International Restructuring Newswire
This issue features articles from the United Kingdom, Australia and Canada.
Fires at sea pose an immense risk to life and property and are a major headache for shipowners, carriers, P&I Clubs and cargo interests and their insurers. The rise of containerisation has exacerbated the problem of fire on board ships as we have seen with the mv Hansa Brandenburg, the mv Jolly Rubino, the mv Maersk Londrina and, most recently, the mv APL Austria.
In February 2017, the mv APL Austria, a Liberian flagged containership, caught fire off the Eastern Cape of South Africa. The vessel entered the Port of Nqura at Port Elizabeth and the shipowners’ representatives and local firefighting units spent a number of days putting out the fire. As a result, the shipowners had to undertake substantial repairs to the vessel; carriers had to tranship the cargo to Cape Town and various destinations in West Africa; and the cargo owners and their insurers suffered damage to cargo, delays and claims for general average contributions.
Fire can pose a particular risk to container ships as cargo is usually vanned into containers before it is received by the shipowner who is, to some extent, dependent on the cargo declaration given by the shipper or shipper’s agent.
A number of fires on board container ships have been caused by hazardous or flammable cargo being misdeclared. One of the most common culprits is calcium hypochlorite which is used to treat drinking water and swimming pools. While it can be carried on board ships, there are stringent guidelines on how it should be carried. Less scrupulous shippers misdeclare it as fertilizer or other more stable compounds to avoid paying a higher freight rate.
Once a fire starts on board a ship, and in particular when the fire originates in containerised cargo, it is extremely difficult to extinguish it safely and without significant damage to the cargo.
A shipowner or charterer will often incur large costs bringing the vessel into a port of refuge, fighting the fire and repairing the vessel. Unaffected cargo may also have to be discharged in order for fire fighters to access the fire. It is not uncommon for fires to reignite when cargo is removed which can pose further risks. Cargo can be further damaged by the firefighting operations, for example, when the holds are flooded with extinguishing water, as was the case with mv APL Austria.
Where a shipowner has incurred extraordinary expenditure to preserve maritime property or to continue the voyage and deliver the cargo to the intended destination, some costs will be recoverable. This is the principle of general average whereby the other interests (such as the cargo interests, the ship itself and its owners’ hull and machinery insurers and the charterers) will contribute to general average on a proportional basis.
Following a fire or other maritime casualty, the shipowner will often declare general average and appoint average adjusters to determine which expenses are allowable and what each interest’s contribution will be.
A general average adjustment (setting out the allowable expenses and each interest’s contribution) can take up to 10 years to finalise. Accordingly, shipowners will routinely demand that each cargo owner provide a general average bond effectively stating that in exchange for the release of the shipowner’s lien over the cargo, the cargo owner undertakes to pay the general average contribution in due course. The payment of the contribution is then guaranteed by either the insurer of the cargo providing an individual general average guarantee or the insurer of the time charterer providing a blanket guarantee for all cargo interests.
The general average is then adjusted and payment of the contribution is demanded from cargo owners and the other parties to the maritime adventure.
Loss or damage, reasonably attributable to fire or explosion, is a peril insured against under The Institute Cargo Clauses A, B and C and The Institute Time and Voyage Clauses: Hulls.
For any loss or damage to cargo to be recoverable under the cargo owner’s policy, the fire or explosion must be a proximate cause of the loss. This means that the fire must be sufficiently related, both factually and legally, to the loss. For example, if a ship suffers an engine room fire, enters a port of refuge and then runs aground and sinks because of bad weather, the courts will consider whether or not the fire was the proximate cause of the loss of the cargo or the damage to the ship.
In addition to covering any loss or damage to the cargo itself, most marine insurance policies also cover the cargo owners’ liability to the shipowner for general average. In the case of the mv APL Austria, the cash deposit (which must be put up by the cargo owner where the cargo is not insured) has been set at 28% of the invoice value of the cargo. The cash deposit is usually a reasonable indication of the level of general average contribution that the owners will seek from the cargo interests.
Whilst loss or damage to cargo caused by fire is covered by most marine insurance policies, the Institute Cargo Clauses (the terms on which almost all marine cargo is insured) excludes insurers’ liability due to the wilful misconduct of the insured; inherent vice; insufficient, unsuitable or defective packing or the unseaworthiness of the ship or container. In the case of the unseaworthiness of the ship, the cargo insurers’ liability is only excluded where the cargo owner was aware of the unseaworthiness of the ship before the commencement of the voyage (which would be unusual).
The large general average and salvage awards handed down in recent maritime casualties highlight the need for cargo owners to properly insure their cargo. Failure to obtain proper insurance could leave a cargo owner in a position where they face damage to their cargo which cannot be recovered from the shipowner as well as large claims for general average and salvage expenses.
Under the Hague-Visby Rules, which set out the liability regime for the carriage of most cargo, neither the carrier nor the shipowner is responsible for loss or damage arising or resulting from fire, unless caused by the actual fault or privity of the shipowner or carrier.
To successfully recover for damage to cargo from the shipowner, or to defend a claim for general average, the cargo owner must show a lack of due diligence of the shipowner to make the ship seaworthy and safe to receive, carry and discharge the cargo.
From a procedural perspective:
The shipowner is not liable for an act or omission by the crew. If the fire was caused by the negligence of the crew, this is a complete defence for the shipowner unless the cargo owner can show that there was some lack of due diligence by the shipowner which made the ship unseaworthy. In the case of fires at sea, this would include the shipowner failing to exercise due diligence insofar as the crew fighting the fire is concerned, a lack of adequate fire-fighting systems or a lack of training or lack of procedural guidance from the owners or carriers to the crew.
Cargo owners are also likely to be successful in claiming against a shipowner where it is shown that the shipowner or carrier failed to correctly stow dangerous or hazardous cargo (provided that such cargo was correctly declared) in accordance with IMDG Guidelines.
Fires at sea continue to pose a significant risk to container shipping and often give rise to long-winded and complex claims between all affected parties. In the event that a shipowner can rely on a “fire defence”, the cargo owner (or their insurers) may be left with a recovery action against the shipper of the misdeclared cargo. However, this often involves expensive litigation in a foreign jurisdiction where the “guilty” shipper may be a brass plate company without any assets to satisfy many millions of dollars’ worth of damage to the ship and her cargo.
This issue features articles from the United Kingdom, Australia and Canada.
Welcome to the twelfth edition of Global asset management quarterly.