February, 2024 - The Polar: Supreme Court decision provides guidance on charterparty war risk provisions

In Herculito Maritime Ltd and others v Gunvor International BV and others (The Polar) [2024] UKSC 2, the Supreme Court found in favour of the owner by concluding that there was not an implied ‘insurance fund’ in the charterparty and, as a result, the owner was not precluded from seeking to recover its losses in general average from the voyage charterer. Of particular interest, given the present situation in the Red Sea area, is the court’s consideration of whether the owner could refuse to transit the Gulf of Aden relying on the War Risk clause in circumstances where it had expressly agreed to the voyage in the charterparty.  

Facts

The ship MT Polar was chartered by fixture recap dated 20th September, 2010 on the basis of a voyage from the area of Talllin/St Petersburg to Singapore. The charter contained an agreement that the voyage would be via the Suez Canal and that “..Suez costs to be for Owners’ account”. The fixture recap incorporated BPVOY4, including a “Gulf of Aden” clause and a “War Risks” clause, which gave the owner the right to cancel or vary the performance of the charterparty if the ship would be exposed to war risks. 

At the time of conclusion of the charterparty, for insurance purposes, the Gulf of Aden was known to be a designated “high risk area” due to the risk of piratical attack and seizure for ransom. Prior to the ship entering the Gulf of Aden, the owner took out kidnap and ransom insurance for the voyage up to the limit of US$ 5 million. Pursuant to the clauses found in the fixture recap, the additional insurance premia incurred for transit through the Gulf of Aden were to be paid by the charterer.

On 30th October, 2010, while transiting the Gulf of Aden, the ship was seized by Somali pirates. The ship was held captive until 26th August, 2011 when the ransom demand of US$ 7.7 million was paid.

The owner declared general average prior to discharge of cargo. The general average adjustment concluded that US$ 4,829,393.22 was due to the owner from the respective cargo interests.  The cargo interests denied any liability in general average, arguing that the charterparty contained an insurance fund by which the parties had agreed that the losses which arose were to be covered by the additional insurance cover.  The owner subsequently commenced proceedings.

The appeal

Four principal issues arose for consideration by the Supreme Court on appeal by the cargo interests:

1. Whether on the proper interpretation of the voyage charter, and in particular the War Risks clause and the Gulf of Aden clause, and/or by implication, the owner was precluded from claiming against the charterer in respect of losses arising out of risks for which additional insurance had been obtained on the basis that the charterparty contained an ‘insurance code’ or ‘insurance fund’;
2. Whether all material parts of those clauses were incorporated into the bills of lading;
3. Whether on the proper interpretation of those clauses the bills of lading, and/or by implication, the owner was similarly precluded from claiming for such losses against the bill of lading holders; and
4. If necessary, whether the wording of those clauses should be manipulated so as to substitute the words “the Charterers” with “the holders of the bill of lading” in the parts of those clauses allocating responsibility for payment of the additional premia.

Dismissing the appeal, the Supreme Court held that the owner succeeded on issues (1), (3) and (4), finding as follo

1. On the proper interpretation of the voyage charter, and specifically the relevant War Risks and the Gulf of Aden clauses, the owner was not precluded from claiming against the charterer in respect of their losses as no insurance fund was established;
2. All material parts of the clauses were incorporated into bills of lading;
3. On the proper interpretation, the clauses did not prevent from claiming for such losses; and  
4. The wording should not be manipulated such as to substitute the words “the Charterers” with “the holders of the bill of lading”.

Commentary and conclusions

i) Existence of an ‘insurance code’ or ‘insurance fund’

A large portion of the judgment explores issue 1 and the existence of an ‘insurance code’ or ‘insurance fund’ in charterparties. This case is the first to consider whether such a fund exists in a voyage charterparty and whether, through incorporation, the same exists in the bills of lading . Notably, such an insurance code was previously found to exist under a demise charterparty in The Ocean Victory [2017] UKSC 35 and under a time charterparty in The Evia (No 2) [1983] 1 AC 736 [HL]. It is clear from the judgment that the courts are reluctant to find that the applicable principles are present to constitute the existence of insurance funds or codes. The Supreme Court stressed that arbitration tribunals should be “cautious” before concluding The Evia (No 2) should be followed and that an implied insurance fund is “akin to a necessarily implied term and involves a similarly high threshold”. Thus, suggesting that the threshold for concluding a ‘code’ or ‘fund’ exists is extremely narrow and most charterparties will be materially different and must be distinguished.

If the intention of parties is to establish co-insurance or joint insurance regimes in respect of war risks under charterparty terms, the Supreme Court considered that this must be formulated using clear and unambiguous language. This is to dismiss doubt as to the intention to create such a regime. Charterparties which include clauses requiring a charterer to contribute to, or fully cover the cost of, additional war risk cover will not dismiss the charterer from general average contributions. Nor will it dismiss the respective cargo interests from their contributions. While this case was a matter of piracy, it is likely that the same conclusion will apply to the current risks of transiting the Red Sea area.

ii) Whether the owner could rely on the War Risks clause and refuse orders

In considering the issue of whether there was an implied insurance fund, the Supreme Court also considered whether the owner would have been entitled to refuse to transit the Gulf of Aden under the War Risks clause despite the charter specifically providing for the voyage to proceed via the Suez Canal. The court considered that the War Risks clause had to be construed in its contractual context and against the background of the circumstances existing at the date of the charter. The circumstances included the well-known risk of piratical attack in the Gulf of Aden and the agreement that the voyage would be “via Suez”, which would necessarily require the ship to transit the Gulf of Aden.

Endorsing the decisions in The Product Star [1993] 1 Lloyd’s Rep 397 and The Paiwan Wisdom [2012] EWHC 1888 (Comm), the Supreme Court considered that the owner had agreed to pass through the Gulf of Aden in the circumstances and it would be inconsistent with that express agreement to construe the War Risks clause in such a way as to permit the owner to refuse to transit the area on account of such piracy risks. In other words, the owner has agreed to accept the risk. The court did consider that if different war risks had materialized or there was a qualitative change in the nature of the piracy risk then it may be that the War Risks clause could be relied upon.

The decision reinforces that contractual construction continues to play a crucial role in the allocation of liabilities in charters and reliance should not be placed on implied interpretation.  Particularly in the context of war risks, parties should pay close attention to the charterparty wording used in order to avoid undesirable outcomes.  

With the dynamic and readily evolving conflict in the Red Sea area, this case provides useful guidance on how the courts interpret war risk provisions and highlights the increased importance of using clear and unambiguous language by those currently negotiating charter terms.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.

Author: Weronika Tworek