Posted: 24/10/2025
As part of the bicentennial celebration of Thomas Cooper’s founding in 1825, Penningtons Manches Cooper is spotlighting a different standout case conducted by the firm across its two centuries of English legal practice for each month of 2025.
This tenth instalment focusses on the judgment in ENE 1 Kos Ltd v Petroleo Brasileiro SA, The Kos [2012] UKSC 17, which arose out of the VLCC supercycle of 2008 and is the only case in which the Supreme Court considered the operation of a time charter employment and indemnity clause.
In March 2007, Thomas Cooper & Stibbard resumed trading under its original title, 'Thomas Cooper', with Stibbard continuing to appear in published judgments until 2009. This transition coincided with a period of extraordinary global financial turbulence, as markets reeled from the early tremors of the worst economic crisis since the Great Depression.
By early 2007, rising interest rates had triggered a wave of defaults among US subprime mortgage holders, leading to the demise of several major lenders. A contagion of financial instability spread to global credit markets by August 2007, freezing interbank lending and prompting central bank interventions. The crisis peaked on 15 September 2008 with the bankruptcy of Lehman Brothers, the largest in US history, and an ensuing stock market crash that saw the S&P 500 lose 38.5% of its value by year's-end. Governments across north America, Europe and Asia launched enormous bailout packages to stabilise financial systems and avert a deeper economic catastrophe.
Trade financing dried up and the demand for raw materials plummeted, resulting in severe overcapacity across the dry bulk fleet, with vessels idled and charter rates collapsing. By the end of 2008, the Baltic Dry Index had crashed 94% from an all-time high on 20 May 2008. Orders for new bulk carriers were cancelled in their hundreds.
But the tanker market was more buoyant than ever. Spot rates for very large crude carriers climbed to unprecedented highs of $120,000 per day in early 2008. The boom was driven by a surge in crude prices, reaching a record-breaking $147 per barrel in July, fuelled by speculative investment in oil as a hedge against the weakening US dollar. As futures prices exceeded spot prices, importing nations and companies began stockpiling crude, resulting in an increased demand for VLCCs, both for transportation and floating storage. Freight rates reached a new peak in December, with some VLCCs earning $250,000 per day, making 2008 one of the most lucrative years in tanker history.
This trend swiftly reversed in 2009. As global trade slowed with limited industrial activity and reduced consumer spending, demand for crude transportation dried up. VLCC rates plummeted to historic lows. A backlog of bullishly-placed newbuild orders caused the global tanker fleet to continue to grow, exacerbating the oversupply of tonnage, and intensifying the downturn. By the end of 2009, oil prices had fallen below $35 per barrel and many VLCCs could not even cover voyage costs. Some fixture rates were as low as $10,000 per day.
By a charter dated 2 June 2006, the 300,965 mt very large crude carrier MT Kos was chartered on the Shelltime 3 form for 36 months. The charter party gave owners a right of withdrawal for unpaid hire, which was immediately exercisable, as the contract contained no anti-technicality wording. Clause 13 included an express right of indemnity:
'… Charterers hereby indemnify Owners against all consequences or liabilities that may arise … from the Master otherwise complying with Charterers' or their agents' orders'.
The vessel had loaded a parcel of cargo at Angra dos Reis, Brazil when at 14.41 on 2 June 2008 owners gave notice of withdrawal for unpaid hire that had fallen due on 31 May. Owners then demanded the current market rate to perform the intended voyage unless charterers 'make prompt arrangements for the receipt back of their cargo'. The charter hire had been $45,000 per day, whereas the market rate was $155,407 per day.
Charterers asked owners to revoke the withdrawal, to no avail, and even accused owners of being in breach of charter. Eventually, charterers discharged the cargo, which enabled the vessel to depart at 06.00 on 5 June 2008.
On 8 April 2009, owners obtained summary judgment to the effect that the vessel was lawfully withdrawn and charterers' counterclaim for breach of charter was dismissed.
At the trial of the outstanding issues, the owners were claiming US$410,274, comprising 2.64 days' loss of use at the market rate, together with US$40,415 in respect of 80.11mt of bunkers consumed over that period, of which 57mt was burned in discharging the cargo.
Mr Justice Andrew Smith decided that owners were not entitled to be indemnified for these sums under clause 13, as the claims 'are too remote from the order to backload the cargo and the vessel’s compliance with it, and resulted from the owners’ decision to withdraw the vessel, a decision over which the charterers had no control and the results of which they could not quantify.'
Nor were the losses recoverable as damages for breach of the obligation to pay hire. The brief delay in payment did not constitute a repudiatory breach, and the owners’ decision to withdraw severed the causal link between that breach and the losses suffered.
The judge also declined to imply a term that would render charterers liable for the sums claimed. While it appeared correct that charterers should have to return the vessel free of cargo following a withdrawal, it was not clear that they were obliged to do this forthwith, rather than within a reasonable time, or that this included an obligation to pay for the time expended.
