Performance Claims (Again) in Time Charters and Causation

London Arbitration 29/22

Charterparty agreements in contemporary practice invariably deal with risk allocation between parties and to that end incorporate lengthy provisions. However, such provisions might not always secure the outcome one party hopes to achieve as their legal construction are bound to be influenced from legal precedents and/or legal causation still plays a vital role in the outcome as charterers and also owners in the current dispute found out to their detriment. Several legal issues raised in this dispute, but it is worth elaborating 3 of them which might provide guidance to parties in future when it comes to drafting similar clauses in their agreements.

Speed and consumption calculations (performance)

The charterparty in question (which was on amended NYPE 1946 form), inter alia, stipulated:

Clause 29:

Speed/consumption based on good weather conditions up to Beaufort Scale 4 and Douglas Sea State 3. No adverse current and no negative influence of swell.

Clause 88:

… no hire to be deducted for alleged underperformance claim until it has been agreed by both parties.

In the absence of consistent discrepancy between deck log and weather routing service and in the absence of amicable settlement the matter will be referred to arbitration.

Charterers argued that the vessel did not perform as warranted on four voyages (in breach of cl 29) and they, accordingly, made deductions from hire. These deductions were based on the report prepared by a weather bureau appointed by the charterers. The reports found that the vessel’s performance was short of what was warranted on four voyages and time was lost consequently. The weather expert appointed by the owners doubted the methodology adopted by the charterers’ expert highlighting several technical reasons why the calculations were not accurate.

The tribunal agreed in general with the evidence provided by the owners’ weather expert especially stressing that:

  1. The charterers’ expert seems to include in calculations performance assessment during periods of adverse currents or when there was a negative influence of swell in contradiction with good weather indices of cl. 29;
  2. The vessel’s log was a more reliable indicator of currents than AIS positioning alone in moderate weather conditions:
  3. Satellite telemetry records did not provide sufficient accurate data regarding localised wind and sea state so as to automatically cast immediate doubt on ship’s observations.

From a legal pointy of view, the tribunal’s decision makes the point again that in instances where the relevant performance provision is silent on the beneficial currents, the owners are entitled to any benefit gained as a result of such currents (a point also made in The Divinegate [2002] EWHC 2095 (Comm)). More significantly, the tribunal’s decision demonstrates that in determining the performance of the chartered vessel, the data in the logbook will not automatically taken into account but equally calculations from weather experts would only be preferred if they are scientifically sound to doubt the accuracy of logbook data.                    

Hull fouling

Clause 82 of the charterparty provided that the charterers are responsible for the cost of hull and/or propeller cleaning if such cleaning is required following the vessel remaining idle at any safe anchorage for a total of 20 consecutive days.  

The vessel stayed at Bin Qasim for 22 days and the owners sought to recover the cost of cleaning at the next drydock. The owners also attempted to claim the cost of cleaning hard barnacle roots became embedded in the vessel’s hull discovered just before re-delivery after a report from an underwater operation carried out in Taiwan.

The tribunal found that the hull and propeller fouling was the result of the vessel’s call at Bin Qasim and the charterers were in breach of cl 82 for failing to arrange an underwater inspection and carrying out the necessary cleaning required. However, it was held that the claim for future freshwater washing and sandblasting was not covered by cl 82 as it was unlikely that hard barnacle roots became embedded in the vessel’s hull during the time spent at Bin Qasim. This highlights the need to demonstrate the existence of a causal link between the alleged loss and breach.      

Damage to hull

The owners claimed that one of the holds was damaged during loading and discharging operations. The claim was backed by a post-discharge survey and the master’s reports and indemnity for this damage was sought from the charterer under clause 8 of the charterparty which obliged the charterer to undertake all cargo operations and indemnify the owners for the consequences of the charterers’ employment orders.   

The tribunal found that it was very likely that the damage was caused during cargo operations but the owners failed in their claim for indemnity as they submitted no invoice following the drydocking giving the tribunal the impression that repairs were either not carried out or had been incorporated with other repairs. Put differently, the owners’ claim was not successful as they failed to prove loss. This is a timely reminder to owners that such indemnity claims need to be documented for recovery.        

Performance Warranties in Charterparties- “Good Weather” Qualification Again!  

Eastern Pacific Chartering inc v. Pola Maritime Ltd (The Divinegate) [2022] EWHC 2095 (Comm)

The Divinegate was trip chartered on an amended NYPE 1946 form with additional clauses for a carriage of pig iron from Riga via the Baltic Sea to the Mississippi River in the United States. Following discharge of the cargo, the owners sought unpaid hire, bunkers and expenses totalling US$ 99,982.79 and the charterers sought deductions from hire of US$ 93,074.55 for the failure to proceed with utmost despatch on the voyage and hull fouling. The charterers also made a counterclaim for US$ 72, 629.01 as damages in tort on grounds of the owners’ allegedly wrongful arrest of the vessel, The Polo Devora, of which charterers believed to be the beneficial owner. The wrongful arrest counterclaim failed and will not be discussed here.

