19 Oct 2016

ShippingBulletin - October 2016

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In this issue:

Limitation of liability - breaking limit - scuttling

The 'ATLANTIK CONFIDENCE' was in the Gulf of Aden on a voyage from the Ukraine to Oman with a cargo of steel products when a fire was reported in the engine room. Firefighting took place but the vessel began listing to port and the master and crew abandoned ship. The vessel took on water until she sank four days later.

The owner, Kairos Shipping, issued proceedings for a limitation decree. AXA is the subrogated insurer of the cargo and has challenged owner's right to limit.

Held (Teare J.):

  1. A shipowner is entitled to limit liability unless the loss resulted from his personal act or omission, committed with intent to cause such loss or recklessly and with knowledge that such loss would probably result. The very heavy burden of proving such conduct lies on AXA and the case must be established on the balance of probabilities.
  2. Looking at the totality of the evidence, the vessel was deliberately sunk by the master and chief engineer at the request of Mr Agaoglu, the alter ego of the owner (he was sole shareholder and director of the group of companies to which Kairos belongs). In those circumstances the loss of the cargo was a natural consequence of his act and therefore the claim for a limitation decree must be dismissed.
  3. That evidence included:

    3.1 It was more likely than not that the origin of the fire was in the store room and there was a real and substantial possibility that the fire was started deliberately.

    3.2 The flooding of the engine room and ballast tanks could have been deliberate, and accidental flooding was a remote possibility.

    3.3 The vessel had changed route into deep water with no justification and the master sought to hide that change of route. There had been an unscheduled abandon ship drill the day before. These matters strongly suggest that the loss of the vessel was deliberate.

    3.4 The chief engineer was unwilling to have others in the engine room at a time when this would normally have been welcomed, to help fight the fire. The master failed to alert owners to the vessel's situation before he abandoned ship. After abandoning the vessel, the master and chief engineer returned twice to the vessel. It is possible that the purpose of the visits was to see what could be done to further the sinking.

    3.5 The master was untruthful in evidence on several key aspects. Considering the whole of the evidence, the master gave untruthful evidence to attempt to hide the truth that the vessel's sinking was deliberate. Any doubts as to whether the scuttler was cunning or incompetent do not outweigh the strong evidence pointing to a deliberate sinking.

    3.6 The master and chief engineer did not have a motive to sink the vessel themselves. There are matters which suggest the involvement of senior employees in the owner's office in the deliberate loss of the vessel and this leads to a strong suggestion of the involvement of Mr Agaoglu.

    3.7 Mr Agaoglu did have a motive to arrange the sinking of the vessel because his companies were in real financial difficulty and he was under pressure from the bank. He lied about the destination of the insurance proceeds and was vague about the financial difficulties that his companies were experiencing. There was no evidence as to when he arranged the request to the master and chief engineer but there was sufficient opportunity to do so.

Kairos Shipping Ltd and another v AXA Insurance (Gulf) BSC and others, The "ATLANTIK CONFIDENCE" [2016] EWHC 2412 (Admlty)

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Whether payment of hire a condition

Spar Shipping was registered owner of three supramax bulk carriers. The vessels were let on long term time charter (amended NYPE 1993 forms) on 5 March 2010 to Grand China Shipping (Hong Kong) Co Ltd ("GCS"). 

Clause 11 of the charterparties provided that:

"(a) Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers"

"(b) Where there is a failure to make punctual and regular payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Charterers shall be given by the Owners 3 clear banking days … written notice to rectify the failure …"

The charterparties also provided for guarantees to be issued by the defendant ("GCL"), which was the parent of GCS. Three letters of guarantee were issued on 25 March 2010. 

From April 2011 GCS was in arrears in payment of hire. On 16 September 2011 Spar called on GCL for payment under the guarantees. On 23 and 30 September 2011 the three vessels were withdrawn and the charterparty was terminated. 

