Case law: London arbitration 10/22

Charterparty –Applicable version of Interclub Agreement (“ICA”) – Whether shipowners’ claim was a “Cargo Claim” – Whether claim was “properly settled” –Whether “clear and irrefutable evidence” that alleged damage was attributable to the act or neglect of either party

This arbitration concerns the interpretation of the ICA clause incorporated in a charterparty in the context of a cargo claim.

Cargo of soyabeans was loaded in Uruguay and Argentina for China. During discharge, the cargo receivers claimed that the cargo was damaged and a cargo claim was brought against the owners before the Chinese courts.  Owners were held liable at first instance and although an appeal was filed they settled the claim, prior to the decision of the Court of Appeal.  Subsequently, owners sought recovery from charterers under the ICA.

Clause 59 of the charterparty provided that “Liabilities for cargo claims … be borne … in accordance with Interclub New York Produce Exchange Agreement of February 1970 and reprints of May 1984 and any amendments thereto.”

The tribunal dealt with the below issues:

1. Which version of the ICA applied?

Owners argued that by way of clause 59 the parties had agreed to incorporate the latest version of the ICA and therefore the 2011 version would apply.  Charterers on the other hand argued that clause 59 incorporated only the 1984 version of the ICA or any later version which fulfilled the requirements of being an “amendment thereto”, as distinct from a reprint or replacement, such as the 2011 version.

The tribunal decided in favour of owners’ argument and preferred not to take a technical approach regarding the language used. The tribunal referred to the Genius Star 1, where Teare J had used the words “edition”, “versions”, “form”, “predecessor” and “amendment” interchangeably when referring to the different versions of the ICA. It would therefore be strange to assume that commercial parties had intended something stricter in a commercial context.

2. Was the claim brought by the cargo interests a “cargo claim” within the meaning of the ICA?

Charterers argued that this was not a cargo claim within the scope of the ICA due to the fact that the Uruguayan cargo did not arrive in a damaged condition and any alleged damage was caused after discharge during the long storage period.  They argued that the burden was on owners to show that the cargo on discharge was materially worse than it was on loading.

Owners argued that for the purposes of a “cargo claim” under the ICA, they needed only to establish that the underlying claim brought concerned damage to the cargo (whether actual or alleged), which was supposedly caused during the course of carriage.

The tribunal decided in favour of the owners and held that the claim fell within the scope of the ICA. A claim regarding alleged damage to the cargo during the voyage was sufficient to constitute a cargo claim under the ICA.

3. What is the exact meaning of “properly settled or compromised”?

Charterers claimed that a proper settlement was a pre-condition to the application of the ICA and the subject claim was not properly settled by virtue of the failure by owners to challenge the cargo interests’ position that the Uruguayan cargo was damaged at the time of discharge. They argued that the failure to do so meant that owners had accepted responsibility for the alleged damage.

Owners argued that the ICA requires a broad-brush approach.

The tribunal held that the phrase “properly settled or compromised” in the ICA does not require a detailed assessment as might be involved in the test of reasonableness for the purposes of an indemnity claim.  Nor did it require the underlying claim to be re-litigated.  The fact that the underlying claim was settled in good faith, for reasons founded upon a genuine perception of the merits of the claim at the time is sufficient.

4. How does ICA clause 8(b) work and were charterers 100% liable?

Owners argued that the cargo damage was attributed to inherent vice and claimed that charterers were 100% responsible for the cargo damage under clause 8(b) as the cargo was pre-destined to undergo mould-growth and self-heating during the ordinary course of carriage.

The tribunal rejected owners’ argument and held that the cargo damage needed to be attributable to more than a mere act of loading the cargo. There should have been a cargo handling aspect to the damage that was improperly performed. As such, this specific claim did not fall within clause 8(b).

5. The apportionment under ICA clause 8(d) and the need for “clear and irrefutable evidence”.

Under the “catch all” provision of clause 8(d), liability is to be apportioned 50/50 between owners and charterers unless “there is clear and irrefutable evidence that the claim arose out of the act or neglect of one or the other in which case that party shall then bear 100% of the claim”.

Owners argued that the ICA stipulates the nature of the evidence required and not a particular standard of proof. They argued that loading of cargo, which was bound to spoil and exposed owners to a liability despite not being at fault, was an act justifying a 100% apportionment against charterers under clause 8(d).

The tribunal held that although there wasn’t any evidence pointing out to a cause other than inherent vice, there was no “clear and irrefutable evidence” of an “act or neglect” by either party and therefore a 50/50 apportionment should apply.

Comment

This is a useful decision that reinstates the spirit of the ICA, being to encourage a broad-brush, commercial approach by parties seeking to apportion liability for underlying cargo claims, rather than to form the basis of further disputes by making technical points.

The decision provides useful guidance on which version or form of the ICA applies to charterparties, a debate which the club still sees on a surprisingly regular basis.  It also provides helpful assistance on the meaning of “cargo claim” as well as the definition of “properly settled or compromised” in the context of the ICA clause.

It is also a useful reminder of the requirements for the damage to fit within clause 8(b), stipulating that it is needed to be attributable to more than the mere act of loading; there needs to be an improper cargo handling aspect to the damage.

Finally, in the absence of “clear and irrefutable evidence” of an “act or neglect” by either party, clause 8(d) of the ICA will lead to the default 50-50 apportionment of liability.

The case is also a useful reminder that apportionment under the ICA is a full and final remedy; without more, it will be rare for parties to be able to rely on alternative routes to recovery under the charterparty, for example, an implied indemnity in favour of owners for complying with charterers’ orders.

Link to i-law can be found here

Category: Caselaw