Category: Charterparties

Safe Port Warranty in Charterparties- London Arbitration 2/23

The chartered vessel (a gearless Panamax bulk carrier) ran aground while entering the port of Chaozhou under pilotage. As a result, she suffered damage to hull structure. The owners claimed the cost of repairs and associated damages in the amount of US$ 1,158.559.59 plus interest and costs on the premise that charterer directed the vessel to an unsafe port in breach of a safe port warranty in the charterparty.


The charterers defended the claim arguing that the vessel was unseaworthy as she lacked the proper charts which prevented the master from preparing an effective berth-to-berth passage plan (The CMA CGM Libra [2021] UKSC 51). On that basis, the charterers argued that unseaworthiness was the effective cause of the loss and as the Hague-Visby Rules were incorporated into the charterparty by a Paramount Clause, they were able to rely on breach of Article III Rule (1) of the Rules as a defence of circuity of action to the owners’ claim for breach of the unsafe port warranty, according to the principle in Post Office v. Hampshire [1980] QB 124.

Was the port unsafe?


There is authority pointing to the fact that a systematic error in the infrastructure of a port could potentially make that port unsafe (The Ocean Victory [2017] UKSC 35)- the pilots employed by a port can certainly be considered part of that port’s infrastructure. It was in essence the submission of the owners that the pilot’s failure to deploy the stern tug in “indirect” mode to bring the stern of the Vessel around to port and her head around to starboard meant that he was incompetent. (according to the owners, this failure demonstrated a disabling lack of skill or knowledge amounting to incompetence in line with the test laid down in The Eurasian Dream [2002] 1 Lloyd’s Rep 719). The tribunal disagreed. After a technical evaluation assisted by expert mariners, it was held that the main fault of the pilot in this case was failure to execute the manoeuvre required to enter into a port (that poses some navigational challenges) correctly. This was deemed to be an isolated error on his part. The pilot worked at Chaozhou for 5 years before this incident, continued working as a pilot there for some five years afterwards, and had not been involved in any other incidents. He had demonstrated the ability to control the Vessel and the tugs in other respects during this incident.


It is not beyond the bounds of possibility that a pilot employed by a harbour authority could be regarded as incompetent but the burden that the owners need to discharge in such a case is a considerable one and unless it can be demonstrated that the pilot in question is recently appointed and no adequate training opportunities are offered to him/her by the harbour authority to familiarise himself/herself with particular navigational challenges the relevant port poses, it is likely that any navigational error of the pilot will be judged as one off as was the case here.

Was the vessel unseaworthy?

The finding on the safety of the port was adequate to dispose the owners’ claim but the tribunal also made the following observations regarding the vessel’s seaworthiness. It was found that the vessel did not have the up-to-date Chinese paper chart on board showing the limits of the dredged deepwater channel. On that basis it was held that the passage plan must have been defective as it could not have been based on appropriate channel data at the time the vessel departed the loading port. The tribunal also found that as a result the Master and deck team failed to alert the pilot to his errors and failed to attempt any action to avoid the grounding. Therefore, it was evident that the vessel was unseaworthy. However, it was held that the unseaworthiness was not an effective cause of the grounding. We can only assume that the tribunal after evaluating the expert evidence concluded that pilot’s negligence was the main effective cause of the grounding- put differently but for the pilot’s negligence the vessel could have still entered the port in a safe manner despite the fact that the passage plan, based on incomplete data, was defective. This is obviously a factual finding, and it is hard for us to comment on without having access to the expert evidence that the tribunal had the chance to see.

That said it would have been very interesting to see how the tribunal would have reacted to the point raised by the charterers: i.e. if the port had been deemed unsafe and unseaworthiness was found to be an effective cause of the loss. In that case, would the charterer be able to avoid liability without having the need to demonstrate that the Vessel’s unseaworthiness was a novus actus interveniens which severed the chain of causation between the unsafety of the port and the grounding? Possibly yes, but that is a moot point which needs to be decided on another day.

Implied term under time charter. Reinspection of holds following initial failure.

Pan Ocean Co Ltd v Daelim Corporation [2023] EWHC 391 (Comm) (24 February 2023)  DL LILAC, involved an appeal under section 69 of the Arbitration Act 1996 heard by Sir Ross Cranston acting as a High Court Judge. The issue of law was:  

“whether there was an implied term of the subject time charter having the effect that where the vessel was off hire under clause 69 after a failed holds inspection and the Master advised that hold cleaning had been completed and called for a reinspection, the charterer was obliged ‘to have the vessel re-inspected without delay’.”

The case involved a time charter trip in early 2017 on an amended NYPE 1993 form to carry a cargo of urea in bulk. Clause 69 was headed “BIMCO Hold Cleaning/Residue Disposal For Time Charter Parties” and provided:

“Vessel’s holds on delivery or on arrival 1st load port to be clean swept/washed down by fresh water and dried so as to receive Charterers intention cargoes in all respects free of salt, rust scale and previous cargo residue to the satisfaction of the independent surveyor.

If vessel fails to pass any holds inspection the vessel to be placed off-hire until the vessel passes the same inspection and any expense/time incurred thereby for Owners account.”

The charterers deducted US$110,765 in hire and US$16,308 in bunkers arising out of the failure of a cargo holds inspection at Jubail (the loading port).  The holds initially failed an inspection between 0700 and 1230 on 16 February 2017 due to the presence of rust, paint flakes and cargo residue. At 14.30 on 19 February 2017 the vessel was ordered off-berth. An hour later the master notified the agents that the vessel had been cleaned and requested a reinspection. At 22.18 the vessel shifted to the inner anchorage and rebirthed at 20.42 on 3 March 2017. At 0700 on 4 March 2017, the holds were reinspected at 11.00 the vessel passed the inspection

The owners contended that it was an implied term of the charter party that the charterers should carry out any reinspection with reasonable diligence and without any undue delay and the charterers were in breach of that implied term because the reinspection took so long to arrange. They argued further that the charterers were not entitled to treat the vessel as off-hire after 1530 on 19 February because any loss of time after then was caused by the charterers’ breach of their obligation to arrange a reinspection with diligence. The owners also referred in their closing submissions to an arbitration report in Lloyd’s Maritime Law Newsletter (“LMLN”) 17/10 “where the clause used was virtually identical to that adopted in the instant  case.

