Bahamas Oil Refining Company v Cape Bari Tankschiffahrts - The Cape Bari

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DMC/SandT/17/06

England

Bahamas Oil Refining Company International Limited v Cape Bari Tankschiffahrts GmbH & Co KG (The “Cape Bari”)

Judicial Committee of the Privy Council: Neuberger, Mance, Clarke, Sumption and Toulson SCJJ: [2016] UKPC 20: 19 July 2016

Peter MacDonald Eggers QC, Oscar Johnson and Tara A Archer (instructed by Clyde & Co LLP) for Bahamas Oil Refining Company (“BORCO”)

Luke Parsons QC, Paul Henton and Kenra Parris-Whittaker (instructed by Reed Smith LLP) for Owners

CONDITIONS OF USE OF BERTH: COLLISION BETWEEN VESSEL AND BERTH: WHETHER – UNDER CONDITIONS OF USE OF BERTH - VESSEL CAN CONTRACT OUT OF OR WAIVE STATUTORY RIGHT TO LIMIT LABILITY: WHETHER UNDER CONDITIONS OF USE VESSEL DID CONTRACT OUT OF OR WAIVE RIGHT TO LIMIT: MERCHANT SHIPPING (MARITIME CLAIMS LIMITATION OF LIABILITY) ACT 1989 OF THE BAHAMAS: CONVENTION ON LIMITATION OF LIABILITY FOR MARITIME CLAIMS 1976

Summary

While it is permissible for owners of a vessel to contract out of or waive their statutory right of limitation, on the true construction of the conditions of use in this case, the owners of the vessel had not agreed to do so, with the result that they were entitled to a declaration of their right to limit liability in respect of a claim for damage to a terminal that their vessel had caused.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member, and International Contributor to DMC’s Case Notes

Background

During berthing operations, the vessel “Cape Bari” collided with a berth at Freeport in Grand Bahama causing substantial damage. The berth belonged to BORCO, who claimed damages of about USD22m, plus interest, against Owners of “Cape Bari”. Owners claimed entitlement to limit their liability to SDR11,012,433, being about USD17m plus interest, under the Merchant Shipping (Maritime Claims Limitation of Liability) Act 1989 of the Bahamas (“the 1989 Act”), incorporating into Bahamian Law the Convention on Limitation of Liability for Maritime Claims 1976 (“the 1976 Convention”).

BORCO denied Owners’ entitlement to limit their liability, on the ground that they had waived their right to do so under a contract for the use of the berth, which the parties had agreed immediately before the vessel’s berthing operation. The contract was contained in or evidenced by a document called “Conditions of Use” which was signed by the Master.

The key terms of the Conditions of Use were the following:

“1. … In all circumstances the Master of any vessel shall remain solely responsible on behalf of his owners for the safety and proper navigation of his vessel …

4. If in connection with, or by reason of, the use or intended use by any vessel of the terminal facilities or any part thereof, any damage is caused to the terminal facilities or any part thereof from whatsoever cause such damage may arise, and irrespective of weather [sic] or not such damage has been caused or contributed to by the negligence of BORCO or its servants, and irrespective of whether there has been any neglect or default on the part of the vessel or the Owner, in any such event the vessel and the Owner shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection therewith. Further, the vessel and her Owner shall hold BORCO harmless and indemnified against all and any claims, damages, cost and expenses arising out of any loss, damage or delay caused to any third party arising directly or indirectly from the use of the terminal facilities or of any part thereof by the vessel ...

6. These Conditions of Use are the [sic] be interpreted and construed in accordance with the Laws of the Bahamas.”

Owners applied to the Bahamian court to constitute a limitation fund. This application was challenged by BORCO and set aside by the Bahamian judge on the basis that Owners had, under the Conditions of Use, contracted out of their right to limit liability. On appeal, the Bahamian Court of Appeal set aside the judge’s decision, not on the basis of the construction of the Conditions of Use but on the basis that, under the 1989 Act and the 1976 Convention, parties could not contract out of a right to limit liability even by entering a contract of indemnity, despite the permissibility to contract out of such rights being common ground between the parties at first instance and on appeal.

BORCO appealed to the Board, submitting that the Court of Appeal was wrong to reverse the decision of the judge because: (1) on the true interpretation of the 1989 Act and the 1976 Convention it was permissible for Owners to contract out of the right to limit (as both parties had acknowledged); and (2) on the true construction of the Conditions of Use, Owners had done so.

Judgment

(1) Is it permissible for owners of a vessel to contract out of or waive their statutory right of limitation under the 1989 Act and the 1976 Convention?

By way of historical background, the Board noted that the 1976 Convention, which superseded the 1957 Convention, had brought about profound and dramatic change, in that the 1976 Convention substantially increased the level of liability but, in return, made the breaking of the right to limit much harder, by requiring the claimant to prove either intention on the part of the shipowner to cause the damage or recklessness with knowledge that the damage would probably result.

The Board further noted that the general approach to interpreting the 1976 Convention was considered by the Court of Appeal in The “CMA Djakarta” (fn1), which set out a number of principles:

First, the interpretation of international conventions must not be controlled by domestic principles but by reference to broad and generally acceptable principles of construction, such that the task of the court is to construe the 1976 Convention as it stands without any English law preconceptions.

