Ship Law Log

Comment and analysis by Reed Smith lawyers on the latest developments in the shipping industry

Commercial Court considers the effect of a Paramount Clause where the Hague-Visby Rules were compulsorily applicable under English law

Posted in Case Law, Hague and Hague Visby Rules

Posted on behalf of Alexander Sandiforth and Nikhil Datta.

In Yemgas Fzco & Ors v Superior Pescadores S.A. Panama, (The Superior Pescadores) [2014] EWHC 971 (Comm), the Commercial Court was asked to consider the effect of a paramount clause in circumstances where the Hague-Visby Rules were compulsorily applicable as a matter of English law (the law governing the contracts evidenced by the terms of the bill of lading).

Background

The MV Superior Pescadores loaded a cargo of machinery and equipment at Antwerp, Belgium (a “contracting state” for the purpose of the Carriage of Goods by Sea Act 1971) for use in the construction of a liquid natural gas facility in Yemen.

The ship owners issued six bills of lading acknowledging that the cargo was shipped in apparent good order and condition.

The terms of these Bills of Lading contained the following paramount clause;

“The Hague Rules contained in the International Convention for the Unification of certain rules relating to Bills of Lading, dated Brussels the 25th August 1924 as enacted in the country of shipment shall apply to this contract. When no such enactment is in force in the country of shipment, the corresponding legislation of the country of destination shall apply, but in respect of shipments to which no such enactments are compulsorily applicable, the terms of the said Convention shall apply.”

During the voyage, the cargo inside one hold shifted causing damage to part of the cargo. The cargo owners calculated their claims using the package limits under both the Hague and Hague-Visby Rules interchangeably for each individual claim, preferring to use whichever regime resulted in them being able to claim a higher figure.

The ship owners admitted liability, but only to the amount of the package limit under the Hague-Visby Rules, contending that the cargo owners could not ”pick and choose” between limits.

Decision

It was common ground between the parties that by virtue of section 1(2)/Article X of the Carriage of Goods by Sea Act 1971 as the port of loading was Antwerp, the Hague-Visby Rules compulsorily applied to the contract evidenced by the terms of the bill of lading notwithstanding the paramount clause.

Notwithstanding this, the cargo owners contended that as a matter of construction, the effect of the paramount clause was such that the parties had agree contractually on a higher package limitation figure than that for which the Hague-Visby Rules provide (in circumstances where the Hague Rules allowed for a higher figure to be claimed).

Mr. Justice Males, influenced by obiter statements of the Court of Appeal in The Happy Ranger [2002] 2 Lloyd’s Rep 357, concluded that the wording of the paramount clause was not apt to incorporate the  Hague-Visby Rules as a matter of construction.  Instead it incorporated only the Hague Rules.

However, this conclusion did not stop the court rejecting the ”pick and mix” approach of the cargo owners, holding that a paramount clause contractually incorporating the Hague Rules did not have the effect of altering the package limitation under the Hague-Visby Rules.  In the court’s view, the parties must have realised that a contractual choice of the Hague Rules would be largely ineffective (given the compulsory application of the Hague-Visby Rules).

Finally, although not necessary given the court’s decision that the liability regime under the Hague Visby Rules was the sole applicable regime, the court also commented on the relevant date for converting the gold value (under the Hague Rules) into money.

In the court’s view, this was the date of delivery of goods or the date when they ought to have been delivered (in case of loss) as this was when the loss crystallises and the cause of action accrues.

The “Bulk Uruguay”: No anticipatory breach where future performance is contingent on a third party’s conduct

Posted in Case Law

In Geden Operations v Dry Bulk Handy Holding Inc (The “Bulk Uruguay”) [2014] EWCA 885, the Commercial Court, in rejecting an appeal under s.69 Arbitration Act 1996, considered the impact of words or conduct giving rise to uncertainty about future performance, the contingency of which rested upon the conduct of a third party, and whether this can amount to anticipatory breach of contract.

