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.

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.

A Nice Try! But Off-Hire Remains the Main Remedy Unless A Separate Breach of the Charter Can Be Demonstrated

London Arbitration 9/22

The vessel was chartered on a trip basis on an amended NYPE form for carriage of bulk titanium slog and bulk rutile sand. On arrival at the first loading port, the surveyors appointed by the charterers to inspect the cargo holds found that the holds were not ready for loading of the intended cargo. The relevant charterparty form stipulated (cl 49):

Vessel holds on arrival at the first load port(s) to be clean, dry, free of rust and/or scale and cargo residues and ready in all respects to load any/all permissible cargoes under the charterparty to the satisfaction of charterers’ nominated surveyor. If the vessel is not approved by the surveyor, the vessel is to be placed off-hire from the time of that failure until the vessel passed a subsequent survey. All expenses, losses and liabilities arising from the failure are for owners’ account.

It was not in dispute that the failure in inspection triggered the application of cl 49 and the chartered vessel was off-hire from the date the formal inspection was carried out until the surveyor found that the vessel was ready for loading on 12 October (this was a typical period off-hire clause). The dispute here was whether the vessel was off-hire at an earlier date (i.e. 2 October)- this was the date when an informal survey was carried out at anchorage by the same surveyor. The request for this survey was made by the charterer and the owners agreed to it so as to save time at the berth but the report was evidently “advisory to master” and the tribunal had no difficulty disregarding the contention that the vessel was off-hire from 2 October highlighting that the language used in the report was not a language of a report with consequences.

This was the easy part. Two further contentions of the charters, however, required the tribunal to engage in a more analytical legal discussion.

  1. The charterers pointed out that if the holds had been clean, the vessel would have been at a berth at an earlier date (at 11.20 on 9 October) whereas the vessel on facts managed to berth on 18 October (at 1605).  On that basis, the charterers were claiming damages for the delay in addition to the vessel being off-hire until 12 October. Their claim was US$ 39,062.50 (hire based on the rate of US$ 6,250 per day) from the time when the holds were found at an acceptable state by the surveyor (at 1010 on 12 October) until the vessel berthed at 1605 on 18 October. 

This is an interesting debate especially given that there was certainly a causal link between the delay in berthing and the failure to pass the inspection. However, from the contract law perspective the key issue is whether the remedy stipulated in the contract (here the “off-hire remedy”) allows any other remedy than deduction from hire for the period of time lost. The tribunal found that cl 49 was clear in setting out the consequences of the vessel’s holds being rejected by the charterers’ surveyor: namely the vessel would be off-hire from the time of failure until she passed a subsequent survey. This precludes any further remedy being awarded to the charterers (an application of the principle that “specific remedy” displaces the general one). Furthermore, the fact that cl 56 of the charterparty conferred the option on the charterer to add any off-hire period to the end of the charter term was viewed as a clear indication that the remedy expressly conferred by the charterparty provided a complete code for failure of holds inspection and according to the tribunal this weakened any case for a claim in damages generally. The argument was put in a sophisticated manner but it was essentially an attempt to bypass the established rule that to claim additional damages on the top of off-hire, one needs to show separate breach of the charterparty. The tribunal, correctly in the view of the author, refused to alter this well-established principle.

  • The second argument put forward by the charterers was an interesting one too. The charterparty contained a clause concerning the rate of hire. Clause 4 provided that the hire would be “at the rate of US$ 6,250 per day pro-rata including the overtime for the first 55 days and US$ 12,000 per day thereafter.”

The chartered vessel was delivered to service at 0900 of 24 September and re-delivered at 0430 on 30 November. Given that the off-hire at the first port occurred during the first 55 days of the hire period, the owners calculated off-hire at the rate of US$ 6,250 per day. However, the charterers claimed that they were entitled to damages as they were required to pay hire at in increased rate of US$ 12,000 per day after the first 55 days of the charter period had expired- essentially they were claiming the differential between the basic hire rate and higher hire rate for the time from when the vessel would have berthed at 1120 on 9 October until 1605 on 18 October when she in fact berthed (US$ 47,138.50).

The tribunal was firmly of the view that this argument was reliant on the construction of the language used in cl. 4 of the charterparty. On that premise, it concluded that the charterers would have had a strong case had cl 4 made specific reference to “on hire days”. If it had,  this would have possibly implied that the increased rate should have applied after the off-hire period added to the time which was the threshold for higher hire rate. However, as this was not the case, there was no reason to look beyond the plain meaning of the term “the first 55 days”, and the manner in which the owners dealt with the off-hire at the first loading port correctly reflected the terms of the charterparty.    

There is a message for charterers here especially if they agree to a hire clause that introduce a higher rate after a period of time. In those instances, if they do not wish the hire deduction to be made at the lower rate in a case when the vessel is redelivered after the threshold for higher hire is passed (for loss of time occurring earlier during the charterparty), they need to say so explicitly in the charterparty. Most charterparties used in practice do not say so!

