Apex Court - breach of warranty entails repudiation - Marine Cargo Insurance - Instt Classification

On 7^th Feb 2020 – two Hon’ble Judges of the Supreme Court delivered a judgment dismissing an appeal (Civil Appeal 971 of 2014), upholding earlier decision of NCDRC, decreeing in favour of Insurer, which should be of great interest of Marine Insurers and those in Sea logistics, import / export and marine cargo movement.

Collision is an accident at sea – ship having a structural impact with another ship or floating or still object. I had earlier posted something about road accidents as also sea accidents. The collision at sea can cause – loss of human life, environment impact like oil spills (when tankers are involved), loss of property (of hull as also the cargo more particularly containers carried), loss of revenue to parties concerned, damage to infrastructure and financial consequences to those living nearby.

The sea lanes are not  congested as roadways and ships do not speed mad like buses and lorries – there are no space jammers like auto rickshaws and law breaking 2 wheeler drivers. Still there are operational loads, denser sea routes, poor visibility even though guided by radar and more importantly human error – all contributing to collision. Improper maneuvering by Master, Pilot or navigational officer, faulty propulsion, rudder or any other machinery, error by shore personnel giving directions all can cause mishaps. Many a times, ships are not pilotted and different vessels operating on different radio frequencies also add to the trouble.

A few years back  - major oil spills  of BP at US and another at China captured  media headlines, occurred this collision and oil spill on  the Indian coast.   On 7th Aug 2010, the container carrier MSC Chitra collided with MV Khalijia-III – 8 kms closer to Mumbai shore.  It was  calamitous news for India -  first there was disturbing news of oil spill, then JNPT rendered non operational due to the mishap and then the news of hundreds of containers floating in the sea lanes close to Mumbai shore. The closure of JNPT & Nhava Sheva disrupted Indian economy in a big way – reportedly 17 ships were stranded and 15 more  had to wait for docking following the shutdown of the ports. MSC Chitra had 1219 containers on board of which 31 were hazardous chemicals and pesticides.

MV Khalijia 3 owned by Kuwaiti Gulf Rocks Co was able to safely dock after the collision. MSC Chitra was dangerously listing and oil was spilling out from her fuel tanks. Listing refers to ship leaning on one side caused by uneven loading or flooding. At the time of mishap MSC Chitra had 512 containers on deck and 707 below the deck. The Port Trust authorities contracted the vessel agent and Insurers & P&I club. Smit Slavage, Singapore were appointed for salvaging the vessel. The vessel dropped anchor and secured from drifting but listing increased and about 250 containers have fallen into the sea.

A couple of months earlier in June 2010 -  our  Nation’s classification society became  a full member of the International Association of Classification Societies.  The Nation’s own classification society IRS (Indian Register of Shipping), established in Mar 1975, had been an associate IACS member since 1991, but that category was abolished in October 2009 when the association introduced single-class membership. The conferring of Full member status at the meeting of IACS Council in Hamburg assumed extra significance when you know that there are only 10 members in this elite group and IRS is 11th of the prestigious association of most advanced ship classification societies of the world. The membership according to IACS, is a reflection of the quality philosophy and high quality standards imposed by the IRS.

The International Association of Classification Societies (IACS) is a gathering of ten classification societies, headquartered in London. It was founded on September 11, 1968 in the city of Hamburg . Dedicated to safe ships and clean seas, IACS makes a unique contribution to maritime safety and regulation through technical support, compliance verification and research and development. More than 90% of the world's cargo carrying tonnage is covered by the classification design, construction and through-life compliance Rules and standards set by the ten Member Societies and one Associate of IACS.

Classification rules are developed to contribute to the structural strength and integrity of essential parts of the ship’s hull and its appendages, and the reliability and the function of the propulsion and steering systems, power generation and those other features and auxiliary systems which have been built into the ship in order to maintain essential services on board for the purpose of safe operation of the ship. Classification societies are not guarantors of safety of life or property at sea or the seaworthiness of a vessel because the classification society has no control over how a vessel is operated and maintained in between the periodic surveys which it conducts.

Cargo Policies have their terms and conditions going by the clauses attached. When the transit is by sea, the coverage is governed by Institute Cargo clauses A / B / C – these do not make any comments / restrictions on class of the vessel but there would be a specific mention which would state that ‘this contract is subject to the Institute Classification Clause’.  This is an express condition though classification of vessel is almost a fundamental requirement of commercial shipping and virtually all vessels would be classed.  There are two clauses that were being used by the cargo insurers in India  :  1)  The Institute   Classification Clause 1/8/97 & 2) Institute Classification clause 1/1/2001.

