UK: Piracy: When Can Owners Reject Charterers’ Orders?

Last Updated: 20 December 2011
Article by Sean Gibbons and Michael Bundock

In what circumstances are the owners of a vessel entitled to reject charterers' orders because they believe that the vessel may be subject to the threat of piracy? This important question has been considered by the High Court in the case of Pacific Basin v Bulkhandling Handymax, 8 November 2011. The case turned on the CONWARTIME 1993 war risk clauses for time charters, but has implications for other forms as well.

The vessel Triton Lark was time chartered by head owners Triton to Klaveness on the NYPE form. Klaveness entered into a contract with Bulkhandling, which was on the same terms as the Triton-Klaveness charterparty. Bulkhandling time chartered the vessel to Pacific on the NYPE form. Pacific voyage chartered the vessel to Kali on the Gencon form. The voyage charter was for carriage from Hamburg to Zhanjiang, China.

Each of the charterparties incorporated war risk clauses which are, for all material purposes, the same: the Triton-Klaveness charterparty and the Klaveness-Bulkhandling contract both incorporated the CONWARTIME 2004 clauses, the Bulkhandling-Pacfic charterparty incorporated CONWARTIME 2003, and the voyage charter incorporated the VOYWAR 2004 war risk clauses.

On 11 November 2008, Pacific notified Bulkhandling that the vessel was fixed on a voyage from Hamburg to Zhanjiang, and "we intend for the ship to transit the Suez Canal". Head owners requested that the route be changed. Bulkhandling wrote to Pacific that:

"we can not accept Chrs' request which will expose vsl and crew members on board to serious risk of pirates attack."

Further exchanges of correspondence took place, and on 18 November, Bulkhandling emailed Pacific:

"Head owners have now stated that ... they refuse to proceed to and transit the Gulf of Aden. They 'insist Chrs. To instruct the vsl to proceed to disport via Cape of Good Hope.' ... alternative orders must be given."

On 20 November, the vessel left Gibraltar, after taking on bunkers. On the same day, the Master emailed that "as per instructions from our owners, Triton" the vessel would be proceeding around the Cape of Good Hope. Pacific emailed Bulkhandling, holding them responsible for additional hire, bunkers and costs.

The arbitration

In the subsequent arbitration, Bulkhandling claimed unpaid hire, and Pacific counterclaimed for additional expenses incurred by reason of proceeding via the Cape of Good Hope. The dispute turned on the construction of CONWARTIME 1993. The arbitrators held that Bulkhandling were entitled to refuse the orders to proceed via the Suez Canal, and there was no deviation in proceeding via the Cape of Good Hope. Pacific appealed to the High Court.

The appeal

Pacific's appeal was allowed and the arbitrators' award was set aside. The Judge, Mr Justice Teare, stated that he was minded to remit the matter to the tribunal to reconsider in the light of his ruling on the correct interpretation of CONWARTIME 1993. However, he made no order to remit the matter pending further submissions by the parties.

The key provisions of CONWARTIME 1993 state:

"(1)(b) ... 'War Risks' shall include any ... acts of piracy ... which, in the reasonable judgment of the Master and /or the Owners, may be dangerous or are likely to be or to become dangerous to the Vessel, her cargo, crew or other persons on board the Vessel.

(2) The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through, any port, place, area or zone ... where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgment of the Master and/or the Owners, may be, or are likely to be, exposed to War Risks."

The Judge held that the effect of this is that "the master or owners must form a reasonable judgment, first, that the vessel, her cargo or crew may be, or are likely to be, exposed to acts of piracy and second, that such acts of piracy may be dangerous or are likely to be or to become dangerous."

There were four issues of law:

Issue 1: The meaning of "may be, or are likely to be, exposed to War Risks"

The most important issue was: what was the meaning of the phrase "may be, or are likely to be, exposed to War Risks" in sub-clause (2)? The Judge held that "may be, or are likely to be" is intended to express a single degree of possibility or probability, not two different degrees. The Judge concluded that the correct test was "a real likelihood":

"I consider that the parties' intentions are best captured by the concept of a "real likelihood" that the vessel will be exposed to acts of piracy. The adjective "real" reflects the need for the likelihood to be based on evidence rather than to be a fanciful likelihood based on speculation. Whilst "a real likelihood" includes an event that is more likely than not to happen it can also include an event which has a less than an even chance of happening. A bare possibility would not be included because the phrase "likely to be" suggests a degree of probability rather greater than a bare possibility. The degree of probability inherent in a "real likelihood" is or can be reflected in phrases such as "real danger" or "serious possibility." The context and purpose of the CONWARTIME 1993 (to enable the Master to exercise his responsibility to keep the vessel, crew and cargo out of harm's way) persuades me, and I so hold, that "real likelihood" is to be understood in the sense of a real danger."

