The “RENOS” – Court of Appeal Clarifies CTL Calculation and Right of Abandonment

In the matter of the "RENOS", Mr Justice Knowles addressed a number of issues, at first instance, regarding the calculation of total loss of the vessel and of an owner's right to abandon the vessel in constructive total loss cases. Following the judgment, handed down on 1 July 2016, insurers appealed. In a recent ruling by Lord Justice Hamblen, the first instance decision was unanimously confirmed by the Court of Appeal, and the insurers' appeal was dismissed.

The "RENOS"[1] was on a laden voyage in the Red Sea when a fire broke out in the engine room causing extensive damage. In August 2012, the owners signed a Lloyd's Open Form salvage contract (LOF contract) to deliver the vessel to a place of safety. The LOF contract was signed with SCOPIC incorporated on 23 August 2012. Later that day, salvors invoked the Special Compensation Protection and Indemnity Clause. The vessel was towed to an anchorage off the Suez Canal which it reached early on 31 August. It was at this time that the owners had an opportunity to survey the vessel for the first time. By very early September, the owners' surveyor had completed his initial work and calculated that repair costs would be in the region of US$8 million. At around the same time, the insurers' surveyor valued the repair costs around US$5.527 million. It was common ground between the parties that, in order for the vessel to be a constructive total loss (CTL), repair costs needed to be in excess of US$8 million.

By late September, the vessel had been towed to the port of Adabiya, Egypt, and by early October it had been redelivered under the salvage contract. It was clear, at this stage, that the damage to the vessel was extensive and the owners, in conjunction with the insurers' surveyors, drew up a repair specification. This was completed by the end of November and, by early December, the repair estimate was, according to the owners, around US$8 million. By late December, the owners had received a number of repair quotations; the final range was $2.8 million to $9 million. Discussions over the repairs continued throughout January 2013 and, on 30th January, insurers declared that it was ultimately a matter for owners to make a decision on repair. On 1 February 2013, owners issued a notice of abandonment.

Court of Appeal

Insurers stated that the owners had lost their right to abandon the vessel to them under section 62(3) of the Marine Insurance Act 1906 (the Act). This requires the owners to give notice of abandonment within a reasonable time after receipt of reliable information of the loss and a reasonable time for inquiry. Insurers contended in this case that the owners had taken more time than was reasonable, and provided a number of dates when, they stated, the owners should have exercised their option to abandon, and did not do so. The Judge concluded, at first instance, that due to the complexity of the repairs required in the circumstances, and the conflicting information from various surveyors and yard quotations, the owners were within section 62(3) of the Act, and had not lost their right to abandon the vessel to the underwriters. It was clear from the chronology that, at the time owners were considering their options, there was a vast amount of conflicting information. Hamblen LJ stated on appeal "a striking feature of the insurers' case on reliable information is that it requires the owners to disregard or reject the Insurers’ own expert assessment at the time as to the scope of repairs, an assessment that the Insurers insist was correct”. Each of the dates the insurers submitted were rejected on the basis that, objectively, the Court could not conclude that the owners had reliable information on those dates, or even on the date they tended the notice of abandonment. Hamblen LJ went on to state "insurers chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the vessel was not a CTL. They shared that information with owners, insisted on its correctness, and can hardly complain if it's taken into account when considering whether there was reliable information of the loss."

Insurers also argued that it was wrong to include the costs incurred prior to the date of the notice of abandonment as costs of repairs for the purposes of the CTL calculation. Section 60(2)(ii) of the Marine Insurance Act 1906 states that account is to be taken of any expense incurred in respect of future salvage operations and any future general average event. Insurers argued that only costs after the notice of abandonment for recovering the ship or for repair should be included in the constructive total loss calculation. This was rejected by both the Court at first instance and by the Court of Appeal, and this decision has cleared up an area of ambiguity that has existed in admiralty law for a number of years. Insurers had argued that their case was supported by the only two authorities[2] on this point, that it was a matter of logic and that section 60(2)(ii) of the Marine Insurance Act 1906 was clear. All three of these arguments were rejected by the Courts. The Court of Appeal was attracted to the commentary set out in Arnould[3] and extra judicial comments provided by Lord Donaldson in an address he gave as Chairman of the Association of Average Adjusters in 1982, which both suggest the relevant date for calculating the costs of repair for the purpose of constructive total loss was the date of the casualty. The Appeal Court confirmed that the reference to "future"[4] in s.60(2)(ii) was best explained by considering it is a word of inclusion rather than exclusion, making it clear that future costs should be taken into account alongside those already incurred.

