RISK WATCH
The Britannia Steam Ship
CLAIMS AND LEGAL
CLAIMS AND LEGAL is a supplement for Members’ claims handlers and legal departments
THE EFFECT ON THE TIME LIMIT OF INCORPORATING A CLAUSE
PARAMOUNT INTO CHARTER PARTIES
Most Clauses Paramount are designed to
incorporate a cargo liability regime into a bill
of lading, or, to a lesser extent, into a voyage
charter party. Often, inappropriate versions are
utilised, with little thought given to the effect
that provisions designed to relate to cargo
liabilities will have on the numerous other
responsibilities which arise under charter parties.
The first question to be asked is whether the
Clause Paramount has been incorporated at all.
The Hague Rules (the Rules) were originally
designed to govern the carriage of goods
shipped under bills of lading or similar
documents of title; they do not mandatorily
apply to charter parties. A Clause Paramount
therefore will have to be incorporated into a
charter for the Rules to apply. In respect of cover
for cargo claims, it is a requirement of the
Association that the Rules are incorporated into
voyage charters.
Incorporation of the Clause Paramount
As the Hague Rules were originally designed to
govern the rights between shippers and carriers
under the bill of lading contract, the Clause
Paramount must make specific reference to
being incorporated into the charter party.The
clause;‘The following Clause Paramount to
apply and to be inserted in all bills of lading
issued under the Charter Party.’ was held in The
Seki Rolette [1998] 2 Lloyd’s Rep. 638 to apply to
the charter party, as well as to the bills of lading.
Incorporating the Clause Paramount can be
straightforward. It has been held that a simple
clause reading;‘Paramount clause to be
incorporated’, is sufficient (The Agios Lazarus).
There are, however, various formulations of
Clauses Paramount and the Britannia Class 3
rule book provides three examples (two for bills
of lading and one for charter parties). Clearly, if
the clause specifies a liability regime then that
regime will apply. If no specific regime is
specified, then, as a matter of English law, the
Hague Rules would be incorporated.
As well as specifying which particular regime
to incorporate, it is also possible to limit the
Articles of the Hague Rules which are to be
incorporated – for example a clause might
exclude Article III Rule 8, in which case, the
courts would uphold other provisions in the
charter contrary to the Hague Rules.
Insurance Association Limited
Volume 1: Number 2: July 2009
Difficulties can arise where the incorporating
clause reads;‘Clause Paramount as attached to
be incorporated herein and in all bills of lading
issued hereunder’, and the attached clause
paramount itself states that the Hague Rules, as
enacted in the country of the shipment, are to
apply. Obviously where the Hague Rules are
enacted in the country of shipment, the Rules
would apply. However, if the Rules are not
enacted in the country of shipment, then it has
been held in a London Arbitration (LMLN 661,
arbitration 06/05), that there is no incorporation
of the Rules.This can lead to anomalies,
especially in a container liner-service where the
ship loads containers from various countries,
some of which have enacted the Hague Rules,
others not. In the above arbitration, the charter
incorporated;‘USA Clause Paramount or
Canadian Clause Paramount, whichever
applicable.’The voyage was UK to Singapore
and Indonesia. It was held that there was no
incorporation, as the shipment was not from
North America.
It is important to note that specific reference
must be made if the Clause Paramount is to be
incorporated into the charter party. A clause
reading;‘The Hague Rules to be incorporated
in all bills of lading issued hereunder’, is not
sufficient to incorporate the Hague Rules into
the charter party as the clause only makes
reference to the bills of lading.
What type of claims are covered by Article III
Rule 6?
Once satisfied that the Clause Paramount is
incorporated into the charter party, it is then
necessary to consider the types of claim
governed by the Clause Paramount.
The Clause Paramount ‘…brings the Hague
Rules into the charter party so as to render the
voyage or voyages subject to the Rules, so far as
applicable thereto; and it makes those Rules
prevail over any of the exceptions in the charter
party…‘ (per Lord Denning The Agios Lazarus
[1986] Q.B. at pp943-944). (NB see later
comments on the Inter-Club Agreement).
As a matter of English law the time bar for
contractual claims is six years.This limit can be
altered by the terms of the contract. For charter
parties, clauses are often incorporated reducing
this limit – for example, there may be a clause
requiring arbitration to be commenced within
Britannia RISK WATCH
THE EFFECT ON THE TIME LIMIT OF INCORPORATING A CLAUSE PARAMOUNT INTO CHARTER PARTIES (CONTINUED)
two years from the date of re-delivery. In fact,
there can often be a number of clauses in a
single charter altering the time bars for different
types of claim. One such clause commonly
used, which can alter the statutory time bar,
is the Clause Paramount.
