Incorporation of charter terms into bills of lading. Is shipowner’s right to a general average contribution from cargo interests excluded?

The Polar ( [2021] EWCA Civ 1828) involved a claim by owners to recover cargo’s proportion of general average in relation to a payment to pirates who had detained the vessel in the Gulf of Aden. The cargo owners defended the claim on the ground that the shipowner’s only remedy in the event of having to pay a ransom to pirates was to recover under the terms of insurance policies, the premium for which had been paid by the voyage charterer.

The charter was on BPVOY 4 standard form, cl.39 of which provided a war risks clause which covered “acts of piracy”. There was also a Gulf of Aden clause which provided:

“Any additional insurance premia (including, but not limited to, those in respect of H&M, crew, P&I kidnap risks and ransoms), crew bonuses (which to be in accordance with the international standard) shall be for chrtrs account. Max USD 40,000 for charterer’s account for any additional insurance premium except for crew bonus which to be max USD 20,000 for charterers account.”

Six bills of lading were issued all of which incorporated the terms of the charterparty and five provided for general average to be settled under the York-Antwerp Rules 1974, with one providing for general average to be settled under the 1994 Rules. The insurance premium was just short of the $40,000 figure in the Gulf of Aden clause and the premiums were paid by the shipowner who was then reimbursed by the charterer.

The arbitrators on a determination of two preliminary issues found that: (1) the terms of the voyage charter, including in particular the war risks and Gulf of Aden clauses, were incorporated into the bills of lading; (2) the shipowner, on the true construction of the bills of lading and/or by implication, agree to look solely to its insurance cover under the war risks and/or K&R insurance in the event of a loss covered by that insurance.

On appeal Teare J held that the incorporating words in the bills of lading were wide enough to incorporate the war risks and Gulf of Aden clauses. However, the bills of lading holders were not liable for additional premium as it was not appropriate to substitute the “bills of lading holders” for “charterers” so as to impose a liability on them to pay the premium. As between the shipowner and charterers the parties had agreed that the shipowner would look to the insurers for indemnification in respect of losses under the Gulf of Aden clause and not to the charterer so that they were precluded from seeking a contribution from the charterer in respect of general average. However, the incorporated provisions of the charterparty did not have this effect as regards the bill of lading holders, who had not agreed to pay the premium.

The Court of Appeal has now upheld the decision. Males LJ, giving the judgment of the Court, noted that this was a weaker case than either The Evia (no 2) or the Ocean Victory for concluding that the shipowner had agreed not to claim a contribution in general average from the charterer. However, the question did not need to be decided, and the case could  proceed on the basis that there was an implicit agreement to this effect as between owners and charterers. As regard the bills of ladings, it was doubtful that the very wide words of incorporation were wide enough to encompass what was merely implicit in the express terms considered as a whole. To find in the bills of lading an agreement by the shipowner not to seek a general average contribution from the cargo owners, that must be because the express terms of the charterparty which are incorporated into the bills demonstrate that the same (or an equivalent) agreement was intended to apply also under the bills of lading.

Part of the additional war risks and Gulf of Aden clauses were prima facie incorporated into the bills of lading contracts, but the next issue was whether the requirement on the charterer to pay the premium should be “manipulated” so as to impose that obligation on the bill of lading holders. Males LJ found that is was not appropriated to engage in such manipulation. There was nothing in either the bills or the charter to say how liability for the premium would be apportioned between different bill of lading holders. The fact that neither the bills nor the charterparty addressed this question suggested that the bill of lading holders were not intended to be liable for the premium. However, the incorporation of these terms did serve a useful purpose as the basis on which the shipowner has agreed in the bill of lading contract that the voyage will be via Suez and the Gulf of Aden, without which there would be uncertainty as to the vessel’s route.

Cargo argued that the premium paid by the charterer could be regarded as paid for the benefit of the bill of lading holders on the basis that its counterparty would not seek contribution from them as the party for whose benefit the premium is paid in the event of an insured loss. Males LJ rejected the argument as the risks of piracy and the potential need to pay a ransom were foreseen by the parties to the bill of lading contract and dealt with expressly by them. There were no clear express words to rebut the presumption that the shipowner did not intend to abandon its right to a contribution from the cargo owners in general average. Any “implicit understanding” was not so clear as to show that this was what the parties intended, particularly as the charterer was not necessarily paying the whole of the additional premium which would be necessary to obtain the cover required.

 In this case both parties were insured against the risk of piracy and allowing the shipowner to claim would mean that each set of insurers would bear its proper share of the risk which it has agreed to cover. In contrast, if the bills of lading were construed so as to exclude a claim by the shipowner, the loss would be borne entirely by the shipowner’s insurers and  the cargo owners’ insurers would escape liability for a risk which they agreed to cover.

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