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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> North Star Shipping Ltd & Ors v Sphere Drake Insurance Plc & Ors [2005] EWHC 665 (Comm) (22 April 2005) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2005/665.html Cite as: [2005] EWHC 665 (Comm), [2005] 2 CLC 238, [2005] 2 Lloyd's Rep 76 |
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| NORTH STAR SHIPPING LIMITED AND OTHERS |
Claimants |
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| - and - |
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| SPHERE DRAKE INSURANCE PLC AND OTHERS |
Defendants |
____________________
Mr Nicholas Hamblen QC and Mr Graham Charkham (instructed by Richards Butler) for the Defendants
Hearing dates: 11th October 2004 – 3 February 2005
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Crown Copyright ©
THE HONOURABLE MR JUSTICE COLMAN :
Introduction
The Insurers' Case
The Insurers' Submissions on Complicity
25.1. It being common ground that some person placed an explosive device against the vessel's hull and caused it to detonate for the purpose of flooding the vessel, the burden of proof rests upon the Owners to establish that the loss was insured under the war risks policy because it was caused by "any terrorist or any person acting maliciously or from a political motive". Within that burden of proof it is for the Owners to disprove their complicity in so far as they rely upon "any person acting maliciously".
25.2. It is submitted that there is no significant evidence to support a case that this was the work of a terrorist or of anyone acting from a political motive. HP's evidence was that neither he nor his family nor Kent had ever been threatened by terrorists or had any political involvement. No terrorist organisation had ever claimed responsibility. The highest the expert evidence of Dr Rathmell, called by the Owners, put the case was that political terrorism could not be discounted as a realistic possibility. He suggested that at the relevant time there was a high level of terrorist activity directed at commercial interests in Greece, as exemplified by the assassination of a Mr Peratikos, a well-known shipowner. He also suggested that Greek terrorist movements such as the 17 November group might have been involved. The environmental lobby might have been involved. The fact that the vessel had been trading on time charter to Israeli interests could have provided a further possible motive for terrorist groups. Dr Rathwell's evidence with which Professor Wilkinson, the Underwriter's expert, agreed, was that, if the explosive device was placed inside the vessel, it was most unlikely that this was the work of terrorists, for the risk of interception would be increased and there would be no clear gain in destructive potential.
In answer to the court Dr Rathwell stated that, taking all relevant factors into account, he would estimate the level of probability of this being the work of terrorists at 5% to 10%.Prof Wilkinson put the likelihood of a terrorist attack as virtually non-existent to 0.001% - and then only on the assumption that the person concerned might have mistaken the target. Professor Wilkinson did not consider that it could be the work of terrorists because of the lack of any apparent motive for a terrorist attack. The 17 November group, which was operating in Greece at the time had always claimed responsibility for attacks which had almost always been directed against individuals and had not up to that time involved attacks on cargo vessels. Their attack on HMS Ark Royal at Piraeus had strong political connotations. Terrorist attacks in port were rare and had not previously been directed against cargo vessels, as distinct from Government vessels.Although terrorism by Islamic fundamentalists was increasing at the time there was no evidence that such groups harboured any particular grudge against Greece or Greek interests. Although the vessel was chartered to Israeli interests, the attack in this case lacked symbolic value for any terrorist group because it was unlikely to attract publicity due to the commercial unimportance of the target. Furthermore, terrorist attacks were normally planned in advance and the vessel, having been diverted at short notice, would not have been in Piraeus long enough for it to be targeted. Nor was there any evidence to suggest that commercial enemies of the Owners or of Mr Kapellakos either existed or could have been responsible.25.3. There was no substance in the suggestion that the attack might have been by business associates, including a Mr Robayna and a Mr Sotiriadis, to whom I refer later in this judgment, or by aggrieved crew members. As to the latter, they were living on board at the time and were pursuing their claims in the local courts.
25.4. The Owners had the opportunity of access to the vessel without risk of any suspicion being raised while it was at Drapetsona. The evidence of the experts was that the quantity of explosive, perhaps about 4 kilos, necessary to cause the damage that resulted could easily have been acquired illegally and taken abroad unobtrusively possibly in a rucksack. HP personally had continuous access to the engine room. There were very few crew members on board and little or no security. The Owners could easily have sent someone abroad to put the explosive in place without arousing suspicion and they had very precise knowledge of the vessel's internal structure such as would enable the explosive to be most effectively located.
25.5. Once terrorism and persons acting from political motives were excluded, the only remaining source of motivation would be the Owners themselves and they had the very strongest of motives for making a fraudulent claim on the underwriters.
25.6. By July 1994 the Owners were in a desperate financial position, from which they had no means of extricating themselves unless they could obtain a very substantial capital injection from somewhere.
25.7. The insurance proceeds that would be derived from loss of the North Star would provide an easy answer to those problems.
25.8. The vessel was vastly over-insured. Her market value was about US$1.4 million whereas the insured value under the war risks policy was US$4 million. The vessel had already been sold to Kapelco on terms that, if it became a total or constructive total loss before delivery, any deposit was immediately to be released to the buyers and the sale contract was to be considered null and void. The buyers had advanced US$1 million out of the purchase price by way of loan to the sellers, secured on the vessel and on its policies of insurance. The net consequence of a total loss covered by the war risks policy would be that the sale contract would be cancelled and that the loan of US$1 million had to be repaid out of the insurance proceeds of US$4 million. The net benefit to the Owners would therefore be about US$ 3 million. Since the Owners had already sold the vessel, the total loss would not deprive them of an actual or potential income-earning asset.
