England and Wales High Court (Commercial Court) Decisions

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

		Royal Courts of Justice Rolls Building, 7 Rolls Buildings Fetter Lane, London EC4A 1NL
		07/12/2016

Mr. Justice Teare:

1. This is an appeal from an arbitration award brought with the leave of Burton J. The issue of law concerns the true construction of clause 8(d) of the Inter-Club Agreement 1996 ("the ICA"). Specifically, the issue is whether the term "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.
2. It is first necessary to set out, on the basis of the tribunal's findings of fact, how the matter arises.
3. The Claimants (in the arbitration) were the Owners of the mv Yangtze Xing Hua which they chartered to the Respondents (in the arbitration) for a time charter trip carrying soya bean meal from South America to Iran. The charterparty was dated 3 August 2012 and was on the New York Produce Exchange 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."

4. 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 vessel for Euros 5 million which, after lengthy negotiations, was settled in the sum of Euros 2,654,238. The Owners claimed that sum together with hire in the sum of US$1,012,740 from the Charterers.
5. It was common ground that liability was to be settled in accordance with the ICA which had been incorporated into the charterparty. Clause 8 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 appointed 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 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."

6. It was also common ground that the relevant part of clause 8 was sub-paragraph (d).
7. 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.
8. 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….. "

9. In considering the application of clause 8(d) the tribunal held that "act" was to be distinguished from something suggesting fault, breach 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."

10. On this appeal Mr. Julian Kenny QC has submitted 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.
11. The ICA was borne out 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."

12. 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. 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 Hazelwood and Semark 4^th.ed. para.15.43) the BIMCO Circular No.5 dated 25 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 NYPE charterparty in the instant case incorporated the ICA 1996.
13. It is thus apparent that the ICA, although in origin an agreement between the Clubs, has been transplanted into charterparties. It was not, as noted in Time Charters 7^th.ed. para.20.47, designed or drafted to be incorporated into charters but it is now incorporated into charterparties as a matter of course. The effect of this transposition was considered by the Commercial Court and the Court of Appeal in The Strathnewton. At first instance Robert Goff J. held that the ICA presupposed "that (where the charterers are seeking redress) there is a claim by the charterers under the charter of the relevant kind, which must be a claim for damages for breach of charter on the basis that the owners have, by breach of their obligations under the charter, caused damage to the goods for which the charterers claim to be liable to the bill of lading holder; and then provides that, in the event of such a claim, it is to be settled between owners and charterers under the Inter-Club Agreement" (see [1982] 2 Lloyd's Reports 296 at p.301). But the Court of Appeal disagreed. Kerr LJ explained (at [1983] 1 Lloyd's Reports 219 at p.225) that the ICA "cuts right across any allocation of functions and responsibilities based upon the Hague Rules [which in that case governed the owner/charterer relationship]; indeed, the avoidance of such allocation is the very objective of the Inter-Club Agreement". The ICA provided a "more or less mechanical apportionment of liability by reference to the nature of claims put forward by bill of lading holders". He said in terms (at p.226) that he disagreed with Robert Goff J.'s analysis of the effect of the incorporation of the ICA into the charterparty. Sir John Donaldson MR and Sir Sebag Shaw agreed. Consistently with the approach of Kerr LJ in The Strathnewton clause 2 of the ICA 1996 states expressly that "the terms of this Agreement shall apply notwithstanding anything to the contrary in any other provision of the charterparty ".^[1]
14. In support of his submission that "act" means "culpable act" Mr. Kenny submitted that the phrase "act or neglect" must be read as a whole, that "neglect" means a culpable failure to do that which ought to have been done and that the coupling of "act" with "neglect" shows that the two words have an equivalent or complementary meaning so that "act" means fault by commission just as "neglect" means fault by omission. This approach to the construction of the phrase "act or neglect" was encapsulated by Burnton J. in Anglian Water Service v Crawshaw Robbins [2001] Building Law Reports 173 at para.93 where the judge (admittedly in the different context of a civil engineering contract) said of the phrase "act or neglect":

"The word "act" can include any positive conduct. Such an interpretation would be hopelessly wide and uncommercial. "Act" must take its colour from its context. "Neglect" means a failure to do what one ought to do, to fail to meet a duty. "Act or neglect" in my judgment may include breach of contract and any tortious or negligent conduct."

