Recent Charterparty Decisions

Lunchtime Lecture for MLAANZ and University of Newcastle

Chief Justice Allsop AO 26 June 2013

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1      I propose to discuss a number of recent cases of some importance both to charterparties and commercial law generally.

2     The cases are:

a Petroleo Brasileiro SA v ENE Kos 1 Ltd [2012] UKSC 17; [2012] 2 AC 164 (The 'Kos'), a decision of the United Kingdom Supreme Court, concerning the operation of time charter indemnities, bailment and restitution.

b The Ships 'Hako Endeavour', 'Hako Excel', 'Hako Esteem' and 'Hako Fortress' v Programmed Total Marine Services Pty Ltd [2013] FCAFC 21, a decision of the Full Court of the Federal Court, concerning the termination of a demise charter.

c Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156, also a decision of the Full Court of the Federal Court, and various other cases concerning the operation of cl 18 of the NYPE dealing with the lien on subfreights.

d The 'Mamola Challenger' [2010] EWHC 2026 (Comm), a decision of Teare J, concerning the principles governing contractual damages, wasted expenditure and reliance damages.

e The 'Dolphina'[2011] SGHC 273, a decision of Belinda Ang Saw Ean J in the High Court of Singapore, concerning the incorporation of charterparty clauses into bills of lading.

Because of its importance, I will spend more time on The 'Kos' than on the other cases.

(a) The 'Kos'

3      The MT Kos was a 301,000 mt VLCC time chartered by owners to Petroleo Brasileiro SA on 2 June 2006 on Shelltime 3 form for 36 months plus or minus 15 days at charterer's option. The withdrawal clause did not contain an anti-technicality provision. A payment was missed and the ship was withdrawn at 14.41 GMT on 2 June 2008. It was agreed that the failure to pay hire was not repudiatory. At the time of the withdrawal MT Kos was at Angra dos Reis in Brazil. She had just completed loading two parcels of oil. Attempts were made by the parties to negotiate both a withdrawal of the notice of withdrawal and a new charter. After over a day of such toing and froing (at 21.36 GMT on 3 June 2008), the charterers agreed to arrange for the oil to be pumped back to the terminal. That was done by 06.00 GMT on 5 June 2008. It was agreed that if the charterers had made arrangements promptly for the discharge as soon as they had received the notice of withdrawal the vessel would have been detained for one day, not 2.64 days as it was. The owners wanted payment for 2.64 days and for bunkers consumed in same period. By the time of the appeal in the Supreme Court there were four bases for the owners' claim:

a Clause 13 of the charter, the employment clause:

"The master (although appointed by owners) shall be under the orders and direction of Charterers as regards employment of the vessel, agency or other arrangements. Bill[s] of lading are to be signed as charterers or their agents may direct, without prejudice to this charter … charterers hereby indemnify owners against all consequences or liabilities that may arise from the master, charterers or their agents signing bills of lading or other documents, or from the master otherwise complying with Charterers' or their agents' orders …" (emphasis added)

b Under an express or implied new contract made after withdrawal to pay for time and bunkers

c Unjust enrichment

d Bailment.

4      The primary judge (Andrew Smith J) found for the owners under (d); the Court of Appeal (Longmore and Smith LJJ and Sir Mark Waller) rejected all bases, but allowed the costs of bunkers consumed in discharging the cargo. The Supreme Court allowed the appeal, the majority (Lord Sumption, with whom Lord Walker agreed, Lord Phillips and Lord Clarke also agreeing and adding some comments) on the basis of the engagement of the indemnity in cl 13, Lord Mance on the bailment and restitution grounds favoured by Andrew Smith J. The further agreement basis was rejected and needs no further discussion.

The Indemnity

5     It is fundamental to understand the nature of the sophisticated class of maritime contract called a time charter. There are a number of clear expressions of the relevant considerations, but few better than that given by Lord Bingham of Cornhill in The 'Hill Harmony' [2001] 1 AC 638 at 641 and Lord Mustill in The 'Gregos' [1994] 1 WLR 1465 at 1468-1469. The owner undertakes to make the vessel available to serve the commercial purpose of the charterer, in exchange for hire. The owner keeps possession of the ship and employs master and crew. The rights of the charterer to give orders as to the employment of the vessel – where she goes, when, what she loads, the terms with third parties under which she carries and the like are fundamental to the charterer's business. These rights are regulated by the charter contract, but underlying the indemnity (express or implied) is the width of the charterer's power of direction and the wide consequences that can flow from following such orders. The indemnity clause (express, or implied in the NYPE) is a concomitant of the ship (through orders to the master by charterers) being placed at the disposal of charterers, and is thus wide. It cannot, however, provide for payment for things included in hire or for which the owners have taken the risk. Up to this case, the leading authority was The 'Island Archon' [1994] 2 Lloyd's Rep 227 and the judgments of Evans LJ and Sir Donald Nicholls VC.