The charterparty contained a performance warranty to the effect that “Speed and consumption basis no adverse currents and valid up and including Douglas Sea State 3/ Beaufort Force 4.”

The essence of the litigation was the assessment of the chartered vessel’s performance to determine whether there was, in fact, a failure to proceed with utmost despatch on the voyage. The owners contended that the performance of the vessel should be assessed in a conventional way, i.e. by reference to the vessel’s speed during “good weather”. The charterers, on the other hand, suggested that underperformance could be established by reference to the vessel’s measured RPM (revolution per minute) which reflects the engine speed maintained by the crew.   

The Judgment and Lessons for the Future          

Ms Clare Ambrose, sitting as a High Court Deputy Judge, made significant observations on the state of law in this area and reached interesting conclusions which are likely to inform the judges and arbitrators who are often called in to deal with performance related claims in the context of time (and trip) charters.

  1. It was stressed that traditional way of establishing breach and loss in performance claims is the “good weather” method and in instances where the parties have adopted such a formulation in their contracts (which was the case here) this will be the primary method of assessment used by the court.

2. The judge also appreciated that this is not the only available methodology for making calculations and there is no bar for alternative methods being used to measure vessel’s performance. However, any alternative method must be consistent with the express wording contained in the charterparty and must also be established as “reliable”. On the facts of this case, the RPM method was not found to be reliable in identifying loss of time as it made incorrect assumptions as to the resistance on the hull and made no allowance for weather conditions being a reason for a reduction in engine speed, as well as ignoring the fact that there were periods the vessel could not achieve the warranted speed due to other factors, e.g. currents.

Therefore, the judge left it open to parties to argue that alternative methods (especially in the light of emerging technologies) could be used to assess a chartered vessel’s performance but strongly hinted that so far no satisfactory method has been put forward to sway judges/arbitrators away from the traditional method and legal principles that have been developed for years. Referring to the “good weather” method, Ms Ambrose said (at [90]):

The approach adopted in the authorities reflects commercial practice in assessing performance and the specific wording chosen by the parties, rather than the court imposing legal methodologies.

3. An interesting debate in the case related to the impact of currents in the assessment of performance of the vessel. It was contended by the charterer that allowance should be made for the positive currents and positive currents should be, therefore, a factor in determining whether the vessel’s performance is at the warranted level. This argument found no support from the judge. It was held that in the absence of wording excluding the benefits of positive currents, such benefits should not be deducted in measuring the vessel’s speed for the purposes of the performance warranty. This provides a judicial clarity on the matter and is logical from a commercial perspective. A contrary solution would have meant that the owners would be penalised for its master finding a favourable current and ensuring that the vessel goes faster and burns less fuel (something that is economically beneficiary for both parties).

The judge applying the “good weather” method, reached the conclusion that the chartered vessel failed to meet the warranted speed so there was underperformance giving rise to a loss of time of 16 hours.

4. The judge also rejected the claim for hull fouling indicating that the use of good weather method for calculating loss from slow steaming would otherwise lead to double recovery.

The judgment is a reminder to the market that in the absence of clear and contrary wording it will be rather difficult to shift the traditional method of assessing a chartered vessel’s performance with reference to good weather method. However, especially in trip charters there remains a realistic possibility that it might not be possible to obtain good weather sample so as to be able to assess the performance of the vessel. In those instances, with the advances in technology, the courts and arbitrators might come under pressure to consider alternative assessment methods that could shed light on the performance of the chartered vessel.              

Laytime- Once Starts Can Only Be Stopped in Limited Instances

The MT Stena Primorsk [2022] EWHC 2147 (Comm) 

The vessel was charted for a single voyage (from Bilbao to Paulsboro on the Delaware River) pursuant to the terms of an amended Shellvoy 6 form. A period of 72 hours was allocated as laytime in the charterparty for loading and discharge and 68 hours and 54 minutes of the laytime had been used at the loading port (Bilbao).

The water depth at the intended discharge berth at Paulsboro was 12.19m. The vessel draft was 12.15m but the tide was expected to vary by 1.6m. Accordingly, in line with charterparty provisions, the master submitted a risk assessment and sought a waiver from the technical operators of the under keel clearance policy as stipulated in the charter form. The technical operators granted the waiver for the transit from anchorage and for the berthing. The waiver was issued on the assumption that the vessel’s draft was equal to or less than the draft of the river/berth at high water. The master was also asked to ensure that prompt commencement of discharge was discussed with the terminal officers.

The chartered vessel arrived at the discharge berth on 31 March 2019. The terminal informed the master that unloading needed to be conducted at a reduced rate initially. This could, in master’s calculations, mean that the discharge rate would be less than the rate necessary to maintain a safe under keel clearance. On that basis, the master took the decision to leave the berth (a short while berthing) and return to anchorage.

