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Newsletter: Current Issue

Issue 63: January 2017

EXCEPTIONS AND GENERAL PRINCIPLES OF CAUSATION

Article provided by Andrew Wilding, Managing Director, Asdem Asia Pte. Ltd.

In a recent matter on which we were asked to advise, bad weather delayed the pilot which in turn delayed the vessel because it was unable to proceed to the berth without one. The clauses in the charterparty contained a 50% exception for bad weather and a 100% exception for delay of pilots. Our task was to advise on which exception applied and why.

In every oil voyage charterparty, there will be exceptions to the counting of laytime or time on demurrage. Exceptions operate on the principle of causality. To apply an exception, this principle requires a causal link between an event e.g. a winch breakdown (the cause) with the loss of time (the effect). The cause is understood to be responsible for the effect, and the effect is dependent on the cause.

The degree of connection which is required between the excepted event and the loss of time may be agreed expressly between the parties. For example, many modern oil voyage charterparties now state that a winch breakdown will apply to both direct and indirect losses of time. Such a provision would apply to a ship's inability to berth (the direct loss of time) without an operative winch and the subsequent or consequential loss of time that might arise from the vessel losing its turn and having to wait after the winch was repaired (an indirect loss of time).

In the absence of wording such as "directly or indirectly", the court will construe the scope of the exception on the basis that the parties intended that the doctrine of proximate cause should apply. Applying the doctrine of proximate cause sometimes seems to necessitate mind-boggling legal analysis.

Often it is not helpful to conceive of proximate cause as a technical legal doctrine, but as a matter of common-sense analysis of the facts. Was the natural and effective cause of the delay - the real and dominant cause (as can be ascertained by applying the common sense of the oil industry person) - an event covered by an exceptions clause?

In the case of Carboex SA v. Louis Dreyfus Commodities Suisse SA [2011] EWHC 1165 the English Court of Appeal was able to conclude, following a strike which caused congestion, that four vessels that continued to wait after the strike ended were nevertheless delayed due to the strike.

Using this analysis, we concluded that the effective cause of the delay in the pilot's arrival and therefore the delay to the vessel was the bad weather. "But for" the bad weather a pilot would have come to the vessel and the vessel would have berthed upon arrival.

CONDITIONS PRECEDENT – WHEN DO THEY APPLY?

Under an amended BEEPEEVOY3 charter party the parties disputed the effect of the owners' failure to comply with the laycan clause which read as follows: "LAYCAN: 4-8 JANUARY 2015, TO BE NARROWED IN OWNERS OPTION TO A TWO DAY SPREAD LATEST 1400 HRS LDN 30 DECEMBER 2015".

Owners accepted that they had failed to narrow the laycan to a two-day spread. However, they disagree on the impact that this failure should have on their claim for demurrage. They had claimed USD 9,495 demurrage for the voyage based on laytime at the load port commencing at 04/01 13.00, 6 hours after anchoring following tendering of the Notice of Readiness.

The charterers considered that the failure to narrow the laycan was a breach of a condition precedent and that laytime should only commence at all fast at 05/01 13.15. If this was correct, they had incurred no demurrage.

Owners claimed that the charterers were aware of the owners' failure to narrow the laycan and had accepted it. They had loaded the vessel without any comment. The breach was not a condition precedent; it was a warranty for which the charterers' only remedy was a claim for damages. As the charterers were unable to show they had suffered any loss as a result of the breach, they had no claim. The vessel arrived at the load port on 4 January, within the original agreed laycan of 4 - 8 January, and laytime should run in accordance with the terms of the charter party. The owners' demurrage claim arose from the charterers' failure to have a berth available when the vessel arrived.

The charterers argued that their understanding of English law was that the narrowing of initial laydays was an essential element of the charter party and the absence of such narrowing would prevent the commencement of laytime. Deprived of the benefit of the narrowing of laydays, the charterers considered it reasonable that laytime would not commence until they could berth the vessel.

