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Appellants
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Respondents
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Michael Ashcroft QC
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Steven Berry QC
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Luke Pearce
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Neil Hart
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(Instructed by Thomas
Cooper LLP)
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(Instructed by Hill
Dickinson LLP)
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LORD SUMPTION: (with whom
Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agree)
1.
On 23 August 2012 the m v “RENOS” was seriously damaged by an engine
room fire while on a laden voyage in the Red Sea. On the same day, the owners
appointed salvors under Lloyd’s Open Form 2011 (No Cure - No Pay). The vessel
was towed by the salvors to Adabiya, where her cargo was discharged, and then
to Suez, where the salvage services came to an end. A tug was hired to stand by
the vessel throughout the time when she was at Suez and to tow her to a place
where she could be scrapped or repaired. These proceedings were brought in
support of a claim against the hull underwriters for a constructive total loss.
Notice of abandonment was served on the insurers on 1 February 2013, while the
vessel was at Suez.
2.
The “RENOS” was insured at an agreed value of US$12m under a hull and
machinery policy subscribed by the appellants (among others) and incorporating
the Institute Time Clauses Hulls (1/10/83). The lead hull and machinery insurer
was the first appellant, the Swedish Club. In addition, the Swedish Club alone
subscribed an Increased Value Policy against the same risks covering certain
charges so far as they exceeded those recoverable under the hull and machinery
policy, up to a maximum of US$3m. At the trial of the action before Knowles J,
it was common ground that there had been a loss by an insured peril. The sole
issue was the measure of indemnity. The insurers acknowledged liability for a
partial loss but declined the notice of abandonment and denied that the vessel
was a constructive total loss.
3.
Knowles J held that there was a constructive total loss. The Court of
Appeal agreed with both his conclusions and his reasons. The courts below addressed
a number of issues, only two of which are before this court. Section 60(2)(ii)
of the Marine Insurance Act 1906 provides that in the case of damage to a ship,
there is a constructive total loss where “she
is so damaged by a peril insured against that the cost of repairing the damage
would exceed the value of the ship when repaired”. As a matter of practice, the
“cost of repair” has always been treated as including salvage charges, and that
is put beyond question by clause 19.2 of the Institute Time Clauses Hulls
(1/10/83), which requires account to be taken of the “cost of recovery and/or
repair”. Both of the issues before this court relate to the expenditure
to be taken into account in computing that cost. The first issue is whether it
includes expenditure already incurred before the service of notice of
abandonment. The insurers say that none of this expenditure is to be taken into
account. If they are right about that, the whole of the salvors’ remuneration
will be excluded, together with the greater part of the cost of the standby tug
and some other miscellaneous costs incurred at Suez. On that footing, the judge
found that the “cost of repairing the damage” would be between US$9,079,533.05
and US$11,248,311.20, as against an insured value of US$12m. It is common
ground that on these figures the insurers are liable for a partial loss only.
The second issue is whether the relevant costs include charges payable to the
salvors under the SCOPIC (Special Compensation, Protection and Indemnity)
clause of Lloyd’s Open Form. The SCOPIC clause is a clause supplementary to the
Form which entitles the salvors to additional remuneration for measures taken
while performing the salvage services in order to prevent or minimise damage to
the environment. The SCOPIC charges, like the rest of the salvors’
remuneration, were all incurred before the service of notice of abandonment,
and will be disregarded if the insurers are right on the first issue. The judge
found that if SCOPIC charges are excluded from the computation but other costs
incurred before notice of abandonment are included, the “cost of repairing the
vessel” ranged from US$11,820,260.05 to US$13,989,038.20 as against an insured
value of US$12m. In that case, she may or may not have been a constructive
total loss, depending on where in that range the true figure lay. Both issues
were decided in the shipowner’s favour in the courts below.
Costs incurred before notice of abandonment
4.
The relevant rules are codified by sections 60-63 of the Marine
Insurance Act. They are in the following terms:
“60. Constructive total
loss defined
(1) Subject
to any express provision in the policy, there is a constructive total loss
where the subject-matter insured is reasonably abandoned on account of its
actual total loss appearing to be unavoidable, or because it could not be
preserved from actual total loss without an expenditure which would exceed its
value when the expenditure had been incurred.
(2) In
particular, there is a constructive total loss -
(i) Where
the assured is deprived of the possession of his ship or goods by a peril
insured against, and (a) it is unlikely that he can recover the ship or goods,
as the case may be, or (b) the cost of recovering the ship or goods, as the
case may be, would exceed their value when recovered; or
(ii) In
the case of damage to a ship, where she is so damaged by a peril insured
against that the cost of repairing the damage would exceed the value of the
ship when repaired.