Spar commenced arbitration proceedings against GCS claiming (1) the balance of hire outstanding; and (2) damages for loss of bargain of the unexpired term of the charters. GCS went into liquidation in Hong Kong and the arbitration proceedings were stayed. So Spar brought a claim under the guarantees against GCL claiming the balance due and damages for loss of bargain.

The main issue for decision was whether the obligation to make punctual payment of hire was a condition. If it was, Spar was entitled to terminate the charterparties and also claim damages for loss of bargain. If it was not, Spar could terminate the charterparties pursuant to the express withdrawal clause, but could only claim damages for loss of bargain if GCS renounced the charterparties. 

At first instance, Popplewell J held that (1) the obligation to pay hire was not a condition; (2) GCS had renounced the charters; and so (3) GCS were liable to pay damages at common law, and GCL were bound by the guarantees.

Held: (Sir Terence Etherton, Gross and Hamblen LJJ) 

Appeal dismissed

  1. The punctual payment of hire is not a condition for the following reasons. The punctual payment of advance hire under a time charter is, no doubt, of great importance to owners, but it is by no means clear that breach of that obligation entitles owners to withdraw the vessel. For that reason, express withdrawal clauses were included in time charters. However, the presence of such a clause does not mean that payment of hire is a condition. All conditions entitle the innocent party to terminate the contract, but not all contractual termination clauses are conferred for breaches of condition alone.

  2. The courts should not be too ready to interpret clauses as a condition. The charterparties, on their true construction, did not make it clear that clause 11 is a condition. Clause 11 did not expressly make time of the essence, nor did it spell out the consequences of the breach. Further, the consequences of a breach of clause 11 could vary dramatically from the trivial to the grave.

  3. The anti-technicality clause did not strengthen the case for timely payment being a condition. Anti-technicality clauses are to protect charterers from the serious consequences of a withdrawal. They were not devised to make time for payment of the essence. No significance was derived from arguments that there is a general presumption in mercantile contracts that time is of the essence.

  4. Certainty is important, but so is commercial common sense. Striking a balance between the two is key: classification as a condition achieves certainty but may cause trivial breaches to carry severe and unnecessary consequences. Sufficient certainty is achieved at present with the use of express withdrawal clauses.

  5. GCS had renounced the charterparties: no criticism could be made of Popplewell J's application of the test to the facts. Conduct is repudiatory if it deprives the innocent party of substantially the whole of the benefit he is intended to receive in consideration for performance of his future obligations under the contract. Hire is payable in advance to provide a fund to meet the expenses of rendering services under the charterparty. The owner is not obliged to provide the services on credit. Given the history of GCS's late payments, the amounts and delays involved together with the absence of any concret or reliable reassurance from GCS/GCL as to the future, Popplewell J. was amply entitled to conclude that GCS had renounced the charterparties.

Grand China Logistics Holding (Group) Co. Ltd v Spar Shipping AS [2016] EWCA Civ 982

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Cruise ship – negligent repairs – liquidated damages

A contract was entered into for the repair and refurbishment of a cruise ship which had been purchased by Saga. Saga made two claims against the yard under the contract. 

(i) A claim for damages arising from catastrophic failure of engine lubricating oil coolers during the ship's inaugural cruise following the refit; and

(ii) A claim for liquidated damages in respect of a two week delay in delivering the vessel. 

Held (Sara Cockerill QC, Deputy High Court Judge):

  1. The claim arising from failure of the coolers was dismissed.

  2. The primary cause of the cooler failure was corrosion, which was longstanding.

  3. The yard was not under a duty to advise that retubing should take place, or should be seriously considered.

  4. The yard was in breach of contract in that (i) it had failed competently to clean the coolers; and (ii) it had failed to report to Saga the existence of the corrosion of the coolers.

  5. However, the claim failed on causation. The corrosion had not been adequately cleaned away by the yard, but their breach did not cause the failure. Saga's case that proper cleaning would have revealed the presence of pinholes was rejected. Even had the yard cleaned to the contractual standard required, it could not be said that holing in the tubes would have manifested.