Sir Ross Cranston concluded that the Award could be read in such a way that the Tribunal did in fact apply the correct legal test for implied terms notwithstanding the reference to “reasonable” in paragraph 25 of the Award. In the opening words of paragraph 25 the Tribunal indicated that it was adopting the owners implied term argument, in which their closing submissions had referred to the “need” for an implied term, and that commercially any other interpretation was not sensible – a reference to the necessity and obviousness benchmarks in Lord Neuberger’s judgment in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742.

Any implied term had to oblige both parties to take reasonable steps to cooperate to organise a reinspection without undue delay. That was all that would be required under the test of necessity for an implied term to protect both parties from delay of the other side and would be consistent with clause 69. The Tribunal was wrong in law to find that the vessel was immediately back on hire once the Master had notified the agents on 19 February 2017 that the holds were ready for reinspection. That was inconsistent with clause 69 of the charterparty, and did not accord with the implied term as found by the Tribunal.

What the Tribunal needed to do was to decide by when the reinspection should have been undertaken had there been compliance with the implied obligation to exercise reasonable diligence to have the vessel reinspected without undue delay. The case wasremitted to the arbitrators todecide what could and should have been done by the parties regarding reinspection, whether either party was in breach in this regard, the relevant timescales (e.g., the time within which the reinspection could have been arranged and completed had there been no breach of the implied obligation), and the financial consequences of any breach.

Caught up in the sanctions web? Not quite: a lucky escape.

The trouble with sanctions, especially with shipping, is that they can hit innocent third parties almost as hard as sanctionees themselves. Full marks, therefore, to Foxton J in Gravelor Shipping Ltd v GTLK Asia M5 [2023] EWHC 131 (Comm) for finding a way to rescue a shipowner caught in the cross-fire when its Russian financiers were fingered by the UK, the EU and the US.

Cypriot owners Gravelor had financed a couple of their small to medium bulkers by a bareboat arrangement with Russian lenders GTLK. These finance charters required hire payments into a Hong Kong account or any subsequently nominated account; they bound Gravelor to purchase the ships at expiry, but also by Clause 19 gave it an option to buy during the charter on three months’ notice on payment of all sums owing plus a “termination amount”. In the event of default, the lenders themselves had a right under Clause 18 to cancel the charter and insist on a sale to Gravelor against payment of all sums due, with a right to sell elsewhere if Gravelor would or could not come up with the money.

Following the 2022 Ukraine debacle, GTLK was sanctioned by the US, the UK and the EU. (It made a half-hearted and decidedly fishy bid to avoid the sanctions by a supposed sale of the business, but we can ignore this here.) At that point the vessels’ insurers and P&I club backed out, and it became illegal for Gravelor to credit the Hong Kong account stipulated in the charter or in any other way to make cash available to GTLK.

To protect its rights, Gravelor immediately gave notice exercising its option to purchase; it paid no more sums in Hong Kong but offered to pay to a blocked account elsewhere. GTLK declared Gravelor in default, gave notice cancelling the charter and rejected Gravelor’s notice exercising the option. It also put in a formal demand for payment under Clause 18; it did disingenuously offer to transfer the vessels against payment to a Russian Gazprom account nominated by it, no doubt hoping that if Gravelor could not do so, this might enable it to get the vessels into its own hands.

Gravelor now sought specific performance of the purchase agreement, arguing either that GTLK had exercised its option to sell under Clause 18 and thereby given them the right to buy, or (which was more advantageous to them) that they themselves had validly exercised their option under Clause 19. Accepting that the latter claim raised triable issues, in the present proceedings they concentrated on the former and sought an immediate interim order for transfer of the vessel.

Despite what might look like serious obstacles, they were largely successful. Foxton J accepted that there was no objection to such an interim order (rightly so: see The Messiniaki Tolmi (No 2) [1982] Q.B. 1248, esp at 1265-1269), if necessary on the basis of paying the higher of the sums due under Clause 18 or 19. By cancelling the charter under Clause 18 the owners had implicitly given notice to Gravelor requiring it to buy the vessels, thus creating a contractual obligation to transfer them, and their demanding payment of sums due had had the same effect.

GTLK then fell back on payment arguments. First, they said that once they had demanded payment into the Gazprom account, this was what was required under the charter, and if for what ever reason Gravelor could not make it (which they clearly could not), then any right of theirs to a transfer of the ship disappeared. Foxton J neatly disposed of this by pointing to clause 8.10, saying that if the owner was sanctioned and payment as stipulated could not be processed as a result, the parties would negotiate another means of payment. This, he said, applied to (in effect) any impossibility of payment, whether by Gravelor or to GTLK. Furthermore, the fact that payment might have to be in Euros rather than dollars did not affect the matter (a point previously decided in the slightly similar case of MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm).

Secondly, GTLK then argued that if the only payment open to Gravelor was to a blocked account (which in EU law was the case), this could not amount to payment triggering a right to the vessel. Despite cases like The Brimnes [1973] 1 WLR 386 holding that payment was not payment unless immediately cashable by the payee, his Lordship rejected this too: payment meant payment that would be available to a payee in normal circumstances, even if this particular one had been sanctioned.

GTLK’s last line of defence was that specific performance was inappropriate and damages more appropriate, but this too was quickly disposed of. A distinct line of authority held that if damages might be difficult to extract from a defendant, that itself might make them an inadequate remedy: the judge applied that here, pointing out that quite apart from any credit risk encashing a money judgment against a sanctioned entity would be fraught with difficulty under the sanctions legislation.

