Elborne Mitchell

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SOLICITORS

COMMODITY CONTRACTS:

RISKS FOR INSURERS AND TRADERS

A lecture by James Sleightholme and Jonathan Steer

These notes are derived from a talk by James Sleightholme, partner, and Jonathan Steer,
Solicitor, of Elborne Mitchell, given at Lloyd's Old Library on Tuesday 9 November 2010.

Where specific reference is made to the law it is to English law as at 9 November 2010.

For specific advice, you should please contact James Sleightholme, Jonathan Steer or the
partner with whom you usually deal at Elborne Mitchell.

Disclaimer: These Notes are for information only and nothing in them constitutes legal or professional advice.
They should not be considered a substitute for legal advice in individual cases; always consult a suitably
qualified lawyer on any specific legal problem or matter. Elborne Mitchell assumes no responsibility to
recipients of these Notes.

Elborne Mitchell Solicitors

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© Elborne Mitchell Solicitors, September 2010

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 COMMODITY CONTRACTS - RISKS FOR INSURERS AND TRADERS

Today we are going to speak to you about some insurance-related aspects of commodity
contracts which we hope you will find of interest. First of all I am going to talk about the
role of insurance generally in commodity contracts, the structure of CIF, C&F and FOB
contracts and the risks for buyer and seller under each type of contract. Along the way I will
try to identify some areas of potential exposure from the trader’s point of view. Finally I am
going to say a few words about inherent vice and containerised cargoes, particularly in the
cocoa trade. Jon is then going to speak about some specific problem areas in marine cargo
covers including recent developments on inherent vice, insufficiency of packing, delay and
piracy

1. THE ROLE OF INSURANCE IN COMMODITY CONTRACTS

Physical commodity contracts are contracts for the sale of goods. The simplest form of sale
of goods is where the buyer agrees to purchase a specific item from a seller, hands over the
price in cash and takes delivery there and then. We do this sort of thing every day in shops.
Everything changes hands at once - title, risk of loss or damage, and cash.

Commodity contracts, and international sale contracts in general, are more complicated
because goods are delivered by the seller into the hands of third party carriers for
transmission to the buyer. That exposes the goods to particular risks - not just the risk of loss
or damage but also to specific marine risks such as potential claims for salvage or general
average. Title, risk and payment usually change hands at different times.

Given the values and risks involved, with cargoes often worth more than the ships in which
they are carried, it seems unthinkable not to insure. Some years ago I acted for a company
which imported Egyptian new potatoes into this country in reefer vessels which it chartered.
The owner of the company did not believe in cargo insurance, on religious grounds. The
result, given the nature of the cargo and the requirement for precise temperature control
during the voyage, was an enormous amount of litigation, most of which I am glad to say was
successful. It was great fun from my point of view, but in my experience this was pretty
exceptional and most traders and (perhaps more to the point) their financiers prefer to sleep
easily at night.

Cargo insurance in London is commonly arranged on the basis of Institute Cargo Clauses
(ICC) or, in the case of soft commodities, Institute Commodity Trades Clauses (ICTC). It is
usual also to include Institute War Clauses and Institute Strikes Clauses and other standard or
tailor-made clauses as required.

ICTC cover is stipulated in, for example, the contract rules of the Sugar Association of
London, the Refined Sugar Association and the Federation of Cocoa Commerce.

The latest version of ICC is dated 1 January 2009 when it updated the previous 1982 clauses.
The latest edition of ICTC is 5 September 1983 when it brought in modifications to the 1982
ICC Clauses generally favouring the assured.

A number of the 2009 changes to the ICC were to incorporate some of those provisions of
ICTC which are more favourable to the assured. However there is one particular change
which is new and not reflected in the ICTC. It is an amendment to the Change of Voyage
clause in ICC which is intended to provide cover to an assured in “phantom ship” cases such

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as The “Prestrioka”1. In that case a vessel sailed from Thailand with a cargo of rice insured
under the previous version of Institute Cargo Clauses (A). No trace of the vessel or her cargo
was ever found. The cargo was deliberately diverted and stolen. It was held in the Court of
Appeal that the insurers could rely on section 44 of the Marine Insurance Act 1906 which
provides that unless otherwise agreed in the insurance contract, where the destination is
specified in the policy and the ship, instead of sailing for that destination, sails for any other
destination, the risk does not attach.