Arbitration Proceedings

The dispute arose out of a time charter party between Disponent Owners and Charterers (the “Charterparty”) containing a Conwartime 2004 clause and an amended BIMCO Piracy clause. The latter had been specifically amended by deletion of paragraphs (a) and (b) and reflected the market practice where it was intended that the vessel could transit the Gulf of Aden (“GOA”) without the owner’s consent. On its own, this meant the vessel could be marketed as “GOA OK”, giving her a competitive advantage. The Head Charter, however, required Head Owners’ permission to transit the GOA.

Head Owners gave permission to transit the GOA for the vessel’s maiden voyage but indicated that this was standalone permission and that permission would need to be sought for future voyages. When Disponent Owners asserted that the charterparty required their permission to transit the GOA and that this would only be given if they  obtained permission from the Head Owners, the Charterers alleged this was an anticipatory breach which they purported to accept as terminating the Charterparty. Charterers brought a claim for damages.

The dispute was originally referred to arbitration. By a majority the Tribunal held that on its true construction, the Charterparty did not make GOA transit subject to Disponent Owners’ consent. It held that Disponent Owners had not evinced an intention not to perform the charter, and that the Charterers were not substantially deprived of the benefit of the whole contract.

Commercial Court

There was no dispute that the correct test was:

(a) Did Disponent Owners, by their words or conduct, evince an intention not to perform, or expressly declare that they would be unable to perform their obligations under the Charterparty; and

(b) If so, did such a refusal have the effect of substantially depriving the Charterers of the whole benefit of which it was the intention of the parties that they should obtain from the contract.

The issue was whether this had been correctly applied by the Tribunal. The Court found that it had, and rejected Charterers’ appeal.

The Court first stated that Charterers’ arguments were an attempt to appeal a finding of fact by ‘dressing it up’ as an issue of law. The Tribunal had found that Owners’ stance was not to be understood as being that they would be unable or unwilling to perform if and when Charterers ordered a GOA transit. This was a conclusion of fact, and was not reviewable by the court.

The Court also held that Disponent Owners had not evinced an intention not to perform. Words or conduct which give rise to the uncertainty of future performance, the contingency of which rests on the conduct of a third party, will not necessarily evince an intention not to be bound.

In light of these conclusions, the question as to whether there was an error of law in respect of point (b) above did not arise, but the judge expressed his brief views as to why he agreed with the Tribunal’s approach. The correct approach was to identify the benefit which Charterers would have been deprived of under the Charterparty for the remainder of the period. This assessment should be made prospectively at the time of the anticipatory breach. The benefit was the opportunity in the longer term to market the Vessel as GOA OK. Disponent Owners’ conduct did not deprive Charterers of substantially the whole of that benefit.

When concluding, Mr Justice Popplewell referred to The Chrysalis [1983] 1 Lloyd’s Rep 503 and upheld the principle that “once the Court has concluded that a tribunal which correctly understood the law could have arrived at the same answer as the one reached by the arbitrator, the fact that the individual judge himself would have come to a different conclusion is no ground for disturbing the award”.

This decision illustrates the fact that courts dealing with arbitration appeals will consider carefully whether the issue before them is one of fact or law. Only the latter may be appealed. Courts will have little sympathy for attempts to present a reasonable alternative finding of fact as an error of law.

Court of Appeal finds Sub-Charterers and Receivers to be Charterers’ “agents” for purposes of proviso to off-hire clause

Posted in Case Law, Hire, Time Charters

Posted on behalf of Steven Avery.

In NYK Bulkship (Atlantic) NV v Cargill International SA (The Global Santosh) [2014] EWCA Civ 403 the Court of Appeal considered the true construction and application of a proviso to an off-hire clause dealing with the capture, seizure, detention or arrest of the vessel.

Background

Pursuant to a charterparty on an amended NYPE form (the “Charterparty”), the claimant owner (“Owners”) agreed to let and the defendant charterer (“Charterers”) agreed to hire the “The Global Santosh” (the “Vessel”) for one time charter trip from Sweden to West Africa.  Charterers sub-chartered the Vessel to Sigma Shipping Ltd (“Sigma”), who sub-sub-chartered the Vessel to Transclear SA (“Transclear”).

