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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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Neutral Citation Number: [2005] EWHC 665 (Comm)
Case No: 1996 FOLIO NO. 644

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL
22/04/2005

B e f o r e :

THE HONOURABLE MR JUSTICE COLMAN
____________________

Between:
NORTH STAR SHIPPING LIMITED AND OTHERS
Claimants
- and -

SPHERE DRAKE INSURANCE PLC AND OTHERS
Defendants

____________________

Mr David Goldstone (instructed by Shaw & Co) for the Claimants
Mr Nicholas Hamblen QC and Mr Graham Charkham (instructed by Richards Butler) for the Defendants
Hearing dates: 11th October 2004 – 3 February 2005

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    THE HONOURABLE MR JUSTICE COLMAN :

    Introduction

  1. In the early hours of the morning of 6th July 1994 the first claimant's bulk carrier "North Star" was damaged by an explosion at Drapetsona, near Piraeus. The vessel was moored in shallow water alongside the mole for the purpose of undergoing repairs in order to complete her special survey. The explosion was caused by the detonation of an explosive device which was located about one metre below the water line on the port side and just aft of the engine room forward bulkhead with No. 6 hold. It is in issue whether the device was either attached or placed close up to the outside of the hull or was placed up against the internal shell plating at the forward end of the engine room. The explosion blew an aperture in the shell plating just aft of the bulkhead. The aperture consisted of the space left by missing plating detached by the explosion and the space created by the fracturing of the edge of the hole left by the missing plating and the formation between those fractures of tongues of metal or "petals" which had been displaced from their alignment with the side of the hull. The result was that substantial quantities of seawater were admitted to the engine room and, through the bulkhead, into No. 6 hold. The seawater so completely damaged the engine room machinery that the vessel could not be repaired except at a cost likely to be in excess of its value. Accordingly, the Owners claim under their war risks policies for a constructive total loss.
  2. The vessel was registered in Malta. The assured registered owner was North Star Shipping Limited which was a one-ship company managed by Kent Trading Corporation ("Kent"), which had offices in Piraeus and New York. Kent was beneficially owned by the third and fourth claimants, the brothers Harry and Michael Petrakakos, ("HP" and "MP" respectively). I refer to them, Kent and the registered owners collectively as "the Owners". Both brothers had been educated in the United States where their father had been a successful businessman in New York. HP had a master's degree from MIT in naval architecture and marine engineering and shipping and shipbuilding management. MP had a master's degree also from MIT in naval architecture and marine engineering. In 1977 both brothers set up P&P Marine Consultants, a consultancy service providing ship repairs supervision and claims and management services. It operated in New York and Piraeus, and it provided services to several large shipowners and to P&I clubs, particularly the Oceanus.
  3. Kent was set up in 1983. As well as its shipping activities it was a trading company which owned or managed other companies dealing in carpets and computer software design.
  4. By the end of 1993 Kent operated a fleet of four vessels – North Star, North Rock, Agios Nektarios and Taxiarchis. HP, although fully competent to deal with all technical aspects of ship management, was more concerned with decision-taking as to financial and commercial matters than MP who concentrated more on the technical aspects of management and consultancy work.
  5. North Star was purchased by one of the Kent companies in a damaged condition for US$1.3 million in September 1989. It was then 17 years old. Substantial repairs were then carried out. These included the fitting of a new tail shaft and propeller and major crankshaft repairs, as well as sand blasting and painting of the holds. It was transferred to the Owners in 1992 and at the time it was transferred from the Cypriot flag to the Maltese flag. At the time of the loss the vessel was mortgaged to the National Bank of Greece. The amount outstanding on that mortgage in April 1994 was US$225,000. Her market value was about US$1.4 million and her scrap value in the range US$0.95 million to US$1.05 million.
  6. At the time of the loss the North Star had been under time charter to an Israeli company called Negev Star since July 1992. Since the previous year the vessel had been employed to carry phosphates from Israel to India.
  7. On 25 November 1993 a new agreement was made between the Owners and time charterers for a 48 months time charter expiring in December 1997. The rate was US$4,600 per day until 1 December 1994 with a 3 per cent increase annually thereafter.
  8. In April 1994, for complicated reasons which are explained later in this judgment, the Petrakakos brothers decided that, if possible, the North Star should be sold. The buyer was the second claimant ("Kapelco"), a company owned by Dimitris Kapelakos. The terms of the sale which had been agreed in substance at meetings in Piraeus on 20th and 21st April 1994 were unusual. The price was to be US$1.4 million on condition that the vessel was delivered either with intermediate survey passed and the time charter to Negev Star reduced to expire in 1996 or, if the time charter were not so reduced, that the seller would put the vessel through her special survey prior to delivery to Kapelco. If the sellers failed to obtain the charterers' consent to reduction of the charter period and the sellers were unable to have the vessel delivered with special survey passed, the buyers were to have the option to request and take the delivery of the vessel and in that event the price was to be reduced to US$1.1 million, the reduction "constituting mutually agreed fair compensation" for the buyers' having to pass the Special Survey themselves during the charter period. The delivery terms were originally between 10th May and 30th May 1994 in Sellers' option; the cancelling date was 10th June 1994 in Buyer's option and delivery was to take place at Ulsan, South Korea. The contract further provided that the sale would be cancelled upon the loss of the vessel.
  9. For reasons which I will explain later, the vessel having commenced surveys and repairs at Ulsan on 14th May 1994, it proved impossible to complete the work required to put the vessel through special survey at Ulsan by 10th June 1994. Accordingly, following negotiations with Mr Kapelakos, it was agreed that the cancelling date should be extended to 10th July 1994 and the place of delivery amended to Colombo, Eilat or Greece in seller's option. This was recorded in an addendum to the MOA signed on 20th May 1994.
  10. A further unusual characteristic of the sale contract was that it was agreed that the buyers would advance US$1 million out of the purchase price to the sellers by way of loan and that a mortgage over the vessel would be provided by the sellers by way of security. That loan was repayable on delivery of the vessel to the buyers or, if the sale of the vessel were not completed, within 7 days from the lender making demand for repayment or in any event on 15th June 1994 without demand. It was also agreed on 25th April 1994 that the buyers would advance to sellers against the price of the vessel US$60,000 which was the cost of part of the work on the vessel carried out at Ulsan towards completion of the special survey and also a further sum of US$25,000 which Negev Star, the charterers, imposed as a condition of their agreement to accept a change in the ownership of the vessel.
  11. The charterers did not agree to reduce the period of the charter and, accordingly, the Owners were obliged to put the vessel through her special survey if they were to be entitled to the full purchase price of $1.4 million. If they failed to do so, the price would be reduced to $1.1 million and, if they failed to tender the vessel for delivery by 10th July 1994, Kapelco would be entitled to cancel the purchase contract and recall the loan of US$1 million.