POSSIBLE ARGUMENTS

There are several court decisions, and at least one published arbitration, that have considered the failure to narrow laydays. The conclusion that judges have reached is that the impact of this failure must be weighed according to the particular circumstances of each case. In some examples, the failure to narrow the laycan may be a breach of a condition and in others it will be a breach of a warranty which only entitles the injured party to claim damages for any loss it has suffered. I have summarised some of these cases.

In Universal Bulk Carriers Ltd. v. Andre et Cie [2001] EWCA Civ 588 there was a requirement for the original laycan of "first half December" to be narrowed by the charterers to a 10-day spread 32 days prior to the first layday. Because the charterers were two days late in narrowing the laydays, the owners had cancelled the charter party. The Court of Appeal held that although the narrowing of laydays was the charterers' obligation and not their option, it was nevertheless intended to be for their benefit. The charterers' failure to narrow the laydays was to the owners' advantage and did not prevent them from performing the charter within the wider original laydays. In such circumstances, the court did not consider that the narrowing of the laycan was ever intended to be a condition of the contract which would entitle the owners to bring the contract to an end. The owners had a choice either to accept the late notice of narrowing the laydays or to reject it as non-contractual in which case the original "first half December" laycan would remain.

In the case of Hyundai Merchant Marine Co. Ltd. v. Karander Maritime Inc. (The Niizuru) [1996] 2 Lloyd's Rep 66, the owners were obliged to narrow the laycan to a 15-day spread 25 days prior to the narrowed laycan. The judge in this case considered that the clause was a condition of the charter party. However, the circumstances were very different from the Universal Bulk Carriers case. It was a time charter rather than a voyage charter and the narrowing of the laycan was used in connection with the delivery of the vessel. The owners had failed to narrow the laycan but they did tender delivery under the charter party. The charterers claimed that the delivery was non-contractual although they accepted delivery.

The judge held that hire was only payable from the time of the actual delivery of the vessel on the date that the charterers were ready to accept it. The owners' attempt to deliver earlier was non-contractual because they had failed to comply with the laycan clause. The judge said that "the laycan narrowing provision is part of the machinery of delivery which must be complied with before any valid delivery can be tendered". He also made this comment which is instructive: "The question of whether the laycan narrowing provision operates as a condition precedent to delivery and the running of time must certainly be answered by considering the role and significance of the provision in its context in the particular charter".

In London Arbitration 5/01 (LMLN 15 March 2001), the owners were late in giving notice of a narrowing of dates for delivery of their vessel under a time charter. The arbitrators came to the conclusion that the late notice was not to be considered a condition precedent. The charterers were entitled to be compensated for any loss they had suffered. However, the charterers were unable to show that they had placed any reliance on the late notice and they had not suffered any loss of time or other costs.

It is not uncommon to find a stipulation in a charter party requiring the laycan to be narrowed by a certain date. Although such clauses often do not specify the penalty for breach of the clause, there are certain fundamental principles of English law that will apply in such circumstances. For example, it is understood that "time" stipulations will be generally considered to be conditions of the contract if they go to the heart of the contract so that their breach deprives the innocent party of much, if not all, of the benefit of the contract. The effect will be that the failure of one party to perform within the time allowed will, unless the contract says otherwise, usually entitle the other party to terminate the contract and claim damages for any loss that it has suffered.

In the well-known House of Lords' case of Bunge Corporation v. Tradax Export S.A. [1981] 2 Lloyd's Rep 1, Lord Roskill who gave the leading speech quoted from Halsbury's Laws of England, 1975:

"Apart from express agreement or notice making time of the essence, the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfill the intentions of the parties. Broadly speaking, time will be considered of the essence in "mercantile" contracts and in other cases where the nature of the contract or of the subject matter or the circumstances of the case require precise compliance".

In this case the House of Lords was considering a contract for the sale of cargoes of soya bean meal with a notice clause which required the FOB buyers to give 15 days' notice of the probable readiness of the vessel to load the cargo. The buyers were 5 days late with their notice and the sellers claimed they were in default and sought damages. The judges concluded that the notice provision was a condition precedent as the sellers were unable to nominate a loading port until the buyers had given the notice of probable readiness.

