Rescinding A Charterparty or Not! That is the Question SK Shipping Europe plc v. Capital VLCC 3 Corp and another (C Challenger) [2020] EWHC 3448 (Comm)

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 on the basis that the charterers’ message was itself a renunciation.

Was there a misrepresentation on the part of the owners?

Under common law, for the charterers to be able to rescind the contract (i.e. set the charterparty aside) it is essential that they demonstrate that the owners made an inaccurate representation with regard to the capabilities of the chartered vessel in terms of speed and consumption. The main argument put forward by the charterers was that the details of the vessel’s consumption circulated to the market by the owners constituted a representation of fact (and this representation was substantially inaccurate). Foxton, J, rather appropriately, held that an owner by offering a continuing speed and consumption warranty in a charterparty could not be assumed to make an implicit representation as to the vessel’s current or recent performance. This certainly makes sense given that the warranty in question did not require the owners to act or refrain from acting in a certain way. The so-called “speed and consumption” warranty in the contract simply related to a particular state of affairs and was only concerned with the allocation of responsibility for certain costs in relation thereto.   

However, this was not the end of the matter! The charters also argued that in a letter sent by the owners, historical speed and consumption data provided which was not reasonably consistent with the average performance of the vessel over its last three voyages and therefore untrue. Foxton, J, found that the owners did not have reason to believe that the statement based on the three recent voyages was true and accordingly this amounted material misrepresentation. However, he also found that this would not have given the charterers the right to rescind the contract as there was no inducement. This was the case because if the same warranty had been offered, but no representation made as to the vessel’s performance, the charterparty would have been concluded on the same terms.

The effect of ‘reserving rights’

It is rather common for most parties in shipping practice to add a ‘reservation of rights’ statement to the end of messages in pre-action correspondence. Usually, such a statement has the effect of preventing subsequent conduct of an innocent party constituting an election. The trial judge found that the charterers were aware at the latest in July 2017 that the fuel consumption of the chartered vessel was misdescribed by the owners. Whilst the charterers sent messages to the owners that they wished to reserve their rights emerging from the misconduct of the owners, they went ahead to fix a voyage with a sub-charterer expecting the owners to execute this voyage. Foxton, J, on that basis, held that such actions of the charterers were incompatible with an attempt to reserve rights to set it aside the charterparty ab initio for misrepresentation of which they had complained. Put differently, the judgment illustrates that in a case where the innocent party demands substantial contractual performance from the other, this is unlikely to be prevented from being treated as an “affirmation” simply because the innocent party earlier attempted to reserve its rights.

Was the owner in repudiatory breach?

The judge accepted that the owner was in breach of the charterparty i) by refusing to accept the legitimacy of the Charterer’s refusal to pay hire or make deductions from hire and ii) by sending messages demanding payment of hire, wrongly asserting that the Charterer was in breach. The terms breached were deemed to be innominate terms. However, it was held that the breaches complained of, taken cumulatively, had not deprived the charterers of substantially the whole benefit which they were intended to obtain under the charterparty for the payment of hire, or “go to the root” of the charterparty. As a result, the charterers had not been entitled to terminate the charterparty and their communication to that effect was itself a renunciation, entitling the owners to damages representing the loss it suffered by reason.              

The facts of the case provided a great opportunity to the trial judge to construe and apply several key principles of contract law (note that in the judgment there is also an obiter discussion on the application of s. 2(2) of the Misrepresentation Act 1967). Perhaps the most significant contribution of the case to the development of the contract law is the trial judge’s observation on the effect of reserving rights in this context. As noted, the previous authorities have not provided any extensive consideration to this matter. It is now emphasised clearly that a reservation of rights will often have the effect of preventing subsequent conduct from constituting an election to keep the contract alive, but this is not an inevitable rule. One might say in this context “actions might speak louder than words”. So in any case whether a statement reserving the rights of an innocent party has the desired impact will depend on the actions of the innocent party!

Off-hire Clauses- Normally Construed Narrowly Unless the Wording Is Expansive!

Disputes concerning ‘off-hire’ clauses often require various legal construction techniques to be employed and can be rather challenging for the courts/arbitrators. However, the arbitrator managed to resolve the dispute under the relevant off-hire clause in London Arbitration 25/19 with not much difficulty.

