Carriage of Goods by Sea Problem Question

Part A. – Problem Question

Statement of Facts

A vessel is time chartered for 2 years at a daily rate of $3000, to be paid monthly. The charterparty states that:

“hull, machinery and equipment in a thoroughly efficient state…capable of steaming under good weather conditions at about 12.5 knots”

There is a clause paramount and the off-hire clause stipulates:

“In event of loss of time from …breakdown or damages to …machinery or

equipment …or by any other cause preventing the full working of the vessel,

the payment of hire shall cease for the time thereby lost; and if upon the

voyage the speed be reduced by defect in or breakdown of any part of her hull,

machinery or equipment the time so lost…shall be deducted from the hire.”

The vessel had been thoroughly serviced and engine repaired in drydock prior to the charter. The vessel is delivered and ordered to load at port A for which the master estimated an eta arrival of 10^th May based on 12.5 knots. The engine broke down and despite good weather the vessel arrived on 20^th May. The charterers had to pay the additional costs.

Loading was also delayed due to constant breakdown of the vessel’s cranes and the main engine overhauled again. On the way to the discharge port the weather was good only 10 knots was achievable and severe delay resulted.

The market rate for hire increased to $5000.

What are the charterers’ claims against the ship owners and what are the rights of the charterers’ in relation to these claims.

Statement of Legal Issues

1.Concerning the claims of the Charterers Against the Ship Owners

(a)Common Law Claims

(i)Seaworthiness

(ii)The Right for there to be no delay

(b)Contractual Claims

(i)The ‘Clause Paramount’

(ii)The Off Hire Clause

2.Concerning the rights of Charterers in relation to such claims

(a)Common Law Remedies

(b)Remedies for ‘Off-Hire’ breach

Statement of Answers

1.Concerning the claims of the Charterers Against the Ship Owners

(a)Common Law Rights

(i)Seaworthiness

This constitutes an implied promise which derives from the case of Lyon v Mells^[1] but the modern version is contained in the case of Bradley and Sons Ltd v Federal Steam Navigation Co^[2]:

“The ship must have that degree of fitness which an ordinary careful and prudent owner would require his vessel to have at the commencement of her voyage having regard to all the probable circumstances of it. To that extent the shipowner…undertakes absolutely that she is fit, and ignorance is no excuse. If the defect existed, the question to be put is, would a prudent owner have required that it should be made good before sending his ship to sea had he known of it? If he would, the ship was not seaworthy…^[3]”

(ii)Application of this test to the facts

The test of the careful and prudent ship owner is not answered in his favour if he took every endeavour was made to make the ship seaworthy or if he did not know of the defect^[4] and the reason for this is that the duty is absolute^[5].

The precise nature of the defects is the breakdown of the vessel’s engine and crane. The former is synonymous with the breakdown of such equipment as the propeller, which is determined as a defect that will render the ship unseaworthy^[6]. This is all that is required in order to argue a successful case for unseaworthiness according to the common law.

(ii)The Right for there to be no delay

This common law implied undertaking that the voyage will be carried out without delay will amount to deviation^[7] and in accordance with the common law, without express exemption of such liability, the only defence to delay is if the ship deviates due to reasonable grounds such as bad weather^[8].

(iii)Application of the law to the facts

In the current case the weather was good but delay was caused and this therefore means that there was no authorised deviation and therefore, the charterers have a claim against the ship owners for the common law, implied undertaking of delay.

(b)Contractual Claims

(i)Breach of Statement as to expected readiness

It is trite law that any statement of expected readiness to load will lead to a breach of the expected time of arrival (ETA) provision. This obligation would be subject to express exemption clauses in the charter, with regard to delays, occurring after the voyage to port has commenced^[9].

Application of the law to the facts reveals that there is an ETA of 10^th May but this is not stated in the facts as being a precise statement. If this is not a statement, it cannot constitute a condition of the charter although there is always the back up of an implied statement under the common law which is that the vessel must proceed with reasonable dispatch on the approach voyage^[10].

