Herculito Maritime Limited & others v Gunvor International BV & others (The "Polar") - Court of Appeal [2021] EWCA Civ 1828

The Court of Appeal has held that in the absence of clear words to the contrary, the holders of bills of lading will not be excluded from their liability to contribute to general average, where the peril suffered is already insured by the shipowner.

The facts

Whilst transiting the Gulf of Aden in October 2010, the M/V Polar (“the ship”), laden with 69,493.28 metric tons of fuel oil was seized by Somali pirates. 

The underlying charterparty was on BPVOY 4 terms with several additional clauses including a Gulf of Aden clause and a war risk clause. These clauses provided that any additional premia for war risks and kidnap and ransom (K&R) insurances would be for Charterers’ costs. The shipowner (“Owners”) purchased additional war risks and K&R cover. Some ten months after the seizure of the ship, Owners paid a ransom of USD 7.7million to secure the release of the ship, and was refunded this sum by the war risks and K&R underwriters.

Owners declared general average (“GA”) and demanded GA security from cargo owners in the sum of USD 4.8million.

Cargo owners provided the security but subsequently argued that they were not liable to contribute to GA because the bills of lading incorporated the charterparty terms, and the charterparty terms conferred upon them the benefit of the war risks and K&R insurances. Cargo owners referred Owners’ claim to London arbitration.

The arbitration tribunal

The two questions below were put to the arbitration tribunal for determination:

1. Were the terms of the voyage charterparty agreement, in particular the war risks and Gulf of Aden clauses, incorporated into the bills of lading?
2. If so, did Owners, on the true construction of the bills of lading and/or by implication, agree to look solely to their insurance cover under the war risks and/or K&R insurances in the event of a loss covered by that insurance cover?

The arbitrators found in favour of cargo owners by answering yes to both questions.

Owners appealed to the Commercial Court.

The Commercial Court

Whilst formulated as two questions of law, to paraphrase, Owners asked the Court to decide whether a bill of lading that widely incorporates a charterparty is capable of excluding liability on the part of its holder from contributing to cargo’s portion of GA in circumstances where the peril that has caused the loss is otherwise insured against by Owners.

The Commercial Court ruled in Owner’s favour – reversing the decision of the arbitration tribunal.

In doing so, the Court held that, whilst the bills of lading were wide enough to incorporate the charterparty’s war risks clauses, it was not the parties’ intention to actually incorporate them. This was supported by the fact that there was no regime, nor expectation, that the bill of lading holders would be called upon to contribute to the war risks / additional war risks premium that was paid. In addition, the Court considered the contrasting positions as between Owners and Charterers to that as between Owners and cargo owners. As between Owners and Charterers, the parties had agreed to seek indemnification from each other’s insurers as opposed to each other through GA. There was no similar insurance ‘fund’ relationship between Owners and cargo owners.  

Cargo owners referred the matter to the Court of Appeal.

The Court of Appeal 

Cargo owners submitted that it did not matter that they were not required to pay a premium for war risks / additional war risks. It  sufficed that the charterparty provided that the peril fell outside the scope of GA as an insured event – and that the bills of lading conferred that benefit directly on them by express incorporation of the charterparty agreement. They contended that a contrary construction would lead to an uncommercial outcome where they would be subject to all of the burdens of a charterparty, but not the benefit of its insurance regime.

Cargo owners additionally argued that, if necessary, the terms of the bills of lading should be so manipulated as to impart on them an obligation to pay war risks / additional war risk premium.

The Court of Appeal held:

1. Reading the terms of the bill of lading as a whole, and applying business common sense, it is a question of construction whether a term of a charterparty agreement is incorporated into a bill of lading. In this instance, the widely drafted incorporation of the charterparty agreement was not sufficient to draw in the war risks clauses – with the effect that Owners would be deprived of its claim for GA contributions from cargo owners.
2. It would not be appropriate to manipulate the terms of the bills of lading to render cargo owners liable to pay for additional war risks / war risks premium – which, at the same time, would amount to a general waiver of Owners’ right to seek a GA contribution.

Obiter, the Court of Appeal pointed out that cargo owners were insured against the risk of piracy – by its own cargo underwriter. If cargo owners’ construction above were to have been applied, Owners (here its insurers in subrogation) would have had to bear the full burden of the loss without contribution in GA.

Conclusion

This is a welcome ruling for ship owners. The Court of Appeal has clarified that clear words will be needed in a bill of lading if cargo interests are to be excluded from their liability to contribute to GA. More broadly, the Court reaffirmed that it is necessary to read, and to interpret, a bill of lading as a whole to determine whether a particular term of a charterparty has been incorporated into the bill of lading.