November 25, 2019

General Average Guarantees and Actionable Fault - The Meaning of “Properly Due”

In the "BSLE SUNRISE" [2019] EWHC 2860 (Comm) the English High Court has considered whether actionable fault of the shipowner is a defence to a claim made by the shipowner against a cargo insurer under a general average guarantee issued on the standard AAA / ILU approved wording. This wording obliges the insurers to pay general average contributions that are "properly due".

Facts

The dispute arose out of the grounding of a vessel at Valencia in September 2012. The vessel was carrying a cargo of pipes which had been shipped from Jebel Ali (destination Antwerp) pursuant to three bills of lading on the standard Congenbill form, which were subject to the Hague-Visby Rules and also provided for general average to be adjusted in accordance with the York Antwerp Rules 1974.

Following the grounding, the owners incurred expenditure in attempting to re-float the vessel and then carrying out temporary repairs before resuming the voyage. The vessel eventually arrived safely at Antwerp, where all of the cargo was discharged. The owners declared general average and the receivers of the cargo issued general average bonds and the cargo insurers issued general average guarantees.

Each of the standard wording GA guarantees was addressed to the owner and provided:

“In consideration of the delivery in due course of the goods specified below to the consignees thereof without collection of a deposit, we the undersigned insurers, hereby undertake to pay to the ship owners … on behalf of the various parties to the adventure as their interest may appear any contributions to General Average … which may hereafter be ascertained to be properly due in respect of the said goods. [emphasis added]

The average adjusters appointed by the Owners subsequently prepared a general average adjustment which calculated cargo’s proportion of general average being in the sum of US$1,073,395.

The cargo insurers were represented by Clyde & Co. Their case was that the grounding occurred because the Owners failed to exercise due diligence to ensure that the vessel was seaworthy before and/or at the commencement of the voyage in breach of Article III.1 of the Hague-Visby Rules. 

In those circumstances, the cargo insurers argued that an "actionable fault" defence was available under the GA guarantees under Rule D of the York Antwerp Rules.

The Owners argued that based on the wording of the Guarantee, the cargo insurers were obliged to pay cargo’s proportion of general average whether or not the general average peril was caused by Owners' actionable fault.

The Preliminary Issue

The Court ordered that there should be a trial of a preliminary issue to determine whether in principle it was open to the cargo insurers to resist a claim for payment under the Guarantees on the basis that the relevant peril was caused by the Owners’ actionable fault.

For the purpose of the preliminary issue, the Court was asked to assume that no general average contributions were payable by the receivers of the cargo because the grounding was caused by Owners’ failure to exercise due diligence to ensure that the vessel was seaworthy, in breach of the relevant contracts of carriage. On that assumption, the Court was asked to determine whether despite this, the GA contribution was payable by the cargo insurers pursuant to the guarantees.

The task for the Court was to consider the meaning of the words “properly due” in this context and whether, if the cargo interests have a defence to a claim for general average, no contribution to general average is “properly due” in respect of the cargo under the GA guarantee.

The Decision

In delivering his judgment, Pelling J first considered the fundamental principles that applied in relation to general average before then turning to the true construction of the GA guarantees and the relevant authorities.

The Judge felt that a "key point" is that, in general, GA guarantees are intended to operate in conjunction with or to go hand in hand with - but not in effective substitution for - the GA bonds. The Judge was very conscious that the case as put forward by Owners did not properly acknowledge the factual and commercial background surrounding the traditional use of GA security in conjunction with a GA bond.

Pelling J then went on to consider the particular language used by the parties. In doing so he rejected the submission by Owners that the language in the GA bonds - and in particular the provision that limits the liability of the relevant cargo interests to the proper proportion of any “… general average … which may hereafter be ascertained to be properly and legally due …” -  created a different and more restrictive obligation than that imposed by the GA guarantees.

In this context the Judge held (agreeing with the cargo insurers) that the meaning of the word “due” when applied to a monetary obligation was that it was legally owing or payable and that there was no good reason for distinguishing between a GA bond and a GA guarantee when considering this construction issue given the commercial and factual context. As the Judge put it:

"Finally and in my judgment decisively, the language of the GA guarantee provides that what is payable is the sum that is ascertained to be properly due in respect of the said goods. As I have said already, in my judgment “due” means owing or payable and GA does not become owing or payable unless and until the merits of a Rule D defence have been resolved by a court. The inclusion of the word “properly” serves to put the point beyond doubt."

Having reviewed the factual matrix and analysed the language used by the parties, in the final passage of his judgment Pelling J considered the relevant authorities.

Owners had sought to rely on the “Maersk Neuchatel” [2014] where the contractual obligation being construed was contained in a Letter of Undertaking issued by a charterer and was to pay what was due “…under an Adjustment…”. The issue was whether Maersk had contracted out of the right to challenge an adjustment and Hamblen J held that they had done so.

Pelling J noted that the language used in the Letter of Undertaking in the “Maersk Neuchatel” was different from that in the GA guarantees in this case which referred to the sum being “properly” due whereas that was not the case in the “Maersk Neuchatel”. The Judge concluded that the nature of the obligation being considered in the “Maersk Neuchatel” was entirely different given that it involved an unequivocal undertaking to pay the sum found due under an Adjustment. In the present case (unlike in the “Maersk Neuchatel”) the cargo insurers’ undertaking was to pay “ … on behalf of the various parties to the adventure as their interest may appear …” the GA “… which may hereafter be ascertained to be properly due in respect of the said goods”. On this basis the “Maersk Neuchatel” could be distinguished and the Owners’ claim under the guarantee was rejected.

Comment

Clearly this decision is a good result for cargo insurers and confirms the correct position that no sum should be payable under the guarantee if the general average peril and resulting general average expenditure was caused by Owners’ actionable fault.

As the Judge recognised, not merely does the language used lead to this conclusion, but also the settled practice in the market is such that only very clear wording should ever justify a departure from that practice of the sort contended for by Owners. The standard AAA ILU approved wordings used in this case did not satisfy that requirement.

Quite correctly the Judge held that if and to the extent the wording used was ambiguous then in any event the factual and commercial context and commercial sense required that it be construed in the manner contended for by the  cargo insurers. Overall the judgment is a comprehensive rejection of the arguments raised by Owners, but also demonstrates the need for cargo insurers to carefully scrutinise proposed GA guarantee wordings and if necessary, to consult their lawyers!