The cost of the salvage operation was around US$1.2 million for the notional Article 13 salvage award and US$1.4 million in respect of SCOPIC paid over and above the Article 13 award. The insurers contended that the SCOPIC costs should not be costs within section 60(2)(ii) of the Marine Insurance Act 1906 or clauses 19.2 and 9.2 of the Institute Time clauses because the SCOPIC remuneration was conceptually different from the Article 13 award payable by the P&I Club. As SCOPIC was not payable under the hull and machinery (H&M) policy, they should not, it was argued, rank for the purposes of a CTL claim under the H&M policy as repair costs. The Court identified the difficulty with this construction in that, in order to recover the vessel (and put the owners in a position to repair or declare a CTL), the owners had to pay the entirety of the salvage remuneration. SCOPIC was an unavoidable part (or extension) of that salvage operation which led to the recovery of the vessel. The Court of Appeal concluded, therefore, that this must be an indivisible part of the cost of repair, confirming the first instance decision.

The decision appears to clarify a number of areas that had been considered to be ambiguous for total loss cases. It also demonstrates that insurers defending a constructive total loss claim have a high burden to meet to justify rejection under a policy. It is interesting that the proactive involvement of surveyors on behalf of the H&M insurers, and a positive/alternative case put forward on repair specifications, was detrimental to the case they brought before the Court in defence of their actions. Obtaining evidence which supported their contention that the vessel was not a constructive total loss allowed the owners additional time to make their decision as to whether to abandon. Had insurers not been so proactive (in arguing and seeking to gather evidence that the vessel was not a CTL), the owners may well have been required to declare the notice of abandonment earlier.

The Courts' treatment of SCOPIC is also interesting. It is clear now that SCOPIC will be considered part of the overall salvage services and thus a benefit to the property, at least for constructive total loss claims. This seems to be in accordance with other areas of law. For example, SCOPIC claims sit alongside Article 13 claims for salvage in their priority as a maritime lien. The Court of Appeal concluded that benefit must have been conferred on the property by the SCOPIC services, and this could not readily be divorced from the benefit under Article 13. Ultimately, calculating a CTL is a purely arithmetical calculation regardless of who pays and under which policy of insurance. If, as in this case, it cost US$1.2m in salvage and US$1.4m in SCOPIC to get the vessel redelivered to the owners, it would make no sense to allow only the salvage element and not the rest; otherwise, had there been no SCOPIC element, the vessel would presumably have been declared economically unsalvageable and, therefore, a wreck.

[1] "The RENOS" - Sveriges Angfartygs Assurans Forening (The Swedish Club) & Ors v Connect Shipping Inc & Anor, Re Renos [2018] EWCA Civ 230 (19 February 2018)

[2] The Medina Princess [1965] 1 Lloyd's Rep 361 and Hall v Hayman (1912) 17 Comm Cas 81

[3] Arnould's Law of Marine Insurance and Average

[4] s.60(2)(ii) to "future salvage operations and of any future general average contributions to which the ship would be liable if repaired" (emphasis added)

Sanctions: Recent Developments and Practical Steps

Written by Kirsten Conacher

Although international economic sanctions feature in the news with increasing regularity, this subject is of particular relevance to those working in the shipping and international trade sector who should be acutely aware of the thorny issues they raise.