The chartered vessel arrived at a port on the US West Coast on 23 October to discharge a cargo of steel products. The vessel’s cranes were inspected on behalf of the charterers’ stevedors by or on behalf of the International Longshore and Warehouse Union (ILWU) and the vessel failed that inspection. The owners maintained that the cranes were in good working order as they complied with all statutory and Class requirements and they had been inspected and used for loading and discharging in the US three months earlier. They also put forward a recent report from the crane manufacturers. The relevant off-hire clause in the charter party was worded in the following manner:

‘The Vessel will comply with any and all safety regulations and/or requirements applicable during the currency of this Charter Party, including those in effect of any port of loading and/or discharge. If the Vessel does not comply with said safety regulations or requirements, the Vessel will be off-hire until the Vessel is compliant with the said safety regulations or requirements… ‘

The charterers’ argument was that the vessel was off hire from the time when she failed the inspection to the time when she passed (i.e. after the cranes were repaired) and discharging started. The arbitrator found that the vessel’s failing the inspection amounted to breach of the Pacific Coast Marine Safety Code. This Code governed safe working practices and conditions for the whole of the US West Coast when ILWU labour was employed. The arbitrator found that the Code was at the very least a ‘safety requirement’ and quite possibly, for practical purposes also a ‘safety regulation’. The views of crane manufacturers, Class and engineering company were treated as irrelevant as they only reflected the earlier experience of the ship.

Given that the off-hire clause made explicit reference to ‘safety requirements’ as well as ‘safety regulations’, the outcome does not come as a surprise. Had it made reference only to ‘safety regulations’, a closer legal scrutiny of the nature and status of the Pacific Coast Marine Safety Code would have been necessary. The fact that the arbitrator refers to the Code as a ‘safety regulation for practical purposes’ indicates that from a technical perspective it might not qualify as a safety regulation! The message to charterers is very clear. Off-hire clauses are often construed in a narrow fashion so to be able to bring themselves under the off-hire clause they need to ensure that the wording used is expansive! Charterers in this case were glad that the wording in the off-hire clause was very broad i.e. made explicit reference to ‘safety requirements’. Few doubts can be raised for a finding that a Code that provides safe working practices and conditions in a port for stevedors, who are members of a trade union, is a ‘safety requirement’ for that port.                    

BIMCO COVID-19 Crew Change Clause – An Attempt to Facilitate Crew Changes

On 25 June, BIMCO announced the publication of their novel COVID-19 Crew Change Clause for Time Charter Parties. The clause provides shipowners with the right to deviate for crew changes ‘if COVID-19 related restrictions prevent crew changes from being conducted at the ports or places to which the vessel has been ordered or within the scheduled period of call’. Shipowners can exercise their right to deviate by giving charterers a written notice as soon as reasonably possible. The crew change costs will rest on shipowners, unless shipowners and charterers agree that the vessel will remain on hire during the deviation period, but at a reduced rate. In such case, the cost of bunkers consumed will be shared equally between shipowners and charterers.

With more than 200,000 seafarers currently working on board after the expiry of their contracts of employment, the COVID-19 Crew Change Clause at least ensures that shipowners can sail to those few ports were crew changes are possible, without facing the risk of breaching their contractual obligations under time charters. It should be noted, however, that this is not a panacea to the issue of crew changes. Recognising seafarers as ‘keyworkers’ and designating ports where crew changes can take place safely following the Protocols designed by the IMO (Circular Letter No 4204/Add 14 (5 May 2020) should remain a priority. 

 

In London Arbitration 3/20 the Tribunal considered the effect of the time bar provision in cl.6 of the Inter-Club NYPE Agreement 2011 (the ICA) .

“(6) Recovery under this Agreement by an Owner or charterer shall be deemed to be waived and absolutely barred unless written notification of the Cargo Claim has been given to the other party to the charterparty within 24 months of the date of delivery of the cargo or the dates the cargo should have been delivered, save that, where the Hamburg Rules or any national legislation giving effect thereto are compulsorily applicable by operation of law to the contract of carriage or to that part of the transit that comprised carriage on the chartered vessel, the period shall be 36 months. Such notification shall if possible include details of the contract of carriage, the nature of the claim and the amount claimed.”

