Petroleo Brasiliero v ENE Kos 1
Petroleo Brasileiro SA v ENE Kos 1 Ltd
United Kingdom Supreme Court: Lords Phillips, Walker, Mance, Clarke and Sumption:  UKSC 17,  2 WLR 976: 2 May 2012
Mr Timothy Brenton QC, instructed by Ince & Co LLP, for the Appellant shipowners, ENE Kos 1 Ltd
Mr Andrew Baker QC and Mr Henry Byam-Cook, instructed by Thomas Cooper Solicitors, for the Respondent charterers, Petroleo Brasileiro SA
TIME CHARTERPARTY: SHELLTIME 3 FORM: VESSEL WITHDRAWN FOR NON-PAYMENT OF HIRE WHILST LOADING: LOSS OF USE OF VESSEL: EXPENSES INCURRED IN DISCHARGING CARGO BACK TO SHORE: WHETHER LOSS AND EXPENSE RECOVERABLE UNDER INDEMNITY CLAUSE: WHETHER RECOVERABLE AS RIGHT CORRELATIVE TO DUTY AS BAILEE TO LOOK AFTER GOODS: WHETHER CHARTERERS’ ORDER TO LOAD AN EFFECTIVE CAUSE
When the Shipowners terminated the time charter due to the Charterers’ failure to pay hire, a parcel of cargo had just been loaded onto the vessel. As a result, the vessel was detained at the port for 2.64 days for the cargo to be discharged back to the shore. The Supreme Court unanimously upheld the Shipowners’ claim for the expenses incurred in discharging the cargo and for the loss of use of the vessel under the principle in The “Winson”  AC 939. The Shipowners were bailees of the cargo and had to incur those costs in discharging their duty to take care of the cargo. Further, the Court held by a majority (Lord Mance dissenting) that the claim fell within the express indemnity clause of the charterparty. The Charterers’ order to load the cargo was an effective cause of the Shipowners having to discharge the cargo at their time and expense. This was not a risk that the Shipowners had agreed to assume under the charterparty.
This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.
In 2006, the owners of the vessel MT Kos entered into a time charterparty (on Shelltime 3 Form) with Petroleo Brasileiro SA for a period of 36 months. The charter contained a standard form termination clause which provided that, if hire was not paid when due, the Shipowners had the right to withdraw the Vessel. No anti-technicality clause was included.
The employment and indemnity clause in Clause 13 provided that:
“… charterers hereby indemnify owners against all consequences or liabilities that may arise from the master, charterers or their agents signing bills of lading or other documents, or from the master otherwise complying with charterers’ or their agents’ orders…”
On 31 May 2008, the Charterers failed to make advance payment of hire as required. The Shipowners accordingly exercised the termination clause and withdrew the Vessel on 2 June 2008. At that moment, a parcel of cargo had just been loaded onto the Vessel; no bills of lading had yet been issued to anyone in relation to the cargo.
The Charterers tried to persuade the Shipowners to cancel the withdrawal. The Shipowners refused. They were only willing to reinstate the charterparty at the market rate which was much higher than the charterparty rate, and required the Charterers to take back their cargo promptly. After further fruitless exchanges, the Charterers informed the Shipowners on 3 June 2008 that they would take back the cargo. Arrangements were duly made, and the discharge of the cargo was completed on 5 June 2008. This was 2.64 days after the Vessel was withdrawn.
The Shipowners sued the Charterers for the service of the Vessel and the bunkers consumed during the 2.64 days under various heads: (i) under the indemnity clause in the charterparty; (ii) under an express or implied new contract made after the Vessel was withdrawn, to pay for the time and bunkers; (iii) under the law of unjust enrichment; and (iv) on the principle in China Pacific SA v Food Corporation of India (The “Winson”)  AC 939 under the law of bailment.
At first instance, Andrew Smith J ( EWHC 1843 (Comm),  1 Lloyd’s Rep 87) allowed the Shipowners’ claim, but only on the basis of The “Winson”. The Charterers appealed.
The Court of Appeal (Longmore and Smith LJJ and Sir Mark Waller) ( EWCA Civ 772,  2 Lloyd’s Rep 409) allowed the appeal [], and only upheld the Shipowners’ claim for the bunkers consumed. Longmore LJ, delivering the leading judgment, held that the principle in The “Winson” was confined to recovering expenses incurred. It could not assist the Shipowners in recovering loss of use of the Vessel at the market rate as the present case disclosed no element of emergency or necessity. There was also no obvious injustice in the Charterers retaining the comparatively small benefit that the stay of the cargo on board the Vessel represented.
The Shipowners appealed to the Supreme Court.
The Supreme Court unanimously allowed the appeal on the basis of the principle in The “Winson”, and by a majority of 4 to 1 (Lord Mance dissenting), on basis of the indemnity clause.