The wording of Article III Rule 6 of the Hague
Rules relating to the time bar provides;
‘In any event the carrier and the ship shall 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…‘
Logically, in instances where the charterer is
also the cargo interest, any cargo claims will be
governed by the one year time limit. Indeed, it
has been held that in a cargo indemnity claim
the twelve month time limit applied even
though the charter contained a clause requiring
arbitration to be commenced within six months
of discharge. In Sabah Flour & Feedmills Sdn
Bhd v Comfez [1988] 2 Lloyd’s Rep. 18, the Court
of Appeal held that it was more appropriate for
the Article III Rule 6 time limit to apply to cargo
indemnity claims than the general six month
time limit, as the Australian Sea Carriage of
Goods Act 1924 (which was incorporated into
the charter by the Clause Paramount) was
designed with cargo claims in mind.
The application of the Clause Paramount is not
limited to those claims which might have arisen
in respect of cargo damage, nor is it dependent
upon proving a breach of one (or more)
provisions of the Hague Rules.The claim must
have some connection with the cargo however.
In The Stena Pacifica [1990] 2 Lloyd’s Rep. 234,
it was held that where the Rules are
incorporated into a time charter the time bar
will apply only where;
(a) the claim is based on a factual foundation
which involves non-compliance with the
owner’s obligations under the Rules, and/or
(b) the claim arising from such breach is one
which, although it might be confined to
financial loss, such as damages for delay, is
sufficiently closely connected with cargo
shipped on the vessel.
In this case, defects in the ship’s pumping
system resulted in the vessel being in breach of
the pumping capacity warranty; consequently
the discharge was delayed. During the delay, the
price of the cargo fell and the charterers sought
to claim the difference from the owners. Mr.
Justice Evans held that the claim for damages
was subject to the Rules,‘…in so far as it
depends upon breaches of the charter party
which correspond with the defendant’s
obligations under the Rules…‘
CLAIMS AND LEGAL is a supplement for Members’ claims handlers and legal departments
The goods subject to the claim do not Whilst the Clause Paramount does apply for
necessarily have to be shipped in order for the cargo indemnity claims, Members should also
Clause Paramount to apply. In The OT Sonja bear in mind the Inter-Club Agreement. Where
[1993] 2 Lloyd’s Rep. 435, the court held where the Inter-Club Agreement is incorporated into
goods intended to be loaded on the vessel the charter, it will have precedence over the
were not loaded due to delay resulting in loss Clause Paramount and therefore its two year
or damage in relation to the goods, that, under time limit would apply.
those circumstances, the time bar would apply,
even though the goods to which the relevant Clearly the importance of incorporation of the
loss or damage related had never been loaded Clause Paramount with respect to the time bar
on the vessel. is that claims brought against the owners are
governed by the one year time limit, rather
In The Marinor [1996]1 Lloyd’s Rep. 301, it was than the more usual longer limits.
held, the Clause Paramount would apply,
(providing that the goods in question were
shipped or intended to be shipped pursuant
to the charter), to claims where there is;
(a) a liability involving physical loss of or
damage to goods, and/or,
(b) a liability for financial loss sustained in
relation to the goods.
In that particular case, the owners sought to
rely upon the Article III Rule 6 time bar for a
claim by the charterers for the extra costs in
substituting the unfit vessel for another vessel
to carry the specified cargo for a series of
voyages.There was no loss or damage to the
goods.The subject matter of the claim was not
the carriage of the goods on those voyages,
but the defective condition of the vessel.The
Clause Paramount was held not to apply in a
case where the charterers sought an indemnity
from the owners in respect of a loss suffered by
a delay in releasing the bills of lading. Mr. Justice
Saville held in The Standard Arbour [1988] 2
Lloyd’s Rep. 159m, that such a claim did not
arise out loss or damage to the goods and as
the words of Article III Rule 6 makes reference
to when the goods were delivered or ought to
have been delivered, the time limit was only
intended to apply to claims for loss or damage
to the goods carried or to be carried.
Where the charterers decide to issue their own
bills of lading and therefore are ‘carriers’ for the
purpose of claims brought under those bills, the
incorporation of the Clause Paramount does
not affect the nature of the charter for any
indemnity claims brought against the owners
(The Khian Zephyr [1982] 1 Lloyd’s Rep. 73).
Volume 1: Number 2: July 2009
PUTTING A LIMIT ON CONSEQUENTIAL LOSSES ARISING FROM CARGO CLAIMS
The case of The Limnos (2008) 2 Lloyd’s Rep.
