Speed & performance warranties - what exactly is the ship owner warranting?
In a previous newsletter ("Taking the mystery out of vessel performance claims"), we highlighted several issues relating to speed and performance claims, one of which was the application of a continuous performance warranty. That particular issue was considered by Mr Justice Phillips in the recently reported decision "THE CORAL SEAS" [2016] EWHC 1506 (Comm), a case in which this firm acted for the successful sub-charterers, first in defending the ship owners' claims in arbitration and then in defending the ship owners' subsequent appeal to the High Court. The Facts By a time charter on the NYPE 1946 form, the owners of the vessel CORAL SEAS let their vessel to the head charterers, who sub-let her to the sub-charterers on materially identical terms. In the course of trading, the vessel was ordered by the sub-charterers to Guaiba Island, Brazil to load a cargo for carriage to Mawan, China. Owing to congestion at Guaiba Island, the vessel waited for a berth from 14 January until 10 February 2008 and finally completed cargo loading four days later before departing Guaiba Island for Mawan. It became clear early into the laden voyage that the vessel's performance had fallen off significantly, so much so that CORAL SEAS had to divert to Jakarta to take on emergency bunkers. An underwater inspection at Singapore the following day revealed heavy hull fouling. After an underwater clean at Singapore, CORAL SEAS continued her voyage to Mawan. The Charterparties Each charterparty contained a vessel maintenance provision (clause 1), an employment and agency clause (clause 8) and a continuing performance warranty at clause 29(b) which stated " ... Throughout the currency of this Charter, Owners warrant that the vessel shall be capable of maintaining and shall maintain on all sea passages, from sea buoy to sea buoy, an average speed and consumption as stipulated in Clause 29(a) above ... ". Clause 29(a) provided details of the warranted laden and ballast speeds and bunker consumptions and expressly defined the circumstances when the warranty was to be applicable, ie " ... in good weather condition up to Beaufort Scale 4 and Douglas Sea State 3 ... ". There was no other restriction on the application of the performance warranty. The Dispute There was no dispute about the costs of the underwater inspection at Singapore, nor the subsequent hull cleaning - those costs were paid by the ship owners. Nor was there any dispute about the legitimacy of the sub-charterers' order for the vessel to load cargo at Guaiba Island. What was disputed was whether the sub-charterers were entitled to make deductions from hire for the time lost and the over consumption of bunkers on the Guaiba Island/Mawan voyage, including the deviation to Jakarta, as set-off damages for the ship owners' breach of the vessel performance warranty. The sub-charterers believed that they were so entitled and made deductions from hire. The dispute, which was essentially between the ship owners and the sub-charterers, was referred to arbitration. The Arbitrators' Findings The arbitrators found (i) that the vessel did not maintain the warranted speed, (ii) that the cause of the vessel's reduced speed was underwater fouling of the vessel's hull and propeller by marine growth which developed during the vessel's lengthy stay in tropical waters at Guaiba Island, (iii) that the marine growth could not be regarded as unusual or unexpected, but constituted fair wear and tear incurred in the ordinary course of trading, and (iv) that the speed warranty in clause 29(b) applied to all sea voyages, including those after a prolonged wait in tropical waters and that it was the ship owners who had assumed the risk of a fall-off in performance as a result of bottom fouling consequential upon compliance with the lawful orders of the sub charterers. The Appeal The ship owners appealed to the High Court. Permission to appeal was granted on the following question of law: "Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?" The ship owners argued that the arbitrators had erred in their interpretation and application of the performance warranty, particularly as the arbitrators' approach was contrary to the principle of law at paragraph 3.75 of the 7th edition (2014) of Time Charters which states: "Where the owners give a continuing undertaking as to performance of the ship, and the ship has in fact underperformed, it is a defence for the owners to prove that the underperformance resulted from their compliance with the charterers' orders ... " The ship owners' case was that the performance warranty should be construed as being given on the basis that the vessel would continue to have a clean hull. The ship owners argued that if the vessel were to suffer marine fouling in the ordinary course of trading, resulting in a drop-off in performance, then while the ship owners would be responsible for cleaning the hull (the risk of such marine fouling having been assumed by the ship owners), the sub charterers would not be entitled to claim under performance. However, the ship owners did not dispute the arbitrators' finding that the speed warranty in clause 29(b) was expressed in wide and unqualified terms - the warranty was that the vessel " ... shall be capable of maintaining and shall maintain on all sea passages ... ". It was clear that the warranty was not limited to the vessel's capacity with a clean hull but, in fact, related to her actual continuing performance. Clause 29(b) contained its own express restriction on its application, ie the performance warranty would not apply when the vessel experienced weather conditions which were outside the charterparty definition of "good weather". It would have been open to the parties also to have excluded the performance warranty in respect of voyages after the vessel had been waiting in warm water ports, but the parties did not do that. The ship owners were therefore seeking to construe the warranty as containing a restriction which the parties chose not to include. The ship owners had given a continuing performance warranty and had assumed the risk of usual and expected marine fouling, but that risk was not excluded from the performance warranty. The Judge therefore rejected the ship owners' contention that the continuing performance warranty did not apply where the vessel's performance fell-off because of fair wear and tear in the course of contractual trading. The ship owners' appeal was dismissed. Conclusion The Judge agreed with the sub-charterers' submission that the principle of law outlined in paragraph 3.75 of the 7th edition of Time Charters is too widely stated. The Judge found that where a vessel has underperformed, it is not a defence to a claim on a continuing performance warranty for the ship owner to prove that the under performance resulted from compliance with the time charterers' orders unless the under performance was caused by a risk which the ship owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers. It is not clear how much, if any, impact this decision will have on present day fixture negotiations. The CORAL SEAS charterparties were negotiated over eight years ago and it is now not unusual for a time charterparty to include an express provision which excludes the application of a performance warranty in the circumstances which occurred at Guaiba Island in January/February 2008. Nevertheless, this judgment should serve as a warning to ship owners of the implications of providing a continuing vessel performance warranty without, at the same time, restricting that warranty's application. Laurence Marron
Summer 2016
The contents of this bulletin are not intended to be a substitute for legal advice on any of the specific issues discussed in it. |