In November 2017, Clyde & Co hosted a seminar on sanctions, financial crime and terrorist financing in shipping and international trade. The seminar was chaired by Marie-Anne Moussalli, a senior associate in the ship finance team, and featured a panel discussion and presentations from Clare Hatcher (a partner and well known sanctions expert), John Leonida (a partner specialising in superyacht law, an area sensitive to sanctions and financial crime issues) and Tristan Frisell (head of legal and administration at tanker owner and operator Union Maritime). All three panellists highlighted main areas of concern: Clare gave a very helpful overview of current sanction regimes and Tristan provided an excellent insight into best practice in his industry, and the practical steps that they take to ensure compliance with any applicable sanctions regimes.

Key messages

A key observation from the Clyde & Co seminar was the notable proliferation of sanctions in recent years. Around 32 countries are now subject to EU sanctions (with only around half of these resulting from UN obligations), while US sanctions (pertinent for any transaction conducted in US dollars and for anyone coming under the (broad) definition of a "US person") are even wider in scope and are used as a popular strategic and diplomatic tool.

Here, in the UK, the government's approach to sanctions has – in common with other countries and international organisations – become much more aggressive in recent years, with the establishment of the Office of Financial Sanctions Implementation (OFSI) in 2016. OFSI's powers were further bolstered by the Policing and Crime Act 2017. The detection rate for sanctions infringement has also increased, and, nowadays, banks have stringent reporting obligations where they suspect sanctions breaches, as do solicitors, accountants, and other professionals. Post-Brexit, the UK government has expressed its intent to continue complying with the EU sanctions regime, whilst retaining the freedom to impose its own additional measures if required. Undoubtedly, the sanctions landscape is looking increasingly complex.

Since the seminar took place, sanctions have continued to expand. The US has widened sanctions against regimes and individuals in Venezuela, North Korea and Russia, while US President Donald Trump has reluctantly renewed the waiver of certain sanctions against Iran. In January 2018, a further raft of sanctions took effect against Russia, the most significant being the expansion of restrictions under section 223 of the Countering America's Adversaries Through Sanctions Act, which prohibits US persons from involvement in certain types of oil projects anywhere in the world, and not just in Russia where certain Russian entities have significant ownership or voting interests.

On the opposite side of the Atlantic, Implementing Regulations (EU) 2018/87 and 2018/88 recently extended EU sanctions against various Venezuelan and North Korean individuals.

Practical steps

It is clear that sanctions are here to stay, and that all businesses – particularly those with an international dimension – need to be alive to the issues involved. Sanctions regimes vary in scope, are multi-layered and are subject to frequent change: in practical terms, a busy commercial team will find keeping up with the minutiae of sanctions lists and their impact challenging.

In terms of best practice, some useful suggestions for businesses included:

  • Do not try to be an expert. Instead, ensure that your approach to sanctions (and other issues such as money laundering) consists in casting a broad net that catches anything suspicious – any links to a sanctioned country within a transaction, or anything that appears unusual to your teams. The expertise and advice on next steps should then come from your compliance team and/or specialist lawyers, who have the knowledge, resources and experience to accurately advise on the appropriate course of action. The people in your business should focus on escalating their suspicions and concerns to the appropriate level, and should avoid making their own assessment of complex situations, as the wrong response could have devastating financial and reputational consequences.

  • The rapid pace of global events can mean changes to sanctions regimes with little (or no) notice, so do ensure that you include appropriate and robust sanctions clauses in your contracts – particularly, provisions allowing you to terminate the agreement if another party becomes the subject of sanctions. If you are being asked to enter into a contract which requires your company to comply with any sanctions regime, you will need to ensure that your business is able to comply with the contractual provisions.

  • Consider process improvements aimed at minimising the risk of human error – such as a "Customer Relationship Management" system that allows your staff to easily cross-check potential customers and suppliers against sanctions lists.

  • Be mindful of your financing arrangements: it is likely that your loan agreements contain sanctions and anti-money laundering provisions; banks are subject to particularly high scrutiny (and indeed financial penalties) when it comes to breaches of these laws.Accordingly, they may well insist on quite onerous undertakings and broadly-worded events of default clauses. When financing or refinancing, never skim over these provisions as standard boilerplate wording – read them carefully, and if in doubt seek advice from specialist lawyers.