25.9. The North Rock was the most profitable vessel in the Kent fleet, but it proved to be the origin of the Owners' rapidly declining financial position. It was arrested in Panama in July 1993 at the instance of a Mr Robayna who had disputes with the Owners arising from a previous business venture. The details do not matter for present purposes but they will have to be more fully considered later in this judgment. Mr Robayna's claim in relation to which he caused the vessel to be arrested was for US$770,000. The P&I Club declined to provide a guarantee. Guiness Mahon, the mortgagees, also declined to do so because they were concerned that other vessels in the Kent fleet might also be arrested even if the North Rock were released against security. Consequently, the vessel remained under arrest until May 1994, having lost 10 months trading. In terms of lost gross income, this amounted to US$1,260,000 as admitted by HP. The Owners also incurred financing costs covering principal and interest payments amounting to US$300,000 together with crew repatriation costs and some US$400,000 in further bank costs, sale costs and legal expenses. Further, the charterers of the vessel brought claims amounting to $46,000 - $56,000 which the P&I Club declined to cover and which had to be paid by Kent. The overall effect was that, instead of earning net profits of US£300,000 over the period of her arrest, the Owners incurred a total of US$1 million in expenses in respect of operational and maintenance costs, financing costs, sales costs, charterers' claims, legal expenses and dry-docking.
25.10. On 4 August 1993 Guiness Mahon informed HP that if the North Rock were not released from arrest that week, there would be an event of default under the loan agreement. HP acknowledged in his evidence that he was thereby confronted by serious cash low problems. At the end of July 1993 HP described himself in a letter to Mrs Zina Constantakis, a friend and lawyer whose help he was requesting in the form of a letter to the bank assuring it that any guarantee that the P&I Club might issue would not be called upon because the claim against Kent and other defendants would fail, as a "drowning man" who "tries to hang on to whatever he has".
25.11. In the course of the period 10 September 1993 to 19 November 1993 HP conducted negotiations with Guiness Mahon as to how to solve the problem of the arrested North Rock. Various proposals were agreed in principle. They involved the bank advancing further funds against the sale of the North Rock and the sale of the North Star which was then mortgaged to the National Bank of Greece but all of these proposals foundered because of the risk that the North Rock even under new ownership following a sale or other Kent vessels might be arrested by Mr Robayna. By 19 November 1993 the bank was urging HP that it was imperative that he should immediately put up the North Star for sale so that he could raise cash to alleviate his "liquidity squeeze". It is to be observed, however, that as late as October 1993 Kent had purchased a vessel called the Taxiarchis for US£1.35 million against a mortgage to the National Bank of Greece for US$900,000 cross-secured by a second mortgage on North Star and US$450,000 from Kent's own resources.
25.12. Following the arrest of the North Rock, Kent depended for its income stream on the North Star time charter to Negev Star and on a vessel called the Agios Nektarios which had just been purchased in July 1993 for US$2.2 million with finance from Guiness Mahon. From October 1993 it also had the income stream from the Taxiarchis. It was, however, also having to service the debt to the bank on the North Rock and to pay the considerable maintenance and other costs on that vessel while under arrest, as already described. Taxiarchis put a very severe strain on Kent's resources. The severity of the cash flow problem was shown by Kent's failure to remit insurance premium in respect of its vessels on the due dates. Thus, the brokers, B&P, informed Kent on 27 September 1993 that approximately US$42,000 was overdue by over 60 days and that figure would increase to US$100,000 on the following day. It appears that Kent had been permitted to pay the premium in instalments. B&P called for confirmation from the relevant banks that payment would be made on the required dates if the proposed schedule were to be agreed. By 8 November 1993 B&P were threatening that they would be obliged to notify the mortgagee bank that there had been a breach of the premium warranty in the mortgage due to the balance of the premium due, namely US$13,581.08, being more than 30 days overdue. On 22 November 1993 the brokers gave 10 days notice of cancellation of the London market share of the hull and machinery and war risks cover for the North Star, North Rock and Taxiarchis unless the bank gave notice of payment of US$62,080 within that period. The payment appears to have been made on 1 December 1993, the day before the deadline expired. On 8 December 1993 the brokers informed Kent that unless US$43,333 outstanding premium on the "Corvette" share of the cover for all four vessels was received, on or before 11 December, they would have to inform the mortgagees of cancellation of the cover. In the event Kent remitted US$42,000 on 21 December 1993, the date to which the insurers had extended the deadline for automatic cancellation of the policies.
25.13. The purchase of the Taxiarchis gave rise to seriously burdensome problems. Following her purchase, the insurers had initially imposed a condition of cover that the vessel should be surveyed by the Salvage Association. The Owners had persuaded them to provide cover pending a postponed survey and subject to a less extensive survey. In the event, it was not until the vessel had been trading for some two months that she was surveyed afloat at Houston. The survey report described her general condition as poor. Her hatch covers were in particular in a defective condition. Recommendations were made for repairs to be affected within 60 days and for the hull to be ultrasonically tested on her next dry-docking within 60 days. The insurers reacted to this report on 20 January 1994 by imposing a warranty that Salvage Association approval must be given before the vessel sailed. The vessel entered dry dock in Venezuela on 18 January 1994, the repairs being expected by HP to be completed in about six weeks at a cost of US$300,000. However, it was found that her tailshaft needed to be replaced. That caused considerable delay until a replacement was available. In the event, the work was not completed until 17 April 1994. The total cost was about US$400,000 which the Owners were somehow able to pay. On her first voyage after leaving dry dock she diverted to Puerto Rico for bunkers. While she was there the United States coastguard imposed certain requirements mainly relating to modifications to her equipment before permitting her to sail. She was detained there until 9 June 1994. Thus, the vessel's contribution to the Owners' income stream during 1994 had been very severely curtailed: she had earned nothing between 14 January and 20 April 1994.