Transclear entered into a sale contract (“Sale Contract”) with IBG Investments Ltd (“IBG”), on ‘free out’ terms, for a shipment of cement, with discharge to take place at ‘Port Harcourt (Ibeto jerry)’.  Pursuant to the free out terms, IBG were responsible for unloading the cargo.  IBG were also liable to pay Transclear demurrage if unloading of the cargo was delayed.

Due to congestion at the discharge port, Transclear obtained an arrest order against the cargo, and (by mistake) the Vessel, in order to secure their claim against IBG for a two month period of demurrage due to congestion when the Vessel arrived at the port.

Charterers withheld hire during the period of the arrest on the basis of Clause 49 of the Charterparty, which included the following provision:

“Should the vessel be captured or seizured or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the Charterers or their agents.

Owners argued that the underlined proviso applied and Charterers were not entitled to withhold hire. Owners’ claim against Charterers for the withheld hire was dismissed in arbitration. On appeal at first instance, the court remitted the award to the Tribunal for consideration of a question of causation.

The Court of Appeal’s Decision

The Court of Appeal held that the proviso in Clause 49 applied (ie. the arrest or detention was occasioned by a personal act or omission or default of the Charterers’ agents) and Charterers were not entitled to place the Vessel off-hire.

The Court held that “agents” was not to be limited to agents strictly so called and delegates of the Charterers were agents for the purposes of the proviso, irrespective of the precise contractual relationship existing between the delegate and the party above him in the contractual chain.  Accordingly, “agents” was held to include sub-sub-charterers and receivers.

Both Transclear and IBG were held to be Charterers’ agents for the purposes of Clause 49 on the basis that they were performing activities which fell within the Charterers’ sphere of responsibility, with responsibility for all matters relating to the discharge of the cargo falling on the Charterer under the Charterparty.  IBG’s failure to unload the cargo within the lay days stipulated in the Sale Contract and its subsequent failure to pay demurrage and/or to provide security following the arrest “occasioned” the detention and IBG were held to be Charterers’ agents in this respect.

The Court noted that this outcome gives effect to the “familiar division between owners’ and charterers’ spheres of responsibility”.

Comment

The allocation of risks and responsibilities as between an owner and time charterer is an important issue, particularly in respect of the risk of delay, which is fundamentally on the time charterer.  The time charterer remains liable to pay hire in all circumstances unless he can bring himself within a clearly defined off-hire clause.

The inclusion of acts, omissions and defaults of the charterer’s delegates as agents, even if such delegates are not the charterer’s “agents” within the strict legal meaning of that term and are not performing a delegated task, offers significant protection to Owners who permit the sub-letting of their ship.

Crisis in the Crimea : Further Sanctions Update

Posted in Sanctions

The Russian Federation and the United States continue to clash over the proposed annexation of Crimea from Ukraine, with the United States adding 20 Russian officials and related persons to its list of sanctioned persons. Some of the persons recently added to the United States’ SDN List were recently sanctioned by the EU, as we have noted earlier this week. Others appear to be novel additions under either the EU or United States’ sanctions lists, and include Russian officials, lawmakers, and persons within Vladimir Putin’s inner circle. For its part, the EU added 12 persons to its list of those subject to the initial travel ban and asset freeze. These new additions have caused a flurry of activity in the international business community as people scramble to guard their investments.

For further information, please see the recent post on Reed Smith’s Global Regulatory Enforcement Blog by Leigh Hansson, David Myers, Sian Fellows, Carlos Valdivia, Alexandra Allan, Sarah Rogers and Alexandra Gordon.

Tribunal comments on validity of NOR and whether laytime stopped running during suspension of loading

Posted in Arbitration, Laytime and Demurrage, Voyage Charters

London Arbitration 4/14.