Another berth became available on 1 April and the master prepared a fresh under keel clearance calculation, and risk assessment and sought another waiver from the technical operators. The technical operators refused to give waiver on this occasion stating that the safety for margin was too small and there were not sufficient controls in place to mitigate the risk of the vessel touching bottom.

The vessel managed to berth only after a portion of the cargo was lightened on 4 April 2019. This caused a further delay and laytime ended on 6 April (10.24). By that time, a further 154.63 hours were used at Paulsboro, bringing the total time used to 226.63 hours. The owners sought demurrage in the sum of US$ 143,153.64. The charterers raised objection to the demurrage claim arguing:

  1. Two incidents (the owner’s decision to leave the discharge terminal within 12 minutes of berthing on 31 March 2019 and the owner’s refusal to comply with the charterer’s request to return to berth at 21.00 on 1 April) had the effect of suspending the running of laytime;
  2. The notice of readiness (NOR) given by the owner upon arrival at Paulsboro was not valid because “free pratique” certificate had not been granted.

His Honour Judge Bird found on both of these points in favour of the owners:                        

  1. The running of the laytime is suspended only when time is lost due to “default on the owner’s part, or on the part of those for whom they are responsible” (The Fontevivo [1975] 1 Lloyd’s Rep 339). This was not the case here as the owner acted in a way permitted and required by the relevant charterparty (the need to operate the vessel safely was explicitly specified in the charter and the contract made clear that under keel clearance was binding and not to be breached without consent). It was also noted that the power to grant or refuse a waiver of the policy was not limited in any way in the charterparty.
  2. The evidence indicated that there was no formal mechanism for the grant of “free pratique” at the discharge port and the port appeared to have operated a free pratique by default system, with decisions communicated if there was disease on board. Accordingly, the NOR had been valid.             

Comment

The running of laytime can only be suspended by express terms of the contract or if there is a “fault” on the part of the owners preventing the loading or discharging operations. It is clear that the “fault” does not need to be an actionable breach of the charterparty, but the present decision (in line with earlier authorities) also makes clear that no fault can be established in cases where the master takes steps that cause delay for safety reasons and such decisions are deemed to be “entirely justifiable” in the circumstances. In the present context, a “capricious refusal” to grant a waiver of keel clearance policy by the operators, for example, could have amounted to a “fault” capable of suspending the running of the clock but that was not the case.

The obtaining of a “free pratique” certificate was a mere formality prior to the commencement of the global pandemic and the finding in this case reflects that position. The matter might be rather different now especially given that some countries have introduced strict quarantining and/or testing requirements for Covid. It is very unlikely that in today’s commercial world we could easily assume that any port operates on a “free pratique” default system. And, in those instances lack of “free pratique“ certificate could prevent the chartered vessel from being regarded as an “arrived ship” which is vital for the commencement of the laytime period.          

Supplementary Nature of Mortgagees’ Interest Insurance Affirmed

Piraeus Bank A.E. v. Antares Underwriting Ltd (The ZouZou) [2022] EWHC 1169 (Comm) 

 In practice mortgagee’s interest policies (MIPs) provide financiers (e.g. banks) a supplementary cover to the shipowner’s policies (marine and war risks) to ensure that the mortgagee will still have cover in the event of the cover is declined under owners’ policies for an insured risk by reason of: a) misrepresentation or non-disclosure; b) breach of a promissory warranty, c) the failure to exercise due diligence insofar as it is required under the owners’ policies d) the expiry of a time limitation period; and, even in case of a total loss where there is a judgment or award holding that the shipowner’s claim is not recoverable under the owner’s hull or war risk policies on the grounds that the loss has not been proved to have been proximately caused by a peril insured against, but is not otherwise excluded by any exclusion or provision. However, on the last point it needs to be stressed that there will be no cover under MIPs, if the loss is proximately caused by a peril excluded from cover under owners’ policies.   

In the present case, the mortgaged ship was detained in Venezuela in late August 2015 on the suspicion that the crew had attempted to smuggle part of a cargo of high sulfur diesel oil by diverting it from the cargo tanks nominated for loading to other tanks through the cargo lines. Four members of the crew allegedly involved in this smuggling attempt were tried and acquitted. The ship was detained for about 14 months and two weeks before its release, the owners tendered a notice of abandonment (NOA) and sought indemnity under its war risk policy for constructive total loss. The vessel’s war risk insurer (Hellenic Club) declined indemnity on the basis that an excluded peril (cl. 3.5 which excluded cover for losses arising out of steps taken “under the criminal law of any state”).

The mortgagee bank turned to mortgagees’ interest insurer, which insured the risk under a standard MIP, and claimed their net loss (indemnity quantified by reference to the outstanding indebtedness).  The mortgagee’s interest insurer declined the claim on various grounds which will be briefly discussed below.                   