(ii)Consequences of ‘Clause Paramount’

The effect of the clause paramount is to incorporate into the charter the Hague or Hague Visby Rules, or any other legislation that would give effect to such rules. Incorporation of these rules will mean that a charterparty will be entitled to raise the same claims as a claimant for cargo under the Bill of Lading. Application of the law to the facts reveal that there has not actually been any loss or damage to the cargo itself other than the delay. This therefore means that, while the ship was not seaworthy under either the common law or, for example, Article III(1)(a) of the Hague Visby Rules, no claims arise out of breach of these rules as they are concerned only with losses to goods. To this effect, Article II of the Hague Visby rules states that:

“Subject to the provisions of Article IV, under every contract of carriage of goods by sea the carrier, in relation to the loading, handling, stowage, carriage, custody, care and discharge of such goods, shall be subject to the responsibilities and liabilities, and entitled to the rights and immunities hereinafter set forth.”

Therefore, despite the presence of a paramount clause within the charter, no rights arise for the charterers against the ship owners in this case.

(iii)Rights Arising from the Off-Hire Clause

This clause will stipulate periods when the services of the vessel are not available to the charterer and hence, during such times, the hire fee will not be payable. The onus is for the charterer to establish the event that has placed the vessel-off hire. There are three requirements. Firstly, the charterer requires to show that the shipowner was unable to perform the services required by the charterer, secondly, the event that triggered off-hire must be accounted for in the off-hire clause and thirdly, the amount of time lost must be ascertained. In order to ascertain whether the off-hire clause is applicable in the current case, it is necessary to examine the clause itself in relation the events that resulted in lost time.

As regards the first requirement, the shipowner was unable to perform the services required by the charterer since these services constituted the ability to transport cargo using a vessel, and doing so within a specific timeframe.

As regards the second requirement, the clause stipulates that in the event of breakdown or damage to machinery or equipment that prevents the full working of the vessel, the payment of hire shall cease. Further to this, if the speed is reduced by such defect or breakdown, the time lost will also be deducted.

According to the facts there were three events that resulted in time being lost. The first took place on the voyage to port whereby the engine broke down and resulted in a delay of ten days. The second took place at port whereby a breakdown of the cranes caused a delay to the loading. Finally, the state of the engine forced the vessel to maintain a speed of 10 knots instead of 12.5 knots, thereby causing a severe delay.

In general the position of the courts is that any wrongful conduct that deprives the charterer of the full use of the ship will result in the vessel being off-hire. Lord Denning stated in Federal Commerce and Navigation Co v Molena Alpha Inc (The Nanfri)^[11] stated that:

“If the shipowner has been guilty of some…wrongful conduct which has deprived the charterer of the use of the ship during some days, or prejudiced the charterer in the use of the ship, then the charterer should in fairness be able to recoup himself by making a deduction from the next month’s hire.^[12]”

The question therefore is whether the engine breakdown, which resulted in delay to port A, and the reduced speed of 10 knots, as well as the crane breakdown, are the fault of the ship owner. As regards the former, it has been established that the common law implied term for seaworthiness has been breached by the ship owner. In addition, the state of the ship was stipulated within the charterparty as having all:

“…hull, machinery and equipment in a thoroughly efficient state…capable of steaming under good weather conditions at about 12.5 knots…”

Breach of this term constitutes a breach of condition that will justify the right for the charterers to take the vessel off-hire, thereby removing their liability for hire and the increased rate of $5000 per day while the ship was delayed on account of the breakdown of the main engine, thereby causing an overall reduced speed as per the off-hire clause.

As regards the third requirement, the addition of ten days to Port A and the delay caused by a reduction in speed are clear. However the latter defect of the faulty crane presents a more difficult calculation for off-hire time. The impact of this kind of defect on the operation of the off-hire clause can be examined with reference to the case of Canadian Pacific (Bermuda) Ltd v Canadian Transport Co Ltd (The H.R. Macmillan)^[13]. Here the ship had been fitted with three gantry cranes, of which only one had broken down. The question for Lord Denning MR was therefore to ascertain the operation of the clause in relation to the breakdown of a single crane. This led to an assessment of the proportionate loss of time attributable to the loss of one of three cranes:

“But if there was work for three cranes, and there was some loss of time owing to the one crane breaking down, there would have to be an assessment of the amount of time lost.^[14]”

However the facts of the current case state that all the cranes were continuously breaking down. Therefore a complex calculation of the rate of proportionate inefficiency would have to be measured in terms of the calculation of total time when the cranes were not working and it may be assumed that each broke down intermittently, independent of each otr. Therefore, time off-hire is measured by calculating the total time of inaction during working hours of each crane. In accordance with Canadian Pacific (Bermuda) Ltd^[15], the off-hire time for each crane is then equal to this total time, divided by the number of cranes.

