England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE TEARE
[2016] EWHC 3132 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/12/2017

See

Order

at foot of this judgment.

Lord Justice Longmore:

Introduction

1. The issue in this case is whether the word "act" in the phrase "act or neglect" means a culpable act in the sense of fault or whether it means any act, whether culpable or not. The question arises as a matter of construction of clause 8 of the Inter-Club Agreement 1996 ("the ICA") an agreement made between Protection and Indemnity Associations (or "Clubs") in relation to liability for cargo claims as between shipowners and charterers. It arises on an appeal from an award of arbitrators.
2. The claimants in the arbitration were the Owners of the mv Yangtze Xing Hua which they chartered to the respondents in the arbitration ("the Charterers") for a time charter trip carrying soya bean meal from South America to Iran. The charterparty was dated 3^rd August 2012 and was on the New York Produce Exchange ("NYPE") Form. The vessel arrived off the discharge port in Iran in December 2012. Not having been paid, for the cargo the Charterers ordered the vessel to wait off the discharge port for over 4 months. The tribunal, Mr Colin Sheppard, Mr Roger Rookes and Mr Michael Baker-Harber, said this:-

"… it seemed very clear that it actually suited the Shippers/Charterers, in money terms, to use the vessel as floating storage, at the Receivers' expense, rather than unloading it ashore into a bonded warehouse. Hence the strangely relaxed approach to the decision to wait outside for over four months. Cheap floating storage was one reason to keep the goods on board. The other was that the goods could be diverted easily if they remained on a vessel. Given the Receiver's slow pace of paying, it was perhaps not unreasonable of Nidera [cargo interests] to keep the goods on board as necessary."

3. The cargo, or part of it, started to overheat. When the vessel was brought alongside and discharged in May 2013 damage was found and a claim was made against the Owners for €5 million which, after lengthy negotiations, was settled in the sum of €2,654,238. The Owners claimed that sum together with hire in the sum of US$1,012,740 from the Charterers.
4. It was common ground that liability was to be settled in accordance with the ICA which had been incorporated into the charterparty. Clause 8 of the ICA provides as follows:-

"(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 Charterers 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 over carriage:

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 bear 100% of the claim.

d) 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 then bear 100% of the claim."

5. It was also common ground that the relevant part of clause 8 was sub-paragraph (d).
6. The damage found on discharge was at the aft end of holds nos. 5 and 6. Cargo in those locations was found to be lumpy and discoloured. The two pockets of damage were unconnected. 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 found that the monitoring was not at fault and that the cause of the damage was a combination of the inherent nature of the cargo (and its oil and moisture content) together with the prolonged period at anchor at the discharge port. Cargo at the aft end of holds 5 and 6 was too moist to withstand the prolonged delay or, put another way, the delay was too prolonged, given the moisture content.
7. The tribunal rejected all the allegations made against the Owners and their crew and also held that the Charterers were not

"in breach or at fault or "neglect" in loading the cargo, albeit that what in fact they loaded, together with the instructions to wait outside the discharge port, was in all probability the cause of the damage …"

8. In considering the application of clause 8(d) the tribunal held that "act" was to be distinguished from something suggesting fault, breach of contract or neglect. The tribunal concluded as follows:-

"Either Owners or Charterers must bear the risk of something going wrong caused, on our analysis by Charterers' decision to not only protect their position but we sense actually profit from it. We can but conclude that this is a case where the ICA must regard Charterers' decisions as an "act" falling within clause 8(d) and bear 100% of the consequences."

9. Mr Julian Kenny QC for the Charterers submitted to the judge that the tribunal's construction of "act" was wrong. He submitted that "act" means "culpable act" and that the phrase "act or neglect" compendiously means "fault". The tribunal was wrong to hold that any act, whether culpable or not, is sufficient to constitute an "act" for the purposes of clause 8(d) of the ICA. This argument was rejected by Teare J who upheld the award of the arbitrators essentially because he considered that clause 8 of the ICA was not concerned with fault but was rather a mechanism for assigning liability for cargo-claims by reference to the cause of the damage to the cargo regardless of fault. He gave permission to appeal. But for Mr Kenny's arguments, I would be happy to say that I agree with the judge for the reasons he gave.

