Pacific Basin v Bulkhandling Handymax, the Triton Lark

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DMC/SandT/12/04

England

Pacific Basin IHX Limited v Bulkhandling Handymax AS (The “Triton Lark”): English Commercial Court: Teare J: [2011] EWHC 2868 (Comm): 8 November 2011

TIME CHARTER: PIRACY RISKS IN GULF OF ADEN IN 2008: CONWARTIME 1993/2004 CLAUSE: ARBITRATION APPEAL: SECTION 69 OF ARBITRATION ACT 1996: CORRECT TEST FOR ASSESSING RISK OF PIRACY INCIDENT OCCURING FOR PURPOSE OF 1993/2004 CLAUSE: WHETHER OWNERS DEVIATED BY REROUTING VESSEL VIA CAPE OF GOOD HOPE INSTEAD OF GULF OF ADEN

Available on BAILII @ http://www.bailii.org/ew/cases/EWHC/Comm/2011/2862.html

Michael Nolan (instructed by Swinnerton Moore LLP) for the Claimant/Charterers, Pacific

Julian Kenny (instructed by Ince and Co LLP) for the Defendant/Disponent Owners, Bulkhandling

Summary

In an appeal under section 69 of the Arbitration Act 1996, concerning the risk of attack by pirates on merchant vessels in the Gulf of Aden and centred on the true construction and implementation of the CONWARTIME 1993/2004 clause, the Commercial Court held that:

(1) The tribunal had misunderstood the correct application of the CONWARTIME clause, leading to a single error of law, in that the phrase "may be, or are likely to be, exposed to War Risks" within sub-clause 2 connoted a serious risk in the sense that there was a real likelihood or real danger that the vessel would be exposed to acts of piracy, rather than in the sense of the importance/magnitude of the harm threatened by that risk.

(2) It followed that the tribunal, through that single error, were also in error in relation to their consideration of whether Disponent Owners had exercised an objectively reasonable judgment made in good faith, as to whether or not they were entitled to reject Charterers' routing order through Suez and the Gulf; and

(3) The tribunal were, however, correct in holding Disponent Owners’ re-routing of the vessel via the Cape of Good Hope not to be a deviation, on the basis that sub-clause 8 of the CONWARTIME 1993/2004 clause provided that anything done or not done in accordance with that clause would not be a deviation. On the assumption that Charterers were not entitled to order the vessel via Suez and the Gulf, they had nevertheless ordered the vessel to China. Pursuant to Disponent Owners' duty to prosecute the voyage with due despatch, the vessel had proceeded to the destination ordered, albeit via a different route.

Note

An additional first instance judgment has been provided in this case, reported at [2012] EWHC 70 (Comm). That judgment briefly deals with two points.

First, the factual dispute regarding whether or not the vessel, her complement and cargo were at risk of exposure to acts of piracy (concerning the distinction between a "bare possibility" and a "real likelihood") was to be remitted to the arbitrators to decide. This was because, on the limited evidence before the judge at the first hearing, the judge was unable to conclude that the result of remitting the case would be inevitable and, therefore, serve no useful purpose.

Second, in relation to an issue in dispute which was not apparent to the judge at the first hearing, the judge decided that the phrase "exposure to War Risks" was to be resolved by reference to clause (2) in the CONWARTIME clause itself. The judge held that this phrase should properly be construed as referring to a situation which is "dangerous". The result was that the question to be addressed by an owner or master (when ordered to go to a place) is whether there is a real likelihood that the vessel will be exposed to acts of piracy in the sense that the place will be dangerous on account of acts of piracy.


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

This was an appeal under section 69 of the Arbitration Act 1996 against an arbitration award made in favour of Disponent Owners of the “Triton Lark”. The award concerned the risk of attack by pirates on merchant vessels in the Gulf of Aden, centered on the true construction and implementation of the CONWARTIME 1993 clause (fn.1) incorporated into Disponent Owners’ NYPE form time charterparty with Charterers of the vessel. The 1993 clause was materially identical to the 2004 version of that clause incorporated into the head time charter. Under certain circumstances that clause entitled Disponent Owners to re-route the vessel to avoid “War Risks” areas (as defined by the clause). Charterers had in turn voyage sub-chartered the vessel on an amended GENCON form, which included the VOYWAR 2004 clause, parts of which are for all material purposes the same as CONWARTIME 1993/2004.

The vessel was a geared bulk carrier built in 2005 with 5 holds, a summer deadweight of 56,025MT and a speed of about 14 knots. Charterers instructed the vessel to carry a cargo of potash in bulk from Hamburg to China via Suez and the Gulf of Aden. Disponent Owners refused to proceed via Suez and the Gulf on account of a risk from pirates and instead proceeded via the Cape of Good Hope.