One final point raised at the seminar was businesses' attitudes to sanctions and financial crime. There is often, perhaps, a tendency to see these as an unwelcome interruption to commercial activity. There is no question that complying with these obligations can be onerous timewise and financially. However, it is important to understand that compliance is not optional and that the consequences of a breach in implementation can be extremely serious and, in some cases, carry personal liability. With appropriate vigilance, established processes and specialist advice, the burden and bureaucracy of compliance can be minimised to allow commercial activity to proceed seemlessly.

Protecting Your Lien on Sub-Freight and Sub-Hire – Practical Guidance

Written by Chris Metcalf and Thomas Choo

The vast majority of charterparties will include in their terms a lien clause which confers on the owner a lien over sub-freight (and sometimes sub-hire), for any amounts due to the owner under the head charterparty. If the owner exercises his lien, sums which would otherwise be payable by the sub-charterer to the charterer under the sub-charterparty, should instead become directly payable to the owner.

The right to exercise a lien over sub-freight is a right which the charterer grants to the owner in their charterparty and it is therefore a contractual right. If the lien over sub-freight were not granted in the charterparty, it would not exist.

It is not to be confused with a "maritime lien" which may arise in relation to certain types of claims[1] and which attaches to the ship or cargo, and which in an insolvency situation should confer priority on the claimant who has a maritime lien over unsecured creditors.

The purpose of a contractual lien over sub-freight is to provide security for any amounts due to the owner under the charterparty. If the charterer makes full and timely payments then the lien clause is not needed. It is only when the charterer fails to pay freight or hire that the owner will look to exercise their lien.

If the owner has fixed his vessel to a charterer who is unable to pay, perhaps because he is insolvent, then, the owner will want to rely on the security afforded by the lien clause and, ideally, the owner will want his right of lien to give him priority over unsecured creditors.

It is when faced with the insolvency of the charterer that the right to lien sub-freight should be most valuable to an owner. However, unless the lien has been registered as a charge against the charterer, then it may not give the owner priority over other creditors; the owner will rank pari passu with all other unsecured creditors and the lien clause will effectively be worthless.

Under English law, if the charterer is a company to which the Companies Act 2006 applies, the lien will be invalid as against other creditors of the charterer unless it has been registered as a charge. This is because a contractual lien over sub-freight is considered, under English law, to be an assignment of the charterer's book debts by way of security[2] and it is therefore registerable as a charge under the Companies Act s.859A. If it has not been registered, then, it is not valid as against other creditors.

The recent case of Duncan, Cameron Lindsay & another v Diablo Fortune Inc. and another matter [2017] SGHC 172, confirmed that the law in Singapore is the same, which should be so, given the similarity between the English and Singapore Companies Act legislation. However, it is worth noting that the case highlights that the position in Hong Kong is different. This is because the Hong Kong Companies Ordinance has been amended to expressly provide that a shipowner's lien on sub-freight is not to be regarded as a charge on a company's book debts or as a floating charge on its undertaking or property. One of the stated reasons for this change to the legislation is that registration of a lien is said to be, "inconvenient from a commercial perspective since charterparties are usually negotiated by shipbrokers and not by lawyers and are normally of a relatively short duration."[3]

While it may be correct that it is commercially inconvenient to register a lien over sub-freight as a charge, if a shipowner wants its lien to be recognised by a liquidator and other creditors then, as the law stands in England and Singapore, it must be registered.

So how does a ship owner register his right of lien over sub-freight?

Identify the correct jurisdiction

The first point to consider is in which jurisdiction does the shipowner register their lien. In the Diablo Fortune case, the Singapore court gave consideration to the law that governs the registration of charges and priority in insolvency matters. In this case, the charterparty was subject to English law, but the charterer who had agreed the lien was a Singapore incorporated entity. A distinction had to be drawn between:

  1. The law governing the initial validity and/or creation of the lien – which in this case was English law being the governing law of the charterparty; and
  2. The law governing the priority of interests and the distribution of assets in the event of the charterers' insolvency – which in this case was Singapore law as the charterer was a Singapore incorporated entity.

