The High Court has recently considered an appeal from an LMAA arbitration award regarding the proper construction of clause 8(d) of the Inter-Club Agreement 1996 (the ICA) which provides for a 50/50 liability split between owner and charterer for all other cargo claims not considered under clause 8 unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other. The issue of law to be determined was whether the term ‘act’ in the phrase ‘act or neglect’ meant a culpable act in the sense of fault or whether it meant any act, whether culpable or not.

Factual background

The dispute arose out of a time charter trip on the New York Produce Exchange Form for a consignment of soya bean meal from South America to Iran. The owner of the “YANGTZE XING HUA”, Yangtze Navigation (Hong Kong) Co Ltd had commenced arbitration proceedings against the charterer, Transgrain Shipping (Singapore) Pte Ltd in respect of a claim for cargo damage.

The charterer had delayed discharging the cargo at the discharge port for over four months because it was not being paid by receivers. On discharge the cargo was found to be damaged due to overheating. A claim was made against the vessel and settled by the owner for €2,654,238. The owner then claimed that sum, plus hire, from the charterer, in application of clause 8(d) ICA, incorporated in the charterparty.

The fundamental issues before the Tribunal were the cause of the damage and whether the owners were to blame for not properly monitoring the cargo temperatures. The Tribunal held that the damage was caused by a combination of the inherent nature of the cargo together with a prolonged period at anchor at the discharge port. In short, the delay was too prolonged given the moisture content of the soya bean meal and the owner did not fail to properly monitor the cargo temperatures.

In considering the application of clause 8(d) ICA the Tribunal held that either the owner or charterer had to bear the risk of something going wrong caused by the charterer’s decision to delay discharge. The charterer’s decision, in the Tribunal’s opinion, constituted an ‘act’ falling within clause 8(d) of the ICA and, therefore, it was found to be 100% liable for the consequences. In reaching this conclusion the Tribunal held that the word ‘act’ in clause 8(d) ICA was to be distinguished from something suggesting fault, breach or neglect. It was also critical of the charterer’s profiting from its decision to keep the cargo on board, both by virtue of the vessel representing a ‘floating warehouse’ at the receiver’s expense and also the charterer’s ability to divert the cargo more easily. The charterer appealed and the matter was heard by Mr Justice Teare.

Legal issues

The issue to be determined was whether ‘act’ had been constructed wrongly and whether it should have been interpreted as a ‘culpable act’ instead. Teare J considered first the context of the ICA, now incorporated into charterparties as a matter of course, and agreed with the Court of Appeal in The Strathnewton [1983] 1 Lloyd’s Reports 219 in that the ICA provided a ‘more or less mechanical apportionment of liability by reference to the nature of the claims put forward by bill of lading holders’.

The charterer’s argument was that the phrase in clause 8(d) should be read as a whole and that the words ‘act or neglect’ had equivalent or complementary meaning, so that ‘act’ meant fault by commission just as ‘neglect’ meant fault by omission. In support of this submission the charterer relied upon similar wording in the case of Anglian Water Service -v- Crawshaw Robins [2001] Building Law Reports 173.

Teare J disagreed. The meaning of the wording had to depend on its context and it had to be construed having regard to the language of the ICA as a whole. The wording interpreted in Anglian Water was in the context of a civil engineering contract, not within the framework of the ICA. The fundamental point was the ‘more or less mechanical apportionment of liability’ envisaged by the ICA whereby the word ‘act’ was to bear its ordinary and natural meaning without regard to any questions of fault. Clause 8(d) was a sweeping up provision dealing with claims which were in neither party’s sphere of risk and which sought to apportion claims as between owners and charterers without having regard to the terms which would otherwise govern their relationship. The Tribunal’s interpretation was correct and the charterer’s appeal was dismissed, however, leave to appeal from this decision has been granted.

This case clarifies the meaning of the word ‘act’ within clause 8(d) ICA in providing that it should now be interpreted to include any positive conduct regardless of fault. Parties should now be careful when entering into a charterparty incorporating the ICA 1996 provisions as they have to be aware that they may be found liable irrespective of fault or breach of the contract.