Charterparty Provisions Concerning The Liability For Claims In The Event Of The Deterioration Of Soyabean Cargoes As A Result Of Prolonged Delays In Berthing The Ship At Discharge Ports

Over the last 20 years the ships carrying soya bean cargoes in bulk to Chinese ports had often been forced to wait at anchorage for prolonged periods either due to the lack of storage space ashore for the cargo, the receivers` failure to complete the import formalities in due time, the change of import regulations, congestion in ports or quarantine restrictions. If the soya bean cargoes are stored on board the carrying ships in excess of their safe storage period, they may deteriorate due to self-heating<sup>1</sup>.
In the event that a soya bean cargo or a part of it deteriorates as a result of prolonged delays in berthing the carrying vessel and the cargo receivers make a claim against the shipowners as carriers under the Bills of Lading, the shipowners have to settle the claim with the cargo receivers.
The shipowners` legal remedy against the charterers will depend on whether the vessel was in a time charter party or in a voyage charter party and on the charter party indemnity provisions, if any.

The Shipowners` Legal Remedy Under Time Charters: The Apportionment Of Liability For Cargo Claims Under The Inter-Club Agreement

In the event of claims for deterioration of cargo caused by prolonged delays in berthing the vessel, in time charters are applicable the provisions of the Sub-Clause 8(d) of the Inter-Club New York Produce Exchange Agreement, commonly referred to as the Inter-Club Agreement or ICA, which stipulates that the cargo claims shall be apportioned 50/50 between the charterers and shipowners "unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall then bear 100% of the claim".

In the English law case Transgrain Shipping (Singapore) PTE Ltd v. Yangtze Navigation (Hong Kong) Co Ltd & Anor², the time charterers of a ship carrying a cargo of soya bean meal gave instructions to Master to wait off the discharge port for over four months. After the ship berthing, it was found that part of the cargo deteriorated due to self-heating. The shipowners had to settle the claim of the cargo receivers and then sought to recover the sum paid to cargo receivers from the time charterers on the ground that the receivers` claim for cargo deterioration was the consequence of an act of time charterers, the order to wait off the discharge port for over four months, and therefore, the time charterers were 100% liable pursuant to the provisions of Sub-Clause 8(d) of the Inter-Club Agreement.
The time charterers contended that their share of liability should have been limited to 50% of the cargo claim and not be held liable for 100% of the cargo claim on the ground that the term "act" in the provisions of Sub-Clause 8(d) of the Inter-Club Agreement means a "culpable act" in the sense of fault.
The LMAA tribunal held that the cause of the damage to cargo was a combination of the inherent vice of the cargo together with the prolonged period of storage in the ship`s holds while the ship waited off the discharge port. The charterers` instructions for the Master of the vessel to wait outside the discharge port knowing the cargo`s inherent vice was considered an "act" falling within the scope of Sub-Clause 8(d) of the Inter-Club Agreement and therefore, the charterers had to bear 100% of the consequences. The LMAA tribunal held that any act, whether culpable or not, is sufficient to constitute an "act" for the purposes of Sub-Clause 8(d) of the Inter-Club Agreement.
The time charterers made an appeal against the arbitration award, contending that the word "act" meant only culpable acts and the LMAA tribunal was wrong to hold that any act, whether culpable or not, is sufficient to constitute an "act" for the purposes of Sub-Clause 8(d) of the Inter-Club Agreement.
The English Commercial Court dismissed the time charterers` appeal and held that the word "act" in Sub-Clause 8(d) of the Inter-Club Agreement does not mean only culpable acts but any act, whether culpable or not. The purpose of the Inter-Club Agreement is to enable the apportionment of liability for cargo claims between the shipowners and the time charterers on a "more or less mechanical" basis without regard to questions of fault³.

The Shipowners` Legal Remedy Under Voyage Charters

In voyage charters, the shipowners or the time charterers as disponent owners should either include an express indemnity clause or ask the voyage charterers to provide a letter of indemnity covering the potential liabilities that might be incurred by the shipowners/disponent owners in the case of cargo deterioration for reasons outside the shipowners/disponent owners` responsibility including, but not limited to, the soya beans` pre-shipment condition (excess moisture content), prolonged storage on board the ship at or off the discharge port due to the failure of charterers/receivers to complete the import formalities in due time and/or to provide a berth upon the ship`s arrival.
The charter party indemnity clause or the voyage charterer`s letter of indemnity should contain the voyage charterer`s undertaking to pay to the shipowners/disponent owners:
- the contractual damages for the detention of vessel, that is, for the time spent by the vessel off the port limits in the event that this is not covered by the charter party demurrage provisions;
- the legal costs for defending the receivers` claim;
- the sums paid for the settlement of the receivers` claim;
- any other costs, including the additional discharge costs incurred for the segregation of damaged part of the cargo.

