Marine & Transit - July 2010
“Please remove your cargo”: compensation for storage
afloat?
Charter termination – no compensation for waiting
time
ENE Kos v Petroleo Brasileiro S.A (The
“Kos”) [2010] EWCA 772 (Comm)
The Court of Appeal has now overturned this
Commercial Court decision, reported in our September 2009
newsletter.
The issue was whether a ship owner, who has
validly terminated a time charter due to charterer default, is
entitled to be compensated for the time the vessel is “detained”
after withdrawal until the charterers’ cargo has been
discharged.
The “Kos” was a VLCC time chartered for 36
months, but which was withdrawn by owners following charterers
delaying payment of the first hire instalment. Owners claimed
damages corresponding to the 2.64 days the vessel spent holding the
cargo post-termination, or about US$410,000 based on the daily
rates.
After dismissing (see below) a number of
owners’ arguments based on charter construction, the Commercial
Court had settled upon the owners being entitled to damages on
principles of bailment. Although the contract under which owners
were bailees of the cargo came to an end, the judge concluded that
owners remained bailees of it pending discharge, and as such were
entitled to recovery of expenses and “reasonable remuneration” for
effectively providing a floating warehouse. The authority for
that was The “Winson” [1982] AC 939, a salvage
case where salvors had looked after and safely stored cargo until
collection for the benefit of the cargo owners.
The Court of Appeal has rejected that analysis
and confirmed that owners have no entitlement to be compensated
waiting time at the market rate. The reasoning (to large measure
agreeing with the Commercial Court, but disagreeing on the crucial
bailment point) was that:
- No claim arose under the employment &
indemnity clause: discharging time was not a direct consequence of
charterers ordering the vessel to load the cargo - “it is not a
natural consequence of ordering it to be loaded that it would have
to be discharged at the self same port”. The causal
connection was too remote.
- Neither did the loss flow from charterers’
breach in the late payment of hire; rather it was the owners’ own
action in deciding to withdraw that directly caused the loss.
- There could be no implication of a
contractual term giving owners rights to damages: if the charter
was silent on the issue “any court should be slow to give owners by
operation of law what they had failed to achieve by
agreement”.
- No entitlement to quantum meruit
arose since the owners had not performed any service for the
charterers. The cargo had not been carried to its contractual
destination and it could not be right to award a quantum meruit to
the owners who had never purported to perform (or partially
perform) the voyage contemplated.
- There was no new contract based upon owners’
acceptance of charterers’ request to remain at the Port and to
discharge the cargo. It was inevitable the vessel would have to
remain at the load port, and it was the owners who were demanding
(as they were entitled to do) that charterers discharge the cargo,
not charterers requesting owners’ services.
However, the Court of Appeal decided the
Commercial Court’s reliance on The “Winson” was
wrong. That case concerned the stranding of the vessel on a reef in
the South China Sea following which six parcels of wheat were
salved and taken by salvors to Manila for storage at their expense.
In that case the vessel’s master was an agent of necessity and had
authority to create a contract between the cargo owner and the
salvor. The salvors could recover actual expenses incurred for the
cargo owners’ benefit (i.e. land storage costs) but the decision
was not authority giving general entitlement to damages, even in
extreme circumstances. It was quite a narrow point.
The position in The “Kos” was
very different. There was no accident or emergency. The
need for dealing with the cargo on board the vessel only arose
because charterers missed a single hire payment, and owners had
chosen to exercise the rights to terminate. After withdrawal,
owners required charterers to discharge the cargo but, at the same
time, invited them to make a new contract at the increased market
rate. The reason why the cargo remained on board was owners
were hoping for a new contract. They could not be expected to
be paid in advance something that never materialised.
It was therefore a contradiction to suggest
that a ship owner who exercises a right to terminate a time charter
continues as a bailee for reward, when he has by his own decision
brought the contract to an end. There was no injustice in
charterers retaining a small incidental benefit which had only
arisen from owners’ action in terminating the charter for their own
motives.
The decision illustrates that whilst the
English courts will allow ship owners to have their contractual
cake in exercising rights to terminate, they cannot expect to be
able to eat it as well.
Mike Burns,
Partner
Weightmans LLP