166, reported last year, clarified how package
limitation should apply to a claim for
consequential economic loss arising from
cargo damage. However, the question of how
the Hague-Visby Rules treat consequential
losses and pure economic loss remains
complicated; it is useful therefore to distinguish
between the issues in The Limnos and other
related matters.
The Limnos had discharged a cargo of corn in
Aqaba, 12 tonnes of which was wet damaged
and a further 250 tonnes damaged as a result of
having to discharge that 12 tonnes by bulldozers.
The cargo interests alleged that the remainder
of the 44,000 tonnes of cargo acquired a
reputation in the market as ‘distressed cargo’,
not least because the authorities had required
that it be fumigated following the wet damage.
In addition to the physical damage to cargo,
cargo interests claimed for loss of market value
(a drop of US$13/mt) for the whole cargo plus
expenses incurred in fumigation, segregation
and storage.The total claim was in the region
of US$ 1.5 million.
The Hague-Visby Rules (Rules) applied.The
parties agreed that economic loss is recoverable
by cargo interests and falls within the scope of
the Rules, accordingly, such claims would be
subject to Art. III r.6 (time bar) and Art. IV r.5
(package/weight limitation).
The term ‘loss or damage’ within the Rules was
accepted by both sides to include economic
loss and consequential loss. However, whereas
Art. IV r.5 repeats the ‘loss and damage’
terminology found throughout the Rules, that
part of the Article providing for limitation (of
SDR2 per kilogram) relates to the gross weight
of the goods ‘lost or damaged’. The shipowners
hoped to distinguish between the two terms.
If ‘lost or damaged’ refers to or implies only
physical loss (as opposed to financial and
economic loss) then the owners would be able
to limit their liability to cargo interests by
applying the limitation provision to the 262mt
of physically damaged cargo and not the total
amount of cargo (44,000mt).
Cargo interests said that ‘lost or damaged’
included economically damaged cargo.They
argued that as a matter of consistency, the
reference to ‘loss and damage’ and ’lost or
damaged’ must carry a similar meaning.
Ultimately, the court would distinguish
between ‘loss’ which includes economic loss
and ‘lost’ which relates to the physical state of
the cargo. Cargo interests also pointed out that
shipowner’s arguments would result in a very
low recoverability of expenses where the cargo
interests have incurred substantial costs in
eliminating or mitigating consequential losses.
Indeed the shipowner’s arguments would A further issue which needs to be considered is
result in there being no limitation available to that of recoverable damages.The Limnos was a
shipowners in circumstances where no goods hearing of a preliminary issue; the recoverability
were physically lost or damaged in, for example, of cargo interests’ damages was not addressed.
a claim for delay. The recoverability of damages is generally
determined by national laws (although again
The owners argued that the inclusion of cargo there seems to be academic disagreement as
subject to economic damage within the to whether Art. IV r.5 serves to limit the types of
limitation tonnage is not consistent with the damages recoverable) and accordingly the
provision of Art. IV r.5(b), which states that any Aqaba cargo interests’ damages would have
amount recoverable should be calculated by to be considered in light of the English legal
reference to the value of the goods at the time concept of remoteness. It should also be noted
they are discharged from the ship. If the relevant that the economic losses of the cargo interests
weight for limitation purposes included cargo arose from physical losses and were not purely
economically damaged, and that economic economic.
damage occurred after discharge, then there
would be no certainty of limitation and the
package limitation would ‘cascade’ as the value
of the cargo altered as matters developed
after discharge.
After a considerable deliberation, the court was
not persuaded by cargo interests’ arguments
and found that their claim would be limited to
an amount determined in relation to the
physically damaged cargo and not the whole
of the cargo. Clearly this finding is of significant
benefit to shipowners who are presented with
claims which include a large element of
consequential and economic loss.
The court appeared to accept that its decision
would result in an anomaly whereby in the
event of a claim for pure economic loss there
would be no package or weight limitation
applicable.
A separate question arises from Art. IV r.5(b),
one which was not before the court in The
Limnos. Does Art. IV r.5(b) (‘The total amount
recoverable shall be calculated by reference to
the value of such goods at place and time at
which the goods are discharged.‘) itself provide
a limit to the amount recoverable? This
question of whether recoverable damages
can be limited to the value of goods would
probably only arise in circumstances where
consequential losses are significant and exceed
the value of the goods.This question has not
yet been brought before the courts.