6     The court in The Island Archon decided (and it was not challenged in The Kos) that the implied indemnity (here of course it was express) operates when the order is contractually valid, as well as when it is not justified by the contract. The Hill Harmony made clear that the order must be in the employment of the ship and not in respect of its navigation or management.

7     Obviously, limits have to be placed on the indemnity, otherwise it will over-ride and replace the bargained for risk allocation of the contract. The first limit is that the indemnity does not cover things for which there is remuneration by way of hire – 'the ordinary risks and costs associated with the performance of the chartered service': Lord Sumption at [11]. The risks or costs that the owners have or have not agreed to bear depend on the proper construction of the contract in the context of 'an informed judgment of the … physical and commercial hazards … normally incidental to the chartered service": ibid.

8     The second limit in a clause such as cl 13 is the necessity for the loss (in respect of which the indemnity is engaged) to be caused by the charterer's orders: Lord Sumption at [12]. Causation is always sensitive to the legal context in which it is being examined. The intended scope of the indemnity is a question of construction. This was not a question of foreseeability, but whether the order was the "effective cause" of the loss, and not a "mere 'but for'" cause. There can be other causes: ibid.

9     The order here was to load the cargo. That was an effective cause of the loss to unload it, together with the circumstances requiring it to be unloaded (the non-payment of hire and termination). The primary judge and the Court of Appeal had used a narrower causal test (as did Lord Mance in dissent on this point). Andrew Smith J said the loss from unloading after breach was "too remote"; Longmore LJ said it was not the "natural consequence" of the order to load. The tension with the use of these notions is, as Lord Sumption said, that the more foreseeable and natural the consequence the more likely it is to be an ordinary risk of the service.

10     Lord Phillips, agreed and added that the order to load meant that the cargo had to be unloaded, usually under time paid for; here, after termination. He did not see the case turning on a choice between competing causes.

11     Lord Mance disagreed fundamentally about the causal restriction on the operation of the indemnity. In reasons more closely linked to prior authority, he said that the causal question was the search for the "proximate" or "determining" cause: Larrinaga Steamship Co Ltd v The King [1945] AC 246 at 253 (Visc Simon LC, agreed in by Lords Thankerton and Wright at 253-254) and The Ann Stathatos 83 Ll L Rep 228. In citing from the last case and the use of the phrase "proximate cause", Lord Mance saw the necessity for the (that is one) proximate cause. Whilst accepting that there may be circumstances where two causes are so closely matched to be both proximate, that was largely theoretical and in insurance and the indemnity here there is to be found a single proximate cause. In this context Lord Mance discussed Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57. It is unnecessary to deal in detail with the reasoning, but Lord Mance favoured the search for the proximate cause. Lord Mance also called in aid the leading judgment of Lord Hobhouse of Woodborough in The 'Hill Harmony' [2001] 1 AC 638 at 656 that indemnities (there NYPE cl 8) apply only where there is a direct causal link between the order and the consequences. This notion of directness fell from what was said by Sir Donald Nicholls VC in The 'Island Archon' at 238 as a limitation on the indemnity. Lord Mance also undertook a close analysis of The 'White Rose' [1969] 1 WLR 1098, which illustrated the need for the isolation of the proximate or real or efficient cause. Lord Mance favoured resort to the law of restitution for recompense for services after the end of the contract.

12     In such a bench brimming with commercial experience, Lord Clarke's views on the "sharp difference" between Lords Mance and Sumption were instructive. He recognised the powerful case advocated by Lord Mance for a narrower application of cl 13 drawn from the authorities, but he also recognised that no previous case involved these facts. Lord Clarke emphasised the width of cl 13, "against all consequences that may arise from complying". This is sufficient to include "an effective" cause, and is not limited to "the proximate" cause, but recognising the mere "but for" providing the occasion is insufficient. At root, Lord Clarke disagreed with the central premise of Lord Mance's reasons that, with possible rare exceptions (often only theoretical) in the operation of the indemnity and insurance generally there can only be one proximate cause. In disagreeing with Lord Mance he undertook a close analysis of the cases relied on by Lord Mance. The search is whether an effective cause of the alleged loss or expense was an insured peril or an indemnifying event. This reflects the modern state of causation in insurance law: McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402 at 429-438 [88]-[116].

13      Thus, the majority rejected any narrow conception of causation by reference to the nature and purpose of the indemnity clause. This attempt to limit the indemnity had been reflected in the tenor of the earlier cases. It remains to be seen what consequences flow from this loosening.


14      The 'Kos' also raised a bailment issue. As with the indemnity clause issue, the peculiar facts in this case gave the Supreme Court an opportunity to clarify, re-characterise and arguably broaden the existing caselaw. This issue arose because the owner argued that it conferred a benefit on the charterer by storing and caring for the cargo during the 2.64 days the ship was delayed. It therefore submitted that it was entitled to be reimbursed for the expenses incurred in doing so. However this claim went beyond a mere demand for expenses, such as the bunkers used in discharging the cargo. The owner also sought remuneration at the market rate for the time the ship was obliged to wait at Angra dos Reis. While this claim for remuneration raised fascinating issues in itself, its significance was diminished by the charterer's concession, the correctness of which the Supreme Court did not examine, that in this case there was no practical difference between remuneration and expenses.

