that it has never been the law that an inability to withstand the ordinary perils of the seas is inherent vice, describing Mayban as a "heresy".

They contended that to uphold the insurer would be equivalent to the introduction of a warranty of unseaworthiness on cargo, which was expressly excluded by the Marine Insurance Act. They also argued that the effect of the insurers' argument would be that an insured in such circumstances would have no cover against ordinary perils of the sea, and this would be against the parties' intentions, especially where the possibility of fatigue was the focus of everyone's attention. The result would also be inconsistent with authority in carriage and hull cases. They argued that inherent vice comes from within and in this case the external, fortuitous "leg breaking" weather caused the loss. Whenever there was weather involvement the loss could not be attributable to inherent vice.

Conclusions

At issue are both  the scope of the risk of inherent vice and whether the loss was caused by that risk. The ordinary businessman/seafarer is a hypothetical person whose personification is the court. One can question whether the proximate cause of the failure of the rig in question really was perils of the sea when the judge found that it had over 99% chance of failing on shipment and that this structural weakness and susceptibility to cracking and fracture was the cause of the loss.

After all there are waves off South Africa and the fact that one led to a leg breaking off may be no more than how the internal weakness of the steel and its susceptibility to metal fatigue was causative of the loss.

However, what is clear is that the need for certainty in the marine insurance market requires a robust judgment from the Supreme Court.

Ishfaq Ahmed specialises in shipping and commercial, including: arbitration; domestic and international carriage of goods; international trade; shipping (wet and dry); marine insurance; P&I Club issues; collision, salvage and towage disputes; fatal and non-fatal maritime accidents; maritime limitation of liability; conflict of laws, jurisdictional disputes and various aspects of international law (including treaties).