25.14. While the Owners were endeavouring to solve the problems of the Taxiarchis they continued to encounter great difficulty in finding funds with which to pay outstanding insurance premiums. On 2 February 1994 the brokers, B&P, warned Kent that the London market were pressing for overdue quarterly premium and that if it were not paid that week a 10 day notice of cancellation could be expected. On 4 February 1994 B&P informed Kent that they anticipated that, if payment were not made, London underwriters would give 10 days notice of cancellation with effect from 7 February. This they did, but this time the Owners were unable to make payment and cancellation of the cover of all four vessels managed by Kent took effect on 6 March 1994. In the course of 8 to 11 March Kent persuaded Negev Star, the time charterers of the North Star to pay US$48,000, repayable by way of six monthly deductions of US$6,000 from hire, to the French insurers of the North Star in respect of overdue premium. On 15 March 1994 Kent informed Mr Stark of HIB that $72,364.72 was still due to the London market for the fourth quarter to 28 April and that Kent was making arrangements to pay this on 22 March 1994. On that day Kent requested Negev Star, charterers of the North Star to transfer US$30,000 to the bank account of P&P Marine Consultants at Royal Bank of Scotland, Piraeus, in respect of insurance premium for the North Star and others and to deduct that amount plus interest in four equal instalments of US$7,500 from charter hire payments to Owners. On 7 April 1994 Kent yet again requested the charterers to advance another US$30,000 to be repaid by five $6,000 instalments to enable Owners to pay outstanding insurance premium.
25.15. In the meantime, while the Taxiarchis was immobilised by repair work, the North Rock had remained under arrest at Panama until on 26 April 1994 it was sold at auction to a Captain Prekas. The circumstances of this sale are relied upon by the insurers as evidence both of the serious financial position of the Owners by early April 1994, and of the deceptive conduct of the Owners in relation to their bankers and of the cosmetic character of HP's evidence. The development of events and HP's account of them is as follows.
25.15.1. In his original witness statement of 22 August 2001 HP had stated merely that the North Rock was sold in April 2004 at the instigation of Guiness Mahon, the mortgagee bank, for US$1.1 million. The Owners had co-operated with the bank in relation to the court sale by auction. They had hoped to buy back the vessel at the auction with financial assistance from the bank, but the bank would not agree. They therefore had to enter into a separate agreement with Capt Prekas of Orionis Shipping to negotiate with the bank and for Prekas to purchase the vessel from the bank after the bank had purchased it under a court auction.25.15.2. In his second witness statement, dated 6 December 2001, HP stated that, following the sale, the Petrakakos family had a 50 per cent interest in the vessel and Prekas (Orionis Shipping) the other 50 per cent. He also stated that (i) Orionis was the vehicle through which the vessel was purchased and by means of which the vessel was available as collateral for a facility granted by Guiness Mahon; (ii) cash was available to Kent from the income earned by the vessel from its re-commencement of trading in June 1994, the charter hire being about US$4,800 per day and the operating costs about US$2000 per day and the bank loan repayment about US$1,000 per day and from funds "returned by Guiness Mahon through the vehicle of Orionis Shipping".
25.15.3. In his second supplemental witness statement, signed on 14 October 2004 and prepared shortly before the commencement of the trial, HP referred to the transcript of an interview of him conducted by the insurers' solicitors in November 1994 in which he had stated that Guiness Mahon did not know that Kent was behind the purchase of the vessel at auction. He put forward the following explanation in his witness statement. The bank was unwilling to refinance Kent to re-purchase the vessel at the auction. Therefore HP consulted Ted Petropoulos to advise him. He suggested to HP and Guiness Mahon that they should enter into a pre-auction agreement which would "involve finding someone with no obvious connection with us to front the purchase". Petropoulos suggested Prekas. Therefore an agreement was entered into between Prekas's company and the bank. The Petrakakos's were not party to it and, although a copy of that agreement was available during his interview, HP personally did not have a copy. Hill Taylor Dickinson, his solicitors, had obtained a copy. HP stated that in the event the vessel was sold at auction for US$1.1 million which was equivalent to the amount of the outstanding mortgage to Guiness Mahon. Since the outcome of the auction was uncertain, the bank had required that additional finance should be made available to it in the amount of US$500,000 in case the bidding went above the floor price of $1.1 million. This was, according to HP, transferred to a Prekas account at Guiness Mahon before 26 April 1994, the date of the auction. The money was transferred by Kapelco as part of the purchase price of North Star. It was a loan to Prekas by Kent.
25.15.4. HP further stated in his second supplemental witness statement that under the agreement between Prekas and Guiness Mahon it had been agreed that the market value of the vessel was US$2.1 million and that a minimum of $1.1 million would be paid to the bank. The bank was refinancing the vessel up to that amount. Since the Petrakakos interests beneficially owned 50 per cent of the vessel they would own 50 per cent of the net equity. Since the sale price was only US$1.1 million, the US$500,000 advanced to Prekas from the proceeds of the North Star was not needed and that was paid back to Kent over June, July and, he thought, early August 1994. It was not paid out of income derived from trading of the vessel, but from its own fund which it had not been necessary for Prekas to use. No documents evidencing this repayment are before the court.
25.15.5. North Rock proceeded, after its release, to Curacao where it was painted and repaired at a cost of about $85,000 and renamed Orion Progress. It started trading in late May 1994, earning about $4,500 per day with net earnings of about US$1,200, received as to 50 per cent by each of Kent and Prekas.
25.15.6. HP stated that the repayment of the US$500,000 loan to Prekas assisted Kent's cash flow, but money was needed to bring the vessel up to trading fitness and for the repair costs on the Taxiarchis and, after the explosion, for repair and recovery costs on the North Star.
25.16. It was accepted by HP in cross-examination that the agreement between Kent and Prekas was not evidenced in writing. The insurers drew attention to the fact that neither Mr Petropoulos nor Mr Prekas nor anyone concerned at Guiness Mahon gave evidence. Kent had to provide Prekas with US$500,000 because Prekas could not raise that sum. The bank did not know that such fund originated from Kent or that it had been remitted by Kapelco as part of the proceeds of sale of the North Star. HP admitted in cross-examination that he knew that the bank believed that Prekas had produced the US$500,000 from his own resources. It is submitted on behalf of the Insurers that the reason why its origin was concealed from the bank was that, if Kent had a continuing interest in North Rock, there would be a high risk that the vessel might be re-arrested by Mr Robayna and that, had it known the truth, the bank would not have embarked on the transaction with Prekas. It was further put that the bank was induced to advance the amount of the purchase price to Prekas by its mistaken belief that he was able to find the additional US$500,000 from his own resources. It is submitted that, on his own evidence, HP was aware that Guiness Mahon was being misled in this manner.
