UK: Supreme Court Rules On Inherent Vice - Loss Of Jack-Up Rig Under Tow

Global Process Systems Inc v. Syarikat Takaful Malaysia Berhad [2011]¹
Supreme Court, 1 February 2011

As Lord Birkenhead LC noted in the famous case of British & Foreign Marine Insurance v. Gaunt [1921]², a policy on "all risks" terms cannot be held simply to cover all damage howsoever caused "for such damage as is inevitable from ordinary wear and tear ... is not within the policies". The principle is simply this: insurance covers risks, that is to say something that might or might not happen, and not certainties.

The point was developed further in Soya GmbH v. White [1983]³, concerning a claim for heat damage to a consignment of soya beans on a voyage from Indonesia to Antwerp. The court in that case drew a distinction between cargo shipped with greater than 15% moisture content, which on the expert evidence it said was bound to suffer heat damage during the intended voyage, and cargo shipped with between 13% and 15% moisture content, which it said "might or might not" result in such damage. In the former case, damage would be regarded as inevitable and thus irrecoverable in principle; in the latter case the damage was fortuitous but resulted from an inherent vice, that is to say the moisture present in the cargo at the time of shipment. In that particular case the claim succeeded because the policy expressly included such loss, by way of an extension covering "heat, sweat and spontaneous combustion".

Commercial Court

The issue has recently come up for consideration again in the long running case of Global Process Systems Inc v. Syarikat Takaful Malaysia Berhad. The claim concerned the loss of a jack-up rig being towed on a barge from Galveston to Malaysia. The jack-up rig design allows a working platform to be floated into position and jacked up on cylindrical legs, to suit the sea depth at the point of operation. Steel pins are engaged into the legs through pinholes spaced at six foot intervals and, to reduce stress at the corners of the pinholes, circular holes are incorporated at each corner roughly an inch and a half in diameter. For the present tow, the rig was carried on a barge with its legs in place and elevated in the air above the deck.

The tow was interrupted mid way through the voyage, near Cape Town, where some cracking was found in the way of certain of the pinhole corners. Repairs were carried out and the voyage resumed, but soon after three of the legs broke off and fell into the sea.

The rig was insured as cargo under Institute Cargo Clauses (A), containing the standard exclusion in respect of loss or damage caused by "inherent vice or the nature of the subject matter insured".

At the initial trial, Insurers argued that the loss was inevitable and as such there was a lack of the necessary fortuity. Alternatively, they relied upon the inherent vice exclusion. They argued that the legs were not capable of withstanding the normal incidents of the tow, as demonstrated by the fact that they failed in weather conditions that could reasonably have been expected on this voyage. For their part, the assured contended that the question of inevitability had to be judged subjectively; thus, they argued, a claim for inevitable loss would be recoverable unless it could be shown that the assured knew the loss to be inevitable when taking out the insurance. As to inherent vice, the assured contended that the true proximate cause was the failure to carry out adequate repairs in Cape Town.

In the Commercial Court, the trial judge determined that the failure of the legs, though very probable, could not be said to be objectively "inevitable." Citing the British & Foreign case, the judge noted that the onus of proving fortuity "represents a low hurdle for the assured", which in this case the assured had cleared. As such, the insurers' defence of lack of fortuity failed.

However, the trial judge went on to hold that a loss could still be caused by inherent vice though not be inevitable. On this point, the Commercial Court took account of the approach in Mayban General Insurance v. Alstom Power Plants [2004]⁴, in which the trial judge put it this way:

Adopting the above approach, the trial judge in Syarikat noted that the legs of the rig had broken off despite the fact that the weather experienced was within the range that could reasonably be contemplated. That was enough to lead to the conclusion that the cargo was incapable of withstanding the ordinary incidents of the voyage, and as such the proximate cause of loss was inherent vice.

Court of Appeal

The matter proceeded to the Court of Appeal, which reversed the decision of the Commercial Court, in a Judgment handed down on 17 December 2009. Having reviewed the authorities and academic texts in some detail, the Court of Appeal came to the conclusion that the test for claims on a cargo policy should in principle be no different to that for hull policies. While not formally overruling Mayban, the Court of appeal said that, if the action of the sea is the immediate cause of the loss, which clearly was true here, a claim may still lie under the policy even though the conditions were within the range of "what could reasonably be anticipated". If, on the other hand, the cargo had been damaged by the motion of the vessel in weather that could be described as "perfect" or "favourable", then the obvious inference in most cases would be that any damage was indeed the result of inherent vice or the nature of the cargo. The Mayban case, said the Court of Appeal, was not creating a strict rule of evidence one way or the other, so much as a matter of inference.

In the present case, the wave conditions may well have been foreseeable but the Court of Appeal considered that they were not so benign at to create, on their own, an inference of inherent vice. On the evidence, metal fatigue was not the sole cause of the loss of the legs. Rather it was a "leg breaking wave" that had caused the starboard leg to break off, something that was "not bound to occur in the way it did on any normal voyage round the Cape". The loss of the starboard leg led to the others being at greater risk and so they, in turn, also broke off. Though with hindsight this may have been a "highly probable" chain of events, that was not enough to render the proximate cause something other than the perils of the sea, a risk for which the assured was covered under the policy.

Supreme Court

The matter then proceeded to the Supreme Court, which handed down judgment on 1 February 2011. The Supreme Court affirmed the decision of the Court of Appeal, but went further in formally overruling the Mayban decision. In so far as Mayban found that inability of a cargo to withstand the ordinary perils of the seas amounted to inherent vice, that case was wrongly decided, said the Supreme Court. Its effect would be to reduce much of the purpose of cargo insurance, for the cover would then only extend to loss or damage caused by perils of the sea that were exceptional, unforeseen or unforeseeable, and not otherwise. This was inconsistent with the purpose of an all risks cargo policy, namely to provide an indemnity in respect of loss or damage caused by, among other things, all perils of the seas.

The court was therefore left to determine what was, in fact, the proximate cause, unconcerned by whether the sea state could be said to be exceptional or not. Applying the Soya v. White test, the Supreme Court concluded that this could not be inherent vice, since inherent vice called for damage to the cargo as a result of its "natural behaviour" and "without the intervention of any fortuitous external accident or casualty". In this case there had indeed been an external fortuity involved, namely the rolling and pitching of the barge in the sea conditions encountered during the voyage. This had caught the first leg at just the right moment to produce stresses sufficient to cause it to break off, thereby leading to increased stresses on the remaining legs and their subsequent breakage. This process could not be anything other than an insured peril of the sea.

Result: Judgment for the assured.

Footnotes

1 [2011] UKSC 5

2 [1921] 2 AC 41

3 [1983] 1 Lloyd's Rep 122

4 [2004] 2 Lloyd's Rep 609

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