Atlantik Confidence — Breaking the 1976 Limitation for Maritime

In what is being described as a landmark judgment, (Karios Shipping v ENKA & CO LLC (The Atlantik Confidence) [2016] EWHC 2412 (Admlty)) before Mr Justice Teare, Cargo Interests have successfully defended an application made by the owners of the bulk carrier, MV “Atlantik Confidence” (the “Vessel”) to constitute a limitation fund pursuant to the Convention on Limitation of Liability for Maritime Claims 1976 (the “Convention”). The owner’s application to limit limitation was brought following a fire and subsequent sinking of the Vessel in deep water off Oman in 2013.

Cargo Interests had their suspicions about the cause of the loss of the Vessel and sought to argue that the fire and subsequent sinking of the Vessel were as a result of a “personal act or omission” by the owners. Article 4 of the Convention, headed, “Conduct barring limitation”, states:

“A person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with the knowledge that such loss would probably result.”

Facts

The Vessel was on a laden voyage from Ukraine to Oman with a cargo of steel products destined to be used for the building of a new passenger terminal at the Muscat International Airport. Around daybreak on the 30^th March 2013 fire reportedly broke out near a generator and storeroom on the starboard side of the Vessel’s engine room. The crew abandoned ship, although curiously both the Master and Chief engineer returned to the Vessel twice. On one occasion the Master returned with a bag of tools, including spanners, a wrench and a hammer. The vessel sank on 3^rd April and the crew were rescued.

Burden and standard of proof

The burden of proving such a “personal act or omission” falls upon the Cargo Interests and is judged on the balance of probabilities. It was recognised by Mr Justice Teare that the approach “…should be the same as it is when a shipowner makes a claim on a hull insurance policy and the insurer alleges the ship was scuttled…”. However, whilst the burden of proof is on the balance of probabilities, it should be recognised that the standard of proof is very high. In particular, Mr Justice Teare agreed with the approach taken by Mr Justice Aikens in the case Brownsville Holdings Ltd v Adamjee Insurance Co. (The Milasan) [2000] 2 Lloyd's Reports 458, where at Paragraph 28 it was stated:

“(4)…However as such allegations amount to an accusation of fraudulent and criminal conduct on the part of the owner, then the standard of proof that the insurer must attain to satisfy the court that its allegations are proved must be commensurate with the seriousness of the charge laid. Effectively the standard will fall not far short of the rigorous criminal standard;”

Consequently, such cases are notoriously difficult to succeed. In this case, the physical evidence lay on the ocean floor in deep water. Consequently, it was necessary for the court to piece together the events before, during and after the casualty as well as assess the plausibility of the explanations provided by each sides’ experts as to the cause of the loss of the Vessel.

The evidence

Various witnesses of fact gave evidence, including the owner, Master, Chief Engineer, superintendents and some junior officers of the Vessel. In assessing the quality of this evidence, in most of the cases, particularly with the more senior personnel, Mr justice Teare treated their evidence with “caution”

Various experts also assisted the court in providing alternative explanations for the loss. In part, these explanations were based upon the witness evidence, photographs of the abandoned vessel before she sank as well as other evidence such as from a recent previous dry-docking.

Each parties’ experts provided an opinion as to both the cause of the fire and the sinking.

The fire

The owner’s case was that the fire started when a fuel line fractured on the number 2 generator. The fuel then sprayed towards the number 1 generator which resulted in a pool of fuel accumulating in that generator’s save all. The spray then changed direction onto the hot surface of the unlagged turbocharger on the number 2 generator. This ignited and in turn ignited the fuel in the save-all. The fire then spread to a storeroom. The spray then changed direction again towards the storeroom.

Cargo Interests sought to allege that the fire was deliberately started

Having considered all the evidence Mr Justice Teare concluded that each sequence of events described above was unlikely and, further still, the “…aggregation of such unlikelihoods…” led him to conclude that it was more likely than not that the fire started in the store-room and not as stated by the owners. Further, given that no explanation had been put forward by the owners as to how the fire could have started accidentally in the storeroom area, there was a “…real and substantial possibility that the fire in the storeroom was started deliberately…”

The sinking

Owners’ case again relied upon a sequence of events occurring. In particular, the heat of the fire caused a crack in the hull below the waterline in way of the storeroom, whilst at the same time, the fire caused damage to electrical cabling controlling valves in the ballast tanks. The damage to the wiring was described as “hot wiring” but in essence was a short-circuit of parts of that system that allowed certain valves to open.

