UK: "Seagate Shipping Ltd v Glencore International A.G": Commercial Court Decision On Charterparty Dispute

Last Updated: 14 August 2008

Those not in the coal and iron ore market may not be familiar with RightShip. This is a ship approval system set up in 2001 and maintained by BHP Billiton, Rio Tinto Shipping and Cargill Ocean Transportation. It vets ships by identifying those suitable for the carriage of iron ore or coal and rates them into various categories defined by their risk profile. Many major shippers in the dry cargo shipping market have come to regard RightShip approval as necessary so that trading without it is now limited in the iron ore and coal industries.

The question arises however whether such approval remains a commercial desirability or necessity, or whether it has become to all intents and purposes compulsory and akin to a legal requirement. In the recent case of "Seagate Shipping Ltd v Glencore International A.G" [2008] EWHC 1904 Comm, Mr. Justice David Steel heard an appeal arising out of two arbitration awards relating to disputes under a head- and sub-charter. The vessel in question was the "Silver Constellation", originally owned by Orient Brilliance Inc., who subsequently sold the vessel to Seagate. Seagate took all Orient's rights and liabilities under a head charterparty by a novation agreement. Charterers were Glencore, who sub-chartered to Swissmarine.

The back-to-back charters were on the NYPE form and contained, inter alia, a condition (clause 31 of the c/p) that the vessel was and would remain in all respects eligible for trading to the ports, places or countries specified or not excluded in the charter and that the vessel / owners would have all valid certificates records and other documents required for such trade at all necessary times. It was a further condition that the vessel would remain throughout the currency of the charter "in possession of the necessary valid equipment and all certificates, records and documents necessary to comply with safety and health regulations, international regulations and all current requirements at all ports of call".

The charter also provided separately for P and I Club insurance and classification, compliance with the ISM Code, a warranty that the vessel complied with IMO regulations and compliance with Australian Navigation Regulations in the event the vessel proceeded to any Australian ports.

A dispute arose between the parties as to whether owners were obliged to provide the vessel with RightShip approval and maintain it throughout the currency of the charter pursuant to clause 31. The vessel had originally had RightShip approval but this had lapsed in 2007 when there was some delay in an inspection by RightShip. This was followed by a request from owners for an increase in hire if the vessel's RightShip status was to be reinstated. Charterers refused on the grounds that RightShip approval would not give them an additional trading benefit but would only keep the vessel fit for normal trading as required under the charter.

The matter went to arbitration and the arbitrators decided that owners were obliged to (1) provide the vessel with RightShip approval throughout the currency of the charter, (2) additionally to permit a RightShip inspection of the vessel and other RightShip vetting procedures as and when required by charterers on the grounds that this would qualify under clause 8 of the NYPE, whereby charterers would give orders and directions regarding the employment of the vessel.

The Commercial Court disagreed with the tribunal on the first point. Mr. Justice David Steel referred to "The Derby" [1985] 2 Lloyd's Rep. 325, where it was held that there was no obligation to comply with the requirements of a self appointed and extra legal organisation. The Court of Appeal in that case emphasised that the valid certificates and documents that a vessel would require were those "which may lawfully be required by the authorities exercising administrative or other functions n the vessel's ports of call pursuant to the laws there in force". In other words, requirements legally imposed either by the law of the flag, the law of the country to which the vessel has been ordered or by the laws of the port of call.

Mr. Justice David Steel stated that RightShip approval was not lawfully required by the ports at which coal or iron ore may be loaded, but was simply a commercial requirement which had become more progressively widespread since 2001. Furthermore, such approval was not provided by way of Certificate but was simply recorded in the computer hard drive of the vetting organisation. This highlighted the extra-legal and private nature of the system. In addition, the fact that the charter provided specifically for a whole range of certificates gave rise to the inference that there was no requirement under the charterparty for RightShip approval.

Turning to the second issue, however, the judge agreed with charterers and the tribunal that owners had a contractual obligation to permit RightShip inspectors on board even absent an obligation to maintain RightShip approval. He likened this to the need to allow shore inspectors on board to inspect the cleanliness of the holds and said that an order requiring a vetting questionnaire to be completed or to permit RightShip inspection were orders "as regards employment" under clause 8 of the NYPE. Otherwise, charterers would be hindered in nominating any loading port and / or any cargo.

Both owners and charterers have been granted leave to appeal. In the meantime, shippers wishing to ensure RightShip approval of their chartered vessels should provide for this expressly and clearly in the charterparty terms.

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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