The Inter-Club Agreement – Guidance on its application

Introduction

The Inter-Club Agreement, otherwise known as the ICA, first came into force on 20th February 1970.  This original version was first revised in 1984, and then again in 1996.  Currently, the latest version is the ICA 2011.  The ICA was originally formulated by the International Group of P&I Clubs (“the IG”) as an agreement between the IG Clubs as to how they will recommend their Members to settle cargo claims between Owners and Charterers entered in IG Clubs. Once incorporated into a charterparty, the ICA becomes an agreement between the parties, not their respective Clubs.  It was designed to provide a simple mechanism for apportioning cargo claims as between Owners and Charterers, and was envisaged to be used with the New York Produce Exchange from (NYPE) and Asbatime form charterparties. 

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.

The ICA sets out the charterparty forms and the kind of cargo claims to which it applies, and the governing time bar.  The scope of application is set out below followed by our explanatory comments.

Scope of Application

  1. This Agreement applies to any charterparty which is entered into after the date hereof on the New York Produce Exchange Form 1946 or 1993 or Asbatime Form 1981 (or any subsequent amendment of such Forms).

Comments: Whilst primarily designed to be used with these charterparties, parties can if they wish incorporate it into other forms of charterparty by agreement. This should however be done with caution as not all charterparty forms are as compatible and inconsistencies may arise.

  1. The terms of this Agreement shall apply notwithstanding anything to the contrary in any other provision of the charterparty; in particular the provisions of clause (6) (time bar) shall apply notwithstanding any provision of the charterparty or rule of law to the contrary.

    Comments: If the ICA is incorporated into a charterparty then the time bar under Clause (6) will supersede any other time bar clauses.  In the case of “The Genius Star” [2011] EWHC 3083 (Comm), the court held that the general time bar of 12 months within the charterparty did not apply to claims falling and apportionable under the ICA. The ICA had its own separate time limit under Clause (6).
  2. For the purposes of this Agreement, Cargo Claim(s) mean claims for loss, damage, shortage (including slackage, ullage or pilferage), overcarriage  of or delay to cargo including customs dues or fines in respect of such loss, damage, shortage, overcarriage or delay and include:

    Comments: There has been much debate as to whether customs dues levied by a customs authority against the ship owner are recoverable under the ICA.  As per (4)(a) below, the ICA states that the claim must have been made under a contract of carriage.  Accordingly, this would seem to rule out the possibility of Owners seeking to recover a customs fine levied by a competent authority against them, from the Charterers, as this would not have been a claim made under a B/L.  If the customs fine was levied against the receiver and formed part of a claim under the B/L against the Owners then there would be  no question, and such a claim would be recoverable.  It has been argued that if the drafting committee intended for customs fines levied directly against the Owners to be recoverable, then they would have said so.  Customs fines arguably fall outside the strict ambit of the ICA, accordingly whether or not a customs fine would be recoverable very much depends on the circumstances of the specific case, but Clubs generally try to take a pragmatic approach.  
  1. any legal costs claimed by the original person making any such claim;
  2. any interest claimed by the original person making any such claim;
  3. all legal, Club correspondents' and experts' costs reasonably incurred in the defence of or in the settlement of the claim made by the original person, but shall not include any costs of whatsoever nature incurred in making a claim under this Agreement or in seeking an indemnity under the charterparty.

    Comments: Again this sub-paragraph has given rise to much debate.  Subsection (c) states that only costs incurred in the “defence of or in settlement of the claim” are recoverable.  It has been argued therefore that investigative costs, such as the costs of tallying the cargo at the discharge port, or conducting precautionary draught surveys are not costs incurred in the “defence” of a claim, but are costs incurred in “investigating” a claim, or indeed in trying to prevent a claim from arising at the outset.  

    Again, it has been argued that had the drafting committee intended for such precautionary or investigative costs to be included within the apportionment, they would have made this clear in the text. If investigative costs are incurred and the reports are used to defend a claim, then arguably these costs would be recoverable.  Clubs often take a pragmatic approach and consider on a case by case basis whether other costs should be apportioned in the same manner as the underlying claim.

