This was an appeal arising from the grounding of the capesize bulk carrier Ocean Victory in the port of Kashima in Japan on 24 October 2006. The vessel was built in China in 2005. On 8 June 2005, by a demise charterparty, its owners, Ocean Victory Maritime Inc (OVM) had chartered it to Ocean Line Holdings Ltd (OLH) on the Barecon 89 form. On 2 August 2006, OLH time chartered Ocean Victory to China National Chartering Co Ltd (Sinochart) and, on 13 September 2006, Sinochart sub-chartered it to Daiichi Chuo Kisen Kasisha (Daiichi) for a time charter trip.

The demise charterparty and both time charterparties contained an undertaking (on materially identical terms) to trade the vessel between safe ports. On 12 or 13 September 2006, Daiichi gave Ocean Victory instructions to load at Saldanha Bay in South Africa and to discharge at Kashima. Between 19 and 21 September 2006, it loaded 170,000 tonnes of iron ore. It arrived off Kashima on 20 October 2006 and discharge began that afternoon.

On 24 October 2006, Ocean Victory sought to leave the port during a storm. However, due to extreme swell caused by long waves and a strong northerly wind, it allided with the northern end of the South Breakwater (which bounds the Kashima Fairway, the only route in and out of the port) and grounded. Shortly after another vessel, the Elida Ace, also grounded in the Kashima Fairway while trying to leave the port. Salvors were engaged but Ocean Victory broke in two and its wreck was subsequently removed.

Two years later, Gard Marine & Energy Ltd (Gard), one of the hull insurers at the time of her loss, took assignments of the rights of OLH and OVM in respect of the grounding and total loss of the vessel. Gard subsequently brought a claim against Sinochart (which Sinochart passed on to Daiichi) for damages for breach of the charterers’ undertaking to trade only between safe ports.

The primary judge (Teare J) held that the casualty was caused by the unsafety of the port in breach of the safe port undertaking in the time charters. He awarded Gard damages for the agreed value of the vessel (USD 88.5m), liability for SCOPIC expenses (USD 12m), damages for wreck removal expenses (USD 34.5m) and damages for loss of hire (USD 2.7m).

The charterers appealed. The Court of Appeal (Longmore, Gloster and Underhill LJJ) allowed the appeal and set aside the judgment of Teare J on the grounds that the conditions which affected Kashima were an abnormal occurrence and that there was no breach of the safe port undertaking on the part of the charterers. The Court of Appeal also held that, in the light of the insurance provisions of the demise charterparty, OVM and OLH (and Gard as their assignee) were not entitled to claim in respect of losses covered by the hull insurers. Gard appealed to the Supreme Court.

The issues in the appeal were:

1. Was there a breach of the safe port undertaking? In particular, was the port unsafe within the meaning of the safe port undertaking, so that the charterers were in breach or was there an ‘abnormal occurrence’ within the context of the safe port undertaking, which was no breach of the undertaking.
2. If there was a breach of the safe port undertaking, did the provisions for joint insurance in clause 12 of the Barecon 89 form preclude the rights of subrogation of hull insurers and the right of owners to recover in respect of losses covered by hull insurers against the demise charterer for breach of an express safe port undertaking.
3. If there was a breach of the safe port undertaking, was Daiichi entitled to limit its liability for Gard’s losses or any (and if so, which) of them as against Sinochart (and Sinochart in turn against Gard) pursuant to s 185 and Schedule 7 art 2.1 of the Merchant Shipping Act 1995 (which enacts the Convention on Limitation of Liability for Maritime Claims 1976 (LLMC 1976)).

Held: Appeal dismissed. The Court of Appeal was right to conclude that the combination of the storm and long waves at Kashima Port was an abnormal occurrence and not a feature of the port. The date for judging whether there was a breach of a safe port undertaking, is the date of nomination of the port. The test for whether a port is safe is to ask if a reasonable shipowner in the position of the particular shipowner trading the ship for his own account and knowing the relevant facts would proceed to the nominated port. If the answer to that is ‘yes unless there is an abnormal occurrence’, the second question to be asked is whether the damage was caused by an abnormal occurrence. An abnormal occurrence is out of the ordinary course of things and unexpected. The mere fact that the event is foreseeable does not make it a characteristic of the port. The combination of long waves and the exceptional nature of the storm was rare. This was an abnormal occurrence which caused Ocean Victory to allide with the South Breakwater. Therefore, there was no breach of the safe port undertaking by the charterers.

On issue 2, the court split 3:2 (Lords Mance, Hodge and Toulson agreeing, Lords Clarke and Sumption dissenting) finding that cl 12 of the Barecon 89 form precluded the rights of subrogation of hull insurers and the right of owners to recover in respect of losses covered by hull insurers against the demise charterer for breach of an express safe port undertaking.

On issue 3, the court found that if there had been a breach of the safe port undertaking, the sub-charterers would not have been entitled to limit their liability under the LLMC 1976. The Court of Appeal had correctly decided The CMA Djakarta [2004] 1 Lloyd’s Rep 460. Article 1.1 of the LLMC 1976 permits shipowners (and salvors) to limit their liability for claims set out in art 2 of the Convention. Article 1.2 provides that 'shipowner' shall mean the owner, charterer, manager or operator of a seagoing ship. The word 'charterer' should be given its ordinary meaning and does not connote a charterer acting in some other capacity. However, art 2.1 of the LLMC 1976 imposes a limitation on liability arising from loss or damage to property ‘occurring on board or in direct connection with the operation of the ship’. Property on board means something on the ship and not the ship itself. Further, the claim for the loss of the ship is not loss of property occurring in direct connection with the operation of the ship because it is the operation of the very ship that must cause the loss of property; the ship cannot be the object of the wrong. In other words, the ship cannot be both the victim and the perpetrator. The expression 'loss of or damage to property ... in direct connection with the operation of the ship' was not intended to include loss of or damage to the very vessel on the basis of whose tonnage limitation was calculated.