Subject to a minor matter of no real importance here, he therefore said in effect that the order should go.

The news is therefore good for Gravelor. But there is an element of luck here. Had the provisions as to payment, or possibly the options to sell or purchase, been different, there might not have been the same result in the Commercial Court. There is something to be said for some general rules about the effects of sanctions on contracts, for example dealing with the effect of payment to a blocked account on contractual rights. But that is a medium to long-term idea.

Meanwhile, both vessels, presumably still manned by Gravelor crews, seem at the time of writing to have been on the high seas in the Baltic, a comfortable distance from the nearest Russian territory (at Kaliningrad). So not only does Gravelor now have an English judgment: it might even have its ships back.

Covid, off hire and construction of clause requiring owners’ consent to deductions from hire.

Fastfreight Pte Ltd v Bulk Trident Shipping Ltd (Re Arbitration Act 1996) [2023] EWHC 105 (Comm) (24 January 2023) is a case involving off- hire arising out of lengthy COVID related delays off a Chinese discharge port in 2021.

The “Anna Dorothea”, was chartered for a trip time charter for the carriage of a bulk cargo from East Coast, India to China in April 2021 on an amended NYPE 1993 form.  The vessel loaded a cargo of iron ore pellets at Visakhapatnam, India for carriage to China, and was ordered by the Charterers to sail to Lanqiao for discharge. It arrived off that port on 4 May 2021 but was not able to obtain a berth. In the event, the cargo was not discharged, and the vessel was not redelivered by the Charterers to the Owners until 28 August 2021.

Except for a period of five days between 22 and 26 May 2021, the Charterers did not pay any hire for the vessel between 4 May and 28 August 2021. They contended that the vessel went off-hire on 4 May 2021 and remained off-hire thereafter on the basis that three crew members had positive rapid lateral flow tests for Covid on 1 May 2021. Owners case was that it was impossible to arrange for PCR testing of those crewmembers, but if they had Covid-19 (lateral low tests not being wholly reliable) they would have recovered by no later than 13 May, as their temperature records for that day and subsequent days showed. The Charterers relied on clause 67 to justify their putting the vessel off hire.

Owners claimed that charterers could not deduct for off hire by virtue of line 146 appended to cl.11 which was headed “Hire Payment” and provided:

“(a) Payment

Payment of Hire shall be made so as to be received by the Owners or their designated payee in cash in to Owners’ bank account in Germany…

(line 146) Notwithstanding of the terms and provisions hereof no deductions from hire may be made for any reason under Clause 17 or otherwise (whether/ or alleged off-hire underperformance, overconsumption or any other cause whatsoever) without the express written agreement of Owners at Owners’ discretion. Charterers are entitled to deduct value of estimated Bunker on redelivery. Deduction from the hire are never allowed except for estimated bunker on redelivery…

Clause 17, headed “Off Hire” stated:

“In the event of loss of time from deficiency and/or default … of officers or crew … or by any other similar cause preventing the full working of the Vessel, the payment of hire and overtime, if any, shall cease for the time thereby lost. Should the Vessel deviate .. during a voyage, contrary to the orders or directions of the Charterers, … the hire is to be suspended from the time of her deviating .. until she is again in the same or equidistant position from the destination and the voyage resumed therefrom. …

If upon the voyage the speed be reduced by defect in, or breakdown of, any part of her hull, machinery or equipment, the time so lost, and the cost of any extra bunkers consumed in consequence thereof, and all extra provide directly related and actually paid expenses (always limited to one shift maximum) expenses [sic] … may be deducted from the hire only after having reached an agreement with the Owners on the figures (costs, times, bunkers). (emphasis added)”

The charterparty also additional clause 67 BIMCO Terms:

“Notwithstanding anything within this charter party, the riders, the recap, and/or the “BIMCO infections or contagious disease clause for time charter parties” and/or its equivalent, in the event any member of the crew or persons (except those on charterers’ behalf) on board the vessel is found to be infected with a highly infectious or contagious disease and the vessel has to (i) deviate, (ii) be quarantined, or (iii) barred from entering any port, all time lost, delays and expenses whatsoever shall be on owners’ account and the vessel shall be off-hire.

…

Owners are fully aware that vessel is fixed for one trip via East Coast India to China.“

The arbitrators made a partial final award of hire in the sum of US$2,147,717.79, without prejudice to the Charterers’ right thereafter to counterclaim the whole or any part of that sum, and reserved jurisdiction accordingly as well as jurisdiction to decide all other undetermined matters that had been referred to them. Three days ago Henshaw J decided  to uphold the decision of the arbitrators on an appeal on the following question of law.

“Where a charterparty clause provides that no deductions from hire (including for off-hire or alleged off-hire) may be made without the shipowner’s consent: Is non-payment of hire a ‘deduction’ if the Vessel is off hire at the instalment date?”

Henshaw J noted the importance of the opening words of line 146 “Notwithstanding of the terms and provisions hereof”. Line 146 singled out cl. 17, the off hire provision, as one which it qualifies. Clause 17 was not primarily directed at allowing the offsetting of overpaid hire but was mainly directed at the prior question of whether hire accrues or ceases to accrue at all. The final part of cl.17 was specifically directed at the making of deductions in the sense of subtractions from hire payments but that portion of the clause clearly included its own bespoke provision requiring the Owners’ written agreement. Read as a whole and in context, the restriction on “deductions” in line 146 applied to any exercise of rights that would otherwise arise under or by reason of cl 17 to reduce (wholly or partly) a hire payment based on the vessel being off hire. 