Disponent Owners had throughout essentially acted as a conduit between Head Owners and Charterers in relation to the piracy risk issue. The facts found in the award indicated that Disponent Owners had taken steps to inform themselves of piracy risks in the Gulf. However, Disponent Owners had not pursued each and every line of enquiry open to them in order to evaluate/appreciate fully the extent of the risks and potential mitigation factors. In particular, there was no formal risk assessment, no enquiries were made about joining a convoy, no analysis of the statistics concerning hijacked vessels had been made and no investigation was made into whether security personnel could be put on board the vessel. The parties agreed, based on contemporary materials and expert evidence, that the risk of a vessel being hijacked by pirates in the Gulf, at or about the time when the vessel was ordered to proceed through that area during November 2008, was about 1 in 300 transits.

The tribunal found that while the information Disponent Owners had received was in "graphic" and "dramatic" language, it enabled them to conclude that there was a serious risk of hijacking, that this was an objectively reasonable conclusion to draw, that they had reasonably informed themselves so as to form a judgment and that their judgment was formed in good faith. The tribunal therefore held that the extra costs of proceeding via the Cape (USD462,221.40) should be borne by Charterers.

Charterers submitted that the tribunal erred in law in its construction of sub-clause 2 of the CONWARTIME 1993/2004 clause, in particular, as to:

(a) the meaning of the words "may be";

(b) the reasonable judgment of owners; and

(c) whether the clause gives owners a discretion and, if so, whether they are obliged to make proper enquiries before exercising it.

As a corollary, Charterers challenged Disponent Owners' re-routing of the vessel around the Cape without Charterers' agreement on the basis that this amounted to a deviation of the voyage.

Judgment

What is the meaning of "may be, or are likely to be, exposed to War Risks"?

The judge first considered how sub-clauses 1 and 2 of the CONWARTIME 1993 fitted together. The judge considered that the master or owners must form a reasonable judgment, first, that the vessel, her cargo or crew may be, or are likely to be, exposed to acts of piracy and second, that such acts of piracy may be dangerous or are likely to be or to become dangerous. The first, and probably the most important, issue, therefore, was the meaning of the words "may be, or are likely to be, exposed to War Risks" in sub-clause 2. This gave rise to difficulty because the clause did not clearly state what the degree of risk must be. In considering the true construction of the clause, the judge kept in mind that the right of charterers to give directions as to the employment of the vessel is a "key right" (fn.2). It followed that any limitation on that right must be clearly expressed.

Sub-clause 2 did not require the master or owners to form a reasonable judgment that the vessel may be or is likely to be "attacked" by pirates. It required the master or owners to form a reasonable judgment that the vessel may be or is likely to be "exposed to" acts of piracy. Exposure to acts of piracy meant that the vessel was subject to the risk of piracy or was laid open to the danger of piracy. The question therefore was what degree of possibility or probability that the vessel will be exposed to acts of piracy must the master or owners show. The reasonable construction, thought the judge, was that the phrase "may be, or are likely to be, exposed to War Risks" was intended to express a single degree of possibility or probability.

The importance of the risk in the sense of the harm it threatened was of course relevant to the definition of "War Risks" within sub-clause 1(b). In the context of the present case the war risks were "acts of piracy ….which in the reasonable judgment of the Master and/or the Owners, may be dangerous or are likely to be or become dangerous to the Vessel, her cargo, crew or other persons on board the Vessel" (judge's emphasis added). If the threatened harm was of a serious or important type then the qualifying test of dangerousness in clause 1(b) would likely be satisfied. By contrast, the phrase "may be, or are likely to be, exposed to War Risks" in sub-clause 2 required an assessment as to whether there was a real likelihood of the vessel being exposed to acts of piracy. Thus the judge considered that there was no requirement in sub-clause 2 to consider importance in the sense of the importance of the harm threatened by exposure to acts of piracy or in any other sense.

The judge concluded that the tribunal understood "a serious risk" to be a risk of an important event, demanding of consideration. However, on the judge's construction of "may be, or are likely to be", it connoted a serious risk in the sense of one of which it could be said that there was a real likelihood or real danger that the vessel would be exposed to acts of piracy. There was a difference between the two which was neatly summed up by Charterers' contrast between a serious risk that an event will occur (being exposed to acts of piracy) and a risk that a serious event (being exposed to acts of piracy) will occur. The judge therefore reached the conclusion that although the tribunal adopted the concept of a serious risk as expressing the meaning of "may be or are likely to be" (which it would be difficult to say was the wrong legal test), they understood and applied that test in a manner which was not warranted by the true construction of the clause, and thereby erred in law.

