General Average guarantees and the actionable fault defence
Navalmar UK Limited v Ergo Versicherung AG and Chubb European SE (The BSLE Sunrise) [04.11.19]
This article was co-authored by Jessica Tham, Trainee Solicitor, London office.
In The Cape Bonny , the Commercial Court found that the general average expenditure incurred by the Owners was due to an actionable fault in failing to make the vessel seaworthy, and therefore cargo interests were not liable to make any contribution. The Commercial Court has now confirmed in the BSLE Sunrise that ‘actionable fault’ under Rule D of the York Antwerp Rules 1974, is a defence available to insurers under the standard form ILU/AAA guarantee.
The dispute arose from the grounding of 1992 built general cargo ship BSLE Sunrise off Valencia in September 2012. The Owners incurred expenses in attempting to refloat the vessel and carrying out temporary repairs.
The Owners declared general average, and cargo interests issued general average bonds. The defendant insurers provided security for those bonds on the standard form general average guarantee approved by the Association of Average Adjusters and the Institute of London Underwriters.
The guarantees provided that the insurers undertook to pay “any contribution to General Average and/or Salvage and/or Special Charges which may hereafter be ascertained to be properly due in respect of the said goods”.
Owners brought a claim under the guarantees for contribution in general average, however cargo interests and their underwriters resisted the claim for payment under the guarantees, on the basis that Owners had failed to exercise due diligence to ensure that the vessel was seaworthy. The ‘actionable fault’ was therefore in breach of Article III rule 1 of the Hague Visby Rules.
Owners argued that this defence did not hold water because the general average guarantee wording imposed a primary obligation on the insurers to pay that which was “properly due” as between cargo interests and Owners. Owners relied upon the decision in the Maersk Neuchatel  in support of their interpretation, where the Court held that the wording of a letter of undertaking precluded the charterers from challenging the average adjustment.
The issue for the Court was whether, on the true construction of guarantees, an ‘actionable fault’ Rule D defence was open to the insurers as well as to the cargo interests.
The Court found in favour of cargo interests. The Court considered the particular language used, and held that the word “due” signified a sum that was legally owing or payable. A sum would not be legally payable until any Rule D defence had been determined, and the word “properly” fortified that conclusion. Whilst the guarantees created a primary obligation between the insurer and Owner, that did not lead to a wider and more onerous obligation which existed between Owners and cargo interests under the bonds.
There was no good reason for distinguishing between a general average bond and a general average guarantee. The language used clearly showed that the guarantees and bonds were intended to operate hand in hand, and there would have been no practical purpose in Owners seeking the issue of bonds if the intended effect of the guarantees had been to create an obligation on the Insurers to pay Owners without regard to the ultimate liability of the cargo interests.
Pelling J noted that payment was to be made “on behalf” of the cargo interests concerned, suggesting that what the insurer was agreeing to pay was what the parties to the adventure would otherwise have had to pay themselves.
The Judge referred to The Kamsar Voyager  and The Cape Bonny , highlighting instances where insurers successfully resisted claims under similarly worded guarantees. The decision relied upon by Owners in Maersk Neuchatel, however, could be distinguished from the present case. The wording of the letter of undertaking was materially different and issued in a different factual and commercial context. Maersk Neuchatel was the exception.
The Commercial Court ruling reinforces the position held in previous case law, that no sum should be payable under the guarantee, if the general average peril and resulting general average expenditure was as a result of an actionable fault on the part of the Owner. Insurers are left off the hook in such circumstances.
The approach taken by Pelling J confirms the settled practice and understanding of the shipping industry and market that only very clear wording should ever justify departing from that practice and understanding.