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On 2 May 2012, the Supreme Court gave judgment in Petroleo Brasileiro S.A v E.N.E. Kos 1 Limited, an appeal concerning the rights of a shipowner to be compensated for the detention of its vessel and the costs of unloading cargo after a time charter has been terminated early.

In a unanimous decision, the Court restored the first-instance decision of Andrew Smith J that the law of bailment entitled the shipowner to compensation.  The majority, with Lord Mance strongly in dissent, also found that an indemnity in the charterparty for losses sustained by the shipowner in complying with the orders of the charterer was engaged in the circumstances.

The background

The MT Kos is a 301,000 mt ‘very-large crude carrier’.  She was time-chartered by her owners to Petroleo for 36 months from 2 June 2006.

The charterparty, which was on the standard Shelltime 3 Form, included a withdrawal clause, pursuant to which the shipowner was entitled to withdraw the vessel and terminate the charterparty if hire was not paid when due.  It did not include an “anti-technicality” clause, however; that is, an obligation on the shipowners to notify the charterer of an intention to withdraw the vessel, in order that the charterer could cure the breach.

And so it happened that, on 31 May 2008, the charterers missed a payment.  From that point the shipowners were entitled to withdraw the vessel, which they did on 2 July 2008 at 14.41 GMT.  There followed a period of negotiation between the parties, during which the charterers tried to persuade the shipowners to cancel the withdrawal.  The shipowners were only willing to do so if the charterers agreed to increase the charterparty rate to the current market rate, which was considerably higher.  Neither party would agree to the other’s demands and so they succumbed to the inevitable: termination of the charterparty.

At the point of termination, the vessel, which was docked at Angra dos Reis inBrazil, had just been loaded with cargo on the charterers’ orders.  No bills of lading had been issued, however.  Once negotiations to continue the charterparty had failed, but not before, the charterers issued orders to unload the cargo.  It was established at first instance that had the charterers issued the order to unload immediately upon receiving notice to terminate on 2 July, the vessel would have been detained for one day.  As it happened, because the charterers waited until negotiations failed, the vessel was detained for 2.64 days.

The judgments on appeal

The shipowners’ claim was that it was entitled to be paid for hire of the vessel during the 2.64 days that it was detained and the bunkers (fuel) consumed during that period.  By the time that it reached the Supreme Court, the claim was advanced on four bases:

  1. under an indemnity in the charterparty, pursuant to which the charterers agreed to indemnify the shipowners against all consequences or liabilities arising from the ship’s master complying with the charterers orders (the “Indemnity“);
  2. under an express or implied new contract made after the vessel was withdrawn;
  3. on the ground of unjust enrichment; and
  4. under the law of bailment.

At first instance, Andrew Smith J concluded that the shipowners were entitled to succeed in bailment only and rejected all other bases of their claim.  The Court of Appeal went one step further, overturning Andrew Smith J’s decision and rejecting the claim on all four bases, save that the Court allowed the shipowners to recover the value of the bunkers consumed in discharging the cargo.

Judgment of the Supreme Court

Allowing the appeal, the Supreme Court unanimously held that the shipowners were entitled to succeed in bailment and restored the order of Andrew Smith J.  The majority (with Lord Mance dissenting) also held that the claim should succeed under the Indemnity.  The claim under an express or implied new contract failed as it had no support on the facts and the claim for unjust enrichment was addressed only in passing by Lord Sumption (who delivered the leading judgment), observing that the shipowners may well be entitled to succeed on this ground but, given their success under the law of bailment (and, in the majority’s view, under the Indemnity), the issue was better decided in a “less specialised context“.

1.         Bailment

The starting position under English law is that there is no general right of recovery for benefits conferred on others or expenses incurred in the course of conferring them.  That is to say, “there is no recovery for benefits ‘officiously’ conferred.”

There are, however, various exceptions to this general rule, one of which arises in circumstances of gratuitous bailment, as was the case in these proceedings.  Here, the shipowners were contractual bailees of the cargo loaded on the MT Kos during the life of the charterparty.  Once the charterparty had been determined, the contractual bailment also came to an end but there remained an obligation on the shipowners to take reasonable care of the cargo until such time as arrangements were made to discharge it.  The Court’s conclusion in this case was that the corollary of such obligation was an entitlement to be compensated for the opportunity cost of MT Kos remaining in port until the cargo was unloaded and the costs of unloading (that is, the bunkers consumed).

