Imperator I Maritime Company v Bunge SA [2016] EWHC 1506 (Comm)

[2016] EWHC 1506 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
IN AN ARBITRATION CLAIM
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 24 June 2016
Before
MR JUSTICE PHILLIPS
Case No CL-2014-001013
Between
IMPERATOR I MARITIME COMPANYClaimantBUNGE SADefendantCase No: CL-2014-000969
Between
BUNGE SAClaimantC TRANSPORT PANAMAX LTDDefendant“THE CORAL SEAS”
Tom Whitehead (instructed by Marine Law Solicitors Ltd) for Claimant in CL-2014-001013David Walsh (instructed by Mills & Co) for Defendant in CL-2014-001013 and the Claimant in CL-2014-000969Michael Nolan QC (instructed by Laurence Marron Solicitors) for Defendant in CL-2014-000969Hearing Hearing date: 2 December 2015
Judgment
[1]The question of law which arises on these arbitration appeals, brought pursuant to s.69 of the Arbitration Act 1996 with the leave of Males J, is as follows:
“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 charterparties

[2]By consecutive time charters dated 9 November 2006 and 6 September 2007, each on the NYPE 1946 form (as amended) with additional rider clauses, the MV ANNY PETRAKIS (“the Vessel”) was chartered by its then owners to Bunge SA (“the Head Charterers”) for about 23 to 25 months. Pursuant to an agreement dated 5 October 2007, ownership of the Vessel was transferred to Imperator I Maritime Company (“the Owners”) and the charterparties were novated accordingly. The Vessel was renamed CORAL SEAS.[3]On 8 November the Head Charterers fixed the Vessel to C Transport Panamax Ltd (“the Sub-Charterers”) under a sub-charterparty, the terms of which were effectively back-to-back with the head charterparties (save as to rates), for a time charter with one or two laden legs, at the Sub-Charterers’ option.[4]The charterparties each contained the following terms (differences between the Head Charterparty and the Sub-Charterparty being noted in square brackets):
“1. … whilst on hire … Owners shall … keep the vessel in a thoroughly efficient state in hull … machinery and equipment … for the service and all times during the currency of this Charter. 8. … the captain shall prosecute his voyages with the utmost despatch … The Captain ... shall be under the orders and directions of the Charterers as regards employment and Agency … Clause 29 (a) Vessel’s description … D Speed/consumption (expected as a new building) About 14.5 knots ballast/about 14 knots laden on about 33.5 mts ISO 8217:2005 (E)RMG 380 plus about 0.1 mts ISO 8217:2005 (e) DMA in good weather condition up to Beaufort scale four and Douglas sea state three and calm sea without adverse current … [in the case of the sub-charterparty the equivalent provision concluded “… up to Beaufort Scale 4 and Douglas Sea State 3 with not current and/or negative influence of swell (sic)”]. Plus: Daily Generator Consumption about 2.5 mt at sea/about 2.0 mt (at sea/idle) ISO 8217:2005 (E)RMG 380 … All details about All details are given in good faith as per shipbuilders’ plans and as a new building vessel can be described. [In the case of the sub-charterparty these details were simply followed by the words “All details about”] (b) Speed Clause Throughout the currency of this Charter, Owners warrant that the vessel shall be capable of maintaining and shall maintain on all sea passages, from sea buoy to sea buoy, an average speed and consumption as stipulated in Clause 29(a) above, under fair weather condition not exceeding Beaufort force four and Douglas sea state three and not against adverse current. [In the case of the sub-charterparty the equivalent provision concluded “… not exceeding Beaufort Force 4 and Douglas Sea State 3 with not against adverse current (sic)”]. (c) Weather Routing and Speed/Consumption Deficiencies Charterers may supply Ocean Routes advice to the Master [the sub-charterparty stated “May supply Ocean Routes or equivalent advice”] during voyages specified by the Charterers. The Master to comply with the reporting procedure of the routing service selected by Charterers ...”
Clause 29 D Speed/consumption (expected as a new building) Plus: All details about

