Hyundai Merchant Marine v Trafigura - the Gas Energy

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DMC/SandT/12/07

England

Hyundai Merchant Marine Company Limited v Trafigura Beheer BV and Daelim Corporation (The “Gaz Energy”)

English Commercial Court: Flaux J: [2011] EWHC 3108 (Comm): 29 November 2011

TIME CHARTER: SPEED AND PERFORMANCE WARRANTY: PROPER CONSTRUCTION OF CHARTER: WHETHER SPEED AND PERFORMANCE AN “ALL WEATHERS” WARRANTY OR LIMITED TO “MAXIMUM WIND FORCE 4 ON BEAUFORT SCALE”

English Commercial Court: Teare J: [2012] EWHC 1686 (Comm): 21 June 2012

WHETHER BUNKERS CONSUMPTION SAVING WAS TO BE DETERMINED WITH REFERENCE TO HIGHER OR LOWER PERFORMANCE FIGURE IN WARRANTIED RANGE: WHETHER FIRST PERIOD OVER PERFORMANCE (BUNKERS UNDER CONSUMPTION) COULD BE CREDITED AGAINST SECOND PERIOD UNDER PERFORMANCE (BUNKERS OVER CONSUMPTION)

Stephen Kenny QC (instructed by MFB Solicitors) for HMM, Charterers

David Semark (instructed by Reed Smith LLP) for Trafigura/Daelim, Owners

Summary

The time charter provisions created an “all weathers” warranty of the vessel’s speed and performance, in that speed and performance was to be assessed throughout the entire period of the charter, and not limited to periods during which wind speed did not exceed Beaufort Scale 4.

Over performance (a bunkers saving through under consumption) would only occur where the bunkers consumption figure fell below the lowest figure in the warranted consumption performance range because bunkers consumed within the range only represented consumption on the basis of what was warranted, not better than what was warranted.

Over performance in the first period could not be credited against under performance (over consumption of bunkers) in the second period because the time charter provisions did not envisage a single calculation being done for the entire charter period.

Case note by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor of England & Wales, Foreign Qualified Lawyer (Practising Foreign Law) in Singapore, Associate at Hill Dickinson LLP and International Contributor to DMC’s CaseNotes [1]

Background

The vessel, a LNG carrier, was time chartered on an amended Shelltime 3 form with various additional clauses; it also incorporated Gas Form C.

A dispute arose in relation to the speed and performance of the vessel and the proper interpretation of the relevant contractual provisions.

The relevant provisions were clause 24 as amended, additional clause 42 and Gas Form C, which stated:

24. Owners warrant that at the date of delivery under this charter the vessel shall be of the description set out in Gas Form C attached hereto and signed by them and undertake to use their best endeavours so to maintain the vessel during the period of her service hereunder. Further but otherwise [without] prejudice to the generality of this clause Owners guarantee that the average speed of the vessel will be not less than …. knots in ballast and …. knots fully laden, with a maximum bunker consumption of …. tons diesel oil/…. tons fuel oil per day for all purposes excluding cargo heating and tank cleaning. See Additional Clause 42 attached which also overrides any references to over performance herein. [lines 209-216]

The aforesaid average speeds shall be calculated in each yearly or other less period, as defined hereinafter by reference to the observed distance from pilot station to pilot station on all sea passages and over the whole of the time the vessel is on hire during such period [lines 217-219]…

In the event of any conflict between the particulars set out in the aforesaid Form and any other provision (including this clause) of this charter, such other provision shall prevail. [lines 241-242]

If during any year from the commencement of the charter period the vessel falls below or exceeds the performance guaranteed in this clause then….

(b) If such shortfall or excess results respectively from an increase or a decrease in the vessel’s average daily bunker consumption, as herein defined, in relation to the average daily consumption guaranteed hereunder, hire shall be reduced or increased as may be appropriate by an amount equivalent to the value of the excess or saving in bunkers involved based on the average price paid by Charterers for the vessel’s bunkers in this period.”

42. Speed/Consumption

Speed about 15 knots average Consumption about 40 mts IFO 380 CST at sea plus about 0.2 mts GO and about 10 mt IFO 380CST at port plus about 0.2 mt GO. Otherwise as per Gas Form C.

Charterers will not be liable for any over performance of the vessel during the course of this charter party. However, any overperformance will be credited against any underperformance due charterers for the purposes of calculation.”

