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To: Transport Industry Operators

The English Court of Appeal issued a Judgment on 13/12/2017 dealing with a cargo damage claim of EUR2,654,238 and a charter hire claim of USD1,012,740 in connection with a NYPE charterparty. [2017 EWCA Civ 2107] [2017 WL 06343564] [Case No. A3/2016/4770]

The issue in this case was whether the word “act” in the phrase “act or neglect” meant a culpable act in the sense of fault or whether it meant any act, whether culpable or not. The question arose as a matter of construction of clause 8 of the Inter-Club Agreement 1996 (“the ICA”), an agreement made between Protection and Indemnity Associations (or “Clubs”) in relation to liability for cargo claims as between shipowners and charterers. It arose on an appeal from an award of arbitrators.

The claimants in the arbitration were the Owners of the mv Yangtze Xing Hua which they chartered to the respondents in the arbitration (“the Charterers”) for a time charter trip carrying soya bean meal from South America to Iran. The charterparty was dated 3 rd August 2012 and was on the New York Produce Exchange (“NYPE”) Form. The vessel arrived off the discharge port in Iran in December 2012. Not having been paid for the cargo, the Charterers ordered the vessel to wait off the discharge port for over 4 months. The arbitration tribunal said this:-

“… it seemed very clear that it actually suited the Shippers/Charterers, in money terms, to use the vessel as floating storage, at the Receivers’ expense, rather than unloading it ashore into a bonded warehouse. Hence the strangely relaxed approach to the decision to wait outside for over four months. Cheap floating storage was one reason to keep the goods on board. The other was that the goods could be diverted easily if they remained on a vessel. Given the Receiver’s slow pace of paying, it was perhaps not unreasonable of Nidera [cargo interests] to keep the goods on board as necessary.”

The cargo, or part of it, started to overheat. When the vessel was brought alongside and discharged in May 2013 damage was found and a claim was made against the Owners for €5 million which, after lengthy negotiations, was settled in the sum of €2,654,238. The Owners claimed that sum together with hire in the sum of US$1,012,740 from the Charterers.

It was common ground that liability was to be settled in accordance with the ICA which had been incorporated into the charterparty. Clause 8 of the ICA provides as follows:-

 “(8) Cargo claims shall be apportioned as follows:
a) Claims in fact arising out of unseaworthiness and/or error or fault in navigation or management of the vessel:

100% Owners
save where the Owner proves that the unseaworthiness was caused by the loading, stowage, lashing, discharge or other handling of the cargo, in which case the claim shall be apportioned under sub-Clause (b).

b) Claims in fact arising out of the loading, stowage, lashing discharge, storage or other handling of cargo:

100% Charterers
unless the words “and responsibility” are added in Clause 8 or there is a similar amendment making the Master responsible for cargo handling in which case:
50% Charterers
50% Owners
save where the Charterers proves that the failure properly to load, stow, lash, discharge or handle the cargo was caused by the unseaworthiness of the vessel in which case:
100% Owners

c) Subject to (a) and (b) above, claims for shortage or over carriage:

50% Charterers
50% Owners
unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or the other (including their servants or sub-contractors) in which case that party shall bear 100% of the claim.

d) All other cargo claims whatsoever (including claims for delay to cargo):

50%Charterers
50% Owners
unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall then bear 100% of the claim.”

It was also common ground that the relevant part of clause 8 was sub-paragraph (d).

The damage found on discharge was at the aft end of holds nos. 5 and 6. Cargo in those locations was found to be lumpy and discoloured. The two pockets of damage were unconnected. The fundamental issues before the tribunal were the cause of the damage and whether the Owners were to blame for not properly monitoring the cargo temperatures. The arbitration tribunal found that the monitoring was not at fault and that the cause of the damage was a combination of the inherent nature of the cargo (and its oil and moisture content) together with the prolonged period at anchor at the discharge port. Cargo at the aft end of holds 5 and 6 was too moist to withstand the prolonged delay or, put another way, the delay was too prolonged, given the moisture content.

The arbitration tribunal rejected all the allegations made against the Owners and their crew and also held that the Charterers were not

“in breach or at fault or “neglect” in loading the cargo, albeit that what in fact they loaded, together with the instructions to wait outside the discharge port, was in all probability the cause of the damage …”

In considering the application of clause 8(d) the arbitration tribunal held that “act” was to be distinguished from something suggesting fault, breach of contract or neglect. The arbitration tribunal concluded as follows:-

“Either Owners or Charterers must bear the risk of something going wrong caused, on our analysis by Charterers’ decision to not only protect their position but we sense actually profit from it. We can but conclude that this is a case where the ICA must regard Charterers’ decisions as an “act” falling within clause 8(d) and bear 100% of the consequences.”

The Charterers submitted to the judge that the arbitration tribunal’s construction of “act” was wrong. The Charterers submitted that “act” meant “culpable act” and that the phrase “act or neglect” compendiously meant “fault”. The arbitration tribunal was wrong to hold that any act, whether culpable or not, was sufficient to constitute an “act” for the purposes of clause 8(d) of the ICA. This argument was rejected by the High Court, which upheld the award of the arbitrators essentially because the High Court considered that clause 8 of the ICA was not concerned with fault but was rather a mechanism for assigning liability for cargo-claims by reference to the cause of the damage to the cargo regardless of fault. The High Court gave permission to appeal.

The ICA came into being as a result of the difficulty in deciding, as between owners and charterers on the New York Produce Exchange Form, who was liable for cargo claims. The major P&I Clubs drew up an agreement to facilitate the settlement of claims between the Clubs.

The Charterers pointed out that sub-clause (a) was not just concerned with claims arising out of unseaworthiness but also claims arising out of error or fault in navigation or management of the vessel. There was also reference in sub-clause (b) to a “failure properly to load, stow, lash, discharge or handle the cargo” being caused by unseaworthiness.

These phrases, of course, include fault but the Court of Appeal did not think that they were confined to fault. There is no requirement that claims arising out of unseaworthiness have to occur because the owner has failed to exercise due diligence to make the vessel seaworthy (to use the language of Article III rule 1 of the Hague-Visby Rules). An error or fault in navigation or management of the vessel encompasses fault but does not require it. An error in navigation may produce a cargo claim even in the absence of fault; so may an error in management of the vessel.

In the Court of Appeal’s view, the reference to a “failure properly to load, stow, lash, discharge or handle the cargo” did not pre-suppose negligence either. Sub-clause (b) deals with claims “arising out of the loading, stowing, lashing, discharging or other handling of cargo” which makes no mention of fault. These are to be 100% for charterers unless the words “and responsibility” are added in clause 8 of the NYPE form when liability is to be shared 50/50 but there is then an exception to that provision for 100% liability for Owners where the failure to properly load was caused by unseaworthiness. The context of the word “properly” is a factual state of affairs not a requirement that there must be fault on the part of either party which, if it had been intended, would have been provided for in the first part of the clause.

The Court of Appeal was of the view that it was fair to say that the division between unseaworthiness claims and loading/stowage claims reflected the respective areas of responsibility (or, as the High Court rightly preferred to regard them, areas of risk) of Owners and Charterers but that did not mean that sub-clause (a) and (b) presupposed or required that there be fault of the relevant party; it was not therefore necessary to construe “act” in sub-clause (c) and (d) as requiring fault in order to achieve some sort of consistency between the clauses.

The Court of Appeal agreed both with the High Court and the arbitrators that the word “act” in the context of the ICA should be given its natural meaning, there was no need to confine it to “culpable act” and the Court of Appeal dismissed the appeal.

Please feel free to contact us if you have any questions or you would like to have a copy of the Judgment.



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