3.3 The majority’s reasoning
The majority of three judges held that the co-insurance clause in Clause 12 barred a subrogated claim against the bare-boat charterer in case of total loss under the hull insurance. According to Lord Toulson, the critical question was
… whether the contractual scheme between the owners and the demise charterer precluded any claim by the former against the latter for the insured loss of the vessel. This is a matter of construction. It has become a common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them. The question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss.(1) Para 139.
The judge referred to previous cases concerning building contracts where the owner, contractors and sub-contractors were jointly assured, and when the electrical sub-contractor were liable for fire due to breach of a warranty in the contract with the owner, the co-insurance barred the owner from claiming the damage from the sub-contractor.(2) Para 139-140, with reference to Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2002] 1 WLR 1419 and Mr Recorder Jackson QC, as he then was, in Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] 1 Lloyd’s Rep 448, 458. The main argument was that “it cannot have been the parties’ intention that parties who were jointly insured under a contractors’ all risks policy could make claims against one another in respect of damage covered by the insurance, or that the insurers could make a subrogated claim in the name of the owners against” the sub-contractor. This was an “implied term”, presupposing that the party relying on it has not by his own conduct prevented recovery of the loss under the policy”.(3) Para 140 with reference to Board of Trustees of the Tate Gallery v Duffy Construction Ltd [2007] BLR 216. See for a different result Haberdashers' Aske's Federation Trust Ltd v Lakehouse Contracts Ltd and others [2018] EWHC 558 (TCC), where the judge in the Technology and Construction Court (TCC) held that a requirement for a sub-contractor to maintain its own GBP 5 million insurance in its sub-contract prevented it from claiming protective cover under a project insurance policy in which it became co assured.
In the present case, the Court of Appeal had followed the same reasoning in holding that the proper construction of clause 12 was that there was to be “an insurance funded result in the event of loss or damage to the vessel by marine risks” and that, if the demise charterers had been in breach of the safe port clause, they would have been under no liability to the owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation. The court did not consider that the introduction of clause 29 on safe ports was intended to alter the way in which clause 12 was to operate.(4) Para 141. Lord Toulson agreed with this and added:(5) Para 142.
The demise charter allowed for a subdemise with the owners’ consent, which was not to be unreasonably withheld. The risk existed that the vessel might be directed to an unsafe port, not necessarily by negligence on anyone’s part, so causing peril to the vessel, but the risk of consequential damage to the vessel was catered for by the insurance required to be maintained by the demise charterer in the joint names of itself and the owners. The commercial purpose of maintaining joint insurance in such circumstances is not only to provide a fund to make good the loss but to avoid litigation between them, or the bringing of a subrogation claim in the name of one against the other. I do not accept that by substituting clause 29 for clause 5 the parties intended to subvert that purpose.
Lord Toulson also stated that “insurance arrangements under clause 12 provided not only a fund but the avoidance of commercially unnecessary and undesirable disputes between the co-insured”.(6) Para 144.
Both lord Mance and lord Toulson commented for the majority upon the relationship between clauses 12 and 13. BIMCO had explained that the reason for the optional alternative of clause 13 was that when a vessel is bare-boat chartered for only a short period it may make sense for the owners to carry on with their own insurances. Clause 13 therefore provides that the vessel is to be kept insured by the owners against marine and war risks, and that the owners and their insurers are to have no right of recovery or subrogation against the charterers on account of loss or damage covered by such insurance. Lord Mance stated that:
It would be unnecessary to include equivalent words in clause 12. It cannot have been the parties’ intention that the charterer’s exposure to liability should be greater under clause 13, where cover against marine and war risks was to be maintained at the owner’s expense than under clause 12, where it was to be maintained at the charterer’s expense. Longmore LJ put the point pithily when he described the exclusion of rights of recovery or subrogation in clause 13 as “a confirmation rather than a negation of such exclusion in the more usually adopted clause 12 for the longer term charters when it is the charterers who pay the premium” (para 88).(7) Para 135.
Lord Toulson agreed and concluded
… that the express exclusion of a right of recovery or subrogation in clause 13 was simply belt and braces in the context of insurances taken out by owners, and that the reason why no such express term appears in clause 12 was that it never occurred that there could be such claims in the context of insurances arranged by charterers to cover their own as well as owners’ interests. It is inconceivable that the parties intended fundamentally to alter the incidence of risk by permitting or excluding breach-based claims as between themselves in respect of a hull loss, depending upon whether it happened to be convenient to continue to use hull insurances taken out by owners or to rely on fresh insurances taken out by charterers.(8) Para 117.