In his analysis, Lord Sumption referred to 19th century authority dealing with similar circumstances, viz. Gaudet v Brown (1873) and Great Northern Railway Co v Swaffield (1874).  In Gaudet, a ship’s master who was charged with delivering a cargo of munitions was unable to discharge the cargo because he was forbidden from landing (in wartime conditions) and the shippers, who could have taken delivery in the outer harbour, failed to present the bill of lading.  Left with no other option, the ship returned to London with its cargo.  In Swaffield, a horse was delivered on its owner’s arrangement to a railway station atSandy.  The owner refused to collect his horse or give instructions as to its fate unless the railway company agreed to assume all liability for storing and delivering the horse.  After four months and no progress, the railway company took matters into its own hands and delivered the horse.

In each of these cases, it was held that the shipowner and railway company respectively were entitled to recover their losses in fulfilling their duty to take reasonable care of the property in their possession.  As observed by Baron Pollock in Swaffield, “if there were that duty [to take reasonable care of the horse] without the correlative right [to be compensated for the costs of doing so], it would be a manifest injustice“.

Referring to the dicta of Lord Diplock in China Pacific SA v Food Corpn of India (The Winson) (1982), the Court concluded that the shipowners were entitled to recover under the law of bailment on the bases that:

(a)        the cargo was originally bailed to the shipowners under a contract that came to an end whilst the cargo was still in their possession;

(b)        as a matter of law the shipowners’ obligation to take care of the cargo survived termination of the charterparty; and

(c)        the only reasonable or practical option open to the shipowners once the charterparty was determined was to retain the cargo until it could be discharged.

There was no need for the shipowners to establish exceptional circumstances or an agency of necessity.

In the premises, the shipowners were entitled to market rate for 2.64 days’ hire and the cost of the bunkers consumed.

2.         Indemnity

The majority also concluded that the shipowners should succeed in their claim under the Indemnity.

Lord Sumption observed that there were two relevant preconditions to the application of the Indemnity in these proceedings.  The first was its context; that is, the Indemnity did not extend to ordinary risks and liabilities that shipowners assumed as part of the obligation to perform the chartered service and in consideration of which they were paid the hire price.  The second was that the losses were caused by complying with charterers’ orders.

Lord Sumption resolved both preconditions in favour of the shipowners.  First, he concluded that the shipowners’ need to discharge the cargo in their own time and at their own expense was not an ordinary incident of the charter or a risk they had assumed and therefore was liable to fall within the scope of the indemnity.  Second, and most significantly, he concluded that the “effective cause” of shipowners’ loss (that is, the 2.64 days in port and consumed bunkers) was the charterers’ instruction to load the vessel, not the shipowners’ later decision to exercise their right to withdraw the vessel upon non-payment.  In so finding, the majority overturned the decisions of Andrew Smith J and the Court of Appeal that the withdrawal of the vessel was an independent cause of the loss, breaking the chain of causation between the order to load the cargo and the detention of the vessel after withdrawal.

Lord Mance delivered a strong dissent, rejecting the Indemnity claim.  In his view, the second precondition identified by Lord Sumption was best expressed as follows: was the charterers’ order to load the cargo the “proximate or determining cause“?  In his view, the answer was “certainly not“.

There were two potential causes of the shipowners’ loss in these proceedings – the charterers’ orders to load the cargo and the shipowners’ decision to terminate the charterparty.  Having considered the cases dealing with the identification of a proximate cause of loss from two or more concurrent causes, Lord Mance’s view was that, applying the “common sense standards as the man in the street or a business or seafaring man would apply them” (per Devlin J in The Ann Stathatos), the shipowners’ loss was not caused by the order load.  Indeed, it did not even arise in the course of compliance with that order.

The outcome, on Lord Mance’s analysis, was clear: the shipowners’ decision to terminate the charterparty intervened so as to break the chain of causation.  Whilst true that there would have been no cargo on board (and therefore no loss) but for the instruction to load, that was no test of the proximate cause.  Moreover, it was “unrealistic to scissor up” the instruction to load and carry the cargo.  Indeed, engaging in such a division highlighted that the intervening act in these circumstances, and the proximate cause of loss, was the decision of shipowners to terminate the charterparty.

Comment

The significance of this judgment lies principally in the decision of the majority to uphold the Indemnity claim.  In his dissent, Lord Mance was highly critical of what he considered to be the unjustified stretching of the scope of such clauses.  In this case, the law of bailment provided an adequate remedy – there was no need to expand the scope of a standard-form charterparty indemnity, particularly in shipping where contractual certainty is extremely important.  The risk now, according to Lord Mance, is mission creep, with future claims seeking to extend further the circumstances in which time-charter indemnities will apply.

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