Posted: 15/08/2024
In its recent decision in MOK Petro Energy FZC v Argo (No.604) Limited, The F1 [2024] EWHC 1935 (Comm), the High Court examined whether an inherent feature of a blended gasoline cargo could constitute physical damage for the purposes of a particular average insurance claim under the ICC (‘Institute Cargo Clauses’) (A).
The claimant, MOK Petro Energy FZC, an oil trading company based in Dubai, entered into a contract dated 5 May 2017 for the purchase of a cargo of 11,800 MT (+/- 5%) 92 RON unleaded gasoline FOB Sohar, from PetroChina International (Singapore) Pte Ltd. PetroChina was not a party to the present dispute.
The cargo was a blend of gasoline and methanol, drawn from four separate shore tanks at the OTT terminal at Sohar, and blended on board the vessel. Quality and quantity were determined and certified at the load port on the basis of shore tank samples taken prior to loading. Two certificates of quality provided that the cargo met the contractual specification.
Pure gasoline does not mix readily with water to form a homogenous mixture (ie they are immiscible). However, when gasoline is blended with methanol, the blend can readily absorb water. The blended cargo in question, however, was found to have absorbed too much water, thus rendering it more prone to phase separation, whereby the blended cargo separates out into its constituent parts during cooling. The cargo’s increased propensity to phase separate reduced its economic utility, because cargo samples could not be cooled to the low temperatures required by the quality tests at the port of discharge without undergoing phase separation.
The cargo was sold by MOK for delivery in Hodeidah, Yemen, with the description ‘Gasoline 92 RON with no more than 15% Oxi according to quality standards and requirements in Yemen’. Quality and quantity were to be determined ‘by official Yemeni competent authorities’. During testing, which required cooling the samples to 1°C, the Yemeni authorities observed phase separation in some samples; the cargo was concluded to be off-specification and was rejected. It was ultimately sold to a salvage buyer. The value of the cargo certified at the load port was US$65.79/bbl, whereas its off-spec value was around US$36/bbl.
MOK was insured by Cedar Insurance & Reinsurance Co Ltd under an all-risks marine cargo open cover for shipments of petrochemical cargoes with cover from ‘shore tank to shore tank’ and reinsured by the defendants on back-to-back terms.
MOK claimed an indemnity under the policy on the basis that the cargo was contaminated by 9MT water during loading (most likely derived from the washing of the vessel’s tanks), which caused the phase separation and thereby brought the cargo off-specification. MOK claimed the difference between the sound value of the cargo and its actual value, on the basis that this represented its loss attributable to damage.
The defendant reinsurer’s primary position was that the cargo as blended at the load port was already off-specification, having a propensity to phase separate at higher ambient temperatures, and that the contamination by water was therefore irrelevant. In the alternative, as MOK had breached a survey warranty in the policy concerning the inspection of the shorelines at the load port, the claim should fail in any event.
Shortly before trial, MOK advanced an alternative case, that the phase separation, or alternatively the cargo’s propensity to separate, was itself damage, caused by the proportions in which PetroChina had blended the cargo, and which was a fortuity for the purpose of the policy. The defendants argued that neither of these cargo properties amounted to damage within the meaning of the policy.
Mrs Justice Dias found on MOK’s primary case that it was more likely than not that the cargo was already off-specification at the load port, and that there had therefore been no loss of value caused by water ingress.
On the alternative case, the judge was required to examine the question of whether the actual phase separation, or the propensity for the cargo to phase separate, could amount to damage.
As to the former, the judge was referred to Quorum AS v Schramm [2002] CLC 77, where it was held that damage requires an alteration in physical state, even if only on a sub-molecular level, and to Pilkington United Kingdom Ltd v CGU Insurance plc [2004] LRIR 891, which held that it is sufficient if such alteration in physical state is harmful in a commercial context.
The present facts were however distinguishable since the separation was reversible and was ‘no more than the natural behaviour of a particular product which reverses when the temperature gradient is reversed’, and could not therefore be properly regarded as ‘damage’.
The judge was equally unconvinced that the propensity to phase separate was itself capable of being regarded as damage. In particular, Mrs Justice Dias referred to the terms of the ICC(A) and what was actually covered by the policy. The subject matter of the cover under the voyage policy was ‘the following shipment’, being the blended gasoline and methanol together, not the constituent parts individually.
As such, the cargo did not come into existence until the constituent parts were blended, and therefore did not ever exist without the propensity to phase separate. It was well-established that damage does not occur where individual (undamaged) components are combined to form an inherently defective product: Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] 2 Lloyd’s Rep 379.
Mrs Justice Dias therefore found that MOK’s alternative claim failed on the grounds that there had been no loss or damage to the cargo that was the subject of cover under the policy.
Having held that neither the phase separation nor the propensity to separate amounted to damage, the judge was not obliged to decide whether the decisions made by PetroChina on blending could amount to a fortuity as far as MOK was concerned.
Although an examination of whether MOK had breached its survey warranty was not therefore strictly required, the judge briefly examined whether there was a failure to inspect and certify the shorelines in accordance with the provisions of the policy.
The judge found that although the shorelines had likely been inspected, they had not been certified, which she considered was a separate and distinct obligation under the policy. Although a certificate produced some years later certifying the inspection was relied on by MOK, it was found as a matter of legal interpretation that such a certificate should have been produced within a reasonable time.
An additional argument was advanced by MOK, as to whether the ‘failure to comply with a warranty will, in normal circumstances, void this insurance policy’ was an agreement to contract out of the ordinary effect of a breach of warranty under section 10 of the Insurance Act 2015. This was rejected on grounds that the words were insufficiently clear as to the meaning of the word ‘normal’ and were not therefore intended to have contractual effect.
A final argument relying on section 11 of the same Act, that a failure to certify the shorelines was immaterial, and therefore not a breach which would affect the liability of the insurers, was also rejected on the grounds that compliance with the warranty as a whole was capable of minimising the risk of water contamination.
Finally, scientific expertise figures prominently in maritime litigation concerning the latent properties of liquid cargoes, both in respect of the credibility of sample analysis evidence and the underlying chemistry of the subject cargo. Where a ship’s tanks are used to perform blending operations, there is the potential for yet further evidential complexity and unpredictable chemistry; litigation risks to which the vessel’s crew may be unaware.
In the present case, the learned judge had to deal with evidentiary issues concerning a lack of sample sealing and ambiguities in the sample chain of custody, neither of which were found to undermine the joint analysis evidence. Mrs Justice Dias also had to form a view on the relevance of inconsistent load port sample analyses showing the cargo to be on specification, and the credibility of the competing evidence of highly qualified expert chemists. No doubt, liquid cargo claims practitioners and cargo insurance lawyers alike will appreciate the groundbreaking analysis on these issues in The F1.
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