Article: Unrecoverable General Average contributions from cargo interests

Introduction

P&I insurers normally provide cover in respect of general average (GA) contributions which are not recoverable from cargo or other interests and resulting from the shipowner’s breach of the contract of carriage. The Standard Club provides such cover under Rule 3.14[1].

In the recent case of The Cape Bonny [2], the English Commercial Court ruled that neither the Chinese cargo interests nor their subrogated underwriters were liable for cargo’s proportion of GA (valued at approximately $2.1m) because the owner of the vessel had failed to exercise due diligence to make the vessel seaworthy at the commencement of the voyage.  This article analyses the decision of the court in The Cape Bonny   and offers some insights from an adjuster’s standpoint on its relevance to the club’s shipowner members.

Legal background

Rule D of the York-Antwerp Rules provides that:
 
‘…Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the common maritime adventure, but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault…’.

The purpose of Rule D in the York Antwerp Rules is to keep all questions of fault outside of the GA adjustment, i.e. the question of an actionable fault of the shipowners in failing to exercise due diligence to make the vessel seaworthy at the beginning of the voyage.

However, regardless of any question of fault, it is necessary for an average adjuster to produce a GA adjustment and leave the parties concerned to make their own arguments and defences independently.

Even where it is obvious from the early stage of the casualty that cargo interests will have a defence against paying GA contributions, a GA adjustment is still required to establish the proportions of GA attaching to individual interests in order that the shipowners may recover the respective part from his hull underwriters and negotiate settlements with the cargo interests.

It follows therefore that where the cargo interests can show that the casualty which gave rise to the GA act resulted from the shipowner’s actionable fault (e.g. failure to exercise due diligence to make the ship seaworthy before and at the commencement of the voyage as required by the contract of carriage- see Articles III r.1 [3] and IV r.1 [4] of the Hague-Visby Rules), the shipowner’s claim for contribution in GA may meet with resistance.   Incidentally, the burden of proving the exercise of due diligence to make the ship seaworthy lies on the owner as carrier (Article IV r.1 of the Hague-Visby Rules).

 

The facts

In July 2011, on a laden voyage from Argentina to China, the Cape Bonny suffered a catastrophic main engine breakdown near Japan, while seeking to avoid the tropical storm Ma-On. She was towed to Yosu in South Korea where the cargo was transferred to another vessel.

The shipowner declared GA. The Chinese cargo insurer put up a GA guarantee on behalf of cargo interests.  Subsequently, the GA adjustment assessed cargo’s contribution to GA at approximately $2.1m. However, the cargo insurer denied liability under the guarantee, alleging that the main engine breakdown was caused by the failure of the shipowner to exercise due diligence to make the vessel seaworthy at the commencement of the voyage.

Dispute

The shipowner accepted that the vessel was unseaworthy at the commencement of the voyage as metal particles were found in the lubricating oil system, but it argued that it had exercised due diligence to make the vessel seaworthy before and at the commencement of the voyage. The shipowner claimed that the main engine damage was due to weld slag [5] left in the lubricating oil pipes since the vessel had been built.

However, the cargo insurer argued that the shipowner did not exercise due diligence for the following reasons:

• Particles were generated by spark erosion (caused by electrical currents) or by damage to the vessel’s chain drive gear.
• Alternatively, the particles entered the engine due to inadequate compliance of the vessel’s procedures by the crew members when  cleaning the filters.
• The crew’s failure to maintain in good condition the earthing device of the vessel’s shaft (the shaft is earthed with a propeller shaft slip ring, which should have prevented spark erosion), their failure to remove the particles from the lubricating oil and to clean the filters properly all amounted to a failure to exercise due diligence.

Judgment

Seaworthiness

The court held that the vessel was unseaworthy at the commencement of the voyage due to:

• the main engine bearing suffering from the presence of wear (in view of the crankweb deflection readings[6]) 
• the presence of foreign particles
• the presence of damaged lubricating oil filters.

Exercising due diligence

On the question of exercising due diligence, the Court held that:

‘a skilled and prudent chief engineer would have ensured that a proper visual check was made of at least a representative sample of candles [7] in May 2011’.

As the shipowner’s engineers and superintendents did not carry out such an inspection, the court concluded that the shipowners had not exercised due diligence to make the vessel seaworthy.  In particular, the damaged lubricating oil filters (candles) should have been detected before the commencement of the voyage in June 2011.

Additionally, in respect of the crankweb deflections, the court held that:

 ‘…a prudent engineer or superintendent would have decided, in the light of the May 2011 deflection readings, that bearing clearance measurements should be taken. The failure to do so was a failure to exercise due diligence to make the vessel seaworthy...’