Second, some particular broad and generally acceptable principles of construction set out in articles 31-32 of the 1969 Vienna Convention on the Law of Treaties (fn2) are to be taken into account, such that:

“[T]he duty of a court is to ascertain the ordinary meaning of the words used, not just in their context but also in the light of the evident object and purpose of the convention. The court may then, in order to confirm that ordinary meaning, have recourse to what may be called the travaux preparatoires and the circumstances of the conclusion of the convention. I would, for my part, regard the existence and terms of a previous international convention (even if not made between all the same parties) as one of the circumstances which are part of a conclusion of a new convention but recourse to such earlier convention can only be made once the ordinary meaning has been ascertained. Such recourse may confirm that ordinary meaning. It may also sometimes determine that meaning but only when the ordinary meaning makes the convention ambiguous or obscure or when such ordinary meaning leads to a manifestly absurd or unreasonable result.” (fn3)

Having considered the background to the 1976 Convention and the principles of construction, the Board was of the clear opinion that it is open to parties to agree to waive their right to limit liability under the 1976 Convention and the 1989 Act. Just as a matter of language, there was nothing in the 1976 Convention or the 1989 Act to prohibit them from doing so and, as the 1989 Act simply gave force of law to the 1976 Convention in the Bahamas, everything turned on the construction of the 1976 Convention.

The Board further noted, in passing final remarks, that there was nothing in the travaux preparatoires of the 1976 Convention to support Owners’ contention that it is impermissible to contract out, and the authorities decided under the previous regime show that nobody suggested contracting out was not possible.

(2) On the true construction of the agreement contained in or evidenced by the Conditions of Use, did the Owners and BORCO agree to exclude Owners’ right to limit their liability under the 1989 Act and the 1976 Convention?

The Board noted that BORCO’s case primarily depended on clause 4 of the Conditions of Use. Where there was, as in this case, no dispute as to the relevant principles, the question was essentially the construction of the clause.

As the Board accepted, the object of construing a contract is to identify the parties’ objective intention by reference to the language used, the factual background which was known or ought to have been known to both parties and the commercial purpose of the contract.

As the Board further accepted, in the present context, the overarching question was what meaning would the words of the agreement, especially clause 4, convey to a reasonable person having the background knowledge which would reasonably have been available to the parties in the position they were in when the contract was made.

The key principles most relevant here, in the view of the Board, were those where it is alleged that the agreement excludes a legal right, including a legal right under a statute. The Board accepted that, for a party to be held to have abandoned or contracted out of valuable rights arising by operation of law, the provision relied upon must make it clear that that is indeed what was intended.

Having considered a number of authorities on the key principles and in applying the same to the present case, the Board concluded that there was nothing in the Conditions of Use which, on its true construction, excluded Owners’ rights under the 1976 Convention. While the Board accepted that it would not be necessary to provide expressly for such a conclusion, it would have to be clear from the language of the clause construed in its context that the parties intended to exclude the right to limit.

BORCO had sought to rely on The “Satanita” (fn4), where the words “all damages” in a yacht racing agreement led the House of Lords to hold that the parties to the agreement had intended to contract out of the limitation of liability regime then in effect. BORCO argued that the meaning of “all damages” in that case was to be attributed to the similar wording in clause 4 of the Conditions of Use (“shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection [with the facilities].”).

However, the Board was not prepared to accept BORCO’s submissions on a number of grounds:

First, the House of Lords had treated the position of yachts engaged in a regatta as significantly different from the position of a merchant vessel.

Second, the House of Lords had treated as particularly significant the fact that the yacht racing agreement provided mutual protection to participants.

Third, in any event, the correct analysis of cases had developed significantly since the House of Lords’ decision in The “Satanita”.

As such, the words of the particular contract must be construed in the light of the default position, namely that the statutory rights of Owners were known to and understood by the parties to apply – as per The “Kirknes” (fn5) - and were treated as being written into the Conditions of Use – as per Ingram & Royle (fn6). That accorded with a first instance decision of the Hong Kong court in Sun Wai Wah Transportation (fn7), which was very similar on the facts to the present case. The Board agreed with the Owners that the analysis in that case could not be faulted.

In the Board’s view, it followed that this remains the position unless, which was not the case here, there is some provision in the contract which clearly and unequivocally excludes the right to limit, such that the two provisions cannot be read together and, as a result, it must have been the intention of the parties to exclude the statutory right.

Given the answers to both questions, the Board concluded that Owners were entitled to a declaration that their liability in respect of damages caused as a result of the collision was to be limited to no more than about USD17m, plus interest.

Comment

The judgment is logical as parties can usually freely contract out of their rights but, for something as fundamental as limitation of liability, clear words are required.

The presentation of conditions of use by ports and terminals is becoming more common and represents a major risk to owners, charterers and their P&I clubs.

As P&I clubs often cover owners and charterers on the condition that the right to limit liability is not compromised, care needs to be taken in accepting conditions of use.

The best approach is to sign conditions of use “for receipt only”, to seek to avoid contractual effect, but that is not normally acceptable to ports and terminals.

As such, owners and charterers should make reasonable efforts to qualify conditions of use, if appropriate, to protect their right to limit liability.


Footnote 1: CMA CGM S.A. v Classica Shipping Co Ltd [2004] 1 Lloyd’s Rep 460, [2004] EWCA Civ 114

Footnote 2: Articles 31 and 32 of the 1969 Vienna Convention on the Law of Treaties provided:

“ARTICLE 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

(a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;

(b) Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.”

“ARTICLE 32

Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) Leaves the meaning ambiguous or obscure; or

(b) Leads to a result which is manifestly absurd or unreasonable.”

Footnote 3: The “CMA Djakarta” (fn2), per Longmore LJ, at [10]

Footnote 4: Clarke v Earl of Dunraven and Mount-Earl (The Satanita) [1897] AC 59 (HL)

Footnote 5: Alsey Steam Fishing Co Ltd v Hillman [1957] P 51

Footnote 6: Ingram & Royle Ltd v Services Maritimes du Trėport Ltd [1914] 1 KB 541 (CA)

Footnote 7: Sun Wai Wah Transportation Ltd v Cheung Kee Marine Services Co Ltd [2010] 1 HKLRD 833