Gas Form C

A.5 Speed Guaranteed average speed on a year's period and max wind force 4 in Beaufort scale: Loaded about 14.5 knots, Ballast about 15.5 knots

A.6 Consumption in metric tons per day: At sea In port Main engine/HFO 35 mt - Aux. engine/HFO/GO 6/0.2 mt 9/0.2 mt Boiler/HFO 2.5 mt Inert gas generator/gasoil 285 kg/h”

Other relevant provisions included those for off-hire (clause 21) and a further one following directly after clause 40 of the amended standard form, which stated:

“Additional Clauses Nos. 41-74, Gasform C and revised Paramount Clause, as attached, are deemed to be fully incorporated into this Charter Party.”

Charterers contended that the proper interpretation of the charter was that the speed and performance of the vessel had to be assessed in all weather conditions across the period of the charter. Owners contended that only periods during which weather conditions did not exceed Beaufort Scale 4 were to be taken into account in assessing speed and performance across the charter period - Issue 1.

The charter was split into two periods: the year from delivery at 0845 on 14 January 2006 and the period from 0845 on 14 January 2007 until redelivery later the same year.The parties agreed that “about 40mt” meant a range of 42mt to 38mt, namely a variance of 5% either way.

If savings were to be calculated by reference to a daily consumption of 42 MT it was agreed there was a saving in the first period of 653.42 MT valued at USD206,023.33. If savings were to be calculated by reference to a daily consumption of 38 MT it was agreed there was no saving – Issue 2.

A saving of USD206,023.33 would exceed Charterers' speed and consumption claim for the first period. Owners wished to offset the excess against Charterers' speed and consumption claim for the second period – Issue 3.

Charterers disagreed with Owners’ interpretation of the speed and consumption provisions.

Judgment

Issue 1 All weathers

Applying the relevant principles of construction to the “all weathers” issue and seeking to construe the time charter as a whole to determine what a reasonable person would have meant by the terms used, the judge concluded that Charterers' construction of the charter was to be preferred.

The starting point was that Additional Clause 42 made no sense unless it was read with clause 24. In effect, it filled the gaps in lines 214-215, as was made clear by the added text after line 216, namely "See Additional Clause 42 attached which also overrides any references to over performance herein". Those concluding words meant that clause 42 overrode references to exceeding performance elsewhere in clause 24. While the parties could have inserted the words in clause 42 into the standard text of clause 24, with some deletions, they evidently found it more convenient to incorporate the speed and consumption figures in clause 42 by reference. The parties therefore did not leave the speed and consumption warranty in the standard form in clause 24 "blank", but instead filled it by incorporating Additional Clause 42 by reference.

Clause 24 then provided in lines 217 to 219: "The aforesaid average speeds [i.e. those incorporated by reference from Clause 42] shall be calculated in each yearly or other less period…on all sea passages and over the whole of the time the vessel is on hire during such period". It was clear, said the judge, from those words that the warranty as to average speed applied in all sea conditions and whatever the weather.

Turning back to Additional Clause 42, the judge considered that the words "Otherwise as per Gas Form C" were capable of more than one construction. They could mean, as Owners contended, that everything in Clauses A5 and A6 of Gas Form C should be read into Additional Clause 42, other than the actual speed and consumption figures, including the words "and max wind force 4 in Beaufort Scale". Equally, they could mean, as Charterers contended, that only those matters set out in Clauses A5 and A6 of Gas Form C which had not been expressly dealt with in Clause 42, namely the consumption of the inert gas generator, "otherwise" applied.

Overall, the judge preferred Charterers’ construction of the words "Otherwise as per Gas Form C" which seemed to be more in accord with the overall commercial purpose of the charter. It also avoided (for reasons to be elaborated below) any internal conflict between the speed and consumption provisions and the “all weathers” warranty in clause 24.

Accordingly, the judge held that, so far as speed and fuel oil/gas oil consumption of the main and auxiliary engines and boiler were concerned, those were as stated in Clause 42 and this overrode any contrary provision in Gas Form C. The "otherwise" referred to those matters set out in Clause A5 of the Gas Form C which had not been expressly dealt with in Clause 42, namely the consumption of the inert gas generator. The judge agreed with Charterers that the use of the word "otherwise" as a matter of language more naturally conveyed something which supplemented clauses 24 and 42, not replaced or contradicted them, which was one of the problems which Owners’ construction faced. Owners’ approach would, instead, elevate clauses A5 and A6 of Gas Form C into clauses which become paramount over clauses 24 and 42, which gave the word "otherwise" a strained and extended meaning it would not bear.

