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12 May 2021

Owner’s right to call for bill of lading freight

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Alpha Marine Corp v Minmetals Logistics Zhejiang Co. Ltd, MV ‘SMART’ [2021] EWHC 1157 (Comm)

Facts

Alpha Marine was owner of the MV SMART and chartered it to Minmetals on a time charter trip on an amended NYPE form. Minmetals voyage chartered the vessel to General Nice Resources (Hong Kong) Ltd. On 19 August 2013 the vessel ran aground shortly after departing the port of Richards Bay in South Africa and broke its back. There was a dispute between Alpha Marine and Minmetals as to the cause of the grounding. Alpha Marine claimed that Minmetals was in breach of the safe port warranty. Minmetals denied that they had given a safe port warranty, or alternatively claimed that the grounding was cause by negligent navigation.

Clause 18 of the time charter provided that “the Owners shall have a lien upon all cargoes and sub-hires and all sub-freights for any amounts due under this Charter…” Under the voyage charter, freight was payable in full once the vessel set sail from the load port and was deemed earned even if the vessel or cargo was lost. Owner’s bills of lading had been issued, which provided that freight was payable “as per charterparty” (this meant the voyage charter). 

On 23 August 2013, Minmetals issued a freight invoice to the subcharterer, which had to be paid by 3 October 2013. On 12 September 2013, Alpha Marine issued invoices to cargo interests for the freight due under the bills of lading, and gave notice revoking Minmetal’s authority to receive the freight, directing that it be paid instead into the bank account of owner’s P&I Club. Around the same time, Alpha Marine referred the dispute as to the cause of the grounding to arbitration. 

No monies were paid for several years until in May 2016 Alpha Marine, Minmetals and the subcharterer agreed to pay the freight into escrow. The subcharterer was wound up later that year but US$500,000 remained in escrow. 

The tribunal held that Minmetals had provided a safe port warranty and that the port was unsafe, but that the grounding was caused by the Master’s negligent handling of the vessel. Alpha Marine’s unsafe port claim therefore failed and they could only recover from Minmetals the cost of bunkers consumed during the voyage. It also held that Alpha Marine was liable to Minmetals for intervening in its contractual relationship with the subcharterer; there was an implied term that Alpha Marine would not exercise its right under clause 18 to revoke Minmetals’ ability to receive freight unless hire or other sums were due under the charterparty. As the grounding was for owner’s account, due to the Master’s negligence, no sums were due to Alpha Marine under the charterparty and it had not been entitled to receive the freight. 

Appeal

Alpha Marine appealed against the tribunal’s conclusion on implied obligation, using section 69 of the Arbitration Act 1996. The specific issue was:

Did the charterparty contain an implied obligation that the owner would not revoke charterer’s authority to collect from the subcharterer the freight payable under the bills of lading unless hire and/or sums were due to the owner under the charterparty?

Decision

Mr Justice Butcher allowed the appeal, finding that there was no implied term. His reasoning was as follows:

  1. An owner’s bill is the owner’s contract and the owner is therefore entitled to demand the bill of lading freight from the holder of the bill as consideration for the agreed carriage. However, bills of lading often provide that freight should be paid as per charterparty, which directs payment to the charterer, as agent of the owner. The owner can countermand that order by notice to the shipper before payment is made and the charterer does not have to have been in default before the owner can do this.If the owner intervenes to receive freight, it must then account to the charterer for any amount that he receives above that due for hire of the ship.

  2. The issue in the present case was whether this time charter qualified or restricted the circumstances in which Alpha Marine was entitled to direct that freight be paid to it, instead of to Minmetals. It had been suggested in previous case law that it was arguable that the charterer could expect that the shipowner would only interfere with charterer’s exploitation of the vessel down the line if the charterer was in default.

  3. The charterparty did not contain express wording limiting Alpha Marine’s exercise of the right. It was therefore a question of whether such a term could be implied following the test in Marks and Spencer v BNP Paribas. The judge concluded that no such term could be implied:

    3.1 Business necessity: There is an obligation on Alpha Marine to account to Minmetals for any excess. In light of that, the time charter does not lack commercial or practical coherence without an implied term restricting Alpha Marine’s right to intervene. Such charterparties work satisfactorily without such a term. Although insolvency could cause some difficulties, the twofold regime of the right to collect freight coupled with an obligation to account works in a commercially satisfactory way.

    3.2 Obviousness: The judge considered that both parties would not have considered the term to obviously have been included, had they been asked.It is likely that Alpha Marine would have said that if it was to commit to owner’s bills, with the attendant obligations, there could be no fetters on their entitlement to collect freight. The judge considered whether the term would be implied to avoid interference with Minmetals’ right to exploit the vessel, but considered that the two stage regime did not deprive Minmetals of the vessel’s earning capacity.

    3.3  It should be clear what the implied term is: The fact that a term may take different formulations is a classic sign that it is neither necessary nor obvious. Three alternatives were proposed and Minmetals suggested that it did not make any difference which was implied. However, there were significant difficulties with the formulation and practicability of each of the terms. The judge rejected all three.

  4. The award was set aside to the extent that it awarded damages for breach of the implied term and the matter was remitted to the Tribunal.

Conclusion

The decision clarifies the scope of the owner’s right to call for freight to be paid to them, as well as highlighting the difficulties with implying terms into contracts. It would not be surprising if attempts were now made by charterers to introduce an express provision requiring that the right only be exercised by owners when the charterer is in default.

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