The dispute

[5]In the course of trading in accordance with the Sub-Charterers’ instructions, the Vessel discharged cargo at Praia Mole (Tubarao) Brazil between 4 and 13 January 2008, completing her first laden leg. The Vessel then sailed for Guaiba Island (near Rio de Janeiro), where she waited for a berth from 14 January to 10 February 2008, completing loading on 14 February. It was immediately apparent on departure from Guaiba Island that the Vessel’s performance had fallen off significantly, as a result of which it became necessary for her to call to take on emergency bunkers at Jakarta on 14 March 2008.[6]On arrival at Singapore on 16 March 2008, an underwater inspection found light fouling of the flat bottom and heavy fouling of the propeller by barnacles. The propeller was cleaned underwater. The Vessel then proceeded to Mawan, PRC, completing her second laden leg.[7]The Sub-Charterers thereafter made deductions from hire, asserting their right to set-off damages for breach of the continuing speed warranty contained in clause 29(b) of the charterparties. The Head Charterers took the same stance against the Owners. As a consequence, the Owners claimed a balance on final hire accounts of US$280,720.69 and the Head Charterers claimed a balance of US$389,379.51, with the Head-Charterers and Sub-Charterers each counterclaiming US$32,825.56. Each claim was referred to London arbitration under LMAA terms pursuant to the BIMCO dispute resolution clause contained in each of the charterparties. The references were determined concurrently by common arbitrators.

The arbitrators’ findings and awards

[8]The arbitrators found the following facts: i) that the Vessel did not maintain the warranted speed, resulting in an increased length of voyage of 90.345 hours; ii) that the cause of the Vessel’s reduced speed was underwater fouling of the Vessel’s hull and propeller by marine growth which developed during the Vessel’s lengthy stay in tropical waters at Guaiba Island; iii) that the marine growth could not be regarded as unusual or unexpected, but constituted fair wear and tear incurred in the ordinary course of trading.[9]The arbitrators further determined that, on a true construction of the charterparties, the speed warranty in clause 29(b) applied to all sea voyages, including those after a prolonged wait in tropical waters and that it was the Owners/Head Charterers who had assumed the risk of a fall-off in performance as a result of bottom fouling consequential upon compliance with the Head Charterers’/Sub Charterers’ lawful orders.[10]Accordingly, in a final award dated 13 August 2014, supplemented on 31 October 2014, the arbitrators dismissed the Owners’ claim for hire and found a balance due to the Head Charterers, and awarded them interest and costs. Similarly, in a final award dated 13 August 2014, amended on 15 December 2014, the arbitrators dismissed the Head Charterers’ claim for hire and found a balance due to the Sub-Charterers, awarding them interest and costs. The Head Charterers were awarded damages against the Owners in respect of the costs the Head Charterers were ordered to pay the Sub-Charterers.[11]In an additional award dated 15 May 2015, after these proceedings were commenced, the arbitrators clarified that they had concluded that the Owners were not in breach of their obligation to maintain the Vessel under clause 1. The Sub-Charterers and the Head Charterers have served Respondent’s Notices seeking to uphold the awards on the grounds that the arbitrators were wrong to so conclude.

The appeals

[12]The Owners sought leave to appeal on the question of law set out in paragraph 1 above. They contended that the arbitrators’ reasoning summarised in paragraph 9 above is wrong, being directly contrary to the principle of law as stated in 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.”
[13]The Head Charterers lodged an appeal in identical terms. Males J granted permission to appeal on the basis that, if the awards are right, a passage in the leading textbook is wrong or at least too widely stated, leading him to conclude that the awards are of some general interest and at least open to serious doubt.[14]The opposing arguments on the appeals were advanced by the Owners and the Sub-Charterers. The Head Charterers were represented in the appeal by Mr Walsh of counsel, but he took a neutral position.