Whilst Mr Justice Teare accepted that a crack in the hull was a theoretical possibility, he preferred the evidence provided by one of Cargo Interests’ experts that if there had have been a crack then there would have been evidence of distortion and bucking in the shell plating/deck. The photographs taken of the Vessel after her abandonment but before she sank showed no such distortions/buckling.

As to the “hot wiring”, the evidence was that for this to happen five events had to occur. TMr Justice Teare again concluded that whilst it was possible that all five events occurred that possibility was remote.

Cargo Interests sought to allege that the Vessel was deliberately scuttled, by the deliberate opening of sea chests and ballast tank valves.

Other evidence

Certain events happened before, during and after the loss which couldn’t be properly or credibly explained by the witnesses. Cargo Interests argued that this further pointed to a deliberate action to cause the loss. These events included:

• A change of course to deeper water in the few days before the fire.
• Some actions taken by the Master and Chief Engineer during and after the casualty that were regarded to be unusual, including the re-boarding with the bag of tools described above. The suggestion was that when the Vessel didn’t initially fully sink, the Master and Chief Engineer went back on board to finish the job. Another example was the Chief Engineer not allowing the Second Engineer into the engine room to fight the fire. The suggestion was that the Chief Engineer needed to be alone in the engine room to open the sea-chests.
• The fact that another vessel under the same management had called into Muscat before rendezvousing with the casualty but owners had not told salvors (who happened to be mobilising in the same port at the same time) of the distressed vessel. Normally there would be a high degree of co-operation between an owner and those trying to save his vessel. The suggestion here was that the owners did not want salvors to be anywhere near the Vessel before she and the evidence sank.

Motive

The final aspect considered was motive. As is often the case in matters like this, the actions of the owner were said to be financially driven. In particular, the financial evidence pointed to the fact that the owner was balance sheet insolvent and had no means to remedy the situation. Mr Justice Teare concluded that the owner was under pressure from his bank which in turn provided a motive to scuttle the Vessel and collect the insurance proceeds to alleviate his immediate financial woes.

Decision

Two elements had to be found for Cargo interests to successfully defend the owner’s application:

1. The fire and scuttling were deliberate; and
2. Such deliberate actions were under instruction from the owner.

On the first element, Mr Justice Teare held, at Paragraph 311:

“Having considered the totality of the evidence in this case and the opposing arguments I have concluded that the chief engineer, with the knowledge and agreement of the master, deliberately set a fire in the storeroom and deliberately caused Atlantik Confidence to sink. They denied that they did so but I cannot accept their evidence. When their evidence is placed in the context of the case as a whole it cannot be true.”

On the second, at Paragraph 315, he held:

“…I have concluded that Mr Agaoglu requested the deliberate sinking of the vessel. I am unable to accept his evidence that he did not do so.”

In consequence, Mr Justice Teare concluded at Paragraph 317:

“The vessel was deliberately sunk by the master and chief engineer at the request of Mr Agaoglu, the alter ego of the owners. In those circumstances, the loss of the cargo resulted from his personal act committed with the intent to cause such loss. The loss of the cargo was the natural consequence of his act as he must have appreciated. There can be no doubt that he intended the cargo to be lost just as much as he intended the vessel to be lost. It follows that the owners' claim for a limitation decree must be dismissed.”

Comments

This was a very long, fact-sensitive judgment. Whilst it is reported that this is a landmark case (because it is reportedly the first time there has been a successful defence to an Article 4 application) it isn’t a landmark decision in the sense that it breaks any new legal ground.

It is however an important case in demonstrating the high threshold a party will have to jump over in order to succeed in breaking the limits of the Convention.

At the time of writing it is unknown whether owners will appeal.

This isn’t the first time this matter has been before the courts. In 2014, the owner and their P&I Club successfully argued before the Court of Appeal that the limitation fund (which now ironically can be broken) could be constituted by way of a P&I Club letter of undertaking. Given there are reports that hull insurers have paid out on the loss, it is doubtful this is the last we hear of this matter.