Causation

While the court determined both that the vessel was unseaworthy, and that the shipowners had failed to exercise due diligence, in respect of the damaged lubricating oil filters, the court did not find that the engine breakdown was caused by these damaged filters. 

However, in respect of the crankweb deflections, the court held that, had the necessary bearing clearance measurements been taken, an increase in clearance of significantly more than 0.05mm would have been revealed thus necessitating a repair before the voyage could safely be undertaken.

Accordingly, the court proceeded to hold that this second element of the crew’s conduct which illustrated a lack of due diligence to make the vessel seaworthy, was causative of the engine breakdown.

Conclusion

The court’s conclusion on liability was therefore that the GA incident was caused by an actionable fault of the contract of carriage to make the vessel seaworthy at the commencement of the voyage. It follows that the cargo interests were not liable to contribute to GA and the claim against the cargo insurers was dismissed. 

 

Additional comments

1. This decision emphasizes the importance of good vessel maintenance which should be carried out in accordance with any planned maintenance system and adequately recorded.

2. Noting the exclusions to club Rule 3.14 [8], shipowners should ensure that their contracts of carriage include the relevant provisions of the Hague-Visby Rules. 

3. From a P&I perspective, in addition to the provisions under club rule 3.14, in practice P&I clubs tend to insist on adequate GA security being obtained, even in circumstances where the prospects of the shipowners recovering GA contributions from cargo interests is remote. With GA security in place, the prospects of negotiating an amicable settlement with cargo interests is improved.

Adequate security would consist of an average bond signed by the cargo receivers and an average guarantee signed by the cargo insurers. A professional average adjuster can assist the shipowner to collect the required GA security from the cargo interests. 

4. Where it is anticipated that the cargo interests have a defence against payment of GA contributions, it is advisable for the shipowner to seek advice from the P&I club early on and collate all relevant maintenance records which might be requested by the cargo interests at a later stage. In this respect, to protect their position, shipowners should discuss with the P&I club before disclosing any documents to opposing parties.

 

Author:

Matthew Cao
Assistant Director, Richards Hogg Lindley
+65 6506 2883
matthew.cao@ctplc.com

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[1] Rule 3.14 P&I Rules of the Standard Club 2018/19

'…The proportion of general average, special charges or salvage which the member is or would be entitled to claim from cargo or from another party which is not recoverable solely by reason of a breach of the contract of carriage.

Exclusions to rule 3.14

(1) If the contribution is irrecoverable by reason of a deviation, rule 3.13 exclusion (2) applies to any claim under rule 3.14.

(2) The board may reject or reduce a claim if the contract of carriage under which the cargo was being carried did not include Article IV Rule (2)(a) of the Hague Rules, as amended by the Hague-Visby Rules, or an equally wide exemption from liability...'

[2] Tankschiffahrts Gmbh & Co Kg v Ping An Property and Casualty Insurance Company
MT “CAPE BONNY” [2017] EWHC 3036 (Comm)

[3] The Hague Rules, Article III

'1. The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to:

(a) Make the ship seaworthy;

(b) Properly man, equip and supply the ship;

(c) Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage and preservation.'

[4] The Hague Rules, Article IV

'1. Neither the carrier nor the ship shall be liable for loss or damage arising or resulting from unseaworthiness unless caused by want of due diligence on the part of the carrier to make the ship seaworthy, and to secure that the ship is properly manned, equipped and supplied, and to make the holds, refrigerating and cool chambers and all other parts of the ship in which goods are carried fit and safe for their reception, carriage and preservation in accordance with the provisions of paragraph 1 of Article III. Whenever loss or damage has resulted from unseaworthiness the burden of proving the exercise of due diligence shall be on the carrier or other person claiming exemption under this article.'

[5] 'Weld slag is a form of slag, or vitreous material produced as a byproduct of some arc welding processes… Slag is formed when flux, the solid shielding material used in the welding process, melts in or on top of the weld zone.' (Source: en.wikipedia.org/wiki/Slag_(welding)

[6] Part of crankshaft maintenance by measuring the crankshaft deflections at regular intervals to ensure that the alignment of the shaft remains within permissible limits.

[7] Candles in the cylinders of the lubricating oil filters

[8] Exclusions to rule 3.14 (1):

‘…If the contribution is irrecoverable by reason of a deviation, rule 3.13 exclusion (2) applies to any claim under rule 3.14. (2) The board may reject or reduce a claim if the contract of carriage under which the cargo was being carried did not include Article IV Rule (2)(a) of the Hague Rules, as amended by the Hague-Visby Rules, or an equally wide exemption from liability…’

 Article IV,r.2(a) Hague Rules

‘…Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from… (a) act, neglect, or default of the master, mariner, pilot or the servants of the carrier in the navigation or in the management of the ship…’