England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/08/2012

MR JUSTICE CHRISTOPHER CLARKE:

1. The central issue in these three arbitration appeals is as to which charterer or charterers in a string of charters of the m.v. "DIMITIRIS L" must bear the cost of US Gross Transportation Tax ("USGTT").
2. The Head Owner in the chain is Sea Rose Marine SA ("Sea Rose"). The head charterer is STX Pan Ocean ("Pan Ocean"). There were then three sub-charterers in the following order: Global Maritime Investments Ltd ("Global Maritime"); Navios International Inc ("Navios") and Sangamon Transportation Group ("Sangamon").
3. The charters were all made in July 2007. Sea Rose paid the United States Treasury a total of US $ 134,400 being the total USGTT levied as a result of the Vessel's calls to three US ports during the charterparty period as follows:

a) New Orleans $ 31,920 paid on 11 September 2007;

b) Bridge Port $ 52,080 paid on 10 April 2008;

c) Baltimore $ 50,500 paid on 12 June 2008.

4. Pan Ocean reimbursed Sea Rose the sum of $ 134,400. Pan Ocean then claimed that it was entitled to be reimbursed that sum by Global Maritime and deducted that sum from monies due from it under another charterparty between the same parties. In the subsequent arbitration ("the Pan Ocean arbitration") the Tribunal (Messrs Aikman & Oakley) decided that Global Maritime was bound to reimburse Pan Ocean and that Global Maritime's claim for the monies failed.
5. Global Maritime claimed against Navios and Navios claimed against Sangamon. In those arbitrations ("the Global Maritime and Navios arbitrations") the Tribunal (Messrs Aikman, Gault and Buchan) decided, by a majority (Mr Aikman dissenting) that Global Maritime and Navios, the disponent owners, were not entitled to reimbursement of the sum that Global Maritime had had to pay to reimburse Pan Ocean. In each arbitration the unsuccessful party has appealed.
6. Global Maritime has, thus, been found both liable to make and unable to recover reimbursement of the USGTT. Since both findings cannot be right, it has sensibly been arranged that the disponent owners' case should be advanced orally at the hearing by Pan Ocean, which was represented by Mr Henry Byam-Cook, and that the Charterers' case should be advanced by Sangamon, which was represented by Mr Julian Kenny. Neither Global Maritime nor Navios were represented at the hearing; but I have received written skeletons from Global Maritime, drafted by Mr Michael Nolan, in support of its position in relation to both arbitrations to which it is a party. Since it is facing both ways these submissions are to the effect that disponent owners (i) are and (ii) are not entitled to recover reimbursement down the chain. I am grateful for the high quality of the submissions made both orally and in writing.
7. The material provisions of the Charterparties are identical and are as follows:

"Clause 1

That the Owners shall provide and pay for all provisions, wages and consular shipping and discharging fees of the Crew: shall pay for the insurance of the vessel, also for the cabin, dock, engine-room and other necessary stores, including boiler water and maintain her class and keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service. With all inspection certificate necessary to comply with current official requirements at ports.

Clause 2

That whilst on-hire the Charterers shall provide and pay for all the fuel except lubrication oil. Port Charges, Canal dues/Tolls (including Bosphorus/Dardenelles), Compulsory/Customary Pilotages, (including Skaw, Belt, Sound, Bosphoros/Dardenelles and Magellan if required by Master and all anchorage pilot), Agencies, Commissions, Consular Charges (except those pertaining to the Crew), and all other usual expenses except those before stated, but when the vessel puts into a port for causes for which vessel is responsible, then all such charges incurred shall be paid by the Owners. Fumigations ordered because of illness of the crew to be for Owners account. Fumigations ordered because of cargoes carried or ports visited while vessel is employed under this charter to be for Charterers account. All other fumigations to be for Charterers account after vessel has been on charter for a continuous period of six months or more. Except fumigations due to vessel and/or vessel's crew. Fumigations on account of ports visited or cargoes carried to be for Charterers' time, risk and expense.

Charterers are to provide necessary dunnage also any extra fittings for a special trade or unusual cargo, but Owners to allow them the use of any dunnage and shifting boards already aboard vessel.

Clause 8

That the Captain shall prosecute his voyage with the utmost despatch, and shall be order the orders and directions of the Charterers as regards employment and agency: and the Charterers are to load, stow, trim, tally, secure and discharge the cargo at their expense under the supervision of the Captain, who is to sign Bills of Lading for cargo as presented, in conformity with Mate's or Tally Clerk's receipts.