In
estimating the cost of repairs, no deduction is to be made in respect of
general average contributions to those repairs payable by other interests, but
account is to be taken of the expense of future salvage operations and of any
future general average contributions to which the ship would be liable if
repaired;
…
61. Effect of constructive total loss
Where
there is a constructive total loss the assured may either treat the loss as a
partial loss or abandon the subject-matter insured to the insurer and treat the
loss as if it were an actual total loss.
62. Notice of abandonment
(1) Subject to the
provisions of this section, where the assured elects to abandon the
subject-matter insured to the insurer, he must give notice of abandonment. If
he fails to do so the loss can only be treated as a partial loss.
(2) Notice of abandonment
may be given in writing, or by word of mouth, or partly in writing and partly
by word of mouth, and may be given in any terms which indicate the intention of
the assured to abandon his insured interest in the subject-matter insured
unconditionally to the insurer.
(3) Notice of abandonment
must be given with reasonable diligence after the receipt of reliable
information of the loss, but where the information is of a doubtful character
the assured is entitled to a reasonable time to make inquiry.
(4) Where notice of
abandonment is properly given, the rights of the assured are not prejudiced by
the fact that the insurer refuses to accept the abandonment.
(5) The acceptance of an
abandonment may be either express or implied from the conduct of the insurer.
The mere silence of the insurer after notice is not an acceptance.
(6) Where notice of
abandonment is accepted the abandonment is irrevocable. The acceptance of the
notice conclusively admits liability for the loss and the sufficiency of the
notice.
(7) Notice of abandonment
is unnecessary where, at the time when the assured receives information of the
loss, there would be no possibility of benefit to the insurer if notice were
given to him.
(8) Notice of abandonment
may be waived by the insurer.
(9) Where an insurer has
re-insured his risk, no notice of abandonment need be given by him.
63. Effect of abandonment
(1) Where
there is a valid abandonment the insurer is entitled to take over the interest
of the assured in whatever may remain of the subject-matter insured, and all
proprietary rights incidental thereto.
(2) Upon
the abandonment of a ship, the insurer thereof is entitled to any freight in
course of being earned, and which is earned by her subsequent to the casualty
causing the loss, less the expenses of earning it incurred after the casualty;
and, where the ship is carrying the owner’s goods, the insurer is entitled to a
reasonable remuneration for the carriage of them subsequent to the casualty
causing the loss.”
5.
These provisions substantially restate the previous common law. Their
effect is that unless notice of abandonment is waived by the insurer or the
circumstances are such that there would be “no possibility of benefit to the
insurer if notice were given to him”, it is a condition precedent to the
assured’s right to claim for a constructive total loss, that he should have
given a valid notice of abandonment: see section 62(1). This is a true
election, although it has some features which differentiate it from other cases
in which the law requires a person to elect between inconsistent rights or
remedies. In particular, it becomes irrevocable only if and when the insurer
accepts the abandonment, in which case he is taken to admit both the validity
of the notice and his own liability to pay on a total loss: section 62(6). He
then becomes entitled to take over the assured’s interest in the subject-matter
insured and all incidental proprietary rights: section 63. In practice,
insurers hardly ever do accept an abandonment except as part of an overall
settlement of the claim. But section 62(4) provides that the insurer’s refusal
to accept the abandonment does not prejudice the assured’s rights.
6.
The owners’ case on pre-notice expenditure is straightforward. They say
that the damage to which section 60(2)(ii) of the Act refers is the entire
damage flowing from the casualty, and that the cost of recovery and repair is
the entire cost, whenever incurred. The insurers dispute this. Their case is more
elaborate. They say that the question whether there has been a constructive
total loss falls to be decided as at the time when notice of abandonment is
given, and by reference to the facts then existing, because the parties’ rights
are, so to speak, crystallised at that point. This question is, as Mr Ashcroft
QC put it, “time-sensitive”, in that a ship may be a constructive total loss at
one point of time and not at another, as events occur which alter the prospective
cost of reinstatement. The assured has to elect between claiming a total loss
or a partial loss on the basis of the options open to him at that time. Those
options cannot be said to include the incurring of costs which he has already
incurred. They are sunk costs, and his real choice is between incurring further
costs in future and abandoning the ship to the insurer. Therefore, only the
further costs can count. The financial and practical implications of this
disagreement are considerable. It is often impossible to know with any
confidence what it would cost to restore the vessel to serviceable condition
after a casualty, until the damage has been professionally assessed. This is
commonly possible only after salvors have brought her to a place of safety. The
insurers’ argument, if it is correct, will in many cases have the effect of excluding
salvage remuneration from the computation of repair costs for the purpose of
ascertaining whether there has been a constructive total loss.
7.
Although the present question must have arisen in a high proportion of
cases where a constructive total loss is alleged, there is very little
assistance to be obtained either from the language of the Act or from
authority.
8.