Facts

The subject vessel tendered NOR around 75 miles from the loadport of Matadi. At the time she was stated to be “in Matadi Roads”, but was in fact at Banana pilot station rather than Matadi Port Anchorage. She then proceeded to the port of Boma, where she awaited a change of pilot, and only eight days later proceeded to Matadi where she anchored at the anchorage.

After loading had eventually commenced, it was temporarily suspended at the request of the vessel “due to contaminated cargo”. The shorelines had to be fully cleaned before loading could recommence.

The buyers of the cargo claimed demurrage, arguing that the NOR tendered at Banana pilot station had been valid, and that laytime started running 6 hours after the tender of NOR. The sellers argued that the NOR was invalid, and also that the time during which loading was suspended should not count as laytime.

Validity of NOR and commencement of laytime

The Tribunal held that the NOR was invalid, applying the test set down by Lord Reid in The Johanna Oldendorff. A NOR could not be considered effective when a vessel was many miles and several hours from the loadport, let alone the loading berth. This simply did not make commercial sense.

Even if the vessel could be considered within the port jurisdiction for administrative purposes (which in this case was doubtful), she was not “at the immediate and effective disposition of the charterer”. Neither was Banana pilot station a “usual waiting place within the port” nor “a place where waiting ships usually lie”. Even if it was, the distance from Matadi would fall within the “extraordinary circumstances” identified by Lord Reid which would rebut the presumption of the vessel’s readiness.

In addition, Banana and Matadi were both ports in their own right. This in itself may not prevent the NOR tendered at the former, for loading at the latter, from being valid, but when considered with all of the other relevant factors, it reinforced the Tribunal’s position.

On that basis, laytime only began to run when the vessel berthed.

Suspension of laytime

Whilst it was not easy to definitively determine the cause of, or responsibility for, the cargo contamination, it appeared on balance that there was some contamination in the cargo being supplied by the sellers from the shore lines.

On that basis, it was reasonable for loading to have been suspended whilst the contamination was investigated and eliminated. There was no fault or breach on the part of the vessel, so the period of suspension should not be deducted from the counting of laytime or demurrage.

Comment

This case highlights that the test set down in The Johanna Oldendorff is still the first and main point of reference in determining with a NOR has been validly tendered. That test must be applied to the specific facts of the case and the nature of the port/s in question. It is notable that the Tribunal applied the test from a commercial perspective, considering whether the parties’ arguments made commercial sense in the context of the facts.

On the suspension of laytime point, it is the cause of and responsibility for the delay that is key. If vessel owners act reasonably in suspending cargo operations, due to causes beyond their control, then they should not be penalised with a suspension of laytime or demurrage (subject always to the specific charter terms).

Court of Appeal reverses High Court decision on constitution of Limitation Funds by P&I Club LOUs

Posted in Case Law, International Conventions

In Cosmotrade SA v Kairos Shipping Ltd (“The Atlantik Confidence”) [2014] EWCA Civ 217, the Court of Appeal reversed the High Court’s first instance decision that English law does not allow constitution of a Limitation Fund by P&I Club Letter of Undertaking.

First Instance Decision

The first instance decision was reported in a previous blog post. The Court considered whether a Limitation Fund could be constituted by lodging a P&I Club LOU into court, and held that it could not. Simon J found that there must be a specific statutory provision stating that a guarantee is acceptable to constitute a Limitation Fund. English law contained no such provision, and so a Fund could only be constituted by a payment into court.

One of the key legal provisions considered was Article 11(2) of the Convention on Limitation of Liability for Maritime Claims 1976 (LLMC 1976). This states that a “Fund may be constituted either by depositing a sum or producing a guarantee acceptable under the legislation of the State party where the Fund is constituted…”. Whilst this is given force of law in England by s.185 Merchant Shipping Act 1995 (MSA 1995), Simon J held that further national legislation is required under which a guarantee is acceptable, and there is no such legislation in England.