A good example of a condition precedent can be found in the Court of Appeal decision in "The Spear I" - Kronos Worldwide Limited v. Sempra Oil Trading SARL [2004] 1 Lloyd's Rep 260.

The agreed laycan in a charter party is also important for calculating laytime which, according the terms of the BEEPEEVOY3 charter party, will not commence prior to 06.00 on the first day of laydays unless loading has commenced. Furthermore, failure of the vessel to arrive before the end of the laydays would entitle the charterer to cancel the charter. A narrowed laycan may therefore be an important benefit to the charterers.

CONCLUSIONS

In this current case, was the narrowing of the laycan so important that it was a condition so that laytime would only commence on berthing? The failure to narrow the laycan did not make the charter unworkable because it could still be performed within the original laydays of 4 - 8 January. The charterers were updated daily with the vessel's eta and this had remained constant as 4 January. The charterers did not appear to have contemplated cancellation as they were aware at all times of the vessel's position during the ten days prior to the vessel's arrival. This suggests that the charterers were relying on the eta's rather than on the actual laycan.

It was arguable that the charterers were aware the owners had omitted to narrow the laydays and had accepted this breach. This may be correct, but I do not believe the charterers had also waived their rights to claim any damages they might incur, simply on the basis that they did not remind the owners of their obligation.

I reached the conclusion that the obligation to narrow the laycan may be a condition of the charter party in certain circumstances, but not in this case. The failure to narrow the laydays did not go to the heart of the contract so that the charterers lost the benefit of a major part of the value of the charter. Furthermore, they were not disadvantaged or prevented from operating the charter party, as would be the case if the obligation was a condition precedent. It is fair to assume that the charterers would have berthed the vessel on arrival if the berth had been available. As the charterers were fully aware of the vessel's position and its eta, there was no likelihood of the charter party being terminated. The obligation to narrow the laydays had therefore to be treated as a breach of a warranty which only entitled the charterers to claim compensation for any damages they suffered as a result. The charterers did not suffer any damages. With or without the narrowing of the laycan, the vessel would still have berthed at 05/01 13.15 when the berth became vacant.

I therefore concluded that the owners were entitled to claim demurrage for the voyage and that laytime at the loadport commenced 6 hours after the vessel anchored on arrival.

OVERRIDING OBLIGATION TO PROVIDE A CARGO

Article provided by Phil Stalley, HubSE Ltd.

It is established in Charter Parties that charterers have an overriding obligation to provide a cargo and any delay in doing so is a breach leaving the charterers liable for time to count as laytime or demurrage. The last time I saw this mentioned in a case was The Nikmary. Here the vessels tanks were not clean, and by the time they were, there was a considerable delay in loading because the cargo was not ready. The tank cleaning clause in the Nikmary case did say in the event the vessels tanks were rejected time would not count for time spent cleaning until the vessel actually starts loading. The clause looked clear to me!

The owners did not dispute the cleaning time. However they claimed for the time waiting for the cargo. The Court of Appeal agreed with Owners citing the overriding obligation to provide a cargo.

Freedom of contract allows us to change this and, for example, if you are fixed on ExxonMobil 2012 you will find in the exceptions clause 14 that time awaiting cargo will count in full. However, if at the same time as awaiting cargo the vessel is delayed by weather, only 50% of the time will count towards laytime or demurrage.

I've been looking at oil contracts and it seems that no overriding obligation applies to FOB sellers. Whilst there may be an obligation to load within an agreed date range there seems to be circumstances where, even if the cargo is not available the suppliers are not liable for the time. I am reminded of The Spear 1 case where cargo was not ready, so the buyers did not rush to open a Letter of Credit. It was found that an L/C was a condition precedent and until L/C was in place there was no obligation to load the vessel or indeed count that time as laytime or demurrage.

Often in oil contracts there are clauses written that preclude time counting for lack of cargo under other circumstances. For example, if you are buying FOB and miss your date range there is often a clause that states time will start only on commencement of loading. It seems to me sellers can rely on such clauses even if the cargo is not available and wouldn't have been had the vessel met the original dates.

Who said laytime and demurrage is fair!

 
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