Charterparty Indemnities


  • Date: 19/10/2001
  • Author: Simon Davidson
  • Source: Holman Fenwick & Willan

A  IMPLIED INDEMNITIES FROM TIME CHARTERERS

 

1 INTRODUCTION

The structure of responsibility under a time charter is that matters of seaworthiness and navigation aside, the Charterers are responsible for and obliged to indemnify the shipowner for loss caused by the employment or Charterers instructions. (See Wilford, Time Charters, 4th Edition, pages 291 to 299). An explanation of the basis of the implied indemnity was given by Mr Justice Cresswell at first instance in the Island Archon [1993] 2 Lloyd's Rep. 387 at 407 where he said:

"Under a time charterparty the shipowner puts the vessel at the disposal of the charterer, who can choose for himself what cargo he shall load and where he shall send the ship, provided that the limits prescribed by the contract are not exceeded. When deciding who has to bear the consequence of a choice being made in one way rather than the other, it is reasonable to assume that the consequences shall fall upon the person who made the choice, for it is the charterer who had the opportunity to decide upon the wisdom of the selection he makes".

There are a number of routes by which an implied indemnity can arise. We consider three

(1) An implied indemnity arising out of clause 8 for the Owners to be indemnified against the consequences of complying with Charterers' orders for employment of the vessel e.g. the consequences of the carriage of a particular cargo.

 

(2) An implied indemnity arising out of Clause 34 that the terms imposed on the Owners by any bills of lading issued by the Charterers will be on more onerous than the Owners' obligations under the charterparty.

 

(3) An implied indemnity arising from Owners' compliance with Charterers' request to deliver cargo without presentation of a bill of lading.

All involve similar principles and in the light of the decision of the Court of Appeal in the Island Archon [994] 2 Lloyd’s Rep. 277 may be seen as examples of the same broader principle.

 

 

2 COMPLIANCE WITH CHARTERS' ORDER

It is not a complete indemnity, but is subjected to certain limits:

a) The loss sought to be recovered must have been caused by the order and not merely have arisen in the course of complying with the orders: Royal Greek Government -v- Minister of Transport (1949) 83 Ll Rep 228.

 

b) The loss must not have been caused by a subsequent or intervening act: The Island Archon [1994] 2 Ll Rep 227, though this may simply be an inevitable consequence of (1) above.

 

c) The Owner must not themselves have been at fault. However, this is limited to manifestly wrongful or tortious conduct, ie there must be an element of turpitude: The Nogar Marin [1944] 1 Ll Rep 442.

 

d) The loss in respect of which the indemnity is sought must not arise from a risk which, on the true construction of the charter, the owners themselves have agreed to bear: The Island Archon [1993] 2 Ll Rep 388, [1994] 2 Ll Rep 227 and The Athanasia Comninos [1990] 1 Lloyd’s Rep 277.

 

e) In the light of The Eurus [1998] 2 Lloyd’s Rep 351 there may be scope for argument as to whether the loss for which indemnity is sought must not be too remote in law to be recoverable, applying ordinary principles of damages for breach of contract.

The limits are often easier to state than to apply, particularly since The Island Archon.

 

 

3 BILL OF LADING ON MORE ONEROUS TERMS

The quid pro quo for the Owners having to sign bills of lading in the form required by Charterers is that they are entitled to be indemnified by the Charterers if such bills contain terms more onerous for the Owner than the terms of the charterparty and the Owners thereby incur a liability which they would not have incurred under the charterparty: The Island Archon [1994] 2 Ll Rep 227. The indemnity arises either as a matter of law or of business efficacy and is not dependent upon breach by Charterers.

 

An interesting illustration of the application of this indemnity occurred in the recent case The Ikariada [1999] 2 Lloyd's Rep. 365. This case involved an amended Gencon voyage charter rather than the time charter but in this case the principles were the same. The charterparty provided that the master was to sign bills of lading as presented without prejudice to the charterparty. The charterers required the master to sign a bill of lading which in Congenbill form. Clause 1 of the standard terms on the reverse of the bill of lading incorporated the terms conditions and liberties and exceptions of the charterparty “dated as overleaf”. However, as is common, no date of a charterparty was endorsed on the front. Whilst the vessel was coming along with the consignees discharging facility in Greece, the vessel collided with the consignees’ discharging crane causing damage. It was alleged that this was negligent navigation. The shipowner was sued for this claim by the consignee in Greece. The shipowner sought a declaration that they were entitled to an indemnity from the charterers on the basis that they had required the master to sign a bill of lading which exposed them to greater liability and under the charter,. This was alleged to be because the bill had not effectively incorporated the terms of the charterparty, including an exception for negligent navigation. The judge took the opportunity of summarising the relevant legal principles. These were as follows:-

a) There could be no claim for breach of contract or a right of indemnity if the bill of lading which the charterers presented to the master for the signature was a contractual and proper bill of lading.

