England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

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

THE HONOURABLE MR JUSTICE COLMAN :

Introduction

1. In the early hours of the morning of 6^th 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 20^th and 21^st 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 10^th May and 30^th May 1994 in Sellers' option; the cancelling date was 10^th 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 14^th May 1994, it proved impossible to complete the work required to put the vessel through special survey at Ulsan by 10^th June 1994. Accordingly, following negotiations with Mr Kapelakos, it was agreed that the cancelling date should be extended to 10^th 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 20^th 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 15^th June 1994 without demand. It was also agreed on 25^th 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 10^th 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 17^th June the Owners decided that, for reasons which I will explain later, the vessel should proceed to Piraeus and on 20^th June orders to that effect were given to the master. The vessel arrived at Drapetsona on 28^th 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 5^th 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 (10^th 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 27^th 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 27^th 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 5^th 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 6^th July and divers installed a temporary patch over the explosion aperture. Pumping of water out of the engine room was completed on 8^th 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 12^th 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 19^th 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 11^th 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 15^th 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.

The Insurers' Case

22. The defendant insurers have raised two main grounds of defence.
23. 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.
24. Secondly, they say that they are entitled to and do avoid the policies ab initio for misrepresentation and non-disclosure.

The Insurers' Submissions on Complicity

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

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

26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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.
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. There had been four steelwork inspections of various part of the vessel in 1993.
40. 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.
41. 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.
42. 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:

"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."

43. That report noted that renewal repairs in the ballast tanks were currently being carried out by a riding crew.
44. 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:

"..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."

45. Subject to a minor requirement of no present materiality, the surveyors considered that the June recommendations had been completed.
46. 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):

"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.

47. 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.
48. The beginning stages of the survey for special survey by BV at Ulsan were supervised by Mr Gaur, an experienced principal surveyor with BV.
49. 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.
50. 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.
51. 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.
52. 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.
53. The same was true for the bottom longitudinals and web frames.
54. 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.
55. 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.
56. 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.
57. 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.
58. 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.
59. 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.
60. 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.
61. 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.
62. 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.
63. 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.
64. 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.
65. 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.
66. As to the matters of previous dishonesty put to HP, the Owners make the following points.
67. 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.
68. 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.
69. 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.
70. 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.
71. 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.
72. 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.
73. 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.
74. 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.
75. 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.
76. 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.
77. 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.
78. 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.
79. 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.
80. 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.

General Approach to the Evidence

81. 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":

"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."

82. 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.
83. 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.
84. 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.
85. 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.
86. 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.

Findings as to the Circumstances and Nature of the Damage

87. 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.
88. 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.
89. 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 of the blast wave phenomena were advanced, either with reference to pressure or time periods. In the course of his cross-examination Mr Misselbrook said this:

"A. I'm of the view, it is still a possibility that some curling of the edges of the petals would take place as a result of the initial stress state which is present in the plate as it is loaded up to the point, at the point of failure. We're not talking about initial stress state due to still water bending moments in the vessel; we are talking about the very complex stress field which is present in the plate when the external loading is applied to that plate. It is bilaterally stiffened structure, there are welds, there are stiffener welds, there are, there is the welds on the frame 49 bulkhead; all those sites will serve to provide certain stress concentrations, as well as around the initial loading point from which failure initiation will take place and at that point of failure, the stress state of the plate changes as well as the loading being applied to it, and that could cause in a way that that failure is initiated and released. It is my view that it could potentially cause some curling of the edges of the petal to take place to the extent and to the degree of that. I think I stated that it is rather indeterminate and it is very difficult to predict, absolutely.

Q. My question, Mr Misselbrook, was: is it your opinion that it is a likely explanation of the outward petalling we see on the North Star, yes or no?

A. I cannot discount it as a possibility.

Q. So you are saying that it is a probability, are you?

A. No.

Q. The only theory that was put to Dr Haxton to explain outward petalling was a theory based on reflected blast wave. Is this your theory?

A. No.

Q. No? But you are not suggesting that it is a possibility that cannot be discounted until the pressure time histories on those parts of the plate can be identified and correlated with the initial expansion of the shock wave into the compartment and the subsequent deflection of the various components.

Q. Let me ask you this: is it your opinion that reflected blast waves is a likely explanation of the outward petalling we see on the North Star?

A. Again, I would say it is a possibility. I cannot go any further than that until it has been further investigated.

Q. And where in your reports do we see any discussion of this point?

A. There is no discussion in any of my reports on this point?

Q. Why not?

A. It has not accounted for it as a possibility."

90. I am bound to say that these explanations present themselves to me as little weightier than purely speculative. They were not properly researched or evaluated.
91. Cdr Braidwood was called by the Owners on account of his experience of tests aimed at ascertaining whether or not an aperature had been caused by an explosive and, if so, locating the position of the charge. This work was confined to externally-placed charges. He therefore had no experience of comparing the results of an external explosion with those of an internal explosion. His knowledge of the latter was based on accounts which he had studied of naval tests conducted in the Second World War the purpose of which was to ascertain what quantity of explosive would be needed to produce an aperture of a certain size. He said in evidence that he had seen petalling only with external explosions but that with internal charges he would not expect to see it. He could not answer the question whether in the case of an external explosion he had seen every single petal facing outwards. He replied that he did not think he had examined petals in detail. He had "simply met the phenomenon before." I am not prepared to attach any real weight to his evidence about the incidence of petalling. The precise configuration of flaps or petals had not been an object or focus of any previous investigation by him. He had no knowledge of the physics of that condition. His evidence drew on a broad recollection of what he had seen long before he gave evidence. At the end of the day the incidence of petalling in the case of external explosions tells you little or nothing about the incidence of petalling from internal explosions. The dynamics disparity between an explosive force emanating from an external environment of hydrostatic pressure and one emanating from an internal environment against a hull subject to such inward pressure is obviously highly material.
92. Dr Baker, whose primary area of expertise is metallurgy, gave evidence for the Insurers to the effect that the outward petalling could not have been caused by reverse gas flow, a theory originally advanced by Mr Misselbrook in his report. The latter accepted that such reasoning could equally apply to reverse blast wave effects. Dr Baker stated at paragraph 2.4.13 of his Supplemental Report:

"If the initial inwards-facing petals had turned through an angle of 180ºC or more, I fail to see how the subsequent development of a high velocity flow from the inside of the engine room could cause the petals to bend back outwards since this would require an initial movement against the proposed reversed gas flow. On the contrary, the flow-induced force acting on the inward facing side of the petals would tend to increase their curvature and press them against the inner face of the shell plating."

93. At paragraph 2.4.17 of the same report Dr Baker stated:

"When bending of a flap of metal occurs in response to a load applied to the surface, the bend occurs preferentially at the fixed end of the flap where the resulting bending moment is greatest. This is a matter of common experience. The limited extent of the pronounced curvature of the petals therefore reflects the extent of the ductile tears which had been created during the initial period of intense explosive loading. By comparison, by the time that the explosion gases had vented into the engine room and the proposed reversed flow occurs, the brittle fractures would have formed causing much larger flaps to be exposed to the proposed flow-induced loading. If reversed bending were to occur under such conditions, outwards bending should not occur at the petals, but at the fixed end of the flap where the highest bending moment would be experienced. This would not cause reversal of the petals and would not be consistent with the pattern of deformation observed in the NORTH STAR shell plating."

94. I find this an entirely plausible explanation for the observed final condition of the petals. No evidence was adduced which went anywhere near disturbing this account. There can be no doubt that at a certain stage in the development of the aperture the explosion caused inward forces to operate so as to cause inward dishing. The precise effect of such forces on the fractured edges of the aperture cannot be delineated. It is to be inferred that the configuration of the plating forward of the engine room bulkhead which was found to be entwined in the longitudinal stiffener was the result of inward forces of the same origin as those responsible for the inward dishing.
95. Both Dr Bland and Mr Bowman, called on behalf of the Insurers, shared Dr Baker's view that the observed condition of the aperture in particular the outward petalling suggested an internal and not an external explosive charge.
96. However, the most telling evidence that the charge was internal is the complete absence of any large slabs of hull plating found in the engine room. The absence of 0.6 sq metres of plating from the aperture suggest that it was blown into the sea, which an external charge could not have been done. If substantial chunks of plating had been blown into the engine room one would expect to have seen extensive impact damage to the engine itself and to other internal surfaces. The only significant impact damage relevant because of its location was one hole in the engine room platform, which was only discovered amongst the photographs at a very late stage. This hole could only have been caused by a small but not insignificant lump of metal. It would indeed be surprising if it were the only fragment of similar size created by the explosion so one would have expected to see a whole range of impact damage at least as large as the hole in an arc pointing inward from the seat of the assumed external explosion. In fact, the only other significant impact damage is that to the engine room forward bulkhead at frame 49. That had been ruptured and a metal projectile had then penetrated the No.6 hopper tank and passed through it into No.6 hold. Dr Baker said that he could not envisage how a piece of metal could have been blown out of the hull from an external charge and then veered very sharply forward so as to have penetrated the bulkhead and the hopper tank. Further, there were particles embedded on the inside of the shell plating and there was damage to longitudinals 2 and 3, both of which pointed strongly towards an internal charge.
97. I am unable to accept the Owners' explanations that all the slabs of significant pieces of shell plating blown inwards are likely to have been lost because the engine room was flooded and dirty, or that the metal blown inwards from the hull plating had granulated into minute particles too small to cause serious internal damage. The probability is that substantial parts of the plating would have struck the contents of the engine room in front of the aperture leaving significant and clearly discernible damage and would then have been discovered on the engine room floor. If there had been granulation of the hull plating it would have pelted the engine room contents in front of the aperture with shrapnel, yet the evidence of shrapnel impact is to be found on the inside of the hull plating but not on the engine or other contents of the engine room.
98. I conclude that the configuration of the petals and the distribution of engine room damage is such as strongly to suggest that the explosion was caused by an internal charge.
99. If this is correct, the explosive must have been placed in the engine room adjacent to the shell plating between longitudinals 2 and 3 just aft of the transverse bulkhead. This was a relatively secluded position having regard to the modest dimensions of the explosive. The expert evidence suggests that this would not have exceeded about 4.5 kg and that it could easily have been taken aboard in a rucksack. There was only very limited security on the vessel. There was one representative of the buyers, Mr Christos, the night watchman, whose main function was to prevent theft of parts of the vessel. He was on board on the evening of 5 July 1994. By 18.15 all the repair shop workers appeared to have left the vessel. HP went to the engine room at about 17.45. HP there met the fitter, Mr Keerth, whom he told to go and have a shower before he turned off the generators. At about 18.00 the Chief Officer, by telephone, told Keerth (then still in the engine room) to shut down the generators. HP had by that time left the engine room. According to Mr Koussis, Kent's accountant, HP arrived back at Kent's office at 18.00 to 18.30 and he and Koussis then left the office together at 20.30 to 21.00. HP's evidence was that he then went home by car. In the meantime, Keerth's evidence was that, having shut down the generators, and closed the door to the engine room, he sat on deck, according to his witness statement until approximately 19.30. The Chief Officer left at about the same time. Christos, the buyer's night watchman arrived on board at about 20.00. At that time, according to the crew statements, in addition to Christos, the Rumanians, A/B Niagu and the 3^rd Officer, Samalescu, were on board, having returned from attending court to pursue their compensation claim at about 17.30.
100. At about 20.30 the 2^nd Officer, the Electrician and the Egyptian 3^rd Engineer joined them in the Officer's smoking room where they watched television by means of a power line run across to an adjacent vessel. Keerth had left the vessel for about one hour at about 19.30 to have a meal ashore. When he returned he sat on deck talking to the Indian mess boy and Christos, the night watchman. He went to bed at about 22.00 at which point the Rumanians (four of them) and the Egyptian 3^rd Engineer were all watching television. The mess boy had already gone to bed. At about 20.30 the 3^rd Officer left the vessel to watch another football match on another nearby vessel since there would be no power transferred to North Star after midnight. He returned at about 02.20 and had only just reached the aft deck at the top of the gangway when the explosion occurred.
101. It is, as I have already indicated, extremely improbable that any of those on board the vessel that evening would have planted the explosive. Unless they were sufficiently conversant with the likely consequences of an explosion it is most unlikely that they would have risked detonation while they or any of their fellow former crew members were on board. The likelihood is therefore either that someone got aboard with explosive without being noticed that evening or that the charge was planted earlier that day in circumstances where its carrier would not arouse suspicion. It is intrinsically improbable that anyone who was not conversant with the engine room would have boarded the vessel carrying the explosive on board. It is also somewhat improbable that this operation would have been carried out by such a person after the generators were shut down, so that torch light would have to be relied on in the engine room. The more probable explanation is that the device was carried on board and into the engine within 12 or possibly 24 hours of the explosion by someone whose presence with a bag or rucksack would not arouse suspicion. This could have been any of those working in the engine room or anyone else who was entitled to enter it. That could have included employees of the repairers, the engine room staff, in particular, the Chief Engineer, Spiros Prevenas, as well as the Owners, including HP. However, there was only a limited presence of shore personnel in the engine room that day for that part of the vessel was almost ready to be handed over to the buyers. The No.5 fuel oil transfer pump serving the No.5 starboard double bottom tanks had just been brought aboard and re-positioned but there had not been time to re-commission it. The Chief Engineer was also concerned with repairs to the sanitary pump. He stated that he left for home at about 17.00 at which point Mr Marty Petrakakos, presumably a number of the Owners' family and two shore works remained in the engine room. The fitter, Keerth, might also have been there.
102. The probabilities therefore are that no stranger could have entered the engine room while the Chief Engineer was there. If this had happened while Keerth was present it seems unlikely that his statement would not have referred to it.
103. I therefore conclude that it is more likely that the device was planted by someone whose presence did not raise the suspicion of the Chief Engineer or Keerth or other members of the engine room staff. I regard it as highly unlikely that the charge was placed by a complete stranger. It is far more likely that it was placed by an "insider" bent on causing malicious damage to the vessel due to a grudge against the Owners or by someone who was acting on the instructions of the Owners or possibly by HP himself.

