Some interesting and important decisions on tanker time chartering

Apr. 9, 1998 The decision of Mr Justice Colman in the Trade Nomad deals with issues of importance to everyone involved in the time chartering of tanker tonnage.

The Trade Nomad, an oil-bulk-oil (obo) carrier, was chartered on the Shelltime 4 charter party form, one of the tanker time charters in most common use in the market today.
The first two voyages under the charter were performed uneventfully with bulk cargoes, but on the third voyage the vessel carried a cargo of crude oil to Wilhelmshaven in Germany.
Because of a defect in the vessel's crude oil washing (COW) system, the shore terminal refused permission for the vessel to perform COW operations.
Not surprisingly, the charterers were unhappy because this would reduce the vessel's outturn. They demanded that the owner rectify the defects, but the owner denied that any defects existed. The arbitrator, however, held that the owners were wrong and that they had breached the contract as a result of the defect in the COW system.

Clause 3 (iii) of the charter appeared to put the charterers in a strong position.
It provided: "If owners are in breach of their obligation under Clause 3 (i), charterers may so notify owners in writing; and if, after the expiry of 30 days following the receipt by owners of any such notice, owners have failed to demonstrate to charterers reasonable satisfaction, the exercise of due diligence as required in Clause 3 (i), the vessel shall be offhire-until owners have so demonstrated that they are exercising due diligence-- So the starting point was for the charterers to establish that owners were in breach of their obligations under Clause 3 (i).
If the owners were in breach and failed to do anything to try to rectify the breach within 30 days of having been told to do so by the charterers, the charterers could place the vessel offhire.
This entitlement does not depend on the charterers establishing any loss of time, or indeed loss of money. They can place the vessel offhire after the 30-day period has expired and can continue to place the vessel offhire until the owners demonstrate due diligence to rectify the defect.

It should be noted that the clause does not in fact require the defect be rectified within 30 days. It merely calls upon owners to demonstrate due diligence within that time.
Clause 3 (i), meanwhile, provides: "Throughout the charter service, owners shall, wherever the passage of time, wear and tear or any event (whether or not coming within Clause 27 hereof) requires steps to be taken to maintain or restore the conditions stipulated in Clauses 1 and 2 (a), exercise due diligence so to maintain or restore the vessel."
Clause 1 provided: "At the date of delivery of the vessel under this charter-(b) she shall be in every way fit to carry coal or crude oil"-
It was found as a fact that a vessel which had an ineffective COW system was not fit to carry crude oil.

Furthermore, it was found that the defect had probably existed as at the date of delivery - indeed, prior to the date of delivery. There was therefore a breach of Clause 1.
It would therefore seem reasonable to suppose that the owners were under an obligation under Clause 3 (i) to exercise due diligence to maintain or restore the vessel to the condition required in Clause 1 and, furthermore, if they failed to do so, the charterers could under Clause 3 (iii) serve notice which, if ignored by the owners, would result in the vessel being offhire after 30 days.
The judge, Mr Justice Colman, disagreed. Mr Justice Colman decided that there was no obligation on the owners under Clause 3 (i) to maintain or restore "the conditions stipulated in Clause 1".
On the face of it, this is rather surprising. The charterers contracted to get a vessel which was fit to carry crude oil. They didn't get one.
Of course they had a remedy in damages "but that would involve the time-consuming process of proving their loss". Besides, the charterers didn't want damages. They wanted to put pressure on the owners to restore the vessel so that it would be fit to carry crude oil. That is, they wanted the COW system fixed. What better way to put pressure on owners than by placing the vessel offhire until such time as the owners demonstrated due diligence?

