Time Charters. Employment and Indemnity Vessel to be placed at the disposal of the charterers …

When deciding who has to bear the consequences of a choice being made in one way rather than the other, it is reasonable to assume that the consequences shall fall upon the person who made the choice, for it is the charterer who has the opportunity to decide upon the wisdom of the selection which he makes.
Per Mustill J in The Georges C Lemos (3rd party proceedings) [1991] 2 Lloyd’s Rep 107.

Usual form of time charter contract when the charterer requires to have the vessel at his disposal and to be free to choose voyages and cargoes and negotiates bill of lading terms also, adopts the concept that the owner must be expected to grant such freedom only if he was entitled to be indemnified against loss and liability resulting from it. In other words indemnity serves to compensate the owner against losses arising from risks or costs which he has not expressly or implicitly agreed in time charterparty to bear. However, there is no the indemnity for risks which the owner has contractually agreed to take, e.g. navigation of the ship or incidents of navigation, or which arise from his own negligence or breach of contract or which are incidental to the service for which the vessel was required to be available, e.g. marine growth and hull fouling.

The right to indemnity exists notwithstanding the fact that the loss incurred while complying with the order which the time charterer was entitled to give and the shipowner was bound to obey. Furthermore, the loss must directly arise from the charterer’s instructions, be one which the owner must not be taken to have accepted and the owners’ compliance with the order should not break the chain of causation but it is the essential link in the chain of causation.

The classic example when indemnity applies is one which arises from the master complying with the Charterers’ orders to sign bills of lading on terms more onerous than those of the charterparty. Moreover, it was held that the scope of the clause also extends to the consequences of such Charterers’ orders as:

a. orders to load particular cargo
b. dangerous cargo
c. orders of the charterers in loading at an unsafe berth

Ordering vessel to load the cargo which is not authorised by local government, i.e. illegal, will have same consequences as ordering to proceed to unsafe port. In ST Shipping and Transport Pte Ltd v Space Shipping Ltd(The CV STEALTH) [2016] EWHC 880 (Comm) time charterers took delivery of owners’ vessel in August 2014. Timecharter party was for eight month (until April 2015) and was on amended Shelltime4 form, with clause 28 stating inter alia that:

28. … No voyage shall be undertaken, nor any goods or cargoes loaded, that would expose the vessel to capture or seizure by rulers or governments.

On 4 September 2014 time charterers sub chartered vessel to a voyage charterer to load crude oil at Puerto La Cruz, Venezuela. Time charterers’ orders included nomination of local agent who was to oversee events at Puerto La Cruz. On 11 September forged authorisation to load cargo, which usually issued by PDVSA, the state oil company was received by time charterers. The Authorisation was stamped but not signed. It aroused time charterers’ suspicions, and they put in train enquiries to check its authenticity with PDVSA. On 12 September 2014 time charterers instructed the master to ignore the Authorisation and comply only with orders coming from the Charterers themselves. It was discovered that forged document was issued by time charterers’ agent. As a direct result of such illegal activity, vessel was arrested in Venezuela and at the moment (April 2016) remains there.

The Charterers paid hire up to and including January 2015 and contended that the Charterparty was frustrated on 29 January 2015. By an email of 1 April 2015, and without prejudice to their position that the charterparty had been frustrated, time charterers purported to redeliver the vessel.

The owners claimed a balance of hire, together with costs and expenses, up to the time of redelivery of the Vessel on 1 April 2015. For the period after 1 April 2015 the owners claimed compensation for the continued detention of the vessel as damages for the charterers' breach of clause 28 of the charterparty.

The Tribunal found as a matter of fact among the other things that cargo was not authorised by PDVSA for sale and was not scheduled to be loaded, and hence the cargo was not one which could lawfully be shipped from Venezuela; as an incidence of the order of 4 September 2014 the charterers ordered the master to communicate directly with agents; as a result of and as an incidence of the above orders the Vessel received the unauthentic PDVSA authorisation; it was the fact that the Vessel was the intended means to carry the unauthorised cargo, and the consequent possibility that the Owners might have been involved in the crimes, which led to the detention of the Vessel on 19 September 2014 and finally that detention is the cause of all subsequent delay. The Tribunal held that the time charterers were in breach of clause 28 and therefore liable to indemnify the owners for consequences of their own breach.

The judge in the High Court called charterers’ appeal as "[an] another example of a disappointed party trying to dress up an appeal against findings of fact as one which turns on questions of law." The judge stressed the strict policy of the 1996 Act to prevent such attempts and reminded that the parties are bound by the findings of fact of their chosen tribunal and cannot challenge them in court, even on the grounds that they were unsupported by the evidence or that they contain internal inconsistencies.

The judge also held that the charterers were in breach of cl.28, he concluded that:

If the vessel is ordered to a port at a time when there is no materially increased risk of capture or seizure, but such a risk arises whilst she is en route, clause 28 would entitle the Owners to refuse to continue to comply with the order, if they were aware of it; and in the event of continued compliance, the charterers would be in breach of clause 28, provided that the risk arose before it became impossible for the charterers to give fresh orders which could be complied with in time to avoid the risk. It is common ground that breach of clause 28 does not depend upon any knowledge of the increased risk on the part of the Charterers: see Ullises Shipping Corp v Fal Shipping Co Ltd (The "GREEK FIGHTER") [2006] EWHC 1729 (Comm) at paragraph 286.