Findings of Fact relevant to the Issue of Complicity

104. HP stated in the course of answers in cross-examination that there had never been any threat to him, his property, his family, the vessel's crew or the Kent Trading staff. When he was asked by the Court whether he had ever arrived at any even suspected explanation for the explosion he said that he could not think of any.
105. Although it was suggested that the attack might have been procured by HP's and MP's former business associate, Mr Robayna, or by those who had suffered losses by having invested in HP's various London investment promotions, any such explanation would seem to be a remote possibility. Neither possibility is supported by any evidence except that the parties were engaged in serious on-going litigation. It is hard to see why or how either could have set out at such short notice to sink the North Star once she reached Piraeus. Indeed, Mr Robayna was hardly likely to reduce his prospects of arresting vessels owned by the Kent interests as long as he maintained his claim in relation to the Ivory K and North Rock. Furthermore, the claims by the disappointed investors were relatively small – up to US$50,000 – except for that by Mr Sotiriadis whose claim is said by the Owners to have been bogus.
106. As for the act of terrorists, the Owners say that they do not put that forward as a positive case because their own expert, Dr Rathwell considered that there was not more than a 5 per cent to 10 per cent likelihood. They merely say that it cannot be excluded as a possibility. Prof Wilkinson said the chances were only 0.001 per cent. On the most enthusiastic view, therefore, it is far down the scale of possibility, the more so because I have concluded that the bomb was placed internally. In short, terrorists would be very unlikely to target an aged low profile Maltese flag vessel whose loss would attract little or no publicity and they would also be unlikely to take the explosive on board rather than to use an external charge. The only evidence that a Greek terrorist attack had been made on a commercial vessel in Greece was that of the 17 November Group who had bombed the salvage tug, Karapiperis VI. However, that was a case of strike-breaking by the owners of the tug. Most of the attacks on shipping had been on passenger ferries and liners to attract maximum publicity. The evidence also indicates a very low possibility of relevance of her trading to Israel. In 1993/4 the Oslo Accords were influencing the PLO against random terrorist attacks, such as that on the Achille Lauro in 1985. Moreover, they tended to concentrate on land targets and not cargo vessels.
107. In summary, such evidence as there is suggests a very low possibility of terrorist motivation and little or no possibility of motivation attributable to a commercial grudge.

Did the Owners have a Motive?

108. To what extent, therefore, was there a motive on the part of the Owners to cause or procure the explosion?
109. First, the insured value was high relative to the market value of the North Star. In an arms-length sale to Mr Kapellakos the as is price was US$1.1 million and the special survey completed price was US$1.4 million. Leaving aside their purpose in maintaining this level of cover, including the fact that when they had first acquired the vessel in 1989 for US$1.3 million, they had, according to HP, spent some US$3 million on repairs necessary to prepare her for trading. She had therefore been trading for over four years and during that time had been earning substantial revenues against the total investment depreciation of some $2.9 million. A recovery of the insured value would have more than offset the whole of that depreciation.
110. Secondly, by the end of June 1994 the Owners were unquestionably confronted by an extremely adverse financial situation. Kent could not pay its defaults on insurance premiums. This continuing financial deterioration had started in July 1993 with the arrest of the North Rock at the instance of Mr Robayna. As admitted by HP, the continuance of that arrest caused the Owners losses, including lost income, financial costs, sale costs, legal fees and claims, of over US$2 million up to the time when the vessel was released by the device of a sale to Captain Prekas in April 1994. This substantial loss of revenue thus proceeded over a period of nine months, the Owners having in August 1993 been unable to raise more than a maximum of US$300,000 towards its release, whereas with another US$340,000, this was said by them at the time to be obtainable. I infer that the Owners then had no sufficient reserve equity in any of their other vessels and insufficient reserve revenue flow from those other vessels to enable them to borrow, service and secure US$340,000 from a bank to obtain the release of North Rock. They were therefore operating in August 1993 in a very substantially under-capitalised condition. Their position was made worse by their extraordinary decision in the circumstances to purchase the Taxiarchis for US$1.35 million in October 1993. For that, they borrowed from National Bank of Greece US$900,000, using up as security much of their remaining equity in North Star. They also found from their resources another $435,000. The exact source of those funds has not been explained by HP. I infer that he introduced the money from family interests of some kind. However, that decision proved to be a very bad bargain. Due to the need for repairs the vessel did not trade from 14 January to about 20 April 1994. The cost of the repairs was about US$440,000.
111. The deteriorating financial position of the Owners is further illustrated by their continuing inability to pay their debts as they became due. Their inability to pay insurance premiums has been summarised at paragraph 25.14 above. For the Owners to have allowed the cancellation of the London Market hull and machinery cover in February 1994 shows that they were so short of available funds that it was hard to see that they could continue to trade. That shortage of funds continued until the beginning of July 1994, as is shown by Owners' continuing inability to pay insurance premiums (see paragraph 25.18 above). It continued right up to the day before the loss. On that day the total outstanding amount of premiums was over US$100,000, but the Owners remitted to HIB the trivial amount of US$10,350, including the very specific sum of $5,350 for war risks premiums and the balance towards the very large outstanding amount of hull and machinery premium. HP's explanation was that war risks premium was payable at inception (see paragraph 25.18 above) and that they "had this money available". I infer that: (i) it then mattered to the Owners that the war risks cover should not be permitted to lapse and (ii) that they had no other money available to them. In other words, unless they could derive some substantial funds from somewhere, they could not then insure their fleet.
112. It is against this background that paragraph 3 of HP's Second Supplemental Witness Statement has to be read:

"It is fair to say, as I mentioned in my first witness statement, liquidity was tight in the first part of 1994, owing to the loss of the 'North Rock' income and the delay in putting 'Taxiarchis' into a trading condition. We were by no means insolvent ie. we did not owe more money than our assets were worth. It is fair to say that meeting our financial commitments involved a degree of juggling during the first half of 1994, but we were never in a situation where we were concerned as to whether it would be possible for us to meet them. This was, for us, just normal business in circumstances that were rather difficult for one reason and another."

113. In my judgment, this statement is designed to create an entirely false impression. The Owners were far beyond a mere "degree of juggling". Their operation was financially crippled. If they were never in a situation where they were concerned as to whether it would be possible for them to meet their financial commitments, as claimed by HP, their attitude could only have been that of profligate gamblers who were continuing to trade in the hope that something would eventually turn up to save them from financial collapse.
114. That the Owners' financial position was known to them to be desperate by the end of June, is further shown by the events that had overtaken the Taxiarchis. Having been detained at Puerto Rico between 28 May and 9 June, a week later she suffered a serious engine breakdown. Serious damage was caused to the No.7 cylinder, including a bent piston rod jamming the piston and indicating the possibility that the crankshaft might have been damaged. She was obliged to put in to Newport News. The Chief Engineer issued a report on 30 April. Altogether five cylinder heads were found to be cracked and leaking. The Chief Engineer welded up the cracks, but this was obviously only going to be a temporary repair. The full extent of the damage and the required extent of the repairs was not then known. It was only when there had been a full survey and report by the Salvage Association that the Owners would know in detail what repairs had to be carried out, how much they were likely to cost and how long they would take. However, MP would have been able to derive from the Chief Engineer's report a broad idea of the scope of repairs and the Owners would certainly know that the vessel's trading would be seriously interrupted. She would not be permitted to go on trading with temporary repairs as carried out by the Chief Engineer. Accordingly, by the end of June 1994 Owners must have realised that there was a high risk that the Taxiarchis would be out of service for at least several weeks and consequently, losing revenue during that period. Although, the cost of repairs might be recoverable from the underwriters and/or as general average, the impact on cashflow which would at once be envisaged would be considerable. Net revenue loss would be at the rate of US$1,175 per day and the operational and finance costs were about £3,000 per day, making a total of $4,175 per day. This would be a very serious blow for a company which could only afford to pay US$10,350 out of a total of over US$100,000 outstanding insurance premiums. The cost of repairs might well also immediately have to be carried by the Owners even if ultimately it was accepted by the insurers.
115. The seriousness of the Owners' financial position is underlined by the fact that the transactions involving the North Rock and the North Star led to the Owners relinquishing a relatively substantial part of their equity in the Kent fleet. This arose because they lost 50 per cent of their beneficial interest in the North Rock and were obliged to sell the North Star. They used the proceeds of the loan of US £1 million by Kapellakos against the sale price of the North Star to re-acquire their interest in the North Rock. I am bound to say that the circumstances of the sale of North Rock to Captain Prekas remain obscure. However, the key issue relevant to the Owners' financial position is whether in consequence of this strange transaction the Owners were entitled to receive back US$500,000 intact following the completion of the sale or whether that amount was to be repaid by Captain Prekas as and when it became available out of freight earnings. There is some contemporary evidence to support the Owners' case that this sum was intended to be used as a buffer fund to be available to Guiness Mahon to be utilised only if and to the extent that the Panamanian auction price exceeded US$1.1 million which was to be the price to be funded by Captain Prekas together with the bank's mortgage. I am persuaded that a transaction was entered into with Captain Prekas, that it was not evidenced in writing and that it involved the Owners re-acquiring a 50 per cent share in the vessel and putting up US$500,000 to enable Prekas to provide the bank with a buffer fund in case it had to pay more than US$1 million at the auction. I am, however, unpersuaded that at the time when the transaction was entered into in April 1994 HP had any very clear idea how or when Prekas was going to pay back the US$500,000 loan. Moreover, there is no reliable evidence as to when it was actually repaid or indeed as to whether it was ever repaid. HP's account of the transaction is so indistinct and has so changed over the years that it is impossible to accept as reliable his assertion that it was paid back in June, July and August 1994. There is no documentary evidence of repayment. I find that if on 5 July 1994 HP had been asked when repayment was to be received, he would have replied that Prekas would refund the money out of the earnings of the vessel, to the extent that they became available, as he stated in his first witness statement. He would, however, have been unable to say with what frequency payment could be made or how long it would take.
116. As to the prospects for the completion of repairs necessary to pass the Special Survey on the North Star, I have come to the conclusion on the whole of the evidence that by the beginning of July 1994 it was the Owners' perception that the work might very slightly overrun the cancelling date under the sale agreement. I accept the substance of HP's evidence on this area of the case that any overrun was seen to be a matter of a few days at the most and that Mr Kapellakos would neither have insisted on delivery with the special survey incomplete or cancelled the sale. The most likely prospect was that he would have extended the time for delivery even if an additional three or four days were needed. The major unknown factor which, I find, would have been present to the mind of HP, was the attitude of BV following further ultrasonic testing. In spite of HP's expressed confidence in the course of his evidence that the further Ultratest results would not call for significant additional steelwork, there was still a substantial area of the vessel to be tested and the approach of BV already experienced had been particularly strict. It is nothing to the point that it might have gone beyond what the BV Rules required. In truth, the Owners were not in a position effectively to challenge the BV surveyor's demands.
117. Having regard to the evidence of Mr Bowman, Mr Stanley and HP, I have come to the conclusion that the Owners' perception early in July 1994 would have been that, at the very least, 30 mt of additional steelwork would be required and that there was a relatively high risk of 50 mt with a much lower risk above that. The bulkheads, cargo area frames and double bottom tanks would have represented the main areas of concern.
118. The cost of 50 mt of steelwork to be carried out on an urgent basis, I find to be about US$3.75 to US4 per mt. Weight must be given to HP's experience of Drapetsona repair operations. In these circumstances, I find that as at the beginning of July Owners' perception would have been that the total cost of the repairs might well be as much as US$185,000 – US$190,000, although they would hope for as low as US$112,000.
119. These findings reflect my conclusion that Mr Stanley's assessment of the general level of deterioration of the vessel is to be preferred to that of Mr Bowman. Having closely considered the survey history of the vessel prior to her arrival at Piraeus in June 1994, set out at paragraph 38 to 46 above, I have no doubt that she was in a considerably better state of preservation as regards much of her internal steelwork than would normally be expected of a vessel of her type and age.
120. The financial impact of that expenditure on the Owners' cash flow was clearly going to be severe and substantially more severe than Owners' original estimate of US$50,000 for the special survey work suggested: see paragraph 25.23.3 above. I accept the calculations of total special survey expenditure put forward on behalf of the Insurers and in particular, that if the cost of the steelwork were no greater than the budgeted cost of US$50,000 plus US$12,000 survey fees, the total bill for the work at Ulsan, the cost of the deviation to Piraeus and the work at Piraeus would have been of the order of US$187,960, so that it would have exceeded the net proceeds of the sale of the vessel to Kapelco (c. US$170,000) by some US$17,500. If, however, the Owners' perception of the cost at Piraeus has to take account of repair costs of US$185,000 – US$190,000, the total deficit on the disposal rises to over US$150,000. That did not include claims by the crew. Yet these claims which had first been the subject of a hearing in court on 1 July and were again in court on 5 July, had a direct effect on the disposability of the North Star. That is because there had been five orders restraining the vessel from sailing unless the claims were settled or secured. The claims amounted to GDr 50 million (US$210,000). Consequently, the Owners would have to put up substantial security before the vessel could be delivered. Had they been confident of receiving a surplus from the proceeds of sale, that might not have been a problem, but, if the repairs' bills were to be paid, no such surplus would be available.
121. The submission on behalf of the Owners that their perception immediately before the explosion can be evaluated by reference to their financial circumstances at a later date is, in my judgment, extremely tenuous. In particular, it is submitted that because between the explosion in July 1994 and the sale of the vessel for scrap in January 1995, it is claimed that in excess of US$900,000 was spent on sue and labour, pollution prevention measures and other related items, it must follow that as at the beginning of July 1994, Owners would have known that they had at their disposal sufficient assets to pay such a large sum. Reliance is placed on a letter dated 30 June 1995 to the insurance brokers. However, that letter is not evidence that any of those items listed had been fully paid. Dates of payment are not set out and the letter ends thus:

"From the proceeds of the sale of the vessel payments to Salvors on account and to third parties were made leaving no cash to the owners.

