The Ocean Victory was lost at the port of Kashima, Japan on 24 October 2006. The port is only accessible via a narrow channel, the Kashima Fairway, which is difficult to navigate in northerly gales, while the port itself is vulnerable to long waves which can result in a ship being required to leave the port. Weather conditions rarely cause two events to occur at the same time.
On the day in question the ship sought to leave the port due to long waves but was unable to safely navigate the fairway due to a severe northerly gale. As a result, it ran aground and eventually broke in two. One of the ship's insurers, Gard Marine & Energy Ltd, sought damages against the charterers, on the grounds that they had agreed to trade only between safe ports.
The insurer was successful in the High Court, which awarded $140 million in damages. The judge found that even though the simultaneous occurrence of the two conditions was rare, both were "physical characteristics" or attributes of the port. This was overturned by the Court of Appeal.
Giving the judgment of the Supreme Court, Lord Clarke said that the 'abnormal occurrence' test traditionally used by the courts to determine whether there had been any breach of a safe port warranty was not the same as the 'reasonably foreseeable' test, relied upon in relation to certain other types of damages. The term, he said, "has its ordinary meaning" and "is not a term of art".
"As I see it, [a safe port warranty] necessarily assumes normality; given all of the characteristics, features, systems and states of affairs which are normal at the port at the particular time when the vessel should arrive, the question is whether the port is prospectively safe for this particular ship," he said. "If the answer is 'yes unless there is an abnormal occurrence', the promise is fulfilled."
"[This approach] provides a coherent allocation of risk between the various interests as follows. The owners are responsible for loss caused by a danger which is avoidable by ordinary good navigation and seamanship by their master and crew. The charterers are responsible for loss caused by a danger which was or should have been predictable as normal for the particular ship at the particular time when the ship would be at the nominated port and was not avoidable by ordinary good seamanship. The owners (and ultimately their hull insurers) are responsible for loss caused by a danger due to 'an abnormal occurrence' ... charterers are not insurers of 'unexpected and abnormal risks'," he said.
Due to the court's unanimous conclusions on the breach of warranty issue, it was unnecessary for the judges to go on to consider whether the provisions of the charter agreement prevented the owners from pursuing the charters directly for damages for insured losses, instead restricting them to a claim via their insurers. The majority of the judges did, however, find that the parties had agreed via an amended 'Barecon 89' charter form to exclude direct rights of recourse in this way. They also rejected a claim that the charterers would have been entitled to limit their liability for loss of the ship under the 1976 Convention on Limitation of Liability for Maritime Claims.
Maritime and complex commercial disputes expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the Supreme Court had "clarified an important question of risk allocation between owners, charterers and insurers".
"Although charterers typically take on the risk of unsafe ports (or units or places in the offshore context), even though the shipowner may be thought to be in a better position to assess such risks, the first instance decision in the Ocean Victory case had potentially widened the scope of the charterer's liability," he said. "It will come as a relief to charterers that the Supreme Court saw the simultaneous occurrence of these two otherwise not uncommon events, long waves and gales, as abnormal, thereby relieving the charterers of liability for the loss of the vessel."
"The judgment will also be of interest in other contexts where joint insurance is taken out, for example by contractors and sub-contractors in a building project. Although not necessary for their decision, the Supreme Court's conclusion that the joint insurance constituted a comprehensive scheme for dealing with repairs and losses regardless of who was responsible for them meant that, even if there had been a breach of the safe port warranty, there was no liability as between the owners and charterers, and therefore no right of subrogation to be exercised by insurers," he said.