15. I do not doubt that there can be contexts where, in the phrase "act or neglect", the meaning of "act" will take its colour from "neglect". But equally there can be contexts where the meaning of "act" will not take its meaning from "neglect", but can mean any act, whether or not culpable. Thus in The Fiona [1993] 1 Lloyd's Reports 257 at pp.268-9 the court had to construe the phrase "act, fault or neglect" in Article IV r.3 of the Hague Rules. HHJ Diamond QC said that "the shipment of dangerous goods is clearly an act of the shipper whether or not it is due to any fault of neglect on his part………..I do not consider that the word "act" in art IV r.3 can properly be disregarded or be treated as synonymous with fault or neglect. " This approach was followed by the Court of Appeal in The Giannis NK [1996] 1 Lloyd's Reports 579 at p.582 where Hirst LJ adopted "Judge Diamond's construction of the word "act"….thus giving the word its natural and ordinary meaning, which would include the very act of shipment itself." (The case went to the House of Lords but it was there held that this question did not arise for decision, see [1998] 1 Lloyd's Reports 337 at p.343, and Lord Lloyd preferred not to express a view on the question.)
16. None of those decisions can determine the outcome of the present appeal. The meaning of "act or neglect" in clause 8(d) of the ICA 1996 must depend upon its context and it must be construed having regard to the language of the ICA as a whole.
17. The context is that clause 8(d) is part of the ICA 1996 which seeks to apportion claims as between owners and charterers in a broadly mechanical manner having regard to the cause of a cargo claim and without having regard to the terms which would otherwise govern the relationship between the owners and charterers.
18. Clause 8(a) provides that claims arising out of unseaworthiness and/or error or fault in the navigation of management of the vessel shall be apportioned 100% to the Owners. No question of due diligence to make the vessel seaworthy arises or of whether errors or faults in the navigation or management of the vessel are excepted perils. So long as the claim arises out of unseaworthiness, navigation of management of the vessel (which Mr. Buckingham referred to as the Owner's "sphere of responsibility" under the ICA but which I prefer to describe as the Owner's "sphere of risk" under the ICA) the Owner must bear 100% of the cargo claim.
19. Clause 8(b) provides that claims arising out of loading, stowage or discharge shall be borne 100% by the charterer. Again, the enquiry is wholly factual. No question arises as to who carried out the loading etc. or who was responsible for it. All that matters is that the claim arose out of the named actions which form the Charterers' "sphere of risk" under the ICA.
20. Clause 8(c) provides that claims for shortage or overcarriage shall be borne 50/50 by Owners and Charterers (because they fall into neither party's "sphere of risk") unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or the other in which case that party shall bear 100% of the claim. This is again a factual enquiry.
21. Clause 8(d) deals with all other cargo claims. They are also in neither party's sphere of risk. The claim in the present case fell within this sweeping up category since it did not arise out of any of the causes of cargo claim mentioned in clause (8) (a)-(c). The claim is thus to be borne 50/50 unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of one or the other in which case that party shall bear 100% of the claim. This is again a factual enquiry.
22. Both clause 8(c) and (d) contain the phrase "act or neglect". Since clause 8 (a) and (b) focus upon the factual cause of a cargo claim (to determine whether the cargo claim did or did not arise out of an event within one party's sphere of risk) rather than upon the question whether a party has been at fault one would not expect clause (c) and (d) to require proof of fault. But the reference to "neglect" probably does require proof of fault because the ordinary and natural meaning of "neglect" is a failure to do that which one ought to do. That therefore raises the question - does the reference to "neglect" colour the word "act"? - so that only culpable acts (described by Mr. Kenny as faults of commission) are intended to attract 100% liability for a cargo claim within clause 8(d) ? Mr. Kenny's submission was attractive and was presented with much forensic skill but I am not persuaded that in the context of the ICA "act" can reasonably be understood as meaning a culpable act.
23. In my judgment, since clause 8 envisages a "more or less mechanical apportionment of liability", the word "act" in clause 8(d) would reasonably be understood to bear its ordinary and natural meaning of any act without regard to questions of fault. Since clause 8(d) is a sweeping up provision the sphere of risk cannot be identified. Instead, the justification in clause 8(d) for apportioning a cargo claim 100% to a party is that the claim arose out of that party's act. "Neglect" is used to encompass claims which arise, not out of a party's act, but out of a party's failure to act. I accept that "neglect" can sensibly only mean a failure to do that which the party ought to do. But by contrast "act" can sensibly mean any act, whether culpable or not. In the context of clause 8 (a) and (b) which focus on whether the cargo claim arises out of a particular activity without regard to fault I would expect clause 8 (c) and (d) to focus on whether the cargo claim arises out of an "act" of a party in the ordinary and usual sense of that word without regard to fault. In that context I do not regard the juxtaposition of "act" and "neglect" to be so cogent as to require "act" to mean a fault of commission. Nor do I regard the mention of "pilferage" in clause 8(c) as requiring "act" to be used only in the sense of an act amounting to fault, notwithstanding that pilferage must involve fault in the form of theft. I accept that the words "neglect" and "pilferage" connote fault but they should, in my judgment, be properly regarded as exceptions to the overall scheme of clause 8 which, as I have already said, envisages a "more or less mechanical apportionment of liability" without any need to investigate questions of fault. If, as I consider, they are exceptions to the overall scheme of clause 8 they would not reasonably be understood as requiring "act" to bear a meaning inconsistent with that overall scheme.