The cause of loss is an excluded peril under the war risk policy

Whilst providing cover for seizure, arrest and detention and the consequences thereof, there was an exclusion in the policy stipulating that loss arising out of action taken “under the criminal law of any state” would not be covered under the policy. The mortgagee bank claimed that this exclusion did not apply as detention was unlawful. Relying on the expert advice, the Court was able to find that the detention was carried out in line with Venezuelan criminal law by the order of the Venezuelan Criminal Court and was accordingly lawful. Therefore, the exclusion certainly was relevant in this context.

The alternative argument of the bank was that the exclusion did not apply as the owners themselves were not guilty (or alleged to be guilty) of the offence. The Court, rightly, in the opinion of the author, rejected this alternative argument stating that the exclusion in question did not draw such a distinction (i.e. excluding losses arising out of steps taken under the criminal law of any state only when the assured themselves are involved in the criminal activity and not so when this is not the case). This is in line not only with literal wording of the clause but also the decision of Hamblen J in Atlasnavios-Navegação v. Navigators (The B Atlantic) [2014] EWHC 4133 (Comm) in connection with the equivalent exclusion in the Institute War and Strikes Clauses.

Additional coverage provided by the MIP in question?

When setting out the coverage terms, clause 1 of the policy provided for an indemnity in the event of loss, damage to, or liability, arising in connection with the vessel:

  1. Which prima facie would have been covered by the Owners’ policies but for any act or omission by the Owners (amongst others and/or their servants and/or their agents- referred to as the “Relevant Parties”; or
  2. Which occurred because of “any alleged deliberate, negligent or accidental act or omission … of any of the Relevant Parties”.    

The Bank’s alternative argument was that it was entitled indemnity under cl 1(ii) as the wording of this clause did not expressly cross-refer to the owners’ insurance policies thus providing wide coverage for any loss or damage to the ship as a consequence of any act of omission by any of the crew or any other servant or agents of the owners or charterers or by any allegation of such and act or mission. The Court rejected this argument as well stressing that cl 1(ii) could not be construed in isolation and was dependent on the war risk policy. Put differently, it was held that the words “relevant party” in this clause referred to the owners’ or their employees/agents acting in the context of the relevant insurance contract (war risk insurance) and claim only. This means that this clause only applies in a case where the loss of the ship is prima facie covered by the owners’ insurances and the owners’ insurers refuse to pay by alleging involvement of the owners or agents in the loss.

As highlighted by the Court, a contrary interpretation would have led to outcomes which would have been wholly uncommercial, such as:

  1. The bank recovering losses which would have never recovered under the owners’ policies as they would have been excluded;
  2. The bank recovering sums far in excess of anything recoverable under the owner’s policies, even if covered; and
  3. The bank recovering from mortagees’ interest insurers even where the loss had already been paid under the owners’ policies.

Was there a loss under the war risk policy in any event?

Most war policies contain a detainment clause, and the owner’s war policy here was no exception, which provided that the vessel will be deemed to be a constructive total loss (CTL) when the owner is deprived of possession of the insured vessel for a period of 12 months. Although, the vessel in question was detained by Venezuelan authorities more than 12 months in the present case, given that the detention was lawful and this was an excluded peril under the relevant war risk policy, there can be no prospect of claiming CLT unless it was found that the detention was in fact unlawful. The Court’s finding that the vessel had not been detained unlawfully at any point meant that there was no CLT under the detainment clause.   

What is the key message coming out of the case?

From the perspective of the application of principles of legal construction, the outcome of the case makes sense and does not break any new ground. However, the judgment reiterates the point that MIPs are secondary in nature and issues a stark warning to financiers that there might be several instances where they might fail to recover under their MIPs. Where, for example, drugs placed by criminal carters on board of a ship which eventually lead to detention of the vessel in question, even if the owners are not involved in this criminal activity, the resulting loss will be excluded from most war risk policies given that there is often an exclusion for loss resulting from “detainment… by reason of infringement of any customs or trading regulations in standard war policies (see The Kleovoulos of Rhodes [2003] 1 Lloyd’s Rep 138) and The B Atlantic [2018] UKSC 26). This would mean that any claim of a bank under a MIP will also fail. Similarly, claims airing out of any detention for alleged breach of government sanctions are likely to be excluded from war risk policies as there is an exclusion for loss, damage, cost or expense arising out of “ordinary judicial process” (see cl 4.1.6 of the Institute War and Strikes Clauses- Hulls- Time (1/10/1983). The banks, therefore, need to appreciate the limitations of standard MIPs and consider negotiating tailor-made coverage clauses in their policies.            

Deductions from Charter Hire Made in Good Faith and on Reasonable Grounds?

London Arbitration 1/22

Disputes often arise in time charters on whether any deduction from charter hire can be made especially when there is an alleged underperformance of the chartered vessel.

