Time Charter – Page 7 – The Institute of International Shipping & Trade Law (IISTL) Blog

Charterers recover consequential loss of time in addition to off-hire.

London Arbitration 24/16 provides a salutary reminder to owners that charterers may recover additional time to that allowed for under the off-hire clause, if the off-hire event is also a breach of contract by owners. A trip charter had been concluded on NYPE 1946 form with additional rider clauses, the relevant one being cl. 7. This provided: a warranty that on arrival at 1^st loading port the holds should be clean and ready to receive charterers’ cargo in all respects; if the vessel failed the hold survey by the shippers’ surveyor then the vessel was to be placed off-hire from the time of rejection until the time of acceptance in all holds; any extra directly-related costs/expenses/time therefrom to be for owners’ account.

The vessel failed her holds survey and on passing it, the vessel had lost her turn to berth and it was a further week before she eventually berthed. The owners argued that the off-hire provision in cl. 7 was conclusive as to the amount of time that charterers could claim and that the vessel would be off hire only for the 70 hours between failing and then passing the survey. The tribunal held that additional time consequential on the failure of the hold survey could be recovered by reason of the owners’ breach of their clean holds warranty in the first part of cl. 7. The additional time spent in waiting for a berth after the vessel reentered the berthing queue was directly related to the breach of the warranty. That appropriate form of compensation was that charterers were relieved of the obligation to pay hire for that time.

Hanjin Rehabilitation. Claims by Owners and the UK Recognition Order

As well as having its own vessels, Hanjin is also believed to have time chartered a substantial number of vessels. It is a good bet that many of those charters will be subject to London arbitration and English law. The Hanjin collapse will see those shipowners making claims against Hanjin, such as for damages for the unexpired residue of the charters following their termination, (an issue on which the Court of Appeal’s decision in Spar Shipping is eagerly awaited).

Shipowners will also seek to claim against third parties connected with Hanjin, by exercising liens on sub-freights against parties who have sub-chartered from Hanjin, or by claiming freight due under shipowners’ bills incorporating the terms of those sub-charters. The mechanism for making such claims is by giving notice to the sub charterer or to the bill of lading shipper that payment is to be made to owners and not to Hanjin, and hoping that the freight hasn’t already been paid. However, the basis of the two types of claim is quite different. The nature of the lien on sub freights has not been definitively ascertained under English law, but the better view is that the lien operates as an equitable assignment giving rise to a floating charge over the charterer’s asset, its contractual right to sub-freights. The claim to freight under the bill of lading on the other hand is a claim under a separate contract between the shipowner and the shipper.

Following the rehabilitation proceedings in South Korea (which are similar to US Chapter Eleven proceedings), recognition orders have been obtained in various jurisdictions including the UK. Under article 20(1) of the UNCITRAL Model Law, which is given the force of law by the Cross-Border Insolvency Regulations 2006, there will be then be an automatic stay of certain actions, such as commencement or continuation of actions or proceedings against the debtor or its assets, or execution against a debtor’s assets. The stay will effect any arbitration proceedings against Hanjin, or its sub-charterers against whom the lien on sub-freights has been exercised. However, article 20 (6) provides that the court has power to modify or terminate the automatic stay and to do so upon such terms and conditions as it thinks fit. Article 20(2) requires the court to apply the same test and principles as it would apply to the stay of a winding up order under section 130(2) of the Insolvency Act 1986 which gives the court a free hand to do what is right and fair according to the circumstances of each case. The stay will usually be lifted when disputed claims need to be resolved by proceedings and it is right and fair in all the circumstances to accept and implement this need.