Owners also failed to establish the existence of a new post-withdrawal agreement made with the charterers. The facts showed that the vessel had remained at Angra dos Reis until 06.00 on 5 June 2008, not in response to a request by charterers, but because the owners had no practical alternative while negotiations were at an impasse.
All four contractual claims therefore failed, but the owners nonetheless succeeded in bailment. When the vessel was withdrawn, the contract under which they were bailees for consideration came to an end, but they remained gratuitous bailees of the cargo. The owners were entitled to recover their expenses in fulfilling their duty as bailees to make the cargo available to the charterers. This included remuneration for the use of the ship, just as owners would have been entitled to reimbursement of any costs they might have incurred in storing the cargo ashore.
Both sides appealed the judge's findings. In a judgment endorsed by Lady Justice Smith and Sir Mark Waller, Lord Justice Longmore allowed the charterers' appeal in part.
Apparently, the claims in contract were decided correctly at first instance. The owners accepted Mr Justice Andrew Smith's conclusion that no term could be implied, and the Court of Appeal agreed with his findings that the losses could not be attributed to a breach of the obligation to pay hire, and that no new agreement had arisen after the vessel was withdrawn. The claim for an indemnity under clause 13 was again rejected, with the court observing that:
'While in a sense the vessel would never have had to discharge the cargo loaded at Angra dos Reis if she had never been ordered to load it in the first place, it is not a natural consequence of ordering it to be loaded that it would have to be discharged at the self-same port.'
The court declined to remunerate owners for the use of the vessel in their capacity as gratuitous bailees, as this would 'go much further than existing authority has, so far, contemplated'. Although the owners might have discharged the cargo ashore, it was doubtful they could have done so immediately without affording the charterers an opportunity to act. Moreover, any recoverable shoreside storage charges would have been limited to reasonable costs; significantly lower than the expense of hiring the vessel.
The owners were awarded just USD28,756, representing the value of the 57mt bunkers consumed in the cooperative effort to discharge the cargo.
It was common ground before the Supreme Court that the failure to pay hire was not repudiatory. The court also swiftly determined that 'it was impossible to spell a new contract out of these facts'. However, by a majority of four, their lordships held that owners' claim for an indemnity under clause 13 succeeded in full.
The central issue was the scope of the indemnity as a matter of construction, meaning that '[w]e are not … concerned with questions of remoteness and foreseeability of the kind which would arise in the law of damages'. The indemnity was not intended to be boundless. Owners could not claim protection against the ordinary risks of performing the charter service, for which they are remunerated by the payment of hire. However, the language of clause 13 was notably broad, prompting the court to observe that:
'The real question is whether the charterers’ order was an effective cause of the owner having to bear a risk or cost of a kind which he had not contractually agreed to bear. … If the charterers’ order was an effective cause in this sense, it does not matter whether it was the only one.'
On this basis, the loss suffered was found to stem from the charterers' order to load the cargo. Once loaded, the cargo necessarily had to be discharged. The order to load was one of the causes of the vessel's predicament, along with the owners' decision to terminate the charter. It followed that the necessity for owners 'to discharge the cargo in their own time and at their own expense was not an ordinary incident of the chartered service and was not a risk that the owners assumed under the contract.'
The claim in bailment was also upheld, their lordships having observed that 'one would expect a coherent system of law to produce a consistent answer under both heads'. The opportunity cost of detaining the vessel at Angra dos Reis was a true cost to owners even though it was not an out of pocket expense.
Lord Mance dissented on the indemnity issue. He argued that clause 13 should only apply where the charterers’ order was the proximate cause of the loss, requiring a direct causal link between the instruction and the resulting consequences. He concluded that the situation could be adequately addressed through the doctrine of bailment, and cautioned against the approach taken by the other law lords:
'the majority’s present decision stretches the application of the express charter indemnity beyond any previous decision, without justification, without regard to the potential consequences (including the uncertainty – or certainty - of ever more ambitious claims) and without need.'
Commenting on the Supreme Court's decision, the authors of Time Charters, 7th Edition opine that: '[t]heir reasoning, we suggest, is unsatisfactory, and it has been criticised …. We respectfully think that Lord Mance’s reasoning on this aspect is preferable and should be followed.'
Carver on Charterparties, 3rd Edition observes that '[o]n the current state of the law, … it is not necessary in order to recover an indemnity to show that the charterer’s orders were the dominant or proximate cause of the loss in question provided that they were an effective cause. On that basis, the claims in … The Evaggelos Th might now succeed' under the implied indemnity, even though they did not succeed under an implied warranty of safety in that case.
That would be a curious outcome in circumstances where, as the Supreme Court has observed, 'one would expect a coherent system of law to produce a consistent answer under both heads'.
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