The judgment of Mrs Justice Dias in MOK Petro Energy v. Argo (No. 604) Limited (The “F1”) [2024] EWHC 1935 (Comm), handed down on Friday 26 July, contains an important analysis of the requirement of physical “damage” in a particular average claim. It is also one of the first reported decisions to analyse the operation of sections 10 and 11 of the Insurance Act 2015 where there has been a breach of warranty.
Simon Rainey KC and Benjamin Coffer appeared for the successful London market reinsurers, instructed by Michael Volikas and Leah Rutley of Wikborg Rein. Guy Blackwood KC appeared for the Claimant with David Walsh of Essex Court Chambers, Lewinton at HFW.
The claim was in respect of a blended cargo of gasoline and methanol, which had been produced by combining gasoline and methanol blend stocks on board the carrying vessel. The cargo produced by this blending process was prone to phase separation, a phenomenon in which the blended cargo separates out into its constituent parts when cooled to low temperatures. The cargo’s propensity to phase separate affected its utility and its economic value, because samples of the cargo could not be cooled to the low temperatures required by standard gasoline quality tests.
The goods were declared to an open cover policy and insured on the terms of the ICC(A) with cover “Shore tank to shore tank”. The Claimant assured was the purchaser of the cargo. The Defendants were London market reinsurers, sued directly pursuant to a cut-through clause.
On the facts found by the judge, it was inevitable that the blend produced by the blending of the gasoline and methanol blend stocks in the proportions in which they were actually loaded would undergo phase separation at relatively warm temperatures and therefore would not be able to pass standard quality tests.
The Claimant argued that it nevertheless had a valid claim under the insurance: it argued that the decision by the seller of the cargo (who was not party to the insurance) as to the proportions in which the blend stocks should be loaded was a fortuity which was covered by the policy. The result of that fortuity, argued the Claimant, was to cause the blend to suffer physical damage by phase separating when cooled to low temperatures and/or by having a propensity to do so.
The Judge rejected the Claimant’s claim. Although she accepted that the blending proportions were fortuitous from the point of view of the Claimant, she found that there had been no “damage” to the cargo. She held that “damage” requires a physical change in state which is economically harmful. Where a blended product is defective from the outset because of the nature of the raw materials from which it is produced, there is no “damage” capable of giving rise to an insurance claim under a marine cargo policy. In any event, the fact that the blended cargo had a propensity to undergo a change in physical state under certain conditions did not constitute damage.
The Judge also held that there could be no claim under the insurance because the cargo had only ever existed in its defective condition: until the gasoline and methanol blend stocks were loaded from the shore tanks, there was nothing which could be said to constitute a shipment or cargo, and therefore nothing to which the insurance could attach. The individual blend stocks were not damaged; all that happened was that they combined to form an inherently defective product. The blended product never existed in any other state.
The Judge went on to hold that the claim would have failed in any event because there had been a breach of a warranty which required inspection and certification of the shore lines at the load port. The Judge found that the shore lines had been inspected but not certified. The Claimant sought to rely on a certificate issued retrospectively by the survey company several years later, but the Judge held that the retrospective certification was insufficient: the certificate was required to be produced as part of the survey at the load port.
The warranties included a statement that “Failure to comply with a warranty will, in normal circumstances, void this insurance policy”. The Claimant argued that this amounted to an agreement to contract out of the ordinary effect of a breach of warranty under section 10 of the 2015 Act, but the Judge accepted the reinsurers’ argument that this was merely a badly-drafted warning which was not intended to have contractual effect.
The Claimant sought to rely on section 11 of the 2015 Act to argue that a failure to comply with the certification requirement was not a breach which could affect the liability of the insurers because it was immaterial. The Judge accepted the reinsurers’ argument that section 11 requires a broad enquiry as to whether compliance with the term in question could have reduced the risk of the loss which actually occurred. In this case, there was no dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination.