Clause 29

Vessel's description

…

OWNERS SEA ROSE MARINE S.A OF MONROVIA, LIBERIA

Clause 111

Mandatory Port Expenses / Services

Any mandatory expenses / port charges including but not limited to immigration, tally clerks, watchmen and garbage removal to be for Charterers' account. It is understood that any immigration charges arising as a result of crew changes will be for the Owners' account.

Clause 112

U.S. Tax Reform 1986 Clause

Any U.S. Gross Transportation Tax as enacted by the United States Public Law 99 – 514, (also referred to as the U.S. Tax Reform Act 1986), including later changes or amendments, levied on income attributable to transportation under this Charter party which begins or ends in the United States, and which income under the laws of the United States is treated as U.S. Source Transportation Gross Income, shall be reimbursed by the Charterers."

[Bold as in original]

8. Clause 112 was drafted by the Documentary Committee of The Baltic and International Maritime Council ("BIMCO") following the enactment of the US Tax Reform Act 1986 which introduced USGTT. The clause itself, when drafted, was recommended in a BIMCO Circular - No 9 of 6 July 1988 ("the Circular"). Both Tribunals regarded the Circular as an important part of the background against which the clause should be construed.
9. The Circular reads, in material part as follows:

"First of all, the new U.S. Tax Law defines the new tax as a Gross Transportation Income tax and good arguments can be put forward in favour of the point of view that the new tax is not an ordinary freight tax but rather an income tax (personal or corporate). What is important to note is that the tax is not levied on the vessel or the cargo but is levied on the shipowner by reference to the monies received from the charterer.

Secondly, the tax is levied on transportation income which is not restricted to ordinary voyage revenues but also applies to time charter and bareboat charter hire.

After proper consultation with legal experts, it was found that one general clause should be sufficient to cover both voyage charter as well as time charter and bareboat charter income.

The following charterparty clause for use with voyage chartering as well as time – and bareboat chartering is, therefore recommended for use forthwith:

"U.S. Tax Reform 1986 Clause

The clause is then set out

What seems to have been the general perception among members is that the only potential liable party for tax is the actual owner of a vessel. However, emphasis should be placed on the fact that in a chain of transactions involving, for instance, bareboat charter arrangements and also time charter agreements, the bareboat charterer and the time charterer may also be exposed to tax. Equally, it should be noted that the taxpayer should not be responsible for any other income than the actual income received under his own contract regardless of whether such tax will be applied to the various charterers in a chartering line.

A simple example may be illustrative of the problem.

A company incorporated in Singapore bareboat charters its vessel to a Filipino company which again time charters out the same vessel to a company based in Hong Kong. The company based in Hong Kong decides to undertake a voyage from Japan to the United States.

The various liable sources involved in this case will include the bareboat charter hire derived by the company incorporated in Singapore, the time charter hire derived by the company based in the Philippines and, finally the freight revenues derived by the company incorporated in Hong Kong trading the vessel to the United States. Irrespective of whether the three companies are owned by residents of Singapore, Philippines or Hong Kong, respectively, they will be subject to U.S. Tax because, as the situation stands at the present, neither of these countries have so far entered into bilateral agreements with the United States.

Therefore, by inserting the above-mentioned Clause in the bareboat charter, the company based in Singapore transfers tax liability for bareboat hire derived to the Filipino company. Again, by inserting the tax clause in the time charter party, the Filipino company transfers tax liability for time charter hire to the company based in Hong Kong and finally by inserting the tax clause in the voyage charter party, the Hong Kong based company transfers tax liability for freight revenues to the actual voyage charterer.

In other words, this clause transfers tax liability from the Owner to the Charterer, be it the bareboat charterer, the time charterer or the voyage charterer, as the case may be.

It should be noted that tax will be transferred on a reimbursed basis according to the wording of the last two lines in the new U.S. Tax Clause, i.e., that "…U.S. source gross transportation income shall be reimbursed by the Charterers". Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterer, because they are the parties which have to file the tax return and thereby pay the tax in the first instance. As soon as the actual tax estimates have been calculated by the tax authorities, the taxpayer can seek reimbursement from the charterer."