The question of priority of the different creditors in the event of the charterers' insolvency will be governed by the law of the country where the bankruptcy takes place and where the assets of the charterer are administered, which should be the jurisdiction in which the charterer is incorporated.

So the first step is to determine in which jurisdiction the charterer is incorporated and then check to see whether it is necessary to register the lien as a charge. If the charterer is incorporated in Singapore or England, for example, then it is necessary (but apparently not in Hong Kong).

How do you register the lien?

If the charterer (as the chargor) were a Singapore incorporated entity, then the charge would need to be registered in Singapore. In Singapore, a charge (which based on the Diablo Fortune case, also extends to contractual liens at the present time) created by a Singapore incorporated charterer in favour of an owner must be registered with the Accounting and Corporate Regulatory Authority of Singapore (ACRA) as either a floating charge or a charge on book debts, within 30 days of its creation. Generally, if a registrable charge is not registered with ACRA within the 30-day period (or any further extension of time granted by the Singapore courts), then the security created pursuant to such a charge will be void as against the liquidator and any creditor of the Singapore incorporated charterer, i.e. the person relying on the charge would not have priority over other creditors, and he will rank pari passu with all other unsecured creditors.

Registration of a charge in Singapore with ACRA is typically done by a registered filing agent (for example a law firm, an accounting firm or a corporate secretarial firm) on behalf of the entity seeking to register the charge, and is required to be done online.

The charge can be registered with ACRA by the chargor (i.e. the charterer) and/or the chargee (i.e. the owner), although it is more likely to be the chargee, as the party who stands to benefit from the charge, who engages the registered filing agent to register the charge.

To register the charge, the filing agent must provide certain information including, for example, a statement containing the prescribed particulars of the charge. ACRA will review the documentation lodged, and if there are no issues, it will send an email notification confirming the registration of the charge. The email notification will serve as conclusive evidence that the charge has been registered in compliance with the relevant statutory charge registration requirements.

Is it worth the inconvenience?

Ultimately, this will be a commercial decision based on the particular circumstances of each charterparty. Of particular relevance will be the financial standing of the charterer, and the duration and value of the contract. However, for the relatively modest investment of management time and a small fixed fee, it is our view that, for longer term charterparties such as time charters, bare boat charters and contracts of affreightment (COAs), if there is any risk that the charterer may become insolvent during the term of the charter, it would be worth taking the step of registering the lien.

Should you have any questions regarding this article, matters of corporate law, insolvency or shipping, please feel free to contact the authors, or your regular Clyde & Co contact.

[1] E.g. salvage, collision damage, crew wages and master's disbursements

[2] The "Ugland Trailer" [1985] 2 Lloyd's Rep. 372

[3] "Second Public Consultation on Companies Ordinance R, dated 2 April 2008

Court Finds "Personal Guarantee" in Charterparty Dispute is an "On Demand Bond"

Written by Jennifer Greengrass

In the recent case of Ultrabulk A/S v Jagatramka (2017)[1], the High Court was asked to determine whether a personal guarantee provided by the defendant company's managing director was indicative of a primary liability or a secondary liability, an important question as the guarantor's level of liability would vary in accordance with the answer. Here, the court held that the personal guarantee was a primary liability equivalent to an on demand bond.

Primary liability v secondary liability

A promise by a surety to a beneficiary to fulfil the obligations of a third party, if that third party fails to do so, can take the form of a primary or secondary liability:

  1. a primary liability (for example an indemnity or a performance bond) is independent of the obligations of the third party which means that if the underlying transaction is set aside for any reason, the primary liability remains valid and cannot rely on the defences available to the third party; and

  2. a secondary liability (for example a guarantee), mirrors the obligations of the third party under the primary contract which means that if the underlying transaction is set aside for any reason, the beneficiary can be prevented from claiming performance as the guarantee is dependent on the primary obligation.

