(As noted in Issue 122 the Editor of this column would visit ITC-Hulls 1/10/83 with the assistance of the one “ITC HULLS 1.10.83” which was written by Mr. D. John Wilson who kindly allowed the Editor copyright on his book for any future editions.)
Almost every accident to a ship results in the Ship-owner or Manager encountering considerable extra work and, for instance, in the case of a serious stranding, this might include arranging for
- Entry into a port of refuge,
- Towage to another port for repairs,
- Temporary and/or permanent repairs,
- The obtaining of spare parts and forwarding to the port of repair,
- Superintendence of the repairs,
- Settlement of repair accounts,
- Salvage security,
- All General Average formalities, etc.
Actual out-of-pocket expenses incurred in making these various arrangements have always been claimable from Underwriters, but it has also been an established practice that the Owner (repeat, Owner) of a ship was not entitled to claim any remuneration for his own time and trouble on such affairs, whether as general or particular average.
The Association of Average Adjusters have a Rule of Practice No. A3 on the subject dating from 1906 and reading as follows:
AGENCY COMMISSION AND AGENCY
That, in practice, neither commission (excepting bank commission) nor any charge by way of agency or remuneration for trouble is allowed to the shipowner in average, except in respect of services rendered on behalf of cargo when such services are not involved in the contract of affreightment.
Over the years, however, and for various reasons, many ship-owners have formed separate companies to manage their ships for them – or have employed specialist ship managers – and these management companies have often put forward a separate fee for the extra work to which they were put in attending to the average matters listed earlier, plus their work of collecting the necessary documents and presenting them for adjustment purposes. Whether such fees were permissible under the management contract is not known, but they were often claimed from and paid by hull underwriters.
Thus, over many years a practice has grown of allowing an agent or manager acting on the Assured’s behalf to charge a fee for the work involved in compiling the Assured’s claim for the Assured to recover this as part of the claim on policies of insurance on hull and machinery which is subject to English law and practice. There is probably no parallel in any other branch of insurance. However, as noted earlier, a ship-owner who manages his own ships and presents his own claims, cannot enjoy the privilege. This produces a result which can be termed anomalous and this anomaly is even more marked where the difference between the management company and the ship owning company is little more than a technicality.
At one time it was considered whether the charges should not be allowed to any management or agency company which was a subsidiary or in any way affiliated to the ship-owning company. In 1970, a Special Committee of the Association of Average Adjusters, which included representatives of Underwriters and Ship-owners, was appointed to consider the above-mentioned Rule of Practice in the light of modern conditions and make such recommendations as might be thought fit regarding its revision. After considerable consideration, a Report was issued on 22nd January 1971 wherein “it was unanimously agreed that the present Rule of Practice should remain unaltered and the Underwriters’ Representatives would consult their principals for agreement that the present practice of allowing agency fees where these had been incurred in connection with the average be continued but reserving the right to question the quantum of such fees if considered unreasonable.” Evidently, in practice Underwriters have continued to pay for the fees charged by vessel Owners’ managers for the time spent handling damage claims, dealing with brokers, surveyors, lawyers, adjusters and others, if they appear to be reasonable.
A further point which needs stating is that it was often the management company which appointed the average adjuster and, human nature being what it is, it was sometimes difficult for the average adjuster to contain the fees proposed by the management company within reasonable bounds. Thus, allowance of large agency fees was not uncommon.
In 1983 the London market introduced a completely new set of Institute Clauses for the insurance of the hull and machinery of ocean-going (blue water) vessels to be used in conjunction with the new Marine Policy Form. Obviously, Underwriters seized the opportunity to exclude liability for remuneration in connection with a claim altogether, whether to a ship-owner or to a managing company. The wording they have chosen as follows (Clause 17 of ITC-83) does not seem to reflect their intention:
17 AGENCY COMMISSION
In no case shall any sum be allowed under this insurance either by way of remuneration of the Assured for time and trouble taken to obtain and supply information or documents or in respect of the commission or charges of an manager, agent, managing or agency company or the like, appointed by or on behalf of the Assured to perform such services.
A straight construction of these words means that fees payable to a management company for those services listed earlier in these comments may still continue to be claimed and paid. Indeed, by inference, perhaps, even a ship-owner operating his own ships should now be entitled to claim similar remuneration?
In practice, however, Underwriters have made it clear that their intention was to exclude all claims for remuneration by the Assured, their managers or agents for time and trouble incurred on any aspect of a claim. Accordingly, ship’s proportion of agency fee allowable in general average would need to be deducted from the claim on policy of insurance subject to ITC – Hulls 1/10/83.
For the record, whilst it was blindingly obvious, without any form of explanation, that agency charges included in a port agent’s general account covering expenses incurred in respect of the vessel thereat are not excluded by the terms of this Clause, to avoid the risk of having the settlement under the adjustment delayed, at one time, the following explanatory note, or similar, would appear in the adjustment:
The fee charged in the above account represent charges of port agents for handling operations connected with the vessel at the port. Allowance therefor is not excluded by the terms of Clause 17 of the Institute Time Clauses – Hulls 1/10/83.”