  6. The judge rejected Saga's evidence that, had it been notified of the corrosion, it would have authorised retubing. It was implausible that a report would have been made up the chain of command, and/or that retubing would have been ordered. Saga's own representatives at the yard had seen the corrosion and approved the coolers; it was unlikely that a report by the yard would have produced a different result.

  7. The claim for liquidated damages succeeded. The contract contained separate provision for liquidated damages and permissible delay. The judge considered the construction of these provisions, and held that the yard was responsible for a number of delays, and could not rely on delays for which Saga was responsible as stopping time running under the liquidated damages clause.

Saga Cruises BDF Ltd and another v Fincantieri SPA (Formerly Fincantieri Cantieri Navali Italiani SPA) [2016] EWHC 1875 (Comm)

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Variation of contract – oral, written or by conduct?

The claimant construction company entered into a development agreement with the defendant university which related to the sale of a property to the defendant. Clause 24 of that agreement provided that the contract could not be modified, altered or waived except in writing, signed by the party against whom the modification was being alleged. 

The contract provided for all disputes (except those concerning the meaning or construction of the agreement) to be determined by an expert appointed by the President of the Royal Institution of Chartered Surveyors. Such an expert was appointed, and a dispute arose as to the extent of the expert's jurisdiction. One issue was whether the parties had, by their conduct, extended the expert's jurisdiction beyond that provided for in the agreement. This raised the question of the effect of clause 24.

Held (Deputy Judge Stephen Furst QC):

  1. A "non-variation" clause could itself be varied by an oral agreement or by conduct.

  2. In relation to the burden of proving the variation, the authorities made clear that the issue in such cases was fact-sensitive, that the question had to be decided on a balance of probabilities and that one relevant factor to consider was the fact that the parties had agreed a specified manner in which their contract could be varied or modified. There was however nothing in the authorities to suggest that the parties must have directed their minds to the relevant clause or that they must have intended to modify, alter or waive the terms of the Development Agreement, or the non-variation clause in particular. What must be determined by the court was whether, by their actions, words or conduct they must be taken to have intended to modify or alter or waive a term of the Development Agreement, bearing in mind that they agreed to the terms of Clause 24 in the first place.

  3. On the facts, the parties had, by their conduct, waived clause 24, and had conferred on the expert the jurisdiction necessary to deal with the dispute.

ZVI Construction Co LLC v Notre Dame University (USA) in England [2016] EWHC 1924 (TCC)

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Container demurrage – duration

MSC carried 35 containers of raw cotton for the shipper, Cottonex. Cottonex sold the cotton to Regent Spinning Mills, the consignee, but the consignee never collected the goods. The goods remained at the discharge port.

The issue was whether Cottonex was liable to pay MSC a daily demurrage charge for each day that the containers remained unavailable to the MSC, because they were still being used to hold the goods. The demurrage had been accruing at US$840 per day for 3 and a half years and the amount claimed was US$1,090,424 (10 times the agreed value of the containers).

At first instance Leggatt J. commented that container demurrage is a relatively new phenomenon and that no case had been cited which involved a claim for container demurrage. However, the substantial body of case law under voyage charters for “demurrage” paid to the owner for charterers’ failure to load or discharge cargo when agreed was applicable.

He held that:

  • the demurrage was payable until the contract was terminated on 27 September 2011, about three months after the cargo was delivered, as a result of the shipper’s repudiation of the contract.

  • The carrier had no legitimate interest in keeping the contracts in force. A demurrage clause is intended to quantify damages for loss caused by detention of the containers. There was no basis for supposing that the carrier suffered any loss after 27 September 2011.

  • If the carrier’s right to keep the contracts alive was unfettered, the demurrage clause was unenforceable as a penalty.

Held (Moore-Bick, Tomlinson, Keehan LJJ):

Appeal allowed in part.