15     The general rule under English law is that recipients of benefits are not obliged to pay for them. However there are many exceptions to this principle. In particular, the owner argued that a line of authority consisting of the cases Cargo ex Argos, Gaudet v Brown (1872) LR 5 PC 134; Great Northern Railway Co v Swaffield (1874) LR 9 Ex 132 and China Pacific SA v Food Corporation of India, (The 'Winson'), [1982] AC 939 demonstrated that it was entitled to recover remuneration and expenses for the benefit they conferred on the charterer.

16     Cargo ex Argos was about a voyage transporting petroleum from London to Le Havre. When the ship arrived at Le Havre it was unable to unload its cargo because of the Franco-Prussian War. The ship spent five days attempting to discharge the petroleum at nearby ports before returning to Le Havre. The port authorities allowed the master to unload the cargo into lighters but it could not be taken ashore because the shippers did not produce the bill of lading or make arrangements to receive the cargo. The master therefore reloaded the petroleum and sailed back to London. He sued for the expenses of the voyage and successfully recovered the expenses for the return voyage and leasing the lighters at Le Havre.

17     Swaffield was a similar case, which involved a claim by a railway company for the expenses of caring for a horse. Mr Swaffield sent his horse to Sandy by rail. However when it arrived he refused to collect it and insisted that the railway company store it and deliver it to him. After four months of caring for the horse the railway company grew tired of waiting for him to collect his property and took the horse to his farm. They then sued for, and successfully recovered, the costs they had incurred in looking after it.

18      The final case in this line of authority was The Winson. The facts of this case were that the Indian government chartered a ship to transport wheat from the United States to Bombay. However the ship struck a reef in the South China Sea. The master engaged salvors, who retrieved the wheat and took it to Manila. They then stored it in warehouses and a ship in the harbour in order to preserve it from deterioration. They contacted the Indian government to inform them of the location of their property and that they should make arrangements to collect it. However they received no response. They subsequently sued to recover the stevedoring, chartering and warehouse fees associated with storing the wheat. The Indian government agreed to pay for the charges after the abandonment of the voyage, but argued that before that date the shipowner was solely responsible for these expenses. The House of Lords upheld the salvors' claim for reimbursement.

19      The owners in The 'Kos' relied on the fact that these cases share certain similarities with the circumstances in The 'Kos', namely that the bailee successfully recovered expenses incurred caring for the bailor's goods after a contractual arrangement had ended. However the charterer denied the applicability of these authorities by distinguishing them on their facts. For example, it argued that Cargo ex Argos and The Winson both involved emergencies. In order to determine whether to apply these cases the Court therefore first needed to distil the legal principle they stood for. The Court of Appeal considered that these were cases about agency of necessity, and as such had little applicability to the The 'Kos' case. The Court of Appeal distinguished between the principles applicable in claims for remuneration and expenses. They held that an agency of necessity must exist for a bailee to recover remuneration for caring for the goods of a bailor. However, this is not necessary in order to recover expenses. The Court of Appeal did not refer to Swaffield, and as such based its analysis solely upon Cargo ex Argos and The Winson. They drew their requirements for recovering remuneration from Cargo ex Argos, because in that case the shipowners recovered freight for transporting the petroleum back to London. Their test for claiming expenses was based on The Winson, because the salvors merely received the cost of storing the wheat. In contrast, the Supreme Court found that this line of authority was not about agency of necessity at all and formulated a three limb test for when these cases will allow bailors to claim for benefits conferred on bailees. The trial judge reached a similar conclusion but did so by modifying a five point test set out by Lord Simon of Glaisdale in Cargo ex Argos.

Supreme Court

20      In contrast, the Supreme Court rejected the Court of Appeal's characterisation of this line of authority in terms of agency of necessity and did not distinguish between remuneration and expenses. In his obiter comments Lord Sumption questioned the coherence of the agency of necessity doctrine. Furthermore, he stated that the facts in Cargo ex Argos, Swaffield and The Winson did not establish an agency of necessity, and as such these cases were not decided on this basis.

21      Lord Sumption formulated a test based on the circumstances that were shared by these three cases. This test's three requirements were:

"(i) that the cargo was originally bailed to the owners under a contract which came to an end while the cargo was still in their possession, (ii) that as a matter of law their obligation to look after the cargo continued notwithstanding the termination of the charterparty, and (iii) that the only reasonable or practical option open to them once the charterparty had come to an end was to retain the cargo until it could be discharged at the port where the vessel was then located."[1]

They considered that these requirements were satisfied in The 'Kos'.

22      As to the distinction between remuneration and expenses, Lord Sumption blurred the lines when he stated that "[t]he opportunity cost of retaining the vessel in Angra dos Reis while the charterers' cargo remained on board was a true cost".[2] Furthermore, Lord Mance pointed out that "the charterers in the present case have expressly disclaimed any reliance upon the distinction between reimbursement of expenses and remuneration".[3] As such the Supreme Court declined to articulate additional principles applying to claims for remuneration.