The use of the words “whether/ or alleged off hire” showed that line 146 was designed to cater for situations where a dispute exists about whether the vessel is off hire or not, and to address the situation by requiring the hire to be paid, leaving the argument for later. The Owners did not have an unfettered discretion when deciding whether or not to agree to an alleged off-hire: their discretion had to be exercised for a contractually appropriate purpose (so there has to be a genuine dispute about the deduction) and rationally. Under clause 23 the Charterers had a cross-claim in debt for any overpaid hire which was secured by a lien on the vessel. The arbitrators were correct to reject Charterers’ submission, that line 146 applied only to set-offs and cross-claims.

The conclusion as to the construction of line 146 meant that it was not necessary to consider the effect of the Bingham J’s decision in The Lutetian [1982] 2 Lloyd’s Rep. 140 that where the vessel is off hire at the date on which a hire instalment would otherwise fall due, the effect of what is now cl. 17 of the charterparty is that the obligation to pay hire is suspended. The Lutetian clearly could not be dispositive of the present case, because it contained no equivalent to line 146.

Comment.

Essentially the additional clause in line 146 reverses the position with claims for off hire. The usual position with a time charter is that a charterer may make deductions on an interim basis only where it can establish that they were made both in good faith and on reasonable grounds at the time of deduction (those requirements applying whether the deduction is made pursuant to equitable set-off or an express term of the charterparty). This is reversed with line 146. Hire continues to be paid, unless owners consent to the deduction for the claimed off hire, with charterers then having to claim overpaid hire from owners. This discretion has to be made for a contractually appropriate purpose -there must be a genuine dispute about the deduction – and rationally.  For charterers it is a case of “pay now, claim back later.”

 COVID may have provided the occasion for this decision, but there is no decision as to whether charterers will be able to claim back hire for this period as off-hire. This will involve construing how cl.67 will operate in circumstances where the port authority refuse to allow the vessel into berth for a substantial period of time during which it is clear that the affected crew members must no longer be infected.

But that is a matter for another day.

What’s coming in 2023?

What’s coming in 2023?

Nearly two weeks into the New Year and the IISTL’s version of ‘Old Moore’s Almanack’ looks ahead to what 2023 is going to have in store us.

Brexit. EU Retained EU Law (Revocation and Reform) Bill will kick in at end of the year. It will be a major surprise if the two Conflicts Regulations, Rome I and Rome 2 aren’t retained, but not the Port Services Regulation.

Ebury Partners Belgium SA/NV v Technical Touch BV, Jan Berthels [2022] EWHC 2927 (Comm) is another recent decision in which an ASI has been granted to restrain proceedings in an EU Member State (Belgium) in respect of a contract subject to English jurisdiction.

Electronic bills of lading. Electronic Trade Documents Bill. Likely to become law in 2023 and to come into effect two months after getting Royal Assent. The Law Commission will publish a consultation paper “Digital assets: which law, which court?” dealing with conflicts of law issues in the second half of 2023.

Autonomous vessels. The Department for Transport consultation on MASS and possible amendments to the Merchant Shipping Act 1995 closed in November 2021. Maybe some results in 2023?

Supreme Court cases

Okpabi v Royal Dutch Shell. The case may well go to trial in 2023, although in May 2022 the High Court EWHC 989 (TCC), held it was premature to grant a  Group Litigation Order and directed that each individual claimant should specify additional details to formulate a proper cause of action for the defendants to respond to.

In similar proceedings in the Netherlands in which the Court of Appeal in the Hague gave judgment in January 2021 relating to multiple oil pipeline leaks in the Niger Delta, it was announced just before Christmas 2022 that Shell will pay 15 million euros ($15.9 million) to the affected communities in Nigeria in full and final settlement on a basis of no admission of liability.

The Eternal Bliss appeal to the Supreme Court is likely to be heard in 2023, with possibility of judgment given in 2023.

But there must be a question mark over London Steam-ship Owners’ Mutual Insurance Association Ltd (Respondent) v Kingdom of Spain (Appellant), Case ID: Case ID 2022/0062 where it is stated “This appeal has been adjourned by request of the parties.”

Climate Change

IMO  Two measures aimed at reducing shipping’s contribution to GHG emissions,   EEXI and Cii, both came into force as from 1 January 2023 and will be in the forefront of the minds of those negotiating new time charters.

EU. Shipping is likely to come into the ETS system with the amendments to the 2003 ETS Directive with phasing in from 1 January 2024. Here and here.

BIMCO has produced time charter clauses to deal with all three of these measures.

Ewan McGaughey et al v. Universities Superannuation Scheme Limited is a case involving whether the investments in fossil fuels by a large pension fund in the UK breach the directors’ fiduciary duties and duties towards contributors of the pension fund. On 24 May 2022, the High Court refused permission to bring a derivative action against USSL, but the Court of Appeal gave permission to appeal in October 2022, so a hearing in 2023 is “on the cards”.

European Union

On 15 July 2022, the EU Taxonomy Complementary Climate Delegated Act covering certain nuclear and gas activities came into force on 4 August 2022 and has applied from 1 January 2023. A legal challenge against the Commission before the CJEU by various NGOs and two member states, Austria and/or Luxembourg has been threatened in connection for the inclusion of nuclear energy and natural gas in the Delegated Act. Climate mitigation and adaptation criteria for maritime shipping, were included in the EU Taxonomy Climate Delegated Act adopted in April 2021.

Previous requests from other NGOs asking the Commission to carry out an internal review of the inclusion of certain forestry and bioenergy activities in the EU green taxonomy had already been rejected by the Commission in 2022.

The Corporate sustainability reporting directive came into effect on 16 Dec, 2022

For EU companies already required to prepare a non-financial information statement, the CSRD is effective for periods commencing on or after 1 January 2024. Large UK and other non-EU companies listed on an EU regulated market (i.e. those meeting two of the three following criteria: more than €20 million total assets, more than €40 million net turnover and more than 250 employees) will be subject to the CSRD requirements for periods commencing on or after 1 January 2025. 

UK and other non-EU companies that are not listed in the EU but which have substantial activity in the EU will be subject to the CSRD for periods commencing on or after 1 January 2028.