  12. In the event, on 24 May 1994 the Owners ordered the vessel to leave Ulsan and to proceed to Eilat via Singapore. On 17th June the Owners decided that, for reasons which I will explain later, the vessel should proceed to Piraeus and on 20th June orders to that effect were given to the master. The vessel arrived at Drapetsona on 28th June 1994. Some work towards special survey requirements in addition to what had already been completed at Ulsan had been carried out by a riding crew in course of the voyage. Further ultrasonic tests were required to be conducted at Piraeus by the Bureau Veritas surveyor responsible for the special survey requirements. Work necessary for passing the special survey was carried out by a firm of ship repairers called Ventouris Vlachos and commenced soon after the arrival of the vessel. By the evening of 5th July 1994 neither the required ultrasonic testing nor the required work had been completed. Precisely how much further steel replacement work would be required by the Bureau Veritas surveyor depended on the outcome of the ultrasonic tests yet to be carried out. There is a difference in view between the expert witnesses as to how much additional work was likely to be required and as to what it would have cost and how long it would have taken. I consider these matters in more detail later in this judgment. For present purposes the range of time estimates can be stated to be from not less than five working days, to three weeks. It was therefore improbable that the vessel could be delivered with special survey complete until much before the expiration of the cancelling date (10th July) and it might not be until 10 working days after that.
  13. Although joined as second claimant in these proceedings Kapelco has taken no part in the trial nor has it been represented. The basis of its cause of action was that by an assignment dated 27th April 1994 the Owners assigned their interest in the insurance policies to Kapelco as purchaser of the vessel. However, it appears that by a series of re-assignments title to the policy proceeds has been recycled to HP and MP.
  14. As to the insurance of the vessel, Kent had previously employed as producing brokers B&P International of New York. They had placed the hull and machinery cover for the Kent fleet for April 1993 – April 1994, with part on the London market and part on the French market. The whole of the war risks cover was placed on the London market. According to HP, because of personal differences between MP and one of the directors of B&P International, a decision was taken to find new brokers for the following year's cover. Accordingly, early in 1994 Kent appointed Marine Insurance and Reinsurance Agencies ("MIRA") in Piraeus as their placing broker. Mr. Caramanos of that firm worked with Mr. Jonathan Stark of Hogg Insurance Brokers ("HIB") in London. In March 1994 B&P International cancelled the London market participation in the Kent fleet hull and machinery policy due to the Owners' failure to pay the fourth quarterly instalment of premium on time. HIB placed a two-month cover for the period up to the end of the policy year in April 1994 and then placed the hull and machinery and war risks cover for the ensuing year.
  15. The hull and machinery cover for the North Star was for an insured value of US$4 million paying US$3 million, that is to say insurers' liability would be capped at US$3 million, but the value for the purpose of calculating a constructive total loss was US$4 million. This was the same level as for that vessel in the previous year. The vessel was insured on a total loss only basis. HP explained in evidence that as the vessel had already been sold and would be spending much of its time in port prior to delivery there seemed no point in incurring the considerable additional expense of cover on a full risks basis. The war risks cover was also left at US$4 million, the same level as for the previous year. It was confirmed by a fax from HIB on 27th April 1994. Under that fleet cover another vessel in the Kent fleet, the Agios Nektarios, was also valued at US$4 million. HP stated that he had contemplated reducing the insured value of the North Star under the hull and machinery policy from US$4 million to US$3 million for 1994-5 but, having raised that with MIRA, since that reduction would have a relatively small effect on the premium, he decided to leave it unchanged. He left the valuation of US$4 million for the war risks cover unchanged without directing his mind specifically to it because the premium at 0.05 per cent was so small.
  16. It is common ground, subject to an issue as to burden of proof, which I consider later, that if the explosion were caused by an explosive device put in place either by terrorists or by some other outsider in order to cause malicious damage, there would have been an insured peril within the Institute War Clauses dated 1.10.83 which was expressly incorporated into the policy.
  17. At the time of the explosion seven members of the vessel's crew were on board in the crew accommodation above the engine room. Five of them, including four Romanians and the third Engineer, who was an Egyptian, had refused to sign off because they claimed to be entitled to severance pay for early termination of their contracts. They were no longer being paid. They had consulted Greek lawyers who had initiated a claim in the Piraeus court against the Owners. There were also two Indian crew members who were still being paid and a Greek watchman who was employed by Mr. Kapellakos and whose function was confined to checking that property was not removed from the vessel. The vessel had no electric power from about 6pm each day when its generators were shut down. Those who remained on board had to rely during the evening on electric power only in the smoke room which was transferred by cable from a neighbouring vessel. That too was cut off at midnight.
  18. HP was on board until about 6pm on 5th July.
  19. As a result of the explosion the engine room and No. 6 hold were flooded. The Owners entered into a Lloyd's Open Form salvage agreement with local salvers after consulting the underwriters' surveyor and the Salvage Association. Under the direction of the Coastguard the water was pumped out of No. 6 hold on 6th July and divers installed a temporary patch over the explosion aperture. Pumping of water out of the engine room was completed on 8th July, but the Greek coastguard would not permit the Owners to enter the engine room until investigation of the scene had been completed. For this reason it was impossible for the Owners to commence clean up and preservation work on the machinery and electrical equipment until the Coastguard released the engine room on 12th July 2004. By that time according to the evidence, which I accept, corrosion of the main and auxiliary engines and electrical equipment would have considerably accelerated after the engine room had been pumped out, thereby exposing those parts to the air for some four days. By the time the Owners took over the engine room, the main engine had already seized so that it could no longer be turned and it would therefore have to be dismantled and rebuilt. The three generator engines were similarly affected. All electric motors would have to be re-wound due to the advance of corrosion which had developed during that period between 6 and 12 July.
  20. HP informed George Caramanos of MIRA of the explosion within hours of its occurrence and MIRA then informed HIB. On 19th July 1994, having been informed, as it is said by HP, by experts that the likely cause of the damage was an explosion from outside the vessel, HP faxed Caramanos that this was a malicious act within the war risks cover and stated that he trusted that HIB had been so informed.
  21. Meanwhile, cleaning activities were being conducted on board and in early August 1994 HP, after holding detailed discussions with the Salvage Association, sent out a repair specification to five yards inviting tenders. By 11th August 1994 three of those yards had indicated their willingness to take on the work necessary to restore the vessel to class. The quoted charges of all three exceeded the insured value of the vessel. Accordingly, on the same day the Owners sent a notice of abandonment to the Salvage Association to be passed on to the insurers. This was eventually rejected by the insurers and on 15th March 1996 these proceedings were commenced. Pleadings were closed by August 1996. The defendant insurers applied for security for costs. The amount involved was over £100,000, but the Owners were unable to raise that amount and the proceedings were in effect stayed for over four years until November 2000 when the claimants were able to arrange for security to be put up. At that point HP and MP were joined as co-claimants on the basis that they were the ultimate assignees from Mr. Kapellakos and his assignees of the insurance proceeds.
  22. The Insurers' Case