Was Disponent Owners' judgment reasonable?

As the judge concluded that the tribunal were wrong in law as to their understanding of the phrase "may be, or are likely to be, exposed to War Risks", it followed that their conclusion that Disponent Owners had formed a reasonable judgment was also wrong in law.

Was there a duty on Disponent Owners to make reasonable enquiries?

Charterers argued that where a contract allocated to one party a power to make decisions under the contract which may have an effect on both parties, a term would generally be implied that the power would be exercised honestly, rationally and not arbitrarily or capriciously and after making any necessary enquiries (fn.3). Charterers further submitted that the tribunal had found that Disponent Owners had made very limited enquires.

The judge was not persuaded, however, that the line of cases cited applied in the present context. There was no necessity to imply any term because the clause expressly required Disponent Owners to make a "reasonable" judgment. The effect was that Disponent Owners must make a judgment in good faith; otherwise it would not be a judgment but a device to obtain a financial gain. Further, the judgment must be "objectively" reasonable: owners who wished to ensure their judgment was objectively reasonable would make all necessary enquiries. If no enquiries at all were made, it may be concluded that a judgment in good faith had not been made. But if Disponent Owners made those enquiries which they considered sufficient but failed to make all necessary enquiries before reaching a judgment, it would not follow that their judgment would on that account be judged unreasonable, if in fact it was an objectively reasonable judgment and would have been shown to be so had all necessary enquiries been made.

In the present case, although Disponent Owners acted largely as a conduit between Head Owners and Charterers, the tribunal held that they "had reasonably informed [themselves] so as to be able to form a judgment". That suggested that the arbitrators considered that Disponent Owners made all necessary enquiries. However, said the judge, what were necessary enquiries depended upon the tribunal's understanding of the phrase "may be, or are likely to be, exposed to War Risks". As the judge concluded that the tribunal's understanding was in error, it followed that their conclusion that sufficient enquiries had been made was also wrong in law, though this merely reflected the first and only error.

Were Disponent Owners entitled to order the vessel to proceed to China via the Cape?

The judge was not convinced that the tribunal's reasoning, though brief, revealed an error of law. The tribunal's decision was explicable by reference to sub-clause 8 of the CONWARTIME 1993/2004 clause and Disponent Owners' duty to prosecute the voyage to China with due despatch. The refusal of Disponent Owners to follow Charterers' order to proceed from Gibraltar to Suez was something "done or not done" in compliance with sub-clause 2. Further, in circumstances where Charterers had ordered the vessel to load and carry a cargo to China, but where the order as to route was an order Charterers were not entitled to give, the vessel was not without orders and proceeding to China via the Cape was in fulfillment of the duty to prosecute the voyage with due despatch.

Comment

One would have expected that owners are required to make a risk assessment of the vessel based on her particular characteristics, officers, crew, cargo, route and voyage and to consider available convoy, escort and other defensive options, such as guards on board, before forming an objectively reasonable judgment. However, this is often easier said than done. Consequently, in practice, it is normal for owners and charterers to barter over terms, risk and cost allocation to manage/mitigate piracy risks sufficiently for vessels to proceed through the Gulf of Aden and Indian Ocean. This follows from clauses of this nature having previously gone untested in court, with parties being alive to the serious consequences to the vessel, her complement and cargo from a highjacking, as well as the commercial result of a repudiatory breach of contract.

What remains unclear is the degree of piracy risk required in the given circumstances, in order to determine when the clause bites. This point is one that was remitted by the judge to the tribunal to reconsider in light of the judgment and the evidence before the tribunal. We may not find out the result of that further consideration unless the dispute returns to court or is published in LMLN or elsewhere. What is for sure is that BIMCO, who drafted the CONWARTIME and VOYWAR clauses, and who in 2009 drafted specific piracy risk clauses, expected that something more than a general threat of piracy in an area would be required before those clauses bite (fn.4). This indicates that something more specific to the particular vessel, owners, managers, charterers, cargo interests, complement, cargo, route and voyage (particularly the time of year of the transit) would be required. Specific examples of this would be threats made by Somali pirate groups to American-flagged vessels following the “Maersk Alabama” incident, in which US Navy Seals killed three Somali pirates who were holding the vessel’s American captain hostage, and to Indian seamen, following Indian naval forces sinking a pirate mothership in international waters.