It is well established principle of law that if a deduction is made from hire, such deduction must be made in good faith and be based on reasonable grounds (otherwise such deduction amounts to breach of contract on the part of the charterer). This effectively means that in case of a deduction for underperformance of the chartered vessel, the charterer might be called upon at short notice to demonstrate that its deductions were made bona fidei and its calculations were based in reasonable grounds (The Kostas Melas [1981] 1 Lloyd’s Rep 18).

This was the central issue in this dispute. The charterers withheld US$ 53,550.40 gross in respect of what they claimed was time loss due to underperformance to the extent of 6.6938 days (off-hire).

When the tribunal asked the charterers to demonstrate a prima facie case as to whether the deduction from hire was made bona fidei and on reasonable grounds, they responded with a report of weather routing company they appointed, some further comments from that company and the fact that the owners did not appoint their own weather routing company.

The tribunal found that charterers failed to address the question of good faith nor had they made any attempt to show that they had a claim for off hire. It was also noted by the tribunal that the charterers did not address the point made by the owners that there was no speed/consumption warranty in the charterparty as the fixture description of the ship was qualified by the words “all details about/in good faith”.

The tribunal here was simply deciding that the charterers had not shown that their deduction was made in good faith and on reasonable grounds so they were wrong to withheld the deduction from hire. It is theoretically open to charterers to claim that there was an underperformance of the chartered vessel but as hinted by the tribunal, based on the wording in the charterparty qualifying the performance of the vessel, it will be an uphill struggle to prove the existence of a speed/consumption warranty and the fact that it was breached!        

 

Misrepresentation and “Reservation of Rights” in Charterparties

SK Shipping Euorope Ltd v. Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights.

The following day, the owners purported to terminate the charterparty on the basis that the charterers’ message was itself a renunciation.

The trial judge (Foxton, J) found that there was no actionable misrepresentation. Furthermore, it was held that charterers’ conduct (especially fixing the vessel for a sub-charterer in July 2017 for a voyage to Tunjung Pelapas) was incompatible with an attempt to reserve rights to set aside the charterparty for misrepresentation) even though they expressly indicated that they “reserve their rights” after alleging that the owners misrepresented the capabilities of the chartered vessel (i.e. speed and consumption) during charter negotiations. The charterers appealed on both grounds.

Was there an actionable misrepresentation?

The key to the charterers’ appeal was a letter sent on behalf of the owner during pre-contract negotiations on 22 November 2016. The charterers argued that the representations made to them in that letter with regard to the chartered vessel’s last three voyages, its average speed and performance, included a representation as to future performance; and such representation was repeated in each of the parties’ subsequent communications by the restatement of the same data; and the trial judge was erred in law in concluding that there was no inducement

The Court of Appeal found that on an objective reading of the 22 November 2016 letter, a prospective charterer would have understood it be saying “this is how my vessel has performed on its most recent voyages and these are the warranties which I am prepared to give” and nothing more. It can, therefore, be safely concluded that there was no representation as to the future performance of the vessel with regard to speed and consumption. The tribunal also found that the explanation in the 22 November 2016 letter relating to the average of the vessel’s last three voyages was deliberately omitted once the parties began to negotiate. The natural conclusion that emerges from that is that they did not become part of the negotiations on which the charter in dispute was based or became “embedded” in the charterparty. (given that the Court already found that the representations in the letter did not include a representation as to the future, this finding had no impact on the judgment). Also, the Court was adamant that the trial judge made no error of law when concluding that there was no inducement.

Reservation of Rights

This part of the judgment has serious practical consequences for the shipping industry. A part of the industry until recently operated on the basis that the words “reserving my rights” would provide a silver bullet for an innocent party in a dispute or litigation that might follow! There is now authority to the effect that this is not necessarily the case.

The Court of Appeal agreed with the general statement that “a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract”. However, just like the first instance judge, the Court stressed that this was not an inevitable rule. On this point, the Court agreed with the Commercial Court’s statement that actions of the charterer, i.e. nature and consequences of any demand for future performance, may in some instances be incompatible with a reservation of rights. By considering all relevant circumstances existed at the time the order to proceed to Tanjung Pelapas was given, i.e. the fact that the voyage would last two months and that the general reservations made at the time concerned other complaints, not just the misdescription of the vessel, the Court of Appeal endorsed the decision of the Commercial Court that the order was intrinsically affirmatory conduct.

Lessons!

The judgment is a good reminder that construction of the representations from an objective point of view will be vital in determining whether there is an actionable misrepresentation or not. But this is hardly new. More significant message to the industry (and lawyers) is that it should not be assumed that “reservation of rights” language will always have the effect of reserving the rights of an innocent party. This kind of language will be construed in the light of surrounding circumstances and whether it will have the desired impact will largely depend on the future actions of the innocent party.  