So why did the judge reach the conclusion that the owners were not in breach of Clause 3 (i) even though the vessel undoubtedly needed steps to be taken to restore it to a condition in which it could carry oil?
The answer, according to Mr Justice Colman, lay in the words, --whenever the passage of time, wear and tear or any event-require steps to be taken--
In the judge's view, the passage of time, wear and tear or event all had to occur during the charter service.
In other words, if the owner supplied a vessel which did comply with Clause 1 as at the date of delivery, but the passage of time etc after delivery resulted in the vessel no longer complying, then " and only then " were the owners under an obligation to maintain or restore the vessel under Clause 3 (i).
If the vessel was already defective at the date of delivery, then Clause 3 (i), and consequently 3 (iii), did not apply.
This leads to a rather strange result. If the defect in the COW system had occurred 5 minutes before delivery, charterers would have no right to demand from owners under Clause 3 (i) that they fix the system, or to place the vessel offhire under Clause 3 (iii) if owners failed to exercise due diligence to do so.
But if the defect in the COW system occurred 5 minutes after delivery, the charterers would have a remedy under Clauses 3 (i) and 3 (iii).

Of course, parties are free to agree what they like. But, when construing a contract, the stranger the result the less likely it can be that the parties intended it.
It would, indeed, seem strange that the parties could have intended a result which would place an owner in a more favourable position where it fails to comply with its contract from the outset (i.e., in breach of Clause 1) than an owner which had complied with its obligation under Clause 1 by delivering a "fit" vessel but which had subsequently allowed the vessel to deteriorate. Yet, according to the decision of Mr Justice Colman (and, indeed, of arbitrator Bruce Harris), this is the combined effect of Clauses 1, 3 (i) and 3 (iii). Leave to appeal to the Court of Appeal was granted and the parties are currently waiting for the appeal date to be fixed.

Further disputes arose under Clause 21 of the Trade Nomad charter, which provided that, in the event of, inter alia, a boiler breakdown, "the vessel should be offhire from the commencement of such loss of time until she is again ready and in an efficient state to resume her service from a position not less favourable to charterers than that at which such loss of time commenced; provided, however, that any service given-by the vessel whilst offhire shall be taken into account in assessing the amount to be deducted from hire."
The first dispute concerned a boiler breakdown while the vessel was discharging at Singapore, as a result of which she was ordered off the berth on June 30.
The boiler was repaired on July 1 but the vessel could not get back into the berth straight away because her place had been taken by another vessel.
While she was waiting for a berth to become free, a second berth "at which the vessel had intended to discharge after completing at the first berth" became free, on July 3. The vessel discharged there between July 4 and 5, and then had to wait another 4 days until the first berth became free, on July 9.
The charterers contended that the time spent waiting for the berth was for owner's account under Clause 21.
They argued that, although the vessel was ready, once again, on July 1, she was not in a position "not less favourable to charterers".
They maintained that the vessel's position was considerably less favourable since, at the time the boiler broke down, she was alongside discharging cargo with the prospect of completing by July 5.
By contrast, following the boiler repair, the vessel was not alongside but was waiting for a berth. She did not complete discharge until some time after July 9. So the charterers contended that the vessel should have remained offhire from June 30 onwards, except for periods when she was actually discharging. Those periods constituted a "service given" under Clause 21 and therefore would be deducted from the offhire period.
In this way, the charterers would have avoided all the waiting time which they contended would not have been incurred but for the boiler breakdown.

The judge rejected the charterers' argument and supported the arbitrator's conclusion that --because the charterers had altered their discharging schedule, sending the vessel to the second berth instead of waiting for her to re-enter the first berth-the second berth was in a position no less favourable to charterers than the first berth."
In short, the question of whether the vessel was in a position which was no less favourable to charterers was a question of fact to be determined by the arbitrator.
Not many charterers, however, would agree that, where they had lost several days which could have been avoided but for the boiler breakdown, their position was "not less favourable" than the one they would have been in if the breakdown had not occurred.

No leave to appeal was given on this point, nor on another Clause 21 issue which arose following an engine breakdown suffered by the vessel at New Orleans, which led to a collision and then a period of offhire.
Following repairs, the vessel was delayed because of a sunken barge which temporarily blocked her river passage.
The charterers contended that the vessel was in a less favourable position as a result of having been blocked by the barge, but the judge concluded that the position of the vessel was not less favourable after it had been repaired because it was in the same position in the river after the repair as before the accident.
"What was less favourable was not her position, but the navigational conditions in that part of the river," concluded Mr Justice Colman, so giving a narrow construction to the word "position" in that he equated it with physical location rather than with surrounding circumstances.