Dealing first with the language of the Act, I reject the submission that
the references in section 60 to expenditure which “would” be incurred point
only to future expenditure to be incurred after abandonment. Notice of
abandonment is not mentioned in section 60, and if the section refers to future
expenditure there is nothing to show from what point it must be “future”. More
generally, it is clear that the word “would” reflects the hypothetical
character of the whole exercise and not the chronology of the expenditure. I
also reject the submission that the reference in the additional paragraph of
section 60(2)(ii) to “future” salvage operations and general average
contributions, points to expenditure following abandonment. Again, there is no
indication of the point of time from which these costs must be “future”, except
that it is implicitly from the time as at which the estimate is made, whenever
that is. I am inclined to think, but do not need to decide, that the additional
paragraph is concerned only with the treatment of general average
contributions. Its effect is that in computing the owner’s cost of repairs (i)
no account is to be taken of general average contributions receivable by him
from other interests such as cargo or freight, whereas (ii) account is to be
taken of future general average contributions payable by him to other
interests. On that footing “future salvage operations” are being treated as
included in the future general average contributions, and would be estimated
looking forward from the general average sacrifice. There is much to be said
for the view of the current editors of Arnould’s Law of Marine Insurance and
Average, 19th ed (2018), para 29.34 that the result was to overrule the
decision of the House of Lords in Kemp v Halliday (1866) LR 1 QB 520
that the owner’s cost of repairs had to be computed net of any liability of
other interests to contribute in general average to salvage charges. But
whether that be so or not, it seems to me to be clear that the reference to
future liabilities was not intended as an implicit exclusion of past
expenditure even for the purpose of general average, let alone more generally
for the purpose of determining whether the ship is a constructive total loss.
It has been said that the maxim expressio unius, exclusio alterius is “often
perilous”: National Grid Co plc v Mayes [2001] 1 WLR 864, para 55 (Lord
Hoffmann). I do not think that it will bear the weight which the appellants
seek to place on it in this case.
9.
Turning to authority, there appears to have been no case in which the
present question was considered before the passing of the Marine Insurance Act
1906, although we were referred to a number of earlier cases in which salvage
charges incurred before notice of abandonment were allowed without discussion.
They include Bradlie v Maryland Insurance Co (1838) 37 US 378, a
decision of the United States Supreme Court in which the opinion of the court
carried the considerable authority of Justice Story; and the English decisions
in Holdsworth v Wise (1828) 7 B & C 794 and Rosetto v Gurney
(1851) 20 LJCP 257. We were also pressed with the observations of Mr Carver QC
at an international conference at Buffalo in 1899 in connection with an
abortive project to draft common rules for marine insurance, in which he proposed
that what happened before the giving of notice of abandonment should be
ignored, adding that he was “not sure that that has always been done”: Report
of the 18th Conference of the International Law Association held at Buffalo,
USA (1900), 120. Since the passing of the Act, there have been two English
decisions lending some support to the insurers’ case. In Hall v Hayman
(1912) 17 Comm Cas 81, 90, Bray J accepted a concession that pre-notice
expenditure was irrelevant. Half a century later, in Helmville Ltd v
Yorkshire Insurance Co Ltd (The “MEDINA PRINCESS”) [1965] 1 Lloyd’s Rep
361, 429, Roskill J accepted without discussion a submission in relation to one
of a large number of disputed items of expenditure that it was “inadmissible
for the purposes of the constructive total loss claim because the work was done
before the date of notice of abandonment.” The lack of reasoning and apparent
lack of argument make it difficult to attach much weight to either decision,
and they are certainly not beyond controversy. Every edition of Arnould’s
Law of Marine Insurance and Average from the 15th ed (1961) onward has
taken the contrary view. The editors of the 12th ed of Lowndes &
Rudolph, The Law of General Average and the York-Antwerp Rules (1997),
considered that the concession accepted by Bray J was correct in law, but the
(different) editors of the 14th ed (2013) appear to resile from that view. In
my opinion, the issue is better approached as a matter of principle than by
trying to squeeze more juice from these rather dry lemons. The answer depends
on some basic principles of insurance law and on an analysis of how those
principles are affected by the requirement for a notice of abandonment.
10.
The first point to be made is that as a general rule, the loss under a
hull and machinery policy occurs at the time of the casualty and not when the
measure of indemnity is ascertained. A claim on an insurance policy is a claim
for unliquidated damages. The obligation of the insurer is to hold the assured
harmless against an insured loss, from which it follows that where the
insurance is against physical damage to property the insurer is in breach of
that obligation as soon as the damage occurs: Chandris v Argo Insurance Co
Ltd [1963] 2 Lloyd’s Rep 65, 73-74; Firma C-Trade SA v Newcastle
Protection and Indemnity Association (“The FANTI”) [1991] 2 AC 1, para 35
(Lord Goff of Chieveley). As Megaw J pointed out in the former case, at p 74,
the result is that “it is not a condition precedent - it is not a fact which
must exist and be pleaded - that the plaintiff has quantified the amount of his
claim; or even that all the facts exist at the date of the writ which will
enable the proper amount of the claim to be determined.” These are “matters of
evidence, not prerequisites of a cause of action.” The rule that the loss is
suffered at the time of the casualty applies notwithstanding that the loss
developed thereafter, unless it developed as a result of something that can be
regarded as a second casualty, breaking the chain of causation between the
first one and the loss. For that reason, it has been held that the fact that
the policy expires before the loss has fully developed will not affect the
assured’s right to recover under it in full: Knight v Faith (1850) 15 QB
649, 667 (Lord Campbell CJ); Wasa International Insurance Co Ltd v Lexington
Insurance Co [2010] 1 AC 180, para 39 (Lord Mance). For the same reason, as
the editors of Arnould, 19th ed (2018) point out at para 29.07, if a
casualty occurs within the policy period, and the loss develops after its
expiry into one which is constructively total, there is still a constructive
total loss under the policy.