(4)  Apportionment under this Agreement shall only be applied to Cargo Claims where:

(a)  the claim was made under a contract of carriage, whatever its form,

(i)  which was authorised under the charterparty;

or

(ii)  which would have been authorised under the charterparty but for the inclusion in that contract of carriage of Through Transport or Combined Transport provisions, provided that

(iii)  in the case of contracts of carriage containing Through Transport or Combined Transport provisions (whether falling within (i) or (ii) above) the loss, damage, shortage, overcarriage or delay occurred after commencement of the loading of the cargo on to the chartered vessel and prior to completion of its discharge from that vessel (the burden of proof being on the Charterer to establish that the loss, damage, shortage, overcarriage or delay did or did not so occur); and

(iv)  the contract of carriage (or that part of the transit that comprised carriage on the chartered vessel) incorporated terms no less favourable to the carrier than the Hague or Hague Visby Rules, or, when compulsorily applicable by operation of law to the contract of carriage, the Hamburg Rules or any national law giving effect thereto; and

Comments: For a claim to be recoverable under the ICA, the underlying claims need to have been made under a contract of carriage which was authorised under the charterparty, i.e. that any Bill of Lading issued was not so issued in breach of the governing charterparty terms.  The term ‘contract of carriage’ is very broad, and therefore ICA claims may arise under any type of contract of carriage, including Bills of Lading, Sea Waybills, charterparties or even sub-charterparties.  Considering that the ICA is a commercial agreement, tribunals are often loath to find that a Bill of Lading was not issued in accordance with the terms of the C/P and as such is ‘unauthorised’ for the purposes of the ICA – see London Arbitration 3/13.

(b)  the cargo responsibility clauses in the charterparty have not been materially amended. A material amendment is one which makes the liability, as between Owners and Charterers, for Cargo Claims clear. In particular, it is agreed solely for the purposes of this Agreement:

(i)  that the addition of the words "and responsibility" in clause 8 of the New York Produce Exchange Form 1946 or 1993 or clause 8 of the Asbatime Form 1981, or any similar amendment of the charterparty making the Master responsible for cargo handling, is not a material amendment; and

(ii)  that if the words "cargo claims" are added to the second sentence of clause 26 of the New York Produce Exchange Form 1946 or 1993 or clause 25 of the Asbatime Form 1981, apportionment under this Agreement shall not be applied under any circumstances even if the charterparty is made subject to the terms of this Agreement; and

  (c)  the claim has been properly settled or compromised and paid.

Comments: Section (2) of the Scope of Application states that the terms of the ICA shall apply notwithstanding anything to the contrary in any other provision of the charterparty.  Accordingly any attempt to insert any other clause which may seek to apportion liability differently from that which the ICA provides shall be resisted.  It is however important to note section 4(b)(ii) above.  While it is not common for “cargo claims” to be inserted in clause 26 of the NYPE or clause 25 of the Asbatime Form,  were such words to be inserted,  then the ICA shall not apply to the contract at all.

With regards to section (b) the English court has looked at the issue of whether a clause has been materially amended, see Lloyd’s Maritime Law newsletters 14/90 and 17/84.

Section (c) has also been a cause of much debate and the subject of many disputes over the years.  Much of the litigation concerning the ICA has been about whether a party seeking reimbursement under the ICA settled the underlying cargo claim reasonably.  Whether or not the level of settlement was reasonable is immaterial, and the courts will generally not consider such issues, but will instead focus on whether the claim has been properly settled or compromised, and paid. Evidence of settlement is a precondition of reimbursement under the ICA.  The leading case on this is “The Strathnewton” [1991] 1 Lloyd’s Rep. 176, in which it was confirmed that it is the basis of the settlement that is considered, rather than the underlying cargo claim itself.

(5) This Agreement applies regardless of legal forum or place of arbitration specified in the charterparty and regardless of any incorporation of the Hague, Hague Visby Rules or Hamburg Rules therein.

Comments: If the ICA is incorporated into the charterparty, then claims shall be apportioned as per the ICA, irrespective of the law and jurisdiction of the charterparty.

Time bar

(6)  Recovery under this Agreement by an Owner or Charterer shall be deemed to be waived and absolutely barred unless written notification of the Cargo Claim has been given to the other party to the charterparty within 24 months of the date of delivery of the cargo or the date the cargo should have been delivered, save that, where the Hamburg Rules or any national legislation giving effect thereto are compulsorily applicable by operation of law to the contract of carriage or to that part of the transit that comprised carriage on the chartered vessel, the period shall be 36 months.  Such notification shall if possible include details of the contract of carriage, the nature of the claim and the amount claimed.

