DORNOCH LTD V WESTMINSTER INTERNATIONAL BV (NO 2)

[2009] EWHC 889 (Admlty), Queen’s Bench Division, Admiralty Court, Mr Justice Tomlinson, 29 April 2009

Insurance (marine) – Vessel becoming constructive total loss – Insurers not accepting notice of abandonment but making payment for constructive total loss – Vessel sold by assured to third party before all of insurers had decided to take over the vessel – Effect of sale – Rights of insurers – Applicable law – Marine Insurance Act 1906, sections 62, 63 and 79

The hull and machinery of a vessel owned by the assured and registered in the Netherlands, was insured by primary and excess layer insurers. She became a constructive total loss on 8 March 2007. Notices of abandonment tendered on 26 and 27 March 2007 were rejected by all of the insurers, but the loss was subsequently paid in full by them. In December 2008 all of the excess layer bar one, and all of the primary layer bar two, representing, respectively, 85 per cent and 77.5 per cent of the market, expressly elected to take over the interest of the assured in what remained of the subject matter insured. On 9 January 2009 the assured sold the vessel to an associated company for €1,000, the purpose being to prevent the underwriters from selling the vessel to any of the assured’s competitors. Thereafter the remaining insurers elected to take over the vessel. These facts gave rise to a series of preliminary issues. Tomlinson J ruled as follows. (1) Where a notice of abandonment was given but not accepted, the assured had to continue to be prepared to abandon the subject matter to the insurers or the right to claim for a constructive total loss would be lost. Conversely, where notice of abandonment was accepted then the abandonment was irrevocable. It was uncertain whether acceptance of a notice of abandonment effected an election by the insurers under section 63(1) to take over the vessel, or whether acceptance of a notice of abandonment was properly to be understood as an irrevocable election to exercise the right which on the promised payment for a constructive total loss would become available to the insurer by virtue of section 79(1). Once insurers had accepted notice of abandonment, equity imposed an equitable lien in their favour of the insurers to secure their position in the interval between the making of their irrevocable promise and irrevocable election and the transfer of the right on payment. (2) Where a notice of abandonment had been declined but there had been a subsequent payment for a constructive total loss, the failure by the insurers to accept the notice of abandonment could not without more deprive the insurers of their right to take over the assured’s interest in the subject matter under section 79(1). There was also no reason why declining a notice of abandonment should amount to an irrevocable election not to exercise their right to take over the subject matter under section 63. (3) In the present case the claimants had not, by virtue of their paying a constructive total loss in April 2008, acquired a proprietary interest in the vessel in the form of an equitable lien. Equity would secure the position of an insurer who exercised his election to take over the vessel, but there was no reason why equity should intervene to secure insurers’ position whilst they took further time to decide whether they wished to assume those burdens. The Act did not provide that an insured who was paid for a constructive total loss must not dispose of his interest in the subject matter insured without underwriters’ consent. (4) The insurers had not impliedly elected to take over the vessel under sections 63(1) or 79(1) of the 1906 Act by paying the salvage/wreck removal claim in July 2008, and by paying the salvage/wreck removal claim in July 2008 the claimants did not acquire a proprietary interest in the vessel in the form of an equitable lien. (5) When, in December 2008, 85 per cent of the excess layer and 77.5 per cent of the primary layer expressly elected to take over the vessel, that election was effective for the purposes of section 63(1) and 79(1) of the 1906 Act. It was not necessary for all subscribing insurers to make an election: that argument ignored the fact that each insurer had a separate contract with the insured and the Act was concerned with each individual contract. Provided that any one underwriter had paid his proportion of a total loss of the ship, or his proportion of a total loss of an apportionable part of or of the whole of the goods, he had a right of election. The electing insurers became co-owners with the assured in their respective proportions. As a result of the express election in December 2008 the relevant underwriters acquired a beneficial interest under a trust. They were entitled to have the appropriate number of whole shares transferred to them to be registered in their name. (6) On the assumption that the purchaser of the vessel was a bona fide purchaser for value without notice of any equitable rights, legal title would have been validly and effectively transferred and the insurers’ rights extinguished, although if the purchaser was not a bona fide purchaser for value without notice then the insurers equitable interests would have survived the purported sale. However, the insurers who had elected in December 2008 had become legal co-owners and remained so even after the purported sale, there being no relevant exception to the principle nemo dat quod non habet. (7) Where legal ownership in a vessel was divided, the majority interest had an entitlement to the possession of the vessel to the exclusion of the minority. As majority legal owners, the insurers would be entitled to apply under section 188(1) of the Law of Property Act 1925 to have the vessel realised by judicial process. (8) It was common ground that the relevant system of law for determining the incidence of proprietary interests in the vessel prior to, at the time of, and after the purported transfer of the vessel to the purchaser Westminster Dredging was the lex situs. The question of whether English law applied the principle or renvoi would not be determined, although if the court was to decide that as a matter of English common law reference to the lex situs as being the law governing the incidence of proprietary rights in moveable property included reference to the choice of law or private international law rules of the situs, it would be rowing against a strong tide. (9) The lex situs of the vessel was Thai law. It was common ground that on deregistration the lex situs became Thai law and, as regards the period before deregistration, there was no authority which bound the court to hold that, when considering the effect of the sale of a vessel, the lex situs was the place of registration rather than the place where the ship was physically situate at the time of the sale.