The amendment to the Change of Voyage clause mitigates the effect of this decision by
providing that where the goods commence the transit contemplated by the insurance but
without the knowledge of the insured or its employees sails for another destination, then the
insurance is deemed to have attached at the commencement of such transit. I mention this
because the unamended Change of Voyage clause in the ICTC reflects the position under the
old ICC and a future phantom ship case under the ICTC would fall foul of section 44.
Presumably the ICTC will catch up with the ICC at some stage but in the meantime, those
who trade on the basis of ICTC should be aware of this potential gap in coverage which they
may wish to plug in the meantime.

Each of ICC and ICTC clauses comes in three forms, (A) (B) and (C). Each form broadly
provides warehouse to warehouse cover.

The (A) clauses provide all risks cover. They cover all risks of loss of or damage to the
subject matter insured except as specifically excluded. “All risks” is not a blanket cover: the
fact that "risks" are insured means that there must be a fortuity or casualty.

Under an all risks policy, it is not necessary for the assured to show which particular peril
operated. All he has to do is to provide evidence showing that the loss was due to something
fortuitous. If the insurer then puts up an argument to show that it was not fortuitous, then the
assured has the burden of disproving it.

ICC and ICTC (B) and (C) clauses are structured differently. Instead of covering all risks, the
cover is for named perils. In this case the burden is on the assured to prove loss by a named
peril. In practice these clauses are not commonly used in commodity trades because the cover
is quite restricted and so I don't propose to say much about them. I would mention though that
there is a potential trap for CIF (or CIP) buyers in contracts incorporating Incoterms. That is
because under CIP and CIF Incoterms the seller’s obligation is to provide only the minimum
cover as provided by Institute Cargo Clauses (C). I have not found it unusual to see contracts
incorporating Incoterms which say nothing about the type of insurance cover to be provided,
which potentially puts the buyer in an exposed position.

2. FORMS OF COMMODITY CONTRACT

The main types of contract used in commodity trading are CIF (cost, insurance and freight)
C&F or CFR (cost and freight), and FOB (free on board). Under a CIF sale it is for the seller
to arrange a contract of carriage and insure the goods. A C&F seller has to arrange a carriage
contract but has no duty to insure. And under an FOB contract the seller’s duty is to ship the
goods on a vessel nominated by the buyer. He has no duty to insure.

1
[1985] 2 Lloyd’s Rep 8

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The general scheme under all of these contracts is that the risk of loss or damage to the goods
passes from seller to buyer when the seller has delivered the goods to the carrier. In the case
of sea transport, this normally happens when the goods have been shipped, that is to say, put
on board a ship.

Title on the other hand will pass when the parties intend it to pass.2 If there is no express term
in the contract about this then the court will look at the terms of the contract to see what the
parties must have intended. Title might pass on shipment, for example if payment were not
due until some time after it was anticipated that the goods would be delivered into the hands
of the buyer at the destination. Commonly, parties agree that title will not pass until the goods
are paid for.

Having delivered the goods to the carrier, the seller will be obliged to tender shipping and
other documents to the buyer for payment. Invariably the documents will include one or more
bills of lading which are documents of title to the goods enabling the buyer to take delivery
from the carrier at destination as well as conferring rights of action against the carrier.
Provided that the documents comply with the contract, the buyer will be obliged to pay.

3. CIF CONTRACTS

Under the simplest form of CIF contract the seller is obliged to tender a clean bill of lading
showing that the goods have been shipped, an invoice and, technically speaking, an insurance
policy providing continuous cover for the goods during the period of transit and in terms
usual in the trade. Normally it is agreed that a certificate, rather than a policy, will be
provided. Usually, other documents will also be specified to show that the goods comply with
the contract, such as quality certificates, certificates of origin and so on. If the documents
comply with the contract then the buyer must generally pay for them even if, by the time they
are tendered to him, the cargo is already at the bottom of the sea. If the cargo is lost or
damaged, the buyer should have his remedy under the cargo insurance. He may also be able
to pursue a remedy against the carrier under the bill of lading contract.