The vessel was time-chartered on the NYPE form. Clause 27 of the charter expressly incorporated the ICA and contained a Clause Paramount. Under a booking note on the charterer’s house form dated 19 December 2014 between the charterer as carrier and G as merchant, the charterer contracted to carry a cargo of engine equipment (the Cargo) from a United States port to a North African port. During the voyage the vessel’s crew accidentally pumped water into No 2 cargo hold.  G gave notice to the charterer of its intention to pursue a cargo claim against it as contractual carrier, although no claim had yet been formally presented. By various emails, information was passed by G to the charterer and by the charterer to the owners, and extensions of time were given by the charterer to G, and by the owners and their P&I Club to the charterer.

The issue before the Tribunal was whether, following the expiry of 24 months from the date of delivery of the cargo, the charterer was now precluded by the time bar provision in clause (6) of the ICA from bringing any claim against the owners in respect of G’s intended cargo claim.

The Tribunal found that the “notification” did not have to refer to the ICA, either expressly or impliedly. Clause (6) required simply “written notification of the Cargo Claim” to be given to the other party. It was not in itself the claim for recovery under the ICA but was a notice required if a claim over was later to be made, which could only happen when the cause of action accrued, which necessitated the proper settlement or compromise and payment of the third-party claim under the terms of clause (4)(c).

To be an effective “notification”, the written notice did not have to comply with the requirements of the second sentence, namely to include details of the contract of carriage, the nature of the claim and the amount claimed, so far as it was possible to do so. The intention of the draftsman was to distinguish between the absence of a written notification which would bar the recovery claim and the absence of details to be included within it, if possible, which would not have that effect. The words “if possible” suggested that the provision of details was not essential to the giving of notification. The breach of such an obligation would give rise to a right to damages if any loss could be established, which appeared unlikely in most situations.

In consequence, as the tribunal had found that a notification was valid, even if details which could have been provided were not provided, and the recourse claim which the charterer wished to pursue was not deemed waived or barred.

Clause (6) of the ICA operated in an entirely different way from a conventional time bar for a cargo claim. The period allowed for notification ran from the date of delivery and not from the date when the cause of action accrued which, in the case of an indemnity might not be for a number of years, as and when the liability to cargo interests crystallised. To stop time running, the prospective claimant did not have to commence proceedings but merely to give notification of the claim under clause (6), with the six-year time bar operating from the date of accrual of the cause of action.

 

Security clauses in charters — by hook or by crook they will be enforced

Behind Teare J’s decision today in Trafigura Maritime Logistics PTE Ltd v Clearlake Shipping PTE Ltd (Rev 1) [2020] EWHC 995 (Comm) lies a fairly standard series of shipping lawyer’s nightmares.

Trafigura time-chartered the Miracle Hope, a big (320,000 dwt) VLCC, from Ocean Light. They voyage-chartered her to Clearlake and Clearlake sub-voyage-chartered to Petrobras, both charters being back-to-back under Shellvoy 6. Petrobras demanded that the cargo be delivered without production of the bill of lading; the demand was passed up the chain and the cargo (worth, before the recent oil debacle, something over $70 million) released.

Thereupon Natixis, a Dutch bank which had financed Petrobras’s buyers, emerged brandishing a bill of lading apparently issued by Ocean Light, demanded the value of the cargo, and arrested the ship in Singapore. Ocean Light immediately demanded an indemnity from Trafigura: Trafigura, relying on a duty in the charterer in such cases to “provide an LOI as per Owners’ P&I Club wording”, demanded an LOI from Clearlake and Clearlake did the same from Petrobras. Following clear practice (e.g. The Laemthong Glory [2004] EWHC 2738 (Comm); [2005] 1 Lloyd’s Rep. 632), Henshaw J granted mandatory orders down the line requiring the charterers to provide such bail or other security required to secure the release of the vessel.

Unfortunately at this point problems arose. Clearlake and Petrobras negotiated with Natixis; the result was deadlock. Furthermore, owing to the worldwide contagion the Singapore courts could not break the deadlock for some weeks. And, of course, all the time the Miracle Hope was mewed up in Singapore: something which, with tanker hire rates now sky-high, would not do.

In other words, Henshaw J’s order was unworkable. As a result the matter came back to the Commercial Court. To order the provision of a guarantee satisfactory to Natixis would be unsatisfactory: furthermore, since the matter was likely eventually to reach the Singapore courts, it risked prejudging the issue in that forum.

The solution reached was workmanlike. The court had to do something. Security to obtain the release of a vessel could take the form of a payment into court; and, faute de mieux, Teare J ordered just that. Clearlake and Petrobras were ordered to arrange for payment into the Singapore court of $76 million within 8 days, no doubt with Petrobras bound to indemnify Clearlake, who in the circumstances were little more than piggy-in-the-middle. If this was necessary to secure the release of the vessel, this would be what was ordered.