  23. The defendant insurers have raised two main grounds of defence.
  24. Firstly, they allege that the vessel's loss was not caused by an insured peril because the explosion was deliberately caused or procured by the assured Owners for the purpose of advancing a fraudulent claim on underwriters.
  25. Secondly, they say that they are entitled to and do avoid the policies ab initio for misrepresentation and non-disclosure.
  26. The Insurers' Submissions on Complicity

  27. As to the first ground, the insurers' case can be broadly summarised as follows:
  28. 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

  29. It is submitted by Mr David Goldstone on behalf of the Owners that on the evidence of HP the war risks insurance valuation of North Star at US4 million was not pre-planned as part of the preparations for her loss but happened inadvertently on the part of the Owners. Reliance is placed both on contemporary documents showing that in March 1994 HIB were proceeding on the basis of a temporary renewal of the hull and machinery cover on a TLO basis, with a value of US$3 million, to pay US$2.2 million. However, HP said that he was persuaded by the brokers to increase this to US$4 million pay $3 million because it only resulted in a small difference to the premium. That was the value at which the temporary renewal was placed. HP said in cross-examination that he thought the war risks cover was for the same value, but he discovered after 18 July 1994 that this was for US$4 million. He said he had no discussion about that value with the brokers. In his witness statement he said that it was left at US$ 4 million because it made little difference to the premium.
  30. As to the motive for the loss, it is submitted that others than the Owners could have been motivated to attack the Owners, including the disaffected ex-crew, Mr Robayna or the Greek investors in Templegate (a financial operation in London in which HP was involved which caused investors to suffer heavy losses and which I shall have to consider in more detail with regard to the Insurers' case on non-disclosure). Further, there may have been enemies of Mr Kapellakos, the purchaser, or the attack might have been aimed at the Drapetsona Port Authority. It is accepted, however, that there is no evidence to suggest that any of these possible perpetrators had such a strong grudge against HP or his brother or Mr Kapellakos or the port authority as would lead them to attack the ship.
  31. It is accepted on behalf of the Owners that the attack was probably not the result of terrorism but it is submitted that terrorism cannot be excluded as a possibility. The trading connection of the vessel with Israel and the prevalence of terrorist attacks in Greece gave rise to such a possibility. There had been two recorded terrorist attacks on commercial shipping in Greece – the KARAPIPERIS VI and the HAMILTON I - the latter while under repair, for which responsibility had never been claimed. Professor Wilkinson's evidence should be rejected because it was based on the erroneous assumption that the device was internally placed.
  32. The Owners submit further that the seriousness of their financial position has been much exaggerated. In particular, until after the North Rock was arrested in July 1993, they had no serious problems as is shown by Kent's purchase of the Agios Nektarios in July 1993 for US$2.2 million with a loan from Guiness Mahon and of the Taxiarchis in October 1993 for US$1.35 million with a loan of US$900,000 from National Bank of Greece. Although, the Owners concede that there were real financial problems early in 1994 while North Rock was under arrest, they submit that on the evidence of HP those problems were solved with the sale of North Star by May 1994. By early June 1994 the Owners had completed a successful refinancing operation for their fleet to the effect that they had sold North Star and had the Agios Nektarios, the Taxiarchis and a 50 per cent share of the North Rock alongside Captain Prekas and all those vessels were trading under profitable charters.
  33. As to the engine breakdown sustained by the Taxiarchis on 16 June 1994, the full extent of that, according to the evidence of HP and his brother, was not known until after the explosion for it was not until 16 July that the engine was opened up. In any event, the damage was seen as an insured loss and indeed this claim for US$1,141,989 was ultimately accepted and paid under the hull and machinery policy.
  34. Although the actual financial position of the Owners after the explosion could not be evidence of their motive at the time when a decision would have been taken to sink the North Star, it was relevant to test their true financial position at that time by reference to the actual expenditure of the Owners after the sinking. HP's evidence was that between the time when the sinking occurred and the time when the vessel was sold for scrap in Turkey for US$450,000 in January 1995 the Owners' expenditure on sue and labour, pollution and prevention measures and other items relating to her disposal was in excess of US$900,000, so the Owners must have had access to funds from sources about which there is very little evidence. They also incurred considerable expenditure on the Taxiarchis. The Owners rely on this as evidence that their financial position at the end of June 1994 was not nearly as serious as the Insurers make out and further in support of HP's evidence (see paragraph 10 above) that the US$500,000 advanced to Captain Prekas on the purchase of the North Rock was in truth repaid by him to Kent in the course of the summer of 1994. In this connection the Owners submit that, after allowing for financial costs of the loan to him from Guiness Mahon, there would have been a surplus from net earnings available to Prekas of US$1600 per day for the first three months and US$600 per day thereafter, so about US$150,000 would have been available for Prekas to make repayments to Kent over the first three months and US$54,000 over the next three months. Moreover, it was the evidence of HP that the Owners had an income of Euros 11,000 per month from property investments and they had their 50 per cent share of the net earnings of the North Rock and 100 per cent share of the net income of the Agios Nektarios. Further, the Owners had substantial equity in the North Rock, sold in 1996 in the order of US$450,000 and also in the Agios Nektarios to the extent of US$200,000 which, according to the evidence of HP was the balance of the sale proceeds after satisfying the bank's mortgage and which in November 1994 was paid to the Owners. The Owners further rely on the fact that they have funded these proceedings, including the satisfaction of a costs order, to the extent of £200,000 upon their application for an adjournment.
  35. As regards the Owners' perception of the risks represented by the need under the sale agreement of the North Star to put the vessel through special survey to enable her to be delivered to Kapelco by the cancelling date, even if the steel renewals and other work would have taken 20 days from 6 July to complete, that is a delay of 16 days beyond the cancelling date of 10 July, it would probably have been confidently assumed by the Owners that Mr Kapellakos would have permitted an extension for delivery. The vessel was in remarkably good condition for her age and Mr Kapellakos's main interest was to take delivery of a vessel with her special survey completed. According to the evidence of HP, he was told by Kapellakos that he granted an extension of a few more days to complete the work. In his witness statement Mr Kapellakos confirmed that as the date for delivery approached there was discussion with the Owners as to the possibility of an extension of cancelling and what would happen if the vessel was not ready by 10 July. He continued "my reply was that if it became necessary, they should let me know how many days they needed and I would have no objection in principle to an extension of a few days". The fax message which he sent on 5 July concerning 10 July being a Sunday and therefore not an appropriate day for delivery (see para 25.35 above) did not mean that he would not have granted an extension of a few days. This was the same evidence as he gave when asked about his position in the course of his interview by the Insurers' solicitors.
  36. In support of the likely attitude of Mr Kapellakos, clause D of the Addendum to the sale agreement expressly provided for what was to happen if the sellers delivered the vessel after 10 July 1994: the Owners would be under a duty either to procure an extension of time of the same period under the time charter to Negev Star or to compensate the buyers at the rate of US$1,836 per day if they were unable to procure such extension. Accordingly, Kapelco were to be in effect compensated for delay in delivery. They would therefore have little incentive to cancel the sale agreement. Indeed, they would know that, if they did cancel, the loan of US$1,060,000 would become repayable by the Owners and, if it came to enforcement of the mortgage, there might have to be a forced sale with the risk of a shortfall on the loan repayment. Also, according to the evidence of HP, he heard that Kapelco's plans for taking delivery of another ship in late June, had been delayed, so that Mr Kapellakos would probably be willing also to delay delivery of the North Star for a few days.