The arbitrators had held that the phrase "may be, or likely to be" in sub-clause (2) connoted "a serious risk". The Judge held that there was probably little, if any, difference between "a serious risk" and "a real likelihood". However, the arbitrators had applied the test in the wrong way. There is a difference between (i) a serious risk that an event will occur (in this case being exposed to acts of piracy) and (ii) a risk that a serious event (being exposed to acts of piracy) will occur. The phrase "may be, or are likely to be" connoted the former, but the arbitrators had applied the latter.

The Judge held that the importance of the risk, in the sense of the harm it threatens, is not relevant to "may be, or likely to be" in sub-clause (2), though it is relevant to the definition of War Risks in sub-clause 1(b):

"If the threatened harm is of a serious or important type then the qualifying test of dangerousness in clause 1(b) is likely to be satisfied. By contrast the phrase "may be, or are likely to be, exposed to War Risks" in sub-clause (2) requires an assessment as to whether there is a real likelihood of the vessel being exposed to acts of piracy. Thus there is no requirement in sub-clause (2) to consider importance in the sense of the importance of the harm threatened by exposure to acts of piracy or in any other sense."

Issue 2: Was owners' judgment reasonable?

The Judge held that, since the arbitrators were wrong in law as to their understanding of "may be, or are likely to be", it followed that their conclusion that Bulkhandling formed a reasonable judgment must also be wrong in law.

Issue 3: A duty to make reasonable enquiries?

Pacific argued that Bulkhandling were under a duty to exercise their right under CONWARTIME honestly, rationally and not arbitrarily or capriciously and after making any necessary enquiries, and that they had, in fact, made only limited enquiries. The Judge rejected that argument. The clause expressly said that owners' judgment must be "reasonable".

Owners must make a judgment in good faith, and that judgment must be objectively reasonable. As to the enquiries which owners should make:

"An owner who wishes to ensure that his judgment is objectively reasonable will make all necessary enquiries. If he makes no enquiries at all it may be concluded that he did not reach a judgment in good faith. But if he makes those enquiries which he considers sufficient but fails to make all necessary enquiries before reaching his judgment I do not consider that his judgment will on that account be judged unreasonable if in fact it was an objectively reasonable judgment and would have been shown to be so had all necessary enquiries been made."

The arbitrators had concluded that Bulkhandling had made all necessary enquiries but, given their error in applying the correct test, their finding that sufficient enquiries had been made must also be wrong in law.

Issue 4: Were owners entitled to order the vessel to proceed via the Cape of Good Hope?

Pacific also argued that even if owners succeeded on the previous issues, they were not entitled to proceed via the Cape of Good Hope, and that the only part of Pacific's order which it was not entitled to give was that which required the vessel to transit the Gulf of Aden: there was no danger in proceeding to the northern entrance to the Suez Canal.

The Judge rejected Pacific's argument. Sub-clause (8) of CONWARTIME provided that anything done or not done in compliance with sub-clauses (2)-(7) "shall not be deemed a deviation, but shall be considered as due fulfilment of this Charter Party". The refusal to follow Pacific's orders to proceed from Gibraltar to Suez was something "done or not done" in compliance with sub-clause (2). Further, Pacific had ordered the vessel to load and carry a cargo to China. Pacific's order as to the route was an order they were not entitled to give, but the vessel was not without orders, and the decision to proceed to China via the Cape of Good Hope was in fulfilment of Bulkhandling's duty to prosecute that voyage with due dispatch.

Comment

The decision is significant in that it provides, for the first time, clarification of an important provision of CONWARTIME 1993. The judgment also applies to contracts incorporating CONWARTIME 2004, VOYWAR 1993 and VOYWAR 2004.

If owners wish to reject charterers' orders because of piracy risks in reliance on CONWARTIME 1993 (or similar provisions), they must comply with the following requirements:

  1. Owners must judge that there is a real likelihood, in the sense of a real danger, that the vessel, cargo, crew or other persons on board will be exposed to acts of piracy;
  2. Owners must judge that there is a real likelihood, in the sense of a real danger, that the acts of piracy will be dangerous to the vessel, cargo, crew or other persons on board. The test of dangerousness is likely to be satisfied if the threatened harm is of a serious or important type.
  3. The owners' judgments must be made in good faith, and must be objectively reasonable. In order to ensure that the judgments are objectively reasonable, owners should make all necessary enquiries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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