And rightly so, in our view. As the title of this blogpost implies, an obligation to secure the release of a vessel has to be given effect. As with Coronavirus, so with the release of a ship: it is a case of doing all that it takes. Even if that takes a slightly unorthodox form.

Switch bills. Initial shipper off the hook for freight due under bill of lading.

 

The effect of switch bills with a new shipper in the second set has the effect of a novation of the initial contract contained or evidenced in the initial bill with the shipowner as carrier under the bill. So held Stevenson J in the Supreme Court of New South Wales in The Illawarra Fortune [2020] NSWSC 183. Both sets incorporated the freight payable under a voyage charterparty with the time charterer of the vessel. The initial shipper, whose parent company was the voyage charterer, ceased to be liable for unpaid freight once the second bills were issued naming a different shipper. Had the original bills not been switched the time charterer, as assignee of the shipowner’s rights under the bills of lading,  would have been able to sue the original shipper for freight due under the voyage charter with the shipper’s parent company.

New year, new sulphur cap.

The Sulphur cap is here. If you’re a shipowner still running on High Sulphur Fuel Oil (HSFO) you need to trust to your Fuel Oil Non-Availability Report (FONAR), unless you are fitted with scrubbers. If you’re running on Low Sulphur Fuel Oil (LSFO) now you still need to get any HSFO off your vessel by 1 March 2020 due to the Carriage Ban. Apart from increasing the cost of running a vessel, the IMO’s two regulation are likely to see various additional costs being incurred by shipowners: costs of disposal of remaining onboard HSFO including costs of tank and line cleaning to avoid residual HSFO mingling with LSFO and pushing the Sulphur level over 0.5%; time lost in performing such operations; effect of LSFO on owners’ performance warranties under time charters; fines and detention due to inability to get remaining HSFO off the vessel by 1.3.2020 (there is no equivalent of a FONAR to cover this eventuality). A report from S&P Global Platts last week reveals that a lot of debunkering is going to have take place between now and 1.3.2020. https://www.spglobal.com/platts/en/market-insights/latest-news/shipping/122719-shipowners-rush-to-de-bunker-hsfo-as-imo-2020-looms

Added to that there is the greater risk of engine damage due to use of LSFO. Today Reuters carries a report that testing companies examining newer, low-sulphur marine blends acquired in Antwerp, Belgium, Houston and Singapore have found sediment at levels that could damage the engines of ocean-going vessels. Depressing news with which to welcome in the new year. https://uk.reuters.com/article/uk-shipping-imo-fueloil/tests-raise-alarms-over-fuel-blends-coming-for-ocean-going-vessels-idUKKBN1YZ1ED

It is likely that the new decade will see a spate of claims arising out of the sulphur cap and the carriage ban, particularly under time charters, with renewed interest by owners in the indemnity as a means of clawing back costs from time charterers.

BIMCO withdrawal clause. No withdrawal for underpayment of previous hire instalment.  

 

Quiana Navigation SA v Pacific Gulf Shipping (Singapore) PTE Ltd “Caravos Liberty” [2019] EWHC 3171 (Comm) involved  a time charter under which the charterers made an underpayment of the fourth instalment of hire but owners did not exercise their right to withdraw under the BIMCO withdrawal clause incorporated into the time charter. However, the shortfall remained and at the time of the sixth instalment, which was paid in full, the owners decided to withdraw the vessel on account of the remaining shortfall in hire under the fourth instalment. The key words in the BIMCO Clause are “If the hire is not received by the Owners by midnight on the due date, the Owners may immediately following such non-payment suspend the performance of any or all of their obligations under this Charter Party (and if they so suspend, inform the Charterers accordingly) until such time as the payment due is received by the Owners.” In the context of the right to withdraw, what constitutes ‘the hire’? The tribunal found that it referred to the hire for that particular instalment and did not encompass previous underpayments. Cockerill J upheld that decision. The question “What is the hire?” question could only sensibly be answered and one single date produced if the charterers’ approach were preferred.  Cockerill J stated [42]:

“[i]t is artificial to ignore the temporal dimension inherent in the reference to a “due date” in (a); and equally artificial to say that the sum outstanding from the fourth instalment was due “on” 10 August. Owners’ argument also, either (as Charterers would put it) impermissibly elides the very real distinction between the continuing entitlement to recover hire as a debt and on the other the independent contractual entitlement to withdraw or at least attempts to draw focus from the existence of other remedies.”

