The ship Renos was seriously damaged by an engine room fire. The owners (the respondents) appointed salvors to salve and tow the ship to safety. Once the ship was towed to safety, the respondents issued a notice of abandonment and declared that the ship was a constructive total loss. The Swedish Club, the leading hull and machinery (H&M) insurer, as well as the other H&M insurers (the appellants) acknowledged that there was a partial loss but denied that there was a constructive total loss.

Section 60(2)(ii) of the Marine Insurance Act 1906 (UK) states that a ship is a constructive total loss if the costs of repairing the damage would exceed the value of the ship repaired.

Two issues arose in respect of determining whether the ship was a constructive total loss: first, whether the costs of repairs would include the expenditure already incurred before the service of the notice of abandonment; and, secondly, whether the costs of repairs would include Special Compensation, Protection and Indemnity Clause (SCOPIC) costs. SCOPIC is an additional remuneration for measures taken while performing the salvage services in order to prevent or minimise damage to the environment. It was developed to supplement art 14.1 of the International Convention on Salvage 1989 (Salvage Convention 1989) which entitles salvors to 'special compensation' from the shipowner for exercising a duty to prevent or minimise damage to the environment.

Both issues were decided in favour of the respondents in the courts below. The appellants appealed.

Held: Appeal partially successful. SCOPIC costs do not form part of repair costs for the purpose of determining constructive total loss.

In relation to the first issue, the Court dismissed the appellants' case. The Court held that for the purposes of determining whether the ship was a constructive total loss, the costs of repairs would include all reasonable costs of salving and safeguarding the ship from the time of the casualty, together with the prospective costs of repair. The costs of repairs were not reduced just because part of the costs had already been incurred at the time of the notice of abandonment.  

On the second issue, the appellants submitted that the test for determining whether an item falls under the costs of repairs depends on the characterisation of the expenditure. They argued that SCOPIC costs should be disregarded because they are not part of the costs of repairs for the purpose of s 60(2)(ii) of the Marine Insurance Act 1906 (UK) even if such costs include the costs of recovering the ship. The respondents, on the other hand, argued that SCOPIC costs were an integral part of the salvor’s remuneration which had to be paid in order for the ship to be recovered and saved.

The Court held that to resolve the issue, one had to look at the objective purpose of the incurred costs. Salvage charges, temporary repairs, towage and other steps which are plainly preliminary to carrying out permanent repairs would fall under repair costs because the objective of such costs was to enable the ship to be repaired. SCOPIC costs, by contrast, had a different objective as their purpose was not to enable the ship to be repaired but to protect an entirely distinct interest of the shipowner, namely its potential liability for environmental pollution. Such a purpose has nothing to do with the subject matter insured, namely the hull. This is further emphasised by the fact that SCOPIC charges will usually be borne by P&I Clubs which take on third party liability (for example liability for environmental damage) as opposed to H&M insurers. The objective purpose of SCOPIC costs can also be gleaned from art 8.1.b of the Salvage Convention 1989 which sets out a salvor’s duty to exercise due care to prevent or minimise damage to the environment, as well as art 13.1 of the Salvage Convention 1989 which states that the assessment of the salvor’s remuneration would be dependent on the skill and effort of the salvors in preventing or minimising damage to the environment. Both art 8.1.b and art 13.1 reiterate the notion that damage to the environment has to be minimised or prevented and that clearly suggests that such a notion is the objective purpose of SCOPIC costs. The Court therefore found that SCOPIC costs did not form part of the costs of repairs for the purposes of determining whether a ship was a constructive total loss.