 

b) To determine whether the bill of lading was a proper one had to be determined in accordance with the proper law of the charterparty.

 

c) The question whether the terms of the bill of lading were effective to incorporate the terms of the charterparty, so as to render the obligations of the shipowner under the bill no more onerous on his obligations under the charterparty, was one of construction of the relevant documents.

 

d) It was necessary to distinguish between charters which require the master to sign bills of lading “as presented” and charters which provide that the master shall sign bills of lading in the specified form. In the latter situation provided the specified form is used, generaly no question of indemnity could arise.

 

e) If the charter requires the master to sign bills of lading as presented, he must do so provided the bill of lading presented to him does not contain extraordinary terms which are manifestly inconsistent with the charter. If the master does sign a bill of lading as presented which imposes upon the shipowner more onerous obligations than under the charter, he has an implied indemnity.

 

f) Where a charter provides that a master shall sign bills of lading in a specified perform when requested, if bills of lading are presented which are not in that form the master is not bound to sign them. Blanks in a specified form are indications in the form that the relevant details should be entered and the master would be entitled to decline to sign such a bill with blanks.

 

g) In the present case, the failure to fill the blank on the face of the bill of lading did not, as a matter of English law, prevent or inhibit the incorporation of the terms of the charter.

 

h) It followed therefore that since the terms of the charter were incorporated into the bill of lading, the bill did not impose more onerous obligations upon the owner than under the charter and there was no implied indemnity.

 

 

1 COMPLIANCE WITH CHARTERERS' REQUEST

2 THE FACTS IN THE EURUS

3 THE ARBITRATORS' FINDINGS

4 REMOTENESS

 

 

5 CAUSATION

6 CONCLUSION

It is not easy to ascertain the effect of this Court of Appeal decision on future claims for indemnities. As Lord Justice Balcombe pointed out, clause 36 did not use the word "indemnity", merely stating that the owner should "be responsible for" the loss suffered. His judgement (but not that of Lord Justice Staughton who delivered the principal judgement) suggests that had the clause used the word "indemnify" the forseeability test may not have been applicable. A clause could certainly be drafted so as to exclude the test of remoteness although the judge at first instance had considered that the test of remoteness would have applied even had the clause referred to "all consequences". It could provide for example that the owners were to provide charterers "with a complete indemnity for all loss whatsoever resulting from a failure to comply with charterers' instructions, however, improbable or unpredictable". It appears to be clear that the courts will seek to limit the scope of recovery under indemnity and similar clauses where this is permissible as a matter of construction of the words used.

 

It is also unclear whether the test of remoteness would apply where the indemnity arises solely by implication. Applying the reasoning of Lord Justice Staughton would suggest that the test should apply to limit the indemnity to losses which were foreseeable since it could only be those that the parties had intended to fall within it. This was also the view of the judge at first instance who considered that the courts would look critically at the scope of express and implied indemnities. However, this may be difficult to reconcile with the earlier decision of the Court of Appeal in The Island Archon [1994] 2 Lloyd's Rep 227. That case involved an implied indemnity under a time charter for the consequences of complying with a request from the charterer. The liability arose from the practice of bringing paper shortage claims in Iraq. The court explained that the implied indemnity would not extend to losses arising from risks which the owner had agreed to run such as navigational risks. It was held that the Iraqi system was not well known or foreseen at the time the charter was entered into and so was not a risk against which the owner could have guarded against at that time and so he had not agreed to bare it. But if the loss was not foreseeable was it not too remote? The answer may lie in the type of loss involved. The parties in The Island Archon would have contemplated cargo claims and even spurious claims but the parties in the Eurus did not contemplate the Nigerian 0800 rule and the compulsory back dating of bills lading leading to the charterer paying a different price under a sale contract about which the owner knew nothing. The scope of the implied indemnities and their application to voyage charters will be a fertile area for development in the future. As Lord Denning M.R. confessed openly, in relation to the judiciary's attempts to establish limits for compensation in connection with the tort of negligence:

“sometimes it is done by limiting the range of the persons to whom duty is owed. Sometimes it is done by saying that there is a break in the chain of causation. At other times it is done by saying that the consequences are too remote to be a head of damage. All these devices are useful in their way. But ultimately it is a question of policy for the judges to decide"

(Lamb -v- Camden London Borough Council [1981] Q B 625)

 

We can expect to see in future similar "policy decisions" in relation to implied indemnities under charterparties.