2.Concerning the rights of Charterers in relation to such claims

As there is no cargo claim in this situation, the question of remedies under either the Hague or Hague Visby Rules is not relevant.

(a)Common Law Remedies

In the event that there is a statement of readiness, this condition within the charter will, if untrue, entitle the charterer to terminate the contract and claim damages. The remedy for breach of the implied term of seaworthiness will usually entitle the charterers to damages but only under certain circumstances will there be a right to repudiate the contract^[16]. The reason why repudiation is only applicable in certain circumstances is that implied term of seaworthiness or reasonable dispatch will be breached but, as stated by Devlin J in Universal Cargo Carriers Corp v Citati^[17] this is only an innominate term that will entitle the charterer to terminate the contract in the event that the consequences of the breach were serious enough to:

“frustrate the commercial purposes of the contract.^[18]”

(ii)Application of the law to the facts

The facts do not indicate the nature of the goods that were loaded onto the vessel and without such information it is impossible to ascertain the effect of a 10 Day delay on the commercial purposes of the contract. More information is therefore required but it can be said that damages are payable for breach of a term than is at least innominate.

(c)Remedies for ‘Off-Hire’ breach

The calculation of damages payable for off-hire equals the amount of hire payable for all the days calculated as being off-hire. This is a clear demonstration of the importance of accurate calculation of the off-hire period.

Part B. – Discuss to what extent the phrase ‘once on demurrage, always on demurrage’ is true.

1.What is demurrage? – Explanation of the nature of the phrase.

Demurrage is the daily rate of detention that is payable in damages by the charterer to the ship owner. The rate is located within the demurrage clause of the charterparty. The maxim ‘once on demurrage, always on demurrage’ is therefore the assumption that, once a delay arises, the demurrage clause will take effect and remain in effect until the voyage reaches its stipulated port.

2.The extent to which the maxim is true.

In order to understand the extent to which the maxim is true, it is necessary to examine it within the context of case law. An example is found in Dias Compania Naviera v Louis Dreyfus, The Dias^[19]. Here the ship, the Dias, was chartered to carry wheat from America, across to China but demurrage became payable as a result of the ship waiting for a berth. During this wait, fumigation of the ship took place but this was clearly not the cause of the delay. Clause 15 of the charterparty exempted demurrage payable for such instances:

“At discharging, Charterers/Receivers have the option at any time to treat at their expense ship’s hold/compartments/hatchway and/or cargo and time so used to not count. The Master to cooperate with the Charterers/Receivers or their representative with a view to the treatment being carried out expeditiously.”

In deciding whether demurrage was payable, Lord Diplock referred to the judgement of Lord Guest in Union of India v Compania Naviera Aeolus SA^[20]:

“Lay days are the days which parties have stipulated for the loading or discharge of the cargo and if they are exceeded the charterers are in breach; demurrage is the agreed damages to be paid for delay if the ship is delayed in loading or discharging beyond the agreed period.”

With this in mind, Lord Diplock surmised that the action of fumigation, which took place after the expiry of laytime, could not be protected by any demurrage exemption clause. The reason for this was that as laytime had already commenced, the cause of the delay was not the fumigation.

“The provision that time is ‘not to count’ has no further application once laytime had expired.^[21]”

As there was no exemption for demurrage for having to wait for a berth at port, demurrage was therefore payable. Further to this, it was not clear exactly when such an exemption/limitation of liability was to be effective and in absence of clear guidance, Lord Diplock ruled that the clause could not apply where laytime had already expired.