Finally, a very happy 2023 to all our readers.

Shipping and the EU Emissions Trading Scheme. It’s going to cost you from 2024 onwards.

Over the last two years the proposed inclusion of shipping in the Emissions Trading Scheme has bounced around the organs of the EU in the trilogue procedure. The EU  Parliament’s initial proposal of 16 September 2020 was to amend  the MRV Regulation 2015/757 and to include ships of 5000 grt and over in the ETS for all voyages into and out of a port in the EU including from and to ports outside the EU, starting on 1 January 2022. The shipowner, demise charterer, and time charterer would all be responsible under the ETS for the costs of acquiring ETS allowances.

The Commission responded on 14 July 2021 https://iistl.blog/2021/07/14/bastille-day-eu-commissions-present-to-the-shipping-industry/with a proposal to amend the 2003/87/EC directive establishing the Emissions Trading Scheme (‘ETS Directive’) so as to include maritime transport within the ETS but with only 50%  cost for CO2 emissions on a voyage from or  port outside the EU to one in EU, and to a voyage from the EU to a port outside the EU. There would be a phase in period between 2023 and 2026 for surrender of allowances. Only the shipowner and demise charterer would be responsible for allowances.

The Parliament made various counter amendments in June 2022 as did the Council, noted in here  https://iistl.blog/2022/07/06/eu-inclusion-of-shipping-in-the-ets-latest-developments/.

On 18 December 2022, hopefully before the World Cup Final took place, the Parliament and Council made a provisional agreement as outlined in the press release quoted below. The text of the agreement has yet to be released but the press release quoted below indicates agreed amendments to the Commission’s proposed amending of the ETS Directive.

“EU ETS maritime

The Council and Parliament agreed to include maritime shipping emissions within the scope of the EU ETS. They agreed on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026.

Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of 5000 gross tonnage and above will be included in the ‘MRV’ on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and off-shore vessels between 400-5 000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026.

In addition, the agreement takes into account geographical specificities and proposes transitional measures for small islands, ice class ships and journeys relating to outermost regions and public service obligations and strengthens measures to combat the risk of evasion in the maritime sector.

Certain member states with a relatively high number of shipping companies will in addition receive 3.5% of the ceiling of the auctioned allowances to be distributed among them.

The co-legislators agreed to include non-CO2 emissions (methane and N2O) in the MRV regulation from 2024 and in the EU ETS from 2026.”

www.consilium.europa.eu/en/press/press-releases/2022/12/18/fit-for-55-council-and-parliament-reach-provisional-deal-on-eu-emissions-trading-system-and-the-social-climate-fund/

It now looks clear that shipping is going to be brought into the EU’s ETS in just over a year’s time. This will entail added costs to voyages into and out of the EU which will fall on owners and bareboat charterers. It should be noted that, although the UK has established its own ETS, this does not currently include shipping.

An example of these coming ETS costs was given by Safety4Sea in late September 2022, https://safety4sea.com/prepare-for-higher-shipping-costs-but-the-eu-ets-should-be-a-manageable-change/, who posited the example of a voyage from Brazil to Rotterdam, using a carbon credit price of $85 per metric tonne of carbon emitted, a similar figure to the current price of $85.20 per m/t. The example has been updated in line with the recently agreed phase-in period.

The example takes a Capesize dry bulk voyage carrying iron ore from Ponta da Madeira in Brazil to Rotterdam (4,100 nm). Assuming a Capesize speed of 14 knots this would take around 12 days: at 62 tonnes per day this corresponds to 744 tonnes of fuel consumed, emitting 2,300 tonnes of CO2. As the voyage starts outside Europe, only half of the emissions qualify for allowances – 1,150 tonnes.

40% of this will need to be covered for 2024– 460 tonnes. Therefore, at a carbon  credit price on 13 December 2022 of just over EUR 85/mt of carbon emitted, the total cost for the carbon allowance would be EUR 39,100, plus a small addition for consumption in port. This compares with a fuel cost for the voyage of around EUR 520,000 (equivalent to 8%).

But two years later, in 2026, the cost for the carbon allowance would rise to 100% almost EUR 100,000 – equivalent to 20% of the total fuel bill for the voyage

For voyage charters to and from the EU, these costs will likely be reflected in increased freight rates for voyages in and out and within the EU. For time charters, although charterers bear the cost of bunkering the vessel during the currency of the charter, that does not mean that owners will be able to recover the costs of ETS allowances from them. Assuming that the EU is a permitted trading area, there is no mechanism for owners under the standard form time charters by which to recover these additional costs. The express or implied indemnity will not work, as these costs will be regarded as the natural costs of trading, as was the case in The Dimitris L [2012] EWHC 2339; [2012] 2 Lloyd’s Rep. 354, where the time charterers’ orders to proceed to the United States did not entitle the owners to be indemnified against the cost of U.S. Gross Transportation Tax.

However, specific clauses may be developed to deal with the apportionment of ETS costs. One such clause was is BIMCO’s Emissions Trading Scheme Agreement for Time Charterparties released on 31 May 2022.

The clause, which is not limited to the EU ETS, provides a mechanism for making the time charterer responsible for providing and paying for emission allowances with both parties cooperating and exchanging data necessary to facilitate compliance with any applicable ETS scheme and to calculate the amount of allowances that need to be surrendered for the period of the charterparty.

While the vessel is off-hire the charterers have the right to offset any allowances due or to require owners to return a quantity of emission allowances equivalent to that for which the charterers would have been responsible for this period had the vessel been on hire.

If charterers fail to transfer any emission allowances in accordance with the provisions in the clause, owners may suspend performance of all or any of their obligations, on giving charterers five days notice, until the time owners receive the emissions allowances in full. During this period of suspension the vessel is to remain on hire and owners are to have no responsibility whatsoever for any consequences arising out of the valid exercise of this right. The right of suspension is without prejudice to any other rights or claims owners may have against charterers under the charterparty.