In light of the above we request your intervention and assistance to collect the above amounts."

122. It follows that this letter goes no further than evidencing payment of part of the Salvors' expenses by means of the proceeds of sale of the vessel for scrap of US$450,000. Indeed, the letter is evidence that part of the salvors' expenses had not yet been paid by mid 1995, nearly a year after the events began.
123. Then the Owners submitted that the fact that they had incurred substantial expenditure on the Taxiarchis after the date of the explosion also suggests an availability of resources which must have influenced Owners' perception of their financial position before the explosion. That submission is not supported by evidence of payments by the Owners for repair costs after the explosion. Although there was a very substantial recovery from underwriters and for GA, there is no evidence as to the extent, if any, to which the Owners themselves discharged these expenses or, if they did make payments, when those payments were made. The vessel was off-hire for four months. She was arrested on 12 August 1994 for non-payment of a bunker account, detained by the US Coast Guard for unseaworthiness and her class withdrawn by BV. In November 1994 she was sold for US$310,000 which did not pay her debts.
124. Accordingly, I have reached the conclusion that by the time when the North Star was sunk, the Owners' perception of their situation, was that it was virtually irretrievably hopeless. I have no doubt that HP conducted his business on the basis of hand-to-mouth funding, but he was certainly sufficiently intelligent to understand the hazardous position which had arisen from the combination of the disposal of 50 per cent of the interest in the North Rock, the casualty to the Taxiarchis and the very real risk of a considerable loss on the sale of the North Star.

Harry Petrakakos, his Character and Conduct

125. HP was cross-examined for four days before me. He showed himself to be intelligent and diligent. He had clearly devoted a great deal of attention to familiarising himself with the documents. Although he sometimes slightly misunderstood the questions, his answers were usually to the point. Indeed, he was extremely self-possessed, self-confident and quick in response. His demeanour was not generally overtly evasive. However, particularly in relation to his account of the financial position of the Owners, his answers were clearly designed to present much greater financial strength than actually existed. He was certainly well aware of the importance of that issue in the context of the Insurers' case on motive. His evidence was directed to diminish the seriousness of the Owners' financial position, even in the face of strong contemporary evidence to the contrary.
126. The Insurers have criticised the honesty of HP in his dealings with Guiness Mahon, the insurers, the charterers of the North Star and Mr Kapellakos [see paragraphs 25.29-25.33 above). These criticisms are to a large extent well-founded.
127. Although HP was probably under no legal duty to inform his bankers, Guiness Mahon, that Capt Prekas was purchasing the North Rock with funds provided as to US$500,000 by the Owners, for they were not a party to the transaction, I have no doubt that it was never disclosed to the bank that Captain Prekas was fronting for the Owners who had put up that money to enable the transaction to go through. The admission made by HP in the course of his interview on behalf of the Insurers at the offices of Hill Taylor Dickinson, the Owners' solicitor, in November 1994, very soon after the event, that the Bank did not know the Owners "were behind Prekas's purchase" represents the true position. HP said in cross-examination that his answer in the interview had meant no more than that the Bank did not know about the US$500,000 advanced by the Owners to Captain Prekas. He also said that Ted Petropoulos, who found Prekas and negotiated the transaction with Guiness Mahon had told HP that he had told the bank that the Owners were to acquire an interest in the North Rock. However, he also accepted that the bank did not want to know that Owners were to have an interest in the vessel because it had been advised that Mr Robayna might arrest any vessel in which the Owners had an interest. On this evidence. I do not accept that the Bank was told in advance of the Owners' intention to obtain 50 per cent interest in North Rock and I find that, in spite of his unwillingness to accept this, HP was very well aware that, had the Bank been so informed it would never have gone on with the transaction. In substance, therefore, HP knowingly facilitated a transaction by which the Bank was induced to advance US$1 million which it would have refused to do had it been aware of the true picture known to HP. I regard this as seriously dishonest conduct.
128. The declaration of the "purchase value" of the North Star on the 6 May 1994 application to insurers (see paragraph 25.30 above) was untrue, whether one reads the words as meaning purchase price or market value at the time of purchase. However, although HP's understanding of English is quite sufficient for him to have understood that, it is not particularly reprehensible that he thought the Insurers ought to be told the cost of purchasing the repairing the vessel in readiness for trading. However, the honest course was to provide the purchase price and the repair cost additionally. The effect of what he was telling the Insurers was that they could assume that the vessel that they were now asked to cover and which had just been sold for US$1.1 million or 1.4 million had changed hands in 1989 for US$4 million.
129. More remarkable was HP's failure to disclose on the application for hull and machinery cover as 6 May 1994 the mortgage of the North Star to Mr Kapellakos which had been entered into only two weeks earlier on 22 April 1994. The explanation put forward in cross-examination that it must have slipped his mind is hardly credible. He could not otherwise explain this clear inaccuracy. I do not believe that he would have forgotten.
130. HP's reply on 3 June 1994 to the underwriters' request for "the current condition" of the Taxiarchis [see paragraph 25.31 above] that it was "currently on a loaded voyage to Canada" was thoroughly misleading. As he was well aware, the vessel was under detention by the US Coastguard at Puerto Rico. HP claimed in cross-examination that he mentioned this to the underwriters at the Posidonia conference but that is unconvincing to say the least. If he were as open as that then, why was he not equally open when he responded to the specific request for information?
131. A similar lack of openness is to be found in HP's failure to disclose to the charterers or Kapelco until 20 June that three days earlier it had been decided that the vessel should be ordered to Piraeus and had been ordered to slow steam so as not to enter the United Nations zone approaching Eilat to where the charterers had previously ordered her to proceed: (see paragraph 25.32 above). I find distinctly unconvincing HP's explanation that he needed time to negotiate about the venue of the special survey with BV. The master made false entries in the logs in order to conceal the change of course to Suez. This was also concealed from the representative on board of Kapelco. The general level of deception is not impressive. I am not able to accept that the chartering brokers were told anything about this, as claimed by HP.
132. Nor am I able to accept HP's evidence that he may have told Kapellakos that, quite contrary to the terms of the mortgage of the North star to Kapelco, that vessel was insured for total loss only. Following the explosion the buyers complained that this was a major default under the loan agreement, the mortgage and the general assignment.
133. I further take the view that HP was not entirely open in his evidence. The criticisms of his evidence advanced on behalf of the Insurers (see paragraph 25.35 above) are, in my judgment, justifiable.
134. Having regard to these considerations, I am unable to regard the character of HP as one of consistent honesty. If it was in his commercial interest to conceal or to distort matters about which in all honesty he needed to be open and frank, he would not hesitate to do so.
135. Further, it is very surprising that HP, having been informed of the explosion by MP at about 0430 on 6 July, did not arrive at the vessel until about 0610. The journey time from his home via his office to Drapetsona by car, which he drove himself, was about 40-45 minutes. Yet he spent one hour and forty minutes before he arrived at the vessel. Of that time about 30 minutes was spent in his office. He said he also spent up to 30 minutes at home before leaving for the office. He said in evidence that he spent the time in his office making telephone calls to arrange tug assistance and for pollution clean-up. He therefore did not proceed to Drapetsona, as might have been expected if he were deeply shocked by the explosion, namely in the shortest possible time to inspect the state of the vessel before making arrangements for a diver and tugs.
136. Additionally, on 7 July 1994 he informed the Owners' expert, Dr Foster, that 90 per cent of the shell plating from the aperture in the hull was in No.6 hold. In reality the fragments in No.6 hold was pieces of the after bulkhead. He also informed Dr Foster that the petalling round the aperture was pointing inwards.
137. These matters, while possibly the result of HP having been given wrong information by others on board, raise serious questions as to whether HP might not have been attempting to mislead Dr Foster as to the location of the explosive device so as to create the appearance of a terrorist attack.
138. MP was the technical half of the brothers' commercial operation. He was not mainly concerned in taking financial decisions. That was exclusively in the province of HP. The latter ran the business side of things and MP, albeit not exclusively, concentrated on technical work. I do not find that MP has demonstrated any previous pattern of reprehensible conduct. I found his evidence before me quite sufficiently open.

Has Complicity been established?

139. In approaching this issue it is important that, in a case where there is no direct evidence of complicity, a court should keep the following considerations clearly in mind.

(i) As indicated in The Grecia Express [2002] 1 Lloyd's Rep 669, at pages 635-636, although the standard of proof of complicity is on the balance of probabilities, the court must feel a high level of confidence that the allegation is true or putting it another way, it must conclude that it is highly improbable that the allegation of complicity is not true.

(ii) In considering the evidence it is essential to weigh all those matters relevant to the issue of complicity but to avoid what may be described as "the Popi M heresy" that is to say, if two possible explanations for the loss are alleged and one can be ruled out, concluding that the remaining explanation must be the cause of the loss, even though it is an intrinsically improbable one: Rhesa Shipping v. Herbert David Edmunds [1985] 2 Lloyd Rep 1, The Marel [1994] 1 Lloyd's Rep 624, and Glowrange Ltd v. CGU Insurance (2001) WL 7020222.

(iii) Although the owner of a vessel may be shown to have had a motive for causing its loss and claiming on the insurers, this alone cannot in many cases be enough to found a conclusion of a fraudulent claim: the physical circumstances of the loss will normally be an essential part in the evidence. If they add nothing to motive, then in the absence of other evidence pointing to fraud, a finding of a fraudulent claim will normally be unlikely.

(iv) Where there is evidence of the Owners' previous or subsequent dishonesty, whether or not relating to insurance claims, that is a matter to which at least some weight can be attached in support of a fraudulent claim. How much weight will depend upon the nature of the dishonesty and its level of gravity. In relation to subsequent dishonesty involving an account of facts relevant to the issue of fraud, as distinct from denials of the facts amounting to it, it is necessary to proceed with great caution in view of the fact that a person accused of fraud may well lie for a variety of reasons not least in order to improve evidence where he or she is entirely innocent: see generally R v. Lucas [1981] QB 720.

140. With these considerations in mind, the starting point is the circumstances of the loss. If the Owners had resolved to cause the vessel to be totally lost, the method adopted in this case was an extremely bad way of doing it. Not only was the vessel in a position where it would be saved if water began to enter the engine room through the aperture blown in the hull, but the blatant appearance of a deliberate sinking would be likely to arouse suspicion that the Owners might be involved. Further, on the assumption that the vessel could be prevented from sinking, it would be impossible to be sure that the explosion would cause a constructive total loss so as to enable a claim for US$4 million effectively to be made on the Insurers. If there had only been available a claim for a partial, but unrepaired loss, the underwriters' liability would have been the difference between the market value and the scrap value of the vessel. That a CTL might well not be achieved by such means is illustrated by the events following the explosion, in particular, the delay in providing water damage protection to the machinery which might well have prevented irretrievable damage. But for that delay caused by the Greek investigating authorities sealing off the engine room (see paragraph 19 above) the vessel might never have become a CTL. Both the Petrakakos brothers are qualified marine architects who might be expected to appreciate that a total loss would be difficult to achieve. However, there can be no doubt that whoever was responsible for positioning the explosive intended to flood the engine room and so at least to cause the maximum possible damage to the vessel, presumably intending to cause a total loss if possible. This can be inferred from the fact that not only was the explosive located below the water line but it was hard up against the engine room forward bulkhead presumably with the intention that the explosion would open up that bulkhead and thereby flood both the engine room and the No.6 hold.
141. There is the further consideration that if a bomb were, as I have found, located in the engine room, that would be regarded as a circumstance pointing the finger of suspicion at the Owners.
142. Whereas it is possible with hindsight to appreciate the inadequacy of the explosion as a means of achieving a total loss as well as the risk of suspicion involved in placing the explosive inside the vessel, it is necessary to bear in mind that, as the expert evidence before this court has shown, technical knowledge of the effect of internal explosions on ships' structures is extremely limited. Thus, whereas it might be obvious that 4.5 kg of explosive would be sufficiently powerful to blow a sizable aperture in the hull and the adjacent bulkhead, it might well also be assumed that it would be capable of causing extensive direct damage to the engine room machinery and that it would be impossible to tell whether the explosive had been located inside or outside the hull. A qualified marine architect and a person having considerable experience in ship maintenance would not be likely to have any relevant experience of the effect of explosive devices such as to enable him to pre-judge with precision the consequences of an explosion. Indeed, if such a person wished to achieve a total loss, the probability is that he would rely on advice or assistance from someone who professed to have the necessary expertise.
143. Further, although it is hard to envisage that it would have been anticipated that the Greek authorities would have prevented the carrying out of measures to prevent corrosion of key parts of the engine and thereby caused the engine room damage to be far worse than it might have been if anti-corrosion measures had been taken at once, it is, in my judgment, very unlikely that whoever caused the placing of the explosion ever contemplated that the effect would be other than immediate total loss. It is highly improbable that anyone would risk leaving explosive in the engine room and risk that being discovered if they were no more than unsure that the vessel would be more than seriously holed.
144. An indication against the complicity of the Owners is that they ordered the vessel to Piraeus and incurred very considerable related expenses in getting it there when they could more easily have procured a total loss while on the voyage. Thus, they incurred Suez Canal costs of US$89,000, fuel and other operational costs of $24,000 and they were going to have to incur a special Suez Canal bonus of $100,000 payable to the charterers for redelivery of the vessel at Ashdod and thereby obliging charterers to return south through the Suez Canal. Moreover, significant expenditure was incurred the work carried out at Drapetsona after arrival there. However, the vessel had been at or off Drapetsona for a week prior to the explosion and, according to the expert evidence it would have been possible to acquire explosive within that period. There are thus two considerations arising out of the Owners' disposition of the vessel. First, it is improbable that the decision to attempt to destroy it had been taken by them or anyone else at or about the time when it was diverted to Piraeus, for that would have involved considerable expenditure by the Owners for cosmetic purposes and most improbable prescience on the part of any one else. Secondly, if the decision to destroy the vessel was taken later, even as late as her arrival in Drapetsona, explosive could still have been obtained in the time available. Further, since not even the Owners had decided to send the vessel to Drapetsona until 17 June, the decision to destroy it could not have been taken before then by an outsider and it is extremely unlikely that an outsider would have discovered the vessel's destination until shortly before or even at any time before its arrival there. Moreover, if the Owners were complicit and the decision was taken at or a little before its arrival, then the subsequent carrying out of repairs for the special survey must have been for cosmetic purposes.
145. The war risks insurance premium had been outstanding on all three of the Kent fleet vessels since 28 April 1994. The total for all three vessels was a relatively trivial amount, namely US$5,350, of which US$2,000 related to the North Star. That was as appears at paragraph 111 above, paid to the brokers as part of a total of $10,350 on the day before the explosion, 5 July. HP was asked about this in cross-examination:

"Q: So you paid your War Risk premium on the 5 July and I suggest to you that that was no coincidence. You paid it then because you knew what was going to happen that night?