This notion was also further explained by Lord Reid in Union of India^[22] who stated in relation to demurrage limitation clauses that:

“These types of clauses, whether excusing breaches, relieving prima facie obligations, or simply excluding or reducing the liability in liquidated damages are all provisions of the character of exclusion or exceptions clauses and will be ineffective for that purpose. This is an application of the ordinary rules of contractual construction governing such clauses. They must be clearly worded.^[23]”

Analysis of these clauses reveals that the maxim, ‘once on demurrage, always on demurrage,’ is actually a guide to interpretation. While it refers to the fact that demurrage will continue to run once it has begun, it does not allude to the fact that, within the charterparty, situations may also stipulate clauses that limit or exclude demurrage under certain circumstances. This therefore means that express removal of demurrage liability is possible but, as is normal for all limitations or exemption of liability, this must be stated clearly, otherwise, once the demurrage liability begins, it will continue.

Therefore, the maxim is true unless there is a clear clause that unambiguously stipulates exemption from the liability of demurrage.

Bibliography

Legislation

Hague Rules

Hague Visby Rules

Case Law

Lyon v Mells (1804) 5 East 428

Bradley and Sons Ltd v Federal Steam Navigation Co (1926) 24 LIL Rep 446

Papera Traders Ltd v Hyundai Merchant Marine Co Ltd, The Eurasian Dream [2002] EWHC 118

McFadden v Blue Star Line [1905] 1 KB 697

Steel v State Line (1877) 3 App Cas 72

SNIA v Suzuki (1924) 29 Com Cas

The Patria (1871) LR 3 A & E 436

Monroe Bros Ltd v Ryan [1935] 2 KB 28, CA

The Democritos [1976] 2 Lloyd’s Rep 149 CA

Federal Commerce and Navigation Co v Molena Alpha Inc (The Nanfri) [1978] QB 927

Canadian Pacific (Bermuda) Ltd v Canadian Transport Co Ltd (The H.R. Macmillan) [1974] 1 Lloyd’s Rep 311 (CA)

Hongkong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26, CA

Universal Cargo Carriers Corp v Citati [1957] 2 QB 401

Dias Compania Naviera v Louis Dreyfus, The Dias [1978] 1 Lloyd’s Rep 325, HL

Union of India v Compania Naviera Aeolus SA [1964] AC 868

Text Book Publications

Day & B. Griffin, 2003, The Law of International Trade, Butterworths, 3^rd edition

Baughen. S. 2004, Shipping Law, Cavendish Publishing, 3^rd edition

Hughes. A.D., 1999, Casebook On Carriage of Goods by Sea, Blackstone Press Ltd, 2^nd edition

Dockray. M, 2004, Cases and Materials on the Carriage of Goods by Sea, Cavendish Publishing, 3^rd edition

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Footnotes

^[1] (1804) 5 East 428

^[2] (1926) 24 LIL Rep 446

^[3] ibid at p 454. See also Papera Traders Ltd v Hyundai Merchant Marine Co Ltd, The Eurasian Dream [2002] EWHC 118

^[4] McFadden v Blue Star Line [1905] 1 KB 697

^[5] Steel v State Line (1877) 3 App Cas 72

^[6] SNIA v Suzuki (1924) 29 Com Cas

^[7] The Patria (1871) LR 3 A & E 436

^[8] See Day & B. Griffin, 2003, The Law of International Trade, Butterworths, 3^rd edition, at pp 33-34

^[9] Monroe Bros Ltd v Ryan [1935] 2 KB 28, CA

^[10] The Democritos [1976] 2 Lloyd’s Rep 149 CA

^[11] [1978] QB 927

^[12] ibid at p 932

^[13] [1974] 1 Lloyd’s Rep 311 (CA)

^[14] ibid at p 318

^[15] supra note 13

^[16] For the leading case law on this matter, see Hongkong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26, CA

^[17] [1957] 2 QB 401

^[18] Quoted by Devlin J from the earlier case of Hongkong Fir Shipping supra note 16, per Sellers LJ at p 34

^[19] [1978] 1 Lloyd’s Rep 325, HL

^[20] [1964] AC 868

^[21] supra note 9 at p 345

^[22] supra note 10

^[23] supra note 10 at p 875