24. Mr. Kenny identified several reasons for not adopting this construction. First, he observed that under the ICA 1984 where there was clear and irrefutable evidence that a short delivery or overcarriage was due to an act, neglect or default on the part of Owners' or Charterers' servants the party whose servants or agents were at fault were to bear the claim in full. That formulation plainly envisaged that act meant culpable fault because of the reference to the party whose servants were "at fault". He submitted that there is no sensible reason for construing "act or neglect" in the 1996 ICA any differently from "act, neglect or default" in the 1984 ICA. I was not impressed by this argument. The text of the ICA 1984 dealing with short delivery and overcarriage is materially different from the ICA 1996. In particular, the former has a clear reference to the party whose servants are "at fault". The latter does not. The sweeping up provision, clause 8(d), was introduced into the ICA 1996 for the first time. In those circumstances the court should seek to construe only the words of ICA 1996 and not also to indulge in what Aikens LJ described as "the archaeology of the forms", an activity which he discouraged, save possibly where the wording was ambiguous; see The Rewa [2012] 1 Lloyd's Reports 510 at para.30.
25. Second, Mr. Kenny submitted that the construction which I favour would have effects which are not sensible and which commercial parties could not have intended. There were said to be two such effects. First, the 50/50 apportionment would almost never apply because in almost every case the proviso would take effect. In other words "the tail would wag the dog". He explained that in the large majority of cases where clause 8(a)-(c) does not apply the cargo claim will arise out of the charterers' order to load the particular cargo or out of the charterers' order to discharge at the particular port. But the shift from 50/50 to 100% is dependent upon there being clear and irrefutable evidence of the act of one party. Thus there will still be cases where the 50/50 apportionment is not shifted either because the evidence is insufficiently clear or because it is clear that the cargo claim arises out of an event not caused by the act of either party. In any event I am not persuaded that "the tail wagging the dog" analogy is apt. The 50/50 apportionment is appropriate where the cargo claim (not otherwise falling within clause 8(a)-(c)) does not arise out of either party's act or neglect. Where it does so the shift to 100% is appropriate. I do not follow why the 50/50 apportionment should be described as "the dog" and the 100% apportionment as "the tail". The one is appropriate where the cargo claim cannot be shown to arise out of the act or neglect of either party. The other is appropriate where that can be shown.
26. The second suggested unreasonable effect is that where the claim did arise out of some action on the part of the master and crew it would be "palpably unfair and uncommercial" to make the Owners 100% liable in every case "irrespective of fault". Mr. Kenny gave two examples: one where the vessel interrupts her voyage to assist another vessel in difficulty, delay ensues and the cargo interests make a claim for the delay; the other where fire breaks out at sea, the master floods the hold and cargo interests make a claim for the damage caused by water. It is said that in neither case can the parties have intended that the Owners should bear 100% of the cargo claim and that such a result "cannot be right". I am not persuaded that there is force in this point. First, in both examples it must be arguable that the claim does not arise out of the master's actions but out of the danger which reasonably and foreseeably causes the master's response, in the one case the other vessel being in distress and in the other case the fire. Second, as I have already noted Hobhouse J. explained in The Benlawers that the ICA is not concerned with considerations of "hardship or lack of moral culpability". As was made clear by Kerr LJ in The Strathnewton the "more or less mechanical apportionment of liability" applies notwithstanding the transposition of the ICA from an agreement between insurers into an agreement between owners and charterers.
27. Third, Mr. Kenny relied upon an award of an American arbitration tribunal, The Mustafa Nevzat, published by the Society of Maritime Arbitrators No. 3820, 2 January 2004. That case involved a charterparty dated 25 June 1999 which incorporated the ICA 1996. A cargo of soyabeans was loaded and on discharge was found to be damaged by overheating. The tribunal concluded that the damage was caused by self-heating of the cargo and that there was no fault either by the Owners or by the Charterers. The Owners contended that there was clear and irrefutable evidence that the claim arose of the act or neglect of the Charterers. One such act was said to be improperly preparing the cargo for shipment. Another was said to be ordering the cargo to be carried by the vessel. The tribunal rejected the claim of improper preparation and ruled that there was no clear and irrefutable evidence that the claim arose out of the act or neglect of either Owners or Charterers. Footnote 23 added this:

