Petroleo Brasileiro S.A. v. E.N.E. Kos 1 Limited  UKSC 17
E.N.E. 1 Kos Limited v. Petroleo Brasilero S.A.  EWCA Civ 772
In a judgment handed down on 2 May 2012, the UK Supreme Court has made a significant ruling on the rights of remuneration of the owners of a time-chartered ship after the ship has been lawfully withdrawn for non-payment of hire. The decision is particularly interesting for ship-owners and time charterers, since there is no previous direct authority on the issue in question.
The Supreme Court (Phillips, Walker, Mance, Clarke, Sumption LLJ) has held that the owners were entitled to compensation for the detention of the ship while the charterers' cargo remained onboard and for bunkers consumed after the ship was withdrawn, although Lord Mance differed from the remaining Law Lords as to the basis on which the owners were entitled to bring their claim.
The background facts
The M/T Kos was time chartered by her owners to the charterers for 36 months plus or minus 15 days at the charterers' option. The charterparty was on the Shelltime 3 form, containing a standard form of withdrawal clause providing that if hire was not paid when due (in this case, monthly in advance), the owners had the right to withdraw the vessel. Unusually, the charterparty contained no anti-technicality clause, requiring notice to be given before the right of withdrawal was exercised.
The vessel was delivered into the charterparty in July 2006. In June 2008, the owners withdrew the vessel when that month's hire instalment was not received in time. At the time of withdrawal, the vessel was at Angra dos Reis, Brazil, where she had been ordered to proceed by the charterers for discharge and back loading and where she had already taken on bunkers and loaded a parcel of cargo. Following withdrawal, there were a number of exchanges between the parties to try to resolve the situation to the satisfaction of both sides but these proved fruitless. Ultimately, the charterers made arrangements with the terminal to receive back the cargo which had just been loaded on board, which was then discharged. Had the charterers made arrangements for the discharge of their cargo as soon as they had received the owners' notice of withdrawal, the vessel would have been detained at Angra dos Reis for one day. Instead, she was detained there for 2.64 days (at a cost to the owners of US$410,274.00) and consumed some 80.11 mts of IFO at a cost of US$504.50/mt (US$40,415.00) before she was cargo free and sailed.
The owners claimed for the service of the vessel for those 2.64 days and for bunkers consumed during that period. This claim was put forward on the following four bases:
- Under clause 13 (employment and indemnity clause) in the charterparty;
- Under an express or implied new contract, made after the vessel was withdrawn, to pay for the time and bunkers;
- On the ground of unjust enrichment; and
- Under the law of bailment.
It should be noted also that the charterers had initially challenged the validity of the withdrawal and sought to assert a counterclaim against the owners for wrongful termination of the charterparty. As a result, they obtained from the owners a first class bank guarantee as security for the counterclaim, which the owners had provided in order to avoid the ship being arrested. In the event, the counterclaim was dismissed on summary judgment and the owners sought additionally an indemnity for the expenses they had incurred in providing and maintaining the bank guarantee.
The Commercial Court decision
We reported in detail on the decision of Mr Justice Andrew Smith in the Commercial Court in our October 2009 Shipping E-Brief (at www.incelaw.com). In essence, the judge held that the owners were entitled to succeed in their claim for time and bunkers in their capacity as gratuitous bailees of the cargo. Relying on the House of Lords decision in The Winson  AC 939, Mr Justice Andrew Smith held that the owners were entitled to be compensated for the costs incurred in fulfilling their duties as bailees, which costs extended to cover not only their out of pocket expenses but also the time incurred during the relevant period of bailment. As regards the bank guarantee expenses, the judge held that the owners could recover these pursuant to section 51 of the Senior Courts Act 1981, which grants the court a discretion to award the "costs of and incidental to" proceedings in the High Court. Mr Justice Andrew Smith found that the original provision of the guarantee and the expenses of doing so were "incidental to" the proceedings within the meaning of section 51 and were, therefore, recoverable as litigation costs.
The Court of Appeal decision
On appeal, the Court of Appeal agreed with Mr Justice Andrew Smith that the owners should recover the bunkers consumed during discharge but found in favour of the charterers in respect of the owners' claim for remuneration for the 2.64 days spent at Angra dos Reis and the balance of bunkers consumed during this period.
With regard to the costs of putting up the guarantee, the Court of Appeal rejected the charterers' argument that if the costs incurred by the owners in having their ship under arrest are not recoverable as costs of the action, then the costs of putting up a guarantee should be equally irrecoverable. Rather, Sir Mark Waller stated that there was a distinction, albeit a narrow one, between the two types of expenditure. He concluded that the costs incurred by an owner of a ship arrested form the basis of a damages claim, whereas the costs of putting up a guarantee are akin to costs incurred to protect the subject matter of an action and are consequently costs "incidental to" the proceedings. This part of the Court of Appeal judgment stands as it was not appealed to the Supreme Court.
