Tuesday, November 08, 2016

Global News

A.         U.S.A. – Marine Insurance

On May 20, 2016, the United States Court of Appeals for the Second Circuit affirmed a decision of the Southern District of New York in Fireman’s Insurance v. Great American Insurance, No. 14-cv-1346, holding that under the doctrine of uberrimae fidei, as well as Mississippi Common law, an insurance contract is void ab initio if the insured is found guilty of misrepresenting material facts which a prudent and reasonable insurance underwriter would have otherwise taken into consideration when determining whether to issue a policy.

The case involved a marine construction firm Signal International LLC (“Signal”). Signal had insured a dry dock it owned in Texas. Signal failed to disclose material information regarding the poor condition of the dock. It had also ignored several recommendations for the dock’s repair. Signal obtained pollution and excess property insurance from Great American Insurance and Max Specialty Insurance Company. The dock thereafter sank. Great American Insurance and Max Specialty Insurance Company argued their policies did not cover the costs of removing the dock from the site and for cleaning up the site.

The court allowed Insurance and Max Specialty Insurance Company to void the policy ab initio for Signal misrepresenting the condition of the dock.

B.         U.K. – Interpretation of Letter of Undertaking in Arrest Proceedings

The issue in this case(*1) was whether the claimant owners could apply to the court to require the defendant P&I club to increase the level of security available under a letter of undertaking issued by the club to the owners. The owners pleaded that the use of the words “liberty to apply” in the LOU meant that the court had power to make such a requirement. The club pleaded that the court had no such power. The parties each issued summary judgment applications against the other, and it was common ground that the case raises a question of construction and law suitable for disposition on a summary basis.

The clause in question provided:

“It is agreed that both Charterers and Owners shall have liberty to apply if and to the extent the Security Sum is reasonably deemed to be excessive or insufficient to adequately secure Owner’s reasonable Claims.

The case arose out of an incident in the Indonesian port of Padang on 9 October 2013 in which the chemical tanker, “FSL NEW YORK” was damaged during loading, and there was an escape of cargo. At the time, the vessel was on charter to ICOF Ship Chartering Pte Ltd. Both owners and charterers asserted claims against each other, owners threatening to arrest vessels owned by the group of which charterers are part.

The defendant P&I club, Norwegian Hull Club, of which charterers are members, provided owners with an LOU in the sum of US$3,500,000.

The Court held that:

In the context of disputes which may lead to the arrest of a vessel, a letter of undertaking issued by a P&I club is a convenient means of providing alternative security, and such letters are widely accepted internationally as such … The letter is issued at the request of a member of the club to the party making a claim, but issue is a matter of discretion, and there is no obligation on the club to do so … The purpose is to place the claiming party in no less a favourable position than if it had begun an action in rem and arrested the vessel... Subject to its particular terms, such an instrument will be treated as giving rise to a primary obligation undertaken by the issuer analogous to a bank guarantee … In that case, the special principles of construction applicable to contracts of suretyship will not apply, since these are premised on the surety’s secondary liability. Letters of undertaking should be construed as commercial contracts having regard to their commercial purpose.

The Court applied the interpretation that “is consistent with business common sense.” Of course, the parties took diametrically different positions as to what constituted business common sense. The Court then proceeded to weigh different factors in the LOU in the interpretation.

The Court held that the “liberty to apply” in the letter of undertaking did not give owners the right to apply to the court to require the defendant P&I club to increase the amount of its undertaking. The Court accepted the club’s construction that this provision enables owners to arrest charterers’ assets if the security provided proves to be inadequate, and notwithstanding the prohibition against arrest or re-arrest provided for earlier in the instrument. The right to enforce an increase in the amount of the security lay against the charterers, and not against the P&I club direct.

C.         U.S. – Limitation of Liability Applies to Passenger in Recreational Vessel

In a recent decision of the United States Court of Appeals for the Second District a vessel owner was entitled to bring a limitation action for injuries sustained by a passenger while diving off a recreational vessel when it was anchored in shallow navigable waters in Lake Oneida.(*2)

The owner of the vessel, Bruce Germain, and four others (including the complainant) had left Brewerton New York on the shore of Lake Oneida for an excursion on Mr. Germain’s 38 foot motor boat. Lake Oneida is connected to and part of the New York State Erie Canal System. Using the federal shipping lane, the five headed to the shallow Three Mile Bay, a popular spot for recreational swimming. The bay was less than a nautical mile from the shipping lane. On anchoring, the bay was already crowded with other boats. Later, as they were preparing to leave, the claimant back flipped off the port side of the vessel into the water striking his head on the lake floor. The complainant suffered a serious spinal cord injury.

At issue was whether a recreational injury occurring on a recreational vessel anchored in a shallow recreational bay of navigable waters could meet the test the Supreme Court had set out in 1972 for admiralty jurisdiction. In addition the Court of Appeal had to consider whether the matter met the “modern test” for admiralty tort jurisdiction: Could the activity disrupt maritime commerce and did it bear sufficient relationship to traditional maritime activity?

The Court of Appeals articulated the Supreme Court’s instruction that “ordinarily” “every tort involving a vessel on navigable waters falls within the scope of admiralty jurisdiction.” Jerome B. Grubart Inc. v. Great Lakes Dredge & Dock Co. 513 U.S. 527, 543 (1995). The Appeals Court reviewed the history of admiralty jurisdiction and the “modern test” and found that a passenger who jumped from a vessel onto open navigable waters has a “more than fanciful potential to disrupt maritime commerce.”  In addition, the Second Circuit stated that Germain’s maritime activity was the transport and care of passengers onboard of a vessel on navigable waters, which constituted a substantial relationship to traditional maritime activity.

(*1) FSL-9 Pte Limited and Northern Tankers v. Norwegian Hull Club [2016] EWHC 1091 (Comm.)
(*2) In Re Petition of Bruce Germain 15-665 issued June 1, 2016.


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