Legal Implications in the Heart of the Sea
Blog: Andrei Gusev, Managing Partner, Borenius Russia, Member of the SeaFocus Advisory Board
Published 8.3.2016

This article illustrates how seemingly secondary legal details may result in a multimillion loss.
(Names used here and further are fictitious (1). The Captain and crew do not number among these(2).)
 
OVERVIEW
The Bank and the Shipping Company signed credit contracts. The shipping company provided the vessel as collateral under the contracts. The vessel was insured in favor of the Bank. The insurance contract stipulates that losses are not to be reimbursed in the event of an intentionally induced wreck, or a wreck as a result of gross negligence on the part of the insured or the beneficiary, their representatives (among which the crew do not number), or if the insured or beneficiary are aware that the vessel is not seaworthy prior to departure.
 
During the voyage, in violation of Сonvention requirements for watch duty, the First Mate alone remained on watch and fell asleep two hours after commencing his watch. The vessel then suffered a wreck.


The vessel was registered as a “refrigerator vessel” with a minimal crew of 11. However, it was operating as a “carry-away boat” / “fish carrier” on the voyage. Fish carrier vessels require a minimum crew of 16 persons.
 
Furthermore, the ship’s Captain, although a certified captain, did not have the requisite experience with such vessels and was appointed only a few days before departing on the voyage.
 
On these grounds, the court of arbitration ruled that no compensation was owed by the insurer.
 
CIRCUMSTANCES OF THE CASE
Marine Bank (1) (hereafter, the Bank) and Oriental Shipping Company (hereafter, the Shipowner, whereas the Bank and the Shipowner are collectively referred to as the Parties) entered a contractual credit agreement in 2007 for the sum of 150 million rubles A number of agreements were signed, supplementary to the original contract, the last of which is dated 2010.
 
The Shipowner pledged the vessel Grace (hereafter, the Vessel) to the Bank as a security of loan repayment.
 
In 2009, the Parties signed another credit agreement for the sum of 50 million rubles, for which the Vessel was also presented as collateral.
 
In 2009, the Shipowner insured the Vessel against total loss for 200 million rubles with the insurance company Prime (hereafter, the Insurer). The Bank was designated beneficiary of the insurance policy with regard to the unfulfilled contractual obligations under the credit agreements.


The insurance policy stipulated that no compensation would be paid to the beneficiary for losses incurred in the event of: (a) intentional or gross negligence on the part of the insured, the beneficiary, or their representatives (2); (b) the insured or beneficiary having knowledge of the Vessel’s unseaworthiness prior to departing on a voyage.

 

On May 5, 2010, the Vessel departed from one of the Nordic ports. On May 6, 2009, at 03:00, the First Mate began his watch, which he undertook alone. The Vessel was on autopilot during the watch. At 05:15 the Vessel ran aground on the southwest shore of one of the area’s islands. The investigation concluded that the wreck occurred as a result of the watchkeeper falling asleep. It was not established whether the watchkeeper fell asleep due to excessive exhaustion. According to the Shipowner’s words, the ship’s log was lost as a result of the wreck and could not be presented to the Insurer. The Norwegian District Court later ruled that the Vessel’s Captain and First Mate were responsible for the wreck, and sentenced them to 25 and 45 days of incarceration respectively. The Insurer denied the insurance claim, stating that the Shipowner failed to ensure proper safety procedures in the operation of the Vessel.
 

LEGAL PROCEEDINGS
At the beginning of 2011, the Shipowner filed a claim against the Insurer with the Maritime Arbitration Commission under the Chamber of Commerce and Industry of the Russian Federation (hereafter, the MAC) seeking 235 million rubles of the loan principal and interest, including the 200-million-ruble insurance claim. The MAC ruled in favor of the Insurer and denied the claim for compensation.

 

The Shipowner did not dispute the MAC’s decision, whereas the Bank successfully appealed it in the Moscow Commercial Court on the grounds that the MAC ruled on the rights and obligations of persons not involved in the case, thus violating the public policy of the Russian Federation. The decision of the Commercial Court was appealed. However, the Court of Appeal upheld the decision without changes. Thereafter, the aforementioned court decisions were nullified by ruling of the Presidium of the High Commercial Court of the Russian Federation, and the decision of the MAC was upheld without changes.


The High Commercial Court of the Russian Federation indicated that the decision of the MAC was without prejudice, did not include conditions which affected the rights and obligations of the Bank, and did not obstruct the latter’s right to defend its violated rights or legal interests.
 
In June 2011, the Bank filed a separate suit at the MAC seeking the sum under the credit agreements.
 
THE MAC’s RULING
Qualification of the violations which were the direct cause of the accident.
 
In its examination of the Shipowner’s culpability in the loss of the Vessel, the MAC ruled that the Accident Investigation Report affirmed that the triple-shift navigational watch with one helmsman per watch was established due to operational necessity. Although the cause of the accident was found to be a watchkeeping violation — sleeping on the watch — the consequences would have been the same if the watchkeeper had abandoned the duty for another subjective or objective reason, including reasons for which the watchkeeper could not be blamed (loss of consciousness, sudden acute onset of illness). Thus, the MAC reached the decision that the conditions for the wreck were created due to the watch duty being undertaken at night by one member of the crew. Furthermore, such a situation on watch was not an isolated incident. The MAC’s ruling notes that this was a regular occurence.
 