What if the buyer fails to pay and the cargo has been lost? Having insured the cargo, the
seller might well expect that if for some reason the buyer refused to pay, then he could rely
on the insurance himself. However, it has been suggested that that is not necessarily the case.

In order to recover under a marine insurance contract it is generally necessary to show an

insurable interest at the time of the loss.

Suppose that goods are shipped under a CIF contract, and the ship and cargo sink shortly
after sailing. The buyer then wrongfully refuses to pay for the documents.

If both title and risk had passed to the buyer on shipment then it appears on the face of it that
the seller would have no insurable interest at the time of the loss and so would be unable to
recover. There might be some argument that when the buyer refused to pay, this would cause
the title and risk in the cargo to revert back to the seller, but it is difficult to see how this
could actually happen if, by the time of the refusal to pay, the cargo had effectively ceased to
exist.

2
Sale of Goods Act 1979, section 17 (1)

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If the seller did have title to the goods at the time when the ship sank, then it might be
thought that there should be no difficulty in demonstrating an insurable interest. However it
has been suggested that this is open to question. In a recently published text3 on Cargo
Insurance it is suggested that in this scenario the seller may not have an insurable interest in
the lost goods. Rather, his loss is the buyer’s wrongful failure to pay, an uninsured risk, and
so his only remedy is against his buyer.

Given the possibility of a gap in cover here it would be prudent for a CIF seller to talk to his
brokers to make sure he is specifically covered in this situation.

Ideally the parties will agree in the sale contract on the extent of cover that the seller is to
provide. This may not be possible in practice and so, similarly, a CIF buyer might wish to
arrange a Difference in Conditions extension to cover the difference between the coverage
under the seller's policy and the level of cover which he requires.

4. INSURANCE CERTIFICATES

It is normal in international trade that a seller on CIF terms will tender an insurance
certificate rather than a policy. Certificates can be in various forms, but generally speaking, a
certificate is not itself a policy. Rather, it is a document which certifies that a policy has been
effected or that underwriters have undertaken to issue a policy. Typically, it will be issued
under an open cover, will describe the vessel, voyage and cargo with the cargo value and any
shipment limits. It will then set out the terms of the insurance, usually by reference to
standard clauses.

How is a certificate assigned to a purchaser? The legal position is surprisingly unclear in the
legal textbooks. On the one hand it is suggested that the benefit of the contract which it
evidences can be assigned pursuant to section 136 of the Law of Property Act 1925. On the
other, it is said that this cannot be right because the original party to the insurance contract,
the holder of the open cover perhaps covering a year’s shipments, cannot have intended to
assign the benefit of that contract which is of greater scope than the individual voyage
covered by the certificate. It is suggested that instead, a new contract comes into being
between the buyer and the insurer when the buyer receives the certificate.

This leaves unclear what is the exact scope of the insurance conferred on a buyer who
receives a certificate. If he receives an assignment under section 136 of the Law of Property
Act then he will acquire the rights of his seller which might include the right to be covered
for pre-shipment loss or damage if there is warehouse to warehouse cover. If the risk only
passes to the buyer on shipment then he will not normally have this cover. But if a CIF
buyer’s rights do not arise under an assignment but under a new contract with the insurers,
then he would not be able to claim for pre-shipment damage because he would not have an
insurable interest at the time of the loss.

To simplify matters, a CIF buyer (or for that matter a C&F or FOB buyer) might wish to
purchase a specific Buyer’s Interest extension to protect himself against the risk of pre-
shipment damage. This can be particularly useful with commodities shipped in containers
which arrive damaged where it is unclear where the damage took place.

3
Insuring Cargoes – A practical guide to the law and practice KS Vishwanath (2010) page 131

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5. C&F AND FOB CONTRACTS

In the case of C&F and FOB contracts it is primarily for the buyer to take out insurance. The
goods are at his risk as from shipment and the seller has no contractual obligation to arrange
insurance. If the cargo is lost or damaged then the buyer should be able to recover under the
insurance if the loss or damage occurs after shipment, when the goods were at his risk.

But what if the buyer does not take out insurance and then fails to pay? Where does the seller
stand? Many standard form commodity contracts provide that the buyer must produce
evidence to the seller that he has in fact taken out proper cargo insurance in order to try to
avoid this type of problem, but it can happen that because the buyer fails to perform this
obligation, then the cargo is in fact uninsured. To cover these eventualities, a prudent seller
will take out Seller’s Interest Insurance to provide cover retrospective to the commencement
of the voyage in the event that the goods are lost or damaged and the buyer fails to take up
the documents or pay for the goods.

