UK: Shipping Newsletter - July 2014

Expert legal advice in uncertain waters

Written by legal experts, Clyde & Co's Shipping Newsletter is a regular publication which covers recent legal developments within the sector.

In this issue:

  • "LNG GEMINI""Cargoes Injurious to the Vessel" charterparty clause examined – American Overseas Marine Corporation v Golar Commodities Limited "LNG GEMINI" [2014] – by Hatty Sumption and Dolly Brown
  • "BULK URUGUAY" – Charterers fail to establish anticipatory breach of contract – Geden Operations Ltd v Dry Bulk Handy Holdings Inc. (The "BULK URUGUAY") [2014] – by Iain Rowlands
  • General average adjustments: Importance of LOU security wording – St. Maximus Shipping Co. Ltd v A.P. Moller-Maersk A/S [2014] – by Chris Moxon
  • The "ASTIPALAIA" – VLCC loss of earnings following a collision – Owners of the ship "ASTIPALAIA" v Owners and/or demise charterers of the ship "HANJIN SHENZEN" [2014] – by Victoria MacGregor
  • Port terminal and shipowners dispute liability for crane damage – Terminal Contenitori Porto di Genova Spa v China Shipping Container Lines Ltd [2014] – by Jason Barnes
  • UAE – Ship arrests in the UAE and recent developments – by Khurram Ali

What's new?

  • Fulton Shipping Inc. v Globalia Business Travel S.A.U. (The "NEW FLAMENCO") – by Elizabeth Turnbull and Marcia Perucca
  • Court of Appeal ruling in The "FALKONERA" – by Hatty Sumption and Peter Ward
  • Court of Appeal defines scope of "Charterers' agent" in an off-hire clause – by Ed Webb-Mills and Dolly Brown
  • China's new Enterprise Income Tax regulation and its impact on international transportation business – by Ik Wei Chong, Samuel Yang and Kirsty Gow
  • China: Validity of mortgages established on vessels owned by company in bankruptcy – by Ik Wei Chong and Leslie Shen
  • China: Financial leasing contracts in China – an update – by Ik Wei Chong and Leslie Shen
  • Sanctions update: EU and US announce new measures – by Michael Swangard and Doug Maag
  • Record US sanctions penalties against BNP Paribas – by Doug Maag
  • Ukraine sanctions: EU lists two Crimean companies and 13 further individuals – by Michael Swangard and Rupert Gordon

The "LNG GEMINI" – "Cargoes Injurious to the Vessel" charterparty clause examined

Hatty Sumption and Dolly Brown

In the context of an LNG timecharter, the Commercial Court considered in American Overseas Marine Corporation v Golar Commodities Limited "LNG GEMINI" [2014] the interpretation of an Injurious Cargoes clause commonly found in the standard Shelltime form.

The clause in question reads as follows:

Clause 30

"No acids, explosives or cargoes injurious to the Vessel shall be shipped and without prejudice to the foregoing any damage to the Vessel caused by the shipment of any such cargo, and the time taken to repair such damage, shall be for Charterers' account."

The claimants, American Overseas Marine Corporation (AOM) were the managing owners of the vessel "LNG GEMINI". Golar Commodities Limited (Golar) had the vessel on timecharter for 60 days (15 days more or less, with two charterers' options to extend the hire for further such periods).

Golar ordered the vessel to proceed to and load a full cargo at the Cameron Terminal in Louisiana, USA, intended for carriage to Senboko, Japan. Difficulties were experienced during loading in the form of over-pressurisation suspected to arise from sediment in the cargo. Debris was found clogging filters in the terminal's loading arms. However, discharge in Japan proceeded without incident and no debris was found. The vessel performed several other voyages over the course of the timecharter, subsequent to the operations at Cameron, during which at various times debris was found in the vessel's spray pump strainers.

AOM subsequently took the vessel to a repair yard to undertake pre-planned works, where debris was found in all of the vessel's tanks. AOM claimed that this was sediment from the "Cameron cargo" and that it had damaged the vessel's tanks and pumps. They claimed from Golar the cost of expenses associated with and time spent on undertaking repairs and cleaning tanks at the repair yard on the basis that the Cameron cargo had been an "injurious cargo" for the purposes of clause 30.

In spite of the fact that clause 30 was in the same terms as clause 28 of the standard Shelltime form, there did not appear to be authority on the meaning of "injurious to the vessel".

On the facts, AOM were not able to prove to the Court's satisfaction that any of the damage observed at the repair yard had been caused by the Cameron cargo, or that the repairs and tank cleaning were necessary as a result of the carriage of that cargo. AOM therefore sought to argue that a cargo could be "injurious to the Vessel" without actually causing damage on the basis that if such cargo necessitated cleaning of the vessel's tanks, it would be "injurious" to the purpose of the vessel as an instrument of trade. In the alternative, a cargo could be "injurious" even if it didn't actually cause damage if it was of a kind that had a tendency or propensity to cause damage.

The judge rejected the first argument and said that Clause 30 was directed solely to physical damage. The clause expressly covered two types of cargo which might cause physical damage to the vessel, acid and explosives, and the inference was that it also covered other cargoes that also might cause physical damage. The clause was then concerned with repairs, which connoted physical damage, and only provided an indemnity for time spent to carry out repairs, not for time lost by other reasons, such as cleaning of tanks.