It is noted that the wording of Clause 17 of the ITC – Hulls 1/10/83 is the same as Clause 19 of the International Hull Clauses (01/11/03).
Understandably, it is not uncommon to see Ship-owners special clauses incorporated in the hull and machinery policies of insurance subject to ITC – Hulls 1/10/83 specifically delete the Clause 17, thus enabling the Assured to enjoy the pre-1983 practice mentioned earlier.
No equivalent provisions are to be found in the American Institute Hull Clauses but it is noted that in practice Underwriters in the American Market would not pay for any agency charge which was made by the Assured himself. For Underwriters to entertain payment, the charge would necessarily have to be made to the Assured – Owner by a managing agent or company.
Section 69 (3) of the Marine Insurance Act 1906 provides that :
“Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage”.
Until about 1950 there was a well-established practice in the London market for negotiating any claim for unrepaired damage. It was generally on the following lines:
- Where the ship was sold, to endeavour to find out what price the purchaser of the vessel would have paid for her if the damage did not exist, subtract the actual price paid, and claim from Underwriters in respect of the difference – (always assuming that this difference was less than the cost of repairing the damage!)
- Where the ship was not sold, to take the basic cost of repairs as estimated by Underwriters surveyor, generally to ignore dry-docking and other incidental charges, and to offer the Assured a figure less than this sum, the amount depending on the likelihood of whether or not the damage would eventually be repaired.
That is to say, prior to 1950 the settlement of claims for unrepaired damage was based on what the market considered to be the pure principle of Marine insurance, i.e. to INDEMNIFY the Assured for the actual amount he had lost – or was likely to lose – by reason of the unrepaired damage, and with the settlement based solely on the estimated cost of repairs and ignoring the insured value (other than as a limit on the amount payable).
There then followed a series of law cases in England and the U. S. A., including Elcock v.Thomson (1949), Irvin v. Hine (1949), the “Armar” (1954), and Delta Supply Co. v. Liberty Mutual (1963),
and these cases introduced the Insured Value of the vessel into the calculation. Although never challenged by Underwriters in the Courts (e. g. see the “Medina Princess” – 1965), they regarded the introduction of the Insured Value into the calculation as something of an irrelevance, in the sense that any claim for repairs actually carried out was payable in full, regardless of whether the real value of the ship was over – or under – insured.
The position under the legal cases is best demonstrated by an extreme example where an elderly
ship with a sound market value not much more than her scrap value sustains a serious damage, e. g.:
The Courts decided that this 40% Depreciation was to be applied to the Insured Value of the vessel and the legal claim on underwriters to be either:
- a) The resultant figure, or
- b) The estimated cost of repairs,
whichever was the less. For example:
It will be appreciated that the real loss sustained by the assured as the result of the accident is only the difference between the sound and damaged values, – i.e. 200,000 – but as most ships tend to be insured for more than their real value, the general effect of the legal cases was to produce a much larger claim for the assured, i.e.:
The London market introduced a new clause in 1983 dealing with the vexed question of unrepaired damage; Clause 18 of the ITC-Hulls 1/10/83 reads as follows:
- UNREPAIRED DAMAGE
18.1 The measure of indemnity in respect of claims for unrepaired damage shall be the reasonable depreciation in the market value of the Vessel at the time this insurance terminates arising from such unrepaired damage, but not exceeding the reasonable cost of repairs.
18.2 In no case shall the Underwriters be liable for unrepaired damage in the event of a subsequent total loss (whether or not covered under this insurance) sustained during the period covered by this insurance or any extension thereof.
18.3 The Underwriters shall not be liable in respect of unrepaired damage for more than the insured value at the time this insurance terminates.
Clause 18.1 overrides the effect of the legal cases and, to a large extent, re-introduces the pre-1950 practice mentioned earlier. The Insured Value will be ignored, other than as a limit on the amount of the claim.
Clause 18.2 is a restatement of the position under English as codified by Section 77(2) of the Marine Insurance Act 1906, which provides that :
“Where, under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed by a total loss, the assured can only recover in respect of the total loss”
The purpose of a marine insurance policy is to indemnify the Assured for losses which he sustains as the result of perils insured against and, in general, a ship-owner does not sustain any loss until he repairs the damage and incurs the cost of those repairs. It follows, therefore, that if the vessel becomes a total loss before an earlier damage has been repaired, the Assured loses nothing by reason of that earlier accident.
English law applies the principle that “the greater absorbs the lesser”, and the subsequent total loss overrides and/or absorbs the earlier damage.
Even if the subsequent total loss is the result of some peril excluded – or not covered – by the policy, the same rule of “the greater absorbing the lesser” still applies, and there is no claim for the earlier partial loss left unrepaired – see the legal cases of Livie v. Janson (1810) and Wilson Shipping Co., Ltd. v. British and Foreign Marine Insurance Co., Ltd. (1919).