Lord Sumption (with whom Lord Walker agreed) delivered the leading judgment. The claim under an alleged new contract was disposed of shortly as it had no factual support.
In relation to head (iv), Lord Sumption noted that there was no general right under English law to recover benefits conferred on others or expenses incurred in the course of conferring them. However, one exception appeared under the law of bailment. Where property was originally bailed under a contract of carriage and the carrier had no choice but to remain in possession after the contract ended, then he, as bailee, came under a duty to take reasonable care of the cargo. It would be manifestly unjust if the bailee did not have a correlative right to charge the bailor for the expenses incurred: see Gaudet v Brown (1873) LR 5 PC 134; Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132. This right was solely based on the existence of a continuing duty to take care for the cargo (see The “Winson”); it was not dependent on the existence of any emergency or on the carrier being an agent of the cargo owner. So long as a bailee had to incur those expenses in discharging his responsibility to care for the property, they were recoverable.
In the present case, the bailment between the Shipowners and the Charterers over the cargo was initially a consensual one under the charter. When the Vessel was withdrawn, the Shipowners became a gratuitous bailee and came under a continuing duty to take reasonable care of the cargo. The only reasonable or practical option open to them was to retain the cargo until its discharge. Thus, the Shipowners’ claim for expenses incurred and the loss of use of the Vessel should be allowed.
Turning to the indemnity clause, Lord Sumption noted two limits to its operation despite its apparently wide scope. Firstly, it only protected a shipowner against losses arising from risks which it had not expressly or implicitly agreed to bear under the charterparty, and not from anything for which they were already remunerated for by the payment of hire. What risks the shipowner had agreed to bear would depend on the construction of the contract and an informed judgment of the broad range of physical and commercial hazards which were normally incidental to the chartered service. The clause typically did not cover ordinary risks and costs associated with the performance of the chartered service, e.g. negligence or breach of contract by the shipowner or consequences such as marine fouling.
Secondly, the indemnity only covered losses caused by complying with the charterer’s orders. This required one to ask whether the charterer’s order was an “effective cause” of the owner’s loss, as opposed to a mere “but for” cause which did no more than provide the occasion for some other factors unrelated to the charterer’s order to operate.
Lord Sumption held that both conditions were satisfied. The need to discharge the cargo at the time and expenses of the Shipowners was not a risk they had assumed under the charter, as it had already come to an end. The cargo had to be discharged because the Charterers ordered it to be loaded. The Shipowners’ decision to withdraw the Vessel was adventitious in timing and merely determined the place at which the cargo was to be discharged. It did not break the chain of causation between the Charterers’ order and the detention of the Vessel after withdrawal. Thus, the losses claimed by the Shipowners were recoverable under the indemnity clause. Lord Sumption was of the view that the analysis would be the same if the charterparty came to an end for any other reason with the cargo still on board, for example, by frustration or expiry at the end of the contractual term.
Lord Clarke delivered a concurring judgment. He disagreed with Lord Mance that there could only be one relevant cause under the indemnity clause. There may, depending on the circumstances, be more than one effective cause.
Lord Mance delivered a strong dissent. He was of the view that the charterer’s order had to be the “proximate” or “determining” cause of the shipowner’s loss in order to trigger the indemnity clause: see Larrinaga Steamship Co Ltd v The King  AC 246. It was necessary to establish an unbroken chain of causation between the charterer’s orders and the loss (see The “White Rose”  1 WLR 1098), and it was not sufficient that the charterer’s order was “a” cause of the loss (see Royal Greek Government v Minster of Transport (The “Ann Stathatos”) (1949) 83 Lloyd’s Rep 228).
Thus, the loss was rather caused because the charter was at an end, the Shipowners were not carrying out the Charterers’ instructions and they were not receiving hire. While no cargo would have been on board the Vessel but for the Charterers’ instructions, this did not make the latter the proximate cause of the Shipowners’ loss. It was unrealistic to attribute the loss to the instructions to load, ignoring the failure to carry. Recovery of such loss was sufficiently taken care of by the principle in The “Winson”, and the approach taken by the majority would “[stretch] the application of the express charter indemnity beyond any previous decision, [and] without justification…”
Two points should be noted about this judgment from the Supreme Court. Firstly, the approach taken by the majority has significantly widened the scope of the indemnity clause. Although Lord Clarke agreed with Lord Mance that a “direct” causal link was required to trigger the indemnity clause, this did not seem to be reflected in the approach taken by the majority. The indemnity clause was aimed at covering the losses suffered by the Shipowners having to discharge the goods in their own time and at their own expense. Such losses would not have occurred but for their termination of the charter.
Secondly, there were no bills of lading in the hands of a third party here. However, as Lord Mance (at para.50) and Lord Clarke (at para.79) suggested, if the shipowners were bound to third parties by bills of lading which charterers had required them to issue, the charterers would be obliged to indemnify the shipowners for the continuation of the voyage.