25.17. More fundamentally, it is submitted on behalf of the insurers that much of HP's evidence about the transaction involving Mr Prekas is untrue and that the agreement involving the loan of US$500,000 and its repayment to Kent by August 1994 is so incredible that it should be rejected. It is said that it has been an evidential device designed by HP to give the appearance of availability of more resources to the Owners than in truth they had. In particular, the agreement said to have been made with Prekas or his company was not recorded in writing, was made through Ted Petropoulos as intermediary to a person with whom HP had no previous dealings and involved an unsecured loan of US$500,000. Moreover, the transaction was intrinsically implausible for it involved Prekas acquiring a 50 per cent share in a vessel whose market value was known to be about US$2 million without his making any capital contribution and having merely lent his company's name to the ownership of the vessel. It also involved his company acquiring an unsecured loan of US$500,000 not subject to any written terms as to the date of repayment or the purpose for which it could be used. Further, in his first witness statement HP had stated that out of the US$1 million advanced by Mr Kapellakos as part of the purchase price of the North Star US500,000 was sent directly to Guiness Mahon designated for the Prekas funds to be used to purchase North Rock and that the vessel was subsequently purchased by Prekas "using our funds and obtaining a 50 per cent interest in the vessel … taking out a loan with us which he repaid with proceeds from the trade of the vessel and from the proceeds of the sale of the vessel". It was only in his witness statement of October 2004 that HP stated that the $500,000 had been repaid over June, July and early August 1994 and there were no documents to evidence that.
25.18. If there ever were a transaction with Prekas of the kind described by HP, which was in itself incredible, it is submitted that his evidence as to the purpose and time of repayment of the $500,000 has been designed to create the false impression that the Owners were not desperately short of funds by early July 1994. It was submitted that the latter was the true position as demonstrated by the following further evidence. In June and July 1994 Kent did not have the funds to pay even relatively small amounts. Thus, on 9 June 1994 the insurance brokers, MIRA, warned HP that the hull and machinery "Corvette" cover for the Kent vessels would be cancelled automatically unless the outstanding premium of $32,271.15, which had been payable on 28 April was paid to HIB that day. But Kent could not pay and was obliged to ask Kapelco to advance that amount out of the purchase price of North Star. On 28 June 1994 instalments of premium in the sum of US$93,605 and US$109,435, in respect of hull and machinery were due in respect of the North Star, Agios Nektarios and Taxiarchis. They had not been paid by 6 July 1994, the day of the explosion. On that date MIRA pressed HP for his earliest remittance "to avoid unpleasant developments with underwriters". On 5 July 1994, the day before the explosion, the Owners remitted from Commercial Bank of Greece direct to HIB the sum of US$10,350. In a message from HP to MIRA dated 23 July 1994 HP, referring to this as being a remittance made at the end of June 1994, stated that it was to cover US$5350 for war risks premiums and the balance towards outstanding hull and machinery premiums. When asked about this payment in cross-examination HP said that the payment was made because he was concerned about the outstanding premiums and, "since we have this money available we sent it and, the first thing the brokers say in the contract of war risk is that it is payable at inception." In reply to the message of 6 July, Kent informed MIRA on 15 July that, in view of the accidents to two of their three vessels (North Star and Taxiarchis), they were not in a position to meet their obligations to the insurers. There was "not enough money to go anywhere". Only the Agios Nekterios was earning freight and that was to be sold. Kent asked to be permitted to make payment of premium in instalments beginning with US$70,000 at the end of July 1994. As at 18 July 1994 a total of US$ 226,000 was said by MIRA to be due in respect of outstanding premium. It is to be observed, however, that, as already indicated, this total may be overstated by some US$10,350 for on 23 July 1994 HP sent a fax to MIRA in which he stated that at about the end of June 1994 Kent had remitted that amount to HIB's account "to cover (US$) 5350 for the (war risks) premiums and the balance towards H&M trading, (outstanding) premiums."
25.19. It is submitted on behalf of the insurers that, accepting that 50% of the trading revenue produced by North Rock was US$600 per day, and assuming that an equivalent amount were released by Prekas from the US$500,000 fund, the total released by August 1994 would have been only a small part of that sum. Accordingly, Mr Petrakakos's evidence about the US$500,000 repayment must be untrue.
25.20. The insurers further rely on the effect of events affecting the Taxiarchis as evidence that Owners were by the end of June 1994 in a desperate financial position. She departed from Puerto Rico, after detention by the United States Coastguard, on 9 June. However, on 16 June 1994 she suffered a serious fire in her engine which resulted in heavy damage, including the cracking of cylinder heads, crankpin damage and damage to the turbo chargers. The first appraisal of the extent of the damage was given in a report by the Chief Engineer dated 30 June 1994. Both HP and his brother accepted in evidence that they were made aware of the contents of that report. MP accepted that he knew of the main items of damage. The vessel was obliged to put into Norfolk, Virginia for repairs. It is submitted that it must have been obvious to the Owners that these were likely to be time-consuming. Further, the full extent of those repairs would not be known for certain until the engine could be properly surveyed after opening up. The cost of repairs was likely to be considerable and, although they could be claimed from the insurers, the Owners would have to fund them at the outset. They would also have to carry operational and maintenance expenses as well as financing charges amounting in total to about US$3,000 per day. The Owners also faced a potential cargo claim. On 12 August 1994 the Taxiarchis was arrested at Norfolk for non-payment of a bill for bunkers. She was also detained by the United States Coastguard for unseaworthiness. Subsequently, Bureau Veritas withdrew her classification. The Owners abandoned the crew. Eventually, she was sold for US$310,000, having been purchased little more than a year earlier for US$1.3 million. The net proceeds of sale did not cover her debts.
