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.