11.
Constructive total loss is a legal device for determining the measure of
indemnity. An insured loss is either total or partial, and any loss other than
a total loss is a partial loss: see section 56(1) of the Act. A constructive
total loss is not a sui generis kind of loss, conceptually distinct from these.
It is a partial loss which is financially equivalent to a total loss, and may
be treated as either at the election of the assured. The ordinary measure of
indemnity under an insurance against damage to property is the depreciation in
the value of the property attributable to the operation of the insured peril.
Section 69 of the Marine Insurance Act provides that the measure of loss is the
reasonable cost of repairs so far as these have been carried out and the
reasonable depreciation arising from the unrepaired damage so far as they have
not: see section 69. The reasonable cost of repairs which have been carried out
is treated as the measure of the depreciation of the ship’s value. Therefore,
if the reasonable cost of repairs exceeds the insured value, as the statutory
definition of a constructive total loss envisages, the value of the ship is
nil, and in financial though not physical terms the loss is total.
12.
Although section 60(1) of the Act refers to an actual total loss
“appearing to be unavoidable”, it is not in doubt that the question whether
there has been a constructive total loss depends on the objective facts. So far
as they are future or unknown facts, a reasonable assessment of the
probabilities must be made. But the test does not depend on the opinion or
predictions of the owner, however reasonable. The rule was laid down by Lord
Ellenborough in Bainbridge v Neilson (1808) 10 East 329, 341:
“The effect of an offer to abandon
is truly this, that if the offer appear to have been properly made upon certain
supposed facts, which turn out to be true, the assured has put himself in a
condition to insist upon his abandonment: but it is not enough that it was
properly made, upon facts which were supposed to exist at the time, if it turn
out that no such facts existed, or that other circumstances had occurred which
did not justify such abandonment.”
13.
It follows from the objective character of the exercise and the fact
that the loss is suffered at the time of the casualty notwithstanding its
development thereafter, that the damage referred to in section 60(2)(ii) of the
Act is in principle the entire damage arising from the casualty from the moment
that it happens. The measure of that damage is its effect on the depreciation
of the vessel, represented by the entire cost of recovering and repairing it.
It cannot make any difference when that cost was incurred. This being the
ordinary principle to be applied, the next question is whether it is affected
by the legal requirement for a notice of abandonment.
14.
It would be surprising if it were. In the first place, a notice of
abandonment is not always required, even in the case of a constructive total
loss. Section 62 envisages two cases where it is not required: where it is
waived by the insurer, and where there is no possibility of benefit to the
insurer. Both exceptions reflect the fact that the requirement for notice of
abandonment exists wholly for the benefit of the insurer. Its purpose is to
enable him to exercise the rights which arise in his favour upon an effective
abandonment. Thus where a total loss is constructive as opposed to actual, the
insurer is entitled to take over what remains of the hull and to receive the
freight in cases where it has been earned notwithstanding the casualty: section
63. Secondly, under section 61 of the Act, there must be a constructive total
loss before any question can arise of an election to treat it as a partial or a
total loss. For this reason, the House of Lords held in Robertson v Petros M
Nomikos Ltd [1939] AC 371, that service of a notice of abandonment was a condition
precedent not to the existence of a constructive total loss but only of the
right to claim against the hull insurers on that basis. It followed that where
recovery under the terms of an insurance on freight depended on the ship having
become an actual or constructive total loss, the assured was entitled to
recover notwithstanding that the shipowner had elected to treat the loss as
partial and had not tendered notice of abandonment. Lord Wright, with whom Lord
Atkin, Lord Thankerton and Lord Russell of Killowen agreed, went on to point
out, at p 387, that the constructive total loss dated back to the time of the
casualty. The freight insurers being liable upon the vessel becoming a
constructive total loss:
“That liability accrues at once
when the casualty happens, even if the exact position is not ascertained till
later. If the assured has rightly given notice of abandonment of the ship, the
loss dates back retrospectively to the date of the casualty.”
15.