Appeal

The Court of Appeal held that there was no ambiguity about the effect of the wording in Article 11(2), nor was specific legislation required defining what was “acceptable” for the purposes of the MSA 1995.

The first instance judge had also been incorrect in drawing a distinction between the terms “enforceable” and “acceptable” in the context of the relevant legislation. Rather than take a narrow and technical approach, the court should construe the legislation purposively. In order to encourage international trade, the court should facilitate vessel owners in limiting their liability by the provision of either a deposit or a guarantee.

The Court concluded that, as a matter of law, a Limitation Fund could be constituted by the production of a guarantee acceptable to the court, as an alternative to payment of money into court.

Comment

The Court of Appeal’s decision is far more in line with the law in other major maritime jurisdictions, as well as international practice where P&I Club LOUs are used widely as security.

After the first instance decision was handed down, there were concerns that a substantive amendment to English law would be required in order to allow LOUs to be used to constitute Limitation Funds, and to prevent parties seeking to litigate in alternative jurisdictions. Following the Court of Appeal’s decision, this should no longer be necessary.

Crisis in the Crimea: Sanctions Update

Posted in Sanctions

Tensions continue to mount between the Russian and Ukrainian governments in the wake of a controversial referendum that threatens to expand the borders of the Russian Federation. The results of that Crimean plebiscite show that an estimated 97 percent of voters favor the Russian annexation of Crimea, but the peninsula’s ethnic Tartars boycotted the referendum. Whatever the outcome, the consequences of the vote reach well beyond the Black Sea, and the international community has coordinated sanctions against Russia.

For further information, please see the recent post on Reed Smith’s Global Regulatory Enforcement Law Blog by Leigh Hansson, David Myers, Sian Fellows, Carlos Valdivia, Alexandra Allan, Sarah Rogers and Alexandra Gordon.

Tribunals have no jurisdiction to hear Owners’ claims for “procuring or inducing” breach of arbitration agreement incorporated into bills of lading

Posted in Arbitration, Bills of Lading, Contractual Issues, Jurisdiction

Owners chartered their vessel by way of a charter containing a London Arbitration clause, for a carriage from Turkey to Liberia. The vessel was sub-chartered, and three bills of lading issued to cover the cargo, each naming the same consignee and incorporating the charter terms.

The consignee claimed for cargo damage and commenced proceedings against Owners in Liberia, which Owners alleged was in breach of the arbitration agreement. Owners commenced separate arbitration proceedings against Charterers (under the charter), and against the consignees and the consignee’s parent company (under the bills of lading) for that alleged breach.

The proceedings against Charterers were the subject of London Arbitration 2/14. Owners alleged close connections between Charterers, Sub-Charterers and the consignee. They argued that Charterers and Sub-Charterers had committed a tortious interference in “positively encouraging” the consignee’s alleged breach of the arbitration agreement.

Charterers responded that the arbitration agreement in question was contained in the bill of lading contracts, and that the alleged breach was committed by a third party. They could not be held liable for failing to prevent a breach of contractual obligations by a third party. Further, any “encouragement” to breach the bill of lading contract could not give rise to a dispute under the charter, which was an entirely separate contract. As such, Charterers argued, the Tribunal had no jurisdiction to hear Owners’ claim.

The Tribunal agreed with Charterers that it did not have jurisdiction. Even if Owners proved the alleged tort, it would not amount to a dispute “arising out of” the charter, and so would not fall within the scope of the charter arbitration clause.

The proceedings against the consignee’s parent company were the subject of London Arbitration 3/14. Owners asserted that the parent company was a party to the contract evidenced by the bills of lading, and so was a party to the arbitration agreement. They alleged that the parent company had wrongfully induced or procured the consignee’s breach of the arbitration agreement.

The Tribunal held that it did not have jurisdiction over Owners’ claims against the parent company. The latter had never been a party to the bills of lading, which were non-negotiable and named only the shipper and consignee. The consignee was a separate legal entity, and the parent company could not be bound by any agreement entered into by the consignee to which the parent was not a party.

