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MT "Cape Bonny" Tankschiffahrts GMBH & Co KG v Ping An Property and Casualty Insurance Co of China Ltd, Beijing Branch

General Average disputes rarely seem to reach the courts so the Commercial Court’s recent judgment in Cape Bonny Tankschiffahrts v. Ping An Property provides a useful summary of where the law stands on certain key points, in particular with regard to the duties owed by shipmanagers. It also provided clarity on a previously unresolved question concerning burden of proof.

Background

On 14 July 2011, in the course of a laden voyage from Argentina to China, a Suezmax oil tanker built in 2005 suffered a catastrophic main engine failure. If this were not bad enough, the vessel was at that time seeking to avoid typhoon Ma-On. General Average was declared and the vessel was taken in tow to South Korea where the cargo was transhipped for onward delivery. Whilst in South Korea, the vessel had to be towed out of the path of another typhoon and was then released for repairs on 9 August 2011.

Ping An Property and Casualty Insurance Company, a Chinese insurance company, provided a General Average guarantee on behalf of cargo interests in favour of the owners. In due course an average adjustment was prepared which assessed cargo’s contribution in General Average to be about US$2.5 million. In the event, the insurer denied liability under the guarantee, alleging that the casualty was caused by the actionable fault on the part of the owners.

Judgment

During the course of the two week trial, Mr. Justice Teare heard evidence from six witnesses of fact and four expert witnesses who dealt with engineering matters and technical shipmanagement.

The owners accepted that the vessel was unseaworthy at the commencement of the voyage by reason of the presence of metal particles in the luboil. Under the Hague-Visby Rules, the burden was therefore on the owners to show that they exercised due diligence to make the vessel seaworthy at the commencement of the voyage. The owners said that they could do so because the main engine failure was the result of a latent defect, namely residual weld slag dating from the vessel’s construction. Mr. Justice Teare dismissed that contention as improbable in all the circumstances. Having effectively dismissed the owners’ case, Mr. Justice Teare then went on to consider the alternative explanations for the casualty advanced by the insurers. In the event, the learned Judge concluded that the particles were a consequence of abnormal wear to main bearing no. 1 immediately before the casualty, and that those particles were only able to cause damage to the main engine because the vessel’s luboil filters were damaged. 

The point to note for practitioners is that the court’s conclusion was expressly based on the factual and expert evidence before it alone, and not because the owners’ only explanation had been dismissed: see The Popi M [1985] 2 Lloyd’s Rep. 12.

The court then had to decide if those facts amounted to a failure to exercise due diligence. Mr. Justice Teare concluded that whilst the owners had failed to exercise due diligence in that the inspection of the filters was too superficial, this failure was not causative. But the insurers had another string to their bow. They said that the movement in the trend in the crankshaft deflection readings taken by the crew was significant and that a prudent engineer and/or shoreside superintendent should have recognised and acted on that information, specifically by taking bearing clearing measurements. Had that been done, the wear would have been detected and repaired so that the voyage could have been safely undertaken. The court accepted that case and held that owners’ failure in this regard was therefore causative.

The point to note for practitioners is that liability on the owners’ part was founded both on a failure by the engineer aboard the vessel and on the failure of the technical superintendent ashore. Vessel owners therefore need to be astute that their shoreside support is not simply filing away the crew’s reports without first applying some independent thought as to whether action is required in response to those reports.

Finally, there was a dispute as to the quantum of the amount claimed. Given the decision on liability this did not arise, but the point had been argued and the learned Judge dealt with certain of the points briefly.

For practitioners, the point to note is one concerning the burden of proof. The owners relied on the commentary on Rule A of the York-Antwerp Rules in the leading text book (Lowndes & Rudolf) to suggest that expenditure will be deemed to have been reasonable unless the contrary be proved and therefore that the burden was on the insurers to show it was unreasonable. The insurers by contrast relied on Rule E of the York-Antwerp Rules, which provides that the onus is on the party claiming to show that an expense is properly allowable in general average, to say that the burden was on the owners.To date, no authority has grappled with this apparent difference in emphasis in the Rules. Mr. Justice Teare concluded that the insurers were correct and that the burden of proving that any expenditure claimed was reasonable was on the owners pursuant to Rule E and the Rule Paramount. Although obiter, it is to be hoped that Mr. Justice Teare’s view will help resolve any residual doubt as to this point should it arise in future disputes.

Christopher Smith QC and Sean Snook, instructed by Rodgers Liu & Co., acted for the successful insurers; Robert Bright QC and Saira Paruk, instructed by Reed Smith LLP, acted for the owners. 

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