It should be noted that the above remarks apply only to situations where both the earlier partial loss and the subsequent total loss occur on the same policy.
As soon as a policy expires, the Assured has a legal right to claim from his Underwriters in respect of any damage sustained during the currency of that policy and which is presently unrepaired. The agreed insured value in the succeeding policy is assumed to take account of the fact that the vessel was then in a damaged condition (even though the matter was probably not considered by Ship-owners or Underwriters at the time) and in the event of a total loss occurring on that following policy, the full insured value will be paid, while a claim for supposed depreciation will be paid on the earlier policy.
This point was covered in the interesting case of Lidgett v. Secretan (1871), where a vessel sustained damage during the currency of one policy and, while repairs were being carried out – but during the currency of a following policy – the vessel caught fire and was totally lost, The Underwriters of the first policy were held liable to pay the cost of the repairs actually completed at the time of the fire, plus a claim in respect of the unrepaired damage, while the Underwriters of the second policy were liable for a total loss and the full insured value. A very complete indemnity!
Clause 18.3, limiting claims to the insured value, was introduced to the ITC Hulls only in 1983 and relates to the equally new provisions in Clause 1.3 where the original insured value of the vessel may be reduced to some lower figure if the vessel sails for the purpose of being broken up.
Lines 117/119 of the American Institute Hull Clauses (June 2, 1977) reads as follows:
No claim for unrepaired damages shall be allowed, except to the extent that the aggregate damage caused by perils insured against during the period of the Policy and left unrepaired at the expiration of the Policy shall be demonstrated by the Assured to have diminished the actual market value of the Vessel on that date if undamaged by such perils.
The wording is quite different from the ITC Hull clause, but the effect of both is identical in that the judgements of the British and American courts have been set aside as commercial irrelevancies. To support a claim, the Assured must demonstrate that the damage left unrepaired when the policy expired has actually brought about a depreciation in the vessel’s value. The AIHC do not state that the indemnity cannot exceed the estimated reasonable cost of repairs as do the ITC Hulls, but, of course, that is also the position in the American market.
The following self-explanatory wording is commonly seen under the Ship-owners Special Clauses incorporated in hull and machinery policies of insurance:
“Underwriters’ liability in respect of unrepaired damage will be the estimated cost of repairs at the first reasonable opportunity including estimated dry-dock and services, tank cleaning, superintendence and removal, if necessary.”
Date : 21 November 2018 (Wednesday)
Time : 4:00 pm – 7:00 pm (regiatration starts at 3:45pm
Venue : INCE & CO
(44/F One Island East, 18 Westlands Road, Taikoo Place, Hong Kong )
Application : Registration
Photo 1: 2017年5月17日，叶伟膺（右）与吴焕宁（中）和尹东年（左）教授应邀出席北京大学《口述海商法史》座谈会
Photo 2: 1986年，叶伟膺（左）与王德超先生（右）在香港会见国际经贸法、仲裁法和海商法专家邵循怡先生
- 苦读魏文翰教授的《海商法讲座》、《共同海损论》和中国后来出版的绝大部分海商法教科书。啃《British Shipping Laws》和英、美 两本关于共同海损（General Average）的权威专著。看不懂时就请教高老和邵副部长；
