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)).  

          

Covid-19 and delays under time charters.

Another London Arbitration award concerning the effects on charterparties of the outbreak of Covid-19 in 2020.

London Arbitration 4/22, involved events in the early stages of the outbreak of Covid-19, before the declaration of a pandemic. The vessel arrived at the discharge port in China on 4 March 2020. Due to anxiety about the outbreak of Covid-19 the third officer checked the temperature of each pilot when they came aboard with a contactless hand-held infrared thermometer and it was alleged that each pilot had temperatures in excess of 37.5C which the master said exceeded the maximum allowed by the owners’ company policy. The master then insisted that the pilots take their temperatures with mercury thermometer before embarking on vessel.  The pilots refused to do so and the vessel missed its berthing slot. After owners had sent an apology for the benefit of the piloting company on an entirely without prejudice basis, replacement pilots boarded the vessel on 13 March to bring it into berth.

The vessel had been chartered for a time charter trip on amended NYPE form and charterers argued that it had gone off-hire for three reasons. First there had been a default of officers or crew under cl. 15. The tribunal held that there was no such default which would involve a refusal by the crew to perform their duties to the shipowner, as defined in The Saldanha [2011] 1 Lloyd’s Rep 187. In contrast, here the master and third officer were clearly seeking to implement company policy. rather than refusing to discharge their duties owed to the shipowners.

Secondly, by reference to cl.58 which provided: “58. Deviation/Put Back: Should the vessel put back whilst on voyage by reason of … the refusal of the Captain, Officers or crew to do their duties without any specific or valid ground for rejection, or any Owners’ matters unless caused by default of Charterers and/or their staff and/or their agents, the payment of hire shall be suspended from the time of inefficiency in port or at sea until the vessel is again efficient in the same position or regains a point of progress equivalent to that the hire ceased hereunder …” The tribunal rejected charterers’ argument as there was no refusal of the master, officers or crew to do their duties within the meaning of clause 58.

Thirdly, by reason of deviation/put back provisions under cl.15 whereby hire would be suspended:  “Should the vessel deviate or put back during a voyage, contrary to the orders or directions of the Charterers, for any reason for other than accident to the cargo..” The tribunal found that there was little logical or practical difference between the vessel being physically diverted away from its course rather than simply failing to proceed forward on that course, and if necessary would have found that the vessel went off-hire under this provision.

In the event, the tribunal was not required to express a firm view on the point and determine the matter on the basis of off-hire. Instead it found that charterers were entitled to damages for owners’ breach of cl.8 as the refusal of the master to allow the pilots to remain on board and, to proceed to berth on 4 March was a failure on the part of the owners to follow the charterers’ legitimate orders and directions. There was no risk to the ship, crew or cargo in those orders to justify the action of those on board the vessel and the delay that resulted from those actions. A general fear of Covid-19 did not provide the owners with carte blanche to refuse to perform under the charterparty, and unilaterally to impose their own conditions for the attendance of the pilots. The charterers were entitled to recover in damages the value of hire and bunkers for time lost.

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

London Arbitration 6/22

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

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

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

The relevant provisions of the charter party were:

Clause 15   

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

Clause 45

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

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

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

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

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

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

London Arbitration 23/21

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

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

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

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

Clause 67 of the charterparty also provided:

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

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

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

The arbitrator found that:

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

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

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

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

Time charter trip. Quantifying shortfall of bunkers remaining on board on redelivery.

In London Arbitration 19/21 the bunker clause in a trip time charter from the Far East to Egypt provided:

“8. BUNKER CLAUSE:

BOD about 830 metric ton IFO 380 CST about 78 metric ton LSMGO.

Prices both ends: USD425 PMT for IFO 380 and USD685 PMT for LSMGO. 

BOR about same as BOD of IFO and BOR as onboard of LSMGO.”

The vessel was delivered with 888.56 mt of IFO on board and redelivered with 686.07 mt. The owners were prepared to allow a margin of 2 per cent for the term “about” but submitted that even on that basis the charterers had redelivered with a shortfall of 184.7188 mt of IFO. They said that the prevailing market price of IFO at the place of redelivery in Egypt was US$510 per mt, and claimed the difference between that price and the charterparty price of US$425 per mt on the shortfall, a total of US$15,701.10.