6. TITLE AND RISK

Title can carry its own risks.

A slightly unusual situation arose in a case that I handled a few years ago. My client had
purchased a cargo of wheat from an FOB seller in Canada, where the cargo was shipped. It
resold the cargo to a German purchaser on a C&F Rotterdam basis. 500 miles off the east
coast of Canada the vessel had a steering failure. Within a short time the captain of the vessel
had signed a Lloyd's Open Form salvage agreement on behalf of vessel and cargo under
which arrangements were made to tow the vessel all the way to Rotterdam. The
reasonableness of this arrangement was challenged. On arrival at Rotterdam, the salvors
exercised a lien over the cargo and demanded security of US$ 3.5 million which was duly
provided by the cargo insurers of the German purchasers. A challenge was raised during the
ensuing salvage arbitration as to whether the German company’s solicitors were in fact acting
for the party which owned the cargo on the date when the Lloyd's Open Form was signed and
therefore had any authority to act in the arbitration.

This opened a can of worms. It turned out that payment was not actually made to my client or
their Canadian seller until a couple of days after the salvage contract was signed. Under the
terms of the contract between my client and the Canadian seller, title did not pass until the
goods had been paid for. The result was that the Canadian FOB seller and not the German
company was in fact the correct party to the salvage agreement and that those who were
participating as cargo interests in the salvage arbitration and had provided security were not.
Luckily, a commercial solution was eventually worked out, but there was some rather
uncomfortable analysis of the implications both for my client and for the Canadian company,
neither of whom had anticipated an uninsured FOB seller being drawn into a US dollar 3.5
million salvage claim. The case is perhaps an unusual example of how cargo risks can arise
unexpectedly, as the Canadian company appeared to be uninsured for the salvage liability. No
doubt it caused it to take a careful look at its future insurance arrangements.

7. INHERENT VICE AND THE COCOA TRADE

Jonathan is going to talk shortly about insufficiency of packing, inherent vice and delay. I
will however say a few things about inherent vice and the cocoa trade.

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In years gone by, when cocoa was shipped in bags and stowed in ships’ holds, inherent vice
was not such an issue because it was part of the job of the carrier to ensure that the cargo was
properly managed and ventilated at the appropriate times, bearing in mind the ambient
temperature and humidity both inside and outside the holds. With that kind of stowage, and
with proper management of the cargo, the risk of damage by sweat was considerably reduced
and it was more difficult for underwriters or the carrier to rely on inherent vice, provided that
there was no evidence that the cargo was shipped with excessive moisture. There was scope
for argument that sweat damage was caused by external elements such as moist air introduced
into the hold from outside or indeed from other cargoes in the same hold, as in CT Bowring &
Co Limited v Amsterdam London Insurance Co Ltd4.

With containers, the argument is much more difficult, as is shown by the approach of the
Court of Appeal in TM Noten BV v Harding5. That case was concerned with a cargo of
leather gloves shipped in containers from Calcutta during the monsoon period which out-
turned in Rotterdam damaged and mouldy. At first instance it was held that the damage was
caused as a consequence of the moisture in the gloves condensing on the inside of the top of
the containers and falling on to them, and therefore the damage was from an external cause.
However in the Court of Appeal it was held that the proximate cause of the damage was the
water within the gloves themselves and that this was therefore a loss by reason of inherent
vice. Lord Justice Bingham said:

"[Counsel] who appeared for the [assured] in this appeal accepted that if the damage
complained of had been caused by excessive moisture in the gloves, but without the
intervening process of condensation on the roof of the containers, the position would
have been different. But he said it was a crucial fact that the moisture condensed on
the container roofs before dropping down on the gloves.

I do not for my part think that this answer given by the [assured] would appeal to the
common sense of the business or seafaring man. He would not understand how the
water which had caused the damage could be regarded as coming from a source
external to the goods, but would regard the gloves as the obvious and sole source of
the water. He would, I think, regard the suggested distinction based on the
intermediate migration of moisture to and condensation of moisture on the roofs of
the containers as owing more to the subtlety of the legal mind than to the common
sense of the mercantile."