社科院 王家福、谢怀栻、梁慧星教授；经贸大学 沈达明、黎孝先、赵宏勋教授；中国法律咨询中心 魏家驹、徐鹤皋教授；中国法律事务中心 高宗泽高级律师；中国贸促会 邵循怡研究员、叶伟膺副研究员；中国远洋运输公司 朱曾杰研究员、张常临译审；外交学院 姚壮教授；中国政法大学 吴焕宁教授；大连海运学院 司玉琢副教授；上海海运学院 尹东年、金祖光副教授；天津南开大学 陈文秋副教授。
Photo 3: 2005年12月，原参加制定《海商法》的部分专家尹东年、叶伟膺、朱曾杰、高隼来、司玉琢和吴焕宁（前排自左至右二、三、五、六、七和八）在北京出席
1978年，党的十一届三中全会，把中心工作从阶级斗争转移到经济建设上来。改革开放后，随着航运和经贸业务的不断扩大，海事和经贸仲裁案件也越来越多，中国的仲裁得到了更大的发展，在国际上也已经很有影响。任建新等领导和高隼来、邵循怡和唐厚志等仲裁员积极参加国际仲裁员大会和国际海事仲裁员大会，参加联合国和国际海事委员会召开的会议和活动。 高老还作为仲裁员，多次到斯德哥尔摩商会仲裁院和香港国际仲裁中心审理案件。有一次，他在香港审理案件，同庭的两位仲裁员是原香港律政司司长唐明治（Michaed Thomas）和按察司司长韩恩德（Neil Kaplan）先生。
Photo 4: 2004年1月7日，叶伟膺（左三）与原政法大学校长江平教授（左二）和经贸部著名国际经贸法专家曹家瑞先生（右三）在北京开庭审理中日买卖船舶争议案
Photo 5: 1977年8月4日，党和国家领导人邓小平、（前排左一）叶剑英
Photo 6: 1985年夏至1991年秋，叶伟膺在香港从事海损理算和律师业务
Photo 7: 1985年10月15日，叶伟膺应邀在香港海事保险学会做“中外海损理算
Photo 8: 1985年12月30日，叶伟膺（左）和广州海运局周勤正船长在香港处理“罗浮山”轮共同海损案
Photo 9: 1987年10月16日叶伟膺（前排左四）和海损理算专家王德超先生（右一）在香港会见仲裁法专家唐厚志先生
photo 10: 1982年3月8日叶伟膺在纽约海特律师事务所办公楼旁留影。后面是被本.拉登炸毁的世贸中心，旁边是屹立于海港中的“自由女神”
photo 11: 1983年春，叶伟膺和外运公司的余本松先生（右一）在美国拜见周恩来总理南开中学的同学、原交通部顾问、上海海运学院教授、海仲委仲裁员魏文翰先生（右二）
Photo 12: 1983年春，叶伟膺自纽约归国途中，到旧金山参加由贝汉庭船长驾驶的“栁林海”轮首航美国四周年庆典并参观金门大桥
还有一起租船争议案件，因遭遇恶劣气候，燃料不足，遂弯航避难港加油，船期损失应由谁承担？我帮美国律师找到一个案例（Hurbut v. Turnure，81 Feb.Rep.208 and the Abbazzia, 127 Feb. Rep. 495）。根据该案例，因船方没有加足燃料，以便完成下一段航程（另加20-25%的安全系数），故应承当责任。美国律师听后非常高兴，认为胜诉在握。从此，对中国律师刮目相看。
Photo 13: 2002年10月6日，叶伟膺与贸促会会长俞晓松、全国政协副主席任建新和原全国律师协会会长任继圣（自左至右）出席中国环球律师事务所成立二十周年庆典
接着，会议就中国代表的发言进行讨论。各国代表对我们的发言给予了很高的评价。认为发言“态度认真，观点正确，内容丰富，所提改革意见具体”。罗马尼亚和泰国的代表说：”“中国代表是出席这次会议的真正专家”。加拿大代表Jerry J.Rysanek 先生两次跑来同我们握手，表示热烈祝贺 。英国代表也表示：“要认真考虑中国代表团的意见”。
Photo 14: 1990年5月6日，叶伟膺在伦敦参加英国海损理算师协会年会
Photo 15: 1991年11月13日，叶伟膺在联合国贸发会航运委员会国际航运立法问题工作组第十三届大会上发言。左为外运公司孟于群先生
Photo 16: 1994年10月2日，叶伟膺在悉尼出席国际海事委员会第三十五届大会
Photo 17: 1994年10月3日，叶伟膺在悉尼国际海事委员会第三十五届大会上发言，参与《约克—安特卫普规则》的修订工作
Photo 18: 1995年10月10日，叶伟膺在希腊罗得岛出席欧洲国际海损理算师协会第十八届大会
Photo 19: 1995年10月10日，叶伟膺（左一）在希腊罗德岛出席欧洲国际海损理算师协会第十八届大会晚宴
Photo 20: 2016年10月30日，高隼来和叶伟膺在北京与部分仲裁员、海损理算师和律师联欢
- 高隼来，1926年生，浙江嘉兴人。东吴大学法律系毕业。海商法、仲裁法和经贸法专家。懂日语和俄语，精通德语和英语。1959-1964年通读British Shipping Laws。
- 详见叶伟膺著：《海天搏击四十年—海商法文集》， 中国商务出版社2012年第1版，第210-212页。
It is an amazing surprise that the Institute Time Clauses – Hulls 1/10/83 (ITC-83) remain widely used after some 34 years in hull and machinery insurance policies!
There were indeed attempts to modernize hull insurance cover, through a 1995 version of the ITC wording and the International Hull Clauses (IHC) 2003, but both failed to attract much market support. In early April this year, it was reported that leading London underwriters would review the ITC-83 to see how they could be improved to meet current ship-owners and underwriters needs.
Understandably, Assureds likely believe the devil they know is better than the devil they do not know. However, it is very common to see hull and machinery policies incorporating ITC-83 but adding on ship-owners’ special clauses with favourable wording either tailor-made or extracted from IHC and/or other hull forms.
For the next few issues of Seaview, the Editor of this column will revisit ITC-83 with an emphasis on claims-related clauses, identifying the major differences with the American Hull Form (which is being used by a few large fleets in Hong Kong). There are plenty of analyses of the ITC-83 by English local market experts; the Editor would however comment with the assistance of the one “ITC HULLS 1 10 83” which was written by Mr. D. John Wilson, a well-respected average adjuster.