Background

10. The ICA came into being as a result of the difficulty in deciding, as between owners and charterers on the New York Produce Exchange Form, who was liable for cargo claims. The major P&I Clubs drew up an agreement to facilitate the settlement of claims between the Clubs. The ICA was described by Robert Goff J and by Kerr LJ in The Strathnewton [1982] 2 Lloyd's Reports 296 at p. 298 and [1983] 1 Lloyd's Reports 219 at p. 223 as analogous to a "knock-for knock" agreement in the field of motor insurance. This was explained by Hobhouse J in The Benlawers [1989] 2 Lloyd's Reports 51 at p. 60 as follows:-

"[The ICA] is an agreement which is primarily for the benefit of the respective parties' insurers that is of the character of a knock-for knock agreement. It has advantages and disadvantages for shipowners, but it is intended to work in that way: it solves insurance problems and is not concerned with such considerations as hardship or lack of moral culpability."

11. As the judge observed, the first version of the ICA was published in 1970. It was amended in 1984 to deal with the time limit for the making of claims (the problem debated in The Strathnewton). There was a more substantial amendment in 1996. Although the 1996 version has been described as "a comprehensive overhaul dealing with many of the shortcomings of the earlier versions" (see P&I Clubs – Law and Practice by Hazlewood and Semark 4^th ed. Para 15.43) the BIMCO Circular No 5 dated 25^th September 1996 stated that it "does not deviate from the fundamental nature of its predecessor and retains a mechanical approach to the apportionment of liability, which has been so successful in avoiding protracted and costly litigation". The same circular noted that the Clubs have recommended the ICA to their members with the result that NYPE charterparties now "routinely regulate the settlement of cargo claims between owners and charterers in accordance with the ICA's formulae". There is now a 2011 amendment which provides for the provision of security.

The submissions

12. Mr Kenny made six main submissions in support of his contention that the judge was wrong:-

i) the first and second versions (1970 and 1984) of the ICA were predicated on fault; if it had been intended to drop the concept of fault in the 1996 version, that would have been clearly expressed;

ii) sub-clauses (a) and (b) in the 1996 version still require fault; it would be consistent with those provisions to construe "act" as requiring fault;

iii) if "act" meant "any act" in sub-clauses (c) and (d), that would be inconsistent with and cut across sub-clauses (a) and (b);

iv) if any "act" of the charterers sufficed for the purposes of sub-clauses (c) and (d), the initial order to load the cargo would count as an "act"; the only constraint on such interpretation would be some doctrine of "effective" or "proximate" cause which would be difficult to assess and contrary to the intended mechanistic application of the ICA;

v) the judge's interpretation amounted to an automatic indemnity being given by charterers to owners; if that was intended sub-clause (d) would have provided for charterers to be 100% liable; and

vi) such authority as there was supported his submissions.

13. Mr Buckingham for the Owners supported the judge and also submitted that if "act" was to be interpreted as "culpable or faulty act" there was no criterion by which the existence of such fault could be determined. It could not be breach of the underlying charterparty because the ICA was intended to cut through the liabilities under the charter and "fault" vis-à-vis the bill of lading holders would be highly elusive.

Previous versions of the ICA

14. Like the judge, I seriously doubt the helpfulness of considering the ICA in its previous incarnations. The Strathnewton sets out the previous version at page 225 of the report. It is certainly simpler inasmuch as it provides for loss and damage due to unseaworthiness to be 100% for Owners' account and damage due to bad stowage to be 100% for Charterers' account. So far, it is the cause of the damage that is relevant not the "fault" of the relevant party. It then provides for a 50/50 split for short delivery, over-carriage and condensation damage claims but it then does provide that where there is clear evidence that the shortage or over-carriage

"was due to act, neglect or default on the part of the Owners or Charterers servants or agents, then the party whose servants or agents were at fault shall bear the claim in full."

