Charterer incurs $138 million liability by breach of 'safe port' warranty - the Ocean Victory case


  • Date: 17/09/2013

Alistair Feeney, partner of London law firm Holman, Fenwick & Willan LLP gives valuable insights into the considerable potential exposure faced by charterers under the 'safe port' warranty of their charter contracts.

Revisiting unsafe ports:  lessons from The Ocean Victory

The recent decision of the Commercial Court in Gard Marine & Energy Ltd v China National Chartering Co Ltd (The Ocean Victory) [2013] EWHC 2199 (Comm) serves as a useful reminder of how far charterers' warranties of port safety extend, and the size of the liabilities that may result when such warranties are breached.

Incidence of the warranty

Warranties of port safety are most typically thought of as appearing in time charters, with charterers warranting to owners that they will direct the vessel only to safe ports, berths and anchorages.  They also appear in voyage charters, particularly where there are ranges of possible loading or discharge ports.

Decisions in recent years have confirmed that safe port wording will be strictly construed, and that charterers will be deemed to have given warranties even where owners do not necessarily require such protection.  In The Livanita [2007] EWHC 1317 (Comm) the Commercial Court held that general wording in a time charter form limiting trading to "safe ports, safe berths and safe anchorages and places" applied as a warranty of safety in respect of St Petersburg even though the form was being used for a trip time charter and owners had expressly agreed to undertake a voyage to the Far East "via St Petersburg".  In The Archimidis [2008] EWCA Civ 175 the Court of Appeal held that the phrase "Load one safe port Ventspils" in a voyage charter contained a warranty by charterers as to the safety of Ventspils.

Charterers in The Livanita and The Achimidis argued that it did not make sense to impose warranties of port safety in the circumstances of those cases.  Such warranties are intended to protect owners from the being directed to an unsafe port during a charter.  They enable owners to refuse to follow orders to proceed to an unsafe place, and to recover damages from charterers if they proceed to an unsafe port and suffer loss as a result.  It is not obvious that owners should be entitled to this protection when they expressly contract to send their vessel to, or via, a named port, which is what happened in The Livanita and The Achimidis.  It seems reasonable to expect owners to make their own enquiries about the safety of a port before contracting to send their vessel there.

However, the reasoning of the Courts in both cases is difficult to fault.  The relevant charters contained language of port safety, and English judges are loath to find that wording in a contract is meaningless or redundant.  The result was that charterers were found to have given warranties of port safety, even when there would have been little or no commercial imperative on them to do so.

The lesson from The Livanita and The Achimidis is that the presence of safe port language in any charter, whether it appears in a printed form or in bespoke wording, will probably mean that charterers have given some form of safety warranty, whether or not they anticipated doing so.

Nature of the warranty

The standard formulation for port safety is derived from the Court of Appeal's judgment in The Eastern City [1958] 2 Lloyd's Rep. 127: "a port will not be safe unless, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship…".  It follows that a port will be unsafe if it is always unsafe for any vessel, or sometimes unsafe for any vessel, or always unsafe for the particular vessel, or sometimes unsafe for the particular vessel.  Conversely, a port will be safe if the particular vessel on charter will only be exposed to danger through negligent navigation or seamanship.

The facts of The Eastern City provide a good illustration of this.  The vessel was chartered for a winter voyage from "one or two safe ports in Morocco" to Japan.  The charterers ordered the ship to load at Mogador, where she was driven onto rocks next to the anchorage by a strong gust of wind.  It was held by the Court of Appeal that the port was unsafe because it was exposed to sudden gales in winter which tended to cause ships to drag their anchors in unreliable holding ground in the anchorage area.  This was an example of a port that was sometimes unsafe for all vessels, or at least sometimes unsafe for the vessel on charter.

In The Ocean Victory the Commercial Court again applied these principles.

Ocean Victory

Ocean Victory was a Capesize bulk carrier on 10-year bareboat charter from Ocean Victory Maritime Inc. to Ocean Line Holdings Ltd.  The charter provided that the vessel was to be employed "between good and safe ports".  The bareboat charterer, Ocean Line Holdings Ltd, time chartered the vessel to Sinochart, who agreed to employ her "via safe anchorage(s), safe berth(s), safe port(s)".  Sinochart sub-chartered the vessel to Daiichi for a trip time charter "via safe port(s) safe anchorages(s) South Africa".

On 24 October 2006, while trying to leave the Japanese port of Kashima in a severe gale, part-laden with an iron ore cargo, the vessel encountered force 9 winds and heavy swell.  The vessel was set down on the end of a breakwater and then driven aground, before breaking up.

