QCR Autumn 2018: Whether the ICA 2011 had been incorporated in full into charterparty so as to require charterers to provide counter-security
London Arbitration 18/18 (2018) 1010 LMLN 2
The vessel was chartered by the claimant disponent owners (“the owners”) to the respondent charterers on an NYPE 1946 form with additional clauses. A cargo claim was raised against the head owners for alleged damage amounting to US$900,000. Following the threat of the vessel being arrested, the head owners’ P&I Club provided the cargo insurers with security of US$900,000 in the form of a letter of undertaking (LOU), and demanded security for the same from the owners, which was duly provided.
The owners took the view that the head owners were entitled to counter-security pursuant to their rights under the Interclub NYPE Agreement 2011 (ICA 2011) which they believed was incorporated into their charterparty. The charterparties between the head owners and the owners and the charterers were essentially on back-to-back terms. However the charterers’ P&I Club refused to provide counter-security to the owners.
The owners brought arbitration proceedings against the charterers and applied, under section 48(5)(b) of the Arbitration Act 1996, for an immediate order for specific performance from the charterers for the provision of counter-security in the form of a Club LOU, or a suitably worded guarantee from a first class London bank, alternatively, the placement of the demanded security amount into escrow with the owners’ P&I insurer.
The charterers opposed the application and denied that they were obliged to provide counter-security under the terms of the charterparty or ICA 2011. They said that the words used in clause 35 of the charterparty were not suitable or appropriate to incorporate into the charterparty the terms of ICA 2011or the provisions regarding security.
The Tribunal's Award
The charterparty included at clause 35 the following sentence providing that “… liability for cargo claims, as between Charterers and Owners, shall be apportioned/settled as specified by the Interclub New York Produce Exchange Agreement effective from 1996 and its subsequent amendments.”
The charterers had argued that it was only those parts of ICA 2011 relating to apportionment and settlement of claims to which reference could be made in clause 35, and that the wording of clause 35 did not provide any basis for applying clause (9) of ICA 2011 which dealt with security for claims. They also argued that the wording of clause 35 of the charterparty did not incorporate the full text of ICA 2011, referring to The Ion  2 Lloyd’s Rep 245.
The owners argued that clause 35 made it clear that the terms of ICA 2011 applied (and were therefore incorporated into the charterparty) in full as regards liability for cargo claims.
The tribunal agreed with the charterers that as a matter of strict construction, clause 35 of the charterparty only related to apportionment and settlement of cargo claims and did not include the provision of security. It did not provide any basis for applying clause (9) of ICA 2011 which dealt with security for claims, and did not incorporate the full text of ICA 2011. Accordingly, clause (9) of ICA 2011 did not apply to the charterparty.
Furthermore, the tribunal accepted the proposition cited in Time Charters that the ICA “was neither designed nor drafted to be incorporated into charters”. Therefore, it could not be assumed that the full terms of the ICA were incorporated into a charterparty without express provision to that effect, which was not the case with clause 35 since it was silent on the matter of security for the claim.
The purpose of the ICA is to provide a relatively simple mechanism for swiftly apportioning liability for cargo claims arising under the New York Produce Exchange Form and Asbatime charterparties. Whilst its aim remains to encourage reasonable settlement and save costs by avoiding expensive legal disputes when dealing with cargo claims, the ICA was revised in 2011 mainly to ensure the parties to a cargo claim would be able to secure themselves against their contractual counterparts without unnecessary difficulty.
The tribunal in this case considered that the decision did not undermine the intent of the ICA because the main purpose, swift apportionment of liability for cargo claims, was not affected. This conclusion was reached in arbitration and is therefore not a legally binding precedent. Members are nevertheless recommended to review the cargo handling clauses in their charterparties carefully, to ensure that ICA 2011 (with its security provisions) are clearly incorporated in its entirety if that is the intention of the parties.
Owners’ application for leave to appeal was refused by the High Court.
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The purpose of the ICA is to avoid lengthy and costly litigation on matters of liability and apportionment, and instead seeks to provide a ‘rough and ready’ split of liability between the parties. The Clubs recommend to their Members that they adopt the Agreement for the purpose of apportioning liability for claims in respect of cargo which arise under, out of or in connection with all charterparties on the NYPE Form 1946 or Asbatime Form 1981, whether or not this Agreement has been incorporated into such charterparties. However, unless the ICA is specifically incorporated into the charterparty, it may not be enforceable.