Falkonera Shipping v Arcadia Energy - The Falkonera
Falkonera Shipping Company v Arcadia Energy Pte Ltd (The “Falkonera”)
English Court of Appeal (Civil Division); Floyd and Christopher Clarke LJJ, Sir Stanley Burnton;  EWCA Civ 713; 5 June 2014
SHIPPING: TANKER TRANSHIPMENT: SHIP-TO-SHIP (“STS”) TRANSFERS: CHARTERPARTY PROVIDING FOR STS TRANSFERS TO BE SUBJECT TO OWNERS’ APPROVAL WHICH NOT TO BE UNREASONABLY WITHHELD: OWNERS WITHHOLD CONSENT FOR A STS TRANSFER BETWEEN TWO VLCCs: WHETHER OWNERS’ WITHHOLDING OF APPROVAL REASONABLE
Mr C Hancock QC and Miss S Tresman (instructed by Ince & Co) for the Appellant Owners
Mr David Allen QC and Mr N G Casey (instructed by Clyde & Co) for the Respondent Charterers
The Court of Appeal dismissed the Appellant's appeal against the decision of Mr Justice Eder in the Commercial Court of the Queen’s Bench Division (reported at  EWHC 3678 (Comm), who had found that the Owners had unreasonably withheld their consent for a ship-to-ship (“STS”) transfer of crude oil (the “Cargo”).
The Court of Appeal set out the test for determining whether or not the Owners’ consent was unreasonably withheld as follows. It was not necessary that Owners' conduct was correct or their conclusions right. They would only be in breach if no reasonable shipowner could have regarded their concerns as sufficient reason to decline approval.
In applying this test, the Court of Appeal declined to depart from the factual findings and the conclusion of Mr Justice Eder. The Court of Appeal emphasised that his judgment was largely one of fact; the conclusion he had reached was one which an experienced commercial judge, hearing evidence over four days about the vessels concerned and the operation intended, was entitled to reach.
Case Note contributed by Ervin Tan, B.A. (First Class) Oxon., based in Singapore.
The Falkonera (the “Vessel”) is a Very Large Crude Carrier (“VLCC”) owned by Falkonera Shipping Company (“Owners”) which was chartered by Arcadia Energy Pte Ltd (“Charterers”) on or about 18 November 2010, to carry crude oil from the Yemen to “1-2 ports far east”. The charterparty contained a clause (“the STS lightering clause”) which provided in pertinent part as follows.
“If charterers require a ship-to-ship transfer operation or lightening by lightering barges to be performed then all tankers and/or lightering barges to be used in the transhipment/lightening shall be subject to prior approval of owners, which not to be unreasonably withheld, and all relevant certificates must be valid.”
The Charter was on BPVOY4 terms, which included the following clause.
“8.1 Charterers shall have the option of transferring the whole or part of the cargo…to or from any other vessel including, but not limited to, an ocean-going vessel, barge and/or lighter (the "Transfer Vessel")… All transfers of cargo to or from Transfer Vessels shall be carried out in accordance with the recommendations set out in the latest edition of the "ICS/OCIMF Ship to Ship Transfer Guide (Petroleum).”
On 24 November 2010, the Charterers gave orders for the vessel to load oil in the Yemen and to proceed to Singapore for orders. On 2 December, loading was complete. The vessel proceeded to Singapore for orders. On 5 December, Charterers asked Owners to approve two vessels for an STS transfer, but subsequently sought Owners’ approval for, inter alia, a STS transfer between the Falkonera and two other VLCCs, the Front Queen and the Front Ace, each measuring 330 metres in length.
After a series of correspondence between, amongst others, Owners’ London agents and Charterers, Owners’ London agents wrote back to Charterers, on or after 14 December 2010, stating in pertinent part as follows.
“Regrettably, Owners, following careful consideration of all safety considerations in respect of the vessel, cargo her personnel and the environment, must therefore decline Charterer's request for acceptance to discharge into another VLCC.
