Dornoch Ltd & Ors v Westminster International BV & Ors

Proprietary effects of a transfer of a vessel are governed by the domestic law of the lex situs. Contractual rights and proprietary rights must be kept distinct. Under the Marine Insurance Act 1906, payment for a constructive total loss does not itself transfer ownership of the vessel to underwriters; an election to take over the assured’s interest is required.

An endorsement reserving accounting for residual value will not objectively amount to an election abandoning that right where the parties’ communications show that the right remains available. A transaction at a substantial undervalue may fall within Insolvency Act 1986, section 423 even without formal insolvency, where a substantial purpose is to prejudice a claimant’s rights. The court may grant relief despite foreign parties and foreign property where the dispute has a strong connection with England.

The judgment concerned the second phase of proceedings arising from the constructive total loss of the dredger W D Fairway. Underwriters had paid the assured under marine insurance policies governed by English law and had later elected to take over their interest in the vessel. The vessel was situated in Thailand, where the parties agreed that Thai law governed proprietary questions.

The assured’s group transferred the vessel, for €1,000, to an affiliated Nigerian company after being served with proceedings seeking to protect the underwriters’ claimed right to take possession and sell the vessel. The issues were whether the underwriters had acquired a proprietary interest, whether an endorsement concerning residual value constituted an election not to take over the vessel, whether the transfer could be set aside under sections 423 to 425 of the Insolvency Act 1986, and whether the English court should exercise its jurisdiction.

1. Conflict of laws. The incidence of proprietary interests in the vessel was governed by Thai domestic law as the lex situs. The proposed exception for contractual transfers governed by another law confused contractual effects with proprietary effects. The court followed the analysis in Glencore v Metro [2001] 1 Lloyd’s Rep. 284 and the principle stated in Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1966] 1 WLR 287.
2. Election under the marine policy. The endorsement stating that the net open-market residual value was to be accounted to insurers did not objectively communicate an election by underwriters to abandon their right to take over the vessel. The surrounding communications proceeded on the basis that underwriters retained that right. An effective election must be communicated clearly and unequivocally: Callaghan & Hedges v Thompson [2000] Lloyd’s IRLR 125. The endorsement was at least equally consistent with the right remaining in reserve.
3. The court rejected the submission that subrogation alone entitled underwriters to residual value after an express disclaimer of the right to take over the vessel. Castellain v Preston [1883] 11 QBD 380 did not establish such a right. If underwriters had expressly renounced their entitlement, the vessel and its residual value would have remained with the assured.
4. Thai law. The Thai Civil and Commercial Code required issues to be determined through a four-tier hierarchy. The court was not persuaded that section 868 excluded the general insurance provisions. Sections 880 and 227 were readily available by analogy, and the evidence did not establish that Thai law automatically transferred ownership of wrecked property to an insurer on payment of a total-loss indemnity. The underwriters therefore acquired no proprietary interest before the sale.
5. Statutory relief. The transfer was at an undervalue and was made for the substantial purpose of prejudicing the underwriters’ claim to take possession and sell the vessel. Section 423 of the Insolvency Act 1986 was available despite the absence of formal insolvency. The jurisdiction was not territorially limited: Re Paramount Airways [1993] Ch 223. The English-law policy, exclusive jurisdiction clause, London negotiations and the purpose of the transfer supplied a sufficient connection with England.
6. The court’s discretion should be exercised. The sale was an intra-group transaction for symbolic consideration, effected secretly and in the face of an injunction application to defeat the relief sought. The Fourth Defendant was ordered to transfer the vessel to the Claimants’ nominee, with further argument reserved on the precise form of the order and method of sale.

This was a first-instance decision in the second phase of the proceedings. The court referred to its earlier Phase 1 judgment, [2009] EWHC 889 (Admlty), but the present judgment determined the remaining proprietary and statutory-relief issues.