With this very lengthy intro, do read this judgement described in the 1^st para :  The impugned appeal arose out of  judgement of the National Consumer Disputes Redressal Commission (‘NCDRC’) in 2013.  The Appellant is a Company engaged in Import/Export of various commodities and the Respondent was The Oriental Insurance Co Ltd who had insured consignment for a value of US$  12,63,712.

The Insurance had been proposed providing details of carrying vessel to be :  ‘Khalijia III’, built in Mar 1985  and its “class” was specified as ‘I.R.S.’  The facts of the case was -  Hangzhou Cogeneration (Hong Kong) Co. Ltd.(overseas seller) through its agent  shipped 80 prime hot rolled steel coils weighing 2000 Metric Tonnes on board the subject vessel from Caofeidian Port, China tobe discharged at Mumbai.  The vessel carried on board consignments of prime hot rolled steel coils of seven other importers who had also imported them from the same Overseas Seller. Subsequently, the Respondent’s brokers issued a single voyage policy covering all risks as per the Institute Cargo Clauses (A), Institute War Clause, and Institute Strike Clause.

The carrying vessel reached Mumbai Port on 6.7.2010 and was allotted a berth – however due to a failure of vessel’s crane, discharge could not be completed and had to be removed from allotted berth.  The vessel subsequent ran aground ! ~ and an intimation to lodge a claim was made.  The shipowners engaged the services of M/S. Smit Singapore Private Ltd. (‘Salvors’) for the purpose of recovering the cargo. The shipowners also appointed M/s Richard Hogg Lindley as the General Average Adjustor (‘GAA’).   The claimants approached their Insurers for GA Contribution by issuing GA Guarantee.  The Insurer too obliged by issuing GA Guarantee on 3.8.2010 thereby   agreeing to pay the GA as also other special charges.   Subsequently there was another request for Salvage Security of 25% of CIF value of the cargo.  Insurer did not issue the security which resulted in consignment not getting released and payment of heavy demurrage.  Later in Aug 2010, the Insurers informed that they were withdrawing the General Average Guarantee, ‘Form B’issued by them earlier in respect of the Appellant’s consignment on  account of non-compliance with the ‘Institute Classification Clause’ (‘ICC’) in the Marine Insurance Policy.

A few days earlier on 7.8.2010 occurred the collision between the subject vessel and a navy vessel in the waters near Mumbai Port. On 13.8.2010, the Salvors claimed a maritime lien on the cargo. Further, the Salvors initiated arbitration proceedings against the Appellant and the shipowners. During the course of the aforesaid arbitration proceedings, the Salvors obtained interim orders from the Hon’ble High Court of Mumbai, restraining the Appellant from removing their consignment from Mumbai Port. Ultimately, vide order dated 24.8.2010, the High Court directed that the Appellant would be allowed to take its consignment on furnishing security in the form of a bank guarantee in the sum of Rs. 14 crores. The Appellant furnished the security as directed and took delivery of the consignment from the Mumbai Port Trust on 3.9.2010. On 2.12.2011, the Arbitrator passed an award against the Appellant and other cargo owners, finding them liable for reimbursing the costs incurred by the Salvors.

On behalf of the Cargo owner (policy holder / insured / appellant here) it was submitted that the IRS classification was granted to the subject vessel by the ‘International Register of Shipping’, which is an independent classification society. Further, that after the issuance of the Cover Note, the Appellant had provided all particulars regarding the subject vessel, and expressly asked the Respondent whether the subject vessel was acceptable. It was argued that had the Respondent indicated at the time of the issuance of the Marine Insurance Policy that the classification was not acceptable; the Appellant could have paid an extra premium to purchase the policy.  Learned counsel also referred to the Institute Marine Cargo Clause  - Institute Cargo Clause   provides for waiver of any breach of implied warranties of seaworthiness of the subject vessel.  It was further contended that the Insurer estopped their rights of claiming breach of ICC once they provided the GA Guarantee.

The impugned judgment is a lucid elaboration of various facets of cargo carriage, insurance, Marine Insurance Act, warranties, principle of estoppel and more and is a must read for every Insurer.  The Hon’ble Court concluded that  the liability of the insurer was discharged on account of the breach of warranty caused by non-compliance of  the classification requirement within the ICC.  The Apex Court averred that - the Respondent rightly repudiated the claim of the Appellant; the judgment of NCDRC stands confirmed, and the appeal is dismissed.

With regards – S. Sampathkumar

19^th Feb 2020.

PS: By intent, this post outlines the circumstances of the case, the decision of the Insurer to repudiate and the Court’s pronouncement on the repudiation.  Some detailed elaboration on the aspects constitute in the impugned judgment are intended to be provided in another post. Do look forward to your feedback.