Pan Ocean Co v Daelim Corporation - The DL Lilac
DMC/SandT/23/
England
Pan Ocean Co Ltd v Daelim Corporation (The “DL Lilac”)
English Commercial Court: Sir Ross Cranston: [2023] EWHC 391 (Comm): 24 January 2023
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2023/391.html
Michael Davey KC and Robert Ward (instructed by Campbell Johnston Clark) for Pan Ocean (Charterers)
Mark Jones (instructed by Marine Law) for Daelim (Owners)
TRIP TIME CHARTER: AMENDED NYPE 93 FORM: HOLD INSPECTION PERIOD OFF-HIRE CLAUSE: HOLDS FAILED INITIAL INSPECTION: HOLDS RECLEANED AND MASTER REQUESTED REINSPECTION: CHALLENGE TO FINAL AWARD IN OWNERS’ FAVOUR FOR LOSS OF HIRE AND COST OF BUNKERS CONSUMED FOR BREACH OF IMPLIED TERM THAT CHARTERERS WOULD ARRANGE FOR PROMPT REINSPECTION OF HOLDS: APPEAL ON QUESTION OF LAW UNDER SECTION 69 OF THE ARBITRATION ACT 1996
Summary
In dismissing Charterers’ appeal on all but one aspect of the case, the High Court held that, based on considerations of reasonableness and necessity to make the contract work, the Tribunal had not been wrong in law to conclude that there was an implied term in the hold inspection period off-hire clause to the effect that Charterers would – when called on by the Master to do so (after an initial inspection failure and further cleaning of the vessel’s holds) – arrange for the reinspection of the vessel’s holds without undue delay.
In particular, contrary to the Tribunal’s decision, there was no breach by Charterers immediately on the Master requesting the reinspection; such breach would only arise at the point when the reinspection should have taken place had there been compliance with the implied obligation to exercise reasonable diligence to have the vessel’s holds reinspected without undue delay.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes
Background
Owners of bulk carrier “DL Lilac” chartered her on a trip time basis to Charterers on an amended NYPE 93 form with additional clauses, subject to English law and London arbitration, for a voyage to carry a cargo of urea in bulk.
Clause 69 of the charter, which was headed “BIMCO Hold Cleaning/Residue Disposal For Time Charter Parties”, provided that:
“Vessel's holds on delivery or on arrival 1st load port to be clean swept/washed down by fresh water and dried so as to receive Charterers intention cargoes in all respects free of salt, rust scale and previous cargo residue to the satisfaction of the independent surveyor.
If vessel fails to pass any holds inspection the vessel to be placed off-hire until the vessel passes the same inspection and any expense/time incurred thereby for Owners' account.”
The vessel’s holds failed inspection at the loadport berth at 1230 hours LT on 16 February 2017 due to the presence of rust, paint flakes and cargo residues.
At 1530 hours LT on 19 February 2017 the Master of the vessel notified the agents that the vessel’s holds had been cleaned and requested a reinspection.
But at 1430 hours LT the same day, the vessel had been ordered off-berth and she shifted to the inner anchorage, arriving at 2218 hours LT.
The vessel only reberthed at 2042 hours LT on 3 March 2017, some 12 days later, when she was reinspected and passed at 1100 hours LT on 4 March 2017.
The Tribunal made a finding of fact that there was no persuasive reason why a reinspection of the vessel’s holds could not have been arranged at the anchorage. It concluded, therefore, that delay had been caused to the vessel in passing the reinspection, which could not be attributed to fault on the part of Owners.
In the event, the Tribunal accepted Owners’ submission that there was an implied term in the charterparty which obliged Charterers to arrange a prompt reinspection when requested to do so. The Tribunal awarded Owners USD106,611.92 net hire plus USD16,308.93 for the value of bunkers consumed, between the time when the Master requested reinspection and the time when the vessel in fact passed reinspection at berth.
Charterers sought and were granted permission by Andrew Baker J to appeal the final award on a question of law under section 69 of the Arbitration Act 1996, “namely whether there was an implied term of the subject time charter having the effect that where the vessel was off hire under clause 69 after a failed holds inspection and the Master advised that hold cleaning had been completed and called for a reinspection, the charterer was obliged ‘to have the vessel re-inspected without delay'.”
Judgment
Having set out the background to the dispute, the key terms of the charter, summarised the Tribunal’s award and addressed a preliminary issue of procedure, the Judge identified that consideration of the appeal divided into three aspects, each of which he proceeded to consider in turn.
(1) Whether the Tribunal was in error in the test it used in implying a term?
The Judge noted that:
(a) The correct test to determine whether a term is to be implied is whether, on an objective basis, the term to be implied (i) is necessary to give business efficacy to the contract or (ii) is so obvious (to an objective observer at the time of contracting) that it goes without saying that it was included in the agreement (fn.1).