Facts

Ultrabulk, a Danish company which operates and charters ships, had entered into two agreements with Gujarat NRE Coke Limited (Gujarat), a coke producer in India. Mr Jagatramka (Mr J) was the director of Gujarat. Gujarat was indebted to Ultrabulk in the sum of US$4.25m and, therefore:

  1. it was agreed that Gujarat would pay the outstanding debt in instalments by December 2013; and

  2. a personal guarantee was provided by Mr J stating that he was aware of Gujarat's debt to Ultrabulk in the sum of US$4.25m (the Gujarat Liabilities) in the following terms:

"NOW, therefore, I, the Guarantor, hereby unconditionally and irrevocably guarantee that if for any reason Gujarat do not repay the Gujarat Liabilities latest by 31 December 2013 then I will on the Beneficiary's first written demand from the Beneficiary, pay a sum equivalent to the Gujarat Liabilities plus the interest"

In June 2015, Ultrabulk demanded the sum of US$4.25m plus interest under the Personal Guarantee but Mr J failed to pay any part of that sum. At the time that Ultrabulk demanded payment under the personal guarantee, Gujarat had already paid US$1.95m towards the guaranteed liabilities.

Issues

Was the personal guarantee an on demand primary liability or was the guarantee a secondary liability co-existent with Gujarat's liability? In other words, was Mr J obliged to pay the sum equivalent to US$4.25m (as a primary obligation) or was that sum reduced by US$1.95m (as a co-existent secondary obligation)?

Decision

On a true construction of the personal guarantee, it was held to be a primary liability on demand bond, and, providing a valid demand was made, then Mr J was bound to pay a sum equal to US$4.25m, and not the lesser amount that Gujarat was liable to pay at that time.

The Court focussed mainly on the language of the personal guarantee:

  1. Mr J agreed to pay "a sum equivalent to" the "Gujarat Liabilities", defined as US$4.25 million (not an amount equivalent to Gujarat's liability at the material time);

  2. Mr J "unconditionally and irrevocably" guaranteed that if Gujarat did not pay the Gujarat Liabilities by December 2013, then Mr J would, on demand, pay a sum equivalent to the Gujarat Liabilities; and

  3. Mr J "irrevocably confirm[ed] that he [would] not contest and/or defend any application and/or proceedings to enforce" the guarantee. Again, such language was consistent with a primary liability and inconsistent with his liability being co-existent with that of Gujarat.

It should be noted that neither the title of the document, nor the party name, will determine whether it is a classic guarantee - documents described as guarantees may actually be guarantees and/or indemnities and/or performance bonds. The language of the document must be absolutely clear as to whether a guarantee or an indemnity or a performance bond is being given.

This case provides further evidence that primary liability performance bonds will be interpreted strictly, in accordance with their terms, and that the beneficiary is under no obligation to prove damages caused by breaches of the underlying contract. The Court will look at the true construction of a guarantee, and a surety will be unable to rely on a presumption against on demand bonds being given by individuals. If a surety has not obtained independent legal advice, then this will not preclude the beneficiary from relying on the guarantee.

Should the beneficiary require the benefit of a primary liability, and wish to avoid reliance on secondary, co-existent liability, then clear wording should be used in the guarantee, for example, by inserting a clear obligation on the surety to pay an identifiable sum, immediately, "unconditionally and irrevocably".

[1] Ultrabulk A/S v Arun Kumar Jagatramka [2017] EWHC 2792 (Comm)

London Arbitration 2/18 – Sellers v Buyers: Who Pays for Demurrage?

Written by Joshua Fraser

A recent decision has settled a dispute that arose between cargo sellers/charterers, and cargo buyers as to who was liable for the consequences of delay caused by shipowners not receiving freight by the agreed date, where the buyers had committed, but failed, under the sale contract, to pre-pay the freight.

Facts

Sellers entered into a voyage charterparty with owners of a vessel, on 8 September 2014, for the carriage of 3,000 m.t. of Ukrainian feed barley from Kiliya, Ukraine to Benghazi, Libya, under CFR (cost and freight) terms of Incoterms 2000 (the Contract). The sellers and the buyers agreed under the Contract that the buyers would pay the freight in advance.