In the face of this authority, it may be difficult to argue that the typical type of sweat damage
which occurs in cocoa transported in unventilated containers is not inherent vice,
notwithstanding that the occurrence of damage is not consistent: it can happen that numerous
shipments are made in dry unventilated containers successfully and without problem.

One of the difficulties facing those who trade on the contract terms of the Federation of
Cocoa Commerce, is that if, as often happens, they agree that quality of the cargo is to be
determined on arrival, then under FCC rules, damaged cargo is left out of account for the
purposes of a quality claim against the seller, who may have shipped cargo with excessive
moisture. Generally, damaged cargo is treated as something which the buyer should claim
against his insurers. If however he has no specific cover for this type of sweat damage and
insurers reject the claim on the grounds of inherent vice, then he will be left without a

4
[1930] 36 Ll L Rep 309.
5
[1990] 2 Lloyd's Rep 283

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remedy. It is apparent from some FCC arbitrations that I have handled that some traders are
not properly alive to these issues and as a result they have suffered serious financial losses.

I mention this as a classic example of how commodity traders need to analyse carefully the
risk implications of their contracts and to consider if necessary whether they need to take out
additional insurance to cover any exposures which they may have.

PROBLEM AREAS IN THE STANDARD MARINE INSURANCE COVERS

Inherent vice can be a difficult problem for cargo owners, who may find themselves without
insurance cover, and without any remedy against the person who sold them the cargo.
Although the concept of inherent vice has been around for well over a century, it still causes
problems.

The Marine Insurance Act stipulates:

“Unless the policy otherwise provides, the insurer is not liable for … inherent vice or nature
of the subject-matter insured, …” - section 55(2)(c)

Most UK cargo policies, including the All-Risks versions of the Institute Clauses, expressly
exclude loss due to inherent vice and so do not “otherwise provide”.

It can be difficult in practice though to establish whether the exclusion applies. Causation
lies at the heart of the problem.

First though, what is “inherent vice”? The classic definition comes from a House of Lords
case concerning a cargo of soya beans. Lord Diplock called it:

“the risk of deterioration of the goods shipped as a result of their natural behaviour in the
ordinary course of the contemplated voyage without the intervention of any fortuitous
external accident or casualty”

Inherent vice is more likely to be a problem with perishable cargoes like foodstuffs, but it is
not just those. These are some examples of goods that might suffer, in one way or another,
from their inherent vice: sugar is prone to caking damage; flour can shrink and self-heat.
Other problems can occur with certain nuts, as well as iron and steel cargoes and rubber.
Certain coals can even spontaneously combust.

We have already mentioned the sweat damage problems arising from containerisation of
cocoa. Sweat damage problems can also arise with soya and coffee beans.

In most of the cases mentioned above, the inherent vice of the cargo might not, by itself,
cause damage. Sometimes a particular external circumstance arises, which in turn triggers a
response by the cargo causing it to deteriorate. For an insurer to exclude loss caused by
inherent vice, he does not need to prove that the cargo suffered damage without any external
intervention at all. That type of damage would be inevitable, and inevitability of loss is a
separate defence, since insurance covers risks, not certainties. The inherent vice defence is a
more delicate one, since it may involve consideration of external factors contributing to the
damage.

Problems occur when arguments arise as to whether a loss was caused by inherent vice or by
some other peril which is insured. Where there is more than one possible cause, one has to

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try to identify the “proximate” cause. Many years ago, this used to mean “proximate in time”,
but no longer. The leading House of Lords judgment found that “to treat the proximate cause
as the cause which is nearest in time is out of the question…the cause which is truly
proximate is that which is proximate in efficiency” 6.

For our present purposes, it is perhaps easiest to think of the “effective cause” of a loss.

There is a Court of Appeal judgment which was handed down in December 2009 which deals
with such conflicting causes. An appeal was subsequently heard by the Supreme Court
(which has taken over the judicial function of the House of Lords), but judgment is still
awaited.

Although not a commodities case, the general principles are no less relevant. The case is
Global Process Systems v Syarikat Takaful Malaysia Berhad. It involved a jack-up rig being
towed from Texas to Malaysia via the Cape of Good Hope. The rig was insured under the
Institute Cargo All-Risks clauses. During the course of the voyage, three of the rig’s four
legs, which proved unable to withstand the motion of the sea, fell off.