The Tribunal  held that the word ‘about’ without further clarification imported a 5 percent margin for both delivery and redelivery. Owners argued that this was not the case on redelivery because the charterers had the opportunity of supplying further bunkers to make up the shortfall but deliberately decided not to do so. Although the Tribunal could see the attraction of the argument it rejected it as adding such a gloss to the usual understanding of the term ‘about’ would cause uncertainty and leave the parties in the dark as to the nature and extent of their obligations.

The Tribunal then held that the charter prices on redelivery only applied to legitimate quantities on delivery and redelivery and not to any quantities as submitted by the charterers. The appropriate comparison to be made was between the charterparty price and prevailing market price at the place of redelivery. Speculation as to where and at what price the owners might have taken on bunkers after redelivery had to be discounted as a matter of an independent commercial decision of the owners after redelivery. 

The Tribunal rejected Charterer’s argument that they had requested the owners to load more bunkers at Singapore but were told that the vessel did not have sufficient tank capacity to load the quantity proposed by the charterers. The charterers had not then taken on additional bunkers in Egypt because the supply of bunkers there was unreliable both in terms of service and quality. There was no warranty as to the bunker capacity of the vessel and/or its ability to take on board any quantity of bunkers required by the charterers at any time at Singapore, or elsewhere, during the course of the trip.

Repudiation of time charter. Owners’ claim for summary judgment for damages.

The Marquessa (Giorgis Oil Trading Ltd v AG Shipping & Energy PTE Ltd) [2021] EWHC 2319 (Comm) involved repudiation of a time charter on Shelltime 4 form (as amended). Following repeated non-payment of instalments of hire, owners eventually accepted this conduct as Charterers’ repudiation and terminated the charter.  The vessel was then carrying a cargo, loaded on the orders of Charterers, for sub-sub-charterers, and having exercised a lien, as an act of mitigation, Owners agreed with Voyage Charterers to complete the voyage in exchange for payments to escrow.

 Owners applied for summary  judgment in respect of:

i)  unpaid hire accrued due prior to the termination of the Charterparty (the “Pre-Termination Claim”), and,

ii) damages consequent upon Owners’ termination of the Charterparty on the basis of Charterers’ repudiation or renunciation (the “Post-Termination Claim”), but excluding damages in respect of the period after the discharge of Charterers’ cargo from the Vessel.

Henshaw J rejected Charterers’ assertion that Owners had failed to allow for off-hire periods, presumably for the periods during which Owners suspended performance. Suspension of performance was permitted by the following clause in the charter.

“… failing the punctual and regular payment of hire …  [Owners] shall be at liberty to at any time withhold the performance of any and all of their obligations hereunder … and hire shall continue to accrue …”

Owners’ right to suspend performance was not a penalty. Nor was it arguable that Owner’s exercise of the right to suspend performance was an unlawful exercise of a contractual discretion.  The nature of the right is such that owners could reasonably have regard purely to their own commercial interests.  In any event, the suspension of performance in the present case was not arguably irrational, arbitrary, or capricious. Neither were Owners obliged to mitigate. Their claim was for liquidated sums due under the contract, not damages for breach. Further, any obligation to mitigate did not require them to refrain, while the Charterparty remained on foot, from exercising their right to suspend performance.  In any event, Owners did subsequently take reasonable steps to mitigate by means of their arrangement with the Voyage Charterers.

Henshaw J agreed that by the time Owners treated the Charterparty as having come to an end by reason of Charterers’ breaches a reasonable owner would have concluded from Charterers’ conduct that they would not pay hire punctually in advance as required by the Charterparty:

i) Charterers had failed to pay hire from the outset, and this continued over the ensuing months. 

ii) At most, Charterers expressed a willingness to perform, but repeatedly proved unable or unwilling to do so. 

iii) Charterers’ conduct in the present case deprived Owners of “substantially the whole benefit” of the Charterparty, and they were seeking to hold Owners to an arrangement “radically different” from that which had been agreed. 