Footnote 1: The material terms of the time charter were:

Clause 8: "The Captain shall prosecute his voyages with due despatch and…shall be under the orders and directions of the Charterers as regards employment and agency…"

Clause 75: "BIMCO Standard War Risk Clause for Time Charters, 1993 Code Name: 'CONWARTIME 1993'

(1) For the purpose of this Clause, the words:

(a) "Owners" shall include the shipowners, bareboat charterers, disponent owners, managers or other operators who are charged with the management of the Vessel, and the Master; and

(b) 'War Risks' shall include any war (whether actual or threatened), act of war, civil war, hostilities, revolution, rebellion, civil commotion, warlike operations, the laying of mines (whether actual or reported), acts of piracy, acts of terrorists, acts of hostility or malicious damage, blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever), by any person, body, terrorist or political group, or the Government of any state whatsoever, which, in the reasonable judgement of the Master and/or the Owners, may be dangerous or are likely to be or to become dangerous to the Vessel, her cargo, crew or other persons on board the Vessel.

(2) The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through, any port, place, area or zone (whether of land or sea) or any waterway or canal, where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgement of the Master and/or the Owners, may be, or are likely to be, exposed to War Risks. Should the Vessel be within any such place as aforesaid, which only become dangerous, or is likely to be or to become dangerous, after her entry into it, she shall be at liberty to leave it.

(3) The Vessel shall not be required to load contraband cargo, or to pass through any blockade, whether such blockade be imposed on all vessels, or is imposed selectively in any way whatsoever against vessels of certain flags or ownership, or against certain cargoes or crews or otherwise howsoever, or to proceed to an area where she shall be subject, or is likely to be subject to a belligerent right of search and/or confiscation.

(4)(a) The Owners may effect war risks insurance in respect of the Hull and Machinery of the Vessel and their other interests (including, but not limited to, loss of earnings and detention, the crew and their Protection and Indemnity Risks), and the premiums and/or calls thereof shall be for their account.

(b) If the Underwriters of such insurance should require payment of premiums and/or calls because, pursuant to the Charterers' orders, the Vessel is within, or is due to enter and remain within, any area or areas which are specified by such Underwriters as being subject to additional premiums because of War Risks, then such premiums and/or calls shall be reimbursed by the Charterers to the Owners at the same time as the next payment of hire is due.

(5) If the Owners become liable under the terms of employment to pay to the crew any bonus or additional wages in respect of sailing into an area which is dangerous in the manner defined by the said terms, then such bonus or additional wages shall be reimbursed to the Owners by the Charterers at the same time as the next payment of hire is due.

(6) The Vessel shall have liberty : -

(a) to comply with all orders, directions, recommendations, or advice as to departure, arrival, routes, sailing in convoy, ports of call, stoppages, destinations, discharge of cargo, delivery, or in any other way whatsoever, which are given by the Government of the Nation under whose flag the Vessel sails, or other Government to whose laws the Owners are subject, or any other Government, body or group whatsoever acting with the power to compel compliance with their orders or directions;

(b) to comply with the order, directions or recommendations of any war risks underwriters who have the authority to give the same under the terms of the war risks insurance;

(c) to comply with the terms of any resolution of the Security Council of the United Nations, any directives of the European Community, the effective orders of any other Supranational body which has the right to issue and give the same, and with national laws aimed at enforcing the same to which the Owners are subject, and to obey the orders and directions of those who are charged with their enforcement;

(d) to divert and discharge at any other port any cargo or part thereof which may render the Vessel liable to confiscation as a contraband carrier;

(e) to divert and call at any other port to change the crew or any part thereof or other persons on board the Vessel when there is reason to believe that they may be subject to internment, imprisonment or other sanctions.

(7) If in accordance with their rights under the foregoing provisions of this Clause, the Owners shall refuse to proceed to the loading or discharging ports, or anyone or more of them, they shall immediately inform the Charterers. No cargo shall be discharged at any alternative port without first giving the Charterers notice of the Owners' intention to do so and requesting them to nominate a safe port for such discharge. Failing such nomination by the Charterers within 48 hours of the receipt of such notice and request, the Owners may discharge the cargo at any safe port of their own choice.

(8) If in compliance with any of the provisions of sub-clauses (2) to (7) of this Clause anything is done or not done, such shall not be deemed a deviation, but shall be considered as due fulfilment of this Charter Party."

Footnote 2: The "Hill Harmony" [2001] 1 Lloyd's Rep 144 (HL) @ 150 per Lord Bingham.

Footnote 3: Socimer International Bank v Standard Bank [2008] 1 Lloyd's Rep 558 @ 575, The "Product Star" (no.2) [1993] 1 Lloyd's Rep 397 @ 404 and Government of Spain v North of England SS Co (1938) 61 LlLRep 44 @ 58.

Footnote 4: BIMCO Special Circular No. 2 - November 2009.