Last year in proceedings arising out of another set of rehabilitation proceedings involving a South Korean charterer, Re Pan Ocean Co. Ltd Pan Ocean); subnom another v. Pan Ocean Co Ltd and another [2015] EWHC 1500 Ch, the discretion was exercised in favour of allowing arbitration proceedings to continue, although the owners’ application to the Company Court was made however on the basis that they would not seek to enforce any arbitration award or subsequent judgement against the assets of Pan Ocean. This follows a similar result in Cosco v Armada [2011] EWHC 216 (Ch), a case involving a recognition order of Swiss bankruptcy proceedings against a time charter. Briggs J allowed the stay to be lifted in respect of owners’ arbitration proceedings against sub-charterers, pursuant to the lien on sub-freights. This was subject to a condition that after an award in owners’ favour had become final, charterers should have the opportunity to restore the matter to the court, in the event that any aspect of the interests of its creditors or office-holder have not been addressed by the arbitrators, or upon appeal.

However, a claim to freight under the bill of lading, as a contractual claim against the shipper, should not be affected by the recognition order unless the freight exceeded the amount of owners’ claim in which case the surplus would be held on account of the time charterer.

As a post-script it may well be that under South Korean insolvency law the rehabilitation proceedings will not affect the exercise of a lien on sub-freight. This was the position in The Bulk Chile [2012] EWHC 2107 (COMM). It was there argued at first instance that the lien on sub freight was subject to the Comprehensive Stay Order, designed to suspend creditors’ compulsory enforcement, which is defined in article 44 of the Debtor Rehabilitation and Bankruptcy Act as meaning, among other things, “the compulsory auction sale proceedings for the execution of security interests”. Andrew Smith J heard conflicting evidence from South Korean lawyers on this and concluded that the Stay Order did not affect the exercise of the lien. He stated [69]:

“Mr Kim’s suggestion of such a purposive construction of the statute is advanced in tentative terms. “Mr Choi firmly rejected it in a report in response dated 22 June 2012, and cited in support of his opinion the views of the Bankruptcy Division of the Seoul court published by them in “Practice in Rehabilitation Cases”. His opinion is in line with a decision of the Seoul court of 21 December 2011 in case no 2011 Hoehwak 382.” I cannot accept that Mr Kim’s suggestion represents the present state of Korean law, and I conclude that the orders of the Seoul court afford the defendants no answer to the lien claims. I uphold the lien claim against Metinvest.”

Performance warranty not qualified by fair wear and tear.

In The Coral Seas (Imperator I v Bunge SA) [2016] EWHC 1506 (Comm), owners were faced with a claim by time charterers for underperformance on their speed warranty. Their defence was that the underperformance was due to fouling after waiting in warm water ports to which the vessel had proceeded pursuant to charterers’ orders. They relied on the following statement of principle in Wilford on Time Charters. Time Charters 7th Ed. (2014) paragraph 3.75 as follows:

“Where the owners give a continuing undertaking as to performance of the ship, and the ship has in fact underperformed, it is a defence for the owners to prove that the underperformance resulted from their compliance with the charterers’ orders: see The Pamphilos [2002] 2 Lloyd’s Rep. 681 per Colman J., at page 690. In that case, the ship’s failure to achieve the promised performance resulted from marine fouling, which was in turn the result of the owners’ complying with the charterers’ order to wait for 21 days at a tropical port.”

Phillips J rejected their argument. The Wilford proposition was too widely stated. Colman J’s decision in The Pamphilos was in the context of refusing leave to appeal under s.69 of the Arbitration Act, and only reported because the application for leave was dealt with at the end of a judgment on an appeal under s.68. Furthermore the details of the performance warranty were not given.

Phillips J held that where a vessel has underperformed, it is not a defence to a claim on a continuing performance warranty for the owners to prove that the underperformance resulted from compliance with the time charterers’ orders unless the underperformance was caused by a risk which the owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers.

The lesson for owners trading to warm water ports is to modify the performance warranty to exclude it in respect of voyages after the Vessel has been waiting in warm water ports,

Loading illegal cargo by ‘Stealth’. Charterer’s libaility for the wrongs of sub-charterers.