The mainstay of the insurers’ case is the proposition that the assured
may not recover on the basis of a constructive total loss unless the loss is
still total at the time of notice of abandonment. The proposition itself is not
in doubt. It was established by a series of cases dating back to the decision
of Lord Mansfield CJ in Hamilton v Mendes (1761) 2 Bur 1198. It is,
however, important to appreciate the basis on which these cases were decided.
They do not depart from the orthodoxy that a loss, including a constructive
total loss, occurs at the time of the casualty and includes any development of
the damage thereafter. Nor do they hold that a constructive total loss may
cease to be regarded as one by reference to the facts existing at some later
stage. They are concerned with the question what happens if the loss is, as it
is put in the older cases, “adeemed” because something happens after the
casualty to reverse it. The ratio of these cases is that even if the vessel is
a constructive total loss, the character of the policy as a contract of
indemnity requires the assured to be limited to his actual loss at the time
when notice of abandonment is given. Exactly the same reasoning underlies the
corresponding rule that he is limited to his actual loss at the time when the
action is brought.
16.
In Hamilton v Mendes itself, the “SELBY” was captured by a French
privateer in the Atlantic during the Seven Years War, and then recaptured from
her French prize crew a few weeks later by a British man-of-war. News of the
capture and recapture reached the assured simultaneously. He purported to give
notice of abandonment. Lord Mansfield, sitting at Guildhall, held that the ship
was never a constructive total loss, because it was never sufficiently clear
that the loss arising from the original capture would be permanent. But on the
footing that it was a constructive total loss, he held that the assured could
recover only for a partial loss, arising from the prize due to the recaptors.
His reason appears at p 1210 of the report:
“The plaintiff’s demand is for an
indemnity. His action, then, must be founded upon the nature of his
damnification, as it really is at the time the action is brought. It is
repugnant, upon a contract of indemnity, to recover as for a total loss, when
the final event has decided that the damnification, in truth, is an average, or
perhaps no loss at all. Whatever undoes the damnification, in whole or in part,
must operate upon the indemnity in the same degree. It is a contradiction in
terms, to bring an action for indemnity, when, upon the whole event, no damage
has been sustained.”
Lord Mansfield (p 1214) left open the question what would
have happened if news of the recapture had arrived after the notice of
abandonment. That question was, however, resolved nearly half a century later
in Bainbridge v Neilson (1808) 10 East 329, another case of capture and
recapture, this time during the Napoleonic wars. In this case news of the
recapture arrived between the tender of notice of abandonment and the
commencement of the action. I have already referred to it as authority for the
objective character of the factual enquiry involved. Lord Ellenborough held (p
344) that the recapture adeemed the loss so that:
“that which was supposed to be a
total loss at the time of the notice of abandonment first given had ceased, and
as only a small loss has been incurred in the salvage; that is the real amount
of the damnification which the plaintiff is entitled to receive under this
contract of indemnity.”
The leading modern case, which holds that the position
was not altered by the Marine Insurance Act 1906, is the decision of the Court
of Appeal in Polurrian Steamship Co Ltd v Young [1915] 1 KB 922.
17.
In Roura & Forgas v Townend [1919] 1 KB 189, the plaintiffs
were the voyage charterers of the “IGOTZ MENDI”. They insured their anticipated
profit on the voyage against the actual or constructive total loss of the
vessel. The vessel was captured by a German cruiser in the Indian Ocean, as a
result of which the profit was lost. But before action was brought against the
insurer, the ship was stranded and abandoned on the coast of Denmark while in
the charge of her German prize crew, and recovered by salvors employed by the
shipowner. Roche J held that the plaintiffs were entitled to succeed. This was
because the rule was that
“restoration precludes recovery,
not because in such a case there never was a constructive total loss, but
because an assured cannot, under a contract of indemnity, although he may at one
time have suffered a loss, recover in respect of such loss if before action it
has already been made good to him.” (p 195)
The recovery of the ship by her owners did not therefore
mean that the vessel was no longer to be regarded as having suffered a constructive
total loss. At p 196, he observed:
“I have already held that there
was a constructive total loss of the Igotz Mendi by her capture, and
before the ship was restored to the owners such capture resulted in a total
loss to the plaintiffs of their rights and profit under the charter. In short,
the event agreed upon as necessary to give a right to indemnity had happened,
and had irrevocably caused the loss of the subject-matter of the insurance. In
these circumstances, as the restoration of the vessel itself to its owners did
nothing to extinguish or minimise the plaintiffs’ loss, so also it cannot, in
my judgment, operate to extinguish or to bar the plaintiffs’ claim.”
This decision was subsequently approved by the House of
Lords in Robertson v Petros M Nomikos Ltd [1939] AC 371, 382-383 (Lord
Wright), 395 (Lord Porter).
18.
