UK: Commercial Court Clarifies Owners’ Obligations Under The Conwartime 1993

Pacific Basin IHX Limited v. Bulkhandling Handymax AS (Triton Lark) [2012] EWHC 70 (Comm)

Pacific Basin IHX Limited v. Bulkhandling Handymax AS (Triton Lark) [2011] EWHC 2862 (Comm)

In a significant decision for owners whose vessels have in recent years been, and continue to be, at risk of vessel hijacking in the Gulf of Aden, Mr Justice Teare of the Commercial Court has recently ruled on the meaning and application of the Conwartime 1993 clause. In particular, he has clarified the meaning of "exposed to War Risks" in sub-clause 2 of that clause.

Referring to the terms of sub-clause 2 of the Conwartime 1993 itself, he stated that an owner or master may have to address both "likelihood and dangerousness" when ordered to sail to a place, in the sense that he has to consider whether, in his reasonable judgment, there is "a "real likelihood", in the sense of a real danger" that the vessel will be "exposed to acts of piracy". "Exposed to acts piracy" means that the place in question will be, or will subsequently become, dangerous on account of acts of piracy.

Mr Justice Teare's ruling on the meaning of "exposed to War Risks" is set out in the later of the two judgments, which supplements his initial decision, of November 2011, in relation to the construction of the Conwartime 1993. We summarise below the background to this litigation and highlight the primary issues of interest which arose.

The background facts

The claimant ("Pacific"), on 29 August 2008, chartered the vessel Triton Lark from the defendant ("Bulkhandling") and, in early November 2008, ordered her to sail from Hamburg to China via Suez (and therefore through the Gulf of Aden). Owing to the threat of piracy, Bulkhandling refused to sail through the Gulf of Aden and instead sailed around the Cape of Good Hope. The dispute arose in relation to which party should pay for the time and the extra costs associated with travelling around the Cape.

The charterparty incorporated the Conwartime 1993 clause, the relevant sections of which are set out below (emphasis added):

The arbitration award

In an award dated December 2010, the arbitrators held that Bulkhandling was entitled to refuse Pacific's orders to sail through the Gulf of Aden. They concluded that Bulkhandling had, based on the information available to it and acting in good faith, reasonably concluded that there was a serious risk of hijacking in the Gulf of Aden. This meant that the Conwartime 1993 clause had been engaged and Bulkhandling was not obliged to follow Pacific's orders to proceed via Suez.

The arbitrators further held that Bulkhandling was not obliged to await further instructions at Gibraltar, as this would not have been commercially realistic, and that to proceed via the Cape of Good Hope was to prosecute the voyage to China with due dispatch. Thus, under the Conwartime 1993 clause, sailing via the Cape did not constitute a deviation and Bulkhandling was awarded its claim for unpaid hire.

Pacific appealed against the award, arguing that the arbitrators had erred in law in the following respects:

1. the arbitrators had mis-construed sub-clauses (1) and (2) of Conwartime 1993, with regard to the meaning of the word "may be";
   
2. the arbitrators had mis-construed sub-clause (2) of Conwartime 1993, with regard to the reasonable judgment of the owners;
   
3. the arbitrators had mis-construed sub-clause (2) of Conwartime 1993, with regard to whether the clause gives the owners a discretion and, if so, whether they are obliged to make proper enquiries before exercising it; and
   
4. the arbitrators were wrong to conclude that the passage round the Cape, rather than via the Gulf of Aden, was not a deviation.
   

The first Commercial Court decision

In his original judgment of November 2011, Mr Justice Teare dealt quite briefly with issues 2, 3 and 4, above, regarding the construction of sub-clause (2) of Conwartime 1993, and Pacific's argument on deviation.

As regards issues 2 and 3, the judge rejected Pacific's submission that the arbitrators had not considered whether the judgment made by Bulkhandling was a reasonable one. He further held that sub-clause (2) of Conwartime 1993 does confer a discretion on the owners, and held that the test was an objective one, such that an owner's judgment must be reasonable. The judge made clear that the fact that an owner has not made all necessary enquiries will not automatically render its judgment unreasonable, provided that, had all necessary enquiries been made, they would have shown its judgment to be objectively reasonable.

The judge also upheld the arbitrators' decision on issue 4, regarding deviation, holding that the vessel had been ordered to China and the master was under a duty to proceed there with due dispatch. Once the requested route via Suez became prohibited by the engagement of Conwartime 1993, it followed that the most direct route was via the Cape of Good Hope. Accordingly, passage around the Cape was "something done" in accordance with sub-clause 8 of the Conwartime 1993 and therefore, by operation of sub-clause 8, was not a deviation.