The law relating to liability for the consequences of the charterer’s orders

[15]It is well established that as a general rule a shipowner has an implied right of indemnity against a time charterer in respect of the consequences of complying with the charterer’s orders as to the employment of the ship, even if the orders were ones the charterer was contractually entitled to give. However, it is equally well established that such indemnity does not extend to the usual perils of the voyage in respect of which the owner must be taken to have accepted the risk: The Island Archon [1994] 2 Lloyds Rep 227 CA.[16]In The Kitsa [2005] 1 Lloyd’s Rep 432 the vessel’s hull became seriously fouled by barnacles due to delay in warm water at Visak, India. The owners claimed the cost of de-fouling the vessel from the charterers under the implied indemnity. Aikens J recognised that, in the broadest sense, the hull fouling was caused by the charterers’ orders to go to Visak, but held that the cleaning costs were outside the implied indemnity as they were a risk the shipowner must be taken to have agreed to bear, explaining the approach as follows:
“24. I accept Mr Turner’s submission that just because a particular risk of loss or expense is foreseen or foreseeable at the time a charter-party is made, that is not conclusive to determine whether that loss or expense is within the scope of an implied indemnity. But it is clear from the judgments of both Evans LJ and Nicholls V-C in The Island Archonthat if, at the time that the charter-party is concluded, the occurrence and type of loss or expense to the shipowner flowing from the order as to employment of the vessel were unforeseen, then that will be a potent factor in deciding that the loss or expense will fall within the scope of the implied indemnity: particularly when the order was lawful. 25. It is also apparent from the decision of the Court of Appeal in The Island Archonthat when a tribunal of fact has to decide whether particular expenses are within the scope of an implied indemnity under an NYPE charter-party, it is entitled, as a matter of law, to ask the question: was this type of risk one that the shipowners agreed to bear, at the time the charter was concluded: see p236.In the present case “this type of risk” means the risk that the vessel will suffer hull-fouling because the vessel was inactive at a warm water port for 22 days as a result of a legitimate order as to employment by the Charterers and the risk that the Owners will suffer expense in hull-cleaning as a consequence. If, as I find, the arbitrators have concluded that "this type of risk" was one that was foreseeable and foreseen by both parties at the time the charter-party was concluded, then, given the approach of the Court of Appeal in The Island Archon,the arbitrators were entitled to conclude that "this type of risk" was one that the owners agreed to accept at the time the charter-party was made. That is, essentially, a finding of mixed fact and law. It is precisely the conclusion that the arbitrators did reach in par. 32 of their Award.”
[17]In ENE Kos 1 Ltd v Petroleo Brasileiro SA (No 2) [2012] 2 AC 164, Lord Sumption, at [11], took the same approach to the scope of a shipowner’s indemnity, expressly recognising that the indemnity did not apply to marine fouling occurring in the course of contractual trading:
“… The owners are not entitled to an indemnity against things for which they are being remunerated by the payment of hire. There is therefore no indemnity in respect of the ordinary risks and costs associated with the performance of the chartered service. The purpose of the indemnity is to protect them against losses arising from risks or costs which they have not expressly or implicitly agreed in the charterparty to bear. What risks or costs the owners have agreed to bear may depend on the construction of other relevant provisions of the contract, or on an informed judgment of the broad range of physical and commercial hazards which are normally incidental to the chartered service, or on some combination of the two. The classic example of a loss within the indemnity, and probably the commonest in practice, is one which arises from the master complying with the charterers' direction to sign bills of lading on terms of carriage more onerous than those of the charterparty … On the other hand, the indemnity will not apply to risks which the owners have contractually assumed, which will usually be the case where they arise from, for example, their own negligence or breach of contract or consequences such as marine fouling which are incidental to the service for which the vessel was required to be available.”
[18]Correspondingly, a charterer cannot ordinarily rely on marine fouling as a ground for deducting hire on the basis that the vessel is not fully working or defective and therefore off-hire under clause 15 of the NYPE form. In The Rijn [1981] 2 Lloyd’s Rep 267 at 272 col 1 Mustill J stated:
“In my judgment, only those causes qualify for consideration which are fortuitous, and are not the natural result of the ship complying with the charterers’ orders. These requirements would be complied with, in the case of fouling by marine growth, in the exceptional situation where the growth was of a wholly extraordinary and unpredictable nature: see Cosmos Bulk Transport Incorporated v China National Foreign Trade Transportation Corporation [1978] 1 Lloyd’s Rep 53, a decision on a rather different form of words, where there was a very special finding of fact by the arbitrator. But in the great majority of cases, the accretion of growth is simply a natural consequence of the ship remaining in service, with nothing fortuitous about it. In the present case, furthermore, it is a fair inference from the findings in the award that the excessive growth stemmed from the abnormally long period which the vessel spent at Lourenco Marques awaiting cargo. It was the charterers’ own choice to keep her at rest in tropical waters for nearly three months, and it would be unjust if they could seek financial relief for the natural consequences of the delay. I have formed the same opinion as regards the claim under the second part of the clause. I am bound to say that I find it hard to visualize the accumulation of marine growth during the contract service as a “defect” in the hull. But even if it were, the defect arose as a natural consequence of the way in which the charterers chose to employ the ship. I do not consider that the loss of time thus caused should be deducted from the amount of time for which hire is payable.”
[19]Referring to The Rijn, The Island Archon and The Kitsa, the arbitrators held that the Owners had assumed the risk of a fall-off in performance as a result of marine fouling and that therefore the indemnity principle had no application in the circumstances of this case.

