In The Renos  EWCA Civ 230 the Court of Appeal considered the financial implications of expensive repairs to a merchant ship. In August 2012 the MV Renos was on a laden voyage in the Red Sea when a fire broke out in the engine room causing extensive damage.
Under section 60(2) of the Marine Insurance Act 1906 (“the MIA”) a vessel is a constructive total loss (“CTL”) if the cost of repairing the damage exceeds the value of the ship when repaired. Where there is a CTL an owner may abandon the vessel to the insurer by issuing a Notice of Abandonment (“NOA”) under section 62 of the MIA. The NOA must be given with reasonable diligence after receipt of reliable information of the loss.
The parties agreed that if the repair costs were US$8 million or more the vessel would be a CTL. Between August 2012 and January 2013 various quotations were obtained, ranging between US$2.8 million and US$ 9.6 million. On 1 February 2013 the owners served a NOA which was rejected by the insurers on the grounds that it was “given far too late”.
In the High Court Knowles J ruled that the owners were not too late. He also rejected the insurers’ arguments that the vessel was not a CTL due to the inclusion of certain recovery costs in the CTL calculation that had been incurred before the NOA was issued. The insurers appealed.
In deciding the appeal on the issue of whether the NOA was served with reasonable diligence, Hamblin LJ addressed three questions:
- Did the owners receive “reliable information of the loss”?
What is to be regarded as reliable information will vary according to the circumstances. In this case the repair costs were on the cusp of making the vessel a CTL and therefore greater detail and accuracy were required for there to be reliable information of the scope and cost of repair. When conflicting information on costs was received from experienced sources, the owners could not be regarded as having reliable information. As Knowles J had put it: “it was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any one source into question”. The conflicting information meant that the information of the loss remained “doubtful”.
- Did the owners act with reasonable diligence once they had reliable information?
The insurers argued that reasonable diligence required the NOA to be given almost immediately. The case, however, had a long and complex history and the owners were entitled to take time to consider their position when the final reports on the repairs and costs were received. They had also acted reasonably in requesting a meeting with the insurers to seek their views on those reports, a request which the insurers declined.
- Did the owners exceed the reasonable time to make enquiry?
The reasonable time was not exceeded because the enquiry was made more complex and slower by the insurers putting forward figures that would not support a CTL and creating an alternative repair specification, thereby making it harder to get a reliable figure.
On the issue of pre-notice recovery costs, the insurers’ argument that the vessel was not a CTL because the calculation included recovery costs incurred prior to the date of the NOA, and that only post-notice costs of recovery should be included was rejected. The insurers’ case was that a prudent shipowner would assess whether the costs of recovery made a vessel a CTL before incurring those costs and thus the NOA had to be given before recovery costs were incurred. Hamblin LJ said that it can be necessary for an owner to recover a vessel, and incur the costs of doing so, in order to be able to ascertain the repair costs and establish whether the vessel is a CTL.
I am very grateful for the assistance of Maria Carolina de França of Vieira Rezende in Rio de Janeiro for her assistance in writing this article.