  1. Much of what the first instance judge said was correct, with the exception of the date by which the contract was repudiated (27 September 2011). It was hard to see how a relatively short delay of 3 months could have been sufficient to frustrate the commercial purpose of the adventure. The first instance judge had not explained sufficiently how he reached his conclusion on that point, and his finding could not stand.

  2. In early February 2012, the delay had continued for a further 4 months and the carrier had offered to sell the containers to the shipper. Negotiations ensued but ultimately reached no conclusion. The offer of 2 February 2012 to sell the containers was the clearest indication that the commercial purpose of the adventure had by then become frustrated and the shipper was in repudiation of the contract as from that date.

MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789

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Insurance – war risks – drug smuggling

On 13 August 2007 the "B Atlantic" loaded a cargo of coal in Lake Maracaibo, Venezuela for discharge in Italy. An underwater inspection by divers discovered three bags of cocaine strapped to the vessel’s hull. This concealment was a criminal offence under Venezuelan law. The vessel was detained and the crew was arrested. 

The Master and Second Officer were charged with complicity with drug smuggling. On 31 October 2007 a Venezuelan judge sent them for trial and ordered the continued preventive detention of the vessel pursuant to Venezuelan law. The vessel remained in detention until in August 2010, following a jury trial, the two officers were convicted and sentenced to 9 years’ imprisonment. The court ordered the final confiscation of the vessel, which the owner had abandoned to the court in September 2009.

The owner presented a claim for the loss of the vessel to the defendant war risk insurers. Insurers declined cover, in reliance on the standard war risk exclusion for detentions arising from infringement of customs regulations (it being well established by previous cases that the customs regulations exclusion applies to cases of drug smuggling).

Flaux J rejected owner’s allegations that the detention and confiscation of the vessel was due to political interference in the judicial process in Venezuela rather than due to the infringement of customs regulations. He held that the loss was covered by the policy: upon the correct construction of the policy and reading the malicious acts cover and the exclusions together, "infringement of customs regulations" in the exclusion does not include an "infringement" which is itself no more than the manifestation of the relevant act of third parties acting maliciously and the exclusion is subject to that limitation. Insurers appealed.

Held (Clarke and Laws LJJ, Sir Timothy Lloyd): 

Appeal allowed. The smuggling of drugs or contraband is not a war risk.

  1. The loss was caused by a combination of (i) the malicious act (the initial concealment of the drugs), and (ii) the subsequent detention (which was by reason of the concealment, which constituted the customs infringement). Both were proximate causes because without the malicious act, there would have been no cover, but without the detention, there would have been no loss. Where there are two proximate causes, one which is covered and one which is within the exclusion, the insurers are not liable (Cory v Burr).

  2. As a matter of construction or implication, Flaux J was wrong to read the 'mere manifestation' limitation into the exclusion and conclude that the exclusion did not apply. The structure of the policy was that the risks covered were the perils, subject always to the exclusions. The perils and exclusions together express the ambit of cover. There was no reason to think that the parties cannot have intended that cover for malicious acts would be excluded, if the malicious act constituted the infringement.

  3. Detention of vessels for infringement of customs regulations does not always involve smuggling, but smuggling is the "paradigm case" in which detention occurs because of such infringement, which brings it squarely within the exclusion. The Institute War Clauses require 12 months (amended to 6 here) to have elapsed before a detainment is treated as giving rise to a constructive loss. It is more likely that smuggling, rather than some less heinous breach of regulation, will give rise to such a lengthy detainment. It would therefore be strange if the one detention to which the exclusion did not apply was detention on account of smuggling.

  4. The exclusion manifests an intention to exclude from cover any detainment attributable to breach of customs laws. This forms part of the "spirit of the policy" as per The 'Anita' in which the Court of Appeal recognised that prima facie the exception means that underwriters will not pay for loss caused by reason of the crew being caught smuggling.