There was no doubt that the cargo was suffering from serious weaknesses and that there was
always a good chance that it might not have survived the voyage intact. However, the
assured argued that the loss was really due to perils of the sea, i.e. the actions of the wind and
waves. The weather conditions encountered on the voyage were worse than usual but not
beyond what could reasonably have been foreseen. In other words, the weather was bad, but
not extraordinary.

The insurers effectively argued that because the weather conditions were foreseeable, there
can have been no peril of the sea. Accordingly, they said, the cause of loss must have been
the inherent inability of the cargo to withstand the ordinary conditions of the voyage – in
other words, its inherent vice.

At first instance, the court agreed with the insurers, finding that the loss was caused by the
inherent vice of the cargo. That decision was reversed by the Court of Appeal in December
20097.

In the leading judgment, the Lord Justice Waller said that “the burden is on the underwriter
to establish inherent vice as the proximate cause. That will involve consideration of whether
there was some other external fortuitous event which caused the loss of the legs”.

He went on to say that “I think it is clearly erroneous to say that because the weather was
such as might reasonably be expected there can be no peril of the sea. There must, of course,
be some element of the fortuitous or unexpected to be found somewhere in the facts and
circumstances causing the loss”.

Essentially the cargo owners won because, although the weather conditions were reasonably
foreseeable, the strength of wave which was found, as a matter of fact, to have caused the
loss, was not “bound to occur”. The proximate or effective cause of the loss was therefore a
peril of the sea, not inherent vice.

6
Leyland Shipping v Norwich Union, [1918] A.C. 350
7
[2009] EWCA Civ 1398

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That case was specifically concerned with inherent vice and perils of the sea. But it may
have broader impact than that. The case leaves open the possibility for argument that where
there is a debate as to whether loss was effectively caused by inherent vice or by some
external peril, evidence that the external peril was not bound to occur may well be sufficient
to show that the loss was caused by that external peril rather than by inherent vice.

Returning to inherent vice in the commodities context, there are a number of external factors
which might override inherent vice as a cause of loss. Failures by the ship properly to
ventilate or stow the cargo might be the real cause. Bad weather can obviously lead to
damage of delicate cargoes. Sensitive cargo stored too close to heated bunker tanks may
suffer damage.

The inherent vice defence may not, therefore, be such a powerful shield for insurers as it once
was.

Of course, there are insurance extensions available which are specifically designed to cover
inherent vice. From an assured’s point of view, it is far better to have certain cover than to be
having an expensive debate about proximate or effective cause. Insurers on the other hand
will wish to consider whether the premium in place reflects the potentially increased risks
associated with certain cargoes, or to obtain suitable warranties from the assured as to the
handling of the cargo.

INSUFFICIENCY OF PACKING

Related to all this is the issue of insufficiency of packing. The Commercial Court has
relatively recently confirmed that bad packing “can properly be regarded as an aspect of
inherent vice”8. This creates a potential problem for assureds: insufficiency of packing might
not be expressly excluded under their insurance policy, but the insurers may nevertheless be
able to rely on insufficient packing to get them off the hook via the inherent vice route.

So what do the Institute Clauses say about it? It is worth noting that the new 2009 Cargo
Clauses changed the scope of the exclusion that was present in the 1982 clauses. Under the
1982 version, loss due to insufficiency of packing was excluded in all cases subject to a
special provision for containerised cargo. Where containers are concerned, insufficient or
unsuitable stowage would only be excluded in certain cases.

The 2009 clauses, by contrast, make no distinction between containerised and other types of
cargo – in all cases the exclusion will only operate where the packing was either (a) carried
out by the assured or his employees or (b) prior to the attachment of insurance.

Insurers might therefore be liable on the face of it under both the 1982 and the 2009 clauses
for damage caused by poor container stowage as long as the container was packed after the
commencement of the insurance or by someone other than the assured or his employees. But
they may nonetheless be able to escape liability due to the inherent vice exclusion.

