Dera Commercial Estate v Derya Inc - The Sur

DMC/SandT/2018/06

England

Dera Commercial Estate v Derya Inc (The“SUR”)

English Commercial Court: Carr J.: 13 July 2018: [2018] EWHC 1673 (Comm)

Mr David Semark, instructed by Mills & Co Solicitors Limited, for the Claimant

Mr Ravi Aswani, instructed by Hill Dickinson LLP, for the Defendant

CARRIAGE OF GOODS BY SEA: HAGUE RULES: WHETHER GEOGRAPHIC DEPARTURE [‘DEVIATION’] FROM THE AGREED VOYAGE CONSTITUTED A ‘FUNDAMENTAL BREACH OF CONTRACT’: WHETHER CARRIER ENTITLED TO RELY ON ONE-YEAR TIME LIMIT IN ARTICLE 3 RULE 6

Summary

This case decided that, despite the subsequent abandonment of the concept of ‘fundamental breach’ in the general English law of contract, the decision in the House of Lords case of Hain Steamship Company v Tate & Lyle [1936] remained good law, unless and until it was over-ruled by the Supreme Court (as successor to the House of Lords). In Hain, the House of Lords had decided that, in the context of the carriage of goods by sea, a geographical departure/deviation from the contract voyage amounted to a fundamental breach of contract, disentitling the carrier from relying on exculpatory clauses in the contract of carriage. Thus, in the circumstances of this case, the carrier was not entitled to rely on the one-year time limit for the presentation of cargo claims provided by Article III Rule 6.

Case note contributed by Edward White BA(Hons), GDL, Associate at Thomas Cooper Singapore LLP

Background

This case involved an appeal to the Commercial Court challenging an LMAA [London Maritime Arbitrators Association] arbitration award primarily on points of law under section 69 of the Arbitration Act 1996.

In February 2011, Dera Commercial Estate (“Dera”) purchased 18,000mt of Indian maize which was to be shipped on board the MV “SUR” from Diamond Harbour and Vizag, India, to Aqaba, Jordan. The cargo was loaded between May and July 2011 and bills of lading were issued incorporating the Hague Rules and providing for English Law and arbitration in London.

The Vessel arrived at Aqaba on 16 August 2011, following which the Jordanian customs authorities declared that the cargo would not be permitted to enter Jordan and would have to be returned to its country of origin, on account of “broken percentage, foreign matters, impurities, damaged kernels… and apparent fungus”.

On 7 October 2011, Dera appointed an arbitrator and commenced arbitration proceedings against the owners of the vessel, Derya Inc (the “Owners”), seeking damages of approximately USD 8,000,000 in respect of damage to the cargo.

On 8 November 2011, the vessel sailed to Turkey with the cargo on board, without the consent of Dera or the Jordanian customs authorities. The Owners commenced proceedings against Dera in Turkey for demurrage incurred and, on 25 April 2012, the cargo was sold under a judicial sale ordered by the Turkish courts and the proceeds transferred to the Owners.

The Arbitration

Though commenced in October 2011, the arbitration remained in abeyance until 23 March 2015, when the Owners served particulars of claim seeking a declaration of non-liability for Dera’s cargo claim and an order that a letter of undertaking issued in Dera’s favour be released. On 1 June 2015, Dera served the Owners with the particulars of its cargo claim, following which both parties served Reply submissions. At the request of the Owners, the Tribunal proceeded to deal preliminary issues. One of the preliminary issues posed by the Owners was: “Should [Dera’s] cargo claim be struck out for want of prosecution?”

Following a hearing in March 2017, the Tribunal published its Award on 13 July 2017. In respect of this issue, the Tribunal found that there had been inordinate and inexcusable delay on the part of Dera in particularising its cargo claim, and struck out the claim under section 41(3) of the Arbitration Act on the basis that the delay had (a) given rise to a substantial risk that it would not be possible to have a fair resolution of the issues; and (b) had caused serious prejudice to the Owners.

In particular, the Tribunal found that the period of three years and nine months taken by Dera to particularise its claim amounted to an inordinate delay when viewed in comparison to the claim’s applicable time bar – one year, under Article III Rule 6 of the Hague Rules. Although the claim had not been time-barred (as arbitration had been commenced in October 2011), the time bar was nevertheless held to be a relevant “yardstick” by the Tribunal in assessing the delay.

