In brief - UK Supreme Court decision on SCOPIC charges in the "RENOS" appeal case may be good news for hull insurers

The question for consideration by the Supreme Court in Sveriges Angfartygs Assurans Forening (The Swedish Club) and others (Appellants) v Connect Shipping Inc and another (Respondents) was whether the first instance Judge and the Court of Appeal in London were right in concluding that there had been a constructive total loss of the vessel "RENOS", which had been damaged by an engine room fire in the Red Sea in 2012. 

Salvors were appointed and the vessel was towed to a place where her cargo was discharged and then to Suez where the salvage services came to an end. A tug had been hired to stand by the vessel throughout the time she was at Suez and to then tow her to a place where she could be scrapped or repaired. 

A claim was made against the hull underwriters for a constructive total loss, Notice of Abandonment having been served on 1 February 2013, which was not accepted by the hull underwriters. 

The only issue in the case was the extent of the indemnity, but Underwriters denied that there had been a constructive total loss. 

Definition of constructive total loss in Marine Insurance Act

That question involved consideration of section 60(2)(ii) of the Marine Insurance Act 1906 (UK) (section 66(2)(b) of the Marine Insurance Act 1909 (Cth)). 

Section 66 is the provision which defines a "constructive total loss". That subsection reads as follows: 

66(2)(ii) In particular, there is a constructive total loss: 

(b) in the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired. 

In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interest, but account is to be taken of the expense of future salvage operations and of any future general average contribution to which the ship would be liable if repaired… 

In writing the Judgment of the Supreme Court, Lord Sumption noted (at [3]) that: 

As a matter of practice, the "cost of repair" has always been treated as including salvage charges, and that is put beyond question by clause 19.2 of the Institute Time Clauses Hulls (1/10/83), which requires account to be taken of the "cost of recovery and/or repair". 

UK Supreme Court considers what expenditures can be included in costs of repair

The issues before the Supreme Court were whether expenditure, already incurred before the service of the Notice of Abandonment, and whether charges payable to the salvors under the SCOPIC clause of the Lloyd's Open Form could be included within such costs. 

So, both of the issues before the Court related to the expenditure to be taken into account in computing the cost of repair.

The Underwriters argued that expenditure already incurred before the service of the Notice of Abandonment was not to be taken into account. That would mean that the whole of the salvors' remuneration would be excluded together with the greater part of the cost of the standby tug and other miscellaneous costs incurred at Suez. At first instance, the Judge found that the "cost of repairing the damage" would be between US$9,079,533.05 and US$11,248,300.20 as against an insured value of US$12,000,000. Thus there would only be a partial loss payable by insurers. 

SCOPIC charges had also all been incurred before the service of the Notice of Abandonment and the first instance Judge found that if the SCOPIC charges were excluded from the computation, but other costs incurred before Notice of Abandonment are included, the cost of repairing the vessel ranged from US$11,820,260.05 to US$30,989,038.20 as against the insured value of US$12,000,000. In those circumstances the vessel may have been a constructive total loss depending on which was the true figure. 

The Supreme Court determined (at [19]) the first issue on the basis that:

The “cost of repairing the damage” for the purpose of determining whether the vessel was a constructive total loss included all the reasonable costs of salving and safeguarding the "RENOS" from the time of the casualty onwards, together with the prospective cost of repairing her". 

The decisions of the lower courts were affirmed on that point. 

However, in relation to the SCOPIC charges, the Supreme Court held that they were not part of the "cost of repairing the damage" or the "cost of recovery and/or repair" for the purpose of clause 19.2 of the Institute Clauses because they were unconnected with the damage to the hull or its hypothetical reinstatement. The appeal was therefore allowed on that point and the matter was remitted to the first instance Judge to determine in the light of the Court's Judgment whether there was a constructive total loss. 

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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