The Editor wrote in 1988 the following Forward for the Chinese version of the “ITC HULLS 1 10 83”, which was published in Taiwan:
I knew Mr. D. John Wilson by name in 1969 through the book he wrote on the ”One Hundred Year of The Association of Average Adjusters 1869-1969”. I met John in London in 1973 when, in conjunction with the present Lord Donaldson, Master of the Rolls, and Lord Justice Staughton, he was editing the current tenth edition of the British Shipping Laws, Vol.7 – the Law of General Average and the York-Antwerp Rules.
For years John has enjoyed the somewhat daunting and unending task of helping the juniors of the Richards Hogg Group progress with their studies and average adjusting work. He was indeed the man I had to satisfy before being put forward to sit for the examination of the Association of Average Adjusters (AAA).
We had the opportunity of working together in Hong Kong for a couple of years. Apparently, he gained the impression that I was an interested person so that when I was visiting Tokyo where he was resident in August 1984, he granted me the privilege of reading his more or less final draft on the ITC HULLS – 1.10.83. When I had read it from cover to cover, I was fully convinced that it would be the best (and perhaps the first) analysis and comparison of some of the clauses issued by the Institute of London Underwriters covering Hull, Freight, Disbursements and Excess Liabilities etc. plus the American Institute Hull Clauses. I immediately asked John if he would allow the book to be translated into Chinese. He gave his consent without hesitation but in return I had to make him a chop for his Chinese name.
Whilst I was deliberating how I should proceed with the translation, my colleague in Taipei, Edmund Chen, completely out of the blue, told me enthusiastically on the phone that he and Ms. Christine Wang would take up this formidable task. Having now read the Chinese version, I believe that the joint vigorous effort of Christine and Edmund is going to be of great value to any Chinese practitioners and students in the field of shipping and/or insurance. My heart-felt congratulations on their success.
As the Chairman of the AAA 1987/1988 John wrote an extremely valuable booklet on “The Insurance of Average Disbursements and other Subsidiary Interests following a Marine Casualty” which was published by the Association in May 1988. John, I understand, is now working on the new edition of the British Shipping Laws, Vol.7 – the Law of General Average and the York-Antwerp Rules.
The Editor understands that John’s Analysis of the 83 Clauses was largely prepared for the Japanese market and the leading insurers there did all the printing, a copy was given to the Editor personally by John who kindly allowed him (the Editor) copy right on this book for any future editions.
It is worth reminding readers that the ITC-83 state that the insurance is subject to English law and practice, meaning that, subject to any overriding provision in the policy, the Marine Insurance Act 1906 and the UK Insurance Act 2015 will apply.
CONSTRUCTIVE TOTAL LOSS
A Constructive Total Loss is defined by section 60 of the Marine Insurance Act 1906, which is subject to any express provision in the policy. In ascertaining whether a ship is a constructive (or commercial) total loss and not worth repairing, a prudent uninsured owner would have regard to three main factors:
- The estimated cost of repairing the ship,
- The estimated value of the “wreck” as scrap, and
- The estimated value of the ship when repaired.
As a general rule, if 1 + 2 is greater than 3, then the vessel is a C.T.L.
It will be noted that each of these three factors depends on an estimate, always a somewhat flexible or “elastic” figure.
An uninsured owner has only himself to consider when evaluating these estimates and making his decision whether to repair or scrap the vessel, but the position is totally different when the vessel is insured. Each estimate will then provide a fruitful source for argument between the parties, more particularly when it is recognized that so much money used to be at stake under the particular conditions of an old fashioned policy of marine insurance subject only to the provisions of the Marine Insurance Act.
If the ship-owner under such a policy was able to demonstrate that the vessel was a constructive total loss and not worth repairing, on an estimated sound value of the ship when repaired of, e.g 500,000 he was entitled to recover the full insured value of the vessel – whatever that might be, e.g.1,000,000 plus his subsidiary insurances, if any, on Freight & Increased Value, etc. of a further, say 250,000, will equal 1,250,000.
In addition (and although this does not concern the ship-owner himself), many reinsurances of the ship on Total Loss Only conditions would be affected by the decision of the original hull underwriters as to whether or not the vessel was a constructive total loss.
Clause 19 of ITC-83 does contain an express provision, which reads as follows:
19. CONSTRUCTIVE TOTAL LOSS
19.1 In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
19.2 No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account.
To reduce the areas of possible dispute between ship-owners and underwriters in ascertaining whether the vessel is a constructive total loss, this clause provides that:
The insured value shall be taken as the repaired value, and Nothing in respect of the damaged or break-up value of the vessel or wreck shall be taken into account.
There is thus only one factor left within the realms of estimate – (the likely cost of repairing the ship) – and, further, that estimated repair cost must be compared with the insured value of the ship instead of her market value. In practice, most ships tend to be insured for more than their market value and it becomes more difficult, therefore, for the assured to demonstrate a constructive total loss and thereby enable him to recover the insured value of his vessel, plus any sums insured on subsidiary insurances such as Freight & Increased Value.
The first sentence of Clause 19.2 sets out in greater detail and reiterates what is already implied in the first section of the clause, i. e. that
“No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value.”