Owners’ construction led to the difficulty of internal inconsistency, with inconsistent speed and consumption figures in Additional Clause 42 and Gas Form C. Owners were unable to provide a satisfactory explanation for the cause and resolution of those inconsistencies.

Therefore, it seemed to the judge much more likely that, so far as speed and consumption was concerned (except for gas oil consumption in the inert gas generator which was "otherwise" dealt with in Gas Form C), the intention was that the wording in Additional Clause 42, which in turn was to be read into clause 24, would prevail over the provisions of Clauses A5 and A6 of Gas Form C.

While it was true that Charterers’ construction rendered the words "and max wind force 4 in Beaufort Scale" in Gas Form C redundant, the presumption against surplusage had little value when construing charterparties and other shipping contracts: e.g. The “Starsin” (fn.1).

Even if Owners' construction of the provisions in Additional Clause 42 and Gas Form C were correct, which the judge had decided was not the case, all that led to was an inevitable conflict between Gas Form C and clause 24 which, by virtue of lines 241-2, was resolved by clause 24, with its “all weathers” warranty, prevailing.

Issue 2 Overperformance

Applying the relevant principles of construction to the overperformance issue and seeking to construe the time charter as a whole to determine what a reasonable person would have meant by the terms used, the judge concluded that Charterers' construction of the charter was to be preferred.

Clause 24 provided for hire to be increased in the event of the vessel's bunker consumption being less than the warranted daily consumption. However, clause 24, as amended, also provided that additional clause 42 "overrides any references to overperformance herein." . Clause 42 provided that Charterers would not be liable for any overperformance, which must have meant that the increase in hire contemplated by clause 24 was no longer applicable. Nevertheless clause 42 went on to provide that "any overperformance will be credited against any underperformance due Charterers." That meant that if hire fell to be reduced pursuant to clause 24 as a result of the vessel's average speed falling below that warranted ("underperformance") the amount of any "overperformance" on bunker consumption could be set-off against that reduction of hire.

In that context the judge considered that the important question was what was meant by “overperformance”. The judge considered that “overperformance” meant a performance better than that warranted. The relevant consumption warranted was "about 40 mt" which, as the parties had agreed, meant between 38 MT and 42 MT per day. If the consumption was less than 38 MT per day the vessel would clearly be performing better than warranted. However, if the consumption was between 42 MT and 38 MT per day the vessel would be performing in accordance with the warranty, not better than the warranted performance.

The judge therefore concluded that because this would be how the reasonable man would understand clause 42, this was the true construction of clause 42. It followed that, in accordance with the agreed figures, there was no credit to be given to Owners for any overperformance pursuant to clause 42.

Issue 3 Setting off

The second question raised on consumption did not arise for decision given the answer to the first question. However, the judge considered and expressed an opinion on the question because the point was a short one. Again, the judge found in favour of Charterers’ construction.

The question was whether an overperformance in one period could only be set off against an underperformance for the same period or whether it could, to the extent that it had not been set off against an under performance for the same period, be set off against an underperformance in a later period.

Charterers’ construction of clause 42 gave effect to the reference in that clause to "calculation" which, in context, was a reference to the calculation envisaged by clause 24. That calculation was done on a yearly basis. Clause 24 did not envisage a calculation done over the whole period of the charterparty, which was what Owners’ construction involved. Owners’ construction also ignored the context in which clause 42 was found, namely as an adjunct to clause 24.

Comment

The present judgment does not stand alone. A London arbitration reported in LMLN (fn.2) achieved the same result. The circumstances of that arbitration resulted from a failure of the description of permissible weather conditions to be tied into the period during which performance was to be assessed.

Given that speed and performance provisions are not normally consolidated in one clause or contractual document, and are often subject to negotiation leading up to a clean fixture, the potential for disputes of this nature arising is ever present.

Footnote 1: [2004] 1 AC 715, [2003] UKHL 12, per Lord Hoffmann at [112]

Footnote 2: (2006) 682 LMLN 3