"For the sake of completeness we note that in the majority's view the shipper of the cargo was not the servant or sub-contractor of the Charterer within the meaning of the ICA; and we do not consider the act of the Charterer ordering or instructing the Owner to carry the cargo in question (without any fault or negligence of Charterer) to be an "act" within the meaning of 8(d)."

28. The footnote suggests that the tribunal considered that an act within clause 8(d) had to amount to fault or negligence and so the decision would appear to support Mr. Kenny's submission. However, this court is not bound by this award and must reach its own decision on the basis of the arguments put before the court, which may not have been put before the arbitration tribunal.
29. Finally, Mr. Kenny said that clause 8(d) is an indemnity clause and that there is a displaceable presumption that an indemnity does not apply to loss caused by the indemnified party's own fault; see Smith v South Wales Switchgear [1978] 1 WLR 165 at p.168D per Viscount Dilhorne. He submitted that it is commonplace in indemnity clauses to have some stipulation which expressly addresses whether the indemnity does or does not cover such losses. He said that clause 8(d) was an example of a provision making it clear that the 50/50 apportionment does not apply to losses caused by either party's fault. However, this argument does not appear to support Mr. Kenny's submission because on the construction of clause 8(d) which I favour an "act" will include an act which is a fault. In any event, the scheme of the ICA and the manner in which the Court of Appeal in The Strathnewton explained the effect of its incorporation into a charterparty show that the ICA is not simply an indemnity provision but is a scheme which enables liability for cargo claims to be apportioned between owners and charterers on a "more or less mechanical" basis. For the reasons which I have endeavoured to explain the context of clause 8(d) shows that "act" was intended to bear its ordinary and natural meaning and not to mean only culpable acts.

Conclusion

30. The tribunal's construction of "act" in clause 8(d) of the ICA, namely, that it did not require fault, was correct. It follows that the appeal must be dismissed.

Note 1   For a critical analysis of the operation of the ICA as a means of resolving disputes between owners and charterers see “Cargo Liabilities under the NYPE Time Charter and the Inter-Club Agreement” a paper by John Weale, a director of Fednav, delivered at the International Colloquium on Charterparties held by the Institute of International Shipping and Trade Law at Swansea University in September 2016 and expected to be published in 2017.     [Back]