  37. The suggestion advanced by Insurers that completion of the special survey and delivery by 10 July would have been of no financial benefit to Owners and might have been a financial loss, was wrong. Of the sale price of the vessel of US$1.4 million the loan to the Owners of US$1 million would become repayable out of the proceeds leaving US$25,000 on 25 April 1994 for payment to the charterers and US$60,000 on 20 May 1994 for payment to the Ulsan repair yard. There was also US$8,000 to be paid to Kapelco as compensation for two days loss of hire by reason of the vessel having been directed to Piraeus for repairs. The total net surplus receivable by the Owners from the sale was therefore US$307,000. Further, on 24 June it was agreed between the Owners and the Charterers that in compensation for the deviation to Piraeus US$100,000 would be deducted from hire and it was subsequently agreed that this would be paid over to the buyers to make good that deficiency in hire. Accordingly, that was to be a further offset against the balance of the purchase price receivable by the Owners. That left a net balance of the price payable to Owners of US$207,000. Accordingly, unless the further cost of the special survey work was likely to equal or exceed that sum Owners would have had an incentive to complete the work and not to sink the vessel.
  38. As to the Owners' perception of the likely cost of repairs to complete the special survey at Piraeus as at 5 July 1994, HP's evidence was US$40,000 to US$50,000 and at worst, US$80,000. He stated that there would be no problem in paying these sums out of the net proceeds of sale and to cover the cost of taking the vessel to Piraeus.
  39. It is submitted by the Owners that HPs perception of the amount of work that would be needed at Piraeus is supported by the evidence that the internal spaces of the vessel had been sandblasted and epoxy coated only three years previously with good adhesion. It was Mr Stanley's evidence that such treatment was likely substantially to reduce the need for steel replacement. He interpreted the survey reports and ultrasonic readings from Ulsan as indicating that the vessel was in exceptionally good condition for her age. The lack of cracking pointed against significant corrosion. The interpretation of the photographs of what appeared to be advanced corrosion was not easy. They could misleadingly suggest a high level of corrosion because of the depth of rusting or scale relative to the underlying metal was so large. Photographs could, according to the evidence of Mr Stanley, be very misleading for it was impossible to infer from the extent of rust and scale the depth of wastage in the underlying metal. There would typically be rust of from eight to ten times the depth of wastage.
  40. Further, according to Mr Stanley, the topside tanks did not appear to be in poor condition. A not unreasonable estimate, from the photographs, was that 5 per cent of the longitudinals and the sloping plating might have to be replaced. The photographs also showed that the double bottom tanks were of good condition.
  41. The Owners further relied on the report of the general condition survey of the North Star conducted in 1993 as indicating that the vessel was still in generally good condition in June 1994 and that, notwithstanding there had been no ultrasonic tests in 1993, Mr Stanley considered that a close-up vessel inspection by an experienced surveyor would have revealed any serious deterioration in the steelwork of the parts inspected.
  42. There had been four steelwork inspections of various part of the vessel in 1993.
  43. In June 1993 the Salvage Association had conducted a JH722 special condition survey afloat on behalf of underwriters at Haldia, India. All the ballast tanks were found to be in very good condition with only occasional wastage. The No.6 tanks were described as in very good condition. The No.2 double bottom tanks were found to have very little rust scale in evidence. There were internal torchlight inspections of holds 2, 5 and 6 and of holds 1, 3 and 4, but only from the hatch openings. They were all found to be well-coated with minimal breakdown of coating and with no appreciable rusting. All steelwork of the frames, stiffeners and beans was noted to be in good condition although two frames in No.2 hold were seen to be heavily buckled. All hatch coamings, cappings and covers were found in good condition. The deck plating was well-coated overall with only minimal breakdown evident although moderate pitting was widespread. The report recommended that all No.1 to 5 topside port and starboard ballast tanks should have all wasted areas cropped and part renewed.
  44. In August 1993 BV conducted an internal inspection of the double bottom tanks. Although in the No.4 tank some localised pitting was found, the other three tanks were found to be satisfactory and in relation to all four tanks the visual appearance was said to be sound and ultrasonic testing was waived. Although some wastage was found in the topside tanks, the visual inspection showed them not to require ultrasonic testing.
  45. In October 1993 the vessel was inspected at Eilat by Ajax Marine in company with loss adjusters appointed by the Salvage Association as a follow-up to the June 1993 report to see that the recommendations had been carried out. The holds were visually inspected prior to the commencement of loading and were "in general found to be well coated with minimal breakdown and mechanical damage and no significant rusting". The tank tops were lightly rusted. There was corrosion of longitudinal frames in the No.4 hopper tanks but not of an excessive nature. The report concluded:
  46. "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."
  47. That report noted that renewal repairs in the ballast tanks were currently being carried out by a riding crew.
  48. The next inspection was carried out by the Salvage Association and loss adjusters at Eilat in December 1993, again for the purpose of monitoring the vessel's condition following the June 1993 inspection. The inspection was confined to the No.3 and 5 topside ballast tanks. It was noted that new sacrificial zinc anodes had been fitted, as recommended. The plates were found to be in sound condition. The internals were:
  49. "..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."
  50. Subject to a minor requirement of no present materiality, the surveyors considered that the June recommendations had been completed.
  51. The Owners submit that much weight should be attached to the inspections conducted on behalf of Mr Kapellakos prior to delivery of vessel. Captain Monios was sent by him to Ulsan together with a chief engineer on 13 May 1994 to take delivery. The vessel was in dry dock for part of the time. He stated in his witness statement (but did not give oral evidence):
  52. "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.
  53. It is to observed that, when the vessel was to leave Ulsan, Michael Petrakakos told him that a further two weeks work remained to be done before the vessel could satisfy the special survey.
  54. The beginning stages of the survey for special survey by BV at Ulsan were supervised by Mr Gaur, an experienced principal surveyor with BV.
  55. Ultrasonic tests were taken by Marutec, an entirely competent firm of surveyors brought from Greece who were temporarily not certified by BV to carry out ultrasonic tests because they had not got round to completing the documents required by BV. In the event, they were certified as competent by BV a few weeks later.
  56. The results of ultrasonic testing at Ulsan were likely to be in respect of those parts of the vessel required to be treated by Mr Gaur as being areas where the visible appearance suggested that minimum thickness might have been exceeded. The Owners submit that, based on the Ulsan inspection and ultrasonic tests and having regard to work carried out at Ulsan, on the intervening voyage and at Piraeus, the Owners were entitled to assume that the only additional steel renewals likely to be required after the further ultrasonic tests required at Piraeus were the completion of work in the topside tanks. The Marutec ultrasonic readings in holds 2 and 4 showed a broadly consistent level of steel thickness reduction within the relevant permissible limits. There was no other evidence, except the age of the vessel, to suggest that significantly different levels of deterioration would have emerged from further ultrasonic tests at Piraeus. This was generally supported by the evidence of Mr Stanley.
  57. In particular, as regards the tank tops, for which the Owners had ultrasonic readings by both Marutec at Ulsan and Ultratest at Piraeus, the Owners were entitled to assume that no renewals were called for. HP would not normally be concerned, according to his evidence, with the extremely complex BV rules, some of which did not then appear in published documents, relating to average thickness diminution by area, zone and group.
  58. As regards the internal numbers of the double bottom tanks, the Owners were also entitled to assume on the basis of the Marutec inspection that no renewals would be needed. Similarly, the Marutec figures indicated that the double bottom tank floors and girders were well within permissible deterioration limits.
  59. The same was true for the bottom longitudinals and web frames.
