Case Summary: The "Coral Seas" - Underperformance due to Charterer's orders?
/THE "CORAL SEAS" [2016] EWHC 1506 (Comm) Phillips J.
Introduction
This matter concerned the appeal of an arbitration award under section 69 of the Arbitration Act 1996, granted by Mr. Justice Males, on a specific question of law; namely:
"Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?"
The Facts
The vessel was time chartered on an amended NYPE 1946 form to Bunge SA (the Charterers) for about 23 to 25 months. During the period of the charter the ownership of the vessel was transferred to Imperator I Maritime Company (the Owners) and the charterparty was novated to reflect this change. The name of the vessel was also changed to ‘The Coral Seas’.
The Charterers then sub‐chartered the vessel to C. Transport Panamax Ltd (the Sub‐Charterers) on predominantly back-to-back terms for one or two laden legs, at the Sub‐Charterer’s option.
Clause 8, in its standard wording, of both the head and sub‐charter provided that the captain shall prosecute the voyages with the utmost dispatch and that the vessel shall be under the orders and directions of the Charterers as regards employment. A continuing speed warranty was also included in the rider clauses of both charterparties, at clause 29.
Under the orders of the Sub‐Charterers the vessel proceeded to discharge her cargo at Praia Mole (Tubarao), Brazil, on her first laden voyage in January 2008. The vessel was then ordered to Guaiba Island, near Rio de Janeiro, where she waited to berth from 14 January to 10 February 2008 to load her second cargo.
After the vessel departed Guaiba Island, it became apparent that the vessel’s performance had fallen off significantly and to such an extent that the vessel had to call at Jakarta to take on emergency bunkers.
Following bunkering, the vessel proceeded to Singapore where an underwater inspection was carried out. The inspection revealed heavy fouling of the vessel’s propeller and light fouling of the vessel’s hull. The propeller was cleaned and she thereafter proceeded to Marwan in China, where she discharged her cargo, completing her second laden voyage.
Subsequently, Sub‐Charterers deducted hire from the Charterers and reserved their right to set-off from hire damages for any breach of the continuing speed warranty. Charterers maintained a similar positon up the contractual chain against Owners. The disputes were thereafter referred to LMAA arbitration in accordance with the BIMCO dispute resolution clauses incorporated into the subject charterparties.
The Arbitrations
The Tribunal found:
- The vessel did not maintain its warranted speed, the cause of which was the fouling of the vessel’s hull and propeller, which accrued while the vessel was waiting in tropical waters at Guaiba Island.
- However, such marine growth was usual and constituted fair wear and tear.
- The arbitrators determined that clause 29 amounted to a continuing warranty and the risk of underperformance as a result of Charterer’s/Sub‐charterer’s lawful orders rested on the Owners.
The Appeals
The Owners thereafter sought leave to appeal, based on a summary of law in Time Charterers 7th Edition (2014) at paragraph 3.75, which included among other things the assertion that Owners should not be liable for under performance occasioned by Charterer’s orders (citing The Pamphilos [2002] 2 Lloyd’s Rep. 681 per Coleman J., at page 690).
Conclusion
The Court analysed the authorities in this area, with a particular focus on the allocation of risk balancing the Charterer’s right to give lawful orders and the Owners’ obligation with respect to the performance of the vessel.
The Court accepted that the Owners had an implied right of indemnity as a result of following Charterer’s orders (and Charterers likewise against Sub‐Charterers), but such indemnity would not include risks which would arise naturally as a consequence of such orders (expected risks) and/or those expressly assumed in the relevant charterparty, despite the decision in The Pamphilos [2002] 2 Lloyd’s Rep. 681.
The Owners, in this case, had assumed a continuing warranty with respect to the vessel’s performance, which included its own limitations. These limitations did not include the expected risk of fouling as a result of trading in certain areas. It was open to the Owners to have contracted out of such a risk, when negotiating the vessel’s performance warranty.
As the fouling arose as an expected consequence of the Charterer’s lawful orders, Owners were precluded from arguing that Charterers could not deduct the claim for under performance from hire.
Comment
It remains to be seen whether this decision will be appealed, but in the meantime it provides some welcome certainty to this area of law. It appears the Court has reverted to a more traditional approach regarding the allocation of risks in time charterparties. It has confirmed that Charterers should be able to take advantage of the commercial employment of the vessel without fear that they will be liable for the expected/normal physical deterioration of the vessel (fair wear and tear), which would otherwise be Owners’ responsibility under clause 1 of the NYPE form.
On the other hand, the decision also appears to suggest that Charterers cannot deduct amounts from hire for under performance if the under performance was caused by an order which breached another charterparty term, or the order resulted in a risk which was outside the Owners’ reasonable commercial contemplation.
Perhaps this decision is not surprising given that there are numerous clauses which deal with the risk of bottom fouling. Needless to say it is in Charterers’ interests to avoid such clauses if possible.
Charterers' Club
Article originally published in the Charterers’ Club magazine in July 2016. View original article.
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