Comments:  Notice of the cargo claim must be given to the other party to the charterparty within 24 months of the date of delivery of the cargo (or the date when it should have been delivered) except when the Hamburg Rules apply compulsorily, in which case the notification period is extended to 36 months.  This makes sense on a commercial and practical level, as the underlying cargo claim will be time barred after 12 months in Hague/ Hague-Visby jurisdictions, and 24 months in Hamburg Rules jurisdictions. Thus, when the Hamburg Rules apply, the notification period gives an additional 12 months to the Owner or Charterer to notify the other party to the charterparty of any underlying cargo claims.  The purpose of this is to avoid scenarios where a third party cargo claimant commences proceedings against an Owner or Charterer at the "11th hour”, leaving the Owner or Charterer with no time to serve a proper notice of its ICA claim on the other party and thus at risk of finding itself time barred.

Once the claim has been notified to the other party, then time is protected.  Thereafter, the time bar under English law for parties to commence formal proceedings is the same as that for breach of contract under the Limitation Act 1980 i.e. six years from the date upon which the cause of action accrued.

By way of example, if cargo is found damaged at the discharge port on the date of discharge, 1st January 2020, then the parties have two years from that date to notify the other party in accordance with the terms of the ICA.  If the underlying cargo claim is subsequently settled between Owners and cargo interests on 1st August 2021, then the time bar for commencing proceedings against  Charterers in respect of the ICA indemnity claim only starts to run from that date, and expires on 31st July 2027.

What information should be included in the formal notification is a matter of common sense.  As a bare minimum it is recommended that the name of the ship, the date of the charterparty, the Bill of Lading details, the date of the incident, the nature of the alleged loss and, if known, the amount claimed, should all be included in the notification, and that the notification explicitly states that it is being served  in accordance with the terms of the ICA.

The apportionment

(7)  The amount of any Cargo Claim to be apportioned under this Agreement shall be the amount in fact borne by the party to the charterparty seeking apportionment, regardless of whether that claim may be or has been apportioned by application of this Agreement to another charterparty.

Comments: The purpose of this clause is to ensure that the apportionment between the two parties in question is to be as per the ICA, irrespective of how apportionment has been agreed by other parties in the charterparty chain.  For example, if in the head charterparty, the ICA is not incorporated and there are separate non-ICA clauses governing how cargo claims are to be dealt with, the claims between disponent Owners and Charterers, where the ICA has been incorporated into the sub-charterparty, would still be apportioned as per the ICA.

(8)  Cargo Claims shall be apportioned as follows:

(a)  Claims in fact arising out of unseaworthiness and/or error or fault in navigation or management of the vessel:

100% Owners

save where the Owner proves that the unseaworthiness was caused by the loading, stowage, lashing, discharge or other handling of the cargo, in which case the claim shall be apportioned under sub-clause (b).

(b)  Claims in fact arising out of the loading, stowage, lashing, discharge, storage or other handling of cargo:

100% Charterers

Unless the words “and responsibility” are added in clause 8 or there is a similar amendment making the Master responsible for cargo handling in which case:

50% Charterers 50% Owners

save where the Charterer proves that the failure properly to load, stow, lash, discharge or handle the cargo was caused by the unseaworthiness of the vessel in which case:

100% Owners

(c)  Subject to (a) and (b) above, claims for shortage or overcarriage:

50% Charterers 50% Owners

unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or the other (including their servants or sub-contractors) in which case that party shall then bear 100% of the claim.

  1. All other cargo claims whatsoever (including claims for delay to cargo):

50% Charterers 50% Owners

unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall bear 100% of the claim.

Comments: Of all the clauses that give rise to disputes, the apportionment clause is probably the most contentious and the one which has perhaps resulted in the most litigation.  The apportionment is meant to be a ‘rough and ready’ division of liability for cargo claims between Owners and Charterers, and the intention was not to forensically examine claims in minute detail, but instead to be able to settle the claims quickly and easily.

Essentially, clause 8 states that if the damage is due to unseaworthiness of the vessel, then Owners are liable; it the damage is due to stowage and handling then Charterers are liable; and claims for shortage or those caused by other factors are to be split 50/50 unless there is clear and irrefutable evidence that one party was at fault, e.g. proven pilferage by the stevedores, who are considered to be Charterers’ agents, in which case Charterers shall bear 100% of the claim.

There is numerous case law on how cargo claims are to be apportioned in various circumstances, for example the “Yangtze Xing Hua” – QBD (Comm Ct) (Teare J) [2016] EWHC 3132 (Comm) which looked at whether the word “act” in 8(d) requires there to be a fault.

Ultimately it comes down to the relevant facts and the circumstances of a particular matter.  If for example there is a shortage claim, and there is evidence to suggest that spilled cargo was swept up, collected and counted towards the total received quantity, then the cause of the shortage is unlikely to be due to stevedore negligence/ mishandling, and is instead likely to be attributable to either  shortloading or simply to differing methods of calculating the received quantity, for example the ship’s draught figures vs the shore scale figures.  Such claims should be split 50/50 as there is no clear and irrefutable evidence that one party was at fault.