10. This Circular predates the charters by nearly 20 years. It sets out an understanding of how USGTT fell to be levied by explaining that it is due on revenues derived from bareboat, time and voyage charters. There is, however, dispute as to:

i) whether the Tribunals were justified in taking the Circular into account in construing the charterparty;

ii) whether the Circular is correct in saying that, if there is a voyage involving a trip to the US and the vessel is the subject of a chain of charters, all the owners, actual or disponent may be liable to pay tax; or

iii) whether, at any rate by 2007, the position was, either at law or in practice, that only the head owner was liable, or only one party was liable, such that the Circular does no more than represent what was in 1988 thought (possibly erroneously) to be the effect of the new law. In the light of that dispute it is necessary to consider what findings the Tribunals have made about the incidence of the tax and whether they are findings as to what the relevant law or practice is, or merely about what it was thought to be.

The relevance of the Circular

11. In the Pan Ocean arbitration the Tribunal clearly regarded the Circular as relevant to the question of construction. No suggestion was made to the arbitrators that they should not take it into account.
12. In their Awards in the Global Maritime and Navios arbitrations, which are materially in the same terms, the majority arbitrators set out familiar principles of law as follows:

"26 The law relating to the construction of contracts has been elucidated in a number of authorities. It is familiar and uncontroversial. It can be summarised briefly as follows:-

a. The object of construing an express term in a contract is to identify and give effect to the intention of the parties to that contract.

b. The intention of the parties is to be identified from the express words which they have used in the contract in the sense which they would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract and in the context in which they appear in the contract.

c. The tribunal should give effect to the express words used by the parties, unless it is obvious from the circumstances in which the contract was made or from the other terms of the contract, that the parties could not have intended the words to have the meaning which they appear on their face to bear and that the parties intended the term to have some other meaning.

The essential question for the tribunal is what the charterparty, read as a whole against the relevant background, would reasonably be understood to mean."

13. They then set out the material provisions of the Circular and said:

"28 In so far as this circular deals with the incidence of USGTT on the owners and disponent owners in a charterparty chain, it seems to us to be admissible factual evidence of the relevant background. To that extent, this evidence was not challenged. It was clear from the wording of the circular that those on the BIMCO committee that drafted the wording that was reproduced verbatim in clause 112 anticipated that the USGTT would be levied by the American tax authorities directly on each of the owners in a chain of charters and that their draft clause would serve to transfer liability to each owner's direct charterer, but no further. We were satisfied that the wording, as embodied in clause 112 served that purpose. The question for us was whether, as the Owners contended, in a charterparty chain in which clause 112 was incorporated, liability for USGTT cascaded down the chain, with each charterer being liable not only for the USGTT tax due on income received by the disponent owner under their particular charter, but also USGTT due from each owner or disponent owner higher up the chain. The answer was to be determined not by reference to the BIMCO circular, but in how clause 112 was to be construed.

29 As the parties agreed, their intention is to be identified from the express words which they have used in clause 112 in the sense which those words would convey to a reasonable person having all the background knowledge which would reasonably have been available at the time of the contract and in the context in which they appear in the contract.

30 There is no difficulty in identifying the intention of the parties to a charterparty which incorporates clause 112 from the express words used in the clause in the sense which they would convey to a reasonable person having all the background knowledge about the incidence of USGTT which would reasonably have been available to the parties in the situation in which they were at the time of the charterparty and in the context in which they appear in the charterparty. The background knowledge is to be found in The BIMCO Special Circular. After it was published, that circular would have been reasonably available to any party to a charterparty which involved trading to the USA.

14. The Tribunals did not, in my judgment, err in taking the Circular into account as part of the relevant background. It was open to them to find, as they did, that the Circular was reasonably available to any party to a charterparty involving trading to the US. I see no reason to regard the majority arbitrators in the Global Maritime and Navios arbitrations as having treated the concept of reasonable availability in any way different to that envisaged by Lord Hoffman in ICS v West Bromwich [1998] 1 WLR 896 when he said that interpretation was the ascertainment of:

"the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract".

15. Global Maritime submitted, by reference to a dictum of Staughton LJ, in Scottish Power v Britoil (Exploration) Ltd [1997] 94 (47) L.S.G 30 that any material to be relied on should be limited to "what the parties had in mind and what was going on around them at the time when they were making the contract". That was a reference to what was said by him in Youell v Bland Welch [1992] 2 Ll. Rep 127,133 where he said that his former observation "applies to circumstances which were known to both parties, and to what each might have reasonably expected the other to know". I do not regard that as a qualification of Lord Hoffman's dictum. Prima facie, the parties can reasonably be expected by their counterparties to know that which was reasonably available to them. In any event it was accepted or agreed that they should take the Circular into account as part of the relevant background.