That undoubtedly does require fault on the part of the servants or agents of the responsible party but the present sub-clause 8(d) does not use the word "fault" at all and I can get no assistance by comparing the present and previous states of the ICA since they say different things. Mr Kenny submitted that, if a change was intended, it was a remarkably oblique way of doing it and he drew attention to the clear way in which later versions of the form dealt with the time bar question (debated as I have said in The Strathnewton) and defendants' costs of defending cargo claims (debated in the later case of The Holstencruiser [1992] 2 Lloyds Rep. 378). I can only say that the difference between the earlier and later versions of clause 8(d) is equally clear and scarcely oblique at all.

Consistency/Inconsistency with sub-clause (a) and (b)

15. Mr Kenny pointed out that sub-clause (a) is not just concerned with claims arising out of unseaworthiness but also claims arising out of error or fault in navigation or management of the vessel. There was also reference in sub-clause (b) to a "failure properly to load, stow, lash, discharge or handle the cargo" being caused by unseaworthiness.
16. These phrases, of course, include fault but they are not confined to fault. There is no requirement that claims arising out of unseaworthiness have to occur because the owner has failed to exercise due diligence to make the vessel seaworthy (to use the language of Article III rule 1 of the Hague-Visby Rules). An error or fault in navigation or management of the vessel encompasses fault but does not require it. An error in navigation may produce a cargo claim even in the absence of fault; so may an error in management of the vessel.
17. The reference to a "failure properly to load, stow, lash, discharge or handle the cargo" does not pre-suppose negligence either. Sub-clause (b) deals with claims "arising out of the loading, stowing, lashing, discharging or other handling of cargo" which makes no mention of fault. These are to be 100% for charterers unless the words "and responsibility" are added in clause 8 of the NYPE form when liability is to be shared 50/50 but there is then an exception to that provision for 100% liability for Owners where the failure to properly load was caused by unseaworthiness. The context of the word "properly" is, as Mr Buckingham submitted, a factual state of affairs not a requirement that there must be fault on the part of either party which, if it had been intended, would have been provided for in the first part of the clause.
18. No doubt it is fair to say that the division between unseaworthiness claims and loading/stowage claims reflects the respective areas of responsibility (or, as the judge rightly preferred to regard them, areas of risk) of Owners and Charterers but that does not mean that sub-clause (a) and (b) presuppose or require that there be fault of the relevant party; it is not therefore necessary to construe "act" in sub-clause (c) and (d) as requiring fault in order to achieve some sort of consistency between the clauses.
19. Conversely, construing "act" as not requiring fault is not inconsistent with sub-clauses (a) and (b) and does not cut across them. Mr Kenny invited us to suppose a case of damage being caused as a result of a delay caused by a master ordering tugs for the vessel. He submitted that there could be no question of liability under sub-clause (a) and that if 100% liability was imposed on the owner by reason of the proviso to sub-clause (d) that would cut across the fact of no liability under sub-clause (a). I cannot see any inconsistency there; claims for delay are specifically assigned to sub-clause (d) and the fact that they do not arise under sub-clause (a) is irrelevant.

Necessity and/or difficulty of investigating causation

20. I found this submission a little difficult to follow. It originated in a suggestion that if "act" was not construed to mean a "culpable act", then the order given by charterers to load a particular cargo at a particular port would constitute an "act" and no further inquiry was necessary. But that cannot be right since one cannot inquire into "causes of causes". Many separate areas of the law have worked out how causation is to be dealt with and maritime law is no exception. The implied (or any express) indemnity given to shipowners for following orders of the charterers in a time charterparty is an example close to the present case (see e.g. The Ann Stathatos (1949) 83 Lloyds LR 228). Of course the inquiry will not necessarily be straightforward but an inquiry into culpability is not necessarily straightforward either.
21. Mr Kenny's fifth submission is only an elaboration of the fourth and fails for the same reason namely that the reliance on an act of the shipowner (or that of his servant, or sub-contractor) is not an automatic right of indemnity for any such act; it must at least be causative of the liability for the damage to cargo.