If however the shortage was a result of clearly negligent cargo handling, resulting in cargo being spilled overboard into the sea, or if there is clear evidence from an independent surveyor of bagged cargo being pilfered by the stevedores, then such “shortages” would be due to stevedore negligence, and again, Charterers would be 100% responsible (unless the words “and responsibility” had been added to clause 8 of the NYPE charterparty, in which case it would be split 50/50).  One cannot take a broadbrush approach here, and it would be necessary to consider each case on the basis of the specific circumstances of the case.

Security

(9) If a party to the charterparty provides security to a person making a Cargo Claim, that party shall be entitled upon demand to acceptable security for an equivalent amount in respect of that Cargo Claim from the other party to the charterparty, regardless of whether a right to apportionment between the parties to the charterparty has arisen under this Agreement provided that:

  1. Written notification of the Cargo Claim has been given by the party demanding security to the other party to the charterparty within the relevant period specified in clause (6); and
  2. The party demanding such security reciprocates by providing acceptable security for an equivalent amount to the other party to the charterparty in respect of the Cargo Claim if requested to do so.

Comments: The above clause is taken from the 2011 version of the ICA.  Prior to 2011 there was no English law authority on whether a party is entitled to seek security for a claim prior to the underlying cargo claim being settled.  This was deemed by the IG to be unsatisfactory as it was resulting in  unnecessary costs being incurred by the parties, not least because there were often legitimate concerns that by the time a cargo claim is actually settled, Charterers might no longer be trading, and as such Owners would remain unsecured.

As a consequence, the above security clause was added into the 2011 version of the ICA to make it clear that if a party has to provide security to a third party cargo claimant, that party was entitled to a counter security in the same amount, from the other party to the charterparty. Sub-section (b) makes it clear that if one party is asked to provide counter security, it could request a reciprocal counter security from the party requesting the counter security.

Practically this means that if Owners, for example, are requested to provide security to a cargo claimant in the sum of USD 100,000, Owners are then entitled to obtain counter security in the sum of USD 100,000 from Charterers, irrespective of the underlying cause of the claim. 

Under sub-section (b) above, Charterers who are asked to provide a counter security are in turn entitled to insist upon a reciprocal counter security from Owners.  This is so, even if the claim is being made under Owners’ bill of lading and will only ever flow down the charter chain.

Again, practically this may result in an Owner having to provide security of USD 100,000 to cargo interests and separately provide reciprocal counter security of USD 100,000 to the Charterer, essentially securing the same claim twice, even though the claim can only ever be pursued once.

This clause has also been the subject of litigation, see Lloyd’s Maritime Law Newsletter 18/18.  This case concerned a charterparty which included the following wording in its clause 35:

“Owners guarantee that the vessel is entered and shall remain entered in a P&I Association for the duration of this charter. Entry shall include, but not be limited to, ordinary cover for cargo claims. In the case of damage to and/or loss of cargo carried on the vessel in which Owners’ and/or Charterers’ liability could be involved under the terms of this Charter Party, as the case may be, the Owners and/or the Charterers shall on request grant reasonable time extension for commencement of suit in each and every occurrence. Such extensions shall not prejudice the ultimate responsibility of both parties. 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.”

Charterers rejected Owners’ request for counter-security as they said the words used in clause 35 only incorporated those parts of ICA 2011 which related to apportionment and settlement of claims, and did not provide any basis for applying clause (9).

The tribunal agreed with 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. The clause 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.

This decision was quite divisive and clearly went against what was intended by the IG when drafting the 2011 revision.  Two subsequent arbitrations on this particular point have not followed the previous decision, so the matter is undecided.  Again Clubs try and take a pragmatic approach to this issue and generally recommend to their Members that where a charterparty has an ICA clause, it will be taken as including the whole of the ICA, including the security and time bar provisions.  However, the wording of the specific charterparty will of course need to be taken into consideration so each case needs to be assessed on its own individual merits.

Governing law

(10)This agreement shall be subject to English Law and the exclusive jurisdiction of the English Courts, unless it is incorporated into the charterparty (or the settlement of claims in respect of cargo under the charterparty is made subject to this Agreement), in which case it shall be subject to the law and jurisdiction provisions governing the charterparty.

Comments: This clause requires little explanation; the ICA will be subject to English Law unless the parties to the charterparty agree otherwise by having a different Law and jurisdiction apply to the charterparty.

Richard Offord

Date19/12/2019

Source Senior Claims Executive

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