Unrecoverable General Average contributions from cargo interests

A web alert from Standard Club, written by Matthew Cao, Assistant Director at Richards Hogg Lindley, covers the recent case of The Cape Bonny, where the English Commercial Court ruled that neither the Chinese cargo interests nor their subrogated underwriters were liable for cargo’s proportion of GA (valued at approximately $2.1m) because the owner of the vessel had failed to exercise due diligence to make the vessel seaworthy at the commencement of the voyage.

P&I insurers normally provide cover in respect of general average (GA) contributions which are not recoverable from cargo or other interests and resulting from the shipowner’s breach of the contract of carriage.

Cao observed that the purpose of Rule D of the York-Antwerp Rules was to keep all questions of fault outside of the GA adjustment, i.e. the question of an actionable fault of the shipowners in failing to exercise due diligence to make the vessel seaworthy at the beginning of the voyage.

However, wrote Cao, regardless of any question of fault, it was necessary for an average adjuster to produce a GA adjustment and leave the parties concerned to make their own arguments and defences independently.

Even where it was obvious from the early stage of the casualty that cargo interests would have a defence against paying GA contributions, a GA adjustment would still be required to establish the proportions of GA attaching to individual interests, in order that the shipowners might recover the respective part from his hull underwriters and negotiate settlements with the cargo interests.

It follows therefore that where the cargo interests showed that the casualty which gave rise to the GA act resulted from the shipowner’s actionable fault, the shipowner’s claim for contribution in GA might meet with resistance.

In July 2011, on a laden voyage from Argentina to China, the Cape Bonny suffered a catastrophic main engine breakdown near Japan, while seeking to avoid the tropical storm Ma-On. She was towed to Yosu in South Korea, where the cargo was transferred to another vessel.

The shipowner declared GA. The Chinese cargo insurer put up a GA guarantee on behalf of cargo interests. Subsequently, the GA adjustment assessed cargo’s contribution to GA at approximately $2.1m.

However, the cargo insurer denied liability under the guarantee, alleging that the main engine breakdown was caused by the failure of the shipowner to exercise due diligence to make the vessel seaworthy at the commencement of the voyage.

The shipowner accepted that the vessel was unseaworthy at the commencement of the voyage as metal particles were found in the lubricating oil system, but it argued that it had exercised due diligence to make the vessel seaworthy before and at the commencement of the voyage. The shipowner claimed that the main engine damage was due to weld slag left in the lubricating oil pipes since the vessel had been built.

However, the cargo insurer argued that the shipowner did not exercise due diligence for the following reasons:

·       Particles were generated by spark erosion (caused by electrical currents) or by damage to the vessel’s chain drive gear.

·       Alternatively, the particles entered the engine due to inadequate compliance of the vessel’s procedures by the crew members when  cleaning the filters.

·       The crew’s failure to maintain in good condition the earthing device of the vessel’s shaft (the shaft is earthed with a propeller shaft slip ring, which should have prevented spark erosion), their failure to remove the particles from the lubricating oil and to clean the filters properly all amounted to a failure to exercise due diligence.

The court held that the vessel was unseaworthy at the commencement of the voyage due to:

·       the main engine bearing suffering from the presence of wear (in view of the crankweb deflection readings

·       the presence of foreign particles

·       the presence of damaged lubricating oil filters.

On the question of exercising due diligence, the Court held that:

·       ‘a skilled and prudent chief engineer would have ensured that a proper visual check was made of at least a representative sample of candles in May 2011’.

As the shipowner’s engineers and superintendents did not carry out such an inspection, the court concluded that the shipowners had not exercised due diligence to make the vessel seaworthy.  In particular, the damaged lubricating oil filters (candles) should have been detected before the commencement of the voyage in June 2011.

Additionally, in respect of the crankweb deflections, the court held that:

·       ‘…a prudent engineer or superintendent would have decided, in the light of the May 2011 deflection readings, that bearing clearance measurements should be taken. The failure to do so was a failure to exercise due diligence to make the vessel seaworthy…’

While the court determined both that the vessel was unseaworthy, and that the shipowners had failed to exercise due diligence, in respect of the damaged lubricating oil filters, the court did not find that the engine breakdown was caused by these damaged filters.

However, in respect of the crankweb deflections, the court held that, had the necessary bearing clearance measurements been taken, an increase in clearance of significantly more than 0.05mm would have been revealed thus necessitating a repair before the voyage could safely be undertaken.

Accordingly, the court proceeded to hold that this second element of the crew’s conduct which illustrated a lack of due diligence to make the vessel seaworthy, was causative of the engine breakdown.

The court’s conclusion on liability was therefore that the GA incident was caused by an actionable fault of the contract of carriage to make the vessel seaworthy at the commencement of the voyage. It follows that the cargo interests were not liable to contribute to GA and the claim against the cargo insurers was dismissed.

Standard Club wrote that the decision emphasized the importance of good vessel maintenance, which should be carried out in accordance with any planned maintenance system and adequately recorded.

It added that shipowners should ensure that their contracts of carriage include the relevant provisions of the Hague-Visby Rules.

From a P&I perspective, in addition to the provisions under club rule 3.14, in practice P&I clubs tended to insist on adequate GA security being obtained, even in circumstances where the prospects of the shipowners recovering GA contributions from cargo interests is remote. With GA security in place, the prospects of negotiating an amicable settlement with cargo interests were improved. Adequate security would consist of an average bond signed by the cargo receivers and an average guarantee signed by the cargo insurers.

Where it was anticipated that the cargo interests had a defence against payment of GA contributions, it would be advisable for the shipowner to seek advice from the P&I club early on and collate all relevant maintenance records which might be requested by the cargo interests at a later stage. In this respect, to protect their position, shipowners should discuss with the P&I club before disclosing any documents to opposing parties.