In August 2012 the MV Renos was on a laden voyage when it was severely damaged by fire. The vessel was owned by the first respondent and managed by the second respondent (owners). The appellants (insurers) were the hull and machinery insurers of the vessel under a policy incorporating the Institute Time Clauses - Hulls (ITCH) (1/10/83). The first appellant, the Swedish Club, was the lead insurer and also the insurer under an increased value policy, incorporating the ITCH Disbursement and Increased Value (Total Loss only) Clauses (1/10/83). Clauses 19.2 and 9.2 respectively of the two sets of clauses provided that no claim for constructive total loss (CTL) based upon the cost of recovery and/or repair of the vessel shall be recoverable unless such cost would exceed the insured value. The insured value of the Vessel was USD 12 million and the increased value insured was USD 3 million. It was agreed that the fire was an insured peril.

The owners appointed Five Oceans Salvage under a Lloyds Open Form 2011 (LOF). The salvors invoked the Special Compensation Protection and Indemnity Clause (SCOPIC). The vessel was towed to the Suez Canal Anchorage for surveys by the owners, insurers and P&I Club representatives.  

Various repair estimates and quotations were obtained, which were inconsistent as to whether the vessel was a constructive total loss (CTL). The parties met on 21 January 2013 to discuss repair quotations.  On 25 January, the owners received an independent survey report estimating costs at USD 8.2 million, which was sent to the insurers but they declined a further meeting. On 1 February 2013, the owners served a Notice of Abandonment (NOA) on the insurers and claimed CTL on grounds that the repair costs would exceed insured value. The insurers contended that the vessel was not a CTL and in any event the owners had lost the right to abandon the vessel and claim CTL. The owners could only claim a partial loss, reflecting the diminution in the vessel’s value due to the fire. 

In July 2016, Knowles J gave judgment for the owners. The insurers appealed, arguing amongst other things that the judge was wrong to conclude that (1) the owners had not lost the right to abandon the vessel and claim CTL pursuant to s 62(3) of the Marine Insurance Act 1906 (MIA); and (2) the vessel was a CTL, and, in particular, that (a) costs incurred prior to the NOA date and (b) SCOPIC costs could be counted as ‘costs of repairs’ for the purposes of the CTL calculation.

Held: Appeal dismissed.

On the first issue as to timeliness of the NOA, s 62(3) of the MIA provides that the NOA ‘must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry’. This requires consideration of whether (1) the owners received ‘reliable information’, (2) if so, whether the NOA was given ‘with reasonable diligence’ thereafter, (3) if not, did the owners exceed the ‘reasonable time’ allowed ‘to make inquiry’.​ The court held that the judge below was entitled to conclude that the owners did not have reliable information of the loss in early December 2012, that the owners acted with reasonable diligence, given the long and complex history of the matter, and that, although it was a long time before NOA was given, in the particular and relatively unusual circumstances of the case, the judge was also entitled to find that no more than a reasonable time was taken by the owners. The judge's conclusion that the owners had not lost the right to abandon the vessel and claim CTL was therefore upheld.