25.21. With the imminent disposal of the North Star, the damage to the Taxiarchis and the disposal of 50 per cent of its interest in the North Rock, Kent was left at the end of June 1994 with the Agios Nektarios and a 50% share in North Rock. Eventually, Agios Nektarios was sold in November 1994 for $1,807,750, all of which went in repayment of the bank and other creditors. Although HP claimed in evidence that the buyers paid an additional $200,000 to Kent, there is no documentary evidence of this and the insurers say that it is untrue.
25.22. The requirement by Guiness Mahon that, in order to retrieve the North Rock from arrest, Kent would have to sell the North Star caused the Owners to become involved in a transaction which put a very heavy additional strain on their financial resources. The main reason for this was the term of the sale contract with Kapelco under which the sale price varied according to whether the Owners put the vessel through its special survey before delivery (see paragraph 10 to 11 above) coupled with the agreed cancelling date. In outline, the insurers submit that it must have been apparent to the Owners by the middle of June that the vessel was unlikely to complete its special survey work in time for delivery by the cancelling date and, even if that work were completed, that the cost of the work would be such that the Owners would gain no financial benefit from the sale and might well make a loss.
25.23. In support of this proposition the insurers make the following points:
25.23.1. The Owners had originally expected to make delivery before the end of May at Ulsan, Korea, the repairs having cost US$60,000 - $70,000, and so to receive the purchase price at that time, that is to say $400,000 ($1 million already having been advanced by Kapelco on loan) less a deduction of $25,000 which the buyers agreed to pay to Negev Star in order to obtain those charterers' agreement to a change in ownership of the vessel. However, by the end of June a number of further expenses arising out of the sale, as well as additional deductions from the purchase price, would fall on the Owners. Due to the Owners' cash flow crisis it was agreed in May 1994 that US$60,000 was to be deducted by the sellers for payment on account to the repair yard in Ulsan which had worked on the vessel towards completion of the special survey. On 9 June 1994 it was further agreed by Kapelco at the Owners' request that US$32,271 was to be deducted from the purchase price and paid direct to HIB for outstanding insurance premiums. There also had to be deducted from the price $8,000 as compensation to Kapelco for deviating to Pireaus and returning to Ashdod. A further $100,000 compensation had to be paid to the charterers for re-routeing the vessel through the Suez Canal. Some 5,000 would have to be paid to Kapelco as default interest on the loan of $100,000 which could not be treated as discharged on 15 June which was the original delivery date and would have to be delayed until the new delivery date, likely to be not earlier than the cancelling date of 10 July. In view of these additional expenses the net amount which, by mid-June, appeared likely to be received by the Owners from Kapelco was as little as about $170,000. This was accepted by HP in cross-examination.25.23.2. However, even if the vessel could have been put through her special survey at Piraeus by the cancelling date and even if the cost of that were no more than originally budgeted by the Owners, namely US$50,000 together $12,000 for class expenses, the costs falling on the Owners would at least substantially exceed $170,000. Thus the expenditure incurred in relation to the work on the vessel at Ulsan amounted to $88,500 which exceeded Owners' estimate of $60,000 - $70,000 by $18,000 to $28,000. The costs of the deviation to Piraeus amounted to about $97,460, made up of Suez Canal charges, compensation to the charterers for the deviation, compensation to Kapelco for returning the vessel to Ashdod from Pireaus and the cost of extra fuel consumed in the course of the deviation to Piraeus. Thus, taking into account the budgeted cost of the special survey work and class inspections as $62,000, the total would be at least US$187,960. That, however, took no account of operational costs at Piraeus or the claim for compensation by the North Star crew which was ultimately settled in August 1995 for G Dr 8 million (about US$117,000). The effect of these figures was accepted by HP in cross-examination. He did, however, suggest that they failed to take account of the charter hire receivable for the voyage from Ulsan to the Red Sea where the vessel deviated to Piraeus. It is submitted by the insurers, as I accept, that the operating costs from arrival at Ulsan to arrival at Piraeus would have been at last equal to the amount of charter hire.
25.23.3. Accordingly, even on the basis of the special survey costs not exceeding budget, the Owners were unlikely to derive any overall financial benefit or any cash-flow benefit from the sale of the North Star other than the US$500,000 which had gone to Mr Prekas, already referred to (see paragraph 25.15.3 above) and which, on the insurers' case, was not to be repaid in the immediate future. The only other benefit had been that they retrieved half the North Rock and half its net income stream.
25.23.4. Further, the insurers submit that the special survey work at Piraeus would in reality have cost much more than the US$50,000 budgeted. In order to establish this, they rely in particular on the very strict attitude of, the Bureau Veritas ("BV") surveyor at Piraeus, and the deteriorating relationship between that classification surveyor and the Owners during the period from 15 to 29 June 1994. Eventually BV by their message of 29 June imposed stringent requirements for the Special Survey. A substantial number of internal areas of the holds were said not to have been ultrasonically tested in accordance with BV's rules and such tests would have to be carried out. In relation to this, the ultrasonic testing at Ulsan had been carried out by an organisation (Marutec) not certified by BV and all those areas would be required to be checked at random. It had observed that some of the areas of bulkheads in the holds were deteriorated further than acceptable limits. It is submitted that, whatever the true condition of the vessel's steelwork and whether or not it really was necessary for there to be duplication or further checking of the ultrasonic tests conducted at Ulsan or for the conduct of further extensive testing, the requirements of the Bureau Veritas surveyor would in reality have to be complied with before the Special Survey was passed. The cancelling date under the sale agreement was 10 July 1994 and all that was necessary for the Special Survey had to be completed by then.
25.23.5. While accepting that there would be a good deal of uncertainty as to the extent of steel renewal work which, after 29 June, BV would have required to be carried out, the insurers submit that at least 50 tons of renewal steel would have to be inserted.
