Introduction

It is common for charterparties to have performance warranties to ensure that vessels will not underperform during the term of the contract. Nevertheless, vessels sometimes have to operate under unfavourable conditions which may make it difficult for their owners to perform the charterparty up to the specifications warranted. Such underperformance may constitute a breach of the charterparty, in which the owners will be liable to pay damages to the time charterers, even when it is a result of the Owner’s compliance with the time-charterers’ instructions.

In the recent case of Imperator I Maritime Company v Bunge SA and Bunge SA v C Transport Panamax Ltd (“The Coral Seas”) [2016] EWHC 1506 (Comm), the High Court had the opportunity to examine a continuing performance warranty in charterparties, and held that the owners are responsible for the underperformance of the vessel even though it was an indirect result of the time-charterer’s instructions to keep the vessel in tropical waters.

Background

Imperator I Maritime Company (the “Owners”) was the owner of the vessel “Anny Petrakis”, which was subsequently renamed as “The Coral Seas” (the “Vessel”). By consecutive time charters on an amended NYPE form, the Vessel was chartered by its previous owner to Bunge SA (the “Head Charterers”) for around 23 to 25 months, which had then sub-chartered it to C Transport Panamax Ltd (the “Sub-charterers”) on back-to-back terms (except the rates). Pursuant to a subsequent agreement, ownership of the Vessel was transferred to the Owners.

The charterparties contained the following clauses:

1.       Vessel’s description: “About 14.5 knots ballast/about 14 knots laden on about 33.5 mts ISO 8217:2005 (E)RMG 380 plus about 0.1 mts ISO 8217:2005 (e) DMA in good weather condition up to Beaufort scale four and Douglas sea state three and calm sea without adverse current ...” [in the case of the sub-charterparty the equivalent provision concluded “... up to Beaufort Scale 4 and Douglas Sea State 3 with not current and/or negative influence of swell (sic) …”];

2.       Speed Clause: “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, under fair weather condition not exceeding Beaufort force four and Douglas sea state three and not against adverse current.” [In the case of the sub-charterparty the equivalent provision concluded ... not exceeding Beaufort Force 4 and Douglas Sea State 3 with not against adverse current (sic)…”]

3.       Weather Routing and Speed/Consumption Deficiencies Clause: “Charterers may supply Ocean Routes advice to the Master [the sub-charterparty stated “may supply Ocean Routes or equivalent advice”] during voyages specified by the Charterers. The Master to comply with the reporting procedure of the routing service selected by Charterers ...”

Under the charterparties and the Sub-charterers’ instructions, the Vessel had to stopover in Brazil for one month for loading before it departed to China. In accordance with the Sub-charterers’ instructions, the Vessel first discharged cargos at Praia Mole of Brazil before it sailed to Guaiba Island (also in Brazil).

However, immediately after the Vessel departed Guaiba Island, her performance began to fall off significantly. She had to take on emergency bunkers at Jarkata and sailed to Singapore to carry out underwater inspection subsequently. The underwater inspection reviewed that the fall off in performance of the Vessel was due to heavy fouling of the propeller during her prolonged stay in the tropical waters near Guaiba Island.

The propeller was cleaned underwater, and then the Vessel sailed to China to complete her voyage under the charterparties and in accordance with the Sub-charterer’s instructions.

The Sub-charterers thereafter made deductions from hire, asserting their right to set-off damages for the breach of the continuing performance warranty under the Speed Clause of the charterparties. The Head Charterers took the same stance against the Owners. The Owners then commenced arbitration against the Head Charterers, seeking to recover the hire deducted by the Head Charterers. The Head Charterers then in turn commenced arbitration against the Sub-charterers on the same ground.

The Issue

The issue before the Arbitration Tribunal and subsequently in the Owner’s appeal to the High Court was “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 Arbitration Tribunal’s Decision

The Arbitration Tribunal made the following rulings on facts:

1.       the Vessel did not maintain the warranted speed, extending the voyage by 90.345 hours;

2.       the cause of the Vessel’s reduced speed was underwater fouling of the Vessel’s hull and propeller which developed during the Vessel’s prolonged stay in the tropical waters at Guaiba Island; and

3.       the fouling of the Vessel’s hull could not be regarded as unusual or unexpected, but constituted fair wear and tear incurred in the ordinary course of trading.

The Arbitration Tribunal ruled in favour of the Sub-charterers and dismissed the Owners’ claim on the basis that the Owners had assumed such risk of underperformance of the Vessel which might result from her compliance with the Sub-charterer’s lawful instructions.

The Owners argued that the reasoning of the arbitrators was wrong and appealed.

The High Court’s Decision

Before the Court, the Owners contended that the decision of the Arbitration Tribunal was wrong as it was in contradiction with the following statement in Time Charters 7th Ed. (2014) paragraph 3.75:

“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: see The Pamphilos [2002] 2 Lloyd’s Rep 681 per Colman J., at page 690. In that case, the ship’s failure to achieve the promised performance resulted from marine fouling, which was in turn the result of the owners’ complying with the charterers’ order to wait for 21 days at a tropical port.”

However, the Court rejected the Owners’ contentions for the following reasons:

1.       The language of the Speed Clause was in wide and unqualified terms. It is clear that the Speed Clause was not intended to apply only to a vessel with a clean hull and propeller. It is a warranty for the Vessel’s actual continuing performance.

2.       The parties expressly restricted the performance warranty to passages under fair weather conditions, but do not exclude the performance warranty in respect of occasions such as prolonged waiting in tropical waters. Therefore, it was not the parties’ intention to construe the warranty in such a way as argued by the Owners.

3.       Marine fouling was an ordinary incident of trading in accordance with the time charterer’s orders.

Accordingly, the Court concluded that the continuing performance warranty in question applies when the Vessel was underperformed due to fair wear and tear as a result of the Owners’ compliance with the Sub-charterer’s instructions. In particular, the Court said that paragraph 3.75 of Time Charters is too widely stated, and it is not a defence to a claim on underperformance for the owners to prove that the underperformance resulted from compliance with the time charterers’ orders, unless the underperformance was caused by a risk which the owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers.

Conclusion

This case serves as a reminder to owners of vessels that time charterers will still enjoy the benefit of performance warranties in charterparties even when the vessels had to operate in unfavourable environments and conditions as a result of the time charterers’ instructions. If the owners wish to avoid being liable in such circumstances, it is advisable for the owners to limit the scope of the performance warranties and exclude warranties to situation where the vessel had to operate in unfavourable environments and conditions in accordance with charterers’ instructions.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.