A: Because I was, before in June, I 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."

146. These premiums had already been outstanding for over two months, although MIRA had only issued debit rates on 7 June 1994 and yet, in spite of the very serious financial position of the Owners, they suddenly paid this very small amount together with another $5,000 towards the very much larger outstanding instalments on the hull and machinery policies, which by that date amounted to $33,503.35 for the North Star and a total of $93,605.99 for all three Kent vessels. HP's explanation is somewhat unconvincing: a month had already passed since the debit notes had been issued by MIRA. There had been no reminder or ultimatum from the brokers threatening withdrawal of cover. And yet something caused HP to remit the small amount of the outstanding war risks premium together with a minute proportion of the outstanding premium on the hull and machinery cover.
147. Finally, it is necessary to consider hypothetically the likely perception of the Owners a few days before 5 July 1994 had they been contemplating the destruction of the North Star.
148. Firstly, they would have foreseen the cancellation of the sale contract with Kapelco and the requirement to repay the US$1 million loan to Kapellakos. Secondly, they would have foreseen making a claim for a total loss under the war risks policy, for it would clearly have been suggested that the explosion was the work of terrorists and its purpose of at least causing a CTL would have been assumed to be accomplished. Thirdly, it would have been contemplated that, although the Insurers might take some months to settle the claim, there would be from the outset a bankable right to US$4 million. Fourthly, although some considerable expenditure might have to be incurred due to anti-pollution and wreck removal, this could not be exactly estimated but was likely to be far less than the insurance proceeds. Fifthly, there would have been the risk of the truth emerging and, if that had happened, not only would the Owners be totally destroyed financially but their commercial reputation would be wiped out, thereby endangering the future survey operations of their American office, and severely restricting their ability in future to raise money from banks for any commercial purpose. Finally, they would, if the truth were discovered, probably face criminal prosecution in Greece and the existing criminal proceedings against them might also be affected.
149. There were thus weighty considerations against an attempt to destroy the vessel but the overall balance for or against that course would depend crucially on the Owners' assumption as to the physical effectiveness of the explosion and as to the magnitude of the risk of discovery of the truth. If they were optimistic as to both these considerations, there were very strong financial incentives for the attempt to create a total loss and by that means to create a considerable net injection of capital into Kent's trading operation. If all went well, the Owners would emerge with the Agios Nektarios and, after it had been repaired, the Taxiarchis as viable sources of revenue, together with their 50 per cent share in the net revenue produced by the North Rock and the ultimate repayment of the outstanding US$500,000 from Captain Prekas.
150. If, on the other hand, they chose not to risk the attempted destruction of the vessel, they were facing a financial crisis of extreme severity. Even assuming that the special survey of the North Star was completed in time to make delivery before cancellation of the sale, that transaction was inevitably going to produce no net financial benefit and might well produce a substantial loss. The Taxiarchis was likely to be disabled from contributing to their income stream for some weeks, the extent of engine repairs remaining in doubt. Even with 50 per cent of the net revenue of the North Rock and 100 per cent of the net earnings of the Agios Nektarios available, they were in the position where it would have been extremely difficult, if not impossible, to avoid cancellation of insurance cover due to their inability to pay the premium instalments.
151. Finally, in order to evaluate the allegation of complicity, it is necessary to stand back and view the overall picture on the whole of the evidence, including in particular, the manner in which the Owners gave that evidence and their character as demonstrated by the matters set out in this judgment. Obviously, it is necessary to take into account whether the explosion was caused by terrorists or by anyone else with a grudge against the Owners, the vessel or those associated with it, such as Mr Kapellakos or Ventouris Vlachos, the repair yard or the port authority. I have already found that it was extremely unlikely to be the work of terrorists due to the nature of the target, the position of the bomb and the lack of any claim of responsibility. I have already found that there is no evidence of anybody bearing a grudge, either personal or commercial against the Owners and that only the former crew members might have been counted as suspects but for the fact that they were all in close proximity to the seat of the explosion at the time. It is therefore necessary to proceed on the basis that whereas it is certainly not impossible that the explosion was caused by terrorists or others acting maliciously, the intrinsic likelihood of either is very low.
152. Is this one of those cases in which, on the whole of the evidence, the responsibility for the loss simply cannot be attributed to anyone and all the known or possible candidates present such an intrinsically unlikely source that none of them can be said with the necessary high level of confidence on the balance of probabilities to have caused the loss?
153. To this question, I have no doubt that the answer is No. For the reasons which I have already indicated and in particular the physical circumstances of the explosion, specifically the location of the explosive device, the character, demeanour, commercial and financial circumstances of HP and the Owners, including the fact that the Kent Group was financially crippled, and the contemporaneous conduct of HP, specifically his presence in the engine room late on the previous day and his delayed arrival at the vessel following the explosion and the information given to Dr Foster, I find that he personally procured the placing and detonation of the explosive in order to commit a fraud on the Insurers. That finding is made with the high level of confidence necessary for allegations of this kind.
154. Accordingly, Owners' claim fails on this ground and must be dismissed.
155. It is right that I should add that I am not convinced to the requisite standard of proof that Michael Petrakakos was complicit in this fraud. He was at the crucial time in the United States. Although he was in telephone contact with HP, I am far from satisfied that he would have taken any part in the planning of this operation or that HP would have taken him into his confidence in the matter before or after the explosion. Accordingly, no finding of dishonesty is made against him.

Non Disclosure of Material Facts: the Submissions

156. The Insurers rely on failure on or before 27 April 1994 to disclose the following matters.

(1) Four separate pending criminal proceedings in the Greek courts, namely

(a) the Sotiriadis proceedings;

(b) the Angelopoulos proceedings;

(c) the Overseas Agency proceedings;

(d) the Alliance Trust proceedings.

In all these HP was a defendant, but Michael Petrakakos was a defendant only in the Sotiriadis proceedings.

(2) Civil proceedings by Atlantic Light Corporation in Panama against Kent Group companies claiming damages for fraudulent trading.

(3) The excessive valuation of the North Star under the War Risks policy at US $4 million.

(4) That the insurance of the Kent fleet was cancelled by hull and machinery underwriters with effect from 6 March 1994 for non-payment of the premium.

(5) That the Owners were in a very serious financial position at the time.

157. It is common ground that the first three of these matters were not disclosed. The Owners submit that these matters are not capable of being material facts, alternatively that, if disclosed, they would not have induced the War Risks underwriters to decline the risk or to have required different terms.
158. It is first necessary to describe the Greek criminal proceedings.
159. (a) The Sotiriadis Proceedings.

It was alleged that the defendants made false representations so as to induce Mr Sotiriadis to invest money in England in a scheme operated by Templegate Financial Management and one John Billington. The scheme involved a guarantee that at the end of the period of the investment a guaranteed minimum amount would be paid back to the investor. Further, the defendants, including HP and MP, gave Mr Sotiriadis a cheque drawn on Kent Trading Corporation for a sum equivalent to the amount invested and payable on the date on which the investment was to terminate. There was also a guarantee from companies in the Kent Group. Having invested two consecutive sums and duly received back his money, Mr Sotiriadis then invested amounts of £250,000 and US$1 million. However, he only received back £40,000. He was encouraged not immediately to present the cheques from the Kent Group companies. It then emerged that the cheques could not be collected for want of funds, that contrary to assurances that he had previously been given, the investments were not fully guaranteed by FIMBRA and that Templegate was a shell company. He alleged that part of his investment had been retained by the defendants. His complaint initiated the criminal proceedings.

160. The allegations were strongly denied by HP and MP.
161. The indictment was dated 26 March 1992. On 17 January 1994 by which time the proceedings were in the hands of the Greek investigating judge, the latter granted bail to HP in the sum of GDr 3 million (about £8,000 at the current rate of exchange) but prohibited him from leaving Greece and he granted bail to MP in the sum of GDr 1 million (about £1,200) later reduced by half, but subject to a requirement to report to the local police. The matter was still under investigation by the Greek judge at the time of the placing. Events after the explosion ultimately led to the Council of the Court of Appeal, by an order of 15 February 1996 setting aside the indictment and revoking the restrictive orders on HP and MP. In the meantime, Charles Russell, London solicitors, acting on behalf of HP, had obtained from the Serious Fraud Office in London ("SFO") a letter dated 30 March 1993, written by the Case Controller responsible for a prosecution of one John Billington and others who were about to go on trial (4 May 1993) on charges of fraudulent trading under the Companies Act 1985. That letter stated:

"Your client, Mr Petrakakos, has asked me to write a letter explaining what the Serious Fraud Office is and to describe the assistance he has given in the investigation of the affairs of John Billington and his various companies and Martyn Ryder and Tony Locke and their various companies. I am aware that it is Mr Petrakakos' intention to disclose this letter to Greek Judicial Authorities and I am happy for him to do so.

I am the nominated Case controller with responsibility for the investigation into the affairs of Billington, Ryder and Locke the trial of whom on charges of fraudulent trading under the Companies Act 1985 is due to commence on 4 May 1993.

I have explained to Mr Petrakakos that I am unable to reveal specific details of our investigation to him however I can confirm for the purposes of this letter that Mr Petrakakos is regarded by this office as a victim of a fraud perpetrated by Mr Billington. Mr Petrakakos it is hoped, will give evidence on behalf of the Crown during the course of the trial."

162. HP relies on this letter, as well as on the subsequent decision of the Greek Court of Appeal, as evidence of his innocence of the allegations made by Sotiriadis and also as part of the materials which, had there been disclosure in April 1994 of these criminal proceedings, would have been included in the brokers' presentation to the underwriters. It is submitted that if the underwriters had been shown the Serious Fraud Office letter they would have been reassured sufficiently to accept the risk. Further, the underwriters would also have been informed that at the English criminal trial Mr Sotiriadis had been called as a witness by the defence and yet John Billington had been convicted of fraudulent trading and other charges of dishonesty and imprisoned for four years. Subsequently, Sotiriadis was convicted by the Greek Court of Appeal for bringing false charges against HP and MP. It is, however, unclear on the evidence whether this had occurred by the time of the placing, although it seems likely that it had. It was HP's evidence that he and his companies had suffered losses of over $2 million in consequence of the Templegate operations.

(b) The Angelopoulos Proceedings.

163. The allegations against HP were similar to those made by Sotiriadis and arose out of the Templegate scheme. The indictment was dated 12 September 1991. HP and Mr Mouroutis had encouraged Mr Angelopoulos to invest US$30,000 in the Templegate scheme against a post-dated cheque for US$31,500 drawn on Kent Trading Corporation. The money was duly returned to Angelopoulos at the end of the investment period but he was then persuaded by HP to reinvest $46,000 for a further period, starting in 1990 by representations that the investment was backed as to 100% by FIMBRA and by a post-dated cheque from Kent Trading Corporation. That investment was totally lost. The cheque was dishonoured. Eventually, on 29 September 1995, the Three Member Court of Fist Instance acquitted the defendants.
164. (c) The Overseas Agency Proceedings

The indictment was dated 6 April 1993. The charges were in substance similar to those in the Sotiriadis and Angelopoulos proceedings. They involved representations by HP that Kent companies were solvent and 100 per cent guaranteed by FIMBRA, that cheques provided by HP were backed by funds and that the money invested would be used for purchasing real property. It was alleged that, when the investment of US$50,000 was lost because the cheque on Kent Trading Corporation could not be met, the money must have gone into the possession of HP. By a judgment of 7 June 1994 the Council of Judges Court of Misdemeanours considered the case prepared by the Public Prosecutor and decided that there was not sufficient evidence to justify a prosecution. The Public Prosecutor appealed, but by a decree of 21 October 1994 the Court of Appeal rejected the appeal and found the defendant not guilty.

165. (d) The Alliance Trust Proceedings.Again, the facts underlying the charges arose out of the Templegate scheme.

Again, the investor, a Mr Dionysiou, was unable to recoup the investment because the cheque for $20,000 provided by HP was dishonoured. The Three Member Magistrates Court of Piraeus found that HP was not guilty following the recommendation of the Public Prosecutor. Eventually, on appeal, by a decision of 23 January 1995 of the Court of Appeal of Piraeus that decision was upheld. That decision was further appealed to Supreme Court and in turn upheld.

166. Thus, at the date of placement of the War Risks cover all four proceedings were in being. In proceedings (b) and (c) it had not yet been decided whether there should be a prosecution. In proceeding (a) the matter was subject to judicial investigation and HP and MP were subject to bail restrictions. In proceeding (d) the decision that the charges should not proceed to trial was being appealed.
167. The proceedings in Panama were commenced on 25 July 1993 in the Maritime Court with the arrest of the North Rock as security for a claim for US$ 770,400 by Atlantic Light Corporation, a company controlled by Mr Robayna. The claim was advanced against Kent Group companies and Kent Trading Corporation legally represented by HP as their controlling manager. It was alleged that the defendants were liable for fraudulent trading in as much as they had caused damage to the claimant by fraudulently endorsing the insurance policy relating to the "Ivory K" to the claimant without disclosing that it had already been endorsed to the benefit of Nedship Bank. Further, it was alleged that the defendants had unlawfully transferred the property rights in the North Rock to Wembley Shipping Company in order to defraud creditors, in particular the claimant which had advanced funds to discharge the debts of that vessel.
168. At the time of the placing the North Rock was still under arrest and the transaction through Capt Prekas had not yet materialised.