If the principle in these cases is that although a constructive total
loss has occurred, the assured is limited to his actual loss so far as reduced
by subsequent events, it must follow that no expenditure of the owner himself
by way of salvage or repair can be regarded as reducing the “cost of repairing
the damage”. It does not reduce his loss. On the contrary, it is part of the
measure of loss against which he is entitled to be indemnified, if not as part
of the sum insured then as sue and labour charges. This was what the House of
Lords decided in the Scottish appeal of Sailing Ship “BLAIRMORE” Co Ltd v
Macredie [1898] AC 593. The “BLAIRMORE” was sunk by a storm while moored in
San Franscisco Bay and abandoned to the insurers by her owner. The assured
pleaded that the cost of raising and repairing the ship was such as to make her
a constructive total loss at the time of the notice of abandonment. After the
notice of abandonment the insurers raised her at their own expense and when
sued for a total loss contended that by the time action was brought the loss
was only partial: she would no longer have cost more to raise and repair than
she was worth, because she had already been raised at their expense. This is
substantially what the insurers are saying in the present case, when they argue
that the position must be determined by reference to the situation of the
vessel at the moment of abandonment, without regard to what has already been spent
on reinstating her. The case came to the House on an issue as to relevancy.
Lord Halsbury appears to have thought that there had been an actual total loss.
But the other members of the Appellate Committee proceeded on the footing that
there had been a constructive total loss. They held that the loss could not be
reduced to a partial loss by the mere expenditure of money by the insurer.
This, as Lord Watson explained at p 607, was because the insurers could not
“avoid their liability as for a
total constructive loss by their intervening gratuitously and taking upon
themselves part of the expenses which primâ facie fall upon the assured, and
would otherwise have been taken into account in estimating whether there has
been such a total loss.”
In other words, if the assured had incurred the
expenditure, it would not have reduced the amount of his loss, and it made no
difference that instead of the assured incurring the expenditure and recovering
it from the insurer, the insurer incurred it directly.
19.
In the present case, the “cost of repairing the damage” for the purpose
of determining whether the vessel was a constructive total loss included all
the reasonable costs of salving and safeguarding the “RENOS” from the time of
the casualty onwards, together with the prospective cost of repairing her. The
cost of repairing the damage was in no way “adeemed” because part of it had
already been incurred at the time when notice of abandonment was given and
action brought on the policy. These costs are therefore to be taken into
account for the purposes of section 60(2)(ii) of the Act. On this point, I
would affirm the decision of the courts below.
SCOPIC costs
20.
As with the earlier issue concerning pre-abandonment expenditure, the
financial implications of this question are significant. The SCOPIC charges incurred
by the “RENOS” were found by the judge to amount to about half of the total
salvage remuneration, and if included in the calculation it might make the
difference between recovery on a partial or total loss basis. In other cases,
especially where a casualty involves an oil or chemical tanker, SCOPIC charges
may be many times the remuneration attributable to the “classic” salvage
services directed at saving the property.
21.
Salvage remuneration is payable under maritime law, independently of
contract, but in practice has for many years been payable under Lloyd’s Open
Form (No Cure - No Pay) in its successive iterations, which provides for its
assessment by arbitration in London. Historically, remuneration was payable
only for services supplied for the salvage of property, ie the ship and her
cargo. Salvors were not rewarded for any additional services supplied for any
other purpose, such as preventing or minimising environmental damage. Indeed they
exposed themselves in some cases to liability for such damage. After the
grounding of the “AMOCO CADIZ” on the French Atlantic coast in 1978, special
provision was made in the 1980 ed of Lloyd’s Open Form for an enhanced rate of
remuneration to those supplying salvage services to laden oil tankers. But the
general law was not modified until the International Convention on Salvage
1989, which has the force of law in the United Kingdom by virtue of section
224(1) of the Merchant Shipping Act 1995. Article 8(1)(b) of the Convention provided
that in performing salvage services as traditionally understood, a salvor had a
duty to “exercise due care to prevent or minimise damage to the environment”.
Article 13(1) provides for the assessment of the salvors’ remuneration, and
stipulates that it should reflect, inter alia, “the skill and efforts of the
salvors in preventing or minimising damage to the environment”. Article 14(1)
entitles the salvors to “special compensation” from the shipowner equivalent to
the expenses incurred in performing the duty under article 8(1)(b). The
Convention regime was not initially as successful in its object as had been
hoped, mainly because article 14(1) did not provide for a profit element in
respect of salvage services provided to safeguard the environment. In 1999,
therefore, the SCOPIC clause was added to Lloyd’s Open Form, which provided for
compensation to be based on commercial rates for the service supplied. In its
current form, it is an addendum to the 2011 edition of the form, which is in
almost universal use for the provision of salvage services.
22.