Unlike many BIMCO clauses, there is no provision for the incorporation into any bills of lading or waybills issued under the charter. This makes sense as ensuring the time charterers bear the financial consequences of acquiring ETS allowances required during the currency of the charter will not directly impact on third party holders of bills of transport documents. This may happen, though, with delay due to owners operating their rights to suspend services under the clause in which case owners would be able to pass on to charterers any resulting liabilities incurred to such third parties.

The Gencon 2022 Charterparty: Striking A Balance

Clause 2 of Gencon 1994 first saw light of day in the 1922 charter and is the product of the thinking of an era that predates the Hague Rules when freedom of contract reigned supreme and carriers were able to include in contracts of carriage clauses that exempted them from liability for practically anything. Consequently, many people and certainly most charterers, now consider the clause to be completely out of touch with modern industry practices and current legislation. By way of contrast, and perhaps not surprisingly, many owners continue to value the wide protection that they believe it affords against liability. However, the reality is that the clause does not really meet the needs of either party and can give rise to some unforeseen and highly unwelcome surprises. Consequently, it is not really satisfactory for either the charterers or the shipowners.

It does not meet the charterers’ needs since it provides the shipowners with a very wide defence for cargo claims. In a nutshell, the Owners are not liable unless there is personal negligence on the part of the higher management of the company [1]. Equally, it does not satisfy the shipowners because protection is limited to claims for physical loss or damage to the goods or for delay in delivering the goods, and the clause provides no defence for other claims relating to purely financial loss, such as a failure to load a full cargo or for delay in arriving at the loadport [2].

These deficiencies have been recognised for many years and the industry has tended to adopt a rough and ready solution by simply replacing Clause 2 with a Paramount Clause that is perceived to introduce greater balance in the form of the Hague or Hague-Visby Rules. However, the weakness of this “broad brush” solution has been repeatedly recognised by the English courts. For example, it has been said that:

“The courts have not found it easy to make sense of the Hague Rules in the context of a charter-party since clearly these rules were not designed to be incorporated in such a contract.”[3]

and

 “[A] very slapdash way of doing things.”[4]

Consequently, the BIMCO sub-committee concluded that the insertion of a Paramount Clause was really no more than a “sticking plaster” solution in that it papered over some of the fault but failed to provide a satisfactory balanced solution.

A Paramount Clause clearly improves the charterers’ chances of making a recovery from the shipowners but makes the shipowners’ duty to exercise due diligence to make the ship seaworthy a continuing one that could potentially extend to all time “before” the commencement of the voyage[5], and which could, therefore, cover a very substantial time before the arrival of the ship at the loadport. It is also unclear whether the Rules provide the owners with protection in all jurisdictions against purely financial loss such as delay either in arriving at the loadport or in performing the laden voyage.

Therefore, the more balanced remedy favoured by the sub-committee was for the new clause 2 of Gencon 2022 to mirror the general approach of the Hague-Visby Rules and

(1)       firstly, place on the shipowners duties that are the equivalent of the non-delegable ones that apply under the Hague-Visby Rules to exercise due diligence to provide a seaworthy ship and to properly and carefully care for the cargo, but to restrict the applicability of the seaworthiness obligation to the two points in time that matter for the charterers, namely, the loading of the cargo and the commencement of the laden voyage; and

(2)       secondly, enable the shipowners to rely on all those rights, defences, immunities, time bars and limitations of liability that are available to a “Carrier” under the Hague-Visby Rules and to make such protection applicable to claims for loss, damage, delay or failure in performance of whatsoever nature. As is the case under the Hague-Visby Rules, these various rights, defences, immunities, time bars and limitations of liability fall into two categories: those that are applicable in any event regardless of breach, such as the time limit for claims under Art III Rule 6, and those that are available only if the shipowner has satisfied his obligations as to seaworthiness, such as those listed under Art IV Rule 2.

Because this new approach is substantially different from that which has been adopted in prior versions of Gencon, the sub-committee thought it prudent to circulate its proposals to the shipping industry before proceeding to a conclusion and received a more or less unanimous approval of its proposals. It is also noteworthy that the International Group of P&I Clubs has confirmed that the new clause 2 should not prejudice Club cover.

Finally, since one of the criticisms of Gencon 1994 is that, unlike many other charters, it does not include an exception clause that protects the rights of charterers, the sub-committee recommended that the new charter should include such a clause. There was some discussion as to whether the charter should include the new BIMCO Force Majeure Clause 2022. However, the sub-committee concluded that such clause was more suited to a time charter than a voyage charter and the industry consultation process supported that view. Consequently, it was decided to include a General Exception Clause of the type that is commonly seen in other voyage charters, and such a clause is now found in Clause 18 of Gencon 2022 thereby ensuring that it is a more balanced charter party.

[1] See, for example, the “Brabant” (1965) 2 Lloyd’s Rep. 546

[2] See, for example, the “Dominator” (1959) 1 Lloyd’s Rep 125 and the discussion in para 11.68 of Voyage Charters (3rd ed)

[3] Per Saville J in the “Standard Ardour” (1988) 2 Lloyd’s Rep 159

[4] Per Devlin J in the “Saxon Star” (1957) 2 Lloyd’s Rep 271

[5] See Art III Rule of the Hague/Hague-Visby Rules

Representing the Institute of International Shipping and Trade Law, Professor Richard Williams was a member of the BIMCO Sub-committee that has produced the new Gencon 2022.

Claims against time charterers for damage to ship, caused by damage to cargo, not subject to limitation under 1976 LLMC.

In  July 2012 while under charter to MSC from the owner Conti, the MSC Flaminia suffered an explosion which killed five of her crew, and one crew member was never found.  Hundreds of containers were destroyed and extensive damage was caused to the ship. The explosion was caused by auto-polymerisation of the contents of one or more of three tank containers laden with 80% divinylbenzene (‘DVB’) which  had been shipped at New Orleans on 1 July 2012. In a series of arbitration awards MSC was held liable to Conti in respect of the casualty, and Conti was awarded damages of c.US$200 million on a quantification by the arbitrators of its recoverable losses.