23     The 'Kos' can be seen as a significant recharacterisation of this aspect of the law of bailment. The Court of Appeal stated that "[t]o accede to the suggestion that an owner who withdraws his ship from the charterers' service should be remunerated at market rates from the time of withdrawal until the cargo is discharged would go much further than existing authority has, so far, contemplated."[4] There is considerable force in this position.

24      Cargo ex Argos was the only case dealing with the recovery of remuneration. The Privy Council in this case couched their decision in the language of agency of necessity. For example, they stated that "not merely is a power given, but a duty is cast on the master in many cases of accident and emergency to act for the safety of the cargo" (emphasis added).[5] They furthermore referred to "the implied agency of the master"[6] and stated that the master's authority was "founded on necessity".[7] Lord Sumption was of the opinion that these references to necessity refer to the necessity for the bailee to expend funds in order to fulfil his or her duty to care for the bailor's goods, rather than an agency of necessity. However, even if this is the case, it does not explain the references to 'accident and emergency' and 'agency' in Cargo ex Argos.

25     The Supreme Court also stated that Cargo ex Argos was not decided on an agency basis because the master did not create contracts with third parties on behalf of the cargo-owner, and as such was not an agent. They base this proposition on Lords Diplock and Simon's statements in The Winson that agency of necessity principles were only relevant when the bailee purported to bind the bailor to contracts with third parties. However, that was a case dealing with expenses, not remuneration. These comments therefore support the Supreme Court's contention that it is not necessary for the bailee to establish the existence of an agency of necessity to recover expenses, but it is at best only obiter in support of their more radical finding that such an agency relationship is not a precondition for recovering remuneration. Cargo ex Argos is the only authority that deals with remuneration and in that case the Privy Council used the language of agency of necessity, even though the master made no contracts between the cargo-owner and third parties. This indicates that the doctrine of agency of necessity is not restricted to cases involving such contracts.

26      Thus, by allowing remuneration in The 'Kos' in the absence of an agency of necessity, the Supreme Court significantly extended owners' ability claim remuneration from charterers as bailees of the cargo. They also clarified the law by setting out a simple three limb test in Lord Sumption's judgment, with which Lord Walker, Lord Phillips and Lord Clarke agreed. While Lord Sumption decided the case on the basis of the indemnity clause and considered his comments on bailment to be obiter, Lord Mance decided the case on the bailment point and on the applicability of The 'Winson' as analysed by Andrew Smith J. Given that the concession about expenses and remuneration was made, Lord Mance accepted the primary judge's application of the principle in The 'Winson' stated by Lord Diplock (with whom Lords Keith, Roskill and Brandon agreed) that if the bailee fulfils the duty it has of taking proper steps to preserve bailed goods, it has a correlative right to charge the owner of the goods with the expenses reasonably incurred in doing so. Lord Clarke allowed the appeal on the bailment issue, as well as the indemnity issue. Therefore, as two Lords decided the case on this basis and the other Lords agreed with them in obiter, The 'Kos' is an important authority on this issue.

(b) Ships "Hako Endeavour", "Hako Excel", "Hako Esteem" and "Hako Fortress" v Programmed Total Marine Services Pty Ltd [2013] FCAFC 21

27      Another recent case that clarified an important issue relevant to charterparties is Ships "Hako Endeavour", "Hako Excel", "Hako Esteem" and "Hako Fortress" v Programmed Total Marine Services Pty Ltd [2013] FCAFC 21. This was a case regarding four tugboats that were used to transport rocks as part of the development of the Gorgon gas project. The vessels were owned by four separate Singaporean companies that had demise chartered them to Hako Offshore Pte Ltd (Hako Offshore), which in turn time chartered them to Boskalis Australia Pty Ltd. Programmed Total Marine Services Pty Ltd (PTMS) provided manning and crew services to these ships. When Hako Offshore failed to pay for these services, PTMS applied for arrest warrants of the four ships, which were subsequently all detained.

28      The shipowners challenged the validity of these arrests. In particular they raised a very interesting issue in relation to one of the ships, the Hako Fortress. PTMS argued that they had the right to proceed in rem against this ship under section 18 of the Admiralty Act 1988 (Cth), which is in the following terms:

18 Right to proceed in rem on demise charterer's liabilities

Where, in relation to a maritime claim concerning a ship, a relevant person:

(a) was, when the cause of action arose, the owner or charterer, or in possession or control, of the ship; and

(b) is, when the proceeding is commenced, a demise charterer of the ship;

a proceeding on the claim may be commenced as an action in rem against the ship.

29     However Dolphin 2 Pte Ltd (Dolphin 2), the owner of Hako Fortress, contended that, having issued a notice of default on 20 October 2011, they terminated the demise charter on 1 March 2012 and withdrew the vessel. As such, Hako Offshore was not the demise charterer of Hako Fortress on 2 April 2012, when PTMS filed the writ against her, and accordingly section 18 did not apply. In response, PTMS argued that Dolphin 2 had not terminated the demise charter because it had not retaken possession of the vessel. This case therefore raised the issue of whether repossession is necessary in order to terminate a demise charterparty.