  5. There was nothing unbusinesslike in the insurers' position that all smuggling fell outside the scope of the Institute War Clauses. When considering what is business-like the Court of Appeal approached the issue by noting that "the question of what is business-like depends on whose business is being considered". The Court of Appeal went on to say that "…it is sufficient to state that there is nothing unbusinesslike in the insurers’ position even though it is favourable to them. The construction for which they argue is not therefore one from which the court should instinctively resile."

  6. The proposition that 'infringement' cannot be taken to include an infringement which is itself no more than the manifestation of the relevant malicious act involves writing in words which are not there, which the court should be reluctant to do in clauses drafted for use in insurance contracts throughout the world. The language of the clause gave no good reason or necessity for this interpretation. Further, the force of this interpretation was lessened by the fact that not all malicious acts were caught by the exclusion (such as sabotage, the explosion of goods secreted on the vessel, the killing or wounding of a crew member or the smuggling of illegal immigrants, none of which involve any customs infringement).

  7. If the 'mere manifestation' interpretation of Flaux J was correct, the application of the exclusion would be anomalous. If the drug laden vessel had sailed and been arrested in Venezuelan waters, there would, on Flaux J's interpretation, be no cover, since the infringement (i.e. the transportation) would be more than a mere manifestation of the malicious act. If the vessel was detained before it set sail then there would be cover. Such an application of the exclusion would be anomalous and therefore could not be correct.

Atlasnavios – Navegacao, LDA (formerly Bnavios – Navegacao, LDA) v Navigators Insurance and others (the "B ATLANTIC") [2016] EWCA Civ 808

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Waiver of right to limit liability

On 25 May 2012, the vessel Cape Bari collided with sea berth no. 10 at Freeport, Grand Bahama. The berth was owned by the Bahamas Oil Refining Company International ("BORCO"), who claimed damages of US$22 million. 

Owners claimed that they were entitled to limit their liability to approximately US$16.9 million under the Bahamian Merchant Shipping (Maritime Claims Limitation of Liability) Act 1989, which incorporated into Bahamian law the Convention on Limitation of Liability for Maritime Claims 1976.

On the owners' application, the Bahamian court ordered the constitution of a limitation fund of of US$16,995,487. BORCO applied to set aside that order, arguing that owners had waived their right to limit their liability under the 'Conditions of Use', a contract between BORCO and the shipowners which had been signed by the master shortly before the berthing operation. The relevant clause was as follows:

"If … any damage is caused to the terminal facilities or any part hereof from whatsoever cause such damage may arise … in any such event the vessel and the Owner shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection therewith. Further, the vessel and her Owner shall hold BORCO harmless and indemnified against all and any claims, damages, cost and expenses arising out of any loss, damage or delay caused to any third party arising directly or indirectly from the use of the terminal facilities or of any part thereof by the vessel ..."

At first instance, the judge held that owners were not entitled to limit their liability, as they had contracted out of their right to do so. The Court of Appeal of the Bahamas held that owners were entitled to limit their liability. They held that under the Limitation Convention 1976 it was not permissible to contract out of the right to limit liability, even by entering into a contract of indemnity. BORCO appealed to the Privy Council.

Held (Lords Neuberger, Mance, Clarke, Sumption and Toulson):

  1. It is permissible for owners of a vessel to contract out of or waive their statutory right of limitation under the 1976 Convention or the 1989 Act. There is nothing in the language of the Convention or the Act which prohibits owners from doing so.

  2. It might be possible to exclude the right without express reference to the Convention, but the right must be clearly excluded, whether expressly or by necessary implication. The contract is treated as if the statutory right of owners to limit liability was written into the contract. If there is a provision which clearly contradicts those rights, such that the two provisions cannot be read together, the statutory right must have been excluded.

  3. On the true construction of the Conditions of Use, the indemnity provision in question did not clearly exclude owners' right to limit their liability. So owners were able to limit their liability.