The judge accepted the alternative argument, but in this case AOM had failed to demonstrate that the debris found in the tanks at the repair yard were from the Cameron cargo, or that it had created a risk of damage to the vessel. The judge further noted that the industry did not appear to share the view that particles in LNG cargo create potential dangers for LNG carriers. When SIGTTO1 recommended that strainers be fitted in the manifolds of those ships, they did this for the purpose of protecting receiving terminals, not the LNG carriers themselves. Accordingly, the Judge held that Golar had not shipped an injurious cargo and they were not in breach of the charterparty. Further, AOM had failed to prove much of its damages claim. AOM's claim was accordingly dismissed.

The "BULK URUGUAY" - Charterers fail to establish anticipatory breach of contract

Iain Rowlands

In the recent case of the "BULK URUGUAY", the Court examined whether anticipatory breach of contract can arise purely on the basis of future performance being made contingent on a third party's conduct.

Facts

By way of a time charter entered into on 2 July 2010, the defendant, disponent owners (Owners), chartered the "BULK URUGUAY" to the claimant charterers (Charterers) for a period of about three years.

During the negotiation of the charterparty, Charterers had made it plain to Owners that the ability to transit the Gulf of Aden (GOA) - an area well-known for piracy - without the need to obtain Owners' permission, was of paramount importance as this would result in a competitive advantage over other vessels. Such a clause was included in the final charterparty. In contrast, under the head charter, GOA transit was subject to the consent of the head owners, resulting in Owners' rights and obligations not being back-to-back in this respect.

Shortly after granting permission to transit the GOA on the vessel's maiden voyage, Owners asserted, in correspondence, that the charterparty terms required their permission to be sought each time the GOA was to be transited, and indicated that Owners' position would be dictated by the position taken by the head owners. The Charterers treated the Owners' insistence on prior consent for each occasion as a repudiatory breach which they purported to accept as terminating the charterparty. The Owners, in turn, accepted the Charterers' purported termination itself as a repudiatory breach.

Arbitration

Arbitration was commenced to determine whether the Owners were in anticipatory breach of the charterparty. The majority of the Tribunal found that the Owners were not in repudiatory breach, Charterers were not entitled to terminate and, therefore, the Charterers' purported termination was itself a repudiation which had been accepted by the Owners.

The Charterers appealed2 the decision on the basis that the majority of the Tribunal had made an error of law in determining that the Owners, by their words/conduct, had not evinced an intention not to perform their obligations under the charterparty.

Appeal from the arbitration award

Popplewell J set out that anticipatory breach may consist of one, or both, of two types of conduct. Firstly, renunciation, which comprises words or conduct which clearly evince an intention by a contracting party no longer to be bound by its contractual obligations (the test for this being whether a reasonable person would conclude this to be the case). Secondly, self-induced impossibility, which includes conduct by the contracting party which puts it outside of its power to perform contractual obligations. In each case, the anticipatory breach has to be repudiatory in character, i.e. breach of a condition, or breach of an innominate term which goes to the root of the contract or deprives the innocent party of substantially the whole benefit of the contract.

Popplewell J referred to the comments of Devlin J in Universal Cargo Carriers Corporation v Citati [1957]3 when discussing the relationship between the two types of anticipatory breach and highlighted that the inevitability of non-performance was the common factor which entitled the innocent party to treat the contract as at an end prior to the time for performance. In the case of self-induced impossibility, this meant actual inevitability, while in the case of renunciation, this meant legal inevitability – which is based on what is clearly conveyed by the words or conduct of the contract breaker. Popplewell J went on to stress the high threshold for self-induced impossibility by saying the breach must be inevitable, not very unlikely or uncertain.

Popplewell J made it clear that there was no principle of law whereby there is anticipatory breach purely on the basis that the future performance is made contingent on a third party's conduct.

The Owners' position was not to be understood as being that they would be unable or unwilling to perform their contractual obligations if, and when, Charterers gave an order requiring GOA transit. There was no error of law and the appeal was dismissed. Popplewell J held that the majority had addressed the correct question. The Judge's acceptance that the correct approach was followed resulted in the ground for appeal essentially being one of fact and not law, and, therefore, the decision not being open to challenge on an appeal under section 69 of the Arbitration Act 1996.

Comment

Charterers and owners should consider carefully the basis on which they may claim anticipatory breach. Given the high threshold for establishing self-induced impossibility, renunciation is more likely to be the preferred route for a party wishing to demonstrate anticipatory breach.

Popplewell J stressed the analysis will be a question of fact, in each case, but that anticipatory breach will not be established purely on the basis of future performance being made contingent on a third party's conduct. The judge cited the fact that contractual performance is commonly subject to a host of uncertainties and contingencies. A party seeking to rely on a purported repudiation should be able to demonstrate that the words and/or conduct of the other party have evinced a clear intention to no longer be bound by its contractual obligations and a subjective belief that the other party's breach of contract will be inevitable.

To read this newsletter in full, please click here.

Footnotes

1. The Society of International Gas Tanker and Terminal Operators (SITTGO)

2. Geden Operations Ltd v Dry Bulk Handy Holdings Inc (The "BULK URUGUAY") [2014]

3. Lloyd's Rep 174

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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