The claimants, who were hull underwriters suing as assignees of the registered owner and bareboat charterer, submitted that Kashima was an unsafe port.  Charterers, Daiichi and Sinochart, submitted that Kashima was not unsafe, and, even if it was, that the casualty was caused by negligence of the master in leaving the port when he did and/or by negligent navigation.  Charterers argued that Kashima could not described as unsafe simply because its systems did not guard against every conceivable hazard, and that the pertinent consideration as whether there had been a reasonable level of safety.  They pointed out that no vessel had ever before been trapped by a combination of wind and swell in the way that happened to Ocean Victory.

The Court found that Kashima had been unsafe for the vessel.  The judge held that the storm that affected the port on 24 October 2006 was not abnormal, because an abnormal occurrence was one that was unrelated to the prevailing characteristics of the port.  The judge found that the danger facing Ocean Victory related to two prevailing characteristics of Kashima: the vulnerability of the berth to long swell; and the vulnerability of the Kashima Fairway to northerly gales caused by a local depression.  The judge accepted that it might be rare event for those two events to occur simultaneously, but observed that it could not be a surprise if they did so, and that in any event the key point was that they flowed from features of the port.

The Court rejected in forthright terms charterers' argument that an element of reasonableness should be taken into account when considering the safety of a port and safety measures at the port.  The judge observed that the Eastern City formulation said nothing about "reasonable safety" and he expressed the view that such a concept would introduce unwelcome and inappropriate uncertainty into the meaning of the safe port warranty.  He pointed out that safety was not absolute but that it was assessed against whether dangers in a port could be avoided by good navigation and seamanship, rather than by reference to any general standard of reasonableness.

The Ocean Victory decision underlines the strictness and extent of warranties of port safety.  It may on a first reading appear surprising that the Court accepted the conditions at Kashima on 26 October 2006 were rare but then concluded that they were not abnormal.  The concept of abnormality is of course often used to describe events that are rare or out of the ordinary.  That is not however how it is used in unsafe port cases.  The judge in the Ocean Victory was following statements of principle expressed in Wilford on Time Charters (6th edn.) to the effect that an abnormal occurrence was one "which is unrelated to the prevailing characteristics of the port" and that "a port will be unsafe only if the danger flows from its own qualities or attributes".  Those statements are derived from various authorities.

The decision in the Ocean Victory may therefore be a particularly stark example of how English law principles relating to safe port warranties may apply, but it does not represent a departure from or a tightening of those principles.  It is a clear indication that the English courts will continue to apply safe port warranties strictly in the interests of maintaining certainty in the allocation of risks between owners and charterers.

Extent of liability

The Ocean Victory also illustrates how charterers' liabilities for breaching safe port warranties can be very large.  The claimant hull underwriters successfully claimed $137.7 million from charterers, which comprised $88.5 million for the loss of the vessel, wreck removal costs of $34.5 million, $12 million in SCOPIC costs pursuant to LOF 2000, and $2.7 million in lost hire.

Charterers sought to limit the claimant's recovery by reference to the fact that the bareboat charterer had been obliged, under the terms of the bareboat charter, to insure the vessel against marine, war and P&I risks under policies in the joint names of the bareboat charterer and the registered owner.  Charterers argued that the registered owner was only entitled to claim on the insurance for the loss of the vessel and was not additionally entitled to recover damages for the loss from the bareboat charterer.  The logical consequence of this submission was that the claimant, as the assignee of the bareboat charterers, should not recover damages from the time charterer for the loss of the vessel.
The hull insurers had paid out $70 million for the loss of the vessel.  If charterers' argument had been accepted, the claimant's claim would have been reduced by that amount.

The Court rejected charterers arguments on this issue.  It held that the bareboat charterer's obligation to obtain insurance, as it was expressed in the bareboat charter, did not preclude the registered owner from making a claim against the bareboat charterer for breach of the warranty of port safety, notwithstanding that they were joint assured.  The Court found that the bareboat charterer was liable to the registered owner for breach of the safe port warranty, despite the registered owner having recovered the insured value of the vessel under the hull policy.  It followed that the claimant hull insurers were entitled to recover damages from the time charterer, as assignee of the bareboat charterer, and that the time charterer was able to recover damages from the sub-time charterer.  The sub-time charterer was left with liability of $137.7 million.

This potential for liability should be borne in mind by all charterers, including trading companies who fix vessels on voyage charters through brokers, without ever becoming involved in the business of operating ships.  The decision in Ocean Victory illustrates how only briefly chartering a ship could in some circumstances result in very large liabilities indeed.


We are grateful to Alistair for this succinct and informative review of charterers' liabilities.  If you have any queries regarding this review, please contact Alistair at the folllowing address/telephone number:


Alistair Feeney
Partner
Holman Fenwick & Willan LLP
Email: alistair.feeney@hfw.com
Tel: +44 (0)20 7264 8000

Alistair provides advice and assistance to trading companies, investment banks and utility companies in relation to a range of commodities, including oil products, LNG and biofuels. He also specialises in international litigation and arbitration, with particular expertise in disputes relating to commodity trading, shipbuilding and ship sale and purchase.

 

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