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10 July 2013
Life as a shipowner is seldom easy. In addition to the commercial challenges that owners face on a daily basis, time must be given to reading law reports to ensure that benefits are gained and warnings heeded from the misfortunes of those who find themselves embroiled in the legal system.
This is particularly true where tough economic conditions demand strict enforcement of legal rights. This update considers three recent decisions of the English courts to which owners may wish to pay particular attention.
Where charterers default on their obligations to pay hire, liens on sub-hires and freights are often an important and valuable right that owners can utilise to secure much-needed income to complete a voyage. The decision in The Bulk Chile (2013) is a welcome endorsement of the rights that owners possess and the willingness of the courts to enforce such rights.
The Bulk Chile was time chartered by its owners to Korea Line, which in turn trip time chartered the vessel to sub-charterers, which then voyage chartered the vessel to the shippers of the cargo. The vessel loaded a cargo of steel. Bills of lading were issued which stated that freight was payable as per the voyage charter. The bills were also marked 'freight pre-paid', although no freight had in fact been pre-paid.
Korea Line defaulted in the payment of hire and the owners issued a notice of lien under the time charter to both the sub and voyage charterers, requiring them to pay any hire and freights due under the charters, bills of lading or other contracts of carriage. In addition, the owners required the shippers (which were also the voyage charterers) to pay the freight due under any bills of lading direct to owners.
Despite the notices that had been given, the voyage charterers paid the bill of lading freight to the sub-charterers, claiming that they were required to do so under the terms of the voyage charter. The owners demanded that the voyage charterers, as shippers, pay to them the freight due under the bill of lading. The High Court upheld this right and stated that the owners were entitled to redirect to themselves the payment of freight due under the bills of lading, provided that the owners' notice of redirection had been given to the shippers before the freight was paid to the sub-charterers under the voyage charter. Therefore, the result was that the voyage charterers were forced to pay the freight twice.
The shippers appealed, but the Court of Appeal upheld the owners' entitlement to receive the freight under the bills of lading. The court explained that the sub-charterer was to be regarded as the agent of the owner and received the freight due on the owners' behalf. Thus, the owners were entitled at any time to revoke the instruction to pay freight to an agent and, provided that the notice was issued before the payment was made, the shipper was obliged to make payment directly to the owners.
Redirecting the payment of freight under a bill of lading can be a simple means whereby owners can secure for themselves any freight that is outstanding. However, this is one of many weapons that owners can deploy where charterers default. Ensuring that effective lien clauses are included in the time charter in respect of both sub-hires and sub-freights is also important – as is taking steps to ensure that, where necessary, such lien rights are registered against the charterers so that they can be exercised effectively in the event of a default brought about by the insolvency of the charterers.
The next case is both interesting and potentially important for owners. It concerned the proper construction of the net loss of time off-hire clause in Clause 15 of the New York Produce Exchange (NYPE) Time Charter. Following the decision in The Berge Sund (1993) the generally held view was that in determining whether there had been a net loss of time under Clause 15, consideration had to be given to the services immediately required of the vessel. The decision of the High Court in The Athena (2012) suggests that this may no longer be the correct approach, since the court adopted a much broader interpretation to the question of what 'net time' had been lost by reason of the vessel not performing the services required by charterers as a result of an off-hire event.
In The Athena the vessel was delayed outside Benghazi until problems with the bills of lading were resolved. The charterers maintained that the owners' decision not to allow the vessel to proceed to the discharge port was an off-hire event under Clause 15 of the NYPE charter. This was because the vessel could not perform the service immediately required, which was to proceed to the discharge port. However, it was clear that had the vessel proceeded to the discharge port, it would not have been permitted to berth until such time as the bill of lading issue had been resolved.
The court held that in determining whether there had been any loss of time, it was necessary to look at the overall causal effect of the vessel not proceeding to the discharge port when ordered to do so. In the case of The Athena, it was held that there was no loss of time because even if the vessel had proceeded earlier, it would not have discharged its cargo any sooner than it did.
This decision gives much greater commercial weight to the term 'net loss of time' and avoids owners being unfairly penalised when a vessel cannot immediately perform the chartered services at a time when the interruption in the performance has no material impact on the overall time taken to perform the services required under the charter.
However, the decision is inconsistent with the reasoning in The Berge Sund, and for that reason it is perhaps unsurprising that the case has been referred to the Court of Appeal for further consideration.
In most cases where a vessel is a constructive total loss, the owners will assume that loss of the ship will bring to an end any charter under which the vessel is performing. Following the decision in The Kyla (2012), such an assumption may not always be correct.
The Kyla was chartered for 12 to 15 months and was involved in a collision 10 weeks into the charter. The collision occurred due to no fault on the part of the owner, but the charter required that the vessel be insured for a fixed value throughout the period of the charter. Following the collision, the owners abandoned the vessel to its underwriters as a constructive total loss on the grounds that the cost of repairs exceeded its sound value at the date of the casualty.
The underwriters settled the claim and the owners then alleged that the charter had been frustrated on the grounds that the cost of repair exceeded the market value of the vessel. The charterer asserted that since the charter provided that the insured value was a fixed amount, the charter was frustrated only if the costs of repair exceeded the insured value of the vessel. Thus, the owner was obliged to repair notwithstanding that, for insurance purposes, the vessel was a constructive total loss.
The arbitrator agreed with the owners, but the court reversed the decision. The judge held that since the owners had warranted the insured value of the vessel, they had assumed the risk under the charter to repair the vessel where the costs of repair were within the insured value. By electing not to repair the vessel, in a sense the owners had frustrated the charter by their own decision.
It remains to be seen whether the court would arrive at a similar decision where the insured value is not fixed in the charter. However, until such time as the position is clarified, owners would be advised to ensure that an express clause in the charter states that where for insurance purposes the vessel is an actual or constructive total loss, this will bring the charter to an end.
Over the last 12 months the English courts and arbitrators have issued some interesting and important decisions for the maritime community. While reading law reports is unlikely to be considered to be an enjoyable way to spend time for shipowners, the benefits gained from doing so may be considerable.
For further information on this topic please contact Clare Calnan at Wikborg Rein's London office by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (email@example.com). Alternatively, please contact Gaute Gjelsten at Wikborg Rein's Oslo office by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (firstname.lastname@example.org).
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