It is worth noting that in deliberating the consumption and speed warranty issue, the Court of Appeal in its judgment made reference to the work of late Dr Nikaki and Professor Soyer “Enhancing Standardisation and Legal Certainty through Standard Charterparty Contracts” published as Chapter 5 in Charterparties Law, Practice and Emerging Legal Issues (Informa Law, 2018)).  

          

Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law


Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.


The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipts and/or Messenger Receipt(s) and/or Warehouse Receipts and/or other shipping document(s).

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:


i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.

Off-Hire Clauses- Burden of Proof, Impact of Covid-19 and Legal Construction

London Arbitration 6/22

The vessel was chartered on trip basis on an amended NYPE form from India to China. The vessel was delivered to charterers’ service on 29 June 2020 and arrived at the first loading port at 04.30 on 30 June. The vessel then commenced drifting until 19.22 on 30 June in order to complete the cleaning of the holds. In fact, it was a requirement under the charterparty that the vessel’s holds to be washed down by fresh water, dried and ready in all respects to receive the charterers’ intended cargo of iron ore pallets/fines/lumps to an independent surveyor’s satisfaction. The charterparty also allowed owners 24 hours for cleaning the holds. The owners acknowledged that the 24 hours permitted expired at 13.44 on 30 June and they had, therefore, exceeded the allowance permitted by 5 hours and 38 minutes by completing cleaning at 19.22 on 30 June. They have, on that premise, accepted that the vessel was off hire during this period. However, charterers argued that hold cleaning was not completed at the end of the drifting period (by 19.22 on 30 June) and submitted that extensive manoeuvring by the vessel after the end of the drifting period has been an attempt by the owners to delay the time of arrival at the first load port with clean holds to ensure that the vessel would not be seen to have used time which would otherwise have fallen outside the agreed cleaning period. In fact, it was alleged by the charterers that hold cleaning continued between the end of the drifting period and was ultimately completed at the arrival of the vessel at the first load port. On that basis, it was the contention of the charterers that the vessel was off hire until 03.36 on 1 July (the time which the notice of readiness was tendered). To substantiate their point, the charterers relied on a message sent to them by owners on 26 June setting out their plan to clean holds taking into account the short ballast leg between previous discharge port and next port of loading.

The arbitration tribunal held that there was no evidence to substantiate the allegations made by the charterers that cleaning of holds continued after 19.22 on 30 June or that the voyage from the end of the drifting period to arrival at the first load port was prolonged by any further cleaning undertaken by the vessel. Therefore, the vessel was off hire until 19.22 on 30 June. Without being aware of all the evidence presented to the tribunal, it is hard to criticise the finding of the tribunal on this point but as a general principle of law the burden of proving something was not the case falls upon the party arguing it and clearly charterers failed to prove their point. There was nothing in the message on 26 June relied on by the charterers to suggest that owners did in fact not complete cleaning of holds at the time they said they did. In the message, the owners simply indicated that completing cleaning might be problematic in the time frame, but they set out a schedule to achieve the required cleaning.

It was also argued by charterers that the vessel was off hire from 14.40 on 26 July until 15.30 on 28 July while awaiting a quarantine officer’s permission to discharge in China. The delay was caused as one of the crew members had a slight fever (37.4 Celsius) and it was as a result requested by the quarantine officer that a nucleic acid test is conducted.

The relevant provisions of the charter party were:

Clause 15   

In the event of loss of time from deficiency of men or stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, drydocking for the purpose of examination or painting of bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost.                         

Clause 45

Officers and crew to comply with vaccination and sanitary regulations in all ports of call and corresponding certificates to be available on board, enabling the vessel to obtain free pratique by radio.

 The crux of the charterers’ argument was that illness of crew member constituted a deficiency of men within cl 15 or alternatively the events fells within the definition of “any other cause” in cl 15. It was also contended that the owners were in breach of cl 45.

The tribunal was of the view that a body temperature of 37.4 Celsius was within the normal range of temperatures for human body and there was no reasonable ground to assume that the crew member was ill. Therefore, there was no good reason for the actions of the quarantine officer which were clearly excessive and arbitrary. On that basis, the delay was not an off hiring event within cl. 15- there was simply no “deficiency” of crew or the full working of vessel was not affected adversely as a result of a similar incident. It was also held that cl 45 was not relevant as there was no evidence that the owners and/or master failed to comply with the vaccination and sanitary regulations at the discharge port or there was evidence of any absence of certificates required be on board.

The events at the discharge port took place when China was implementing very strict measures to deal with the outbreak of the pandemic. That said, terms of a commercial agreement still need to be construed in line with the established principles of law and construction. The finding of the tribunal emphasises once again the fact that off hire clauses (just like any exception clause) will be construed narrowly (as illustrated recently in The Global Santosh [2014] EWCA Civ 403 by the Court of Appeal).