Deviation for Crew Change- Who Pays for Additional Delay?

London Arbitration 11/22

What happens if parties agree that the chartered vessel (time or trip charter) would deviate to perform a specific task (e.g. crew change) but after the agreed task is completed further delay arises as a result of other factors (e.g. bad weather) and consequently additional time is lost? Is this a risk that shipowner assumes or is it simply an operational hazard that charterer in a time/trip charter is normally expected to bear?

This was the main issue that the tribunal was asked to address in London Arbitration 11/22 (a proceeding brought under LMAA Small Claims Procedure). The vessel was chartered under an amended NYPE 93 form for a trip from a sole load port in the Sea of Japan to a discharge port in the South China Sea carrying a cargo of steel billets and with an estimated duration of 25 to 30 days. The parties agreed in the charter that the vessel would have had a crew change at Hongai (Vietnam) and the deviation time and bunker costs to be at owners’ account. After the crew change had taken place on departing Hongai the vessel encountered bad weather in the South China Sea and her speed was reduced. The charterers made a deduction of 1.05 day from hire for the delay caused by bad weather following departure from Hongai. The owners argued that the charterers’ deduction was unlawful and breach of charterparty.   

In effect, this is a dispute concerning the application of “causation principles” in the context of a term in a charterparty. There can be no doubt that any time lost during the process of deviating to Hongai for crew exchange is on the owners’ account. However, does the owner remain responsible for any delay that occurs after the crew change had been completed on the premise that further delay would not have happened had the vessel not deviated to Hongai in the first instance?

There is little doubt that the deviation was a “but for” cause of the further delay arising due to bad weather after leaving Hongai but is this adequate to make owners’ liable? The tribunal thought “not”! And rightly so! Imagine that a taxi driver is involved in an accident after dropping a customer at a cottage in a remote location. Will it be possible for the driver to revert to the customer seeking compensation for the loss asserting that s/he would not have ben at that location if the customer had not engaged his/her services in the first place. Naturally not! One might say this is a different situation here as the charterer and owner are still in a contractual relationship. That is true but to make one party liable for consequential losses emerging in a contract, it is necessary that the term in question adopts a broad “causation trigger” to that effect. The clause in question here did not, but merely stated that “the deviation time/bunker/costs to be at Owners’ time/account”. In a similar context (indemnity for charterer’s orders) , the Supreme Court in The Kos [2012) UKSC 17, [2012] 2 Lloyd’s Rep 292 making a distinction between “effective causes” and “but for” causes ruled that in the absence of contrary wording in the relevant clause only losses emerging from an effective cause of the loss are recoverable. Here it can plausibly be argued that the relevant clause (enabling deviation for crew change) did not introduce a broad causation trigger and the loss arising due to bad weather was a “but for” cause and not an effective one.                         

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.              

Because of whose COVID? Quarantine and offhire under a trip time charter.

London Arbitration 27/22 is the latest in a series of arbitration awards being published which deal with the effects of delays due to COVID-19 on vessels under time charter trips. The vessel here was chartered for a time charter trip on amended NYPE form in March 2020 for loading in South America and discharge in the Far East. In April 2020 the vessel arrived at the load port and was quarantined after the bosun tested positive for COVID 19. The charterers argued that the vessel was off-hire for the period of quarantine from 12 April to 1 May 2020. As well as the standard NYPE offhire clause 15, the charter contained two rider clauses, a pestilence and disease clause cl 78; and cl.114 which provided:

“Notwithstanding anything in this charter to the contrary, in the event that, at any time during the currency of this charter, the vessel suffers any loss of time (directly or indirectly) in connection with procedures (including, but without limitation, inspections and/or quarantine and/ or disinfection) imposed on the vessel, cargo or officers/ crew by any port authority or other authorized authority, body or agency, in order to combat avian influenza (or other similar disease) (influenza procedures), the vessel shall not be off hire for any such loss of time and any such loss of time (and the consequences of any such loss of time) shall be for charterers account and, irrespective of whether or not there has been any loss of time charterers shall be liable for the cost of all such influenza procedures which may be charged to or levied against the vessel or owners or officers/crew or cargo provided always that the vessel shall be off hire in respect of any such loss of time and shall be responsible for all influenza procedure costs which arise solely as a consequence of the vessel’s or officers/crew’s history prior to delivery under this charter …”

The tribunal found that the opening wording of cl.114 ‘notwithstanding anything in this charter to the contrary’ meant that the clause provided a complete code to allocate the rights and obligations of the parties as regards loss of time due to quarantine imposed in order to combat avian influenza (or other similar disease) (influenza procedures). Covid-19 being a similar disease, cl.114 covered the off-hire position due to the quarantine at the loading port. The vessel would remain on hire as regards any loss of time due to such quarantine procedures, with the sole exception being that owners would bear the loss of time and associated costs if these arose as a direct consequence of the vessel’s or officer’s or crew’s history prior to delivery.