The 2011 Form provides by clause A for the provision of the classic
salvage services, ie services to “salve the property”, being the vessel, her
cargo, freight, bunkers and stores together with any property thereon (with
specified exceptions), and to take the property to an agreed place or in the
absence of agreement on the place, to a place of safety. It provides separately
by clause B that “while performing the salvage services the Contractors shall
also use their best endeavours to prevent or minimise damage to the
environment”, and by clause C that unless otherwise agreed the SCOPIC clause is
to be treated as incorporated. The critical parts of the SCOPIC clause for
present purposes are clauses 5 and 6. Clause 5 provides for the assessment of
the salvors’ remuneration for the totality of the services provided, including
those required for the protection of the environment, in accordance with an
elaborate tariff set out in Appendix A. Clause 6 provides that the salvors’
basic remuneration shall be assessed in accordance with article 13 of the
Convention, but that so far as the remuneration calculated in accordance with
clause 5 exceeds the amount payable under article 13, it will be payable in
addition by the shipowners alone. In other words, it will not be shared with
the other interests salved. This reflects the fact that SCOPIC remuneration is
intended to avoid environmental damage which would be a liability of the
shipowner, in respect of which he will be insured not under the hull and
machinery policy but by the owner’s Protection and Indemnity insurer.
Accordingly, clause 15 of SCOPIC, which deals with general average, provides:
“SCOPIC remuneration shall not be
a General Average expense to the extent that it exceeds the article 13 Award;
any liability to pay such SCOPIC remuneration shall be that of the Shipowner
alone and no claim whether direct, indirect, by way of indemnity or recourse or
otherwise relating to SCOPIC remuneration in excess of the article 13 Award
shall be made in General Average or under the vessel’s Hull and Machinery
Policy by the owners of the vessel.”
The “RENOS” was entered for these among other risks with
the American Club, which ultimately paid the SCOPIC charges in this case.
23.
The insurers’ case is that the test for determining whether some item of
expenditure is part of the “cost of repairing the damage” depends on the
characterisation of the expenditure. They say that SCOPIC charges fall to be
disregarded because they are not part of the “cost of repairing the damage” for
the purpose of section 60(2)(ii) even on the footing (which is common ground)
that that includes the cost of recovering the vessel. The assured, by
comparison, say that the SCOPIC charges are part of the “cost of repairing the
damage” because they were an integral part of the salvors’ remuneration. They
had to be paid if the ship was to be salved, and she had to be salved if she
was to be repaired. The assured accept that the shipowners could in theory have
contracted with the salvors on terms which excluded the SCOPIC clause. But they
say that the test is whether a prudent uninsured owner would have contracted on
terms that the salvors’ remuneration included SCOPIC costs. There is no basis
in the judge’s findings for concluding that the prudent uninsured owner would
have contracted with the salvors on terms any different from those that these
owners agreed. This submission was accepted by Knowles J and the Court of
Appeal.
24.
I can travel a certain distance down the path favoured by the assured,
but not as far as their destination. Although, on the face of it, the words
“the cost of repairing the damage” describe a kind of expenditure, it is well
established that they include some costs which are not directly expended on the
actual reinstatement of the ship but are preliminary to that reinstatement.
Salvage charges are the classic example. They are included in the cost of
repairs because the vessel must be salved in order to be repaired. For the same
reason, temporary repairs near the site of the casualty and towage to a repair
yard are generally allowed if they are reasonable preliminaries to the repairs
themselves. As Roskill J put it in The “MEDINA PRINCESS” [1965] 1
Lloyd’s Rep 361, 520, temporary repairs and towage to a repair yard may be part
of “what would have to be expended to put the ship right.” This accords with
the concept of a constructive total loss. The cost of repairs is the measure of
the extent of the damage. The reason why section 60(2)(ii) requires a
comparison between the cost of the repairs and the value of the ship when
repaired, is to determine whether the ship is financially worth repairing.
Expenses for a purpose which is an essential preliminary to repairing her
necessarily enter into that comparison. Even if the actual repairs would cost
less than the repaired value of the ship, if she cannot be got off the rocks or
towed to a place where she can be repaired save at a cost which when added to
the cost of the actual repairs will exceed her value, then she is not
financially worth saving. For the same reason, the mere fact that the insurer
would not, under the policy terms, be liable to indemnify the assured for some
item of expenditure on a partial loss basis does not necessarily mean that it cannot
be included in the comparison for the purpose of deciding whether there is a
constructive total loss. It is still potentially relevant to the question
whether the vessel is financially worth saving.
25.
The common feature of all the cases where the cost of steps preliminary
to repairs have been included in the comparison is that their objective purpose
was to enable the ship to be repaired. That will generally be true of salvage
charges. The same goes for the cost of temporary repairs, towage, and other steps
which are plainly preliminaries to carrying out permanent repairs. The
objective purpose of SCOPIC charges was different. It was not to enable the
ship to be repaired, but to protect an entirely distinct interest of the
shipowner, namely his potential liability for environmental pollution. That
purpose has nothing to do with the subject-matter insured, namely the hull. It
was no part of the measure of the damage to the ship, and had nothing to do
with the possibility of repairing her. The point may be tested by asking what
the position would have been if the shipowner, instead of making a single
agreement with salvors to salve the ship and prevent or minimise environmental
damage, had contracted with one enterprise to salve the ship and another to put
floating booms around her with a view to preventing or minimising environmental
damage. Mr Berry QC was inclined to accept that in that case the cost of the
booms would not have entered into the comparison required by section 60(2)(ii).