The Owners’ argument

[20]Counsel for the Owners, Mr Whitehead, disavowed any reliance on the Owners’ implied indemnity, submitting that the arbitrators had been wrong to focus on that principle as the Owners’ answer to the claim for breach of the continuing speed warranty.[21]He explained that the Owners’ case was that the clause 29(b) speed warranty should be construed as being given on the basis that the Vessel continues to have a clean hull and propeller. On that basis, he submitted, if the Vessel suffered marine fouling in the ordinary course of the Charterers’ use of the Vessel, resulting in a drop-off in performance, the Owners would be responsible for cleaning the hull (and/or could not claim damages on re-delivery), but the Charterers would not be entitled to treat the Vessel as off-hire, nor claim for a diminution in performance. Mr Whitehead stressed that to hold the Owners liable for the performance consequences of marine fouling which they could not know about, let alone remedy, would be unfair and would flout business common sense, the arbitrators themselves recognising that treating the speed warranty as unqualified was “counterintuitive”.[22]Mr Whitehead submitted that the above approach to the contractual “scheme” was recognised in The Pamphilos [2002] 2 Lloyd’s Rep 681 and is reflected in the passage in Time Charters set out above, neither of which was considered by the arbitrators. In The Pamphilos, thearbitrators had decided that marine growth was an ordinary incident of trading in accordance with the charterer’s orders so that the charterer was not in breach of the re-delivery obligation, but nonetheless had determined that the charterer’s deduction of hire for underperformance was unjustified. Colman J held that the decision was not obviously wrong and so refused leave to appeal under s.69 of the Arbitration Act 1996, stating:
“… The arbitrators accepted that the barnacles had grown during the charter period but found that they were an ordinary incident of trading in accordance with charterers’ lawful orders and the owners therefore failed to prove their claim [in relation to re-delivery] The issue whether hire justifiably be deducted by the charterers depended on the quite different point as to whether compliance with charterers’ orders was the sole cause of the growth of the barnacles, regardless of whether that growth was fair wear and tear. The exception was not applicable to protect the charterers from the consequences of their orders having caused the vessel’s under performance. The scheme of the contract involved that charterers bore the cost of under performance caused by their orders and the cost of restoration of the vessel to her on-delivery condition where the deficiency was due to compliance with their orders and was not fair wear and tear. If the latter, the owners bore the cost.”
[23]In support of his proposed construction, Mr Whitehead further relied on The Leonidas [2001] 1 Lloyd’s Rep 533, a case of a voyage charterparty containing a tailor-made speed warranty and also a printed clause paramount incorporating the Hague Rules. The vessel suffered a major engine failure, as a result of which the charterer claimed damages for breach of the speed warranty. Langley J held that the speed warranty, although absolute on its face (save for bad weather or navigation), should be read to apply subject to the owners establishing that the cause of the vessel failing to reach the warranted speed was one of the exceptions set out in the Hague Rules. Langley J, at p.536 cl 2, stated, in relation to the conclusion he had reached:
“If (as I think it may well be) that is to read the speed warranty as in effect a provision that the vessel is capable of a speed of 11 knots on ‘a’ laden voyage rather than an absolute warranty that it would perform the chartered voyage at that speed come what may (except bad weather or navigation) then in my judgment such a result is both legitimate and indeed commercially appropriate. Not only do I agree with [the owner]…that it would be remarkable for an owner to make the agreement for which [the charterer] contends but I cannot conceive why an owner who did so will choose to except from it only weather and navigation conditions but not other matters which could arise without any semblance of fault on his part.”
[24]Mr Whitehead points to the fact that the charterparties in the present case also contain a clause paramount incorporating the Hague Rules. He refers in particular to Article IV rule 2 (q), which provides that neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from:
“Any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show that neither the actual fault or privity of the carrier nor the fault or neglect of the agents or servants of the carrier contributed to the loss or damage.”
[25]As I understand it, Mr Whitehead does not contend that the Owners have established that the case falls within Article IV rule 2 (q), and no appeal has been made in relation to any finding of the arbitrators in that regard. His argument is, it seems, that the incorporation of the Hague Rules is relevant to the overall construction of the scheme of the charterparties, militating against the conclusion that clause 29 is an absolute warranty as to speed.

