Defeat for shipping’s “most spectacular fraud”

War Risk underwriters have succeeded in rejecting a $77m claim on the basis that the constructive total loss of the Brillante Virtuoso was caused by the wilful misconduct of the Owner.

On October 7, 2019, Mr Justice Teare handed down a 140 page judgment putting to bed the questions about what has been described as the “most spectacular fraud in shipping history”.

The Brillante Virtuoso was carrying a cargo of fuel oil on a voyage from Ukraine to China. Shortly before midnight on July 5, 2011 the ship was drifting just within the territorial waters of Yemen, waiting to embark an unarmed security team, prior to transiting the Gulf of Aden at a time when Somali piracy in the area was rife. A small boat approached the vessel carrying seven persons armed with Kalashnikovs and with covered faces. The Master allowed them to board, on the basis that they were “security”, whereupon they turned upon the Master and crew, apparently hijacking the vessel.  

The Master was taken to the bridge and the chief engineer to the engine control room; the rest of the crew were rounded up in the day room. While the VDR audio recording provided evidence that the armed men told the Master to sail towards Somalia, in fact the ship headed towards Djibouti.

A few hours later, the engine stopped and shortly afterwards, a fire broke out in the lower part of the ship. The fire was started by the detonation of an explosive device brought on board by the armed men. They subsequently fled the ship and by 0500 hrs the entire crew (including the Master and chief engineer) had abandoned ship and were rescued by a passing vessel. Salvors, Poseidon, were promptly engaged and the Judge commented that their response was “impressively rapid”. The fire resurged during the day and the ship, having been extensively damaged by the fire, was ultimately scrapped.

Previous litigation

The vessel’s owner, Suez Fortune Investments Limited, and mortgagee bank, Piraeus Bank AE, brought a claim on the ship’s war risks policy for a constructive total loss. The insured value was $55m plus $22m for disbursements and increased value, making a total claim of $77m.

In 2015, in the ‘phase one’ litigation regarding the costs of repairs, Flaux J held that the Brillante Virtuoso was a constructive total loss. The ‘phase two’ litigation concerned liability, with the underwriters alleging that the fire had been deliberately started, with the connivance of the owner, and therefore the loss was not covered. Flaux J struck out the owner’s claim on the policy in 2016 as the beneficial owner of Suez Fortune, Mr Iliopoulos, had failed to comply with a court order to provide his solicitors with an electronic archive of documents and was held to have lied to the Court to prevent the claim from being struck out. The claim was continued by the bank and their mortgagee’s interest insurers.

If the ship was scuttled, the underwriters submitted that such misconduct by the owner would also invalidate the claim by the bank under the policy.

Teare J carefully unpacked the leading authorities on establishing wilful misconduct, and the large volume of witness and expert evidence, in coming to his clearly articulated judgment in favour of the War Risk underwriters.

Wilful misconduct

While the burden of proof was on the bank to show that the loss was caused by an insured peril, the burden of proof was on the underwriters to show wilful misconduct with the knowledge of the owner on the balance of probabilities. Teare J referred to his judgment in The Atlantik Confidence [2016] in which he held that the fact that insurers were unable to give a full and complete account of the alleged scuttling need not be fatal to their case, so long as after examining all the evidence the Court is able to infer that the vessel was scuttled on the instructions of the owner. He added to that further guidance from Neill LJ in The Captain Panagos DP [1989] that an inference of an owner’s guilt can properly be drawn if the probabilities point clearly and irresistibly towards its complicity.

The Judge found that there were several matters which, when viewed collectively, cogently suggested that the hijacking was staged. In particular, he held that it was improbable that:

• a group of Somali pirates would have known that the vessel was expecting a security team to board;
• the Master’s decision to allow armed men on board was an innocent mistake in an area known for its risk of piracy; a group of pirates, intent on sharing a ransom for the release of the vessel, would bring with them an explosive device and moreover one that required an accelerant which the armed men did not possess; the Master disobeyed instructions from the pirates to sail towards Somalia and that they (in fact being members of the Yemeni coast guard) did not notice that the Vessel was proceeding away from Somalia;
• the chief engineer slowed and stopped the main engine and the Master turned the ship round to starboard in circumstances where they feared violence against their persons;
• the armed men should so quickly abandon the intention to ransom the ship, instead activating the explosive device and setting the ship on fire;
• the armed men located accelerant and additional fuel in an unfamiliar engine room in the short time available between the main engine stopping and the explosive device being activated.

In making these findings, Teare J noted that while the improbable can happen, when a number of improbabilities occur consecutively within a short period of time, it is very difficult to accept that they are coincidences. The explanation must be that the Master and chief engineer were co-conspirators. There were also further matters pointing to the Master and chief engineer being involved, including that the ship was drifting in the Gulf of Aden and the Master did not sound the SSAS signal so that the authorities did not learn of the attack until it was over. There was also evidence that the salvors were responsible for the damage to the drain cock to the diesel oil tank, which permitted the resurgence of the fire on the following day.

Attention was also paid to the involvement of Mr Iliopoulos. In 2011, his companies were in serious financial difficulties following the crash experienced by the shipping industry since late 2008. Taken together, evidence relating to the events on board the ship, inconsistencies between the crew’s early witness statements and the accounts that they later gave, and Mr Iliopoulos’ motive to set fire to his ship amounted to a cogent and compelling case that he orchestrated the events. This was strengthened by what was known of his character from the earlier findings made by Flaux J.

Having considered all the evidence, the Judge set out several firm conclusions about what happened on the night of 5 July 2011:

• The armed men boarded the Brillante Virtuoso with the intention of starting a fire on board the ship rather than hijacking it for a ransom;
• The Master and chief engineer assisted in this task, in deciding to drift in the Gulf of Aden, in allowing the men on board and in providing accelerant for the explosive device;
• The salvors, specifically their principal Mr Vergos, were a party to the conspiracy. Once the ship was on fire, upon attending the casualty they failed to take obvious precautions to prevent the spread of fire;
• The orchestrator of these events was the owner of the vessel, Mr Iliopoulos. In addition to the evidence mentioned above, it was improbable that the Master, chief engineer, armed men and salvors all took part in this conspiracy by their own initiative.

Teare J held in light of the above that the owner’s claim would have failed in any event had it not been struck out. The fact that the owner’s claim was barred did not prevent the bank from claiming as a co-assured. However, the bank did have to show that the loss was caused by an insured peril.

Well-founded claim

For War Risk underwriters this will be a very pleasing result following a hard-fought dispute based on the events of over eight years ago. The Judge’s decision endorses the underwriters’ concerns about the claim as well-founded and confirms that the questions they and their advisors asked from the very early days after the casualty were justified.

Mr Justice Teare weighed up the body of expert evidence, across many fields, and gave reasons for preferring the explanation offered by the underwriters’ experts. The Judge was unpersuaded by evidence from the chief engineer whose story changed and by the Master, who failed to answer difficult questions and whose answers sometimes had no basis in reality. While owners normally give evidence in scuttling cases, the Judge noted that Mr Iliopoulos had not been called in this trial to give evidence, because his counsel had advised that he should not give evidence in light of the ongoing investigation against him by the City of London Police. No inference could be drawn against the Bank in that regard but Mr Iliopoulos’ earlier attendance in the action, where he showed that he was capable of deliberate and planned dishonesty in relation to this very case, allowed the Judge to draw an adverse inference which strengthened the underwriters’ case.

The soundness of the judgment in fully considering the detailed factual and expert evidence and attributing weight accordingly is likely to make it hard to appeal.

Carrie Radford is a partner and Lucy Espley is a senior associate at Ince, www.incegd.com.