Excessive Valuation of the North Star

169. It is common ground that the vessel's market value charterfree in sound trading condition, fully equipped and with class maintained was in the order of US$1.25 million to 1.4 million, according to whether she was sold with special survey complete. It is also agreed that

"The open market valuation of the North Star was not substantially affected by the charterparty to Negev Star (originally concluded in July 1992, extended for a further year on 21 April 1993, and renegotiated in November 1993 to 48 months to conclude in December 1997)."

170. The scrap value was $95,000 to $1,050,000. The insured value was $4 million. The Insurers submit that this was far in excess of a "disparity consistent with prudent ship management": see The Grecia Express [2002] 1 Lloyd's Rep 669 where at paragraph 479 I said this:

"I conclude that where an owner genuinely and reasonably believes that his vessel ought to be insured for a particular value which is in excess of the market value, he does not have to disclose the true market value, for, given his reasonable perception, the disparity is not capable of suggesting moral hazard. As a matter of logic, it is nothing to the point that the insurer is thereby deprived of the opportunity of investigating why there is a disparity. It is only where the disparity cannot be justified on reasonable commercial grounds that it ought to be disclosed. If insurers wish to secure the right to investigate for themselves the justification for any significant disparity, they have the simple remedy of requiring the assured to provide an independent market valuation and to explain any disparity in the insured value."

171. The Insurers submit that the Owners do not satisfy that test and disclosure of the disparity ought to have been made.
172. As to all the matters relied upon in the Greek and Panamanian proceedings, the Insurers rely in relation to materiality on the general approach taken by this court in The Grecia Express, supra, and approved by the Court of Appeal in Brotherton v. Aseguradora Colseguros SA (No.2) [2003] 1 Lloyd's Rep 746. In particular, the would-be assured is under a duty to disclose all matters which, as tested at the time of presentation of the risk to underwriters, were material to the risk, either as to its magnitude or as to the moral hazard involved in writing it or were material to the decision to the underwriter's decision to insure. In the Grecia Express I said this at paragraph 282 and 283: with regard to:

"allegations of criminality or misconduct going to moral hazard which had been made by the authorities or third persons against the proposer and are known to him to be groundless;

As to case (1), if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact that the allegation is unfounded cannot divest the circumstance of the allegation of the attribute of materiality. For example, if the proposer had told the insurer of the allegation and also that it was unfounded, the insurer might well have preferred not to trust the word of the assured or might have preferred to conduct his own investigation before agreeing to underwrite the risk."

173. In Brotherton, supra, Mance LJ. at paragraph 22, observed that, with regard to the case where the potential assured has been accused of an offence or other conduct of which he knows that he is innocent:

"I add however that, in this situation, the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured's knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement. That would of course be a matter of fact and evidence."

174. In this connection, as Mance J. observed in Insurance Corporation of the Channel Islands etc v. The Royal Hotel Ltd [1998] LRLR 151 at p157.

"Materiality does not depend on what the ordinary insured would or would not be expected to disclose in the practical world. It depends upon what a prudent underwriter would, if he knew it, take into account when assessing the risk."

175. Further, it is necessary to consider the whole picture of the risk and of the assured which full disclosure would have conveyed to the underwriter. As I put it in The Grecia Express at paragraph 318:

"There is no doubt that in combination facts which, taken in isolation might not be material, can become material."

176. Thus, whereas disclosure of some material facts might not have caused a prudent insurer to decline the risk, such an insurer might have taken a different view if there had been disclosed to him the whole picture known to the assured. However, as indicated in The Grecia Express, at paragraph 292:

"In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge would normally be non-disclosure of a material fact."

177. The attribute of materiality of allegations of relevant criminal conduct or fraud, whether in pending criminal or civil proceedings, is that they call in question the commercial integrity of the assured: CTI v. Oceanus [1982] 2 Lloyd's Rep 178 at p198, a matter inescapably relevant to the underwriters' decision whether to accept the risk.
178. The Insurers rely on the expert evidence of Mr Hall that the pending Greek proceedings and the allegations in the Panama civil proceedings would have caused a prudent war risks underwriter to decline the risk in any event but particularly having regard to the fact that the assured was a new client, the premium was extremely small – some US $2000 – and the market at the time was very firm. Mr Hall, who had forty years experience in underwriting, including marine war risks policies was firmly of the view that moral hazard was as relevant to the writing of war risks as of hull and machinery risks.
179. The Insurers submit that the evidence of Mr Posgate, the expert on materiality called by the Owners, should be rejected as untenable because it was illogical. It was his view that moral hazard had no part to play in war risks underwriting. However, that failed to take account of the fact that the risks insured by the Institute War Clauses include loss caused "by any person acting maliciously". That would give ample opportunity for dishonestly procuring an apparently innocent loss. However, Mr Posgate's active underwriting career having been concluded in 1982, he would have no experience of writing war risks on this form which was introduced in October 1983. Prior to that time the London war risks market standard cover included the risks excluded from the hull policy by the Malicious Damage Clause – "loss, damage, liability or expense arising from (a) the detonation of an explosive (b) any weapon of war and caused by any person acting maliciously or from a political motive", a more qualified ambit of cover than that provided under the Institute War Clauses applicable to the policy in this case. This, it was suggested, could have coloured his evidence.
180. The Insurers further rely on the fact that Mr Posgate's general views on materiality were so eccentric as to render all his evidence unreliable. His evidence included the following passages in cross-examination:

"Q. Now presumably, you would also accept that, if an insured had recently been charged in criminal proceedings with fraud and had, in fact, committed that fraud, then that too would be a material matter for underwriters to know?

A. Not on the War policy; it would be on the Hull risk policy.

Q. Surely it would be relevant on any policy in relation to which you may have dealings with that insured?

A. I don't think so because the War policy is outside the control to 99% of the assured. So to me, it is irrelevant. His bank require it and I am happy to give it and the assured is not at risk of scuttling that boat to any reasonable amount."

181. There was also the following passages in answer to the Court:

"Q. What I do not quite understand from your evidence is why you exclude, which I think you do, the prospect that he will use a means of causing water to enter the hull of the vessel which has exactly the same effect, namely the sinking of the ship, but which is a means which, because of the division of Risk between the Hull and Machinery policy and a War Risks policy, technically falls under the War Risks policy, not under the Hull and Machinery policy. I just do not follow that?

A. I follow your argument, my Lord. All I can say is that statistically, over my experience since 1953, it has always been the favoured choice because it is easier for the dishonest owner or scuttler to choose the Hull Risk. It is only a new fashion over the last few years that we have had these few War cases. Before, my Lord, we never had a War scuttling. There has never, up until now, been a successful War scuttling. Maybe the shipowners were not bright enough, I don't know. It has always been a possibility, my Lord. All I can say is 99.5% of all decent scuttlings have been Hull Risk; they haven't been War Risk, but why, you will have to ask the dishonest shipowner? I don't know, my Lord.

Q. I think what you are saying – and correct me if I am wrong, I get this from your statement in your report – is that the opportunity is presented by a War Risk policy because of the way in which the Risk is defined. The insured Risk as defined on the War Risks policy, being compared to the way it is defined for the purposes of a Hull and Machinery policy, is more circumscribed?

A. Yes.

Q. So the area of potential loss-causing activity is itself more circumscribed. Do you put it higher than that?

A. No, my Lord, but it may become a fashion now for a scuttling to be one by War Risk. I don't put it higher than that, my Lord."

182. Later in his evidence he said this:

"Q. So even though, as we have seen, there are various ways a dishonest assured could manufacture a total loss, could manufacture a partial loss, could manufacture exaggerated claims under his War policy, the fact that he is dishonest is of no interest to you whatsoever?

A. It is of no interest to me, but it is of interest to the primary policy; this is an exclusion policy. It is of interest to the leaders of the primary assurance and I would wish to satisfy myself that the primary assurance has gone into those points. I am not interested.

Q. So is what you are saying this: that provided the Hull and Machinery underwriters have been fully informed of the assured's dishonesty?

A. I would have assumed they had; I would not have asked. I can't go around each time I write a War Risk and say, "Look, old boy, did you ask any pertinent questions?" If it is a respectable Hull Risk underwriter, he would have done so.

Q. My question is: if the Hull and Machinery underwriter has not been told various facts relating to the assured's dishonesty, then in those circumstances you would regard those as matters which you should be told?

A. No, I would not.

Q. So your position remains that, however dishonest the insured may be, it is a matter of no concern to you as a War Risk underwriter. Is that right?

A. Put that way, yes."

183. He also said this:

"Q. So the reason why, for example, in this case, you say that the fact that there were criminal proceedings afoot in Greece in which allegations of dishonesty had been made against the Petrakakos brothers, the reason you say that would not concern you as a War Risk underwriter is that because no facts relating to dishonesty of the assured, however clearly established, would matter?

A. Ah, well, I think I would go further. Considering there had been no proof, I don't think that it is material either way, but it is certainly not material to the War underwriters. The only marginal question is: is it material to the All Risks underwriter? I doubt it is. The Greeks are very litigious.

Q. Going back to my question: your evidence is that none of this would be material to a War Risk underwriter?

A. None of it would be material to the War Risk underwriter.

Q. That opinion does not depend on what is or is not said in the Serious Fraud Office letter; it is simply your general view?

A. No, I think that is irrelevant."

184. And in a later passage in answer to the Court:

"Q. So you do not think that an underwriter who cannot prove the scuttling ought to take a nondisclosure defence?

A. I don't like it. It is the most unattractive part of underwriting. It is very unattractive.

Q. Why do you not like it?

A. Because we don't ask the questions.

Q. No.?

A. And we are in trade.

Q. Yes?

A. Trade, not a profession. I don't like it. In trade, you tend not to ask; you are greedy for the money and to then say, 'Ah, but I can get you because you did not disclose this', to me has always been very unattractive, and I don't want to come to that."

185. Finally, there was the following passage in answer to questions put by the court:

"Q. What I wanted to ask you about was this: you did express, when you were giving evidence, in the course of cross-examination and in answer to questions I put to you, a view in relation to reliance on defences of non-disclosure which is a view which, speaking for myself, I have never previously heard expressed by any Lloyd's underwriter in this Court?

A. I think that is to the regret of Lloyd's, my Lord.

Q. Is this a view which you have long held?

A. Yes, my Lord and you make money – I attracted – I had by far the largest – I had over half the world's War income. Over half the world's Total Loss income; over half the world's kidnap and ransom, War income. I am in trade. The trouble with Lloyd's is it thinks it is a profession. It is not, it is trade.

Q. During this period, this very, very successful period which you had, particularly specialising in War Risks cover and Total Loss cover, did you, in fact, ever take non-disclosure points?

A. I never took a non-disclosure point.

Q. The whole time you worked as an underwriter?

A. The whole time, because it was known I had a very fast quick queue and, as I think I said, I did not ask many questions and, if I did not ask questions, it was my fault."

186. Mr Posgate was further of the opinion that because in each case the value had been agreed by the underwriter, excessive over-valuation was not a material fact.
187. The Insurers submit that, as Mr Posgate was prepared to agree, there are available ways of faking a claim for a total loss or a partial loss under a War Risks policy, although the scope for fraud may be narrower than under the hull and machinery policy. As long as there are available methods for fraudulent claims, it is submitted that moral hazard is a relevant and material consideration for an underwriter of a war risks policy.
188. The Owners submit that, on the expert evidence of Mr Posgate and Mr Hall, it is wholly incredible to suppose that any war risks underwriter would regard moral hazard considerations as a significant factor when considering whether to write a risk. In particular, Mr Hall's evidence was that in all his 41 years of underwriting war risks to his knowledge he had not had a single fraudulent total loss claim brought under a war risks policy. He further accepted that apart from the "person acting maliciously" peril, there was little or no scope for making a fraudulent claim for a total loss. In cross-examination he said this:

"Q. So what I suggest, Mr Hall, is that, in the context of a war risks policy, so far as total loss claims are concerned, the reality is that any moral hazard concern on the part of the underwriter can only really be directed at the risk that the owner might bomb his own ship in order to make a fraudulent claim under clause 1.5?

