Liability for unrecoverable freight following total loss of Vessel – High Court Judgement

Background

Most Assureds chartering vessels on the widely used NYPE form will be interested to hear about a judgment recently handed down by the London High Court dealing with bill of lading freight payable to the time charterer and the carriers (normally the head owners) right to collect the same direct from the shipper of the cargo (most commonly the bottom charterer in a chain of charterparties).

This is what happened in the SMART case. The vessel was on time charter on a NYPE form. In turn she had been sub-chartered out on a voyage basis. As it is usual on time charters, the head owners issued bills of lading as carriers with freight payable “as per charterparty”, that is, allowing the time charterers to collect any bill of lading freight.

The vessel grounded while navigating a channel in Richards Bay and became a total loss. At the time, the sub-charterers had not paid the freight due under the bills of lading to the time charterer which, pursuant to the voyage charterparty, was payable “whether vessel/cargo lost or not lost”. The head owners then issued notices to the sub-charterers/shippers demanding payment of the bill of lading freight direct to them on grounds they had revoked any authority given to the time charterers to collect bill of lading freight. Despite these notices being sent, the voyage charterers failed to pay most of the freight outstanding and subsequently became insolvent leading to the loss of a substantial sum in freight.

 

Arbitrators’ decision

The time charterers objected to the head owners’ demand to the shippers for freight. In London arbitration, the time charterers claimed they had a claim in damages for the unrecovered freight. Their claim was based on what they considered was an implied term in the charterparty precluding the head owners from revoking their authority to collect bill of lading freight save in situations where they were owed hire or other sums under the head charterparty. The arbitration tribunal agreed with the time charterers. Citing recent case law, the arbitrators held there is an implied obligation in a NYPE form to permit time charterers to collect freight, said obligation being an implicit corollary of the obligation in Clause 8 (employment & indemnity) to allow time charterers to direct the ship’s employment. Only if the time charterers default, does the implied term cease to apply such that a head owner is free to collect any freight owed to them.

 

High Court decision

On appeal to the High Court, the judge held that there was no basis to imply a term of the sort found by the Arbitration Tribunal or contended for by the time charterers. A head owner had therefore an “unfettered right” to collect bill of lading freight under its bills of lading. Where that head owner has time chartered the ship, he retains a right to countermand the authority granted to a time charterer to collect bill of lading freight on the carrier’s behalf, and this right was not conditional on any default by a time charterer. The judge added:

“if an Owner does intervene to collect bill of lading freight whilst the ship is on time charter, then he will generally have a duty to account to a time charterer for any amount which he receives over and above that which is due under the time charter”.

The judge reached this conclusion by applying the usual test to justify the implication of terms into a contract and because the longstanding “intercept and then account for any surplus” mechanism was sufficient to protect time charterers. The judge said it was preferable that it be clear to all in the market that a shipowner is ordinarily entitled to collect bill of lading freight under its bills of lading without restriction.

 

Conclusion

Assureds chartering vessels on a NYPE form should be aware that, absent an express provision to the contrary, their head owners may unconditionally seek to collect freight due under the bills of lading even if they are up to date in their hire or other charterparty payments. That said, it is unusual for a head owner to exercise such right in the absence of any default and, even if he does so, head owners could still be asked to prove they have not made a windfall profit by virtue of collecting both hire and bill of lading freight.

It is also worth mentioning that head owners’ rights as above should not be confused with the well-known remedy available, which allows them to intercept sub-freights for any sum due under the head charter. While the former is straight forward and automatic as it is now confirmed in the SMART case, the exercise of a lien on sub-freights is invariably complicated requiring in most cases legal assistance to prevent charterers/shippers risking paying freight twice.

 

MECO Group

September 2021

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