The proper construction of the speed warranty

[26]As the arbitrators found, and Mr Whitehead does not dispute, the speed warranty in clause 29(b) was expressed in wide and unqualified terms. As the warranty was that the Vessel “shall be capable of maintaining and shall maintain on all sea passages” the specified performance, it is clear that the warranty was not limited to the Vessel’s capacity as newly built, but related to her actual continuing performance.[27]Further, the parties included an express restriction on the extent of the performance warranty, limiting it to passages under fair weather conditions. It would have been open to the parties also to have excluded the performance warranty in respect of voyages after the Vessel had been waiting in warm water ports, and such clauses are now commonly included in time charters. The Owners are therefore seeking to construe the warranty as containing a restriction which the parties chose not to include.[28]In my judgment there is no basis for reading the warranty in the way suggested by the Owners, the language being clear and unambiguous. Further, I consider that the Owners’ acceptance that they cannot rely on the implied indemnity undermines their proposed construction for the following reasons: i) As set out above, the Owners had an implied indemnity against any risks arising as a consequence of the Sub-Charterers’ orders which the Owners had not assumed as part of the charter. It follows that there is simply no need to read into the warranty an exclusion for such risks, including the consequences of unusual and unexpected fouling: the indemnity would provide the Owners with a defence to a claim under the warranty by way of circuity of action. ii) On the other hand, where no right to an indemnity arises because the risks were assumed by the Owners, such as usual and expected marine fouling during legitimate deployment of the Vessel, it is difficult to see why the warranty should be read as not applying where performance is affected as a consequence of such an assumed risk. The Owners have given the continuing warranty at the same time as assuming that risk, without excluding it from the warranty, so the warranty must be taken to apply with full force. iii) The fact that the Owners are seeking to avoid liability on the warranty in relation to a risk they have assumed demonstrates that holding them liable is neither unfair nor flouts business common sense.[29]I therefore reject the contention that the continuing performance warranty did not apply where the Vessel’s performance fell-off because of fair wear and tear in the course of contractual trading. I recognise that Colman J expressed the opposite view in The Pamphilos, but that was in the context of refusing leave to appeal under s.69 of the Arbitration Act, only reported because the application for leave was dealt with at the end of a judgment on an appeal under s.68. Further, the terms of the speed warranty in that case are not set out in the report and it does not appear that the cases on the application of the implied indemnity were cited.[30]Neither do I regard the incorporation of the Hague Rules as undermining the above analysis. Indeed, the fact that it may have been open to the Owners to prove that one of the exceptions applied only goes to support the view that clause 29(b) should not be limited as a matter of contractual construction.

Conclusion

[31]For the above reasons, I consider that the proposition stated in paragraph 3.75 of Time Charters is too widely stated. 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.[32]The appeals are therefore dismissed. In the circumstances it is not necessary for me to determine the issues arising on the Respondent’s Notices.