The second sentence of Clause 19.2 was largely borrowed from the American Institute Hull Clauses ( June 2, 1997 ). The clause provides that only the costs relating to a single accident may be taken into account in determining whether the vessel is a constructive total loss. This resolves a problem which had been discussed for many years and which was mentioned in the case of the “Medina Princess” (1965) and also in his address to the Association of Average Adjusters in 1982 by Lord Justice Donaldson, later Master of the Rolls.
For example, a vessel insured for 1,000,000 might sustain damage by grounding, repairs to which were deferred, but which would cost……………………………………………………………………………………….. 400,000
Subsequently, the vessel is involved in a collision or some other accident, repairs to
which would cost ………………………………………………… …………………………..…….…. 650,000
Clearly, the vessel is a constructive total loss within the terms of Clause 19.1, but should the assured be entitled to claim the insured value of the vessel, plus the sums insured on his subsidiary insurances, – and that without the application of any policy deductibles (under Clause 12.1 )? Or should his claim be limited to one for Unrepaired Damage (under Clause 18 ) and be subjected to the application of the policy deductibles?
As already stated, this problem has now been resolved and a claim for constructive total loss can only be based on the costs relating to a single accident.
- Costs of recovery &/or repair of the Vessel which may be included in computing a C.T.L.
- Repairs to hull and machinery of the vessel, including spare parts
- (Add) 10% for contingencies – as recommended by the “Renos” 2016
- Air freight on spares
- Cost of dry-docking and general services
- Superintendent’s fees and expenses
- Towage to repair port (including crew wages and maintenance, bunkers, etc.)
- Cost of discharging cargo necessary to enable repairs be effected
- Cost of Class survey
- Port charges, pilots, towage, etc.
- General Average contributions payable by ship (cargo sacrifice)
- Cost of salvage of the vessel
- SCOPIC liability – as upheld by the Court of Appeal in the “Renos” 2018
Lines 134/139 of the American Institute Hull Clauses (June 2, 1977) reads as follows:
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and repairing the Vessel would exceed the Agreed Value. In making this determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of notice of abandonment shall not be considered if such are to be claimed separately under the Sue and Labour clause.
The provision is largely of identical effect to their counterparts in the ITC-83, the difference being that the American Hull form specifically state that “expenses incurred prior to tender of notice of abandonment” and “are to be claimed separately under the Sue and Labour clause” cannot be ranked when calculating the cost of recovery and repairs of the vessel.
Ship-owners Special Clauses
The following self-explanatory wording is commonly seen under the Ship-owners Special Clauses incorporated in the hull and machinery policies of insurance (the wording being the same as Clause 21 of the IHC 2003):
21. CONSTRUCTIVE TOTAL LOSS
21.1 In ascertaining whether the Vessel is a constructive total loss, 80% of the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
21.2 No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed 80% of the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account.
Furthermore, there are other clauses amended to the effect that it would be necessary to show costs up to 80% of the Insured Value or Market Value at the Assured’s option (or whichever is lower).
Raymond T C Wong
The HKMLA is holding a drinks get-together combined with a 1-hour seminar on recent shipping cases of interest.
Free to attend – drinks, food and a 1-hour seminar on recent cases of interest.
1 CPD point applied for.
When: Thursday 31 May, 6.00pm for speakers at 6.30pm to 7.30pm
Where: FCC Veranda
1. Raymond Wong (Asia Maritime Adjusting Hong Kong): General average: “The Longchamp”  1 Lloyd’s Rep 1
2. Fergus Saurin (HFW): Charterparties: Lukoil Asia Pacific Pte Ltd v Ocean Tankers Pte Ltd  EWHC 163 (Comm)
3. Nick Luxton (Gilt Chambers): Hague Visby Rules limitation: “The Aqasia”  2 Lloyd’s Rep 510, Sea Tank Shipping AS v Vinnlustodin  EWCA Civ 276 and Kyokuyo Co Ltd v AP Møller-Maersk A/S  EWCA Civ 778
4. Edward Alder (Prince’s Chambers): C/P guarantees and arbitration: Jiangsu Shagang Group Co Ltd v Loki Owning Co Ltd EWHC 330 (Comm)
The Institute organized an evening seminar on the subject “Substituted Expenses in General Average per York-Antwerp Rules” on 20th March 2018, a workshop in Hong Kong following the English Supreme Court’s decision on “The Longchamp” case, which was reported in the last issue of “Seaview”.
The Editor was not surprised to receive a question: “What about the substituted expenses in Particular Average?”.
It is worth recalling that the principle of substituted expenses is not generally recognized under English law, which position is, however, varied by the York-Antwerp Rules in the case of general average.