Other cases

22. In the end neither Mr Kenny nor Mr Buckingham placed much reliance on other cases construing the words "act or neglect". They were right not to do so, since everything must depend on the context.
23. It is true that in Anglian Water Services Ltd v Crawshaw Robbins & Co Ltd [2001] BLR 173 Burnton J construed the words "act or neglect", as they appeared in a particular proviso in an indemnity given by the Contractor to the Employer in an engineering contract for the construction of piping subject to the ICE Conditions of Contract, as meaning an act which constituted a breach of contract or of a tortious duty. But as Burnton J said (para 94) the meaning must depend on the terms of the contract and cannot apply to deprive an Employer of his indemnity as a result of his failure to do what it is the responsibility of the Contractor to do. No such suggestion can be made in the present case.
24. Conversely the words "act, fault or neglect of the shipper" in Article IV rule 3 of the Hague and the Hague-Visby Rules have been held by HHJ Diamond in The Fiona [1993] 1 Lloyds Rep 257 to encompass a non-negligent act and that decision was expressly approved by this court in The Giannis NK [1996] 1 Lloyds Rep 577, a point which arose neither at first instance [1994] 2 Lloyds Rep 171 nor in the House of Lords [1998] AC 605. In one sense that is closer to the area covered by the present case but, as Mr Kenny pointed out, the phrase fell to be construed in an exceptions clause and in a context rather different from the ICA.
25. It is perhaps worth adding that such limited authority as there is on the construction of the words "act or omission of the shipper" in Article IV rule 2(i) of the Hague-Visby Rules does not suggest that the relevant "act" has to be culpable before the shipowner can rely on it, see Ismail v Polish Ocean Lines [1976] QB 893, 903A per Lord Denning M.R.

Conclusion

26. For my part I agree both with Teare J and the arbitrators that the word "act" in the context of the ICA should be given its natural meaning, there is no need to confine it to "culpable act" and I would dismiss this appeal.

Lord Justice Hamblen:

27. I agree that the appeal should be dismissed for the reasons given by Longmore LJ. In particular:

(1) The natural meaning of the word "act" is something which is done. It does not connote culpability.

(2) "Neglect" does connote culpability. Whether this colours the meaning of "act" is largely a matter of context, as is illustrated by the case law.

(3) The general context of the "archaeology" of the ICA does not assist. On any view, the 1996 ICA involved substantial redrafting of and changes to the ICA.

(4) The specific context of the other apportionment provisions of the ICA does not suggest that culpability is required since, in various circumstances, they apply regardless of culpability. For example, claims "in fact arising out of":

(a) "unseaworthiness" under clause 8(a) are 100% for Owners' account regardless of whether there was a failure to exercise due diligence by Owners, their servants or agents or other culpable fault.

(b) "error" in navigation or management of the vessel under clause 8(a) are 100% for Owners account under clause 8(a) even if no negligence or culpable fault is involved.

(c) "loading, stowage, lashing, discharge, storage or other handling of the cargo" are 100% for Charterers' account under clause 8 (b). No mention of fault is made. Even if the reference to a failure to do so "properly" (in the proviso to the 50%/50% division where the words "and responsibility" are added) governs the meaning of the main part of the clause, it is referring to a state of affairs rather than culpable fault.

(5) The critical factual question under clause 8 is that of causation. Does the claim "in fact" arise out of the act, operation or state of affairs described? It does not depend upon legal or moral culpability, nor is there any stated or obvious criterion against which such culpability is to be judged.

(6) This does not result in uncertain and difficult issues of causation. Causation is always central to the operation of the ICA when proof "in fact" is required. The issue of causation is the same whether one is considering the consequence of an identified act or an act of neglect, although proof of effective causation may be more difficult.

(7) Nor does it lead to unacceptably wide liability. Causation is an important limiting factor, as is the need for "clear and irrefutable evidence". Further, clause 8(d) is a sweep up provision which only applies where there is no apportionment under clause 8(a), (b) or (c).

Lord Justice Henderson:

28. I agree.

Order

UPON the hearing of the Appeal in this matter;

AND upon hearing counsel for the Claimant and counsel for the Respondent;

IT IS ORDERED THAT:

29. The Appeal is dismissed.
30. The Claimant do pay the Defendants' costs of the Appeal in the amount of £40,000. That sum to be paid within 14 days of the date of this order.

Dated 13 December 2017