The B Atlantic Case

IMIF BUFFET LUNCHEON

Date: Wednesday 16th November 2016

Venue: Stephenson Harwood LLP, 1 Finsbury Circus, London.  EC2.

Host: Julie Clegg, partner, Stephenson Harwood LLP.

Speakers:  Simon Moore, partner, marine and international trade team, Stephenson Harwood, and Paul Hofmeyr, an associate at that firm.

Subject: The B Atlantic Case

Report by James Brewer

Mr Moore and Mr Hofmeyr, who represented underwriters, reviewed the ongoing B Atlantic case (Atlasnavios-Navegação v Navigators [2014] EWHC 4133 Comm) which has been closely watched by the London and international marine insurance market.

The case centred on the interpretation of standard war risks clauses and, in particular, whether an owner is covered for detention and confiscation of a vessel where the loss arises in connection with drug smuggling.

It involved the widely reported detention in Venezuela of the 24-year-old, 38,500 dwt dry bulk carrier B Atlantic in August 2007 and the arrest of the crew who were charged with complicity in drug smuggling. An inspection found cocaine strapped to the hull.

The owner, who was not alleged to be complicit in the smuggling, made insurance claims which were rejected by underwriters.  The judgment of the Court of Appeal confirmed that insurers were not liable for the loss and this was significant “as the legal principles on the correct interpretation of insurance contracts are of broad application” said Mr Moore.

Nearly 10 months on from the original incident, the case could be taken further if the Supreme Court grants leave to appeal the Court of Appeal finding. Its announcement is expected around mid-February 2017.

Mr Moore began by outlining the background. The B Atlantic loaded a cargo of coal at Lake Maracaibo for discharge in Italy. During loading, two underwater inspections were carried out. In the first, divers found a grappling hook, a saw, a rope and other tools behind a grille that was loose on the hull. The ship’s master was told to report the finding of suspicious equipment to the harbourmaster and to fix the grille, but did not do so.

The vessel did not sail on the day planned, because a further 800 tonnes of cargo had to be loaded. A second inspection the following day found 132kg of cocaine strapped to the hull near the rudder.

The ship was detained by the authorities and the crew arrested. Most of the crew were released within a few days and allowed to return to the vessel but the Ukrainian master and second officer were charged with complicity in drug trafficking. The two men were held in Venezuela until their trial in August 2010, and sentenced to nine years in prison, although returned a short time later to their home country [where they faced further imprisonment]. Had the trial been in London, the two would not have been convicted, speculated Mr Moore.

The owner asked the Venezuelan court to release the vessel, but in vain. The hull in August 2007 was insured for $18m, although on the collapse of the freight market the value would have been nearer $10m or perhaps as low as $5m, said Mr Moore.

The wheels of justice turned slowly, and because of its continued detention (and the freight market still being terrible) the owner abandoned the vessel to the court in September 2009.

A claim was presented for constructive total loss under London Institute War and Strikes Clause 1 October 1983. Clause 1 stated that there was cover for “capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat…any person acting maliciously or from a political motive…confiscation or expropriation.”

Underwriters relied heavily upon specific exclusion wording: “This insurance excludes… loss damage liability or expense arising from arrest, restraint, detainment, confiscation or expropriation by reason of infringement of any customs… regulations.”

Following a trial of preliminary issues Mr Justice Hamblen (who since 2015 has been a Lord Justice of Appeal) determined in underwriters’ favour in that they did not need to show that the owner or its servants or agents were privy to or complicit in any Customs infringement. Mr Justice Hamblen found that the exclusion could apply to all of the insured perils. In other words, it can apply to loss caused by any person acting maliciously.

Mr Hofmeyr took up the story. On the basis of that interpretation of preliminary issues, Mr Justice Flaux considered the facts of the specific scenario.  In December 2014 he ruled in favour of the owner and ordered that underwriters pay $23m (the value of the vessel, plus interest, plus costs). This was a substantial sum, said Mr Hofmeyr.

Mr Justice Flaux said that the exclusion did not apply because underwriters conceded in the scenario that there was a “put up job” – in which hypothetically the authorities could have arranged for drugs to be attached to the hull to facilitate confiscation – the exclusion would not be triggered. This meant that underwriters accepted there was an implied limitation to the scope of the exclusion. It would not be “within the spirit of the policy” to conclude that the exclusion is triggered, said the lower court judge.

The owner was, at that time, a substantial trading company, which owned a number other bulk carriers against which a Court of Appeal judgment could be enforced, so the sums were to be paid in advance of that – but one by one all three of the owner’s remaining ships were sold. In March 2015 the owner and underwriters agreed, said Mr Hofmeyr, that the judgment sums would be paid into escrow (as security for the appeal) in return for all interest being waived. Later the owner’s lawyers sent a message denying the existence of the agreement. In June 2015 on behalf of the underwriters, Stephenson Harwood secured a ‘without notice’ worldwide freezing injunction in the Commercial Court leading to the seizure of $23m in the owner’s bank account, with the money paid into escrow.

Mr Moore continued that in August 2016, the Court of Appeal reversed the decision of Mr Justice Flaux, and held that he was wrong to conclude that the exclusion did not apply. Underwriters have received their money back.

The Court of Appeal reasoned that the structure of the clauses is that coverage is “subject always to the exclusions.” The exclusion was meant to target Customs detention, and this contention was supported by previous cases as the Kleouvoulous of Rhodes and the Anita.

The court, it said, should be reluctant to read words into policies which are not there, especially in respect of those clauses which are for use in insurance contracts throughout the world.

The ‘put-up job scenario’ could be distinguished from the case as the smugglers did not intend for the vessel to be confiscated (if anything they intended for it not to be detained); and the detention was not an inevitability as there was an intervening fortuity, namely the second inspection.

In addition, the court confirmed that the correct application of the policy is to view the loss as being proximately caused by a combination of the malicious act (the insured peril); and the subsequent detention because of Customs infringement, which was the excluded peril.

The Stephenson Harwood duo said there were five takeaway lessons from all this. First, the smuggling of drugs or contraband is not a war risk, and not covered by such standard policies. Owners should purchase the additional cover from the market if they want to protect themselves against such a risk. If the underwriters were to extend the war risk policy, they would find themselves “quite exposed.”

Secondly, the courts continue to sway towards a more literal reading of contracts which are entered into between two commercial parties – on the principle that a contract means what it says and says what it means even if it leads to disastrous consequences for one of the parties.

Third, the courts should be reluctant to depart from a literal interpretation unless they feel it necessary to correct an ‘obvious mistake’; or it is necessary to give business efficacy to the contract.

Fourth, where there is ambiguity, exclusions should be given a businesslike interpretation in the context – what is businesslike will need to be determined from the perspectives of both parties. Fifth, if the proximate cause of the loss is an excluded peril the loss is excluded.

The Court of Appeal refused the owner’s application for permission to appeal to the Supreme Court, which would now itself consider the owner’s request to appeal.  Mr Moore said that the owner will need to demonstrate that there is a sufficiently arguable point of law; and that there is a point of general public importance at stake. Underwriters argue that neither of these provisions applies.

On behalf of members of IMIF in the hall, and of Jim Davis who was unable to be present, Victoria Mott thanked Mr Moore and Mr Hofmeyr for their detailed presentation, and expressed appreciation to Julie Clegg and colleagues at the law firm for their hospitality.