It is also clear from the finding of the tribunal that burden to prove that the off hiring event took place is on the charterers and mere speculation will not be adequate to convince the arbitral panel or judge that the event might have occurred in a particular way.            

Performance Claims in Trip Time Charters- Log Book Entries and Weather Routing Company Reports

London Arbitration 23/21

The charterted vessel was on a trip charter of about 55 days without guarantee from Recalada (Argentina) to Cuba. The charterparty form used was NYPE 1946 with additional clauses, and contained a performance warranty (cl 74) which stipulated:         

SPD/CONS ARE ABOUT, UNDER GOOD WEATHER CONDITION’ I.E. THE WINDS NOT EXCEEDING BF4, EVEN KEEL, NO DECK CARGO, NO SWELL, NO ADVERSE CURRENTS, THE SEA STATE UP TO DOUGLAS SEA SCALE 3 (MAX 1.25M). THE WORD ABOUT IN SPEED/CONSUMPTION REFERS TO AN ALLOWANCE OF +/- 0.5 KNOTS ON SPEED AND +/- 5% ON BUNKER CONSUMPTION RESPECTIVELY BOTH ALWAYS IN VESSEL’S FAVOUR. ANY GAIN ON TIME AND/OR CONSUMPTION TO BE SET OFF AGAINST LOSS OF TIME AND/OR CONSUMPTION – IF ANY.

ABT 13 KNOTS ON ABT 20 TONS VLSIFO + 0,1 MT LSMGO ECO SP/CONS:

ABT 12 KNOTS ON ABT 18 TONS VLSFO + 0,1 MT LSMGO

Clause 67 of the charterparty also provided:

The Charterers may supply an independent weather bureau advice to the Master, during voyages specified by the Charterers and the Master shall comply with the reporting procedure of the weather bureau. However, the Master remains responsible for the safe navigation and choice of route. Alternatively Charterers have the option to instruct the Master to report daily to a weather bureau during the execution of sea voyages. The weather bureau will subsequently produce a performance analysis report.

Evidence of weather conditions shall be taken from Vessel’s logs. Consideration of minimum 24 hours continuous good weather periods from noon to noon. No hire deductions for alleged underperformance claims. Vessel to be monitored by Charterers’ appointed weather routing company strictly in accordance with the performance warranty. The independent weather reporting bureau appointed by Charterers will be for their account. This does not preclude Owners from appointing their own independent weather reporting bureau for their account which evidence along with Vessel’s evidence shall be taken into consideration by all parties.

The charterers instructed a weather routing company (WRC) which prepared a report on the performance of the chartered vessel during the trip concluding that the chartered vessel achieved a good weather performance speed of 10.63 knots on the voyage compared to the minimum 12.5 knots warranted. As part of its assessment, the WCR employed a “good weather parameter” which utilised significant wave height (which naturally included swell) and ignored the effect of the adverse currents. Accordingly, the charterers claimed that the trip took an additional 87.78 hours (so was off hire during that period)- a sum of US$ 49,383 and they also claimed excessive bunker consumption in the sum of US$ 31,423.20. The charters also contended that the hull was fouled on entry into charterparty, which was a breach of line 22 of the Charter form providing that “On delivery the vessel to be… tight, staunch and in every way fitted for the service.” The charterers also challenged the veracity of the logbooks as “not true and correct logs of the voyage.”            

The arbitrator found that:

1) In the light of the evidence presented by the charterers, the vessel’s hull was fouled on entry into the charter (especially the constantly high slip figures on the laden voyage were inconvertible indication of hull fouling). This was a defect of the hull in breach of line 22 of the charterparty. Moreover, as the vessel was not in every way fit for the service to be undertaken, the owners were in breach of the charterparty, which resulted in a loss of time. The loss of time was an off-hire event under cl. 15 of the charterparty.

2) The arbitrator was convinced that the master exaggerated the wind and sea conditions recorded in the log book from sailing from Recalada until 16 February so he failed to maintain a true and correct log in breach of cl. 11.

3) The arbitrator found that the role of cl 67 was to evaluate the performance strictly in accordance with the parameters set in this clause. However, WRC essentially devised its own methodology of assessing the vessel’s true performance by construing the parameters set in cl. 67. Therefore, WCR’s findings were based on non-contractual criteria and not binding. However, based on the finding that the log entries were not accurate, the arbitrator was satisfied that the vessel underperformed in speed due to a hull deficiency.    

The finding of the arbitrator was in favour of the charterer but it clearly demonstrates that if the charterparty specifies the source of data from which good weather assessment should be derived, that data needs to be used and an assessment that employs other methods (or data) will be regarded as non-contractual regardless of how sound those methods are.  The arbitral finding also shows that increasingly reports from weather routing companies play a significant role in performance claims and the days of relying solely on the log book entries of the master are long gone! Performance claims usually require complicated assessment methods and there is plenty technical analysis in this arbitral finding that might be useful to parties and arbitrators in the future especially when depicting “good weather” qualification.          