30      At first instance McKerracher J identified two competing lines of authority. He stated that Tamberlin J in Patrick Stevedores No 2 Pty Ltd v MV 'Turakina' (1998) 154 ALR 666 and the High Court of New Zealand in The 'Rangiora', 'Ranginui' and 'Takitimu' [2000] 1 Lloyd's Rep 36 held that a demise charter can only be terminated by repossessing the vessel; notice alone is insufficient. In contrast CMS (Aust) Pty Ltd v Ship 'Socofl Stream' (1999) 95 FCR 403 is authority for the proposition that whether an owner can terminate a demise charter merely by giving notice depends upon the provisions of the specific charterparty. McKerracher J also referred to ASP Holdings Ltd v Pan Australia Shipping Pty Ltd (2006) 235 ALR 554 and pointed out that, although Finkelstein J felt obliged to follow the Socofl Stream in that case, he actually preferred the contrary view. McKerracher J agreed with Finkelstein J that termination through notice alone did not reflect the practical reality that, until the owner retakes possession, the charterer still has control over the vessel. This could lead to unexpected and unfortunate results, such as the master having ostensible authority to bind the owners. In the light of these conflicting authorities, McKerracher J felt it was inappropriate to decide the termination issue at the interlocutory stage. He also declined to make a finding regarding which line of authorities was binding.

31      Upon appeal to the Full Court Siopis, Rares and Buchanan JJ clearly reaffirmed the principle in the Socofl Stream that the terms of the charterparty will determine whether repossession is necessary to terminate the charter. Rares J did not even consider that there was any competing rule, as in his view the outcome in the Turakina merely reflected the terms of the particular charterparty in that case.

32     The justices therefore proceeded to interpret clauses 28 and 29 of the charterparty, regarding termination and repossession. These clauses provided that:

28 Termination

(a) Charterers' Default

The Owners shall be entitled to withdraw the Vessel from the service of the Charterers and terminate the Charter with immediate effect by written notice to the Charterers if:

(i) the Charterers fail to pay hire in accordance with Clause 11. However, where there is a failure to make punctual payment of hire due to oversight, negligence, errors or omissions on the part of the Charterers or their bankers, the Owners shall give the Charterers written notice of the number of clear banking days stated in Box 34 (as recognised at the agreed place of payment) in which to rectify the failure, and when so rectified within such number of days following the Owners' notice, the payment shall stand as regular and punctual. Failure by the Charterers to pay hire within the number of days stated in Box 34 of their receiving the Owners' notice as provided herein, shall entitle the Owners to withdraw the Vessel from the service of the Charterers and terminate the Charter without further notice;

29 Repossession

In the event of the termination of this Charter in accordance with the applicable provisions of Clause 28, the Owners shall have the right to repossess the Vessel from the Charterers at her current or next port of call, or at a port or place convenient to them without hindrance or interference by the Charterers, courts or local authorities. Pending physical repossession of the Vessel in accordance with this Clause 29, the Charterers shall hold the Vessel as gratuitous bailee only to the owners. The Owners shall arrange for an authorised representative to board the Vessel as soon as reasonably practicable following the termination of the Charter. The Vessel shall be deemed to be repossessed by the Owners from the Charterers upon the boarding of the Vessel by the Owners' representative. All arrangements and expenses relating to the settling of wages, disembarkation and repatriation of the Charterers' Master, officers and crew shall be the sole responsibility of the Charterers." (emphasis added)

33      The Full Court held that these clauses clearly distinguished between termination and repossession and specified that in the intermediate period the charterer would possess the vessel purely as a gratuitous bailee for the owner. As such, the demise charter was terminated when the owners gave notice to that effect on 1 March 2012. Therefore, as Hako Offshore was therefore not the demise charterer at the time PTMS commenced proceedings against the Hako Fortress on 2 April 2012, the Federal Court had no jurisdiction with regards to this vessel.

(c) Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156

34     Another important recent Australian case is Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156. In this case Keane CJ and Rares and Besanko JJ reviewed the law regarding shipowner's liens, particularly the breadth of the term 'sub-freights' in clause 18 of the 1981 NYPE form. (The 1993 Revision in line 260 adds "and for sub-hire" to "all sub-freights".

35      The facts were that Go Star Maritime Co SA had chartered the MV Go Star to Breakbulk Marine Services Ltd (BMS). The vessel was then subject to a number of sub-charters, including a charter from Daebo Shipping Co Ltd (Daebo) to Nanyuan Shipping Co Ltd (Nanyuan). When BMS failed to pay the hire the owner's agent contacted Nanyuan on 2 January 2009 and stated that:

"we advise you that Head Owners Messrs GO Star Maritime Company SA hereby exercise their rights under the head charter in respect of lien and kindly request you not proceed with any payment under your sub-charter and you are being put on notice that should you elect to ignore this notice you may be called upon to pay such sums twice over." [23]

36      Similar communications followed. On 3 January the certificate of delivery of the vessel to Nanyuan was executed. Daebo accordingly invoiced Nanyuan USD303,436.60 for the first hire payment and the cost of the bunkers on delivery. However, this invoice was never paid as on 8 January Nanyuan withdrew from the sub-charter. Furthermore, on 15 January the owner withdrew the ship for non-payment of hire. Daebo therefore commenced proceedings in rem against Go Star and in personam against the owner seeking damages for conversion and detinue of the bunkers and unlawful interference with its contractual relations with Nanyuan.