  60. The forepeak tank had been visually inspected by Mr Gaur at Ulsan and he was sufficiently satisfied with it to waive ultrasonic tests or any additional close up survey. There was thus no basis for the view that renewals would be required.
  61. There was some cracking in the aft peak tank on the voyage from Ulsan. Mr Stanley thought that it was probably due to engine vibration, as suggested by the current master. Otherwise there was no evidence to suggest the need for renewals in this area.
  62. As to cargo hold members, the close up surveys at Eilat in August 1993 and at Ulsan, covering holds 1 and 2 and 1 and 6 respectively suggested no need for replacements except for stevedore damage. An owner would, according to Mr Stanley be entitled to assume that the uninspected cargo spaces were in a similar satisfactory condition.
  63. The renewals in the topside tanks had been calculated on the basis of inspections carried out at Ulsan. HP calculated about 8 to 10 mt for the renewals which were already known about. The difference between these positions was on US$30,000 even, taking the Insurers' costings.
  64. Mr Bowman's estimate that in respect of the No.2 hold forward bulkhead on the basis of the Ultratest readings taken at Piraeus some 16 mt of steel would be required should be rejected. The holds had been expoxy coated after sand blasting in 1991, according to HP. Mr Bowman appeared to consider it was soft coating and therefore more vulnerable. However, according to the Ultratest reading nearly 50 per cent of the bulkhead was excessively reduced in thickness. According to HP this was due to the fact that the readings were taken from pitted areas and were therefore unrepresentative of the whole. Since the readings in question were only taken the day before the explosion, they have no materiality. HP's perception would be conditioned by his knowledge of the physical appearance of the bulkhead which showed no significant wastage.
  65. The Owners rely on HP's evidence as to the cost of steell renewals at Piraeus – US$2-3 per mt – as against Insurers' figure of US$5.50. HP's evidence was to be preferred on the basis of his much greater experience of using small contractors such as those at Drapetsona where the average at that time would be GDr 670 per mt for steel and fitting.
  66. There were grounds for concluding that the attitude of the BV surveyor at Piraeus in requiring re-testing and further testing was over-zealous. Nevertheless, the entire testing operation, including retesting the Marutec areas could have been completed in six days and Mr Stanley put it as low as four days or a little longer. It could have been done without staging using ladders in the holds. It could also have been carried out simultaneously with the renewal work on the topside tanks.
  67. According to the evidence of the Drapetsona contractor, Mr Vlachos, something like 75 per cent of all the work had been carried out by the time of the explosion and he stated that it would have been completed by 10 July. He had arranged for ten more men to be employed on the vessel from 5 July. Mr Stanley calculated that, on the assumption that roughly equal amounts of steel renewals were required on each topside tank, some 57 per cent of the total work on the topside tanks had been completed and, having regard to the fact that the replacement upper brackets had already been prefabricated before the vessel's arrival at Piraeus, the remainder of the work in the topside tanks could realistically be completed in about five working days, including planning and mobilisation time. The topside tanks represented quite the most substantial area to be worked upon. They would have to be pressure tested by filling them with water and checking for leaks, but that would not take more than about one hour for each tank and the approval of each tank by BV would take place as and when the work had been completed. HP also said in evidence that the remainder of the work on the topside tanks would have taken four to five days. Mr Bowman did not dissent from this view, the substance of his evidence being that the further ultrasonic testing would have shown up the need for further steel renewals in areas additional to the topside tanks. He thought that the other work would take less than 12 days but perhaps more than 7 days. Mr Stanley stated that the other work could be done in a week. That would be carried out simultaneously with the topside tank work. According to the evidence of HP, if there had been any requirement arising out of the further ultrasonic testing for additional steel renewals, these would not necessarily have extended the overall completion date for the special survey because of the speed with which repair yards at Drapetsona were able to work, in his experience reaching 25 mt of installed steelwork per day.
  68. It was HP's assumption that no work would have to be carried out on the main engine. In the MOA the seller's obligation was to deliver the vessel with the CMS (continuous machinery survey cycle) "up to date". The CMS had been fully credited in 1991 and each item was therefore in class for the next five years. HP believed that the Owners' only obligation was to deliver with no item of machinery overdue for survey under the CMS regime. In this he was absolutely correct: see The Buena Trader [1978] 2 Lloyd's Rep 325. The Insurers eventually abandoned reliance on their point that some or all of the machinery had to be put through the CMS.
  69. Accordingly, it is submitted on behalf of the Owners that the Insurers have much exaggerated both the prospective financial implications of the repair work at Piraeus and the effect of that work on the Owners' ability to deliver the vessel with special survey complete by 10 July 1994 or so soon after that as would be acceptable to the buyers. Indeed, not only was the prospective cost of these repairs less than suggested by the Insurers, but the Owners' underlying financial condition was significantly less serious than Insurers had made out and accordingly Owners were substantially better placed to absorb the prospective special survey expenditure than Insurers submitted. There was little or no risk of the buyers electing to take delivery of the vessel with special survey incomplete and thereby paying only US$1.1 million as well as requiring repayment of the US$1 million mortgage debt. The grounds for maintaining Owners' motive to effect a fraud on insurers were thus much diminished.
  70. As to other evidence relevant to the possibility of Owners' complicity, it is submitted by Mr Goldstone that weight should be attached to the possible timing of the decision to sink the vessel. The case put in cross-examination to HP was at the relevant moment after BV at Piraeus had made clear that they required the much more extensive ultrasonic testing and the re-testing of the areas tested at Ulsan for the Special Survey he must then have realised that substantial steel renewal would be found to be necessary and at least some 50 tons of steel would be required. It is to be observed that BV's telex to Kent of 17 June 1994, timed 13.55, listed those inspections which would yet have to be carried out to put the vessel through special survey and those inspections at Ulsan (wrongly called Pusan) which would be credited, including ultrasonic gaugings "(after review in office)". It further stated that BV could not accept that the survey should be conducted in Haifa. HP said in evidence that it was on that same day that he decided to have the special survey completed in Piraeus. The master was ordered to proceed there on 20 June. However, it was not until 29 June, two days after the vessel had arrived at Piraeus, that BV gave a list of areas which would have to be ultrasonically tested and stated that they would require to conduct random checks of areas already tested at Ulsan.
  71. Since the Insurers' case, as put, was that the decision to sink the vessel was taken after its arrival at Piraeus, it was unnecessary to consider the circumstances which led to the vessel being sent there. I interpose that those circumstances were in no way suspicious. It was sent to Piraeus because the repair yard at Ulsan declined to conduct the work when invited to do so and because BV subsequently refused to permit the work to be undertaken at Haifa.
  72. As to the matters of previous dishonesty put to HP, the Owners make the following points.
  73. With regard to concealment from Guiness Mahon of the fact that the Owners were to get a 50 per cent share in the North Rock and were financing Captain Prekas with regard to the transaction, HP had said in answer to the court that he had not been asked to disclose those facts by the bank or anyone else and it was not HP's transaction, but that of Mr Petropoulos, which was correct. He had no duty of disclosure to the bank.
  74. As to the application on 6 May 1994 for hull and machinery cover for the North Star containing the statement that the purchase value of the vessel was US$4 million when the vessel had been purchased for 1.3 million, HP said in evidence that the Owners had spent US$3 million on repairs after purchase to enable the vessel to trade, which included towage to the repair yard, engine repairs and sandblasting and recoating with epoxy of the whole ship. HP believed that the figure to be provided was the entire cost of getting the vessel ready for trading at the outset. Given the use of the phrase "purchase value", that was a possible interpretation of the words. The suggestion that he must have known that this was wrong because of the value declaration for the Taxiarchis was incorrect. Although significant drydocking and repair costs had been incurred which had not been included in the price, those expenses were incurred after trading had already begun and not as part of the vessel's preparation for its first trading voyage.
