Transgrain Shipping (Singapore) Pte Ltd v. Yangtze Navigation (Hong Kong) Co Ltd (Yangtze Xing Hua) [2017] EWCA Civ 2107

This recent Court of Appeal decision reaffirms the view that the word “act” in the phrase “act or neglect” in Clause 8(d) of the Inter-Club Agreement (“the ICA”) does not stretch to “culpable act”. The Court of Appeal, upholding the first instance decision, held firm to the reasoning that the intention behind Clause 8 was to provide a mechanical apportionment of liability based on causation without comprising a fault-based analysis.

History or ‘archeology’ of the ICA

The purpose and history of the ICA has been to provide for a degree of certainty as between owners and charterers, and their respective insurers, as to who is liable for cargo claims, and in what proportion. This ‘knock-for-knock’ agreement between P&I Clubs has been in place since the first version of the ICA in 1970, with the aim of settlement occurring in line with the ICA terms and in order to avoid lengthy and costly litigation. As such, the intention of the ICA is to solve insurance problems swiftly without consideration of “hardship or moral culpability” as cited in the Court of Appeal case, The Strathnewton [1982] 2 Lloyd’s Reports 296.

The ICA was amended in 1984 to deal with the time limit in which to make a claim and again in 1996, with a more comprehensive overhaul, but without any fundamental deviation from the overall purpose or nature of the ICA. Most recently, the ICA has been amended in the 2011 version to include provision of security.

The background facts

The Owners had time chartered the vessel Yangtze Xing Hua to the Charterers for the carriage of soya bean meal from South America to Iran. The NYPE charterparty provided for cargo claims to be settled under the 1996 ICA. Upon arrival in Iran, the Charterers ordered the vessel to wait off the discharge port for over four months.

In subsequent arbitration proceedings, the Tribunal deemed it clear that the vessel was being used as a floating storage by the Charterers to avoid the cost of storing the cargo ashore. Part of the cargo started to overheat and, once the vessel was brought alongside to commence discharge, damage was found in two holds.

The cargo claim was settled by the Owners for approximately €2.6 million, which was then in turn claimed by the Owners against the Charterers, together with hire of approximately €1 million.

The arbitration proceedings

Clause 8(d), the applicable clause of the ICA, states as follows:

“(d) All other cargo claims whatsoever (including claims for delay to cargo):

50% Charterers

50% Owners

unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of one or the other (including their servants or sub-contractors) in which case that party shall then bear 100% of the claim.”

The Tribunal looked to the cause of the damage, including whether the Owners had failed to monitor properly the cargo temperatures. It found that the cause of the damage was a combination of the inherent nature of the cargo, together with the prolonged period at anchor. The delay was too long given the moisture content and, therefore, liability did not fall to the Owners.

Importantly the arbitrators distinguished between “act” and something suggesting fault, breach of contract or neglect. It deemed the Charterers’ decision to delay discharge as an “act” falling within Clause 8(d).

The Commercial Court decision

On appeal, the Charterers argued that the arbitrators’ construction of “act” was wrong and that an “act” must be a “culpable act”, implying fault.

The Commercial Court rejected the Charterers’ argument and upheld the Tribunal’s decision on the basis that the ICA is primarily concerned with a causation-based approach and provides a mechanism for which liability for cargo claims can be apportioned regardless of fault.

The Court of Appeal decision

The Court of Appeal upheld the decisions of the Tribunal and of the Commercial Court:

1. The Court of Appeal rejected the Charterers’ argument that the first two (1970 and 1984) versions of the ICA were fault-based and that, if it was the intention to do away with the concept of fault, the 1996 version would have expressly stated this. The ‘archaeology’ of the ICA was of no use in determining the meaning of the 1996 ICA.

2. The Court of Appeal also disagreed with the Charterers that sub-clauses (a) and (b) of the 1996 ICA require fault such that “act” must be construed as requiring fault. They do not.

3. The Charterers had also argued that if an “act” did not require ‘fault’, then the mere act of ordering the loading of the cargo would constitute an “act” for which the Charterers would be 100% liable under sub-clauses (c) and (d) of the ICA. This, they said, cannot be right and is why an “act” requires ‘fault’ in order for clauses (c) and (d) to be workable. The Court disagreed. An act will only constitute an “act” under sub-clauses (c) and (d) if it was the effective cause of the cargo damage/shortage. There was, therefore, no reason to introduce ‘fault’ to limit the scope of what would constitute an “act”. Causation itself is the limiting factor, as was the additional need for “clear and irrefutable evidence”.

4. In short, “act” should be given its natural meaning within the context of the ICA – restricting it to “culpable act” is incorrect. “Act” is just that – something which is done. It does not connote culpability. By contrast, “neglect”, which is separately mentioned in sub-clause (d), does connote culpability.

Comment

This decision, it is submitted, reinforces the purpose of the ICA, namely to provide a mechanism that regulates the settlement of cargo claims between owners and charterers by providing a particular formula and thereby doing away with protracted and costly litigation. The decision settles the debate surrounding the meaning of sub-clause (d) in the context of the foregoing sub-clauses and confirms that the sub-clauses are not interdependent. Despite being deemed as a ‘sweep up’ clause, the wording of sub-clause (d) is to be read alone and taken on its own standing, and the word “act” should be given its common sense meaning.