A. I would agree with that; either total loss or partial loss."

189. In re-examination he said that an owner bombing his own ship was the most likely circumstance of acting maliciously.
190. It is submitted, rightly in my judgment, that it would not be profitable for a fraudulent owner to procure his vessel to sustain a partial loss because, as Mr Hall accepted, the limit of indemnity would be the actual cost of repairs and that would have to be proved.
191. It is submitted on behalf of the Owners that, although fraudulent claims under a war risks policy are theoretically possible, that risk has little practical significance for underwriters because it is very remote in view of the scope of cover. For this reason, as Mr Goldstone puts it on behalf of the Owners, moral hazard considerations can play only the most peripheral role in war risks insurance and certainly the standard for materiality in relation to matters pertaining to moral hazard under such insurance must be a great deal higher than in relation to hull insurance. The facts said to go to moral hazard must point directly to a significantly heightened danger of a fraudulent total loss claim being advanced, such as a previous history of vessels lost by bombs.
192. On this basis it is submitted that the nature of the allegations in the Greek proceedings had nothing to do with shipping or insurance and was not such as would suggest that the Owners would bomb their own ship.
193. In any event, full disclosure would necessarily have involved an explanation that HP and MP were entirely innocent of the matters being investigated in the Greek criminal courts, the production of the SFO letter of 30 March 1993 and the further information that John Billington had been convicted and sentenced to four years imprisonment. Mr Goldstone draws attention to the substance of Mr Hall's evidence that, if previous allegations of fraudulent insurance claims had been made against the assured, and they were disclosed, he would not accept the risk unless there was put before him such independent evidence from a third party as satisfied him on investigation of it that the allegations were untrue. I interpose that he said that he would not be prepared to rely on the assurance of even the most reputable London market broker as sufficient to allay his concerns.
194. On the basis of that evidence Mr Goldstone put forward the SFO letter as evidence which, if produced at the time of placing, would have sufficiently satisfied the prudent underwriter of the innocence of HP and MP since it was independent evidence from a reliable source. He invited the court to reject Mr Hall's evidence as to that letter. Mr Hall said that it would not have satisfied his concerns about the proposed assured, first because it was unclear whether it referred to HP or MP and secondly because he would not have known what the impact of the letter was in relation to the Greek proceedings.
195. The Insurers similarly rely on Mr Hall's view as to the materiality of the Panama civil proceedings. These involved allegations of fraud, although not in relation to a claim on underwriters.
196. On behalf of the Owners, Mr Goldstone submits that if there had been disclosure of those proceedings, underwriters would also have been informed that they represented one facet of complex litigation in Panama at the suit of a former business associate, Mr Robayna. Further, they would also have been told that the allegation of a fraudulent transfer of the vessel was groundless – which could have been strongly supported by the fact that the claimant had at no stage attempted to defeat the title or mortgage of the bank – Guiness Mahon – who had sold as mortgagee. As to the allegations in respect of the policy on the Ivory K, it could be demonstrated that the insurance proceeds of the Ivory K (about US$10 million) far exceeded the indebtedness to Atlantic Light of about US$2 million and the amount of the loan from Nedship (about $3.5 million). It is submitted that Mr Hall's evidence should be rejected on the grounds that no underwriter would be interested in on-going litigation between Greeks who were, according to Mr Posgate, known to be "notoriously litigious".
197. The Owners also criticise Mr Hall's evidence to the effect that underwriters would not have accepted the risk because the market was so hard. Materiality could not depend on that kind of extraneous circumstance.
198. It is submitted by the Owners that mere cash flow difficulties of the Owners were not material to be disclosed. They would not be relevant to the war risks cover. In any event such a duty to disclose would be impracticable in the modern shipping industry. Mr Hall's evidence was that he was unable to recall a single case of a shipowner disclosing details of cash flow difficulties when applying for war risks cover.
199. The Owners submit that their previous defaults in premium payments in relation to other policies were not material facts. They rely on a recent decision of Mr Richard Siberry QC sitting as a Deputy High Court Judge in this court in The Martin P [2004] 1 Lloyd's Rep 389, to the effect that facts going only to the credit risk of the potential insurers are incapable of being material. I shall have to consider that authority in more detail later in this judgment. The Owners support this submission by reference to section 53(1) of the Marine Insurance Act 1906 which provides:

"Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium."

200. Further, Mr Hall could not remember any particular case where there had been default in payment of a war risks premium. However, I interpose, Mr Hall did regard ability to satisfy the premium due to the modest amount, under a war risks policy, as a major consideration. In practice, the underwriter would not look to the broker and he could have to write off the debt.
201. As to the alleged excessive overvaluation of the vessel, the Insurers submit that the fact that only a few days before the risk was placed the vessel had been sold for US$ 4 million ought to have been disclosed particularly against the background of the serious cash flow problems of the Owners. Mr Hall made the point in his report as follows:

"A prudent underwriter certainly would wish to know that there was such a large differential between the sale price of US$1.4 million and the insured value of US$4 million, and this is something that should have been disclosed. I accept there is nothing unusual in there being a differential, but I would expect this to be in the region of 10-15%, possibly somewhat more, but certainly not a multiple as here. Such a differential raises a clear concern as to moral hazard. In blunt terms, the insured would or might have a financial interest in losing the vessel."

202. Mr Hall repeated in his evidence his point about the need to disclose such a large differential between the insured value and the actual value. He said that an underwriter would not raise an eyebrow as to the insured value of a vessel of this size and age being US$ 4 million. It is submitted that no reasonable commercial justification for such a large differential has been put forward. In particular, the fact that the Owners had spent US$ 3million on the vessel immediately after her purchase in 1989 would necessarily have already been taken into account in the open market valuation which has been agreed as not in excess of US$1.4 million. Similarly, it is agreed that the current time charter would not substantially affect the open market valuation. The scrap value would also be taken into account in arriving at the open market value.
203. On behalf of the Owners it is submitted that, on the evidence, they reasonably believed that the vessel ought to be insured for a value in excess of its market value. The value was carried over from the previous year and took into account that, according to HP, about US$3 million had originally been spent on repairs at the time of acquisition and the substantial future charter earnings. It was accepted by Mr Potter, the Colonia-Baltica underwriter, that the insured value might reflect the money which the assured had spent in buying and renovating it and that it would not be suspicious or unreasonable for the assured to wish to reflect in the insured value the fact that the vessel was on a profitable long-term charter, even if the insured value were greater than the market value. Mr Hall accepted in cross-examination that, if a disparity between insured value and market value could be explained by reasonable ship management reasons, that would not be a matter for suspicion. It was also Mr Potter's evidence that an underwriter could be expected to know the market value of a standard type of vessel such as this to within 20 per cent and if they were prepared to agree a valuation of US$ 4million knowing the type of vessel in question and her age, there was no relevance in the differential.
204. In this connection the Owners refer to a passage in Arnould Law of Marine Insurance, 16^th Edn, para 643 which states:

"Cases, however, rarely occur in which the insurers seek to avoid a policy on a ship on the ground that there was no disclosure of the fact that the valuation therein was excessive, because the insurers usually have ample information about the vessel, which enables them to form a fairly accurate estimate of her value. Indeed, in the majority of cases where hull insurance is placed at an excessive value it is probably safe to say that the underwriter is unaffected by non-disclosure of the true value of the vessel. High insured values in excess of the margin regarded as acceptable in Ionides v. Pender are now by no means uncommon, particularly in hull insurance and from the point of view of the premium income which they generate are often looked on favourably by underwriters.

205. A similar approach was applied by Bailhache J. in The Borre (1923) 15 Lloyd's Rep 173 at 176R.

Materiality: Discussion

206. The proposition in the passage from the judgment of Mance LJ. in Brotherton, supra, at p755L cited at paragraph 172 above, that the issues of materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would "have embraced all aspects of the assured knowledge including his own statement of his innocence and such independent evidence as he had to support that by the time of placing" at least as regards the question of materiality gives rise to considerable problems of application.
207. Thus Section 18(2) of the Marine Insurance Act 1906 provides:

"Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk."

208. In this context influencing the judgment of the prudent insurer means influencing the formation of the underwriter's opinion as to the acceptability of the risk in the sense of having an effect on his mind. In other words, the material facts must be such as he would take into account in the course of forming his view about the acceptability of the risk: see Pan Atlantic Insurance Ltd v. Pine Top Limited [1995] 1 AC 501 at page 517 per Lord Goff and 532 per Lord Mustill.
209. If current allegations of fraud in pending criminal or civil proceedings would be material facts relevant to moral hazard in the sense that they would be taken into account by the underwriter in forming a view as to the acceptability of the risk and the proposer is in possession of evidence suggesting his innocence, it must follow that he is under no less a duty to disclose the existence of the allegations as if he had no exculpatory evidence. That is because, even if the exculpatory evidence were available, it would still be for the underwriter to be given the opportunity of taking both lots of evidence into account in forming his opinion: see The Grecia Express, supra, at paragraph 81. It might well be that he would be more likely to form a favourable opinion of the risk if the exculpatory evidence were disclosed to him but that likelihood does not deprive the information as to the allegations of its intrinsic attribute of materiality.
210. So I would hold that in the case of allegations of fraud in the course of pending proceedings, criminal or civil, the attribute of materiality is not diminished by exculpatory evidence. Such evidence would, in my judgment, go only to inducement in relation to which the question would have to be asked whether the underwriter was induced to write the risk by the failure to disclose information as to the material facts and such exculpatory evidence as would probably have been presented with it.
211. As to the submission of the Owners that in the case of war risks insurance moral hazard is a peripheral consideration or of little or no importance, I accept that the scope of war risks cover is such that by comparison with the scope of hull and machinery cover the opportunities for faking an insured loss are somewhat less available under a war risks policy than under a hull policy. Under the latter there is a whole range of opportunities for sinking a vessel in the course of a voyage by operation of her sea valves or by fire or barratry which are not available in relation to a war risks policy. Under the latter, although more limited, the scope for faking an insured loss is not by any means negligible. Loss caused by persons acting maliciously offers a very available opportunity because it provides a facility for fatal damage to a vessel when at anchorage or alongside which, barratry apart, would hardly be available under a hull policy and which can be accomplished without the danger to any crew who happen to be on board which sinking the vessel at sea might involve. Given that under the Institute War Risks Clauses a war risks loss can be suffered without a war or hostilities or terrorism or the use of weapons of war or bombs or other explosives, there is no logical basis for differentiating such cover from hull and machinery cover with regard to moral hazard. The opportunities for a fraudulent owner to cause a total loss of his vessel under a war risks policy are thus, taken alone, sufficiently available to include moral hazard in the ambit of underwriters' concerns relevant to materiality. There are, however, other considerations within the ambit of the moral hazard concern of underwriters. These are the risk that an assured will put forward an untrue account of the circumstances of loss or damage to his vessel in order to support a claim for a partial loss. The financial risk to underwriters would obviously be less than in the case of a total loss, but it would still be present. There might also be the case of an assured failing to disclose that his vessel was trading in a war zone in order to avoid being charged an enhanced premium.
212. In this connection, I must refer to the evidence of Mr Posgate.
213. There are two specific aspects of this evidence which must be taken into account.
214. First, it is clear that Mr Posgate appeared fundamentally to disapprove in principle of avoidance for non-disclosure. He made repeated references to the presentation and underwriting of risks as being analogous to a "market"or "trade", as distinct from a profession. In that environment, his view that, if underwriters believe that they need more information about the assured, they can always ask the brokers and should not avoid the risk written on the information they were given, evidence a misconception of the assured's duty of disclosure of material facts as now settled in Pan Atlantic Insurance v. Pine Top Ltd, supra. In my judgment, his general approach to materiality was such that little weight can be given to his views as to the materiality at the time of placing of any of the specific facts relating to the Owners relied on as material in this case. Those views were coloured by his pre-conceived bias against avoidance for non-disclosure.
215. Secondly, in the period of 21 years since he ceased to be an active underwriter war risks cover has changed in form and substance. Although he had an unrivalled experience of writing war risks cover, that was under the old pre-1983 form. The regime under which he had written war risks cover had been constructed on the basis of the fc & s clause, an exclusion in the standard SG form of hull policy, which had excluded hull underwriters' liability for war risks losses which losses from 1964 had included a Malicious Damage Clause excluding loss, damage, liability or expense arising from:

"(a) the detonation of an explosive (b) any weapon of war and caused by any person acting maliciously or from a political motive."

216. The standard London Market Institute War risks cover had been in terms that it covered the risks excluded from the Standard Form of English Marine Policy by the fc & s clause and loss of or damage to the interest insured by other named perils such as hostilities, war-like operations and mines, torpedoes, bombs or other engines of war. It was only in 1983 that the Institute War Clauses replaced this oblique regime as a free-standing war risks policy covering named perils, including loss or damage caused by persons acting maliciously. Consequently, Mr Posgate's reference to reliance by war risks underwriters on disclosure of material facts having previously been made to the hull underwriter, although not logically sustainable, is a little more understandable. Nevertheless, the obvious defect in this approach is that the fact that a hull policy has been written does not guarantee to a war risks underwriter before whom the risk is subsequently placed that there has not already been non-disclosure to the hull underwriters. Further, the underwriter of a different set of risks is entitled in his own right to disclosure of all facts material to those risks, including the moral hazard involved in writing such risks.
217. It is against this background that I have reached the conclusion that Mr Posgate's evidence on the materiality of the fraud allegations in the pending criminal and civil proceedings, particularly in aggregate, cannot be accepted. By contrast I found Mr Hall's evidence on these matters entirely convincing. Reviewing his evidence as a whole, I am completely confident that in deciding whether to write this risk the prudent underwriter would have been influenced by the allegations of fraud made in the criminal and civil proceedings. In as much as there would have been placed before him exculpatory information, that too would have been regarded by him as something to be taken into account. If, having regard to what was said in Brotherton, supra, and contrary to what I have held, it is necessary or permissible to take the presentation of exculpatory evidence into account in deciding upon materiality, as distinct from inducement, I find that the SFO letter would not have been regarded by the prudent underwriter as rendering immaterial the facts as to the fraud allegations in the criminal proceedings in the sense that all that was hypothetically disclosed, including the exculpatory evidence, would not have influenced the judgment of a prudent underwriter. The prudent underwriter would have been influenced by the whole of the related information and, as indicated in evidence by Mr Hall, would not have accepted the risk.
218. In particular, the SFO letter, while indicating that a Mr Petrakakos, assuming this person to be identified as HP to the underwriter, had given assistance to the SFO in its investigations and tells the reader that the SFO regarded HP as the victim of a fraud perpetrated by Mr Billington and that SFO hoped that HP would give evidence on behalf of the Crown in the course of a trial of Billington, Ryder and Locke on charges of fraudulent trading and due to commence on 4 May 1993. The letter contains nothing which connects those defendants with the allegations against HP in the Greek criminal proceedings. Further, although it states that HP was the victim of fraud and that it is hoped that HP will give evidence for the Crown, it does not state that HP was not fraudulent or dishonest in relation to the Greek complainants or that the Greek proceedings were groundless or that the use of worthless cheques drawn as security on HP's company was an innocent consequence of a fraud on HP or the companies by Billington.
219. Since it was Mr Hall's evidence that he would not have been content to accept the word even of a leading broker that there was an innocent explanation for the allegations of fraud but would have expected to see convincing independent evidence from a third party to that effect, I accept his evidence that the prudent underwriter would not have regarded the SFO letter as going nearly far enough because he was not a trained lawyer and could not judge its weight. The fact that Billington had been convicted of fraud would not add substantially to the contents of the letter for the fraud in question was not shown to be the same as that alleged against HP in the Greek proceedings. Had the prudent underwriter been a trained lawyer he would have known that giving evidence for the prosecution does not necessarily provide a badge of innocence.
220. Accordingly, I find that not only would the prudent underwriter's opinion as to the acceptability of the risk have been influenced by information as to the Greek criminal proceedings, but that opinion would have been adverse to acceptance of the risk even on sight of the SFO letter.
221. The same conclusion applies to the allegations of fraud in the Panamanian proceedings. In relation to those allegations, however, there is no potentially exculpatory evidence emanating from an outside reliable source equivalent to the SFO. In his expert report Mr Hall said this of the Panama proceedings:

"I believe that in this case the arrest and the underlying allegations ought to have been disclosed for two reasons.

