The commercial court upholds owners’ right to revoke time charterers’ authority to collect freight: the considerations arising for the contractual chain

Posted: 13/05/2021

---

In the recent judgment of Alpha Marine Corp –v- Minmetals Logistics Zhejiang Co. Ltd [2021] EWHC 1157 (Comm) on appeal from the arbitral award of a distinguished LMAA tribunal, the Commercial Court has held that a time charter on the NYPE form does not contain an implied term barring owners from revoking a time charterers’ authority to collect freight.

In the article below, Francis Hicks examines the reasoning behind the court’s decision and discusses the legal steps that time charterers can take to protect their entitlement to collect freight in the event that their authority to do so is placed at risk.

The facts

The claimants in the appeal were the owners of the vessel MV SMART (owners), a capesize coal carrier. The owners chartered the vessel to the defendants in the appeal (charterers) for a time charter trip on an amended NYPE form (the charterparty). The charterers in turn sub-chartered the vessel to General Nice Resources (Hong Kong) Ltd (GNR) pursuant to a voyage charter dated 1 August 2013. 

Shortly after commencement of the fixture on 19 August 2013, and with the first instalment of hire having been paid in advance by the charterers, the fully laden vessel ran aground in heavy weather on departure from Richards Bay and subsequently broke up.

The voyage charter provided that freight was “deemed to be earned” whether the vessel/cargo was lost or not and that GNR had to pay the freight to the charterers within 45 days of sailing and after receipt of the charterers’ freight invoice.

The charterers duly issued their freight invoice to GNR but on 12 September 2013 the owners revoked the charterers’ authority to receive the freight and directed that it be paid into the bank account of the owners’ P&I Club (the Notice). The charterers contended that the owners had no right to do so. While there were other matters in dispute, this article focuses on the Commercial Court’s analysis of this particular issue.

The tribunal’s findings

The dispute was referred to arbitration before a distinguished LMAA tribunal comprising Mr Simon Gault, Sir David Steel and Mr Lionel Persey QC. The tribunal held in its award that, as no hire or other sums were due to the owners under the charterparty as at the date of owners’ Notice, there was an implied obligation in the charterparty that the owners would not revoke the charterers’ authority to receive freight.

In reaching this conclusion, the tribunal relied on paragraph 30.69 of the widely used practitioner text Wilford on Time Charters (7^th Ed) which, with reference to the comments of Lord Justice Tomlinson in The Bulk Chile [2013] 2 Lloyd’s Rep.38, states that “… it seems that, ordinarily, under the terms of the New York Produce and similar forms of charter, there is an implied obligation on the owners to allow the charterers to collect freight. That obligation is an implicit corollary of the obligation in Clause 8 to allow the charterers to direct the ship’s employment.”

It does not appear, however, that the parties took the further step of making submissions to the tribunal on the application to this case of the authorities regarding the implication of terms into contracts, and so this issue was not addressed in the tribunal’s award. The tribunal proceeded to award the value of the freight to the charterers in the sum of USD1,860,390 comprising sums paid into escrow by GNR with the remainder payable by the owners.

Owners’ appeal to the Commercial Court

The owners were granted permission to appeal to the Commercial Court pursuant to s.69 of the Arbitration Act 1996 on the basis of a question of law arising out of the tribunal’s award. The question of law was formulated as follows:

“Did the Charterparty contain an implied obligation that the Claimant would not revoke the Defendant’s authority to collect from GNR the freight payable under the Bills of Lading unless hire and/or sums were due to the Claimant under the Charterparty?”

The matter proceeded to hearing before Mr Justice Butcher on 21 April 2021.

The parties’ submissions on appeal

The owners argued that the tribunal was wrong to imply the obligation because the legal threshold for implication of a term into a contract, as set out in the authorities, was not met in this case. The owners submitted that, in order to be implied, the term had to be necessary for the business efficacy of the charterparty or so obvious that it went without saying.  They contended that neither of these circumstances were the case.

The charterers contended that such a term should be implied and set out three possible formulations.

1. The All Freight Implied Term which provided that, if charterers were in default of their obligations under the charterparty, then owners were entitled to collect all freight, even if it exceeded the amount of owners’ claim against charterers. However, as the charterers contended that they had not been in default of their obligations to the owners at the time of the owners’ Notice (i.e. no hire or any other sums had been outstanding – which the owners disputed), the owners had breached this implied term by revoking their authority to collect freight.
2. The All Freight (Sum Identified) Implied Term which provided that owners were not entitled to revoke the charterers’ authority to collect freight unless a specific sum was identified as being owed at the time of the revocation.
3. The Dollar for Dollar Implied Term which provided that owners were only entitled to collect freight for an amount up to but no more than the amount due from the charterers under the charterparty.