DELAY

Another area where there is room for uncertainty, and where standard insurance exclusions
are not quite as effective as people might think, relates to delay. This is something which is a

8
Mayban General Assurance BHD v Alstom Power Plant [2004]

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particular issue with perishable commodities and it gives rise to some interesting questions in
the context of piracy.

Section 55(2)(b) of the Marine Insurance Act specifies that:

Unless the Policy otherwise provides, the insurer…is not liable for any loss
proximately caused by delay, even though the delay be caused by a risk insured
against.

The 1982 Institute Cargo, and the 1983 Institute Commodity Trades clauses both provide:

“4. In no case shall this insurance cover

4.5 loss damage or expense proximately caused by delay, even though the
delay be caused by a risk insured against …”

The 2009 revised clauses delete the word “proximately” but are otherwise the same. This
deletion is not thought to have any impact on coverage. More likely it simply reflects the
judicial shift away from the “proximate in time test” towards the “effective” cause test.

Whilst the exclusions appear clear enough on paper, tricky questions can arise in practice.

What clearly is not covered is pure financial loss arising from delay. An obvious example of
this would be the late arrival of diaries, calendars or toys for Christmas markets. Drops in
market value during the period of delay, where the cargo itself is undamaged, are also not
covered by the standard policies.

The position can be different though with perishable commodities. On the one hand, since
these naturally deteriorate over time anyway, if an event occurs which does not in itself
damage the cargo, but significantly delays the voyage such that the cargo decays and loses
some or all of its value, one could be forgiven for thinking that it is either the delay, or the
nature of the cargo itself, which has caused the loss.

Looking back at the Marine Insurance Act and Institute exclusions, these appear on the face
of it to exclude all damage which results from the passage of time, even if the additional time
was caused by an insured peril. In the past, the courts have rejected claims where loss has
been suffered following delay, even where the delay resulted from an insured peril, such as a
collision. Nowadays, however under the “effective cause” test, it is unlikely in most cases
that delay would ever be the true “cause” of the loss because delay is merely a consequence
of a peril rather than a peril in itself.

That means that the scope of the delay exclusion under the Act and the Institute Cargo
Clauses is actually rather limited. Delay will only be excluded if it can be shown that it was
at least equal to any other cause of loss.

These days, of course, with the speed of modern transit, delay is much less likely to be so
prolonged as to lead to a loss. Much of the case law on the subject comes from days when a
voyage could very easily be delayed by months due to a lack of modern communications and
the slow speed of repairs and voyages generally.

Piracy, however, presents a very up-to-date problem.

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Piracy is an insured risk under the Institute all risks covers (although not under the B and C
covers).

When pirates capture a ship, the average period of detention, which has been increasing
recently, is about 3-4 months. During that time, perishable cargo like foodstuffs is likely to
become worthless. That loss should be recoverable under an all risks policy since the
effective cause of the loss would be the pirate detention, rather than the delay itself. That is
so notwithstanding the fact that a non-perishable commodity would not have suffered
damage.

The recent Commercial Court case of Masefield v Amlin considered an assured’s claim for
actual total loss, or, in the alternative, constructive total loss, in a piracy context9. In that
case, the assured was the owner of parcels of bio-diesel being carried on a vessel which was
detained by pirates. About a month after the vessel was captured, the assured sent a notice of
abandonment to the insurers. The vessel and cargo were released just 11 days later.

Despite that, the assured brought a claim for actual total loss, or, in the alternative,
constructive total loss. The claim was quantified based on the difference between the insured
value of the cargo and what they eventually sold it for following its release. Since the cargo
had not suffered any material physical damage, the assured was effectively trying to claim for
a pure financial loss resulting from their being deprived of possession of the cargo.

The assured’s claims failed. The actual total loss claim was based on the assertion that, at the
date of the notice of abandonment, the assured had been “irretrievably deprived” of the cargo,
which is the test for actual total loss under the Marine Insurance Act.

The judge stated that the appropriate test was to look objectively at the facts as at the date of
the purported abandonment. The fact that the cargo was recovered shortly afterwards was not
directly material, although the judge accepted that it might assist in “showing what the
probabilities really were, if they had been reasonably forecasted”.