25.23.6. The Owners' expert, Mr A Stanley, stated in the Joint Experts Memorandum that an additional amount of about 50 mt of steel renewals would be required if the results of the ultrasonic test were unacceptable to the class surveyor, whereas the insurers' experts, Mr Shortall and Mr Bowman, stated that at least approximately 70 to 100 mt would be required, but probably more.
25.23.7. The insurers rely on the results of the ultrasonic tests which had been conducted at Piraeus up to the time of the casualty as indicating to the Owners that BV were likely to insist on more extensive steel renewals than had been anticipated on the basis of the Marutec ultrasonic readings at Ulsan. In his evidence HP recognised that there was a risk that up to 10 metric tons of steel renewals to the bulkheads might be required in view of the Piraeus ultrasonic results. Further, his evidence was that, following discussions with BV at Piraeus, he estimated that about 20 per cent of the vessel's frames that is about 40 to 45 frames, would need to be replaced or worked on and he accordingly increased his estimate of steel requirements by 5 tons. The insurers point out that 45 frames account for 8.4 mt of steel.
25.23.8. It was also known to the Owners that there was wastage in the double bottom tanks where BV described the costings as poor, some steel replacements already having been effected at Ulsan. Only limited areas had been tested at Ulsan and one belt had indicated relatively high wastage. It would therefore be apparent that this area was also vulnerable to BV requirements for steel renewal. As to the topside tanks, BV required ultrasonic tests of the web frames and longitudinals. Photographic evidence indicated that there was some wastage in the longitudinals. HP thought that the wastage would have been apparent to the BV surveyor at Ulsan and therefore replacement would have been effected before arrival at Piraeus. There is, as the insurers submit, no documentary evidence of this. Further, in relation to the tank tops the Piraeus ultrasonics were in places, to the Owners' knowledge, showing wastage in excess of the modulus section limit of 10 per cent which suggested a real risk of BV requiring further steel replacements.
25.23.9. It is therefore submitted that it must have been apparent to the Owners that BV might well require steel renewals of as much as 50 mt. Since the cost of steel at Piraeus, including installation, would, according to the Owners' expert, Mr Stanley, be of the order of US$4.50 per metric ton, it must have been appreciated by the Owners that the total cost of the steel work required for the special survey would be at least US$200,000 and not US$50,000, as budgeted by HP. Although MP claimed in evidence that the price of steel at Piraeus was as low as G Dr 670 per metric ton, or about US$3 per metric ton, Mr Stanley estimated that in order to get the work expedited with overtime, the Owners would nevertheless have to pay US$4 or possibly US$4.5 per metric ton.
25.23.10. Accordingly, it is submitted that Owners' perception of the immediate expenditure required to deliver the North Star with special survey completed, as seen at the end of June 1994, must have been that it would very significantly exceed the net available balance of the proceeds of sale and would present an insurmountable financial burden for the Owners. An increase in the cost of replacement steel from US$50,000 to US$200,000 would increase the cost to the Owners from US$187,000 (see paragraph 25.23.2 above) to US$337,000 against a surplus on the sale of the vessel of US$170,000.
25.24. However, it was submitted, the Owners were under seriously increased pressure on account of the cancelling date under the sale contract. If they failed to complete the special survey by 10 July, the buyers could cancel the sale and call for immediate repayment of the loan of US$1 million which the Owners could not repay, having already spent the money by advancing half of it to Capt Prekas for the North Rock purchase and using the balance for the incomplete Special Survey repairs to the North Star and for other purposes. Alternatively, if the Owners were to repay the buyer's loan, they would be obliged to tender delivery prior to completion of the special survey but in that event the price would be reduced to US$1.1 million. This very serious situation could be avoided only if either Mr Kapelakos could be persuaded to extend the cancelling date sufficiently to enable the Owners to complete the special survey by 10 July or the repairs required by BV could be completed on time. As to the latter, the evidence suggested that this was not possible. As at 3 July 1994, given that the ultrasonic testing required by BV had not yet been completed and that steel renewals were likely to be about 50 mt, it would be two to three weeks according to the evidence of the insurers' experts and 5 to 7 days on the basis of the evidence of Mr Stanley, assuming in the latter case simultaneous working of repair gangs and overtime. The risk of non-completion by 10 July 1994 was therefore very high.
25.25. It was therefore against this background of the likelihood of impending financial disaster that it was to be inferred that the Owners were tempted to turn to the prospect of extracting the very considerable proceeds of a claim on the insurers as a means of solving their problems. This inference was supported by the fact that these Owners were not strangers to lucrative insurance claims. In 1990 HP and MP acquired a part beneficial interest in the Ivory K, the vessel which was to be at the root of the dispute with Mr Robayna which led to the arrest of the North Rock Panama. The vessel had been purchased by Ivory Shipping which was beneficially owned by the Petrakakos and Robayna families for US$4.5 million from Atlantic Light Corporation which was beneficial owned by Kent and the Government of Nicaragua. The money was borrowed from Den Norske Bank. The vessel was a total loss in August 1990. That was at a time when, according to the evidence of HP, Kent "had some cash flow needs". The insurance claim was for US$10 million and was paid in full in August 1992. The proceeds were used to repay the bank loans, (US$3.5 million), to satisfy promissory notes covering part of the purchase price (US$2 million) and to pay US$1.5 million for consultancy services to HP and his brother.
25.26. The Insurers further rely as supporting the involvement of the Owners in arranging for the explosion on one particular feature of the vessel which was found when it was subsequently inspected. This was the configuration of the explosion aperture, the adjacent hull area and the interior of the engine room and No.6 hold. The predominant characteristic was that of outward petalling, that is to say tongues of plating adjacent to the aperture curled outwards. It is submitted that this configuration strongly supports the case that the explosive device was positioned on the inside of the hull and not on the seaward side, the force of the explosion having severed an area of plating of about 0.6m² from the hull and having caused the adjacent metal to fracture into outward curling petalling. The fact that, as is common ground, the hull was also found to have become dented inwards ("inward dishing") did not point necessarily to an explosion initiated outside the hull because the relevant dynamics would involve the blast forces travelling through the aperture and then being reversed back against the shell plating upon meeting the countervailing pressure from the sea.