The judgment

Mr Justice Butcher examined the judgment in The Bulk Chile in detail. This is the case which the authors of Time Charters, at paragraph 30.69, had cited in support of their view that an implied obligation exists; and on which the tribunal in turn had relied in reaching the same conclusion in its award.

The judge noted that, in The Bulk Chile, the issue of whether a charterer could prevent an owner from directing that freight should be paid to it under an owners’ bill of lading did not arise for decision; and that Lord Justice Tomlinson had commented that this was a point that would have to be decided in a case in which it arose.

He further noted that Lord Justice Tomlinson had not gone further than stating that he considered it arguable that a charterer may have a remedy if the owner intervened in such circumstances and the charterer was performing under the head charterparty.

The judge also observed that Lord Justice Tomlinson’s suggestion had been taken up and developed by the authors of Time Charters to the effect that it seemed that there was an implied obligation on the part of owners to allow charterers to collect freight in such circumstances.

In his analysis of the basis for this conclusion, Mr Justice Butcher demonstrated that this was not, however, a principle of settled law and thus the law governing the implication of terms into a contract was key to disposal of the case.

The judge reviewed the authorities on this issue and referred to the following well-established principles:

• A term may be implied into a contract on the basis of business necessity or obviousness. The issue of whether business necessity pertained was a question of whether the contract would lack commercial or practical coherence without the term.
• The term to be implied should be clear and capable of clear expression.
• The fact that an implied term may take several different formulations is a sign that it is neither necessary nor obvious.

The judge held:

• On the issue of business necessity, in light of the obligation upon an owner to account, neither the charterparty nor other charterparties in similar form lacked commercial or practical coherence without an implied term restricting the owner’s right to intervene.
• While the obligation upon an owner to account to the time charterer for freight received in excess of sums owed to it had not been the subject of detailed consideration by the courts, its existence was not in doubt and it appeared not to give rise to real problems in practice.
• The twofold regime of a right for owners to claim the freight under the bills of lading and the obligation to account to charterers works in a commercially satisfactory way for the parties to the arrangements.
• The charterers’ ambivalence as to which of the three possible implied terms was correct was suggestive of there not being a term which met the tests for implication.

The judge held that there were significant difficulties with each of the three implied terms mooted.

• As to the All Freight Implied Term, the judge held it was unclear what sums or types of claim would count for the purposes of there being a sum due under the charterparty; on what date the sum was required to be outstanding; and whether it would have to be in a minimum amount or in any sum, however trivial. If it was the latter, the judge considered the implied term would be unlikely to help a charterer as the owner might very well be able to point to a sum as being due.

For an owner, the All Freight Implied Term would be undesirable as it would preclude them from intervening to collect freight even in circumstances where it was clear that a charterer would be unlikely to pay the next instalment of hire but where there was as yet no sum outstanding under the charterparty.

• As to the All Freight (Sum Identified) Implied Term, the judge considered the same difficulties would apply, together with further questions as to what notice would need to be given, in what form, when and to whom for it to trigger the owners’ right to intervene.
• As to the Dollar for Dollar Implied Term, the judge considered that it was difficult to reconcile this proposition with the well-established legal principle of the owner’s duty to account. Moreover, the judge considered that this implied term raised questions as to whether an owner would be placed in breach of contract and liable in damages if they collected a sum in excess of the amount outstanding under the charterparty, even in good faith. It also raised questions as to whether owners would need to give notice to charterers of their intention to intervene and the grounds for doing so, specifying the amount said to be outstanding.

In rejecting the three implied terms as neither necessary nor obvious, the judge held that the tribunal had been wrong to conclude that there was an implied term in the charterparty preventing the owners from intervening and withdrawing the charterers’ authority to collect freight; with the corollary that owners were entitled to the freight subject to the obligation to account. The judge further observed that an express provision could have been drafted into the charterparty to this effect but that this was not the case.

The full judgment can be found here.

Conclusion

This robust decision of the Commercial Court highlights the danger of assuming the existence of an implied term without subjecting it to the stringent tests laid down by the Supreme Court, most recently in Marks and Spencer plc -v- BNP Paribas Securities Services Trust Company (Jersey) Ltd [2016] AC 742.

In this case, the charterers and tribunal appear to have fallen into the trap of placing greater weight upon commentary found in a leading practitioner text (here paragraph 30.69 of Wilford on Time Charters (7^th Ed.)) rather than applying the prescribed tests. Ultimately, this led them into error.

For owners, the decision is an important one as it makes it clear that they not only have a powerful weapon to deploy in the event that they have concerns about the solvency of their charterers but also that they can deploy this weapon even if all charter hire has been paid up to date.

Intermediate charterers will be concerned by this development but they can protect themselves by simply including an express term into the charter. The marine, trade and energy department at Penningtons Manches Cooper LLP has drafted terms to this effect and, if this issue is of concern to you, please do not hesitate to contact our team to discuss your requirements.  

---

Return to news headlines