The parties entered into an agreement to ship wheat for discharge at Djibouti. After discharge, the vessel was to be redelivered via the Suez Canal. The parties agreed ultimately to discharge the cargo in Damietta, involving passage through the Suez Canal. A dispute arose as to whether the cost of traversing the canal should be paid by the charterers under an indemnity clause.

The claimants – the disponent owners of the “GLORY SANYE” – chartered the vessel to the defendant charterers for a voyage from Constanza to Djibouti for the shipment of a cargo of wheat. However, on arrival at Djibouti, the cargo could not be discharged because receivers were not present.

After the vessel had remained anchored off Djibouti for approximately three months, the parties entered into an agreement (Addendum Number 1) pursuant to which the discharge port was changed to Ain Sukhna, Egypt. Addendum Number 1 also stipulated that the disponent owners were to be ‘held harmless and indemnified against all losses, expenses, damages, risk whatsoever and howsoever arising… which may arise from… charterer’s failure to discharge cargo’ (the Indemnity Clause).

Subsequently, the parties entered into a further amendment agreement (Addendum Number 2), pursuant to which the discharge port was changed to Damietta, Egypt. All other terms of the original charterparty and Addendum Number 1 were agreed to remain in force. In order to get to Damietta, the vessel had to navigate through the Suez Canal. Had discharge taken place at Djibouti as originally agreed, the vessel would then have been redelivered at Port Said, Egypt under the head charterparty pursuant to which the disponent owners took ownership of the vessel. She would have had to transit the Suez Canal. Under the head charterparty, the disponent owners were responsible for paying all canal tolls incurred. 

The disponent owners (owners) asked the charterers to pay for the costs of transiting the Suez Canal pursuant to the indemnity clause, but the charterers refused. The owners alleged that passing through the Suez Canal in order to discharge at Damietta was an expense caused by failure to discharge at Djibouti because, had discharge taken place at Djibouti, the vessel would not have transited the canal under the charterparty, and that cost would not have been incurred. It was therefore recoverable under the indemnity clause.

The owners commenced arbitration proceedings against the charterers to recover the costs of transiting the Suez Canal. The tribunal dismissed the claim, interpreting the words ‘losses’ or ‘expenses’ in the indemnity clause – which survived as part of Addendum Number 2 - as covering only additional losses and expenses which would not have been incurred in any event. Given that the owners would have incurred costs of transiting the Suez Canal even if the vessel discharged at Djibouti, to this extent the costs were not to be borne by the charterers. There was evidence that transit in ballast would have cost US$20,000 less than when laden, and the tribunal allowed the claim to that extent.

The owners appealed to the Commercial Court on a point of law, pursuant to section 69 of the Arbitration Act 1996. The court took an objective approach to construing the indemnity clause: how would a reasonable person, with the parties’ background knowledge as it was when they entered the Constanza-Djibouti charterparty and Addendum Numbers 1 and 2, interpret the indemnity clause?

The court held that:

  1. if the original voyage had been performed as originally agreed, the cost of traversing the canal would not have been incurred; and
  2. in order to perform the amended contract, the cost of traversing the canal had to be incurred to discharge at Damietta.

Therefore, the obvious interpretation was that the expense of transiting the Suez Canal to perform the charterparty was a cost that only arose due to failure to discharge in Djibouti. The court held that this would be the conclusion drawn by a reasonable person, with the parties’ background knowledge on entering the agreements.

The tribunal’s error of law identified by the court was that the disponent owners’ responsibilities under the head charter was not part of the background knowledge available to both parties when they entered into Addendum Numbers 1 and 2. The disponent owners’ liability to head owners was therefore not a factor which ought to be borne in mind when interpreting the indemnity clause. The transiting expenses were therefore an extra cost caused by the charterers’ failure to discharge at Djibouti.

The court therefore allowed the appeal.