Entries in the medical log from mid to late March 2020 recorded the third engineer as having a dry cough, a possible indicator of COVID-19,  and this was advised to the port health authorities along with details of the last historical crew shore leave back in December 2019. The vessel arrived on 12 April 2020 but on 16 April 2020 the port health authority decided that due to the log entries regarding the third engineer’s coughing symptoms, which happened prior to delivery, the entire crew should be tested for COVID-19. On 17 April 2020 19 of the 20 crew, including the third engineer, were found to have tested negative, but the bosun tested positive and as a result the vessel was quarantined for 14 days. The bosun tested negative on 27 April but the port authority maintained the quarantine until 1 May when they granted free pratique.

Clause 114 required the tribunal to address whether the quarantine directive was imposed as a result of the ship’s medical records, which disclosed the pre-delivery coughing symptoms of the third engineer, or for some other reason. The port health authority showed no further interest in the third engineer after his negative result on 17 April and its focus of interest was entirely on the bosun due to his positive test. Had all the crew tested negative it is likely that free pratique would have been granted on 17 April. As the quarantine directive did not therefore arise as a consequence of historical events prior to delivery, the charterers had not brought themselves within the exceptions provision of clause 114 and the vessel remained on hire between arrival on 12 April and the granting of free pratique on 1 May.

EU inclusion of shipping in the ETS. Latest developments.

Almost a year ago the EU Commission proposed inclusion of shipping in the Emissions Trading Scheme https://iistl.blog/2021/07/14/bastille-day-eu-commissions-present-to-the-shipping-industry/  with a proposed directive amending the 2003 ETS Directive. This was considerably less extensive that the proposed amendment to the 2015 MRV Regulation which is what the EU Parliament voted for in October 2020. The matter has recently come back to the European Parliament which voted on 22 June to make certain amendments to the EU Commission’s proposed directive amending the 2003 ETS Directive.

The Parliament’s proposed amendments would see coverage of 100% of emissions from intra-European routes as of 2024 and 50% of emissions from extra-European routes from and to the EU as of 2024 until the end of 2026. From 2027, emissions from all trips in and out of the EU should be covered 100% with possible derogations for non-EU countries where coverage could be reduced to 50% subject to certain conditions. 75% of the revenues generated from auctioning maritime allowances should be put into an Ocean Fund to support the transition to an energy-efficient and climate-resilient EU maritime sector. Instead of the phasing in of the surrender of allowances proposed by the Commission, the Parliament proposes that from 1 January 2024 and each year thereafter, shipping companies shall be liable to surrender allowances corresponding to one hundred percent (100 %) of verified emissions reported for each respective year.

Under the Commission’s proposal the person or organisation responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner.

The Parliament has accepted this, but has proposed an amendment whereby, a binding clause should be included in contractual arrangements with the shipping company so that the entity that is ultimately responsible for the decisions affecting the greenhouse gas emissions of the ship is held accountable for covering the compliance costs paid by the shipping company under this Directive. That entity would normally be the entity that is responsible for the choice and purchase of the fuel used by the ship, or for the operation of the ship, as regards, for example, the choice of the cargo carried by, or the route and speed of, the ship – in other words, the time charterer.

Quite how this binding clause in time charters of vessels coming into and out of the EU would be monitored is another matter.

The Parliament also proposed the expansion of the MRV Regulation, Regulation (EU) 2015/757, beyond CO2 emissions, to encompass ‘greenhouse gas emissions’ meaning the release of CO2, Methane and Nitrous Oxides into the atmosphere. The scope of the MRV Regulation should also be amended to cover ships of 400 gross tonnage and above from 1 January 2024, but operators of such ships operators should only be required to report the information which is relevant for inclusion from 1 January 2027 of such ships within the scope of the EU ETS, in particular the type of fuel, its carbon factor and energy density.

The Parliament’s decision was shortly followed by the Council communication of 29 June 2022 stating:

“The Council agreed to include maritime shipping emissions within the scope of the EU ETS. The general approach accepts the Commission proposal on the gradual introduction of obligations for shipping companies to surrender allowances. As member states heavily dependent on maritime transport will naturally be the most affected, the Council agreed to redistribute 3,5% of the ceiling of the auctioned allowances to those member states. In addition, the general approach takes into account geographical specificities and proposes transitional measures for small islands, winter navigation and journeys relating to public service obligations, and strengthens measures to combat the risk of carbon leakage in the maritime sector.

The general approach includes non-CO2 emissions in the MRV regulation from 2024 and introduces a review clause for their subsequent inclusion in the EU ETS.”

Following the adoption of the Council’s position, negotiations between the Parliament and the Council will start shortly in view of finding an agreement on the final text. One way or another, the inclusion of shipping in the ETS is coming soon.

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)).