In June 2020 MSC commenced an Admiralty limitation claim under the 1976 LLMC as amended by the 1996 Protocol which came before Andrew Baker J who gave judgment at the start of this month, MSC Mediterranean Shipping Company SA v Stolt Tank Containers BV & Ors [2022] EWHC 2746 (Admlty) (02 November 2022)

There were three defendants two Stolt companies (the first and second defendants, ‘Stolt’), Stolt having been the road carrier of the DVB tank containers to New Orleans, and vis-à-vis MSC the shippers of those containers onto MSC Flaminia, claimants other than Stolt in a claim brought by cargo claimants whose bill of lading claims against MSC were subject to English law and jurisdiction, and Conti, the shipowner.

Conti’s claims included ship repair costs, payments to public authorities in Belgium, France, the UK and Germany following the casualty and also the costs of and associated with removing the waste from the ship. Could MSC limit in respect of these claims? This involved a question of whether the effect of the phrase ‘consequential loss’ in Article 2(1)(a). Where losses caused by damage to the cargo were losses which Conti was required to incur in order to repair the ship, could Conti’s claims in respect of those losses be characterised as claims in respect of damage to the ship or consequential losses resulting from such damage and if so, did it follow that those claims could not be limited under Article 2(1)(a)?

Claims for consequential loss had been found to be limitable in The Aegean Sea  and The APK Sydney. Andrew Baker J, considered that the lost profits claims in The Aegean Sea, were claims for consequential loss resulting from the environmental damage, and the lost profits claims in The APL Sydney, had been claims for consequential loss resulting from the pipeline damage, where the relevant property damage occurred in direct connection with the operation of the ship in question, and was not damage to the ship herself. Those claims as made against the owner were limitable, and similarly the claim by the owner to pass those claims on to the charterer.

However that was not the case in the instant case, which involved claims in respect of damage to the ship which were not limitable, as held by the Court of Appeal in The CMA Djakarta , approved obiter by the Supreme Court in The Ocean Victory. The fact that it could be said, in point of fact, that all the damage to the ship can be traced back, by a chain of causation, to loss of or damage to the DVB that exploded, did not mean that a claim by Conti for compensation for damage to the ship was a claim in respect of loss of or damage to the DVB (or consequential loss resulting therefrom). The causal connection on the facts did not turn a claim for damaging the ship into a cargo claim. Conti’s claim against MSC, established in the arbitration, did not seek to enforce a right of redress in respect of loss of or damage to cargo, but rather a right of redress in respect of the risk of harm to the ship that had been posed by the cargo, and the damage the ship suffered when that risk eventuated

MSC also claimed that costs incurred by Conti related to the removal or destruction of cargo waste, burned or unburned were limitable under Article 2(1)(e), as claims “in respect of the removal, destruction or the rendering harmless of the cargo of the ship”. This claim was also found not to be limitable. The ordinary meaning of Article 2.1(d)/(e), is that tonnage limitation is to apply in respect of liabilities such as might be incurred by an owner for casualty intervention or aftermath liabilities of the kinds indicated, i.e. wreck removal (etc.) (Article 2.1(d)) and cargo removal, destruction or neutralisation (Article 2.1(e)). Conti’s claim for reimbursement of or damages in respect of the cost of cargo handling due to MSC’s breach in loading dangerous cargo was not a claim in respect of the removal, destruction or rendering harmless of cargo within Article 2.1(e). Nor could the claims be limitable to the extent that the relevant costs related to the removal or destruction of cargo waste, burned or unburned as they were to be characterised as claims in respect of damage to the ship or for consequential losses resulting from such damage.

As regards Conti’s costs cost incurred in disposing of the firefighting water these were not limitable under Article 2.1(f) as the claim was not distinct from the non-limitable category of claims in respect of the loss of or damage to the ship.

Effectively, all Conti’s claims related to damage to the ship and the fact that had occurred due to the damage to the cargo in the explosion did not mean that the claim was one relating to damage to cargo. All the claims were claims for damage to the ship and were not subject to limitation.

Charters, subjects and arbitrators’ jurisdiction

Hopeless appeals sometimes clear the air. One such was today’s appeal by the claimants in the arbitration decision of The Newcastle Express [2022] EWCA Civ 1555.

Owners of a largish bulker fixed her for a voyage carrying coal from Australia to China. The charter was on the terms of an accepted proforma containing a London arbitration clause, and subject to Rightship approval. The recap, however, contained the words SUB SHIPPER/RECEIVERS APPROVAL, and no sub was ever lifted. The charterers declined to accept the vessel, alleging that Rightship approval had not been obtained on time; the owners alleged wrongful repudiation, and claimed arbitration.

The charterers argued that because the necessary approvals had not been forthcoming no agreement of any kind had been concluded, and politely sat out the owners’ proceedings. The arbitration tribunal decided that there had been a concluded contract; that it therefore had jurisdiction; and that the owners were entitled to something over $280,000 in damages. On an appeal under ss.67 and 69 of the Arbitration Act Jacobs J allowed the charterers’ s.67 appeal, holding that there had never been either a contract or an agreement to arbitrate anything; hence neither the charter nor the arbitration bound the charterers. For good measure he also said that he would have allowed a s.69 appeal on the law.

The owners unsuccessfully appealed to the Court of Appeal. They argued first, one suspects without much enthusiasm, that the “sub shipper/receivers approval” term was not a precondition of there being any contract, but instead acknowledged the presence of an agreement and merely qualified the duty to perform it. The Court of Appeal had little difficulty sweeping this point aside. Terms fairly clearly giving a person the right to disapprove a transaction on commercial grounds, as here, were fairly consistently construed in the same way as other “subject to contract” terms: and this one was clearly intended to allow either party to walk away without penalty.