In the case of Wilson v. Bank of Victoria  (which case pre-dates the York-Antwerp Rules), an auxiliary sailing ship, on a laden voyage from Australia to Britain, struck an iceberg and sustained damage, being dismasted. The ship put into Rio de Janeiro where, on account of the prohibitive cost of repairs, only temporary repairs were carried out allowing the ship to proceed to destination under steam with coal being purchased at Rio and at Fayal for such purpose. A claim was made by the Shipowners for contribution towards the cost of the coal purchased on the grounds that they were substituted expenses for the expenses that would have been incurred at Rio if permanent repairs had been effected there. The claim was disallowed by the court holding that the use of the auxiliary engine to bring the vessel home, and the consequent expenditure on coal, was merely the performance of a service by the Shipowners to the owners of the cargo carried and was therefore not a subject for contribution.
The Editor has some notes on the subject of “Substituted Expenses in Particular Average” made by his former partners and colleagues who are highly respected average adjusters and would like to share these with readers of “Seaview”.
Particular Average, as defined by section 64(1) of the Marine Insurance Act 1906, is a partial loss of the subject matter insured caused by a peril insured against, and the measure of indemnity for the partial loss of ship is the reasonable cost of repairs, as provided by section 69 of the Act.
It is perhaps a fallacy to think that alternative means of repair are open to the Shipowners in circumstances where they are obliged (vis-à-vis their Underwriters) to effect repairs at the most reasonable cost. There may in theory be several ways in which a Shipowner can go about effecting a particular repair, but only one of those ways can be the most reasonable. Once the most reasonable course of repairs is determined, the other alternatives cease to exist and it therefore follows that the course adopted cannot have been a substitution for another alternative.
This was the gist of Wilson v. Bank of Victoria, i.e. that for there to be a substitution an alternative must exist. It was held in that case that, in as much as the Master could, by the expenditure of a small sum on temporary repairs and coal, bring the ship safely to destination, it was his duty under the contract of carriage to do so. Consequently, the perceived alternative of landing the cargo and repairing at the port of refuge was not an alternative open to the Shipowner at all and it was therefore a fallacy to say that the cost of the coal (which the Shipowners were seeking to recover in General Average) was incurred in substitution for those measures. The principle can therefore be applied to Particular Average claims that, as the Shipowners are obliged to effect the most reasonable repair, the claim must be based on the actual cost thereof and not on the cost of some alternative prohibited from taking.
For Particular Average on ship, the test continues to be “the reasonable cost of repairs” and hence any cost which is not a repair cost cannot be allowed as part of the claim without the specific agreement of Underwriters. An example of a non-repair cost which Underwriters do agree to bear or contribute to, depending on the circumstances, is the cost of removal from one place of repair to another because the latter is cheaper. On the face of it, this appears to be no different to the situation where the Shipowners incur extra fuel costs, say by burning diesel instead of fuel oil, to get from a port of refuge, where repairs are expensive, to destination, where repairs are cheaper. However, in the first example, Owners have derived no operational benefit from the removal cost. That is not the case with the second example, where the voyage on which the extra operating costs have been incurred is a freight-earning voyage.
Mr. John Crump, in his address on “Reasonable Cost of Repairs” at the annual general meeting of the British Association of Average Adjusters in May 1992, highlighted a few interesting cases on which he commented as follows:
(A) A vessel has damage to her steering gear in an area where repairs are expensive. Class agrees that the vessel may continue to trade for a limited period until she reaches a cheaper repair area provided extra tugs are employed when entering and leaving ports.
(B) A vessel has a main engine damage and Class agrees a temporary repair until she reaches a more appropriate and cheaper repairing port. The repair adopted, however, involves burning diesel oil instead of the customary fuel oil during the interim period.
(C) Damage to a winch, or winches, is sustained during discharge. Rather than effect repairs at the discharge port, which is an expensive one, equipment is hired to enable the affected hold(s) to be discharged, thus enabling the vessel to repair later at reduced cost.
In case (A) the assured claims for the cost of extra tugs, in case (B) he claims for the extra cost of diesel oil over fuel oil consumption and in (C) the claim is for hire of equipment for discharge. In each case the claim is based on the fact that the extra costs incurred saved greater repair costs for which Underwriters would otherwise have been liable. At the same time, I would submit that it is difficult, if not impossible, to argue that any of them in themselves form part of the cost of repairing the ship.
The only law case of which I am aware which is sometimes quoted as authority for applying the “substituted expenses” idea to insurance claims is Lee v. Southern Insurance (1870) LR5, CP397.
That case in fact involved not an insurance on ship but an insurance on freight and the facts were as follows:
A vessel was bound for Liverpool with a cargo of palm oil and stranded off the Welsh coast. Cargo had to be discharged and the Shipowner arranged to forward it by rail to destination at a cost in excess of ￡200, thereby earning his freight which was at risk. The vessel was then towed to Caernarfon, where she was made seaworthy for the rest of the voyage.
The forwarding costs were claimed under the freight policy, but the Court held that such claim must be limited to ￡70, which would have been the cost involved in reshipping the cargo onto the original vessel after repair.
The case thus involved a claim for particular or special charges, not a claim for particular average loss. I cannot see it as referring in any way to the “substituted expenses” concept, for the hypothetical reshipping costs of ￡70 were introduced solely as a test of the reasonableness or otherwise of the forwarding costs of ￡200. The older editions of Arnould report the facts of the case under the sub heading “Only reasonable expenses recoverable.”
