Now you see it, now you don’t

PHANTOM vessels are ships which are used by unscrupulous individuals as a vehicle for grand-scale theft. Typically, after loading a bulk cargo, the vessel will sail and shortly thereafter the buyer of the cargo will receive what appear to be genuine telex messages from the master complaining of delays. In reality, the vessel is destined for a different destination to the one named in the bills of lading, where the cargo is being offloaded, stored or sold to another buyer. The buyer will usually then be sent a final telex stating the vessel has sunk, and he will proceed to make a claim under his cargo insurance policy. After investigations by insurers and their lawyers, the true situation comes to light. The resultant claims nearly always involve a considerable amount of money and lead to disputes between the buyers and their cargo insurers.

Three recent cases are classic examples of such phantom shipments. Step by step, the cases have developed the defences which can be successfully used by insurers under the usual Institute Cargo Clauses (ICC(A)) policy and Institute Classification Clause (ICC).

The first case, Sirena I, was decided by the Court of Appeal in Singapore in favour of the insurers on the basis of a defence based on the ICC. The second case was the Prestrioka in which Mr Justice Andrew Smith indicated that he agreed with the argument based on Section 44 of the Marine Insurance Act 1906 which had been referred to by Lord Denning in the Salem, but the judge left the issue ‘in the air’.

In May last year, however, another phantom vessel case was brought before the Hong Kong Court (The Pacifica, Nam Kwong Medicines & Health Products Co Ltd v China Insurance Co. Ltd) and this time Mr Justice Stone was provided with an opportunity to review both the ICC defence and Section 44 of the Marine Insurance Act 1906 defence. Mr Justice Stone found for the insurers on both the ICC arguments and the Section 44 argument. In respect of the ICC argument, he dismissed the attempts of the cargo owners to rely on the ‘held covered clause’ following the reasoning in Liberian Insurance Agency v Mosse. He stated:

“There was no possibility of the assured being held covered under the ICC in that no prudent insurers would be prepared to underwrite this risk at any reasonable premium on the basis of the facts capable of being known at that the material time; the held cover provision in the ICC did not assist; and such provision could not be invoked where it would be impossible to offer the risk at a commercial rate of premium.”

The plaintiffs also referred to Clause 8(1) of the ICC (A) policy which states:
“This insurance attaches when the goods leave the warehouse for the commencement of the transit …”

The plaintiffs argued that the risk attached from the time the goods left the warehouse or the place of storage in Pasir Gudang for the commencement of the transit and, therefore, displaced Section 44 of the Marine Insurance Act 1906, which states:

“Where the destination is specified by the policy, and the ship, instead of sailing for that destination, sails for another destination, the risk does not attach.”

The judge refused to accept this line of argument, stating:

“As to Section 44, a voyage policy was no more than insurance on a particular risk; it was evident that if in actuality the voyage performed was not the voyage described in the policy, then equally clearly it was not the risk that the insurer had bargained to cover; the scope of the cover from shipment was defined by reference to the voyage so specified and it was not easy to see why Clause 8 of the ICC(A) (the insurance attaches when the goods leave the warehouse for commencement of the transit) should circumvent or be circumventing that action.”

He concluded:

“Clearly it was the voyage that constituted the key component of the [transit] referred to in Clause 8 and the period prior to loading was not to be considered independently of the prescribed voyage; it was subordinate to the voyage which was the core of the adventure, so that if the ship sails for a destination other than one described in the policy the insurance did not attach; S 44 applied and the plaintiff's claim failed.”

The judgment was later referred to and reconfirmed in the Prestrioka case when it came before the Court of Appeal in the UK. It should be noted that the Pacifica case did not proceed to appeal in June 2003 as planned and, therefore, remains good law.