Global law firm Reed Smith on Tuesday (30 January) shared key takeaways of the UK Supreme Court’s judgement of a case involving vessel “MT Polar” which was chartered for a voyage from St Petersburg to Singapore laden with a cargo of fuel oil when it was seized by Somali pirates in 2010 until ransom was paid. Cargo interests disputed liability for their share of the ransom payment:

Key takeaways

• The UK Supreme Court recently gave judgement in The Polar, ruling that the cargo interests were liable for their share of a ransom payment claimed in general average.
• Shipowners may need to consider the specific wording of their charters, including any war risks clauses, when assessing their rights and liabilities in war-affected areas.
• The judgement has a limited impact on shipowners’ right to deviate in the face of potential Houthi attacks in the Red Sea, as the decision is largely based on the construction of terms.

On 17 January 2024, the UK Supreme Court handed down judgement in The Polar [2024] UKSC 2. The judgement addresses an issue of current relevance given the ongoing war risks issues in the Red Sea area. 

Key facts

The vessel MT Polar was chartered for a voyage from St Petersburg to Singapore laden with a cargo of fuel oil.

The voyage charter contained a specific agreement that the voyage would take place via the Suez Canal, with the wording “All above via Suez with the Suez costs to be for Owners account”.

This necessarily required that the vessel would transit the Gulf of Aden, a known piracy risk area at the time. The charter incorporated the amended BPVOY 4 form, including a revised clause 39, “War Risks” (Clause 39) and various additional provisions, including a “Gulf of Aden” clause. Clause 39 gave the Owners considerable liberties to cancel or vary the performance of the charter if performance would expose the vessel to war risks.

On 30 October 2010, while transiting the Gulf of Aden, the vessel was seized by Somali pirates and held captive for 10 months until a ransom of US$7.7 million was paid. General average was declared by the Owners, including the ransom payment. Eventually the adjustment found that over US$5.9 million was due from cargo interests. Cargo interests disputed liability for their share of the ransom payment. The present appeal is an appeal brought by the cargo interests against the Owners.

The Supreme Court judgement addresses several issues, the most important of which (as a threshold) is whether, on the proper interpretation of the charter, there was an insurance code or insurance fund agreed between the Owners and Charterers to compensate the Owners. If there is such an insurance code or fund, it means the parties have agreed to look to the insurers (rather than to each other) for indemnification.

The Owners’ right to refuse the Charterers’ order

When dealing with this threshold issue, the court considered whether the Owners would have been entitled to refuse to transit Suez and the Gulf of Aden on the basis that this transit represented a war risk which exposed the vessel to danger.

In this regard, the court distinguished the case Kodros Shipping Corp of Monrovia v. Empresa Cubana de Fletes (The Evia (No 2)) [1983] 1 AC 736 [HL], where a complete insurance code to similar effect was held to exist under a time charter, a decision that was not without its critics. The complete code was held to exist based on four particular features of the charter identified by Lord Roskill, the first of which was that Clause 21 (A) gave the owner an unqualified right to refuse to accept orders for the ship to go or to continue to any place which would subject her to any danger arising as a result of war.

However, in The Polar, although Clause 39 was also expressed in comprehensive and unqualified terms, it had to be construed in its contractual context and against the background of the circumstances existing at the date of the charter.

The relevant background included 1) the well-known piracy risks in transiting the Gulf of Aden, 2) the agreement between the Charterers and the Owners that the contractual voyage would be “via Suez”, and 3) the detailed arrangements as to the parties’ rights and obligations when the vessel transited the Gulf of Aden. Considering these factors, the court said it was unacceptable for the Owners to refuse to take on the known piracy risk of transiting the Gulf of Aden on the terms they had agreed.

The court went on to say that the Owners may have been able to rely on the ”War Risks” clause and refuse to proceed if there had been “a change in the nature of the piracy risk, or a change in its degree sufficient to make it qualitatively different”. In this case, the court did not consider that the piracy risk changed “at any time from that known and contemplated at the time that the charter was agreed”, and the Owners were therefore not entitled to refuse a route through Suez and the Gulf of Aden.

Having considered the above factors and various other aspects, the court concluded that there was no insurance code or fund between the parties. Since the existence of the insurance code or fund was the foundation of the cargo interests’ appeal, the court dismissed the appeal.

Implications for Red Sea issues

This decision of the Supreme Court is relevant to charterparties for passage via the Gulf of Aden and Red Sea, because it affects shipowners’ rights to deviate to avoid potential Houthi attacks. However, the application of this judgement to current Red Sea issues is arguably limited because:

• Many charterparties will not contain an express obligation to proceed via Suez and the Red Sea, giving shipowners greater freedom to navigate by a usual or customary route.
• Most charterparties for ships presently in the area may pre-date the outbreak of the current hostilities, meaning that a shipowner can usually rely on a change in the nature of the risk since the charter was concluded.

Of course, every charter will need to be considered on its own terms, taking into account the specific wording and context of the relevant clauses. Reed Smith is advising on a range of issues related to war risks and Red Sea transit.

Photo credit: CHUTTERSNAP from Unsplash
Published: 1 February, 2024