Introduction

In Pan Ocean Co Ltd v Daelim Corporation (DL Lilac) [2023] EWHC 391 (Comm), the Commercial Court of the High Court of England and Wales (the “Court”) allowed an appeal in part by the charterers of a ship against an arbitration award in favour of the owners of the ship. The Court has clarified the correct test for finding an implication of terms in a charterparty and found an implied term which obliged both the charterers and the owners to take reasonable steps to cooperate and arrange a reinspection without undue delay after a failed holds inspection. However, the Court disagreed with the arbitral tribunal on the factual findings and ordered the arbitral award to be remitted to the tribunal for further consideration. Nonetheless, the Court stressed that an arbitral award should be read in a commercial and reasonable manner as a whole.

Background

The claimant charterers (the “Charterers”) entered into a charterparty with the defendant owners of the vessel (the “Owners”) in 2017 for a time charter carrying cargo. During the charter, the holds were inspected by a surveyor on 16 February 2017 but were failed due to presence of rust, paint flakes and cargo residue. On 19 February 2017, the master of the vessel notified the agents that the vessel had been cleaned and requested for a reinspection. The reinspection was not conducted until 4 March 2017.

The Owners submitted the case to the arbitral tribunal (the “Tribunal”) to claim against the Charterers for loss of hire and the cost of bunkers. The Owners contended that from 19 February 2017 until the reinspection, the vessel was in all respects ready to load cargo and the holds were ready for reinspection, particularly when the master so advised on 19 February 2017. The Owners argued that the charterparty contained an implied term that required the Charterers to carry out an reinspection with reasonable diligence and without undue delay, and accordingly, the Charterers, having arrange the reinspection after a lapse of 12 days, was in breach of the implied term. Therefore, the Owners argued that the Charterers were not entitled to treat the vessel as off-hire after 19 February 2017 as the loss of time was caused by the Charterers’ breach of their obligation to arrange for reinspection with diligence.

The Charterers’ case was that it was the terminal having advised the vessel to shift off the berth, right before the master advised that the vessel was ready for reinspection. The terminal further advised the agents that hold inspections could only be carried out once a vessel was berthed, and therefore, reinspection can only take place when a berth became available.

The Tribunal found in favour of the Owners and accepted that the Charterers were under an implied obligation to have the vessel re-inspected without delay when the vessel had been cleaned and the master called for a reinspection. Accordingly, the 12-day delay was considered as unreasonable by the Tribunal (the “Award”).

The issue

The question of law in dispute is whether there was an implied term to the time charter obliging the Charterers to have the vessel re-inspected without delay when the vessel was off hire after a failed holds inspection and the Master advised that hold cleaning had been completed and called for a reinspection.

The Charterers argued that the Tribunal had erred in law by applying the wrong test when implying the terms and the Tribunal should have found that the parties were obliged only to exercise reasonable diligence to cooperate and conduct a reinspection of the cargo holds. Therefore, the Charterers contended that they were not responsible for the delay and so the Award shall be varied to dismiss the Owners’ claim regarding loss of hire and the cost of bunkers due to the delay in reinspection.

Appeal allowed

In allowing the Charterers’ appeal, the Court has succinctly summarised the test for determining implication of terms in a charterparty, namely, whether on an objective basis, the term to be implied is necessary to give business efficacy to the contract or is so obvious (to an objective observer at the time of contracting) that it goes without saying that it was included in the agreement. Five requirements for an implied term shall be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract; (3) it must be so obvious that it goes without saying; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract. The Court ruled that the Tribunal did apply the correct legal test for implied terms based on necessity and obviousness.

However, the Court disagreed with the Tribunal and took the view that any implied term had to oblige both parties, instead of just the Charterers, to take reasonable steps to cooperate to organise a reinspection without undue delay. The Court further ruled that the implied term did not oblige an immediate reinspection upon the master advising that the holds were ready for reinspection. The implied term only requires reasonable diligence to be exercised to have the vessel reinspected without undue delay. Therefore, the Court held that the Tribunal was wrong in law to hold that the vessel was immediately back on hire once the master had notified the agents for reinspection on 19 February 2017. The vessel was only back on hire from the point when reinspection should have been arranged in compliance with the implied obligation to exercise reasonable diligence to have the vessel reinspected without undue delay. Accordingly, the case was remitted back to the Tribunal for further consideration.

In its reasoning, the Court has also made it clear that when interpretating arbitral awards, the Courts would strive to uphold them and read them as a whole in a reasonable and commercial manner, so as to construe an award in such a way to make it valid rather than invalid.

Key takeaways

This case serves as a helpful reminder as to the correct test for finding an implication of term in a charterparty. Subject to circumstances of each case, terms implied will usually impose bilateral obligations on both parties to take actions by exercising reasonable diligence. Such implied obligation usually is not a strict obligation obliging one party only. The Court has also made it clear that Courts will strive to uphold an arbitral award and when interpretating the award, it will be read as a whole in a commercial and reasonable manner.

 

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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.

Published by ONC Lawyers © 2023