Bahamas Oil Refining Company International Limited v The Owners of The Cape Bari Tankschiffahrts GMBH & Co KG [2016] UKPC 20

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Commencement of drilling – meaning

Vitol sold the shares in Padina Energy Limited to the defendant, AOGC. A key part of the sale was the fact that Padina's subsidiary had an interest and the benefit of a research permit in an offshore drilling area. The sale and purchase agreement provided for part of the consideration to be deferred. The Deferred Consideration clause provided that:

"The Purchaser shall pay the Seller the Deferred Consideration if one of the following conditions is satisfied:

…..

(B) the drilling of the Lideka East Well is not commenced before the date of expiry of the Second Exploration Period"

A dispute arose as to whether drilling had commenced before the expiry date.

Held (Judge Waksman QC): 

Taking the natural meaning of the words in the clause, 'commencement of drilling' means the initial turning of the drill bit into the seabed (spudding), rather than the beginning of the drilling process as a whole, which starts with mobilisation of the rig. Therefore commencement of drilling did not occur by the requisite time and AOGC was required to pay the Deferred Consideration to Vitol.

Vitol E&P Limited v Africa Oil and Gas Corporation [2016] EWHC 1677 (Comm)

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Performance warranty – underperformance – compliance with charterers' orders

In a charter chain on amended NYPE 1946, Imperator were owners, Bunge were head charterers and Panamax were sub-charterers. During the course of trading and following sub-charterers' instructions, the vessel waited at Guaiba Island (near Rio de Janeiro) from 14 January to 10 February. Upon departure it was discovered that the vessel's performance had fallen off significantly as a result of fouling of the bottom and propeller by barnacles.

The sub-charterers deducted hire, asserting their right to set-off damages for breach of the continuing speed warranty in the charterparty. The head charterers made the same claim up the line. The arbitrators found the following facts:

(1) The vessel had not maintained the warranted speed

(2) The cause of the reduced speed was underwater fouling of the hull and propeller by marine growth during the lengthy stay in tropical waters.

(3) The marine growth was not unusual or unexpected, but constituted fair wear and tear.

The tribunal found in favour of the sub-charterers/head charterers. They held that the speed warranty applied to all voyages , and that owners/head charterers had assumed the risk of a fall-off in performance as a result of bottom fouling consequential upon compliance with head charterers'/sub charterers' lawful orders.

Owners appealed, raising the following issue:

Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?

The basis of owners' appeal was paragraph 3.75 of Time Charters (7th ed.) which clearly supported their position.

Held (Phillips J):

Appeal dismissed.

  1. Owners did have an implied indemnity from time charterers for the consequences of complying with charterers' orders but that indemnity did not extend to the usual perils of the voyage. There are a number of authorities which confirm that the indemnity does not apply to marine fouling in the course of trading.

  2. Owners argued that the speed warranty was not absolute and was only given on the basis that the vessel continued to have a clean hull and propeller. The judge disagreed and held that the warranty was clear and unambiguous. It had been open to the parties to qualify the warranty in respect of voyages after the vessel had been waiting in warm water ports (which is commonly done), but they had chosen not to.

  3. As a result, paragraph 3.75 of Time Charters is too widely stated.

Imperator I Maritime Company v Bunge SA, Bunge SA v C Transport Panamax Ltd, The "CORAL SEAS" [2016] EWHC 1506 (Comm)

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Dispute as to binding contract – arbitration agreement declaration

HCT claimed that they had entered into a contract to sell clinker in bulk (to be shipped in several parcels) to Tradeland. That alleged agreement contained a London arbitration clause. When no shipments occurred, HCT wanted to bring a claim against Tradeland. Tradeland disputed the existence of a binding contract. Rather than commence arbitration, HCT issued court proceedings for a declaration that there was a binding arbitration agreement.