Firstly, I understand that in the Panama proceedings, there were allegations of fraudulent behaviour, in particular an allegation that an insurance policy had been dishonestly assigned. I have to say that if I had learned of such an allegation of dishonesty, particularly relating to an insurance policy, I would have refused the risk without a second thought. I would not have wanted to do business with this client for the very reasons relating to moral hazard discussed above. I am confident that any prudent underwriter would do the same.

Secondly, it would be relevant to the financial position of the beneficial owners of that vessel, who I believe were the same as the Owners of the "NORTH STAR". A prudent underwriter, having been provided with this information, would make further enquiries to establish whether this was a one off arrest which had no bearing on the financial position of the proposed insured, or whether it either signified an underlying financial problem or was likely to cause the insured financial difficulties. The outcome of these enquiries would certainly have influenced the judgment of that prudent underwriter.

In reality, given the low premium, high turnover nature of war risk business, although he would ask the broker, I doubt that a prudent underwriter would wish to undertake his own detailed enquiries. I expect he would decide not to take the risk, particularly if the market was firm from the underwriter's point of view which, as I recall, it was in 1994."

222. In the course of his cross-examination Mr Hall said nothing which detracted from this view.
223. I accept this evidence. In my judgment, the prudent underwriter would not have embarked on a detailed evaluation of the complicated facts underlying the arrest of the North Rock or the Panamanian proceedings in general. The kind of cursory consideration to be expected from underwriters of exculpatory information from the brokers with regard to those proceedings would not have led to the allegations of fraud being regarded as immaterial, particularly on the assumption which has to be made, that there had been full disclosure of the Greek criminal proceedings.
224. As to excessive over-valuation of the North Star, the relevant test of materiality is, as I held in The Grecia Express, supra, whether the disparity between the insured value and the market value was consistent with prudent ship management. The evidence of HP was that the insured value of US$4 million under the war risks policy was simply maintained from the previous year and that the hull and machinery insured value of US$4 million to pay US$3 million would have been reduced to US$3 million to pay US$2 million had it not been for the fact that the brokers persuaded the Owners that the extra US$1 million made so little difference to the premium that it was not worth reducing the value insured. The reduced value would have reflected the amount initially spent over four years earlier on refurbishment of the North Star as well as the value of the existing time charter. According to Mr Petrakakos, he had assumed, without discussing the matter with the brokers, that the war risks policy would have the same valuations. However, I infer that at the time of the policy the brokers and therefore the Owners knew that US$ 4 million was the war risks policy value.
225. Although Mr Hall stated that he would accept that there was nothing unusual in a differential of 10-15 per cent above market value and that an underwriter could be expected to know very roughly the market value of standard types of vessel such as the North Star and further that an insured value of US$4 million would not have raised an underwriter's eyebrow, he was adamant that a prudent underwriter would have wanted to know of the very large differential between the sale price of a vessel struck a few days before the risk was placed and the insured value.
226. That which renders excessive over-valuation material is the fact that in general the greater the excess over market value the greater will be the temptation to advance a fraudulent claim. However, the market value takes account of the current condition of the vessel and may be increased but only slightly by a medium term time charter. The current condition of the vessel is the result of the owners' previous expenditure on maintenance. It is not unreasonable in terms of prudent ship management that an owner would wish to protect his original maintenance expenditure and the benefit of an on-going charter by placing an insured value which was at a level reflecting his discounted earlier capital investment as well as the future net revenue to be derived from the time charter. Accordingly, a disparity with market value which was no greater than roughly reflected those components would not normally be treated as material. To the extent that Mr Hall's evidence was simply based on the extent of the disparity it cannot logically be accepted. Given the cost of the initial refurbishment which HP put at US$3 million and the value of the net revenue to be derived from the charter, I am not persuaded that an insured value of US$ 3 million would be outside the range of what was consistent with prudent slip management, a conclusion consistent with HP's evidence as to his original intention with regard to the hull and machinery cover. It is, however, the additional US$1 million cover which went beyond that level and was effected only because it was the previous year's level and with regard to the hull and machinery cover. To that extent the value was for that reason speculative as distinct from reasonably protective.
227. Taken alone and alongside the contemporaneous sale of the vessel for US$1.1 million as is and US$1.4 million with Special Survey complete, this was therefore a material fact and certainly taken in conjunction with the Greek proceedings and the Panamanian proceedings it should have been disclosed.
228. Mr Hall was not strongly of the view that an owner's cash flow difficulties were generally to be regarded as material facts, but he considered that the cash flow problems of the owners in the present case were so severe that they ought to have been disclosed as going to moral hazard. So also should the Owner's defaults in payment of the hull policy premiums.
229. Whereas there will no doubt be cases where an owner's cash flow problems need not be disclosed, there are undoubtedly other cases where they are so serious, as where the owner is almost insolvent, that they may become material because of the risk of the owner's falling into the temptation of making a fraudulent claim. Mr Hall identifies in paragraph 14 of his report particular features of the Owners' financial predicament which cause him to conclude that the latter ought to have been disclosed. Further, in such circumstances the owner might default in payment of the premium.
230. It is necessary to approach this issue with some caution because, on the evidence of Mr Hall, disclosure of routine financial information about Owners would be abnormal. Further, there is authority to the effect that late payment of premium or failure to pay premium under a previous policy is in itself not material to the risk under a hull and machinery policy. In The Martin P [2004] 1 Lloyd's Rep 388 at paragraph 228 Mr Richard Siberry QC, sitting as a Deputy High Court Judge held as follows:

"My conclusion is that late payment or failure to pay premium under a previous policy is not in itself material to the risk being insured under a H&M policy, and therefore not disclosable as such. It may be relevant to whether or not the new insurer will be paid promptly and without any hassle, but that does not make it a material fact for the purposes of MIAA, s18. It is MIA, s.53(1), together with policy terms such as the premium warranty, rather than s.18, that provide the insurer with protection in the event his insured proves to be a serial premium payment defaulter. I am reinforced in this conclusion by the evidence as to how unusual it would be to disclose past premium payment record, and the absence of any inquiry in relation thereto in the Argonaut Questionnaire (notwithstanding the presence of other inquiries regarding previous insurance). Given the apparent prevalence of late premium payment in the marine market, I do not think the rarity of such disclosure and the absence of such inquiry can simply be attributed to reliance on the brokers to vet bad payers out."

231. It is to be observed that in that case there were present both a brokers cancellation clause and a premium warranty clause. Mr Siberry also relied on section 53(1) and on the rarity of disclosure of owners' past premium payment record.
232. The risk that premium will not be paid on time or at all falls neither within the scope of a matter going to the magnitude of the insured risk nor normally, of a matter going to moral hazard. It goes exclusively to the payment of consideration for the underwriter assuming the risk. The availability of a right of recourse against the broker under section 53(1) of the 1906 Act does not necessarily result in such prior premium defaults being incapable of the attribute of materiality, for the underwriter's opinion as to the acceptability of the risk may be affected by the prospect of his having to rely on his right of recourse against the broker, which may be commercially undesirable, particularly in the case of a hull and machinery policy for which very substantial amounts of premium may be payable.
233. Further, section 18(2) of the 1906 Act is sufficiently broadly worded to include circumstances which do not go to the magnitude of the insured risk, but include the risk that the insured may act in breach of the duty of the utmost good faith and therefore of the contract of insurance in advancing a bogus claim. Accordingly, if the latter risk is such as to found a duty of disclosure, there would have to be something in the wording of the sub-section which differentiated the risk of the assured's breach of contract by non-payment of the premium if that eventuality were to be treated as incapable of amounting to a material fact and therefore of founding a duty of disclosure. But the wording does not indicate any such distinction. I would therefore hold that there is no reason in principle why facts suggesting the risk of premium defaults should never be capable of amounting to material facts. It may be, however, that it will only be in rare cases that it could be shown that non-disclosure of previous premium defaults would have induced an underwriter to accept the risk, particularly, having regard to his right of recourse against the broker under section 53(1) of the 1906 Act.
234. I would therefore not go as far as Mr Siberry in The Martin P, supra, in holding that previous premium payment defaults are incapable of amounting to material facts in any circumstances.
235. In the present case it is, in my judgment, necessary not to lose sight of the fact that the previous record of premium payment defaults and the insurers' cancellation of the hull policies were but the consequence of the extremely difficult cash flow problems currently confronting the Owners.
236. It might well be said that, by reason of the right of recourse under section 53(1) and of the very small amount of the war risks premium, the risk of non-payment of the premium would, taken alone, hardly have any influence on the underwriters' decision to accept the risk. Even so, it is difficult to accept that it would have had no influence on the underwriter's decision, for the reason that had there been disclosure he might well have insisted on the conclusion of a premium warranty clause in the policy. However, I accept the evidence of Mr Hall that, when taken together with other facts which were material to be disclosed, such as the pending Greek and Panamanian proceedings and the excessive overvaluation of the North Star, both the very serious financial circumstances of the Owners and the previous cancellation of their policy for non-payment of premium, which was really an inseparable facet of their financial problems, were material to be disclosed particularly because of their relevance to moral hazard as distinct from the risk of non-payment of premium. The more serious the financial predicament of the Owners the greater was the moral hazard risk to which the Greek and Panamanian proceedings were relevant.
237. I therefore conclude that in this case there was a failure to disclose material facts. The Greek and Panamanian proceedings taken alone were in themselves material as was the excessive valuation under the policy. The serious financial situation of the Owners and the previous policy cancellation and record of premium defaults were also material as relevant parts of the general condition of the Owners which went to evaluation of the potential moral hazard exposure of the insurers.

Inducement

238. The Insurers rely on the evidence of Mr William Tobin, the deputy marine hull underwriter employed by Colonia Baltica Insurance Management which was the underwriting manager for the third and fourth defendants who operated a joint venture in equal shares and who were joint leaders on the war risks policy with Sphere Drake. Mr Tobin was deputy to Mr Keith Potter, who was the chief marine underwriter. They would discuss new policies and refusals of risks. Mr Tobin accepted the North Star war risks cover in this case.
239. The Insurers also rely on the evidence of Mr David Hewitt, deputy marine hull underwriter at Sphere Drake. He accepted the North Star war risks cover on behalf of the first and second defendants.
240. Mr Tobin's evidence as to the fraud allegations is encapsulated in the following evidence in cross-examination:

"Q. And you proceed on the basis that it is reasonable to suppose that there might be some substance in those charges if they had led to criminal charges being brought?

A. That's correct, yes.

Q. Unless you can be satisfied that there is no substance to the charges, you may not or you might not insure the applicant?

A. No, the fact that there are serious allegations would be enough for me considering a new potential assured. The fact that the allegations were and still are in existence and ongoing, that would have been the end of the story as far as I am concerned. I am not interested in whether these allegations are true or not, insofar as the fact that there are allegations of fraud is the all-important issue as far as I am concerned.

Q. Let us take it step by step, Mr Tobin. The relevance of the allegations, you have just agreed, is that they raise a concern that there may be some substance in the charges, because if somebody is the subject of criminal proceedings, then you work on the basis that there may be some substance to that: that is your working assumption?

A. Yes, part of it, yes.

Q. So if you can in fact be satisfied that there is no substance to those allegations, then in those circumstances which maybe unusual, there is no difficulty, but you would need to be satisfied?

A. I would not have entered into a discussion any further with the broker had he advised me that there were allegations of fraud. I wouldn't have been interested in going any further to discuss the rights, wrongs or where with all as far as those particular allegations are concerned.

Q. So your position is that you would have an entirely closed mind?

A. Absolutely, yes.

Q. It does not matter what information is provided to you?

A. I know my management at that particular time would not have been happy had I entered into a contract knowing that there were serous fraud issues with that issue and nor indeed would I have been happy to enter into a contract with somebody who had ongoing serous fraud allegations."

241. He was cross-examined about his reaction had he been shown the letter from the SFO in the course of the placing. He would have read it but he would not have been prepared to discuss the allegations with the broker and it would not have persuaded him to accept the risk. His evidence is exemplified in the following exchange:

"Q. What I suggest to you, Mr Tobin, is two things: I suggest first of all that if a broker had asked, you would have extended the courtesy of a discussion and I suggest secondly that the exceptional circumstances of this letter being as it is, a representation from the premier prosecuting authority in England and Wales, being provided after what must have been a thorough investigation makes this a quite exceptional case and whatever the ordinary position of your company, in the light of this letter you would have been prepared to grant this insurance?

A. No. This as I say, this is one issue of a number of issues which were ongoing with the assured and all the broker would have said is one issue seems to have been addressed and there are also X many issues still ongoing unresolved. So this really would not be a discussion, a major discussion point. The fact is that at that particular time there were ongoing allegations still applying in Panama and Greece and that would have been enough, as far as my discussions are concerned."

242. Mr Goldstone, on behalf of the Owners, has criticised Mr Tobin's evidence having regard to an earlier answer he gave in cross-examination that he would always be prepared to listen with an open mind to what a broker had to say in presenting a risk. It is submitted that his evidence wholly failed to give any good reason why, having regard to the SFO letter, he would have declined to write the risk. It was merely an unreasoned assertion.
243. Mr Keith Potter, who was Mr Tobin's immediate superior but who had not been consulted in relation to the war risks cover granted to the Owners in April 1994, gave evidence substantially consistent with that of Mr Tobin:

"MR GOLDSTONE: Very well, Mr Potter. The position is when you made your statement you were unaware of the Serious Fraud Office letter?