(b) The content of an implied obligation and whether there has been compliance with it are fact dependent. As such, this depended on the relevant factual matrix, including market practice and what was reasonably known to the parties; thus, where the question was highly fact specific, a judge might be more likely to give weight to the tribunal’s market experience and would only reverse the decision if satisfied that the tribunal had come to the wrong answer (fn.2).
(c) When interpreting arbitral awards, the court strives to uphold them and to read them in a reasonable and commercial manner as a whole. As such, not only would the court not be astute to look for defects but in cases of uncertainty would, so far as possible, construe an award in such a way as to make it valid (fn.3).
In applying the above principles, the Judge concluded that the award could be read as a whole in such a way that the Tribunal did in fact apply the correct legal test for implying a term.
(2) Whether the content of the implied term imposed a strict obligation, and on charterers alone?
The Judge noted that this aspect concerned whether the Tribunal was correct in its formulation of the content of the term it implied. The Tribunal had stated this was to the effect that Charterers were “to be under an implied obligation to have the vessel reinspected without delay”.
The Judge considered that Charterers were correct in saying that any implied term had to oblige both parties to take reasonable steps to cooperate to organise a reinspection without undue delay. That was, in the Judge’s view, all that would be required under the test of necessity for an implied term to protect both parties from the delay of the other. As such, it accorded with business efficacy and was consistent with clause 69.
Again, adopting a fair and supportive reading of the award, the Judge concluded that this was what the Tribunal had decided was the content of the implied term.
(3) Whether the implied term meant that the vessel was back on hire immediately the Master called for a reinspection of the holds that had been cleaned?
In view of the above, the Judge stated that the implied term did not oblige Charterers to reinspect the holds immediately upon the Master informing them that the holds were clean and requesting a reinspection. As such, Charterers were not immediately in breach on such notice being given. What the implied term required was that reasonable diligence be exercised to have the vessel reinspected without undue delay.
Accordingly, it was common ground between the parties, said the Judge, that the Tribunal was wrong in law to make the determination it did, that the vessel was immediately back on hire once the Master had notified the agents on 19 February 2017 that the holds were ready for reinspection. The Judge pointed out that this was inconsistent with clause 69, which provided that the off-hire period ceased at the point of a successful reinspection.
Nor did the above accord with the implied term found by the Tribunal. As the Judge highlighted, no tribunal properly instructed could have reached this conclusion. As such, what the Tribunal needed to do, said the Judge, was to decide by when the reinspection should have been undertaken had there been compliance with the implied obligation to exercise reasonable diligence to have the vessel reinspected without undue delay. It would follow that the vessel was back on hire at that point, not when the Master gave his earlier notice.
As this required the facts of the case to be reconsidered in the light of the correct implied obligation, the Judge decided to remit this aspect to the Tribunal, for it to decide what could and should have been done in the circumstances.
Comment
This judgment tackles the common scenario of considering how a time charter first loading port hold inspection period off-hire clause applies, where the holds fail the first inspection, after which there is a delay (following remediation of the holds by the crew and a request for reinspection) in arranging the reinspection.
The question that arises is: does the vessel go back on hire when she could and should have been reinspected had reasonable diligence been exercised (based on an implied term) or when there was a reinspection (based on an express term)?
The Judge had to consider the question within the limitations placed on an appeal on a question of law against a final arbitration award. Such an appeal is only allowed if the tribunal had clearly got the law wrong. However, free from such limitations, another tribunal or judge might, on the facts they find, decide that there is no such implied term despite applying the same legal test.
This is significant because Andrew Baker J, who gave Charterers permission to appeal, considered the Tribunal’s decision to be “an obviously unsound basis for the implication of a term” (see para [20] of the judgment). Further, the recent majority decision in the UK Supreme Court, on when a term can be implied to fill an apparent gap in an agreement, in Barton v Morris [2023] UKSC 3, suggests that implying a term should be done sparingly, based on whether the express term is a complete or only a partial statement of what the parties agreed.
Given the above, despite the specific context of this appeal, and the conclusions drawn, this may not necessarily be an end to the issue of whether or not a reinspection term is to be implied into a time charter. Despite this, the present case achieves a businesslike result, in line with the term implied in the arbitration award reported as LMLN 17/10, in recognition that otherwise a charterer could delay reinspection with impunity to keep a vessel off-hire.
Therefore, the key issue for future determination, should this issue again arise, may be whether the tribunal or judge has rightly discerned what the parties intended the terms of the charter to be in light of the material factual matrix at the time when the charter was agreed or has instead wrongly re-written the charter terms in retrospect, contrary to Arnold v Britton [2015] UKSC 36.
Footnote 1: Marks & Spencer v BNP Paribas [2015] UKSC 72, [16] and [21], per Lord Neuberger
Footnote 2: London Maritime Arbitration (4th Ed, 2017), para 22.14
Footnote 3: Zermalt v Nu-Life [1985] 275 EG 1134, per Bingham J; MRI v Erdenet [2013] EWCA Civ 156, [35], per Tomlinson LJ