The actual incidence of the tax

16. It appeared to me, initially, that para 28 of the Awards in the Global Maritime and Navios arbitrations could be regarded as a finding as to the actual incidence of the tax in 2007 namely that it was exigible from all the owners down the chain. But in para 34 of their Awards the majority said this:

"34 As set out in paragraph 9 above, in support of their argument that under clause 112 liability for USGTT cascaded down the charterparty chain, the owners submitted that where charterers and sub-charterers are foreign corporations, as in the present case, United States revenue authorities impose USGTT on head owners. As we noted above, this is not the method of implementation envisioned by the BIMCO Documentary Committee nor, on its true construction, by clause 112. It was clear to us that the wording of that clause reflected the method of implementation anticipated by the Committee; it followed that if the U.S. authorities levied the tax in a different manner, the clause as drafted would not be suitable. Had the parties intended the clause to apply in the manner argued by the Owners, it would have been a simple matter for them to have modified the clause accordingly". [Underlining added]

17. In those circumstances I do not regard it as possible to spell out of the majority decision a finding as to how, at any rate in 2007, the US authorities in fact levy tax, much less as to the incidence of such tax as a matter of US law.
18. By contrast Mr Aikman in his minority decision said this:

"USGTT is declared and paid to the U.S. Treasury only once for each voyage or transportation as is apparent from the evidence adduced in this reference. Claims made to the effect that USGTT is levied upon each party in the charter party chain involved in a single voyage have not been evidenced and are not correct."

19. In the Pan Ocean arbitration the Tribunal referred to the Circular and how it explained that the clause "...transfers the tax liability from the Owner to the Charterer, be it the bareboat Charterer, the time charter, or the voyage charterer, as the case may be". They then said this:

"20 The Circular provided an example of [sic] whereby the shipowner bareboat chartered his vessel to another company; which in turn time chartered the vessel to a third company; which in turn voyage chartered the vessel to a fourth company. By incorporating the U.S. Tax Reform 1986 Clause in the bareboat charterparty the shipowner transferred the tax liability for the bareboat hire to the bareboat charterer. With the Clause inserted in the time charterparty, the bareboat charterer transferred tax liability for the time charter hire to the time charterer. Finally, by inserting the Clause in the voyage charterparty, the time charterer transferred the tax liability for freight revenues to the voyage charterer that required the vessel to call to a U.S. port. The intention and operation of the Clause is directly applicable to this reference and, to quote the Circular, its purpose is that "...the tax is transferred on a reimbursed basis according to the wording of the last two lines i.e. …'U.S. source gross transportation income, shall be reimbursed by the Charterers.'"

21 The Charterparty incorporated the U.S. Tax Reform 1986 Clause in clause 112. It provides that the Charterers will reimburse the Owners and nowhere does it require the Owners, as disponent owners, to have paid the United States Treasury directly before the clause applies. As is described in paragraph 20 above, provided the clause is incorporated in each of the charterparties down the chain, the eventual liability for the U.S. Freight tax is transferred from the shipowner to the eventual charterer who requires the vessel to carry a cargo to or from a United States port. As the BIMCO circular makes clear, it is important to recognise that the tax liability is transferred only on a "reimbursed basis.""

20. It does not seem to me that that paragraph 20 is a finding as to the actual incidence of the tax in 2007 and, if it is, it is not clear to me what the finding is intended to be. Paragraph 20 deals with a transfer of tax liability for bareboat hire to the bareboat charterer; of tax liability for time charter hire to the time charterer; and of tax liability for freight revenues to the voyage charterer. The example given in the circular is of a chain of charters and contemplates that all the charterers in the chain are potentially liable for the tax on the hire or freight which they are paying to the owner or disponent owner. In the present case tax was only levied on the hire paid to Sea Rose (such tax being defined in the Award as "the US Freight Tax") but the Award leaves unclear whether it could, in this or other cases, be levied on all the hire or freight payable up the chain. The potential significance of that appears below.
21. The Circular is relevant, therefore, not because it is to be taken as an accurate statement of the incidence of the tax (on which topic it may or may not be correct), but because it indicates the risk with which the clause was designed to deal. Mr Kenny submitted that in cases of this kind where the parties incorporate a clause drafted by a trade body the intentions of the parties must be regarded as being the same as the intention of the draftsman. Evidence of the subjective intention of the draftsman is not admissible and does not become admissible by submitting that his intention and that of the parties are to be treated as the same. But evidence of the aim of the transaction and, in particular, the risk that it was designed to address, is, in my judgment, admissible. A commercial party to whom the Circular was available would interpret the clause on the basis that it was intended to meet that risk.