The Supreme Court decision
Lord Sumption (with whom Lord Walker agreed) held that, on the facts, no new contract had come into existence between the parties after withdrawal. He, therefore, dismissed this basis for the claim.
Lord Sumption, however, rejected the charterers' argument that any delay or loss arising from the need to discharge the cargo resulted from the owners' decision to withdraw for their own commercial purposes and that they should consequently bear the adverse as well as the beneficial consequences of an optional decision made in their own interest. Rather, Lord Sumption confirmed that the reasons for the owners' withdrawal of the vessel were not a relevant factor impacting on their right to recover. The fact that they withdrew their vessel because it might have been in their commercial interest to do so was irrelevant for present purposes.
His Lordship went on to find that the owners' claim came within the scope of the indemnity in clause 13 of the charterparty. The indemnity was to protect the owners against losses arising from risks or costs which they had not expressly or implicitly agreed in the charterparty to bear and which were caused by complying with the charterers' orders. He held that the charterers' order to load the parcel of cargo which was on board the vessel when it was withdrawn was an effective cause of the owners' loss in the present case. The need to discharge the cargo in the owners' time arose from the fact that the cargo had been loaded pursuant to the charterers' orders and the purpose for which it had been loaded had come to an end with the termination of the charterparty. In simple terms, the cargo was on board because the charterers had put it there.
His Lordship added that, whilst it was fair to say that it was only because of the withdrawal of the vessel that the subsequent discharge at Angra dos Reis had to be done in the owners' time and without earning contractual hire, that was the very reason why the detention of the vessel fell within the indemnity. The need to discharge the cargo in the owners' time and at their expense was not an ordinary incident of the chartered service and was not a risk that the owners assumed under the contract. It arose after the chartered service had come to an end in accordance with the withdrawal clause in the contract.
Lord Sumption held, therefore, that the whole of the 2.64 days during which the vessel was detained resulted from the cargo being on board on the charterers' orders at the time of the withdrawal and that the owners were entitled to recover the market rate of hire for those 2.64 days. He also held that they were entitled to the value of bunkers consumed during the whole period of detention.
Whilst this conclusion made it unnecessary to address the owners' case on bailment, Lord Sumption nonetheless proposed to deal with the question whether the owners were also entitled to succeed at common law as non-contractual bailees of the cargo after the withdrawal of the vessel. He held that they did. His Lordship distinguished between cases where there was no previous contractual relationship between the parties and the present case where the original bailment of the cargo had occurred under the charterparty contract. Relying on The Winson, he held that the circumstances which entitled the owners to recover in bailment in the present case were that: (i) the cargo was originally bailed to the owners under a contract which came to an end while the cargo was still in their possession; (ii) as a matter of law, their obligation to look after the cargo continued notwithstanding the termination of the charterparty; and (iii) the only reasonable or practical option open to them once the charterparty had come to an end was to retain the cargo until it could be discharged at the port where the vessel was then located.
Finally, as regards the case on unjust enrichment, Lord Sumption thought that the owners might be entitled to succeed on this basis also but decided not to make a conclusive determination on this aspect.
Lord Phillips concurred with Lord Sumption as did Lord Clarke. Lord Mance, on the other hand, agreed that the owners were entitled to recover for their claim in bailment but disagreed with the majority that the claim fell within the indemnity in clause 13. In his view, an indemnity like clause 13 only applies where there is a direct causal link between the orders and the consequences and that, pursuant to cases such as The White Rose  1 WLR 1098, it was necessary to establish "an unbroken chain of causation". In Lord Mance's view, the owners' loss was not suffered as a result of complying with the time charterers' instructions, rather it was caused because the charter was at an end. He held, therefore, that the direct or unbroken causal link required was lacking in this case.
Lord Phillips agreed with Lord Mance that there must be a causal link between the order and the consequences relied on and no break in the chain of causation between the two. He disagreed though with any suggestion that there can only be one cause. Rather, depending on the circumstances, he stated that there may be more than one effective cause for a loss and that, in the present case, there were two effective causes of the owners' expense and loss, namely the withdrawal and the fact that the cargo had been loaded. In those circumstances, he saw no reason why the claim for an indemnity under clause 13 should not succeed.
The judgment provides very interesting clarification in relation to the scope of contractual indemnities in a time charter context and the rights and responsibilities arising out of a non-contractual bailment where a time charter has come to an end.
A perhaps unusual feature of the case was that no bill of lading had been issued, with the charterers remaining the owners of the cargo. It remains to be seen what effect the issue of a bill of lading and ownership of the cargo by persons other than the charterers might have in similar circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.