In The CV Stealth [2016] EWHC 880 (Comm) time charterers sought permission to appeal against the award of an arbitrator who had found them liable to the shipowners in respect of the consequences of the vessel’s detention following an attempt by the sub charterer to load a cargo of oil from Venezuela without the necessary export permission. The finding was on the basis of an indemnity under cl. 13 of Shelltime 4 form, off hire under cl. 21, and for breach of cl.28 which provided … No voyage shall be undertaken, nor any goods or cargoes loaded, that would expose the vessel to capture or seizure by rulers or governments.” The appeal was on the basis that the arbitrator had committed an error of law in not construing cl.28 as having prospective effect at the time the relevant order was given by the charterer. Popplewell J found that the arbitrator had construed the clause prospectively and found that the risk of loading the unauthorised cargo had existed at the date the order was given. He also expressed the view that by analogy with the charterer’s obligation to nominate safe ports, if the risk arises whilst the vessel is en route, the owners would be entitled to refuse to continue to comply with the order, if they were aware of it. In the event of continued compliance, the charterers would be in breach of provided that the risk arose before it became impossible for the charterers to give fresh orders which could be complied with in time to avoid the risk.

Permission to appeal was refused because the statutory criterion in s. 69(3)(a) of the Arbitration Act 1996 was not fulfilled.

The case also raised a procedural issue as to the effect of cl. 41 of the charter which provided “The parties hereby agree that either party may –(a) appeal to the High Court on any question of law arising out of an award;” The clause was clearly drafted with the terms of section 69 of the 1996 Arbitration Act in mind. It scope was limited to a question of law whose determination by the Court may serve a useful purpose for the parties, on a question that will substantially affect the right of the parties.

The problem of foreign judicial determinations

A charterparty case today, Shagang Shipping Co Ltd v HNA Group Co Ltd [2016] EWHC 1103 (Comm) looked like a simple case of owners claiming charter hire and damages from time charterers (or rather their parent company guarantors). Unfortunately it turned into something like a nightmare for the owners’ lawyers.

The difficulty was that, while the figures were fairly straightforward, the charterers’ group (HNA) sought to escape scot-free by alleging that the charterers had only signed the charter because the owners had bribed one of the charterers’ employees to approve it. HNA was a leading and influential company in Hainan Province in China. It duly produced confessions of, and convictions in Hainan for, the relevant bribery by an officer of the owners and their own employee. Unfortunately there were distinct indications that these confessions had been obtained by some interesting police practices not unconnected with rubber truncheons, cigarette burns and near-drowning, which were testified to in the case and which Knowles J specifically stated could not be ruled out. Happily Knowles J was able to rule against HNA on the basis of external evidence that there had been no bribery.

A correct result, therefore. But the difficulties cases like this raise are of a high order. External evidence will not always be present; and where it is not the difficulties of obtaining evidence of malpractice of the kind alleged in Shagang are obvious. The only cure would seem to be a term in the relevant contract excluding a priori the use of at least some court decisions as evidence in subsequent proceedings arising out of a dispute. But that cure might well be worse than the disease.

The Global Santosh and the Vicarious Performance of Third Parties

The Supreme Court today (11 May 2016) handed down its decision in NYK Bulkship (Atlantic) NV v Cargill International SA (The Global Santosh) [2016] UKSC 20.

Simon Rainey QC, visiting fellow of the IISTL, was brought in to argue the SC appeal and represented the successful appellants, Cargill.

The decision of the Supreme Court is a landmark one in relation to a contracting party’s responsibility for the vicarious or delegated performance by a third party of its contractual obligations, both in the common charterparty and international sale of goods contexts.

Overview

The Global Santosh was time chartered on terms that the vessel should be off-hire during any period of detention or arrest by any authority or legal process, unless the detention or arrest was “occasioned by any personal act or omission or default of the Charterers or their agents.” She was arrested as a result of a dispute between the receiver of the cargo and a party who appears to have been a sub-sub-charterer, and which had nothing to do with the owners or the ship. The question which arises on this appeal is whether the arrest can be regarded as having been occasioned by the time charterer’s “agents” in the sense in which that word is used in the proviso.