Clause 112

The Owners' submissions

22. Mr Byam-Cook submits that disponent owners are entitled to be reimbursed by their charterers for the reimbursement that they have made to those from whom they chartered the vessel in respect of the USGTT that the latter either paid or reimbursed to those who had themselves made either payment or reimbursement. All that the clause requires is that there shall have been (i) tax paid by someone; (ii) that the tax was levied on income attributable to transportation under the relevant charterparty; and (iii) that what the owner is claiming is a reimbursement. In the present case tax of US $ 134,400 was paid by Sea Rose. The clause does not require the tax to have been paid by the disponent owner who is claiming from the charterer. It was levied on income attributable to transportation under the several charterparties, including, in particular the final charterparty pursuant to which the orders to undertake the voyages to the US were given. Lastly, what is claimed down the chain is reimbursement for a single sum that will have been, or will fall to be, paid up the chain. In the present case the tax was only levied on one person in the chain. It is not apparent that the tax can or ever would be levied on more than one person in the chain; and even if it could be, there is nothing uncommercial in the ultimate charterer bearing all the tax payable since it is he whose directions required the vessel to go to the US.

The Charterers' submissions

23. Part of the relevant background which the parties as reasonable persons in their position should have had in mind was that the Circular showed that it was understood by the body which drafted the clause that the tax would, or at any rate, could be exacted from anyone in the chain other than the final sub-charterer, who would not be a recipient of either hire or freight, and from more than one person.
24. In those circumstances the clause was, as the Circular made plain, designed to enable each owner in the chain to recover any tax paid by him from his charterer. It does not, however, provide for any further recovery. That is, Mr Kenny submitted, for three reasons.
25. First, the clause refers to "Any tax…." being reimbursed. An owner, disponent or otherwise, will (or may) pay tax on the hire/freight that he receives. But if the charterer from him seeks reimbursement of what he has paid the owner he is not seeking reimbursement of tax, but reimbursement of the sum he has had to pay to reimburse someone else in respect of tax that the latter has paid.
26. Second, any tax has to be levied on "income attributable to transportation under this charterparty". In the present case the tax was levied on income attributable to transportation under the head charter because it was a percentage of hire under the head charter. It was not a tax levied on income attributable to transportation under any of the sub-charters. It was not, for instance, a percentage of the hire payable by Sangamon.
27. Third, if the effect of the clause is that the ultimate charterer has, or may have, a liability to pay all of the tax paid by each of the owners up the chain he will risk having to shoulder a liability whose extent he cannot gauge or predict, since he will not be likely to know all the charters in the chain or their rates of hire, or whether, if so entitled, the charterers will claim any exemption. This exposure may be a very substantial proportion of the hire which he is paying since it is a sum of the percentages payable on more than one hire. Neither the draftsman nor the parties can have intended that there should be such an open ended liability.
28. Further it would make the charterers liable for costs which were in the owners' sphere and control, since the tax for which the charterers would be liable to make reimbursement would extend to hire on charters higher up in the chain by means of which the owners put themselves in a position to charter out the vessel. This contrasts with clause 64 which provides:

"Any taxes on hire earned under this Charterparty or its sub-hires, or sub-freights, freight or cargo to be for Charterers' account except for taxes if any levied on Charter Party hire by the Nation of the vessel, Flag or Ownership."

The Majority Awards

29. In their Awards in the Global Maritime and Navios arbitrations the majority held as follows:

"31 The words of clause 112 "… levied on income attributable to transportation under this Charter party…" (our emphasis), makes it as clear as it is possible to do that it is only USGTT which is levied on income attributable to transportation under the charterparty to which the claimant owner and respondent charterer are a party for which the charterer is liable to the owner. A charterer is not liable for USGTT for which an owner or disponent owner is liable under a charterparty higher up the charterparty chain."

32 This seems to us to be a perfectly sensible provision for distributing the burden of USGTT on each of the charterers in a charterparty chain. It is at least as sensible as imposing the entire burden of USGTT on the charterer at the end of the charterparty chain. In our view, we have to give effect to the express words used by the parties. It is certainly not obvious from the circumstances in which the charterparty was made or from the other terms of the charterparty, that the parties could not have intended the words in clause 112 to have the meaning which they appear on their face to bear and that the parties intended the term to have some other meaning.

33 To accept the Owner's case on this issue would require one to read clause 112 as if the words quoted and underlined in paragraph 31 were not there. This was a carefully drafted clause produced by BIMCO for general use in all types of charterparty. There can be no conceivable reason for concluding that the parties who incorporated clause 112 did not intend the words used to bear their obvious and natural meaning."