As to issue 2(a) regarding whether costs incurred prior to the NOA could be included as 'costs of repairs' for the purposes of the CTL calculation, the court noted that s 60(2)(ii) of the MIA provides that ‘[i]n estimating the cost of repairs, … account is to be taken of the expense of future salvage operations and of any future general average contributions …’. The insurers argued that repair costs for the purposes of CTL calculation under s 60(2)(ii) should include only post-NOA costs of recovery and repair, but not prior salvage and general average costs (citing Hall v Hayman (1912) 17 Comm Cas 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361). The court disagreed, noting that s 60(2)(ii) makes no mention of the giving of NOA and draws no distinction between the time at which the repair costs may be incurred, and that there is no principled reason to do so.  Recovery costs, which may often be incurred before NOA, are necessarily incurred in order to repair the vessel are part of the ‘cost of repairing the damage’. In many cases an insured has to expend substantial salvage costs before the vessel can be ascertained a CTL and be in a position to give a NOA. CTL is a state of objective fact relating back to the date of the casualty (Robertson v Petros M Nomikos [1939] AC 371). It is independent of the right to abandon the vessel and claim for CTL. It would therefore be surprising and illogical if salvage costs prior to NOA could not be counted. The court doubted the authoritative weight of Hall v Hayman and The Medina Princess as the conclusions on the point were unreasoned. Further, the references in s 60(2)(ii) to ‘future salvage operations and of any future general average contributions’ is problematic on the insurers’ suggested construction. It is difficult to see how there can be a liability to future general average contributions given that the casualty giving rise to rights to general average will have already occurred, and why salvage and general average expenses should be singled out. Further, there is no ‘future’ restriction in relation to other expenses. The best explanation for the problematic wording is that these are words of inclusion rather than exclusion, making it clear that such future costs can be taken into account. The judge was therefore correct to hold that costs incurred prior to the NOA date could be counted as 'costs of repairs' for the purposes of the CTL calculation under s 60(2)(ii).

The court also upheld the judge's conclusion on issue 2(b) that SCOPIC costs could be counted as ‘cost of repairs’ for the purposes of the CTL calculation. The amounts payable to the salvors comprised (i) USD 1.2 million in respect of the owners’ apportionment of the notional award made to the salvors pursuant to art 13 of the Salvage Convention 1989; and (ii) USD 1.4 million in respect of the SCOPIC remuneration payable to the salvors above the art 13 award. The court noted that the purpose of SCOPIC remuneration is to protect P&I Clubs from liability they might otherwise incur in relation to environmental damage caused by a casualty. It replaces the regime for special compensation under art 14 of the Salvage Convention 1989. In effect, it gives salvors the right to additional compensation, beyond the basic art 13 award, in order to encourage them to take steps to minimise the environmental damage following a casualty.

The insurers argued that SCOPIC costs are not, properly understood, a 'cost of repair' for the purpose of s 60(2)(ii) of the MIA and/or cls 19.2 and 9.2 of the policies, and that the owners are contractually precluded, by para 15 of the SCOPIC clause, from counting SCOPIC costs as part of the CTL calculation. The court rejected the insurers' argument that SCOPIC remuneration is conceptually distinct from the art 13 award payable to salvors as the reasonable cost of their services in saving the vessel because it is paid by the vessel's P&I insurers, and is paid to protect the owners (and in turn the P&I insurers) from what might otherwise be a substantial liability in relation to environmental damage or other liabilities. The court held that costs of recovery are part of the cost of repair. In the present case, in order to recover the vessel the owners had to pay the entirety of the salvage remuneration to the salvors. The cost of recovery was the total amount paid and that the remuneration comprised two distinct elements does not alter that fact. The salvage remuneration element was an unavoidable part of what had to be paid to recover the vessel.

The court noted that para 15 of the SCOPIC clause provides as follows: 'any liability to pay such SCOPIC remuneration shall be that of the Shipowner alone and no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 14 Award shall be made in General Average or under the vessel's Hull and Machinery Policy by the owners of the vessel'. Although the insurers were not a party to the salvage agreement, they relied on para 15 under s 1 of the Contracts (Rights of Third Parties) Act 1999 by way of defence to the claim. The court held that the claim in the present case was for CTL. No claim for an indemnity or recourse or otherwise is made relating to SCOPIC remuneration. Its only relevance is as part of the cost of repair which is to rank for the purpose of determining whether the vessel is a CTL. Ranking costs for the purpose of a CTL do not have to be incurred. They may be future or hypothetical. No indemnity or recourse is sought in relation to such costs. They are simply costs to be taken into account for the purpose of determining whether an indemnity for a total loss can be claimed. Despite the wide wording of para 15, the court agreed with the judge's conclusion that it does not apply here. SCOPIC costs can therefore be counted as 'cost of repairs' for the purposes of the CTL calculation.