  75. As to HP's failure to disclose on the same application form that the vessel had been mortgaged to Kapelco as security for the US$1 million loan, HP accepted that he had made this omission. There was, however, no dishonesty involved for there could be no reason for concealing that information from the insurers, particularly as notice of the mortgage would be likely to be given to the brokers, as happened as early as 19 May 1994 when Kapelco's lawyers' notice of assignment reached HIB.
  76. The failure to inform the charterers of the decision and the order to proceed through the Suez Canal to Piraeus was a breach of the charter but not a matter which carried much weight as regards proof of dishonestly of HP.
  77. The payment of commission on the Ivory K was of no more than the market rate and was in any event being funded as to half by HP and MP themselves as part owners.
  78. As to HP's movements on the morning of 6 July, it is submitted that there was nothing suspicious or surprising about his account of his movement. His recollection of timings was in the disturbing and stressful circumstances hardly likely to be accurate. He had been obliged to spend time in his office on the way to Drapetsona in order to arrange for the attendance of divers and for anti-pollution measures. Furthermore, the owners, such as Tsavliris and Matsas were telephoning him trying to persuade him to enter into a Lloyd's Open Form Salvage agent. He said that in all he was involved in about ten telephone calls. He estimated that they took about half an hour. That would have detained him in the office between about 05.30 and about 06.00. In his witness statement he put his time of arrival at Drapetsona at between 0645 and 07.00. In a statement made in March 1996 to the Hellenic Coastguard he put the time at about 06.00, the same time as he gave in a statement very shortly after the events to the Salvage Association.
  79. According to Mr Lunt, the Salvage Association surveyor who attended at Drapetsona shortly after 06.00 on the morning of the explosion, the vessel's managing agents were sufficiently present at about that time to agree terms with the salvors and divers. Further, the fax sent from HP's office to the brokers at 0750 that morning could not have been sent by HP who was at Drapetsona at that time. He must either have written it out or dictated it earlier that morning, leaving it to be sent out by his office staff when they got to work.
  80. There was, contrary to the Insurers' submissions, nothing to give rise to adverse inferences arising out of the disclosure of the Owners' documents. Their original solicitors, Hill Taylor Dickinson, "HTD", had in 1996, before service of the defence, removed from the Owners' offices all the documents they then regarded as relevant. All such documents would have related exclusively to the North Star and not to the other vessels. It was when the Points of Defence were served in May 1996 that wider issues emerged. The action then went to sleep for several years and the Owners in the meantime moved into a new office in Piraeus and disposed of any documents. They changed solicitors to Moore Fisher Brown ("MFB") in 2000, whereupon, in response to a substantial request for disclosure by the Insurers' solicitors, MFB visited the Owners' offices and their storage area and removed any documents that looked relevant. Further, there would be no extensive or detailed accounting documents from previous years back to 1994 and earlier. The managing agents of the foreign-registered vessels were what was known as Law 89 companies which required scant accounting documentation to satisfy the annual audit requirements of the National Bank of Greece. They would not be preserved after the year's accounts were closed and as they paid no tax, there would be no returns.
  81. As to the issue in relation to the location of the explosive device, it is submitted on behalf of the Owners that this is of relatively little significance, in particular because of the evidence that security at Drapetsona was so slack that anybody could gain access to a vessel without hindrance. Given that evidence and the further evidence that the vessel would be unlit, because without electric power, unguarded and unsecured after nightfall, little weight could be attached to the device having been located in the engine room. Indeed, given that it is obviously easier for a terrorist or criminal to plant a device outside the hull than to risk gaining access to the vessel and carrying the device on board, an owner who intended to sink the vessel would hardly be likely to risk placing the device inside the vessel, for that would at once point the finger of suspicion at him. Accordingly, if the bomb was planted internally it would hardly be likely to have been placed by the owner. He would assume that it would be no great problem subsequently to ascertain whether the bomb had been placed inside or outside and he could therefore be expected to place it outside. In view of the lack of security any determined terrorists or criminals could have got aboard undetected and found their way to the engine room. Consequently, even though the device might have been placed internally, that did not point to the owners or crew for they might equally have placed the charge outside the hull.
  82. In relation to the computer model evidence presented by the Insurers' expert, Dr Haxton, in support of his thesis that there was an internal explosion, that unstiffened model pointed more strongly to an external explosion. Using a 4.5 kg TNT external charge Dr Haxton achieved inward dishing to the same extent as that found on the North Star. The model with 9 kg TNT placed internally produced dishing to a much smaller extend and indeed none of Dr Haxton's models for internally placed charges produced as substantial inward dishing as that shown by the vessel. This was supported by the practical experience of Cdr Shaw who gave evidence that in the course of investigating underwater damage owned by internal charges to a standard bulk carrier off Singapore in 1968 he had witnessed no inward dishing. Further, Dr Haxton's final stiffened model failed to create an aperture size more than about 25 per cent the size of that created by the real device and his explanation that if the model had been run for longer the hole would have increased in size should be rejected because the aperture was apparently about complete at the end of the model period.
  83. An external device was also suggested by the configuration of the plating forward of the engine room bulkhead which was found to be entwined in the longitudinal stiffener which was inconsistent with an internal explosion for that would have had the effect of forcing the plating outwards from the stiffener.
  84. The process of petal formation was very complex and did not simply involve that the petals indicated the edge of the initial blast aperture or indeed its inward or outward location in relation to the hull. Indeed, it was at the lowest unsafe to rely on the petal direction. That was demonstrated by Dr Haxton's model of the 1.5kg external charge which indicated one flap moving outward and not inward. Had he used a model with a 4.5 kg charge it was likely that outward petalling would have been greater because of the increase in the outward force of the reflected blast waves. In short the models created by Dr Haxton were not sufficiently sophisticated to demonstrate with any confidence how the outward petalling on the vessel came to develop.
  85. It was submitted that the evidence of the Owners' expert, Dr Misselbrook, as to the pattern of internal damage strongly supported an external explosion. In particular, he pointed to the lack of any damage to the ventilation trunking which consisted of relatively vulnerable thin metal. Secondly, a bilge manifold probably made of cast iron but located only about one metre from the explosion was largely undamaged. Yet one would have expected a cast iron feature to be severely damaged because of its susceptibility to shock waves due to its brittle substance. Third, there was no damage to the large pumps close to the position that an internally-placed explosive device would have occupied and exposed to the full force of the blast. Fourthly, the damage inside the engine room was more focused than could be expected from an internal explosion. There was also photographic evidence of a hole in the engine room ceiling which could only have been caused by a large fragment of metal several inches across which could only have been caused by an external charge.
  86. Finally, it is submitted that it was not surprising that no large fragments of the hull were found in the engine room. It had been flooded with oil and water and was never cleaned out sufficiently to disclose fragments lying on the tank top. The effect of the stiffeners might also have tended to cause fragmentation of the hull into small pieces of metal and no larger pieces might have been projected into the engine room.
  87. General Approach to the Evidence