Contractually, there is agreement under the Charter Party which allows for the vessel to discharge the cargo by trans-shipment and that this shall be carried out in accordance with the recommendations set out in the latest edition of the ICS/OCIMF Ship to Ship Transfer Guide (Petroleum) and it is clear that this does not contain any references/recommendations for Ship to Ship transfer between two VLCC's. [The “First Withholding”]
Owners repeated this in an email of 15 December 2010 (the “Second Withholding”).
Subsequently, Owners again declined to give their approval (the “Third Withholding”), following the Charterers’ offer to execute a Letter of Indemnity (“LOI”).
Finally, on 16 December, the Falkonera arrived at Pasir Gudang where Charterers gave orders for her to perform an STS transfer onto smaller tankers, the Kythira and the True. By this time, the prior negotiations in which Charterers sought Owners’ approval had caused some delays, in respect of which (a) Owners brought a claim for demurrage while (b) Charterers denied liability for demurrage and counterclaimed for additional expenses incurred.
- The Legal Test
In determining whether or not Owners acted reasonably in refusing to approve the Frontline vessels as transfer vessels for discharge of the Cargo, it was for Charterers to prove that Owners had acted unreasonably. In order to entitle them to withhold approval, it was not necessary that Owners' conduct was correct or their conclusions right. They would only be in breach if no reasonable shipowner could have regarded their concerns as sufficient reason to decline approval. This is an objective test [Fn 1].
- Application of the Legal Test
On the facts, the Court of Appeal considered which factors could (or could not) constitute sufficient reason to decline approval.
First, the Court of Appeal held that there might be some force in the proposition that a VLCC – VLCC transfer was in a sense “non-standard”, but the fact that the proposed transfer was to such a vessel, and could in a sense be regarded as non-standard, was not of itself a reasonable ground for refusal. This followed from the fact that the right to transfer was a right to transfer to any vessel, including a VLCC, and if a non-standard transfer could, of itself, be a reasonable ground for refusal, the right, insofar as it embraced VLCC – VLCC transfer, would be illusory [Fn 2].
Next, the Court of Appeal approved Mr Justice Eder’s approach in distinguishing between reasons for refusal based on the inherent characteristics of the vessel (a) “in the abstract” and (b) in the context of the proposed operation – holding that both were relevant. The Court of Appeal emphasised that it did not understand Mr Justice Eder to have been confining a reasonable refusal to one related to safety or requiring Owners to prove that the operation would be unsafe; instead, a refusal might be reasonable if, leaving aside the paper characteristics of the vessel, she had some feature which meant that the proposed operation would have been unsafe [Fn 3].
This, in turn, required a consideration of the particular characteristics of the transferee vessel, and accordingly, a Court would be more likely to find a refusal unreasonable if the Owners did not even consider the characteristics of the transferee vessel. The Court of Appeal found, on the evidence, that Owners did, indeed, have a settled policy or at the lowest had reached a clear position that they simply would not allow a VLCC-VLCC transfer. That did not inevitably mean that a refusal of permission in relation to this charter was unreasonable but it supported the inference that Owners' refusal was, in truth, based on their aversion to any VLCC-VLCC transfer rather than any particular characteristics of the transferee vessel [Fn 4].
This point was emphasised by the Court of Appeal in its interpretation of the STS clause, as follows [Fn 5].
“The function of the STS clause [is] to allow Owners to vet the plans for the STS operation before deciding whether to approve the transferee vessel. The question was whether there was some characteristic of the receiving vessel that meant that the proposed STS transfer would be unsafe in the sense that it would give rise to a degree of risk which a prudent owner who had agreed to allow VLCC – VLCC transfers would (or could), acting reasonably, not be prepared to accept.
In any event, and on the facts of the case, Mr Justice Eder, at first instance, had concluded that, in the light of the evidence, the mooring arrangement proposed was safe in principle, and accordingly, none of the points raised by Owners’ London agent in Owners’ first response provided any reasonable basis for withholding approval to the Frontline vessels. [Fn 6]. The Court of Appeal was not prepared to disturb these findings.
1. At ,  of the judgment
2. At - of the judgment
3. At  of the judgment
4. At  of the judgment
5. At  of the judgment
6. At - of the judgment