Despite case authorities suggesting that there could be an actual constructive total loss in
cases of capture, the judge in Masefield found that an assured is not irretrievably deprived of
property if it is legally and physically possible to recover it. Given that almost all of the
piracy captures to date have ended in the eventual release of the ship, cargo and crew after
payment of the ransom, it simply cannot be said in a modern piracy context that there is an
actual total loss when the vessel is seized. But of course there may be a total loss if the cargo
perishes or deteriorates whilst the vessel is held.

As for the assured’s alterative CTL claim, this was also unsuccessful. Section 60(1) of the
Marine Insurance Act provides that there is a CTL

“where the subject matter insured is reasonably abandoned on account of its actual total loss
appearing to be unavoidable, or because it could not be preserved from actual total loss
without an expenditure which would exceed its value when the expenditure had been
incurred”.

The judge found that the abandonment required meant abandonment of any hope of recovery.
On the facts of the case, given that ransom negotiations had been ongoing for some time, and

9
[2010] EWHC 280 (Comm)

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given that all the indications were that these negotiations would result in the release of the
vessel, it could not be said that this requirement was met.

The assured also tried to argue that the payment of ransoms was against public policy and
that the possibility of such payment leading to release of the cargo should therefore be
discounted. The court had little hesitation in rejecting that idea.

It is worth mentioning that the Marine Insurance Act goes on in section 60(2) to set out cases
where there would be a constructive total loss. Of relevance here is the provision that there
will be a CTL where:

(i) …the assured is deprived of the possession of his…goods by a peril insured against, and

(a) it is unlikely that he can recover the…goods…

This “unlikelihood of recovery” test appears to be a lesser hurdle than the “actual total loss
appearing to be unavoidable” test. However there is some uncertainty as to whether the
unlikelihood of recovery test applies in the context of the institute cargo clauses. That is
because the institute clauses provide that “No claim advanced for CTL shall be recoverable
unless ATL appears unavoidable”, which mirrors the stricter test. There is disagreement
among commentators as to whether this wording excludes the unlikelihood of recovery test
and there is no case authority on that point. The Masefield case provides little assistance
because it was agreed between the parties that the Institute clauses did exclude that additional
category of total loss, and so the question did not arise for the court to decide. In any event,
on the facts of Masefield, the assured would not have been able to meet the test anyway.

Of course, with perishable cargoes, depending on their lifespan, an assured would find it
much easier to argue that actual total loss appears unavoidable, thus entitling him to claim for
a constructive total loss.

What an assured can do though, if his cargo survives the detention, is to make a claim for the
financial cost of getting the adventure back on track. Both the Institute Cargo and the
Institute Commodity clauses provide for reimbursement of reasonable “forwarding charges”,
whereby the assured will be indemnified for “any extra charges properly and reasonably
incurred in unloading, storing and forwarding the subject matter insured to the destination to
which it is insured”. Underwriters are entitled at that point to seek additional premium.
However, since additional insurance to cover the extended voyage is a reasonable expense in
the circumstances, it seems that underwriters would be faced with the prospect of having to
foot the bill for their own premiums.

There is also the concept of cover for “loss of the adventure”. One way the courts have
looked at cargo insurance in the past is cover not just for the goods themselves, but also,
more broadly, cover for the arrival of the goods at the insured destination. In a sense, that is
what the Institute Clause forwarding charges are designed to cater for. But the concept of
loss of the adventure goes a little wider than that.

There are old cases where the courts have allowed cargo insurance claims based on financial
loss arising from the loss of the intended market for the goods. It is doubtful whether such
claims can be made under the Institute Cargo Clauses. The better view is probably that the

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only loss of the adventure type claims which may be allowed are those which arise under the
forwarding charges clause.

So what broad conclusions can we draw in the context of commodities?

Of course, many of the principles discussed above apply to all forms of cargo. But perishable
commodities occupy a special place. It is clear that the exclusions for inherent vice and delay
are in some respects really quite limited. The position on total loss at least is clear enough
following the decision in Masefield. But, given the right facts, the door may still remain open
for an assured to claim pure financial loss following a pirate detention, although that is
untested and would certainly be something of a long shot.

In most cases, ambiguity as to coverage can be cleared up with carefully drafted exclusions or
extensions to cover. Certainly there are specific extensions available to cover both inherent
vice, or delay. But both underwriters and assureds should appreciate that the position under
the standard covers may not be as clear cut as it should be.

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