The main focus of the November 2011 judgment, therefore, was on issue 1, the meaning of the phrase "may be, or are likely to be" exposed to war risks in clause sub-clause (2) of the Conwartime 1993. In giving judgment on this point, the judge made it clear that he did not consider that the construction of the words "may be, or are likely to be" could have been intended to signify that one of two different degrees of possibility or probability had to be shown, such that one meaning would be ascribed to "may be", and another to "likely to be". Instead, he held that the phrase was intended to express a single degree of possibility and that the word "or" should be read in the sense of "that is", so that the phrase would be read "may be,[that is] likely to be".

In the context of sub-clause 2, the judge found that "likely to be" was analogous to a "real likelihood" that the vessel would be exposed to acts of piracy. The concept of a "real likelihood", he explained, covers something that has a less than 50% chance of happening but does not include something which is a bare possibility; it can also be expressed as a "real danger" or a "serious possibility".

The arbitrators had interpreted the phrase "may be, or are likely to be" as meaning that there was a "serious risk" of exposure to war risks. Although the court was of the view that there is little difference between a "real likelihood" and a "serious risk" in this context, it was, nevertheless of the view that the arbitrators had applied the wrong test to interpret sub-clause 2 because they had considered whether there was a risk of a serious event occurring, rather than a serious risk that an event would occur. Accordingly, the correct question to be considered by the tribunal was "whether, in the reasonable judgment of Bulkhandling, there was a "real likelihood", in the sense of a real danger, that the vessel would be exposed to acts of piracy".

The judge's ruling as to the correct question then led to a further dispute between the parties as to the meaning of the phrase "exposed to War Risks", with War Risks being, in this case, acts of piracy. This issue was not one that had been before the judge at the first hearing and led, therefore, to a further hearing and a further judgment.

The second Commercial Court decision

At the second hearing, the parties' submissions focussed on the part of the judge's first judgment in which he stated that '"exposure to acts of piracy" means that the vessel is subject to the risk of piracy or is laid open to the danger of piracy'. Pacific asserted that this sentence should be interpreted as meaning to be exposed to acts of piracy having an actual effect on the vessel, such as an attack (including a failed attack) by pirates. They argued that "exposed" should be given the same meaning as when used in "exposed to radiation". Bulkhandling's submission was that it simply meant being exposed to the risk of piracy.

The judge held that the words "exposed to War Risks" in sub-clause 2 of the Conwartime 1993 properly referred to a situation which was "dangerous". In the judge's view, that was the meaning which flowed naturally from the wording of the clause read as a whole and thereby gave effect to the parties' intentions. Therefore, the question to be addressed by an owner or a master, when ordered to go to a place, was whether there is a real likelihood that the vessel will be exposed to acts of piracy in the sense that the place will be dangerous on account of acts of piracy. He added he did not consider that this was too complex a test for an owner or master to apply.

What is dangerous will, however, depend on the facts of the particular case. The judge said it would depend both on quantitative factors (the degree of likelihood that a particular peril might occur, in this case piracy), and qualitative factors (the seriousness or otherwise of the consequences of that peril to the vessel, cargo and crew should it occur). Applying that reasoning to the facts of the present case, the judge held that the question was whether, in the reasonable judgement of Bulkandling, there was a real likelihood that the Gulf of Aden would, on account of acts of piracy, be dangerous to the Triton Lark. That was, however, a matter of fact for the arbitrators to assess on the evidence before them. The matter was accordingly remitted back to the arbitrators.

Comment

Taken together, the two judgments now present a sensible and coherent test by which the applicability of the Conwartime 1993 clause can be determined by those seeking to rely on it in a commercial context, including masters and owners of vessels.

It now seems clear that the phrase "maybe, or is likely to be", which was the subject of much of the first judgment, and which the court ruled to mean "real likelihood", is directed towards the issue of the timing of the master's or owner's judgement. In other words, at the time the judgement is made, there must be a "real likelihood" that the place in question is, or will be, dangerous at the time at which the vessel arrives there.

Accordingly, an owner or a master can refuse to go to an area where a war risk exists (or will exist at the time of the vessel's arrival there) and where there is a "real likelihood that the area will be dangerous for the vessel", where "dangerous" is defined by reference both to the extent/prevalence of the risk and the nature/severity of the risk.

The defendant, Bulkhandling, was represented by Michael Stockwood and Katy Hanks of Ince & Co. For any queries arising out of this article or in respect of this litigation generally, please contact Michael Stockwood or Katy Hanks.

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.