Distinguished writers disagree. It appears that
Professor Tetley is of the view that the provision
does serve to limit recoverable damages
whereas Professor Nick Gaskell offers the view
that the intention of the provision is merely to
encourage uniformity in the general rules to be
followed in calculating damages in respect of
loss or damage to the goods.
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DELIVERY WITHOUT PRODUCTION OF BILL OF
LADING – LETTER OF INDEMNITY COMPLICATIONS
The effect of the International Group’s standard
form of letter of indemnity (LOI) – given in
return for delivery of cargo without production
of original bill of lading – has recently been
considered by the courts and Members should
be aware of difficulties that have been highlighted.
The case concerned the Bremen Max, a bulk
carrier, carrying iron ore to Bulgaria. Upon
request for delivery of cargo without surrender
of the bill of lading, an LOI was accepted by the
owner from his charterer. In fact, there was a
lengthy charter party chain, each of the
charterers giving an LOI on the standard
wording to their respective disponent owner.
(This dispute arose between disponent owners
and intermediate sub-charterers but for the
purposes of this article we shall refer to them as
owner and charterer). Subsequently a dispute
arose concerning delivery of the cargo and
owners were put on notice for mis-delivery in
the sum of US$11 million. Arrest was threatened
and security demanded.
Two issues arose. Firstly, whether the owners,
having given security to prevent the ship’s
arrest, could then turn to their charterers under
the LOI received from them and demand that
they substitute that security.The court held that
they could do so. However, and most
importantly, the court did so on the basis that
the owners, prior to providing security to the
cargo interests, had requested that the
charterers put security in place.The court found
that the charterer remained under an
obligation to put up security in accordance
with Clause 3 of the LOI notwithstanding that
the owners had provided security themselves.
(It should be noted that in the first instance the
security given by the owner was in the form of
a cash deposit held in escrow. Accordingly the
mechanics of substituting security may have
been simpler than in the more usual case
where the cargo receiver is holding an LOI from
the P&I Club and is therefore reluctant to accept
alternative securities offered by charterers.) The
important point to note however is that owners
(and disponent owners), having received a
threat of arrest, should ensure that they make a
formal written demand that their charterers act
in accordance with the LOI and provide security
direct to the cargo interests, before giving
security themselves.
The second issue concerned the submission by
charterers that they were not under a duty to
respond to the provisions of the LOI given by
them as the LOI provided that cargo be
delivered by the owners to a specific party and
that that party had not received the goods.The
court agreed with the charterers that the
undertakings provided in the LOI were
conditional upon delivery to the cargo interest
specified.The burden upon owners to deliver
the cargo to the correct party was, therefore, of
crucial importance.
Owners need to be especially careful in those
trades where cargoes are discharged to
terminals where they do not have direct control
over the delivery of the cargo. When an LOI
requires delivery to a specific party, owners
should give written instructions to their agents
requiring delivery to that party only and obtain
written acknowledgement of those instructions.
Amendments may be necessary to the
International Group wording in order to ease or
avoid the burden that this places upon owners
delivering cargo.The International Group of P&I
Clubs is currently reviewing the wording of the
standard form LOI.
CLAIMS AND LEGAL is published by The Britannia Steam
Ship Insurance Association Limited, and can be found at
www.britanniapandi.com/en/publications
The Britannia Steam Ship Insurance Association Limited
is happy for any of the material in CLAIMS AND LEGAL
to be reproduced but would ask that written permission
is obtained in advance from the Editor.
POWERS OF ATTORNEY
IN TURKEY
The Association has recently become aware of
an attempt by the charterer’s agent at the Port
of Ceyhan, Iskenderun, to require the Master of
the ship to sign an extremely onerous Power of
Attorney (POA) authorising the agents, amongst
other things, to sign and correct Mate’s Receipts
and Bills of Lading and to issue Letters of
Guarantee on behalf of the Master.
In view of the extremely wide terms of this
POA the Association has sought the advice of
its commercial correspondent in Turkey, Vitsan.
As a result of those enquiries the Association
has learnt that the use of this private POA is
considered normal practice not only in Ceyhan
but also in some other Turkish ports.
Since there appears to be no justification for
agents to require a POA giving such wide
powers it is essential that Masters of ships
calling at Turkish ports do not sign any such
POA. Vitsan recommend that a limited POA be
given so that the agents can conduct normal
business on the owner’s/Master’s behalf.
Members with ships calling at Turkish ports
and experiencing any serious difficulty in this
respect are asked to contact the local
correspondent for assistance. Recent experience
has indicated that a revised POA will reluctantly
be accepted by the agents and that clearance
of the ship should not ultimately prove
problematic.