Conclusion

30. In my judgment the construction adopted by the Tribunal in the Pan Ocean arbitration is erroneous. I agree with the majority that the words "tax …levied on income attributable to transportation under this charterparty," where they appear in the sub- charters, are not apt to cover tax levied on income received under the head charter. The clause is dealing with tax levied on hire due under the charterparty with the person from whom reimbursement is claimed.
31. In order for Navios to succeed against Sangamon, Navios needs to say that the tax paid by Sea Rose was "tax …levied on income attributable to transportation under [the] charterparty" with Sangamon because it was the transportation to and from the United States ordered by Sangamon which gave rise to the income which was taxed. (Global Maritime needs to say the same, substituting Navios for Sangamon).
32. That is, in my view, a strained and unnatural construction which involves a fallacy. The income taxed, i.e. the hire received by Sea Rose, was not attributable to Sangamon's order that the vessel sail to the US; although the incidence of taxation on it was. Sea Rose would have been entitled to its hire under the head charter wherever the vessel went or (unless it was off hire) if it went nowhere at all. Further, insofar as the hire on which the tax was levied was attributable to transportation under any charterparty it was attributable to transportation under the head charter since it was only under that charter that any hire (which is the "income attributable to transportation") was payable to Sea Rose.
33. It thus becomes necessary for Navios to say that the hire under the head charter on which tax was levied was attributable to transportation under the Sangamon charter because Sea Rose earned its hire by making its vessel available to Pan Ocean to transport goods or allow others such as Sangamon to do so. I see no reason why it is necessary or appropriate to adopt this strained and dubiously possible construction.
34. That conclusion is underscored by the fact that it is also necessary to extend the clause so as to apply not only to reimbursement for the payment of tax but also reimbursement for the reimbursement of tax. Tax and reimbursement in respect of tax are different things and I see no sufficient reason to construe "Any …Tax" as covering reimbursement for tax.
35. Mr Byam-Cook submitted that there was no real difficulty in doing this. The charterparties contain provision in clauses 1 and 2 and elsewhere (e.g. clause 55 which provides for "Annual War Risk Insurance and Crew Bonus to be for Owner's account") as to who shall bear the cost of various items such as fees of the crew, insurance, and stores (in the case of the Owners) and fuel, canal dues and "other usual expenses" in the case of the Charterers. These items are identified by a descriptive title. They may, in practice, be paid for in the first instance by different persons including those not ultimately liable. But that does not mean that only one person in the chain can recover an indemnity. If the owners or some intermediate charterer/disponent owner pay for the fuel they can recover the cost down the chain. If some charterer pays for stores, he can recover up the chain. It makes no difference whether what is being claimed is reimbursement of an expense or reimbursement of a reimbursement. So here: the tax paid by Sea Rose can be recovered down the chain by disponent owners, even though paid, initially, by Sea Rose. When the claim passes down the chain it is, at each stage, a liability in respect of USGTT.
36. I do not regard the two situations as comparable. Clause 112 does not speak of tax in purely general or generic terms. It speaks of tax levied on income. This can only refer to the income of a particular recipient on which the tax has been levied. There is not, as there is with (say) canal dues or fumigation expenses, a single item the cost of which is to be passed up or down the line. The tax will (under the interpretation contemplated by the Circular – see para 39 below) differ according to the payer because the income to be taxed will be different. The phrase "any tax ... levied on income attributable to transportation under [the] charterparty" is, also, inapt to cover not only tax but, also something related to it but different, namely an obligation to reimburse someone else for tax. Even if "tax" is wide enough to include reimbursement to tax, reimbursement is not something levied on income.
37. Lastly, so far as commercial considerations are concerned, the majority arbitrators have held that the distribution of the burden of tax which they construe the clause to provide, namely reimbursement of the tax to the taxpayer by the charterer from him but no further, is at least as sensible as imposing the entire burden of the tax on the ultimate charterer. That is sufficient reason not to feel constrained to adopt a different construction.
38. I would myself go further. It would seem to me that to impose on the ultimate charterer the risk of having to bear the entirety of any imposition of tax all the way up the chain is a very heavy burden and that that consideration weighs heavily in favour of the construction adopted by the majority arbitrators.