The shipowners/disponent owners should also stipulate in voyage charter parties that the demurrage is intended to cover only the direct losses resulting from the detention of ship beyond the contractual laytime and not the liability that the shipowners/disponent owners might incur due to the cargo deterioration for reasons for which the shipowners/disponent owners are not responsible.
The failure to address this matter in voyage charterparties and to ask for an express indemnity covering the potential liabilities that might be incurred by the shipowners/disponent owners in the case of cargo deterioration would expose the shipowners/disponent owners to the risk of claims from the cargo receivers without the possibility to recover from the voyage charterers.
An example of such case was the English law case K-Line Pte Ltd. v. Priminds Shipping (HK) Co. Ltd. (The "Eternal Bliss")⁴. In that case the dry bulk carrier "Eternal Bliss" carried a cargo of 70,133 MT of soya beans in bulk from Tubarao, in Brazil to Longkou, in China, pursuant to the terms of a contract of affreightment dated 30 July 2014.
The ship tendered NOR at Longkou anchorage on 29 July 2015 but was kept at anchorage for 31 days before berthing on 30 August 2015 due to congestion in port and lack of storage space ashore for the cargo. Discharge was completed and the ship sailed away from Longkou, on 11 September 2015.
During the time spent by the ship waiting for berth the condition of soya bean cargo deteriorated by self-heating due to the prolonged storage in the ship`s holds.
The cargo receivers brought a claim against the shipowners for cargo damage. The shipowners (in fact, the ship`s P&I Club) had to pay $1.1 million to the cargo receivers to settle their claim for damage to cargo and then sought to recover the financial loss from the charterers.
The case was submitted for analysis first to LMAA, then to the English Commercial Court and finally to the English Court of Appeal. The questions in dispute were whether or not the shipowners` claim was a claim for detention of the ship and whether the demurrage is liquidated damages for all the consequences of the charterers` failure to unload the cargo within the contractual laytime or only some of them.
In a decision from 2020, the English Commercial Court held that the financial loss incurred by the shipowners for the settlement of claim for cargo damage was a distinct kind of loss than the loss incurred due to the detention of the ship and therefore, the shipowners were entitled to recover the sum of $1.1 million paid to settle the claim of the cargo receivers in addition to the amount due for demurrage. This decision was overturned by the English Court of Appeal in a decision from November 2021 based on the following reasons:
- In English contract law, the demurrage is liquidated damages for breach by the charterer of the obligation to complete the cargo operations within the laytime. It is not just an amount due for the detention of ship beyond the contractual laytime.
- The charterers agreed that the shipowners incurred an additional expense as a result of the ship detention at discharge port but contended that the additional expense was not caused by the charterers` breach of a separate obligation than the obligation to discharge the cargo within the contractual laytime. If a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation.
- In the absence of any contrary indication in the charterparty, the demurrage liquidates the whole of the damages arising from the charterers` breach of charterparty in failing to complete the cargo operations within the laytime and not merely some of them.
- If the demurrage is liquidated damages for all the consequences, the shipowners cannot recover by way of an implied indemnity rendering the charterers liable for one of those consequences but only on the basis of an express provision in the charterparty.
- It is open to the shipowners and disponent owners to stipulate in voyage charterparties that a liquidated damages clause such as the demurrage clause covers only certain stated categories of loss flowing from breach of the obligation to unload within the laytime. In the contract of affreightment concluded by K-Line Pte Ltd. with Priminds Shipping (HK) Co. Ltd., the demurrage clause did not indicate whether the demurrage was intended cover all or only some of the losses flowing from a failure to complete the cargo operations within the laytime. If the contracting parties intended demurrage to cover only some of the losses, they should have stated expressly which losses were intended to be covered and which were not.

"[I]t was within the reasonable contemplation of the parties when entering into the contract that a failure to discharge within the laytime might cause the shipowner to incur liability for cargo damage."

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Grain Trade Review Edition No. 8.

Endnotes:

1. For more on this matter see Gard`s Loss Prevention Circular No. 03 – 13 – "Prevention of soya bean cargo claims".
2. [2016] EWHC 3132 (Comm)
3. The decision of the English Commercial Court was upheld by the English Court of Appeal. See Transgrain Shipping (Singapore) Pte Ltd v. Yangtze Navigation (Hong Kong) Co Ltd., [2017] EWCA Civ. 2107
4. [2021] EWCA Civ. 1712