  88. There can be no doubt that the explosive device was adjacent to the hull and detonated for the purpose of causing damage to the vessel. There is not the remotest possibility that the explosion and the resulting damage were caused accidentally. In The Grecia Express [2002] 1 Lloyd's Rep 1 669 at page 683L, I said this in relation to the meaning of "persons acting maliciously":
  89. "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."
  90. Since barratry is not a peril insured under a war risks policy the scope of the phrase "persons acting maliciously" has to be construed as excluding conduct of the master and crew amounting to barratry: see The Grecia Express, supra, at p684.
  91. The causing of deliberate or reckless damage to the vessel by someone who is neither a terrorist nor someone acting from a political motive and is not a member of the crew is therefore an insured peril for which the insurers will be liable unless they prove to the requisite standard of proof that the claim is fraudulently advanced because the assured was complicit in the causing of damage.
  92. In the present case Insurers' case has always been that the Owners were complicit: it has not been pleaded or suggested that, in the alternative, the damage was barratrous. Had it been advanced that the vessel was damaged by or on behalf of the crew for the purpose of injuring the owners, I should have rejected that contention as so intrinsically improbable that it could at once be totally discounted. It is the case that there was at the relevant time an ongoing dispute between the owners and former members of the crew who were claiming additional wages and other payments. However, on the night of the explosion all such persons were on board the vessel in or close to the crew accommodation at the after end above the engine room. It is intrinsically so highly improbable that they would have caused a bomb to be detonated adjacent to the hull immediately below where they were spending the night that this possibility can be ignored as fanciful. Further, all those involved in the payment dispute appear to have ceased to be crew members by the time when the bomb was placed.
  93. Accordingly, the one issue on liability apart from avoidance for non-disclosure, is whether it has been established that the owners were complicit in causing the explosion.
  94. In approaching this question one starts from the position that there is no direct evidence of complicity. Accordingly, complicity can be established mainly by inference from the primary facts and from the demeanour of the witnesses. These primary facts fall into three broad groups, namely (i) the circumstances and nature of the damage, (ii) the conduct of the Owners, and in particular HP before, at and after the explosion and (iii) the financial and other circumstances going to the possible motive of the owners.
  95. Findings as to the Circumstances and Nature of the Damage

