News

Wed, 20 Apr 2011

Perils of the Sea

It was wrong to assume that the inability of cargo to withstand the ordinary perils of the sea would automatically amount to “inherent vice” for the purpose of s.55(2) of the 1906 Marine Insurance Act.

The respondents in Global Process Systems Inc v Takaful Malaysia Bhd [2011] UKSC 5 obtained a marine insurance policy with the appellant in relation a jack up rig called “The Cendor MOPU”, which, the respondents sought to transport on a towed barge from Galveston in the U.S.A to Lumut in Malaysia.

The policy covered all risks of loss and excluded “loss, damage or expense caused by inherent vice or nature of the subject matter insured”.

The Cendor MOPU was loaded on to the barge with its four legs each weighing 404 tons extending no less than around 300 feet in to the air. During the voyage, on 04 November 2004, the starboard leg of the rig broke off and fell in to the sea. Within hours the forward leg and later the port side leg also broke off.

When the rig was examined, surveyors found that there had occurred a considerable degree of fatigue cracking. It was accepted that the loss arose from metal fatigue and this was a three stage process. Initial cracking, propagation of the cracking and complete fracture.

The initial cracking would occur at a stress raising features which would propagate until they reached a point described as a “leg breaking” stress which would then completely fracture the leg.

Seemingly following the case of Mayban General Assurance BHD v Alstom Power Plants Ltd [2004] EWHC 1038, at first instance, the Judge concluded that the proximate cause of the loss was the fact that the legs were not capable of withstanding the weather reasonably expected during the voyage and therefore the cause of the loss was inherent vice within the meaning of the exception. Although the sea conditions during the voyage were reasonably contemplated, on account of the expert evidence and the analysis above, the Court of Appeal reversed the decision concluding that the proximate cause of the loss was an insured peril namely a “leg breaking wave” which resulted in the loss.

Unsurprisingly, this decision was appealed to the Supreme Court.

Whilst the decision on whether a loss was covered by a marine insurance policy depended upon its proximate cause, the Supreme Court affirmed previous case law that the proximate cause was not the cause that was closest in time but that which was proximate in efficiency and as LJ Bingham put it in Leyland Insurance v Norwich Union Fire Insurance Society Ltd [1918] “unchallenged and unchallengeable authority shows that this is a question to be answered applying common sense of a business or seafaring man”.

This left the Supreme Court to determine the meaning of inherent vice.

The appellant submitted that Lord Diplocks’s reference (Soya v White [1983] 1Lloyd’s Rep 122), to “the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage” was wide enough to cover any case where the goods were unfit to withstand any weather conditions which may foreseeably be encountered on the voyage. This was in line with Mayban.

However, the Supreme Court did not agree. Lord Saville concluded that what Lord Diplock was saying was that “where goods deteriorated, not because they had been subject to some external fortuitous accident or casualty, but because of their natural behaviour in the ordinary course of the voyage, then such deterioration amounted to inherent vice”.

Moreover, overruling Mayban, the Supreme Court held that if the inability of the cargo to withstand ordinary perils amounted to inherent vice then the effect of this would be to frustrate the very purpose of all risks insurance.

On the facts of the case, the court held that the proximate cause of the loss was not the inherent vice but an external fortuitous accident or casualty of the sea.

This Judgment is a welcome decision for the assured. Clearly any external factor, whether this is considered to occur in the ordinary course of a voyage or time, will suffice to negate the inherent vice exception subject to causation. In all likelihood, this decision will turn the spotlight on concurrent causes.