The Court of Appeal disagreed with the arbitrators that an event occurring before the wrongful act could never be the cause of the loss as a matter of law. The arbitrators were therefore wrong to rule out the Nigerian 0800 hours rule as a possible cause of the loss as a matter of law. The argument based upon the metaphor of a chain of causation may suggest that if the first link in the chain was the wrongful act only a subsequent event could be an intervening cause. However that metaphor was not appropriate as a test of causation in contract. The true test was whether the wrongful act was a cause of the loss as a matter of common sense rather than something else.

 

The charterer sought support from the egg-shell skull cases. In those cases the wrongdoer who caused a slight personal injury was liable for the full injury suffered even if it was as aggravated by the abnormal or unusual condition of the victim which could not have been foreseen. The unusual physical condition will not negative a causal connection where at least some slight physical injury was foreseeable. The court did not consider that the egg-shell skull negligence cases were an example of a general principle that a cause which preceded the wrongful event in time could never be a true cause of the loss. The court would therefore have remitted the issue back to the arbitrators to reconsider the matter to decide whether it was the master's failure to obey the charterers' instructions or the Nigerian 0800 hours rule that was the cause of the loss. It was unnecessary to do so in the light of their finding that the indemnity claim was subject to a test of remoteness.

 

 

Charterers contended that scope of loss covered by the express indemnity in clause 36 was not limited by the requirement that it be reasonably foreseeable. The owners contended that the scope of loss recoverable was limited by the usual principles applicable to damages for breach. There was no clear authority on the point. One Court of Appeal case which had considered the scope of the indemnity under Article IV rule 6 of the Hague Rules whereby a shipper was liable for damages and expenses "directly and indirectly arising out of” the shipment of dangerous goods gave no guidance to the present case. The court considered the question was to be approached as one of interpretation and construction of the contract; did the clause provide the charterers should recover even if the loss suffered was not within the reasonable contemplation of the parties? There was no reason to assume that for this particular breach, namely, to comply with charterers instructions, the scope of the loss recoverable should be wider than that usual for breach. There was nothing in the clause that required this to be so. This was sufficient to dispose of the appeal since the arbitrators had held that the 0800 rule was not reasonably foreseeable.

They found that the instruction from charterers to the master and owners not to tender a notice of readiness before 1100 hours on the 31st January also necessarily implied an instruction not to commence loading until after that time. Had loading not commenced until after that time it would not have been completed until after 0800 hours on the 1st February and the February price would have applied. The practice and the regulations in Nigeria were that if loading was completed before 0800 hours on the first day of the month then the bill of lading would be dated the previous day to allow the Department of Petroleum Resources to carry out an audit of stocks at the end of each month more conveniently. This peculiarity of procedure and regulation in Nigeria was unknown to either the Owner or the charterer and was probably unique in the world. It was therefore not reasonably foreseeable. The arbitrators held however that charterers could recover an indemnity. The scope of the indemnity was not limited by requirement that the nature of the loss be reasonably foreseeable and that the loss was caused by the master's failure to comply with the instruction not to commence loading until after 1100 hour on the 31st January. On the question of causation, they held that the peculiar procedure and law in Nigeria could not be an intervening cause of the law so as to break the change of causation from the master's failure to comply with his orders because it proceeded those orders in time. Owners appealed against the arbitration award to the High Court and succeeded at first instance. The charterers then appealed to the Court of Appeal.

 

 

The claim was brought by the charterers under a voyage charter for the carriage of minimum of 122,000 tons of crude oil from one safe port Nigeria in charterers option to a number of different ranges. Clause 36 provided:

 

"Owners shall be responsible for any time, costs, delays or loss suffered by charterers due to failure to comply fully with charterers voyage instructions specified in voyage orders. Provided such instructions are in accordance with the charterparty and custom of the trade".