37      The Full Court's discussion of the shipowner's lien arose in the context of the unlawful interference with contractual relations issue. The owner argued that its communications with Nanyuan were not tortious because they merely asserted its rights under the shipowner's lien contained in clause 18 of the head charter and sub-charterparties. Clause 18 of the 1981 NYPE form provides that:

The Owners shall have a lien upon all cargoes and all sub-freights for any amounts due under this Charter, including general average contributions, and the Charterers shall have a lien on the ship for all monies paid in advance and not earned, and any overpaid hire or excess deposit to be returned at once. Charterers will not suffer, nor permit to be continued, any lien or encumbrance incurred by them or their agents, which might have priority over the title and interest of the Owners in the vessel. (emphasis added)

38      This argument raised the controversial issue of whether 'sub-freights' includes hire under time charterparties. There are conflicting authorities on this point. In Care Corp Shipping Co v Latin American Shipping Corp (The Cebu (No 1)) [1983] QB 1005, Lloyd J held that this term was broad enough to cover timecharter hire charges. However, in Care Shipping Corp v Itex Itagrani Export SA, 'The Cebu' (No 2) [1993] QB 1, Steyn J held that 'sub-freights' means only freight under bills of lading and voyage charterparties.

39      It was not necessary for the Full Court to resolve this question because it rejected the owner's submission on other grounds. First, even if 'sub-freights' had the broader meaning set out by Lloyd J in Cebu 1, it would still not include the cost of the bunkers, because this "was not in the nature of freight or hire but a debt due on a sale of property."[8] Secondly, the owner did not properly give Nanyuan notice of its lien because, while brought it to their attention and consequently requested Nanyuan not to pay Daebo, it "did not claim to be presently entitled to, and certainly did not request or require, payment of any sub-freight (however wide that term may be) then due by Nanyuan to Daebo under their charter."[9]

40 However, the Full Court nevertheless went on to discuss the interpretation of 'sub-freights' in obiter. They expressed a clear preference of Lloyd J's broad meaning in Cebu 1. They considered that, because the NYPE form is American in origin, it is important to consider the meaning of 'sub-freights' under American maritime law, rather than exclusively referring to British cases, such as Cebu 1 and Cebu 2. In order to determine the breadth of this term under American law they referred to a footnote in an influential American text, Thomas J Schoenbaum's Admiralty and Maritime Law, which states that "[s]ubfreights are the hire under a subcharter as well as bill of lading freight payable by shippers and consignees." (emphasis added)[10]

41 Another consideration that influenced the Full Court was the fact that "because cl 18 expressly recognises that, as between owner and charterer, the owner can exercise a lien over the cargo (as would ordinarily be the case with any bill of lading signed by the master), the reference to 'sub-freights' must apply to money due to, or able to be demanded by, the charterer from a sub-charterer."[11]

42 Finally, they questioned the basis on which Steyn J adopted a narrower construction in Cebu 2. He based his interpretation on Lord Denning MR's comment in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The 'Nanfri') [1978] QB 927 that the meaning of 'sub-freights' had recently evolved so that time charter hire payments "'are usually now described as 'hire' and those under a voyage charter as 'freight'. (Emphasis added.)"[12] The Full Court thought that the use of the word 'usually' indicated that Lord Denning MR did not believe that the term had completely adopted this new, more restrictive, meaning.

43      Therefore, while Daebo does not authoritatively resolve the conflicting authorities on the meaning of 'sub-freight' in NYPE clause 18, the Full Court's judgment does set out strong arguments in favour of Lloyd J's broad interpretation and gives an indication of how Australian courts may interpret this term in the future. This broader view accords with earlier Australian authority in The Lakatoi Express (1990) 19 NSWLR 285. Recently in England in Dry Bulk Handy Holding Inc v Fayette International Holdings Ltd [2012] EWHC 2107 (Comm) Andrew Smith J expressed a personal view in accordance with Lloyd J, but felt constrained to follow Steyn J.

44     The Full Court also briefly examined the jurisprudential nature of the owner's lien on subfreights (see [95]-[97]). It was not necessary to resolve it. Reference may also be made to Cosco Bulk Carrier Co Ltd v Armada Shipping SA [2011] EWHC 216 (Ch) at [26]-[29] and Western Bulk Shipowning III A/S v Carbofer Maritime Trading APS [2012] EWHC 1224 (Comm) at [36]-[52] where Clarke J concluded that it was an assignment by way of charge not a sui generis personal contractual right of interception analogous to an unpaid seller's right of stoppage in transitu. The proper characterisation of the right will be crucial in the context of insolvency, including the obligation to register a charge.