The meaning of the common term “or their agents” in this charter context raised far-reaching issues as to the extent of a party’s responsibility under a contract for the acts of a third party who vicariously performs some aspect of the party’s contractual obligations or to whom performance of the obligation has been delegated by the creation and operation of a series of sub-contracts.

These issues, previously only canvassed at first instance and open to debate, have now been addressed in full by the Supreme Court.

Summary of the Supreme Court’s Decision

In general terms, in deciding whether a contracting party is liable or responsible for some act or omission done by a third party in performing that party’s obligation under a contract, the correct approach is to define what obligation has been delegated to the third party and to what extent that party is vicariously acting as the contracting party in acting or omitting to act.

In the specific context of a time charterparty off hire clause, the question as to who bears responsibility for delay occasioned by an arrest by or involving such a third party is one of construction of the clause.

But the use of the concept of charterer’s “agents” in such a provision (and others) is to be approached in just the same general way.

In particular, there is no over-arching concept of ‘spheres of responsibility’ which would treat any party who becomes involved in the chain of contracts around the charterparty which result from the charterer’s trading of the vessel and its commercial or trading arrangements (such as a sub- or sub-sub- charterer or a buyer or seller of cargoes) as its “agent” by being on the charterer’s ‘side of the line’.

P & I clubs and direct actions — again

In March 2014 the laden Turkish container ship Yusuf Cepnioglu grounded on Mykonos and became a total loss, yielding — apart from the odd oil slick — the usual fun for lawyers. The time charterers (Turkish), faced with numerous suits by irate cargo owners to whom they had issued bills of lading, claimed over against the shipowners (Turkish) in London arbitration proceedings for breach of the charterparty. So far so good. Simultaneously, however, the charterers began proceedings in Turkey against the owners’ P&I club to attach directly $13.5 million of its assets in Turkey under a Turkish direct action statute. The club reacted strongly, saying that its contract with the owners, like zillions of other P&I covers, was governed by English law and stipulated for “pay to be paid” and for all claims to be arbitrated in London. It sought an anti-suit injunction. The charterers for their part said that they had a direct action against the club governed by Turkish law, and that English courts had no business telling it how to enforce (or not enforce) its Turkish law rights in Turkish courts. The real point of course was that the charterers wanted to ensure that any claim they had against the club was litigated in Turkey, which would not apply the terms of the P&I cover and would repel any awkward demands for arbitration.

The club won before Teare J and in the CA.

First, the Turkish law was held to give, not a direct claim against the club, but one derivative from the contract between the club and the owners (like the equivalent Spanish and Indian laws: see The Prestige [2015] 2 Lloyd’s Rep 33 and The Hari Bhum [2005] 1 Lloyds Rep 67). It followed that it was governed by English law and any enforcement was subject to the conditions in the club cover.

However, there then came the issue whether this gave the owners a right to an anti-suit injunction. True, their right to arbitration would be stymied if the charterers weren’t stopped in their tracks. On the other hand, the charterers weren’t party to the P & I cover in that they hadn’t promised not to sue in Turkey. On this point there was a pretty clear conflict of authorities: The Hari Bhum [2005] 1 Lloyds Rep 67 said the charterers were right, while The Jay Bola [1997] 2 Lloyd’s Rep 279 was for the owners. The Court of Appeal had no doubt that The Jay Bola showed the correct way forward and should be followed. Where someone took over rights that were clearly conditional on arbitration, etc, this in itself was enough to justify the English courts preventing them having an end-run around the requirement by suing elsewhere. One suspects, with respect, that this must be correct. One suspects also that, though this case dealt with the English direct action under the Third Parties (Rights against Insurers) Act 1930 and not its 2010 replacement, there will be no change as and when the latter — finally — does come into force.

See Shipowners’ Mutual v Containerships Denizcilik Nakliyat ve Ticaret AS [2016] EWCA Civ 386.