In accordance with the STCW Convention 78/95, Section A-VIII/2, Part 3-1, “...The officer in charge of the navigational watch may be the sole look-out in daylight provided that on each such occasion: the situation has been carefully assessed and it has been established without doubt that it is safe to do so; full account has been taken of all relevant factors including, but not limited to: state of weather, visibility, traffic density, proximity of dangers to navigation, and the attention necessary when navigating in or near traffic separation schemes; and assistance is immediately available to be summoned to the bridge when any change in the situation so requires.”
 
On the basis of these stipulations, the MAC concluded that watchkeeping by the First Mate alone may only be undertaken in the daytime, under certain circumstances. Solitary watchkeeping in the nighttime is prohibited. The MAC dismissed as unfounded the Bank’s claim that the Vessel was sailing under polar day conditions, with the sun remaining above the horizon 24 hours a day.
 
CREW WORKING CONDITIONS
The arbitrators were required to establish the crew’s activities during the voyage, and the reason for the First Mate’s solitary watch without the support of the ship’s crew. The issue is of crucial importance, in order to determine whether the Shipowner was culpable for the crew’s absence from watch duty, or whether the situation arose as a result of the Captain’s orders and he was responsible for the loss of the Vessel.
 
The Insurer claims that solitary watchkeeping by senior members of the crew was caused by the unavailability of other crew members, who were busy preparing the holds for cargo and preparing the fenders. Therefore, the Captain is not responsible for the loss of the Vessel.
 
The Bank and the Shipowner claim that the holds did not require preparation during the voyage, as this had already been accomplished while the Vessel was still in port. Accordingly, the Captain could and should have designated sufficient crew members for the watch.
 
The Parties base these claims on the contradictory testimonies of the Boatswain and the Captain.


 



 
 

Furthermore, the insurer claims that during the voyage the crew were regularly overworked, with their work day ranging from 8 to 17 hours. Neither the Bank nor the Shipowner has presented any evidence to the contrary.

 

Additionally, the arbitration tribunal expected the delivery of the Vessel’s logbook, in which the activities on the Vessel, both in preparation for, and on, the voyage, should have been recorded. It is the arbitrators’ opinion that the circumstances surrounding the loss of the logbook, as reported by the Shipowner, cannot be accepted as given in good faith, due to the improbability of the Captain, who has 8 years of experience, abandoning ship without retrieving the logbook. It is the arbitrators’ opinion that the Shipowner has not taken the necessary measures to locate the logbook.
 
Furthermore, neither the Shipowner nor the Bank has submitted the crew’s employment contracts to the court, explaining this course of action as protecting personal information. The tribunal stated that this justification was unfounded, as the crew members had received no request for permission to disclose the aforementioned contracts; moreover, the proceedings in the MAC were being carried out on a confidential basis.
 
Based on the above, the arbitration tribunal comes to the conclusion that neither the Shipowner nor the claimant has provided sufficient arguments or evidence in support of their claims regarding the working conditions of the Vessel’s crew.
 
In the subsequent paragraph, the arbitration tribunal notes that the Captain was appointed a few days before the ill-fated voyage, which means that he did not have an established relationship with the crew and could not convince the crew to undertake watch duty on the vessel in a particular fashion.
On these grounds, the arbitrators have reached the conclusion that the Vessel commenced the voyage with a crew which could not ensure the safe navigation of the Vessel.
 
CLASSIFICATION OF THE VESSEL AND ITS UNSEAWORTHINESS
The arbitrators were to establish what crew requirements applied in determining the seaworthiness of the Vessel.
 
The Vessel was classified as a “refrigerator vessel”, designated for sailing in freezing Sub-Arctic waters, transport and storage of refrigerated cargo, without geographical restrictions on sailing. The maximum actual crew of the Vessel was 12 persons.
 
The Captain of the Murmansk Maritime Trade Port issued a document stating the minimum crew complement of the Vessel to be 11 persons.
 
The arbitrators state that the classification of the Vessel as refrigerator vessel implies its use only for transport and storage of refrigerated cargo. Meanwhile, the Vessel departed on a voyage as a “carry-away boat” (also referred to as “fish carrier”).
 
Fish carrier vessels require a minimum crew of 16 persons, per Order № 148 of the State Committee on Fishing.
 
Therefore, the arbitrators have come to the conclusion that the Vessel should not have been operated as a carrier, and departed with an insufficient crew, and was therefore unseaworthy.
 
QUALIFICATION OF THE CAPTAIN OF THE VESSEL AND ITSE UNSEAWORTHINESS
The arbitrators have established that the Captain had no experience with the Vessel’s safety management system, and had in fact no practical experience of commanding a vessel with an established safety management system. Despite the Captain’s possession of a certificate in accordance with the relevant requirements, he did not possess the required qualifications or experience. On these grounds, the tribunal concludes that the Shipowner is guilty of gross negligence, in appointing such a captain.
 
CONCLUSION
On the basis of the above, the MAC concludes that the accident occurred as a result of the Vessel’s unseaworthiness, and is not subject to an insurance claim. Accordingly, neither the Bank nor the Shipowner is entitled to any compensation