25.27. In support of the inside explosion theory the insurers rely in particular on the fact that no large fragments of plating were found in the engine room. If a 0.6m² aperture were blown inwards, substantial fragments of plating could be expected to have been found. Nor, with one possible exception, was there any evidence to suggest shrapnel damage from substantial fragments to any part of the engine within the range of any likely trajectory from the seat of an outside explosion. Further, such damage as was found to the inside of the engine room, in particular to the forward bulkhead and to the stiffeners at L2 and L3 and also inside No. 6 hold where the hopper tank had been punctured close up against the shell plating out of the angle range of an external explosion, as well as pitting and metallic particles on the inside of the shell, strongly suggested that the explosion occurred inside the engine room. It was submitted that the Owners' expert, Mr Misselbrook, had failed to put forward any sufficiently sustainable theory in support of the outward petalling being consistent with an outside explosion.
25.28. I shall have to consider the technical evidence rather more fully later on in this judgment. However, the insurers submit that, if they are right in submitting that there was an inside explosion, this supports the probability that it was the work neither of terrorists nor of outsiders acting maliciously, but rather the work of someone with easy access to the vessel and who was sufficiently familiar with the internal structure of the vessel to enable him to place the explosive in a position where it was likely to cause the maximum water ingress and resultant damage.
25.29. The defendant insurers have strongly criticised the conduct of HP and invited this court to conclude that, although he is a well educated, intelligent and capable man, a graduate of MIT, and qualified as a naval architect, he is prepared to lie to achieve his ends. In particular, he was prepared knowingly to allow Guiness Mahon to be deceived into believing that Captain Prekas had provided US$500,000 towards his purchase of the North Rock when, in truth, it was being provided to him out of the US$1 million loan by Kapelco to Kent when it must have been clear to HP that, had the bank known the truth, it would not have advanced the balance of the purchase price.
25.30. Further, in an application for hull and machinery insurance signed by HP on 6 May 1994, just two months before the loss of the vessel, under a declaration of truth, he gave the "purchase value" of the North Star as US$4 million. In truth, the purchase cost of the vessel had been US$1.3 million in 1989 and the agreement to sell to Kapelco had recently been negotiated at US$1.4 or 1.1 million on 20/21 April. There could thus be no way in which HP had made a mistake. However, while under cross-examination, he had attempted to justify this error by suggesting that he was giving the market value as repaired, a suggestion which could not have been true for in relation to the purchase value of the Taxiarchis, which had also undergone repairs, he did declare the cost of the vessel before repairs. He also failed to disclose in his application the mortgage of the North Star entered into on 22 April 1994, some two weeks earlier, for US$1 million. He said it must have slipped his mind, but when asked by the court how he could have forgotten, he had no explanation.
25.31. On 2 June 1994 the brokers informed HP that the hull and machinery underwriters required to be made aware of the current condition of the Taxiarchis. The next day HP stated that the Taxiarchis was currently on a loaded voyage to Canada without informing underwriters that it had diverted to Puerto Rico for bunkers on 28 May and had been detained there by the United States coastguard due to safety deficiencies. HP said that he told the underwriters all about this orally immediately after that while visiting the Posidonia Conference in Piraeus.
25.32. The insurers also draw attention to HP's conduct in relation to his decision that the vessel's special survey would be carried out at Piraeus. In the course of his evidence, after having confirmed that he had taken that decision on 17/18 June 1994, for no apparent reason he then denied having given that evidence. Following that decision the charterers were not told about it until 20 June. They had ordered the vessel to Eilat for orders, and then were given an ETA for Eilat of 20 June, but the Owners ordered the master to slow steam in order to delay arrival at Eilat. This he did. HP conceded in evidence that this was in breach of the charterparty but said that he needed time to negotiate with BV and the buyers as to the place for completing the special survey repairs and in particular, whether that would be Piraeus. The Owners then ordered the master not to enter the UN Zone which had to be traversed if the vessel was to go to Suez. This was all concealed from the charterers. Next HP ordered the master to proceed to Suez but not to arrive there before the evening of 22 June, again without telling the charterers. The master made false entries in the vessel's log in order to conceal the change of course towards Suez. Not only was this deviation concealed from the charterers, but also from Kapelco whose representative was on board throughout the voyage. This was on HP's instructions. His claim that he kept the chartering brokers informed was implausible.
25.33. The mortgage against which the buyers of the North Star had advanced US$1 million to the Owners provided that the vessel was to be fully insured, that is against partial loss, as well as against total loss. However, the vessel's insurance was for total loss only and, although HP's evidence in his witness statement was that he informed Mr Kapelakos of this and in cross-examination was that he thought that he may have told the buyers but could not recall whether he had mentioned this to them, he could not have done so. He had attempted in his evidence to justify failure to obtain full cover by stating that the vessel was about to be delivered to the buyers at Ulsan and would not be proceeding on any voyages before delivery. However, when on 6 July 1994 following the explosion, the buyers discovered from MIRA, the brokers, that the vessel was not insured for partial loss, they registered a very strong protest and stated that this was "despite your repeated express reassurances and confirmations". The Owners had never refuted this statement.
25.34. There were serious question marks about the transfer of the Ivory K and the disposal of the insurance proceeds following its total loss. These were that the value of that vessel at the time of the sale for US$4.5 million by Atlantic Light, the corporation jointly owned by HP's family and the Nicaraguan Government, to New Forum, a corporation jointly owned by HP's family and Mr Robayna, was said to be US$6.5 million or US$7.5 million. HP claimed in evidence that the Nicaraguan Government had agreed to sell at US$4.5 million. It is submitted that this must have been because the Petrakakos interests misled them as to value. Further, when the vessel was lost and the proceeds of the undisputed insurance claim (US$10 million) were received, the Petrakakos brothers helped themselves to US$1.5 million for "consultancy fees", at 15 per cent in addition to travelling and other expenses. This consultancy, as HP admitted in cross-examination, was for "nominal" services.