I think that his instinct was right. The money paid to the boom contractor
would in no sense have been preliminary to the repairs. By comparison, the cost
of temporary repairs or towage to the repair yard would have been preliminary
to the repairs whether these tasks were undertaken by the salvors or by some
other contractor. What this suggests is that the only reason why the SCOPIC
charges are said to be part of the cost of repair is that the charges for
environmental protection were owed to the same contractor as the charges for
salving the property so that she could be repaired. Yet that is an entirely
adventitious factor. Whether the same contractor or different contractors were
used has nothing to do with the objective purpose of the expenditure or with
the comparison required by section 60(2)(ii).
26.
I am prepared to assume that a prudent uninsured owner would have done
what these owners did and contracted with the salvors for both the salving of
the ship and protecting the environment. But I do not think that that makes any
difference. The prudent uninsured owner test was first laid down by Lord
Abinger CB in Roux v Salvador (1836) 3 Bing NC 266, 286 and endorsed by
the House of Lords, adopting the advice of the judges of the Exchequer Chamber
in Irving v Manning (1847) 1 HL Cas 287. It is a test for determining
whether the subject-matter insured is a constructive total loss in
circumstances where the relevant facts are hypothetical or cannot be known. As
applied to a damaged ship, the test is whether the prudent uninsured owner
would have repaired her and if so how. Before the passing of the Marine
Insurance Act 1906, there was a controversy about how far the prudent uninsured
owner was assumed to take account of matters other than the cost of repair and
the repaired value of the ship, such as the value of the wreck if sold to
breakers. In Angel v Merchants’ Marine Insurance Co [1903] 1 KB 811, the
Court of Appeal held that only the comparison between the repaired value of the
ship and the cost of repair (including steps preliminary to repair) was
relevant. In Macbeth & Co Ltd v Maritime Insurance Co Ltd [1908] AC 144, a case decided after the Act but by reference to the law as it stood
before, the House of Lords overruled Angel, holding that the question
fell to be decided by reference to whatever other considerations would have
been taken into account by a prudent uninsured owner. These might include the
financial benefits and detriments of not repairing, which in that case included
the benefit of being able to sell the wreck. If that view had prevailed, it
would have been relevant to ask whether the prudent uninsured owner would have been
induced to repair notwithstanding that the cost of salvage and repair would
exceed her repaired value, because of the potential liability for environmental
pollution associated with abandoning her. But section 60(2)(ii) resolves that
question in favour of the view taken in Angel, which was the leading
authority at the time that the Act was drafted. The effect of that provision is
that the prudent uninsured owner is assumed to be interested only in the
comparison between the cost of repair and the repaired value, and his
hypothetical choices are relevant only to the quantum of the repair costs. The
statutory solution has sometimes been criticised as illogical, but the world of
marine insurance has accommodated it and moved on. The classic division of
risks between hull insurers and P&I insurers assigns environmental
liabilities and associated sue and labour charges to P&I insurers, a state
of affairs which is reflected in clause 15 of the SCOPIC clause. The old
controversy about the value of the wreck has for many years been resolved by
what is now clause 19.1 of the Institute Time Clauses Hulls (1/10/83), which
excludes it from the constructive total loss comparison.
27.
The result is that it is necessary to identify the purpose of the
expenditure which it is proposed to take into account, and to apply the prudent
uninsured owner test only to expenditure for the purpose of repairing the ship
in the larger sense which I indicated above. The fact that a prudent uninsured
owner might have contracted with the same contractors for both the protection
of the property and the prevention of environmental pollution does not show
that both are part of the cost of repairing the damage. Neither does the fact
that the charges under both heads are secured on the ship. The two heads of
expenditure have quite different purposes, only one of which is related to the
reinstatement of the vessel. If they were truly indivisible, this might not
matter. But the whole scheme of the SCOPIC clause depends on their being
separately identifiable, and the very fact that one is for the hull
underwriter’s account and the other for the P&I insurers shows that they
cannot be indivisible. In my opinion, SCOPIC charges are not part of the “cost
of repairing the damage” for the purpose of section 60(2)(ii) of the Act or the
“cost of recovery and/or repair” for the purpose of clause 19.2 of the
Institute Clauses, because their purpose is unconnected with the damage to the
hull or its hypothetical reinstatement. I would therefore allow the appeal on
that point.
Disposal
28.
I would make a declaration accordingly, set aside the order of Knowles J
and remit the matter to him to determine in the light of this court’s judgment
whether the “RENOS” was a constructive total loss and what financial
consequences follow from that.