The Commercial Court

Dera was given permission to appeal the Tribunal’s decision on four questions of law under section 69 of the Arbitration Act. One question concerned a point which had only been raised by Dera in its written opening submissions provided before the arbitration’s preliminary issues hearing: Whether, in a contract evidenced by a bill of lading subject to the Hague Rules, a geographic deviation [in this case, the vessel’s unauthorised voyage to Turkey] precludes a carrier from relying on the one year time bar created by Article III Rule 6.

The Tribunal had held that it did not.

It was this point which the Commercial Court considered in the most detail. In particular, Carr J. had to consider the present-day applicability of Hain Steamship Company Ltd v Tate & Lyle [1936] 41 Com Cas, 350. It was held in Hain Steamship that a geographic deviation of a vessel entitled the innocent party either to declare itself “no longer bound by any of the contract terms”, or to otherwise elect to treat the contract as subsisting. The decision was based on the now discredited doctrine of fundamental breach, which precluded a party from relying on an exemption or limitation clause in a contract where it had breached a “fundamental” term of that contract.

Carr J noted that the decision in Hain Steamship was inconsistent with the modern doctrine of repudiatory breach. Firstly, according to Hain Steamship, any geographic deviation would entitle the innocent party to treat itself as no longer bound by the terms of the contract, “however slight the deviation”. As per Hong Kong Fir Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, the modern doctrine of repudiatory breach would consider the degree of seriousness of the breach in question, and whether it deprived the innocent party of the entire benefit of the contract. Furthermore, under the old doctrine, a fundamental breach would have the effect of displacing the entire contract, rendering any exemption or limitation clauses under it automatically unenforceable. This would not be so in the case of a repudiatory breach under the ordinary law of contract today.

The applicability or otherwise of Hain Steamship would have a significant bearing on the yardstick applied in the Tribunal’s consideration of inordinate delay. Had the Owners not been entitled to rely on their contractual one-year time bar under the Hague Rules, the statutory 6-year period would have applied in its stead under s.5 of the Limitation Act 1980. This 6-year period could, in turn, reasonably have been considered a relevant yardstick for assessing an inordinate delay.

Although the doctrine of fundamental breach has otherwise fallen away in the years since Hain Steamship, the question has remained open as to whether it still applies specifically to deviation cases. This is largely due to comments of Lord Wilberforce in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, which Carr J. went on to consider. In this case, it was held that there was no general rule of law which prevented a party in fundamental breach from relying on limitations or exemptions in the contract. However, when addressing the law as it applied to deviation cases specifically, Lord Wilberforce gave the following view: “It may be preferable that they [deviation cases] should be considered as a body of authority sui generis with special rules derived from historical and commercial reasons.”

The Court of Appeal judgment in the “The Antares” [1987] 1 Lloyds Rep 424 was also considered. Here it was held that non-geographic deviations (in this case, the unauthorised stowage of cargo on deck) could not be considered as ‘special cases’ and would be subject to the ordinary law of contract. Carr J. nevertheless concluded that, insofar as cases of geographic deviation were concerned, Hain Steamship remained good law unless and until it was overturned by a decision of the Supreme Court. For this reason, she held that a geographic deviation does preclude a carrier from relying on the one-year time bar under Article III Rule 6 of the Hague Rules, if the other party elects to terminate the contract. Accordingly, it was held that the Tribunal had made an error in law.

The Owners were given permission to appeal to the Court of Appeal on this point.

Comment

The decision in The “SUR” has confirmed that geographic deviation is an exceptional case insofar as the otherwise discredited doctrine of fundamental breach is concerned. This will be of particular concern to shipowners seeking to rely on contractual exemptions or limitations in the event that such a breach is alleged. The innocent party to such a breach, on the other hand, must be sure to promptly declare itself to be no longer bound by the terms of the contract on becoming aware of a geographic deviation, or otherwise it will be regarded as treating the contract as subsisting. Finally, it should be noted that Carr J. would not have reached this decision had she not been bound by the precedent set in Hain Steamship. Indeed, drawing from the commentary given in modern authorities such as Scrutton on Charterparties and Bills of Lading (23rd ed.) (2017), the judge would have otherwise treated geographic deviation cases as subject to the ordinary law of contract.