 

Charterers had a long term contract for the purchase of oil from the Nigerian National Petroleum Corporation. This provided that the price would be fixed at that applicable at the date of the bill of lading. Before the vessel arrived at the end of January, the charterers were notified by the Nigerian National Oil Corporation that the price for February shipments would be significantly reduced. To try to take advantage of this, the charterers gave instructions to the owners that a notice of readiness should not be given to the terminal until 1100 hours on the 31st January at the earliest but as between the owners and charterers it would be treated as if that the notice of readiness was given on arrival. The vessel arrived about midnight on the 30th January and the Notice of readiness was given to charterers. Subsequently notices of readiness were given at 1100 hours the next morning to the terminal. However notwithstanding that no notice of readiness had by then been given, the vessel left the anchorage, and reached the berth at 0300 hours and loading commenced at 0636 hours. The loading was completed at 0130 hours on the 1 February. However, the shippers presented a bill of lading which was dated the 31st January although it did state that the lifting was completed before 0800 hours on the 1st February. As a result the charterers were obliged to pay the higher January price for the cargo suffering a loss of about US$680,000. The charterers sought to recover this from the owners by way of an indemnity under clause 36 arguing that the owner had failed to comply with their orders and that this caused the loss.

 

 

On similar principles to the implication of an indemnity for the consequences of complying with Charterers' orders, there is a general principle of law whereby a party who performs an apparently legal act at the request of another and the act turns out to be injurious to the rights of a third party is entitled to be indemnified against the consequences of doing so. It derives in particular from Sheffield Corporation -v- Barclay [1905] AC 392, but was specifically identified in the The Island Archon as one of the bases giving rise to the implication of an indemnity for complying with Charterers' orders. There is an alternative chain of authorities deriving from Birmingham & District Land Co. -v- London & NW R'Y Co. (1886) 34 Ch D 261 which creates a similar right of indemnity where the act is not done under an existing obligation.

 

 

The legal principle is that the Owners are obliged to comply with the orders of the Charterers as to the employment and agency of the vessel and that they are therefore entitled to be indemnified against the consequences of doing so. This may include the reasonable costs of defending legal proceedings: The Caroline P [1985] 1 WLR 553; Strathlorne SS -v- Andrew Weir (1934) 50 Ll L Rep 185. It applies regardless of whether or not the Charterers are at fault: The Athanasia Comninos [1990] 1 Lloyd's Rep 277.

 

B THE EURUS: THE SCOPE OF EXPRESS AND IMPLIED INDEMNITIES

 

1 INTRODUCTION

We have seen in an earlier paper that implied indemnities can arise in a number of circumstances under time charters. There may also be a number of circumstances in which there may be an implied indemnity under voyage charters under the same broad principle although it is, as yet, unclear what these circumstances may be. There are often express indemnities under charterparties or under letters of undertaking given to an owner in consideration for his agreeing to do something which he is not contractually obliged to do under the charter party. Examples are the express indemnity under the Baltime clause 9 for the consequences of the master or agent signing bills of lading and the P&1 club recommended forms for delivery of cargo without surrender of original bills of lading or for a change of destination. We would like to consider the scope of such indemnities and the losses which may be covered particularly in the light of the recent Count of Appeal decision in the EURUS [1998] 1 Lloyd's Rep 351.

 

The earlier paper set out various limits upon indemnity : the shipowner must not be at fault in the sense that he had committed a manifestly wrongful or tortious act; it is irrelevant that the charterer was not at fault; the loss in respect of which the indemnity sought must not arise from a risk which on a true construction of the charterparty the owners have agreed to bare; the loss must have been caused by the relevant act or order of the charterer; finally it may be a requirement that the loss was not too remote.

 

It is these last two limitations concerning causation and remoteness of damage which we would like to consider in this paper. It may be seem at first sight to be an easy question as to what caused a particular loss, but it has often given rise to considerable debate in various different areas of English law from contract and tort to marine insurance and tax. Different tests are applied in different circumstances. Perhaps the simplest is the "but for" test to see whether the consequences would still have followed had the alleged cause not taken place. Sometimes the metaphor of a chain of causation is used to try and identify the underlying case at the start of the chain. Perhaps a house of cards would be a better metaphor. In the context of marine insurance where there may be a number of competing or contributing causes it is necessary to try to identify the primary or proximate cause or that which is proximate in efficiency (Leyland Shipping v Norwich Union (1918) A.C. 350). Causation is to be distinguished from remoteness which primarily concerns the type or nature of loss and not the sequence of events leading up to the loss. When considering what particular types of damage are recoverable as damages for breach of contract the test of remoteness is that laid down in Hadley v Baxendale (1854) 9 Ex 341. A particular type of loss will only be recovered if either a) objectively it should reasonably have been within the contemplation of the parties at the time of the contract was entered into that such loss would be suffered or b) the party in breach had actual knowledge that such loss may be suffered. The extent to which the tests for causation and remoteness for damages for breach apply to limit the recovery under indemnities recently came up for consideration in the EURUS.

 

 

 

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