It was not arguable, that Owners themselves were in repudiatory breach, for suspending performance and then reaching an agreement with Voyage Charterers: The charter entitled Owners to suspend performance, and the arrangement with the Voyage Charterers was a lawful step in mitigation, realising value from the exercise of Owners’ lien, and in any event post-dated the contract having come to an end upon their acceptance of Charterers’ breaches.

When the Charterparty came to an end in November 2020, the Vessel was laden with cargo and until discharge, no replacement charterparty at the current market rate was possible, and therefore there was no scope for entering into a mitigation charterparty. Accordingly damages ran at the charter rate up until discharge, from which Owners gave credit for address commission, Charterers’ payments and relevant sums received from the Voyage Charterers.  Credit was also given credit for the value of bunkers remaining on board at the date of discharge at the contractual rate in the absence of any evidence from Charterers as to the actual sums paid for the bunkers.

The correct date for assessing the credit for bunkers remaining on board was that of discharge on completion of the voyage for which Charterers had given orders, and not the date of termination. Clause 15 of the Shelltime 4 form (as amended) provides that “… Owners shall on redelivery (whether it occurs at the end of the charter or on the earlier termination of this charter) accept and pay for all bunkers on board …”.

The relevant date must, logically, be the date of actual redelivery, even if it was in fact later than the (natural) end of the charter or the date on which it was contractually brought to an end.  In any event, even if clause 15 were not construed in that way, owners would be still entitled to recover the bunkers used to complete Charterers’ voyage on a different basis, viz as damages or in bailment – as in The Kos [2012] UKSC 17.

Accordingly, Henshaw J found that Owners were entitled to summary judgment for a sum equivalent to hire from when they accepted Charterer’s repudiation to the date of discharge on the laden voyage in progress at that date, less credit for commission and bunkers remaining on board at the latter date.

Smart claims for bill of lading freight by owners.

If an owner’s bill of lading incorporates the freight provisions of a time charterer’s voyage charter, can owners intervene to require payment of the freight to themselves rather than to the time charterer? That was the issue recently before Butcher J in Alpha Marine Corp v Minmetals Logistics Zhejiang Co Ltd (MV Smart) [2021] EWHC 1157 (Comm) (05 May 2021).


Claim were made by owners against charterers in respect of the loss of the vessel for breach of the safe port warranty. the Tribunal found that the Charterers had provided a safe port warranty in respect of Richards Bay and that there were some shortcomings in the running of the port. However, the Master had been negligent in his handling of the Vessel and it was this that caused the grounding of the Vessel. Owners had issued bills of lading which stated ‘freight as per charter’.  After the vessel was lost the Owners gave notice to the bill of lading holder, the voyage charterer to pay full freight to them. At that time only a sum in respect of bunkers was due to Owners.  Charterers claimed damages in respect of losses sustained as a result of owners’ intervention in respect of freight due under the bill of lading through the incorporation of the terms of the voyage charter. They also claimed in tort on the basis of procuring breach of contract by the voyage charterer and/or knowingly and/or unlawfully interfering with the Voyage Charter. The Tribunal found that Owners were not entitled to revoke Charterers’ right to obtain the bill of lading freight or to direct it be paid to the Owners. This is because the Charterparty contained an implied obligation that Owners would not revoke unless hire and/or sums were due to them under the Charterparty

On appeal, Butcher J considered three possible terms constraining owners’ exercise of their rights to intervene to claim freight under the bill of lading. First, the “all freight” implied term whereby if the Charterers were in default of their obligations under the Charterparty, then the Owners would be entitled to collect the entirety of the freight, even if it exceeded the amount of the Owners’ claim against the Charterers arising out of their default. Second, “All Freight (Sum Identified) Implied Term”) by which the Owners were not entitled to revoke the Charterers’ authority to collect any freight unless a sum was due to the Owners under the Charterparty and the relevant sum was identified at the time of any revocation of the Charterers’ authority; and (3) the “Dollar for Dollar” Implied Term whereby the Owners were only entitled, in the event of a default by the Charterers, to revoke the Charterers’ authority to collect freight in respect to an amount up to, but no more than, the amount due from the Charterers under the Charterparty.