HELD (Judge Waksman QC):

  1. It was wrong in principle to grant declaratory relief in circumstances such as this. Those circumstances were that (i) the claimant asserted that there was a binding arbitration agreement; (ii) the claimant had a claim which it wished to assert and which therefore (on its own case) could only be brought in arbitration; and (iii) the claimant was clearly able to commence arbitration, even if it had not done so.

  2. The appropriate forum for deciding whether there was an arbitration agreement was the arbitral tribunal. The claimant could not avoid the scheme of the Arbitration Act simply by not commencing arbitration.

  3. Even if there was no reason in principle against granting declaratory relief, as a matter of discretion, the judge refused to do so. It was a needless invocation of the court's powers where the tribunal was particularly suited to ruling on this issue. Also, there was a real risk of the court impinging on the central issue between the parties, which was whether there was a binding agreement at all: that was clearly within the province of the arbitrators. There was no practical impediment to HCT commencing arbitration.

HC Trading Malta Ltd v Tradeland Commodities SL [2016] EWHC 1279 (Comm)

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LOU – P&I Club – additional security

Disputes arose between the claimants (owners of the "FSL NEW YORK") and ICOF Ship Chartering Pte Ltd (charterers of the vessel). Owners threatened to arrest vessels owned by the charterers' group. An LOU was provided by the defendant P&I Club (Norwegian Hull Club), of which charterers were members.

Owners subsequently formed the view that the security of the LOU was insufficient, and asked charterers for additional security. Owners' request was refused "on behalf of the Club". Owners applied to the court to require the Club to increase the level of security available under the LOU. The Club applied to strike out the claim, alternatively for summary judgment.

It was not disputed that the owners were under-secured. The central issue was whether, under the terms of the LOU in question, owners were entitled to look to the Club direct to make good the shortfall.

The relevant clause of the LOU provided:

"It is agreed that both Charterers and Owners shall have liberty to apply if and to the extent the Security Sum is reasonably deemed to be excessive or insufficient to adequately secure Owners’ reasonable Claims."

HELD (Blair J):

  1. The Club's application succeeded.

  2. "The 'liberty to apply' in the letter of undertaking did not give owners the right to apply to the court to require the defendant P&I club to increase the amount of its undertaking. This provision enabled owners to arrest charterers’ assets if the security provided proved to be inadequate, notwithstanding the prohibition against arrest or re-arrest provided for earlier in the instrument. The right to enforce an increase in the amount of the security lay against the charterers, and not against the P&I club direct.

FSL-9 Pte Limited and Nordic Tankers Trading A/S v Norwegian Hull Club [2016] EWHC 1091 (Comm)

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Bunker supply contracts - risk of paying twice

Shipowners, PST, entered into a contract under which OWBM would supply bunkers to the vessel Res Cogitans. OWBM in turn contracted with OWBAS. OWBAS contracted with RMUK, who contracted with RNB, who physically supplied the bunkers to the vessel. 

The contract between owners and OWBM described itself as being for sale and delivery of gasoil. The key elements of the contract were that payment was to be within 60 days of delivery, title to the bunkers was reserved to OWBM until payment and until payment owners were entitled to use the bunkers only for the propulsion of the vessel. 

On the assumed facts, owners consumed the bunkers in the propulsion of the vessel without payment being made at any time by OWBM or OWBAS to RMUK. OWBM and OWBAS are part of the OW Bunker Group, which became insolvent. RMUK did pay RNB. RMUK asserted a claim against owners for the amount OWBAS owed to RMUK, but had not (as yet) pursued the claim.

Owners commenced arbitration claiming a declaration that they had no liability to pay OWBM for the bunkers. The arbitrators rejected that application, and held that, on the assumed facts, OWBM would be entitled to payment.

On appeal, the arbitrators' conclusions were upheld by the High Court. On further appeal, the Court of Appeal upheld the High Court judgment. The key points were:

  1. Where the Sale of Goods Act 1979 applies to a contract, it is an implied condition that the sellers have a right to sell the goods (or will have such a right at the time when property is to pass). Inability to transfer property when it is to pass is a breach of condition. The buyers are not obliged to pay the price, and can recover it if they have paid.