This left the separability point: why not invoke the “one-stop-shop” preference adumbrated in Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, [2007] 4 All ER 951 and engage in a bit of constructive interpretation, so as to treat the parties as having agreed that even if the main agreement hadn’t been concluded they had agreed on any dispute, including whether the agreement was enforceable, being decided by arbitrators? To this, however, there was a simple answer. Harbour Assurance v Kansa Insurance Co [1993] QB 701 before the 1996 Act, and the post-1996 Fiona Trust case itself, showed that this chicken wouldn’t fight. It was all very well to separate out the arbitration agreement in cases where the parties had seemingly agreed but there was some alleged vitiating factor, such as mistake or duress, in their agreement. But here the very point at issue was whether there had been agreement on anything in the first place: if there had not, any arbitration provision fell with the agreement itself. Game set and match, therefore, to the charterers.

This must all be right. Admittedly it does leave claimants in a quandary when faced with defendants who, like the charterers in this case, deny that parties ever reached agreement and refuse to arbitrate. Do they have to go to the expense of an arbitration in the full knowledge that they may then have to traverse the same ground again in a court to prove that the arbitrator had jurisdiction to decide in their favour?

The solution suggested by Males LJ at [86], an agreement ad hoc to arbitrate the jurisdiction point, is certainly useful, though it requires agreement from the other party. A further possibility might be to amend s.32 of the Act. Currently this allows an application to the court to determine jurisdiction, but only with the agreement either of both parties or of the tribunal and the court. There is something to be said for relaxing this requirement where one party refuses to take part in the proceedings at all, and saying that in such a case either party can demand a court determination as of right. Ironically the threat to force on the other party a quick trip to the Commercial Court, with the extra costs that involves, might act as a wholesome encouragement to agree to the one-stop-shop businesspeople are always said to want and which Males LJ advocates.

The Law Commission, as it providentially happens, is currently looking at s.67 and s.32, and has a consultation paper out (in which it tentatively suggests, among other things, that a s.67 appeal should not be a rehearing except where the other party plays no part in the arbitration). This is perhaps another idea that could be discreetly fed to it. You have till 15 December, when the consultation closes, to get any proposals together.

Running of laytime. Charterers’ order owners not to permit cargo sampling or to berth/discharge.

London Arbitration 31/22 is another reminder that once laytime starts it runs continuously unless interrupted by a laytime exception or a laytime definition or through delay due to the fault of the ship owner.

The vessel was chartered on an amended Gencon 94 form to carry wheat from Russia to Turkey. On Friday 17 September the vessel tendered NOR and was ordered by the harbour master to remain at anchor pending authorisation being given for cargo samples to be taken and analysed. The charterers’ agent then told owners’ operations manager not to send cargo documents to the discharge port agents and not to allow sampling, berthing and discharging as the receiver had not yet paid for the cargo. Eventually charterers permitted sampling and discharge on 29 September and discharge completed on 2 October.

As well as the laytime provisions, under which time would have started to run on 20 September, the voyage charter in question had two separate provisions dealing with time lost, and the question was which applied in the circumstances attending the vessel’s delay at the discharge port.

These two provisions were:

“TIME LOST WAITING FOR CARGO ANALYSES AND/OR LABORATORY TESTING AND/OR IMPORT AND/OR EXPORT FORMALITIES IF ANY TO COUNT AS LAYTIME OR TIME ON DEMURRAGE W/O WEATHER INTERRUPTIONS AND/OR ANY EXCEPTIONS.” (Provision 1.)

“TIME LOST DUE TO CHARTERERS’ INSTRUCTIONS AND/OR FAULT TO BE REIMBURSED BY CHARTERERS AS DAMAGES FOR DETENTION.” (Provision 2.)

The owners claimed damages for detention at the demurrage rate under Provision 2 for the period from tender of NOR on 17 September until 29 September when the charterers authorised the taking of samples. The tribunal held that this claim must fail because the time lost waiting for cargo sampling clearly fell under the express terms of Provision 1.  The arbitrator found that time lost on arrival was due to the failure by the charterers to authorise/arrange for cargo samples to be taken, a problem that was caused by lack of payment for the cargo which fell within Provision 1. Provisions 1 and 2 appeared consecutively in the fixture recap and the parties could not have intended there to be any overlap between them, and time lost for reasons covered in Provision 1 could not come within the time lost in Provision 2.

Had the arbitrator found that Provision 2 applied, he would have been inclined to accept charterers’ argument that laytime would have started on 29 September and demurrage would have been unlikely to have accrued. Therefore, the arbitrator might have accepted that, given the evidence of lower demurrage rates in similar charters, damages for detention up to 29 September would have been assessed at a rate lower than the charter demurrage rate.

The owners also presented two alternative laytime statements and the arbitrator held that their second was correct. Under this laytime began at 08.00 on Monday 20 September and the vessel went on demurrage from 13.30 on 23 September until discharging was completed at 17.00 on Saturday 2 October.

The charterers argued that “cargo analyses and laboratory testing” did not include “cargo sampling” but the arbitrator considered that the wording in Provision 1 covered any delay in the import formalities after arrival at the discharge port, including the charterers authorising the taking of samples, analysis, communication of the results and allocation of a berth.

The arbitrator also rejected charterers’ claims that time did not count during ‘port congestion’ nor for ‘weather interruption’, alternatively was suspended by duty pilot due to bad weather. Time lost on arrival was due to the failure by the charterers to authorise/arrange for cargo samples to be taken, a problem that was caused by lack of payment for the cargo which came within Provision 1 and the charterers were wrong to argue that congestion was a circumstance obstructing the sampling/berthing/discharging, which was beyond their control. Once a valid NOR was tendered and took effect, laytime ran continuously against the laytime allowed. Congestion was therefore a charterers’ risk.