The Award in the Pan Ocean arbitration

39. The Award in the Pan Ocean arbitration does not, with respect, appear to me to grapple with the difficulties in the way of the interpretation which it adopts. It refers to the example given in the Circular, which contemplates that each of the owners may be liable for tax on its income. Whilst the Circular is not absolutely explicit, on a fair reading it contemplates that tax may be levied, in respect of the same voyage, on more than one party in the same chain and on the hire or freight payable to them respectively. That is apparent from the following references:

"….in a chain of transactions involving, for instance, bareboat charter arrangements and also time charter agreements, the bareboat charterer and the time charterer may also be exposed to tax. Equally, it should be noted that the taxpayer should not be responsible for any other income than the actual income received under his own contract regardless of whether such tax will be applied to the various charters in a chartering line."

"The various liable sources involved in this case will include the bareboat charter hire …the time charter hire…the freight revenues …Irrespective of whether the three companies are owned by residents of Singapore, Philippines or Hong Kong … they will be subject to US Tax.

Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterer because they are the parties which have to file the tax return.

…Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterer, because they are the parties which have to file the tax return and thereby pay the tax in the first instance."

[Bold added]

40. The Pan Ocean Award does not address the potential consequence of its interpretation namely that the ultimate charterer is, or may be, responsible for all the tax levied on all those in the chain. It also relies – in para 21 – on the Circular as having the effect that the eventual liability for the tax is transferred from the shipowner to the eventual charterers. That is not what the Circular says. The Circular makes clear that each charterer may, as disponent owner, be liable for the tax and that the clause provides for each such owner to be able to recover the tax it has paid from its charterer. It says nothing about liability for one or more taxes cascading down the chain to the end charterers. The very fact that it refers to tax liability for bareboat hire transferring to the bare boat charterer, to tax liability for time charter hire transferring to the time charterer, and to tax liability for freight revenues transferring to the voyage charterer - but makes no reference to any of these liabilities descending any further than the immediate charterer - is an indication that a cascade to the end charterer of all tax liability, or even of tax liability in respect of hire paid to the head owner, is not something that BIMCO contemplated.
41. Accordingly, as I hold, Sea Rose was entitled to reimbursement from Pan Ocean in respect of the tax which Sea Rose paid, but no one else was entitled to reimbursement.

Postscript in relation to clause 112

42. I have reached this conclusion by reference to the material which it is permissible for the court to take into account on the hearing of the appeal. In so doing I have ignored the matters which are set out in the succeeding paragraphs.
43. I must, however, record that a BIMCO News Article dated 24 May 2011 states that:

"US source gross transportation income is not just restricted to voyage revenues but also applies to time charter and bareboat charter hire (i.e. at every level of the chartering chain)". [Bold added]

Mr Kenny told me that the minority arbitrator's conclusion was wrong for the following reasons. USGTT is potentially exigible from everyone in the chain in respect of the same voyage. But tax is not necessarily due, because of the exemptions. There is an exemption from the tax, if the company potentially liable has an office in the US or is established in a country with which the US has a Mutual Recognition Treaty^[1].

44. But it is, he said, necessary to claim an exemption. He directed my attention to BIMCO Circular No 4 of 12 April 1989 which referred to the fact that clause 112 did not impose on those in a chain of transactions any obligation to claim the exemption, and that an owner might decline to do so for confidentiality reasons because the relevant form requires a declaration as to beneficial ownership of a company's stock. It recommended the incorporation in charters of a stipulation that owners be required to claim the exemption.
45. That circular was not before any of the arbitrators and is not referred to in any of the Awards. It is, however, an illustration of the risk that would face an ultimate charterer if he was liable for all the tax in the chain. He might find himself bound to pay all the tax due even if there could have been a claim for exemption in respect of some or all of it.
46. I mention these matters because (a) they illustrate a limitation on the value as a precedent of a decision on an arbitration appeal where not all the potentially relevant facts have been found; (b) there is a risk that, were I not to do so, this case might be taken as authority for what may be inaccurate.
47. As to (a) the arbitrators other than the minority arbitrator did not make any findings as to the actual incidence of liability to the tax (or as to the knowledge of the parties as to such incidence). A subsequent attempt was made by Sangamon under section 70 (4) of the Arbitration Act 1996 to secure findings as to how and on whom USGTT is levied. That application was rejected by Hamblen J on the grounds (a) that the Court could form its own conclusion (as I have done) without evidence as to the actual incidence of the tax and could do so even if the Circular was inadmissible; (b) that it did not appear to have been necessary to have the findings now sought at the time of the arbitration; and (c) that findings as to the actual incidence of taxation would only be of assistance if it was also found that this incidence would reasonably be known to the contracting parties. The application thus raised a further issue and the possible need for further evidence. He also refused relief on five discretionary grounds. In addition he doubted whether section 70 (4) could be used to re-open the evidence in an arbitration.
48. As to (b) I must not be understood as proceeding on the basis that the Circular was wrong to state or imply that more than one party in a chain of charters could be liable for the tax. Insofar as it does so the Circular may well be right or, in the light of the minority decision, it may be wrong. For the present I can make no assumption either way.
49. It is unfortunate that, where permission to appeal was given on the basis that there was a point of construction on a common form of charterparty, there are no findings as to the actual incidence of the tax or as to what was known about the actual incidence. But that is a consequence either of the way in which the case was presented at arbitration (as Hamblen J thought) or of the approach of the arbitrators other than the minority arbitrator, which was to make no finding on the actual position.