Accordingly, owners’ withdrawal was unjustified and amounted to a repudiation of the charter.

“My wife may capture my heart”. Off hire and capture by pirates.

 

Owners time chartered the “Eleni P” on an amended NYPE 1946 form and during a voyage from Ukraine to China the vessel was routed via the Suez Canal and the Gulf of Aden. After transiting the Gulf of Aden without incident she was attacked and captured by pirates in the Arabian sea and released some seven months later.

Owners claimed US$ 4.5 million hire for this period. The Tribunal rejected the claim on the grounds that two additional typed clauses, clauses 49 and 101, excluded it. Owners appealed in respect of the correct construction of each pursuant to s69 of the Arbitration Act 1996. In Eleni Shipping Limited v Transgrain Shipping BV (“The ELENI P”) [2019] EWHC 910 (Comm) Popplewell J held that the appeal succeeded in respect of clause 49, but failed in respect of clause 101.

Clause 49 – Capture, Seizure and ArrestShould the vessel be captures [sic] or seized or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended for the actual time lost […]

Owners contended before Popplewell J that Clause 49 only applied when the Vessel was captured, seized, detained or arrested by any authority or any legal process – it therefore did not apply to capture by pirates. Charterers argued that only the word “arrested” was qualified by the phrase “by any authority or by any legal process” andnot  the word “captured” , and therefore as a matter of ordinary language, the Vessel had been captured.

Popplewell J held that the clause only applied to capture by an authority or legal process, and therefore not to capture by pirates. The words “any authority or any legal process” applied to the whole preceding list of events. To limit it to arrest would be superfluous. The tribunal had stated that ‘capture’ was not something that an ‘authority’ could be involved with. Not so, Popplewell J stating “capture does not necessarily connote the use of force. Unoccupied land or undefended goods may be captured. My wife may capture my heart. I see no difficulty as a matter of the ordinary use of language in the concept of a governmental authority or ruler capturing a vessel.”

Clause 101 – Piracy ClauseCharterers are allowed to transit Gulf of Aden any time, all extra war risk premium and/or kidnap and ransom as quoted by the vessel’s Underwriters, if any, will be reimbursed by Charterers. […] In case vessel should be threatened/kidnapped by reason of piracy, payment of hire shall be suspended. It’s remain understood [sic] that during transit of Gulf of Aden the vessel will follow all procedures as required for such transit including but not limited the instructions as received by the patrolling squad in the area for safe participating to the convoy west or east bound.

Did the suspension of hire only operate if the vessel were threatened or kidnapped by reason of piracy while transiting the Gulf of Aden, as owners argued, or did it operate wherever the Vessel was threatened in the Gulf of Aden or as an immediate consequence of her transiting or being about to transit the Gulf, a charterers argued? The Tribunal had accepted charterers’ argument and so did Popplewell J. The purpose of the Clause was to allocate the risks associated with such trade, not solely within a specifically defined geographical area. Its first sentence allocates the burden of an extra war risk premium and the sentence concerning hire suspension allocates the risk of delay from detention as a consequence of the transit which the first sentence requires.

Accordingly, owners were unable to claim hire for the seven months during which the vessel was held by the pirates.

No deduction from hire clause in time charter means what it says.

In London Arbitration 7/19 the tribunal decided that a clause in a time charter stating ‘Charterers have no right to make any deduction from hire payments… Chrts do not have the right to deduct from hire payment any amounts on alleged under performance, except undisputed off hire” precluded charterers from making deductions from hire by way of equitable set off. The tribunal referred to the unreported decision in Marubeni v Sea Containers Ltd 17 May 1995, in which Waller J said:

“First, in the same way as the words ‘deduction or withholding’ are not terms of art which will always include‘set-off’, they are equally not terms of art which limit their meaning to only covering taxes, levies or duties. Second, the fact that clear words are necessary does not mean that the word ‘set-off’ must be used. The words can be clear from their context. Third, what is said in one contract between other parties in one context, cannot really assist in the construction of another contract between different parties in a quite different context.”

Charterers could not deduct their off hire claims either as these were not undisputed. The charterers had argued that they had not made deductions from hire,but that hire was simply suspended, but that was a distinction without a difference.