The vessel was loaded and set sail on 14 September with an ETA of 19 September. The bill of lading was marked ''Freight Prepaid''.

On 15 September, the owners invoiced the sellers for freight of US$131,550.01. The sellers, in turn, invoiced the buyers for the same amount, plus the full price of the goods (US$ 705,586.42), requesting payment within three banking days. They pointed out 17 September was the last day for payment, and warned the buyers that owners would not release the bill of lading until they received full payment.

Buyers requested a change to the issued invoice, so that payment could be routed via New York. The buyers sent a copy of a SWIFT payment order for US$100,000. However, the payment order had a value date for only Monday 22 September.

The sellers emailed the buyers stating that the vessel could not proceed to berth until owners had received 100% freight under the charterparty, and discharge would not begin until sellers had received full payment for their goods under the Contract.

When the vessel arrived at Benghazi, the funds had still not been received. The sellers asked the buyers to investigate. It transpired that payment had not been completed by the bank in New York because of sanctions requirements in relation to Iran and Syria.

Six days later, the sellers finally received the US$100,000 less bank charges, and paid the owners, however, a balance of US$31,610.01 for freight remained unpaid. The owners released the original bill of lading after the sellers gave the owners a guarantee for payment of the outstanding freight.

The sellers were then able to present the documents required by the sale contract at the buyers’ bank, which they did on 30 September. They received payment from the buyers the next day. Discharge was finally completed on 11 October.

Dispute

Owing to the significant delay, owners claimed demurrage of US$70,917.84 against the sellers. The sellers brought arbitration proceedings against the buyers for the demurrage, arguing that the delay was due to the buyers’ failure to promptly pay the full freight. They argued if this had been done at least before the vessel reached Benghazi, the sellers would have been in a position to pay freight to the owners, which would have led to a speedier discharge and no losses.

The buyers denied liability. They argued that, whether or not they complied fully with their obligations under the Contract, the delay in discharging the vessel was due to the sellers’ failure to meet their obligations to pay freight due to the owners under the charterparty; an obligation independent of the Contract.

The freight invoices sent by the sellers required the buyers to make payment to the sellers, not to the owners - their obligation to pay the charterparty freight under the Contract was to pay it “as soon as possible”. Interpreted objectively, it followed that the buyers were also in breach of their obligations, though under the Contract, for not remitting the full freight to the sellers when requested, and in delaying the initial remittance of the US$100,000 part payment until 22 September 2014. But it did not follow from the buyers’ breach that they were responsible for demurrage.

Arbitration

The Tribunal held that, as CFR sellers and charterers of the vessel, the owners’ contractual partner was the sellers, not the buyers. Therefore, paying freight under the charterparty remained the sellers' responsibility. As such, the tribunal found that instead of taking steps to remit the overdue freight to the owners themselves, the sellers had wrongly decided to take the risk of the vessel’s discharge being delayed for non-payment. The sellers could not excuse themselves either by relying on cash flow difficulties. If they did not have sufficient working capital to meet their obligations under the charterparty, they should not have entered into the Contract. As it was, they did manage to find sufficient resources to arrange a guarantee for the balance of the freight, once an on-account payment had been made on 26 September 2014.

As for the buyers, their obligation to pay the charterparty freight under the Contract was to pay it “as soon as possible” which meant that the buyers also breached their obligations under the Contract for, firstly, not remitting the full freight to the sellers when requested, and, secondly, for delaying the initial part payment of US$100,000 until 22 September 2014. This did not, however, mean that the buyers were responsible for demurrage under the charterparty.

Accordingly, the sellers' decision not to promptly pay freight to the owners, or seek agreement with them to release the bill of lading, broke any chain of causation that existed between the buyers’ breach and owners under the Contract. The sellers, thereby, incurred a liability for demurrage that could have been otherwise avoided, and their claim against the buyers failed in its entirety.