  2. However, the present contract was not a contract of sale to which the Sale of Goods Act applied. The contract was not for the transfer of property in the whole of the bunkers. Rather it was a contract for delivery of bunkers with an immediate right to use them, but no obligation to pay until expiry of the credit period.

  3. It was not an implied condition that OWBM would comply with its payment obligations to the party above it in the chain on expiry of the credit period. Such an implied term was unnecessary and inappropriate.

Owners appealed.

HELD (Lords Neuberger, Mance, Clarke, Hughes and Toulson):

  1. The contract was not one of sale within the Sale of Goods Act 1979, s 2(1), but a sui generis transaction. The contract was not a straightforward agreement to transfer the property in the bunkers to the owners for a price. Rather, it was an agreement with two aspects: firstly, to permit consumption prior to any payment and without property ever passing in the bunkers consumed; and secondly, if bunkers remained unconsumed, to transfer the property in the bunkers so remaining in return for the owners paying the price (ie the price payable for all the bunkers, whether consumed before payment or remaining after payment).

  2. The contract was not subject to an implied term that OWBM would perform or had performed its obligations to its supplier, in particular by paying for the bunkers timeously. There was no basis or need for such an implied term. Having regard to the essential nature of the bargain, the only implied undertaking was that OWBM had the legal entitlement to give permission for the bunkers to be used. To be so entitled, OWBM did not need or acquire title to the bunkers.

  3. Had OWBM been unable to pass title to any bunkers in existence at the time of any payment, then it may be that owners could have treated OWBM as in breach of condition and terminated the contract (though they would have had to refrain from further use of the bunkers). OWBM would then have been unable to maintain a claim for the whole price, and would have had to assert a contractual or restitutionary claim to pro rata payment for bunkers consumed. But that was not what had happened in this case.

  4. Because of the court's earlier answers, the issue did not arise of whether section 49 would have precluded any claim by OWBM/ING for the price of the bunkers used, if the contract had been classified as a contract of sale within the Sale of Goods Act 1979, section 2. However, the answer would have been no. Section 49 is not a complete code for situations in which the price may be recoverable under a contract of sale, and in the present case, the price was recoverable by virtue of its express terms in the event which occurred, namely the complete consumption of the bunkers supplied.

PST Energy 7 Shipping LLC and another v OW BUnker Malta Limited and another, The 'Res Cogitans' [2016] UKSC 23

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York-Antwerp Rules 2016

A new set of York-Antwerp Rules was adopted by the Comité Maritime International in May 2016. The new rules are designed to speed up the adjusting process.

BIMCO announced that it would include reference to the 2016 York-Antwerp Rules in its new and revised charterparties, bills of lading and waybills. This is significant, as BIMCO did not take the same course of action with the previous version of the York-Antwerp Rules (2004) and retained reference to the 1994 or 1974 Rules.

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UK delay in implementing new Limitation of Liability figures

Significant increases to the figures for the limit of shipowners' liability were introduced by the IMO in June 2015. The limits affected are the "general limits" in Art 6 of the LLMC 1996 (as previously amended by the 1996 Protocol), ie those which apply to all claims other than those for loss of life or personal injury to passengers. (Passenger claim limits are not affected.) The affected figures will increase by 51%.

The increases have yet to be implemented by the UK. The UK Department of Transport published a Consultation Document on the subject, and the period for responses ended on 2 February 2016. However, the Statutory Instrument which is required to bring into force the new limits has yet to be published and accordingly the date when the changes will take effect remains unknown.

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Michael Bundock

Michael Bundock
Professional support lawyer

T:  +44 20 7809 2637 M:  Email Michael | Vcard Office:  London

Joanne Champkins

Joanne Champkins
Professional support lawyer

T:  +44 20 7809 2623 M:  +44 7825 625 900 Email Joanne | Vcard Office:  London

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