(d) The Mamola Challenger [2010] EWHC 2026 (Comm)

45     The Mamola Challenger provides a valuable reminder and illustration of the general rules of contractual damages in the context of charterparties.

46     Mamola Challenger Shipping Co. Ltd. contracted to charter Mamola Challenger to Omak Maritime Ltd (Omak) for five years. Omak in turn planned to subcharter the ship to Shell Nigeria Exploration & Production Company Limited (Shell Nigeria) for use in the oil industry. The charterparty was a good deal for Omak because the charter hire was set at US$13,700 per day, which was $7,500 less than the market rate of US$21,347. Moreover, the owner agreed to install an extra crane on board for free. It accordingly incurred expenses preparing for this charter, for example by removing a crane from another vessel in order to install it on the Mamola Challenger. However, Shell Nigeria ultimately refused to sub-charter the vessel because the National Petroleum Investment Management Services would not approve the deal. Omak subsequently repudiated the charterparty and the owner elected to terminate.

47      As a result, the money the owner had spent on removing the crane and otherwise preparing for the charterparty was wasted. However, the termination of the contract freed the owner to enter more lucrative contracts. The vessel was delivered for the first such charterparty only a week after the owner terminated the contract with Omak. The increased profit that the owner would receive during the five years that they had planned to charter the vessel to Omak was calculated to exceed the expenses that were thrown away preparing for it. The owner nevertheless claimed $675,000 damages for their wasted expenditure, and were awarded $86,534 by a LMAA tribunal. The charterer appealed on the basis that awarding anything more than a nominal sum would be contrary to the compensatory nature of contractual damages.

48      To support their positions the owner and charterer characterised the relationship between reliance and expectation damages in very different ways. The owner argued that these two types of damages are fundamentally distinct. Expectation damages are calculated so as to put the plaintiff in the position they would have been in had the contract not been breached. Thus, if they would have made a profit, they can recover that sum as damages. In contrast, reliance damages are designed to place the plaintiff in the position they would have enjoyed if the contract had never been made, which may be a better position than if the contract had been performed. For example, they can claim any money wasted preparing for the contract as reliance damages. The plaintiff has the right to elect between these two types of damages. In this case the owner had chosen to claim reliance damages and it was therefore irrelevant that the charterer's breach ultimately placed them in a better financial position overall.

49      In contrast, the charterer argued that calculating contractual damages involves a global assessment of the loss that the breach had caused the plaintiff. In this case, although the plaintiff had wasted expenses, it had actually benefited from the termination of the contract, and as such it was only entitled to nominal damages.

50     Teare J's judgment comprehensively reviewed the relevant authorities and reaffirmed fundamental principles of contractual damages. He rejected the owner's argument that expectation and reliance damages are distinct. He held that "reliance losses are a species of expectation losses"[13], and as such they are governed by the guiding rule articulated by Baron Parke in Robinson v Harman (1848) 1 Exch. 850. that "where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."[14] Accordingly, the plaintiff is not entitled to be placed in a better position than they would have been in if the contract had not been breached. Teare J found that this position was supported by authorities from a range of common law countries, namely the United Kingdom, Canada, the United States and Australia (including Amann Aviation).

51     Teare J accordingly held that:

"I consider that to award substantial damages, measured by wasted expenditure, where the Owners have, as a result of the Charterers' breach, been able to trade the vessel at the higher market rates and have 'more than recuperated' their loss, would be wrong in principle. Such an award would place the Owners in a better position than they would have been in had the contract been performed. Moreover, damages for breach of contract are intended to compensate for loss suffered and the Owners have, as a result of their own efforts to mitigate their loss, suffered no loss."[15]

52      This decision is a useful guide for the calculation of damages in similar situations in the future.

(e) The Dolphina [2011] SGHC 273

53      The Dolphina [2011] SGHC 273 deals with the contentious issue of how charterparty choice of law clauses can be incorporated into bills of lading. This case involved a claim for breach of contract for delivery of cargo without production of the original bill of lading. It was therefore necessary to identify the law governing the bill of lading. While the bill itself did not contain a choice of law clause, clause 32 of the charterparty specified that "this CP to be governed by English law."[16] The plaintiff argued that this provision had been incorporated into the bill of lading by the incorporation clause, which provided that:

This shipment is carried under and pursuant to the terms of the Charter dated 19 February 2008 between [Universal] as owner and [KOSB] as [charterer], and all conditions, liberties and exceptions whatsoever of the said Charter apply to and govern the rights of parties concerned in this shipment.[17]

54      An issue therefore arose about whether this clause incorporated the charterparty's choice of law provision. The judge broke this issue down into two distinct questions. First, did the general words incorporating "all conditions, liberties and exceptions whatsoever of the said Charter" include the choice of law clause? Secondly, was the choice of law clause linguistically inapplicable to the bill of lading?