These decisions are further illustrations of the importance of taking care to ensure that proceedings are commenced against the correct party under the correct contract, particularly in a situation where there are multiple contracts and several of the parties involved are connected. Where parties seek to arbitrate a dispute under a standard charterparty London Arbitration clause, the wording of the clause must be considered carefully: if the clause refers to disputes “arising out of” the charter, there must be a connection to the performance of the charter in order for the dispute to be arbitrable under the charter terms.

Tribunal rules on breach of consumption warranty in NYPE trip time charter

Posted in Arbitration, Speed and Performance

London Arbitration 1/14

The subject vessel, a new build which had just entered service, was chartered on an amended NYPE form for one time charter trip.

Clause 29 of the charter, dealing with speed and consumption, provided as follows:

“Speed ballast/laden about 15/14 knots on about 39.5 metric tons IFO 380 … Eco-speed ballast/laden about 13/12.5 knots on about 26/27 metric tons IFO 380 … Port consumption about 2.5 metric tons IFO … The vessel consumes MDO when entering/leaving ports, during manoeuvring and sailing in confined and/or shallow waters, rivers, canals, heavy weather, restricted visibility, stopping and starting engines, during ballast operations, cargo hold cleaning etc… Bunker and specification is RMG 35 (net calorific value of 10200 KCAL/KG).”

Owners claimed for a balance of account. Charterers counterclaimed on the basis that the vessel had overconsumed IFO and MDO in port, and MDO at sea during hold cleaning.

The Tribunal held that the charter did not contain an express continuing warranty of consumption, and clause 29 applied at the latest at the time of delivery. However, this was a relatively short time charter trip. As such, the vessel’s consumption in performing the charter service could be good evidence of its capability at the time of delivery.

The alleged overconsumption related to time spent at four ports. The first was the first port of call after delivery. As a result the Tribunal held that although there was no continuing warranty of consumption, the vessel’s consumption there could be considered to reflect its capability at the time of delivery. Owners were unable to explain the discrepancy between the warranted and actual consumption. The difference pointed to the vessel being unable to meet its warranted in port consumption at the time of delivery. The Tribunal applied similar reasoning for the subsequent three ports. Charterers’ claim was allowed for all four ports. Adjustments to the calculations, including allowing a 5% tolerance for the term “about”, meant that they recovered in a lower amount for each port.

As regards the hold cleaning, the Tribunal held that the charter imposed clear obligations on Owners as regards the required state of the vessel’s holds on delivery. Charterers could not, as Owners alleged, be obliged to make the holds ready between delivery and arrival at the first loadport in order to load their own cargo, but then be entitled to place the vessel off-hire if the holds failed an inspection. Charterers were, therefore, entitled to recover for the MDO consumed during hold cleaning.

This case is a good example of a Tribunal using a vessel’s performance during the charter service as evidence of its condition and capability on delivery. The specific circumstances were clearly relevant. The vessel was a new build, this was a short trip time charter, and the overconsumption occurred very shortly after delivery. Such reasoning would not be applied in every case. However, it is clear that a Tribunal will take into account the surrounding circumstances and all relevant facts in determining whether there has been a breach of the consumption warranty.

Sanctions Update – Iran: Easing of Sanctions by the United States and European Union

Posted in Sanctions

As reported in our Client Alert of December 2013, the “Joint Plan of Action” reached between the United Kingdom (“UK”), the United States (“U.S.”), Germany, France, Russia and China (collectively known as the “E3+3″) and Iran in November 2013 envisaged a two-step process in relation to relief from international trade sanctions against Iran.

On 12 January 2014, it was announced that the first step, the interim deal (with a time limit of six months renewable by mutual consent) between the E3+3 and Iran, would begin to run on 20 January 2014.

For further details of the measures put in place by both the United States and the European Union, please see the Reed Smith Client Alert by David Myers, Sian Fellows, Lisa Mason, Alexandra Allan, Sarah Rogers and Alexandra Gordon.