Butcher J rejected the implication of any term.  Owners’ duty to account to the charterer for any excess in the amount of freight collected over the amount due under the charterparty meant that the present charterparty, or other time charters in similar form, did not lack commercial or practical coherence without an implied term restricting the owners’ right to intervene.  If owners claimed freight in excess of sums due to them under the time charter the owners would have to account for the balance to the time charterers, and that was the charterers’ protection.

The Award was set aside insofar as it awarded damages for breach of the implied term found by the Tribunal; and the matter was remitted to the Tribunal for reconsideration of the Charterers’ freight counterclaim on the alternative Tortious Basis, having regard to this judgment.

Off-hire and arrests unconnected with the vessel detained.

On 15 December 2018, while under time charter to Navision the “Mookda Naree” was arrested at Conakry in respect of a claim against sub-sub charterers Cerealis, and remained under arrest for nearly a month. The claim related to an alleged shortage claim against them by SMG in respect of cargo discharged at Conakry from a previous, unrelated vessel. The head charter and the sub-charter were time charters on the Asbatime form with additional clauses. In both cases, additional clause 47 put the ship off hire inter alia upon her being detained or arrested by any legal process, until the time of her release, “unless such … detention or arrest [was] occasioned by any act, omission or default of the Charterers and/or sub-Charterers and/or their servants or their Agents.” Additional clause 86 of the head charter, not included in the sub-charter, provided as follows:

“Trading Exclusions

When trading to West African ports Charterers to provide adequate security guards during port stays in these countries to protect the vessel her crew and cargo.

When trading to West African ports Charterers to accept responsibility for cargo claims from third parties in these countries (except those arising from unseaworthiness of vessel) including putting up security, if necessary, to prevent arrest/detention of the vessel or to release the vessel from arrest or detention and vessel to remain on hire.

…”

By cl.43 the Inter-Club Agreement was incorporated into the head charter.

Owners claimed that the vessel never went off-hire and that Navision was liable in damages for breach of cl.86. It was common ground that in the context of both time charters, Cerealis was a “sub-Charterer” within the clause 47 proviso.

The tribunal heard separate references by the sub charterer against the time charterer, and by the time charterer against the owners. They held that the clause 47 proviso applied, so that the vessel was not off hire after 12:00 hrs on 17 December 2018, because by that time her detention under arrest thereafter was occasioned by Cerealis’ failure promptly to deal with or secure SMG’s claim so as to procure her release.

In the head charter reference, the arbitrators held that the second paragraph of cl.86 applied, and was not limited to claims concerning cargo carried under the head charter. Therefore, the vessel was off -hire for the entire period under arrest.

On appeals by sub-charterers and time charteres against the awards, Andrew Baker J held, [2021] EWHC 558 (Comm) 10.3.21, that the tribunal had correctly concluded that the detention of “Mookda Naree” after 12:00 hrs on 17 December 2018 was occasioned by Cerealis’ failure to act. It ought reasonably to have acted to deal promptly with the claim being made against it by SMG, that being an “act or omission or default of … sub-Charterers” within the meaning of the proviso to clause 47 of both charters. As regards s.86 under the head charter which concerned the award of hire up to 12,00 on 17 December 2018 it was clear that clause 86 was intended to create a different regime to that generally applicable by reason of clause 47. The vessel never went off-hire during the period of the arrest.

The arbitrators had erred in their construction of clause 86 and should have said that SMG’s claim, though it related to a cargo that had been carried to a West African port, was not a cargo claim within clause 86 of the charter between the Owner and Navision because it did not concern “Mookda Naree’s” West African trading pursuant to that charter but a different ship altogether. It was therefore not a claim allocated to be Navision’s full responsibility by clause 86, any more than it would have been a claim to be dealt with under the Inter-Club Agreement pursuant to clause 43 in the absence of clause 86. Navision’s appeal against the award in the head charter reference succeeded to the extent that because the arbitrators misconstrued clause 86 they wrongly held that the ship never went off hire, whereas they should have held that when arrested she went off hire under clause 47 until the proviso bit from 12:00 hrs on 17 December 2018. They had also wrongly held that Navision had a liability for damages to be assessed for breach of clause 86.

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!