Maritime Fraud:What is Rust Bucket Fraud?

RUST BUCKET FRAUD

In the previous publication we have provided the definition of fraud but the readers should know the details of the maritime fraud.?

One of the Maritime frauds is Scuttling of ships, which is also known as “Rust bucket” fraud. This crime is committed by the ship-owner when his vessel is at the end of her economic life i.e. drastically reduced freight earning capacity due to her old age . The crime may affect hull interests alone or both hull and cargo interests.?

A dishonest ship-owner may approach an exporter to carry his cargo by his vessel at a low freight. The exporter approaches his buyer to open a Letter of Credit in his favour to pay the invoice amount. The issuing bank undertakes to pay the invoice amount to the exporter of the goods upon compliance of requirement of the importer as specified in the contract. The Ship-owner approaches the exporter to engage his vessel. The ship-owner and the exporter decide to defraud the buyer. The Bills of Lading is issued without cargo.

?The exporter submits all other documents related to shipping along with the Bills of lading to the bank negotiating the letter of credit. The banker pays against documents and not against goods. The ship leaves the port without cargo.

The ship will not arrive at the destination to give any opportunity to the buyer to discover the fraud and in order to avoid this the vessel is scuttled at a remote place, so as to remove all evidences of non-existent shipment beyond any prospect of subsequent investigation.? The hull insured approaches the hull underwriter to pay hull claim and also receives a share of the sale proceeds from the exporter, leaving the helpless buyer to pursue an insurance claim for loss of cargo.??

Whether the innocent buyer is entitled to recover the loss?

Where a loss is attributable to wilful misconduct of the Assured, the insurer is not liable for the loss. However, if the deliberate casting away of a ship is caused without the connivance of the Assured, it would either be a barratry (wrongful act wilfully committed by the crew) or a malicious act of a third party intending to harm the ship-owner.? The Hull underwriters are liable to pay the losses, if the ship is cast away barratrously by the crew without connivance of the Owner.

The cargo insurer may disown the claim under a cargo policy under Clause 4.1 of the General Exclusions of Institute Cargo Clauses, where such loss damage or expense is attributable to wilful misconduct of the Assured

?The case of Forder vs Great Western Railway Company [1905]? 2 KB 532 provides that, “ wilful misconduct” requires a deliberate act by the assured which is designed to cause loss, or which is committed recklessly with a blind eye to its consequences, and in respect of which he intends to make an insurance claim . However, the assignee of the cargo policy is entitled to recover his claim, provided the assignee was not involved in maritime fraud.?

Clause 10.2 (Change of voyage) of the Institute Cargo Clauses 1/01/2009 refers to the ? “Phantom ship” which might? have sailed for an uninsured destination without the knowledge of the Assured with the object of stealing the cargo. The pre-planned “phantom ship” fraud is now covered under the clause 10.2 of Institute Cargo Clauses 2009 to give protection to the innocent assured, which previously was? not covered under Sec 44 of the Marine Insurance Act,1906.