  96. Although there are arguments of some weight that no strong inference either in favour of complicity or against it can be drawn from the location of the explosive device on the interior or exterior of the hull, the issue needs to be resolved because the location of the device is, in my judgment, of at least potential evidential importance in considering whether the owners were complicit.
  97. There can be no doubt, on the basis of the evidence of Dr Haxton, Dr Baker, Dr Bland and Mr Misselbrook, that the physics relevant to damage caused by an explosion adjacent to the hull, whether inside or outside, is distinctly complex and the subject of very little research. The essential problem is to trace backwards in time from the observed state of structural damage to the initial effect of the explosion so as to identify the location of the explosive. The problem is accentuated by the fact that forces are shown to be travelling in both directions, towards and away from the seat of the explosion, over very short periods of time. This phenomenon makes it difficult to re-construct an order of events leading back to a particular location. That difficulty was illustrated by the computer modelling presented by Dr Haxton, the Insurers' expert physicist, which was designed to illustrate the effects on the hull of an external explosion of a charge of 1.5 kg of TNT over a period up to 2.5 milliseconds. This showed that whereas the major part of the petals or tongues of metal at the edges of the aperture were bent inwards, away from the seat of the explosion, as was the surrounding area of the hull, there was at least one flap, and possibly two, that were bent in the opposite direction. On the face of it this suggests that, 1.5 to 2.5 milliseconds after the explosion, forces travelling in opposite directions were operating in the immediate area of the aperture. That such countervailing forces were operating at some stage is clearly shown by the combination of inward dishing of the hull and outward petalling which was the condition of the hull at the end of the explosion sequence.
  98. The Owners, supported by Mr Misselbrook, advanced a number of theories in support of the external location of the device. Those theories sought to explain the development of the aperture to the point where all the petalling was outward and where there was inward dishing to the extent found. In order to arrive at the ultimate condition of the petals assuming an external charge, it was necessary to assume that up to the expiration of 2.5 milliseconds from zero the configuration of the majority of them had been completely reversed, whereas the configuration of just one or possibly two of them had not been reversed. However, comparison of the configuration in the computer model with the configuration as found makes it virtually impossible to envisage how the initial inward convex curvature of the main petals could have been converted by forces of internal origin into petals of outward concave curvature, a process which would have involved their uncurling and re-curling in an opposite-bending plane. Before he had seen the Haxton model Mr Misselbrook's Supplemental Report advanced the explanation for outward petalling that reverse gas flow had forced the flaps of metal outwards. There was a gas bubble which formed on the interior of the aperture, as suggested by some evidence given by Dr Best on behalf of the Insurers, and the gas bubble forced seawater which had already entered the vessel back against the initial inward petalling. However, in the course of his cross-examination, Mr Misselbrook accepted that since, according to Dr Best, reverse gas flow would only commence, after the aperture had already opened to about 0.5 sq metres, his explanation was inconsistent with the chronology. In the course of his evidence he very belatedly developed an explanation for outward petalling based on reverse blast waves, a matter not heralded in any report and not raised in cross examination with any of the Insurers' experts except Dr Haxton. In the circumstances, Dr Haxton had no real opportunity of assessing this theory. No quantitative elements o