55      With regards to the first issue, the judge decided that this wording was sufficient to incorporate clause 32 because clause 32 was a 'condition' of the Charter and, even if it were not, it provided vital context for understanding the other conditions.

56      The judge recognised a distinction between 'conditions' of the charterparty, "which are directly germane and material to the shipment, carriage and delivery of the BL4 Cargo",[18] and ancillary provisions. While 'conditions' were included in the incorporation clause's general reference to "all conditions", ancillary provisions needed to be explicitly mentioned in order to be incorporated into the bill of lading. The defendant relied on Siboti K/S v B P France SA [2003] 2 Lloyd's Rep 364 as authority for the proposition that a choice of law clause is an ancillary provision. However, the judge distinguished this case on the basis that it was about an exclusive jurisdiction clause, rather than a choice of law clause. She therefore drew a distinction between exclusive jurisdiction and arbitration clauses, which cannot be incorporated by general words, and choice of law provisions, which can be. She supported this reasoning by reference to the text Bills of Lading,[19] which states that "general words of incorporation of an applicable law clause are effective".[20] This statement was based on Lord Denning MR's judgment in Pacific Molasses Co and United Molasses Trading Co Ltd v Entre Rios Compania Naviera SA [1976] 1 Lloyd's Rep 8 (The 'San Nicholas'), in which he said that arbitration clauses can only be incorporated by specific words, whereas choice of law provisions only need general wording. Lord Denning in turn referred to Sir Boyd Merriman's judgment in The Njegos [1935] 53 Ll L Rep 286. Furthermore, the judge held that the choice of law clause was a condition because "it provided a system of law by which the other conditions … were to be construed for their meaning scope and effect."[21]

57      The judge also held that clause 32 was covered by the incorporation clause in any event because it provided vital context, without which the bill of lading could not be properly understood. In reaching this conclusion she relied on The Njegos. In The Njegos the parties agreed that a clause limiting the liability of the shipowner had been incorporated into the bill of lading. The issue was whether, because English law applied to the charterparty, its provisions should still be interpreted in accordance with this legal background once incorporated into the bill of lading. Sir Boyd Merriman held that these incorporated provisions could not be properly understood without reference to the English laws that governed them and, as such the parties were taken to have intended for the charterparty's choice of law provision to be incorporated as well. The judge considered that the situation in The Dolphina was analogous. She stated that "it would not be sensible to incorporate those provisions into BL4 but ignore the fact that they were intended (in their original setting in the February Charterparty) to be governed by English law."[22] Finally, her decision on this point was further reinforced by her view that "it made good commercial sense"[23] for the charterparty and bill of lading to be governed by the same laws because "BL4 and the February Charterparty related to the same voyage by the same carrier also meant that it made good commercial sense for its rights and obligations as carrier against the original and any later holder of the bill of lading to be, as far as possible, the same as its rights and obligations against the charterer."[24]

58      She then considered the second issue regarding whether the choice of law clause could nevertheless not be incorporated because of "linguistic inapplicability"[25] with the bill of lading. The defendant submitted that clause 32 could not apply to the bill of lading because it only explicitly referred to the 'CP'. One authority supporting this proposition was Lord Robson's statement in TW Thomas & Co, Limited v Portsea Steamship Company, Limited [1912] 1 AC 1 that "the terms of the charterparty when incorporated or written into the bill of lading shall not be insensible or inapplicable to the document in which they are inserted".[26] Furthermore, in Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] 1 AC 676 Lord Diplock rejected the "verbal manipulation"[27] of charterparty clauses to allow their incorporation into bills of lading. However, the judge distinguished both these cases. She held that TW Thomas was not applicable because it was a case about an arbitration clause. She disregarded Miramar on the basis that, unlike in the present circumstances, changing the wording in that case would have involved altering the contractual obligations of the parties.

59      The judge therefore held that the charterparty's choice of law provision applied to the bill of lading, albeit slightly altered so that it read "this CP or bill of lading to be governed by English law" (emphasis added).

[1] At paragraph 28, per Lord Sumption.

[2] At paragraph 29, per Lord Sumption.

[3] At paragraph 35, per Lord Mance.

[4] At paragraph 30, per Longmore LJ.

[5] Quoted paragraph 21, per Lord Sumption.

[6] Ibid.

[7] Ibid.

[8] At paragraph 91.

[9] At paragraph 96.

[10] At paragraph 103.

[11] At paragraph 104.

[12] At paragraph 102.

[13] At paragraph 42.

[14] Quoted at paragraph 11.

[15] At paragraph 59.

[16] Quoted at paragraph 115.

[17] Ibid.

[18] At paragraph 128.

[19] R Aikens, R Lord and M Bools, Bills of Lading (Informa, 1st ed, 2006), [14.10].

[20] LMCLQ 2012. p 483.

[21] At paragraph 128.

[22] Ibid.

[23] Ibid.

[24] Ibid.

[25] At paragraph 120.

[26] Quoted at paragraph 129.

[27] Quoted at paragraph 130.