A. That is correct.

Q. So for the last three years you have been proceeding on a certain basis. That basis is that the Petrakakos brothers have been charged with fraud and you are unable to form any view as to whether there was substance behind those allegations, and on that basis you would not have granted the insurance?

A. That is correct, my Lord.

Q. I suggest to you that that view has become entrenched in your mind, is that right?

A. That view is a view that I have held for quite some time, my Lord. I don't wish to deal with anyone that has either been allegedly, has allegedly committed fraud, or has been proven to have committed fraud. So far as I'm concerned, that is not an area that I would wish to discuss with a broker. If that information was given to me I would not carry on with the conversation.

Q. The point I am putting to you, Mr Potter, is that for the last three years you have been proceeding on a certain basis, and that it is now very difficult for you to approach the Serious Fraud Office letter with an open mind, is that right?

A. No, I don't agree, my Lord. I can only repeat that so far as I'm concerned, fraud is fraud whether it's proven or not, and the number of instances of fraud being advised to an underwriter, I would imagine, would be very, very few. If they were advised I can see absolutely no reason to even consider the risk."

244. Later in his evidence there was the following exchange:

"Q. So the fact that the Serious Fraud Office say that the Petrakakos brothers are innocent and the fact that Mr Billington is convicted of the fraud, you say would have made no difference?

A. That is correct, my Lord.

Q. I suggest to you, Mr Potter, that that is not true, and that the true position is that you would have appreciated immediately, had you been told those facts that this was an exceptional case. And I suggest to you that in those circumstances you would not have turned around to Hoggs and refused the cover because it would have made you appear quite unreasonable?

A. It would have made no difference to me, my Lord, I would still not have written the risk."

245. Further, Mr David Hewitt, who was unable to give evidence due to ill health, said of the Greek criminal proceedings in his supplementary witness statement:

"I could make no assessment of the strength of the fraud allegations in Greece or their likelihood of success. The number of different proceedings would itself have struck me as significant and led me to the conclusion that there must be something wrong somewhere to have generated so many claims. The allegations of fraud, although they had nothing to do with either shipping or insurance, would still have been of significance to me as undermining the character and trustworthiness of the people I was being asked to insure.

I would have considered the letter from the Serious Fraud Office, but do not believe that this would have affected my decision. The letter does not say which of the Petrakakos brothers it is concerned with and it is only commenting on the proceedings which the Serious Fraud Office is intending to bring against John Billington in England. Although it appears to be intended that the letter will be shown to the Greek judicial authorities, it does not seem to me to comment upon the allegations against the Petrakakos brothers in Greece.

The premiums for war risk cover are, as I have said, miniscule. At a rate of 0.5%, for example, a total loss would take thousands of risks to recoup, from a financial point of view, and I would simply not have taken a chance with these owners having heard of the fraud allegations and, as stated in paragraph 23 of my First Statement, I would simply not have taken the chance.

Realistically, I would not have considered these allegations in isolation. I would also have had in mind the allegations in Panama. Any single fraud is a serious matter but in this case there was also the fact of the combination of the allegations in Greece and Panama. I would have doubted whether this could have been coincidence."

246. As to the Panamanian proceedings, Mr Hewitt had stated in his supplementary witness statement after consideration of the nature of the allegations, including the allegation that an insurance policy relating to the Ivory K had been endorsed to a business associate without disclosing that it had already been endorsed to a bank and that the North Rock had been transferred in fraud of a business associate who had funded its release from arrest:

"If the broke to me had been of the above nature, I would not have written the risk. I could not judge the truth or otherwise of the allegations of fraud but they were made in the context of the owners' shipping business and concerned their dealings with insurance. The allegations were therefore being made in respect of the very things that I would be concerned with. I would not take the risk of dealing with untrustworthy people.

The fact of a dispute with a business partner and the arrest of the North Rock, with the possibility of further arrests of the ship, would also have been a great concern to me. These were not arrests of a similar nature to the usual arrests for a cargo claim where the ship is quickly released after a P&I club provides security. Because of the age of the Kent fleet, I would have assumed that these owners were the type of owners who were operating on very tight margins and who would need the ships to be earning nearly all the time to enable the whole operation to hang together and continue. A dispute with the business partner which, it appears, would prevent one or more of the ships from earning an income for a considerable period of time would have a major impact on the owners' ability to run and maintain the ships and to continue with their business. If the owners' source of income is dramatically reduced, not only would they be unable to properly maintain and run their ships, they might well be tempted to resort to an insurance scam and scuttle a ship in order to save their business venture."

247. The Insurers submit that, given that the issues underlying the Panamanian proceedings were very complicated and that it would only have been by a detailed explanation of the evidence and by the production of numerous documents that a broker could attempt to convince an underwriter of the Owners' innocence, a full disclosure which included all that exculpatory evidence would not have led to the underwriters accepting the risk because, as recognised by Mr Posgate and Mr Hall, the process of placement requires an almost immediate response from the underwriter and does not ordinarily cater for that kind of explanation and investigation of complicated facts. In reality, the underwriters would have been more likely to react adversely to the extent allegations of fraud than positively to the proffered exculpatory evidence.
248. As to the failure to disclose the overvaluation of the North Star, Mr Tobin stated in his witness statement that if he had been aware of the market value of the North Star he would not have insured it for US$4 million. However, in cross-examination he accepted that, by reference to prudent slip management considerations, it would be logical for an owner to wish to place an insured value which reflected both his capital investment in refurbishing the vessel and the benefit of an on-going lucrative time charter. However, in answer to the court he said in evidence that he would have compared the proposed insured value with the market value as distinct from any capital investment or the benefit of ongoing charters unless those matters had not been subsumed in the market value. Mr Potter's evidence in cross-examination was to the effect that it would be reasonable for a vessel to be insured above its market value if the excess were explicable by reference to previous capital expenditure or to an ongoing beneficial charter.
249. With regard to the failure to disclose the previous insurance premium defaults and the cancellation of the policy, Mr Tobin said in cross-examination:

"If – it has always been viewed by – certainly by me and my company certainly at that time, that if an insured had not paid a premium and had a policy cancelled that that is a very, very serious issue and it is certainly a client that we would not wish to get involved with."

He also said:

"Q..and what you would be looking for, I suggest, is an explanation that reassures you that it is not likely to be a problem in the future?

A. If we are talking about a policy that has been cancelled due to non-payment of premium and the broker advised me that the policy had been cancelled for non-payment of premium, I would not have wished to get involved with that particular client. If a policy is cancelled by underwriters that has to be a very, very serious matter. Underwriters don't cancel policies very, very easily."

250. Further, he said even if the brokers had given full explanation for the cancellation of the previous policy it would have been very difficult to consider positively the broker's proposal because of the moral hazard dimension. Further, as appears from the following passages in re-examination he was also concerned about the risk of a bad debt.

"A. If I had known that there was – the only possible acceptable explanation would be a temporary situation as far as perhaps the assured's financial position is concerned. Certainly if I had taken the risk on with the information that there was no financial irregularities, no problems as far as the assured is concerned, everything is absolutely fine, the chances are you would put a premium payment warranty on which means the premium – generally marine policies don't have a premium payment warranty on, and are notoriously loose as far as credit control is concerned.

Q. What would the warranty provide?

A. It could be full payment within 30 days or something of that nature and that would be a warranty as opposed to a request, and that would mean the poll would lapse if the premium had not been paid within the settlement due date."

Later he said:

"Q. What I would like to ask you is this: even though the potential bad debt involved would not have been significant, if there was nevertheless a potential bad debt issue, would you or would you not have considered it worth while getting involved?

A. No, absolutely not. I wouldn't have felt that it would be worthwhile exposing my company to a bad debt situation, and the amount is almost irrelevant really. It is just the problems that you go through as far as bad debt is concerned and it is just not worth it. It is not worth exposing your company to a bad debt issue."

251. Mr Potter gave similar evidence.
252. Mr Hewitt stated in his witness statement:

"I do see a significant difference between underwriters cancelling a previous cover and a history of delayed payment of premium by owners. If an underwriter has actually cancelled cover it signifies to me that that underwriter has lost complete confidence in either the willingness or the ability of the insured to pay. War underwriters provide cover for large exposures at miniscule premiums at the basic rate. I would not want to be concerned with a risk where I have to chase the broker for payment, where the brokers might come back to me repeatedly and ask for an extension of time for the insured to pay the premium only to find that six months or more into the risk that I have not received the premium and the policy is cancelled by the owners or, possibly, that the brokers ask for the broker's cancellation clause to be operated. All that time I would have been on risk for no premium.

If a recently expiring policy had been cancelled by underwriters for non-payment of premium, I would not have written the risk.

If, by contrast, the owners' premium payment history showed them to be slow payers, I would have inserted a premium payment warranty which would have required the premium to be paid by a certain date, shortly after the attachment date, failing which the policy would be cancelled from inception."

253. Finally, with regard to the financial condition of the Owners, Mr Tobin's evidence was that if he had known of the seriousness of Owners' financial difficulties he would not have written the risk, even without first consulting Mr Potter, particularly had he been told that Guiness Mahon had refused any further advances unless the North Star were sold for at least US$1.4 to 1.5 million. Any such financial difficulties created a moral hazard. Mr Potter confirmed that he would have taken the same view, particularly if informed of the Greek and Panamanian proceedings. Mr Hewitt expressed the same view in his statement. He stated that had he been informed that Guiness Mahon had refused any further advances unless the North Star were sold, he would probably have discussed the matter with the head of the hull department, Mr Platt. He said:

"Even if we did not know any of the other financial background, I expect we would have refused to cover the risk because again this circumstance indicates severe financial difficulties of the Owners."

Inducement: Discussion

254. In evaluating the underwriters' evidence it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available.
255. Further, in a case such as this, where diffuse matters can be said to be material facts, it is unrealistic to evaluate the issue of inducement except on the hypothesis of the disclosure of all the facts found to be material facts as distinct from isolated material matters.
256. Another relevant consideration is the fact that in the London marine market underwriters will normally expect to evaluate a risk with some rapidity. They do not normally deliberate at length on the acceptability of such risks. They would expect to give an immediate or at least a fairly immediate response to a broker. In particular, their approach is not usually to go behind the information presented to them. The submission that an underwriter would take the time necessary to consider whether the details of the activities of John Billington and Templegate suggested that the SFO letter sufficiently explicitly exonerated HP or MP from all wrong-doing relevant to moral hazard presents itself to me as unrealistic in the context of everyday marine underwriting. Similarly, investigation necessary to elucidate the complexities of the Panamanian proceedings and the underlying facts would in reality be unusual and improbable. Underwriters simply do not have the time or the legal expertise necessary to satisfy themselves with regard to a complicated structure of disputes as to the innocence of the assured. Accordingly, they have to take the risks at face value and if there are queries going to the probity of the assured, they are unwilling or at least reluctant to rely only on the broker's assurance of innocence in the absence of cogent independent evidence which is obviously such as to dispel the adverse impact of the other (material) facts disclosed to them. In the case of war risks insurance, where the premium is typically very small, an underwriter would not wish to involve his company in cover if there were any lingering doubt as to the commercial probity of the assured. This was the clear substance of the evidence of all the underwriters except Mr Posgate. But even his evidence assumed that there had been adequate disclosure of moral hazard factors to the hull underwriters.
257. Approaching the evidence of inducement with these matters in mind, there is a striking consistency between the evidence of the underwriters who wrote the risk and of the Insurers' expert, Mr Hall. Mr Posgate's evidence was by contrast eccentric and based on the palpable misconception that moral hazard had no part to play in war risks insurance. Although on moral hazard grounds none of the underwriters called could recall ever having avoided a war risks policy for non-disclosure, I have no doubt that this was because the occasion never arose and not because they had considered that such grounds were inapplicable. In the event, I find that, had all the material circumstances referred to in paragraphs 155 above been disclosed at the time of placing, neither of Mr Tobin nor Mr Hewitt would have written the war risks cover for the North Star. They would both have attached much weight to the Greek criminal proceedings and to the fact of HP and MP being subject to bail as relevant to moral hazard and neither would have been sufficiently satisfied by the SFO letter, the contents of which fell far short of exonerating HP and MP from the fraud of which they had been accused in Greece. At its highest, even together with the brokers' further explanation, it would have left the underwriters in too great a doubt for them to treat the Greek proceedings as not suggesting moral hazard and would not have persuaded them to write the risk.
258. Similarly, I find that, even taken alone, the allegations in the Panamanian proceedings would probably have deterred both underwriters from accepting the risk. The allegations of fraud were serious and one of them was in relation to dealings with an insurance policy. I accept that both underwriters would have given the brokers the opportunity at the time of placing to explain that the Owners were innocent of fraud but I do not consider that the underwriters would have regarded that, which, I assume, would have included the matters set out in paragraph 197 above, as displacing their concerns.
259. As to the overvaluation of the vessel, whereas I am not persuaded that underwriters would probably have refused the risk on this basis alone, that is to say, that North Star was unreasonably over-insured by US$1 million, I find that the non-disclosure of this matter taken in conjunction with the other undisclosed material facts at least contributed to the decision to accept the risk. It would have been regarded as another uninviting facet of the overall circumstances of the Owners.
260. I find that, taken alone, the previous policy cancellation for delay in payment of the premium would probably have caused both underwriters to refuse to insure, largely because this circumstance is virtually inseparable from the extremely serious financial condition of the Owners. Both went to moral hazard and the policy payment defaults and consequent policy cancellation went to the desirability of the inclusion of a premium payments warranty.
261. Accordingly, the Insurers have established that both leading underwriters were induced to enter into this war risks policy by non-disclosure of material facts and they are therefore entitled to avoid that policy.

Conclusion

262. The Owners' claim is dismissed both by reason of the fact that the vessel became a total loss which was attributable to the wilful misconduct of HP and the owners and by reason of the Insurers having justifiably avoided the policy for non-disclosure of material facts by the Owners.