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Web alert: the importance of a clause paramount

22 December 2014

As club managers we often receive queries from our membership, predominately owner members, as to whether a clause paramount should be included into the subject voyage or time charter. Our general answer is ‘yes’. 'Why is that?' you might say. This article aims to answer that question.

What is a clause paramount?
A clause paramount is essentially a clause which incorporates a cargo liability regime, the Hague and/or Hague Visby Rules (‘the Rules’) into the subject charterparty. See, for example, Clause 24 of the NYPE 1946 form, which reads as follows:

‘It is further subject to the following clauses….the Carriage of Goods by Sea Act of the United States, approved April 16, 1936, which shall be deemed to be incorporated herein….’

What is the effect of a clause paramount?
Where the Rules are incorporated  and apply to a charterparty generally (such as under the NYPE form – see more below), their application will not be limited to cargo claims.  An owner may, therefore, benefit from the defences provided for by the Rules in respect of claims that they may otherwise have faced.   This can have a significant impact on an owner’s defence of claims outside the context of cargo loss or damage, on which the Rules themselves are focused. 

Indeed, the leading treatise Time Charters[1] suggests that the effect of the incorporation of U.S. COGSA, by virtue of Clause 24 of the NYPE form, is that the express obligation of seaworthiness, at the beginning of the charter period, is reduced from an ‘absolute’ obligation to an obligation to exercise due diligence to make the ship seaworthy before and at the beginning of each voyage under the subject time charter.

For example, in the Saxon Star[2] there was a consecutive voyage charter which included a clause paramount. Delays occurred on voyages, including ballast, due to breakdowns of machinery caused by the incompetence of the engine-room staff. They were incompetent despite the fact that the owner had exercised due diligence in their selection. Their incompetence made the ship unseaworthy. It was held by the House of Lords that the Rules would apply to all voyages, whether these were in ballast or with cargo, and the immunity given in respect of ‘loss or damage’ extended beyond physical loss or damage to cargo and covered the loss here; namely the financial loss to the charterer from the reduction in the number of voyages ultimately performed under the charter.

Where a clause paramount is incorporated into a charterparty, the provisions of the Rules are notionally written out in full into the charter and only those provisions which are ‘insensible’ or ‘inconsistent’ with the charterparty are to be disregarded. For example, in the Aquacharm[3] the ship was time chartered for a trip on the NYPE form to carry a cargo of coal from Baltimore to Japan. Due to the master’s negligence the ship was refused passage through the Panama Canal, which meant the cargo on board had to be discharged, carried through the Canal on another ship, and then reloaded. The English Court of Appeal held that the ship remained on hire throughout, as the loss arose from neglect of the master ‘in the management of the ship’ which is an excepted peril under the Rules.

The incorporation of the Rules will also give an owner the benefit of the one-year time limit in respect of claims in relation to goods loaded or to be loaded under the charter. The result is that ‘the carrier and the ship’ will be ‘discharged from all liability in respect of loss or damage’ unless ‘suit is brought’ within one year after delivery of the goods, or the date when the goods should have been delivered. This covers proceedings by a charterer against an owner. It does not, however, cover proceedings by the owner against the charterer.

The words ‘loss or damage’ in the Rules are not necessarily restricted to physical loss of or damage to goods, but can be extended to loss or damage related to goods – such as extra tank cleaning costs, pumping costs, standby lifting equipment and/or substitute cargo costs. The question of whether there is a sufficiently close relationship between ‘loss or damage’ claimed and the ‘goods’ in question to enable the owner to invoke the one year time limit, is one of fact in each case; and upon construction of the particular clause paramount in the subject charterparty.

For example, there is a difference between the NYPE form compared with the Shelltime standard form. The English courts have typically held the former (NYPE) contains wider and more expansive incorporation clauses than the latter (Shelltime). This should be of no real surprise given the Shelltime forms are drafted and prepared generally to be more ‘charterer friendly’ – as their namesake indicates.

Therefore, if a charterer wishes to limit the application of the Rules to claims for physical loss or damage to cargo, or at least to claims made in connection with cargo, they should ensure the incorporating clause contains appropriate limitations. Similarly, an owner wishing to benefit from the wider application of the Rules should do likewise, but in reverse.

Summary
Whether or not a clause paramount is included in a charterparty is a matter of commercial risk and negotiation. Furthermore, whilst it is not a prerequisite for P&I cover that all charterparties are to contain a clause paramount (and thus incorporate the Rules), there could be P&I cover implications if, as a result, an owner member is held liable for a cargo claim liability over and above those which would have been incurred had the contract of carriage been subject to the Rules.

It is nearly always beneficial for an owner to have a clause paramount incorporated into a charterparty. If such a clause is not to be included then the owner should consider the implications carefully and weigh up the ‘pros’ and ‘cons'. Parties should then know exactly the nature of the bargain they are entering into. 

The Standard Club is always on hand to assist. If in any doubt, the reader should contact the authors of this article, or their usual club contact.

***
  1. See Time Charters, Authors: Terence Coghlin, Andrew Baker, Julian Kenny, John Kimball, and Thomas H. Belknap Jr; Edition: 7th Edition, 2014; Chapter 342.

2. Adamastos Shipping v. Anglo-Saxon Petroleum (The Saxon Star) [1958] 1 Lloyd’s Rep. 73 (H.L.)

3. The Aquacharm [1982] 1 Lloyd’s Rep. 7 (C.A.)