25.35. It is also submitted on behalf of the insurers that HP has in many respects not been candid in his evidence. In particular, he tried to suggest that there were no serious liquidity problems for the Owners before the loss in the face of clear evidence to the contrary. He tried to deny that he knew that the vessel was insured for US$4 million yet admitted in his statements that he knew that it was. He also tried to make out that the US$500,000 paid to Capt Prekas in respect of the purchase of the North Rock was money available to Kent at the time of the loss of the North Star, thereby suggesting that the Owners' financial position at that time was stronger than in truth it was. Further, HP's evidence was that, having regard to the fact that the agreed cancelling date under the North Star sale agreement was 10 July 1994 which was a Sunday, it was agreed with Mr Kapelakos or his representative that delivery could be made on 10 or on 11 July. Yet on 5 July 1994 the buyers had sent a message insisting that delivery could not be made on 10 July as it was not a banking day. On the face of that message, HP stated in cross-examination that whereas he had not met the buyer after 1 July 1994 he could have spoken on the telephone to Mr Kapelakos or his representative before 6 July. It is submitted that this evidence was untrue.
25.36. The insurers submit that the following matters further suggest the complicity of the Owners, if not their actual participation, in placing the explosive.
25.36.1. The explosive device was located in an unobtrusive position on a ledge on a longitudinal in a corner of the engine room.25.36.2. There were long periods on 5 July when, according to their statements, most or all of the crew had left the vessel.
25.36.3. HP was well acquainted with the engine room and well aware of the absence of the crew on 5 July. Indeed, at one point on 5 July he personally suggested to one Keerth, a crew member, with whom he was alone in the engine room, that he should go and take a shower, thereby causing him to leave HP alone in the engine room.
25.36.4. The Owners paid the outstanding war risk premium the day before the explosion in spite of having practically no available funds.
25.36.5. The period of time between when HP was awakened with news of the explosion, about 04.30 on 6 July, and his arrival at the vessel about 06.10, was suspiciously long and surprising considering HP had been informed of an explosion below the water surface.
25.36.6. Dr Foster, who was advising the Owners as technical expert from the outset, was incorrectly informed that the plating was petalled inwards both by HP and, to the extent of 90 per cent, by a technical representative. He was also incorrectly told that shell plating was in course of being removed from No.6 hold.
25.36.7. When the question had been raised as to whether the explosive device had been placed inside or outside the hull, the Owners obtained a statement from Gionon Konstantinos the diver who had first inspected the underwater aperture, in which it was stated (paragraph 12) that when they had been preparing to fit a patch over the aperture they had cut away part of the protruding tongues of metal but that had not really been necessary for carrying out the work. The expert evidence was that the cutting away would have been necessary because of outward petalling and it was to be inferred that the diver's evidence was designed to belittle the outward petalling.
The Owners' Submissions on Complicity
"The vessel has been built to a good specification throughout but has experienced a period of operation at minimal expense and resultant poor maintenance. Although there is active corrosion and some wastage of the structure in the topside ballast tanks this is relatively minor, the fitting of anodes should arrest the corrosion and the wastage noted can be rectified at no great cost.
The vessel last drydocked in July 1991 and is next due in January 1994 for which there is a Class requirement for Ultrasonic thickness gaugings to the hull plating below the water line to be taken at that time.
Although there is some corrosion on the outer hull the condition of the bottom side tanks and double bottoms are such that any wastage that may be recorded should be well within acceptable limits as the structure throughout is good.
There are no apparent major deficiencies and it should be possible to maintain the vessel for a few more years with some modest investment for drydocking and remedial works on the main engine."
"..found to be in sound condition with exception of slight corrosion spots at places, but general impression is that all internals are sound and strong."
"I inspected most of the non-engineering parts of the vessel which included the holds, the bridge, double bottom tanks, topside tanks, forepeak, accommodation, galley and mess rooms. I found the ship to be in very good condition. Some aspects that specifically stand out in my mind were that the welding between the shell plating, deckplating and holds was very good, the plates were without rust. Aft and forward deck was in excellent condition which actually surprised me, because of the age of the ship. I recommended to Mr Kapellakos that we definitely buy the vessel as it was in excellent condition."
He further stated:
"The class surveyors were very strict and thorough. The problem stopping the vessel from passing special survey was the outstanding work to the topside tanks. There was some work to be done on one or two bilges."
and
"Before sailing from Ulsan I pressed Mr Kapellakos to take delivery of the ship without Special Survey having been passed because the outstanding points to pass Special Survey were small, in my opinion (bilges, topside tanks). I said that the buyers should take delivery in Ulsan and that I would arrange for the work to be done during the voyage to the next anticipated loadport. This was also the opinion of the two engineers. Notwithstanding this recommendation Mr Kapellakos decided to take delivery after all the outstanding work has been done to pass Special Survey.
General Approach to the Evidence
"That the word "maliciously" is quite capable of covering wanton damage is clear from its use and the meaning accorded to it under the Malicious Damage Act 1861. Section 58 provides that where malice is an ingredient of an offence under that Act it is immaterial whether the offence was committed "from malice conceived against the owner of the property in respect of which it shall be committed or otherwise". That opens up the meaning to cover any conduct whereby the property in question is intentionally caused to be lost or damaged or is lost or damaged in circumstances amounting to recklessness on the part of some person.
In my judgment, there is no reason why the meaning of "person acting maliciously" should be more narrowly confined than the meaning which would be given to the word "maliciously" under The Malicious Damage Act 1861. Provided that the evidence establishes that the vessel was lost or damaged due to the conduct of someone who was intending to cause it to be lost or damaged or was reckless as to whether such loss or damage would be caused, that is enough to engage the liability of war risks underwriters. The words therefore cover casual or random vandalism and do not require proof that the person concerned had the purpose of injuring the assured or even knew the identity of the assured."
Findings as to the Circumstances and Nature of the Damage