Alternatives to clause 112

50. The disponent owners have other strings to their bow. They submit that, even if clause 112 does not entitle them to recover the amount of the tax, it is recoverable either under clause 2 as one of the "all other usual expenses" of a voyage to the USA or one of the "mandatory expenses" under clause 111. "Expenses" is, it is submitted, a word broad enough to cover tax liabilities and, when used with the words "all other," is wide enough to cover a sum paid to the relevant tax authority and to someone else in the chain by way of reimbursement.
51. Further, or alternatively, disponent owners are, it is said, entitled to an implied indemnity for the consequence of complying with charterers' orders to proceed to the USA, the effect of which was to make the income payable to the head owner subject to the tax: The Georges Christou Lemmos [1991] 2 Lloyd's Rep 107; The Athanasia Comninos [1990] 1 Lloyd's Rep 277,290; The Island Archon [1994] 2 Lloyd's Rep 227. Such an implied indemnity may arise even if another clause in the charter deals with the subject matter in respect of which an indemnity is sought: Royal Greek Government v Minister of Transport [1949] 3 Ll. L Rep 228, 235.
52. The majority arbitrators rejected these alternative submissions on the ground that clause 112 was a complete code dealing with USGTT which allocated the burden of the tax as between the Owner and the immediate Charterer but no further, so that if disponent owners were unable to recover under that clause they could not recover at all. In the Pan Ocean arbitration the arbitrators expressed "sympathy" with this point (para 24).
53. In my judgment the majority arbitrators were right. The charterparties contain, in clause 112, specific provisions in respect of the distribution of liability for USGTT and in clause 64 for distribution in respect of liability for the tax there specified. The reasonable reader of the charterparty would not understand that clauses 2 and 111, which deal with expenses generally, should be regarded as covering USGTT and producing, in relation to that tax, a different result to that provided for by clause 112 which deals with USGTT specifically. This is a case where the general must give way to the specific.
54. I would go further. As it seems to me, clause 2 is designed to deal with the payments that need to be made to third parties (such as port authorities, canal operators, providers of fumigation services or dunnage equipment) to enable the vessel to be able to transport a cargo from port to port and to carry out the charter service; and not with a levy imposed on the contractual reward for the charter service, or a liability to reimburse someone higher in the charter chain in respect of that levy. Similarly, clause 111 deals with port expenses and port charges, not levies on hire or freight. Hence the need for clause 112.
55. As to clause 8, in a broad sense the tax was incurred in consequence of the order to proceed to the US. But owners are not entitled to recover from charterers under the implied indemnity the ordinary expenses and losses of trading or those of which the owner has accepted the risk: The Island Archon [1994] 2 Lloyd's Rep 227,235; The Antiparos [2008] 2 Lloyd's Rep 237,243. In the case of voyages to or from the USA USGTT is, as it seems to me, an ordinary expense of trading and not an unusual feature. In any event the risk of incurring or being liable for this very tax has been dealt with by clause 112 and, to the extent that the owners are not entitled to recover under that clause, the risk of having to bear the cost of the tax is one which they must be taken to have accepted.
56. I propose, therefore, to allow the appeal of Global Maritime in respect of the Pan Ocean arbitration and to dismiss the appeals of Global Maritime and Navios in the Global Maritime and Navios arbitrations. I invite Counsel to consider what form of order should be made to give effect to these conclusions. I am grateful to counsel for the high quality of their submissions, including the written submission of Mr Michael Nolan.

Note 1    In the Pan Ocean arbitration the arbitrators recorded (in para 17) the Charterers’ ( i.e. Global Marine’s) claim that every party in the string, with the exception of Sea Rose had places of business in the United States and were not liable to pay USGTT on that account. In the minority Award in the Global Maritime and Navios arbitrations (para 19) it was said to be generally acknowledged that it was extremely difficult to qualify successfully for full exemption.    [Back]