Athens Convention- Elaboration on key terms “defect in ship” and “fault”

Warner v. Scapa Flow Charters (No 2) [2021] CSOH 92

The pursuer was the widow of Mr Warner who tragically died in a technical exploratory diving trip on a wreck off Cape Wrath on 14 August 2012. The defenders facilitated the trip and skippered the boat (MV Jean Elaine). While walking in his cumbersome gear, including diving fins, preparing for a dive, Mr Warner fell off the deck of the vessel. This fall caused him, unknowingly, to suffer internal injuries. Stating that he was fit, he started his dive but during the dive he got into difficulties and made a rapid surface ascent due to the pain of his internal injuries. By the time he surfaced, his breathing apparatus was no longer in situ and he drowned.       

Mrs Warner brought an action for damages on behalf of her son. The action was within the scope of the Athens Convention 1974 (by virtue of the Carriage of Passengers and their Luggage by Sea (Domestic Carriage) Order 1987). It was argued that:

  1. Mr Warner’s injury arose from or in connection with a “defect in ship”. This meant under Article 3(3) of the Athens Convention that the carrier’s fault could be presumed.
  2. Even if not, the carrier was at fault as it failed to make adequate risk assessment.

The Outer House of the Court of Session held that the injury was not connected with or arose from a “defect in ship”. There was no evidence that the configuration of the deck defective. Also, it was pointed out that there were handrails that could have been put to sensible use, but at the time of the incident Mr Warner was not using them. The Court, however, held that the carrier was at fault in that he failed to recognise that the system of dive preparation he had set up or allowed to develop permitted or even encouraged divers to walk on deck in fins, and that was an inherently risky activity to the extent that consideration should have been given to putting in place mechanisms apt to eliminate it or at least bring it under control. Given the known risk of falls while walking in fins, particularly given the equipment worn by technical divers, and the unavailability of swift medical assistance on board, there should have been put in place proper precautions to mitigate the risk. Such precautions would have eradicating or minimising the risk of falling and Mr Warner would not have fallen at all, or it he did, he would not have  sustained a serious injury as he in fact sustained, because the force of any fall would probably have been broken by him holding on to a handrail or being supported by the onboard deckhand.  Accordingly, the defenders were liable to make reparation to the pursuer in terms of Art 3(1) of the Athens Convention 1974.               

What do we learn from the case?

The Athens Convention 1974 does not provide a definition for the term “defect in ship”. This means that determining whether an injury has occasioned from a “defect in ship” needs to be addressed by the national court. It is hard to suggest that the court’s handling of the matter in the present case is not satisfactory. That said, it should be noted that 2002 version of the Athens Convention provides a more rounded definition for this term. There, a defect in the ship has been described as “any malfunction, failure or non-compliance with applicable safety regulations in respect of any part of the ship or its equipment when used for the escape, evacuation, embarkation and disembarkation of passengers, or when used for the propulsion, steering, safe navigation, mooring, anchoring, arriving at or leaving berth or anchorage, or damage control after flooding; or when used for the launching of life saving appliances” (Article 4 of the Athens Convention 2002). Given that the main finding of the Court here was that the carrier failed in their risk assessment and there was no evidence that the deck’s configuration was defective, it is unlikely that a different outcome would have been reached even if Athens Convention 2002 had applied in this case.       

It is also left to the national law to determine what amounts to “fault” for the purposes of Article 3 of the Athens Convention 1974. This enabled the Court to adopt a flexible approach in determining whether the carrier was at fault for failing to make appropriate assessment of the risk. The Court initially focussed on a statutory duty to carry out a risk assessment of those on board under Regulation 7 of the Merchant Shipping and Fishing Vessels (Health and Safety at Work) Regulations 1997 but then moved its focus to general duty to exercise reasonable care for the health and safety of others onboard and a positive obligation to assess risk. This approach is in line with the general principles of tort law and a similar approach has been employed by British courts in the context of deliberating what amounts to “fault” under the Athens Convention- see Janet Dawkins v. Carnival PlC (t/a) P & O Cruises [2011] EWCA Civ 1237.

One positive development coming out of the case, especially for small maritime operators and their insurers, is that the Court found that a risk assessment was carried out by the skipper here although it was not written down or recognised as such (and of course although it was not adequate). This indicates that risk assessments need not to be formal affairs and a dynamic risk assessment carried out by the skipper or operator might be deemed to be adequate in some instances.            

For a comprehensive analysis of these issues see:

Carriage of Passengers by Sea: A Critical Analysis of the International Regimeby B. Soyer and G. Leloudas published

[2018] Michigan State University International Law Review, Volume: 26, Issue: 3, Pages: 483 – 535

This article has been cited with approval by the District Court of Columbia in Erwin-Simpson v. Berhard (DC DC, 2019).