Reverting to the three practical examples already mentioned, I submit that as a matter of principle the unfortunate assureds have no remedy for recovery of any of their extra costs under the hull policies.
At first sight this stance seems a harsh one, even ‘uncommercial’. In each instance a peril covered by the policy has operated and the assured has, as a direct consequence, incurred costs. As a result of his doing so Underwriters on the ship have been saved money. Should they not respond on that basis?
It should perhaps first be pointed out that the assured too would almost certainly have saved substantial sums as a result of the actions taken. That, however, is not, in my view, the real point which is that the losses suffered by the assured as a result of incurring those extra costs relate to freight or earnings rather than hull insurance. If the freight was at risk and insured for the voyage on which these various expenses were incurred, I would suggest they would form a particular or special charge on the freight policy. That is their essential character and the fact that nowadays freight is frequently at the risk of the cargo owner rather than the Shipowner so that the latter will then seldom have appropriate insurance cannot alter that character.
Could I add one final point about this type of case. It will doubtless be argued that if the assured cannot recover this type of expense from his Underwriters he may on occasion seek to avoid incurring it and allow the latter to take the rap for the increased repair costs that result. I do not believe that argument to be realistic. Even in those cases, probably rare ones, in which the assured himself does not gain from adopting the practical and commercially sensible course, it must be remembered that the test of ‘reasonableness’ of the ultimate repair cost must still be applied and if the assured increases the latter cost solely to save additional costs of keeping his ship operational in order to protect his freight or earnings, that increase will not, strictly, be for account of Hull Underwriters.
I submit that the concept of substituted expenses, which under English law is of doubtful validity in any context, can certainly have no application to a claim for particular average on a hull policy.
The following are few common examples where the damages are caused by perils insured against, the insurances being subject to English law and practice:
Vessel sustains damage to stern-tube seals. There are 2 alternatives open to the Shipowner – an emergency drydocking which will be claimed in full from Underwriters, or deferment of repairs for 3 months which will involve additional consumption of lubricating oil but save 50% of drydock dues. Can the cost of lubricating oil be claimed from Hull Underwriters?
It is tempting to take the view that if it can be shown that Underwriters benefited from the extra consumption of the lube oil they should pay for it or contribute towards it. It is submitted that since the Shipowners are obliged to effect repairs at the most reasonable cost, they do not, in reality, have the option of drydocking immediately. The extra consumption of lube oil is thus of no benefit to Underwriters – they were only ever liable for the cost of repairs as deferred and carried out in drydock. The excess lube oil consumption is not a repair cost – it is an extra or enhanced operational cost. There are no grounds for allowing it to Particular Average.
Vessel under Time Charter. Turbo charger breaks down in the South Atlantic. The vessel can continue to Santos but additional diesel oil will be consumed and will be charged by Time Charterers to Shipowners. The alternative is that the vessel could be towed to Santos. The vessel uses the extra diesel oil. At Santos repairs are deferred again but more additional diesel oil is claimed on the basis that repair costs would be cheaper if repaired later. Can the extra cost of diesel oil be claimed from Hull Underwriters?
Applying the same logic as in Example 1 above, there does not appear to be any ground that either the tugs or extra fuel getting to port could be charged to Underwriters. The second set of alternatives, once at the port, are effectively the same as in Example 1 and cannot be allowed to Particular Average.
Vessel’s crankshaft condemned but the new crankshaft will take 6 months to supply. Instead the Owners grind down existing crankshaft as temporary repair. Temporary repairs result in following –
(i) additional manning required in engine room;
(ii) turbo charger requires more frequent cleaning;
(iii) additional consumption of diesel oil;
(iv) as a result of running out of balance, some fretting results in main engine.
Can these additional costs (i) to (iv) be claimed from Hull Underwriters?
Firstly, Underwriters should recognize that the sole purpose of the ship is to be a freight or revenue earning instrument. It is patently unreasonable to leave her out of commission for 6 months awaiting parts if, by way of a temporary repair, she can be quickly returned to employment with the permanent repair effected on delivery of the necessary parts. It follows therefore that the temporary repairs is in itself reasonable and forms a direct claim on Underwriters.
There is suggestion that where a temporary repair is reasonable, any extra operating costs which is known will result direct from the temporary repair would be treated as part of the cost of that repair. However, it is submitted that whilst (ii) and (iv) can comfortably be allowed as Particular Average as they involve damage or quasi damage to the vessel, (i) and (iii) should be disallowed as they are merely the enhanced cost of running the vessel in semi-damaged condition.
Editor’s Note: It is advisable that if claims are put forward at the request of the Assured, which are not in accordance with the law (and practice as it should be) then the Adjusters should seek prior agreement of the Underwriters before issuing the adjustment, making it clear to both parties what the position is.
(Editor: Raymond T C Wong Average Adjuster)
Substituted Expenses in General Average
Click here for the presentation slides