Thus it is direct order of the charterer, in the first place, which ought to trigger invocation of indemnity clause. But in Petroleo Brasileiro S.A. v E.N.E. Kos 1 Limited [2012] UKSC 17 this concept was extended to instances where the time charterparty contract had already come to an end. In that case the owners withdrew their tanker from the service under time charterparty for non-payment of hire, when loading operation was in progress and some cargo had been already loaded on board. Both judge at first instance and the Court of Appeal rejected owners’ indemnity claim on the ground that the true cause of owners’ loss was their own act of withdrawal of the vessel. On appeal the Supreme Court held that the relevant order of the charterers was the order to load the parcel of cargo which was on board the vessel when it was withdrawn and the loss claimed by owners was the consequence of that order. Lord Sumption explained this view in the following passage:

13. …The need to discharge the cargo in the owners’ time arose from the combination of two factors, namely (i)that the cargo had been loaded, and (ii) that the purpose for which it had been loaded (ie carriage under the charterparty to its destination) had come to an end with the termination of the charterparty.
In other words, the cargo which charterers had ordered the vessel to load was still on board when the charterparty came to an end. In other words, the cargo which charterers had ordered the vessel to load was still on board when the charterparty came to an end. On any realistic view, this was because the charterers had put it there. The analysis would have been exactly the same if the charterparty had come to an end for any other reason with cargo still on board, for example by frustration or expiry at the end of the contractual term.

16. …The need to discharge the cargo in their own time and at their own expense was not an ordinary incident of the chartered service and was not a risk that the owners assumed under the contract. It arose after the chartered service had come to an end in accordance with the withdrawal clause in the contract.

Lord Mance disagreed with majority’s view and in his dissenting judgment argued that the indemnity clause only applied to consequences or liabilities arising from compliance with the Charterers’ instructions. His Lordship said at para 51:

Here, if one asks whether the loss suffered by the shipowners was "caused by compliance with the time Charterers’ instructions" - the natural answer, it seems to me, is: certainly not. It was caused because the charter was at an end, the owners were not performing the Charterers’ instructions and they were not receiving hire for the time wasted prior to discharge. The "direct" or "unbroken" causal link required by the authorities is lacking. The loss did not even arise "in the course" of compliance with Charterers’ orders,
… It is true, historically, that no cargo would have been on board but for Charterers’ instructions. But that is no test of the proximate or the effective cause, as the authorities make clear… It is also unrealistic to scissor up the instructions between loading and carriage to destination, and to attribute the loss to the instructions to load ignoring the failure to carry. When one engages in such a division, one is in fact recognising that subsequent events superseded Charterers’ orders and rendered them a matter of history.

While the Charterers’ orders to sail amount to instructions as to employment, it nevertheless leaves to the discretion of the master who is responsible for the safety of his ship to choose the time and opportunity for starting on his voyage. If owner suffers the loss as a result of erroneous act of master in navigating vessel on her passage to port as ordered by the charterers such loss is not one for which the charterer was responsible.

As it was held in Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The Hill Harmony) [2001] 1 Lloyd’s Rep 147 HL shipowner’s obligation under a time charter to proceed with the utmost despatch not have been met if the master unnecessarily chose a longer route. Although the owner argued that master’s choice was based on previous experience when ship had previously suffered serious heavy-weather damage on the northern (ordered by the charterers) route, the arbitrators made no finding justifying such deviation. A desire to avoid heavy weather alone did not assist to the owners because the vessel was found fit to sail the ordered route. And in such case the duty to proceed with utmost despatch on usual route prevails, as Lord Bingham pointed out at pp.149, 152:

It is the duty of the ship, at any rate when sailing upon an ocean voyage from one port to another, to take the usual route between those two ports. If no evidence be given, that route is presumed to be the direct geographical route, but it may be modified in many cases for navigational or other reasons, and evidence may always be given to show what the usual route is, unless a specific route be prescribed by the charter-party or bill of lading …
The charterer’s right to use the vessel must be given full and fair effect; but it cannot encroach on matters falling within the specialized professional maritime expertise of the master, particularly where the safety and security of the vessel, her crew and cargo are involved. He is the person, on the vessel, immediately responsible. Technical questions concerning the operation of the vessel are for him. Thus a decision when, in the prevailing conditions of wind, tide and weather, to sail from a given port is plainly a navigational matter…
By contrast, a decision without good reason to remain in port instead of continuing with a voyage … or to economise on bunkers for no good maritime reason … were properly regarded as falling outside the navigational area reserved to the master’s professional judgment…

It is necessary to stress that for the Charterers’ orders to fall under provision of the the indemnity clause, the consequences of such orders should be the direct consequences as distinct from mere consequences. Mr Justice Colman in Ullises Shipping Corp v FAL Shipping Co Ltd (The Greek Fighter) [2006] EWHC 1729 (Comm) at para 302 defined the scope of the indemnity obligation in the following words:

In particular, the parties are unlikely to have contracted for the protection of the Owner against losses which are remote as a matter of causation from the charterer’s order. That is because it is in a commercial setting improbable that a charterer would be prepared to assume the risk of eventualities causally remote from his own orders.

Much less would a charterer be likely to assume the risk of eventualities causally contributed to by negligence or other fault on the part of Owners notwithstanding that Charterers’ order may have initiated the train of events leading to Owners’ loss. For these reasons it is improbable that a charterer would ever willingly enter into an indemnity which protected Owners from losses not predominantly or proximately caused by the Charterers’ orders under the charter.

If no express indemnity provided in time charter, shipowners have to rely on indemnity implied by the court, footing on principles postulated by Brett J in Dugdale v Lovering (1875) LR 10 CP 196:

… that when an act has been done by the plaintiff under the express directions of the defendant which occasions and injury to the rights of third persons, yet if such an act is not apparently illegal in itself, but is done honestly and bona fide in compliance with the defendant’s directions, he shall be bound to indemnify the plaintiff against the consequences thereof.

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