The Yangtze Xing Hua – Clarification on the Interclub agreement

TRANSGRAIN SHIPPING v YANGTZE NAVIGATION (The “YANGTZE XING HUA”) – The English Court of Appeal rules on the meaning of “act” in the NYPE Inter‐Club Agreement 1996

Introduction

In our e-bulletin of 8 March 2017 we reported on an English High Court decision dealing with the interpretation of the Inter-Club Agreement 2016 (the ICA). In an appeal on an award of arbitrators the Court was asked to determine whether, as a matter of construction of Clause 8 of the ICA, the word “act” in the phrase “act or neglect” means a culpable act in the sense of fault or whether it means any act, whether culpable or not.

The facts

The Owners chartered M/V Yangtze Xing Hua to the Charterers for a time charter trip carrying soya bean meal from South America to Iran. The charterparty was on the New York Produce Exchange (“NYPE”) Form. The vessel arrived off the discharge port in Iran in December 2012. Not having been paid for the cargo, the Charterers ordered the vessel to wait off the discharge port for over 4 months. The cargo, or part of it, started to overheat. When the vessel was brought alongside and discharged in May 2013 damage was found and a claim was made against the Owners for €5 million which, after lengthy negotiations, was settled in the sum of €2,654,238. The Owners claimed that sum together with hire in the sum of US$1,012,740 from the Charterers. It was common ground that liability was to be settled in accordance with the ICA which had been incorporated into the charterparty. Clause 8 d) of the ICA (the relevant clause for the purpose of this dispute) provided as follows:-

“(8) Cargo claims shall be apportioned as follows:

….

  1. d) All other cargo claims whatsoever (including claims for delay to cargo):

50%Charterers

50% Owners

unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall then bear 100% of the claim.”

The Arbitrators’ decision

The issues before the arbitration tribunal were the cause of the damage and whether the Owners were to blame for not properly monitoring the cargo temperatures. The tribunal found that the monitoring was not at fault and that the cause of the damage was a combination of the inherent nature of the cargo (and its oil and moisture content) together with the prolonged period at anchor at the discharge port. The tribunal rejected all the allegations made against the Owners and their crew and also held that the Charterers were not “in breach or at fault or “neglect” in loading the cargo, albeit that what in fact they loaded, together with the instructions to wait outside the discharge port, was in all probability the cause of the damage …” The tribunal held that “act” was to be distinguished from something suggesting fault, breach of contract or neglect regarding Charterers’ decisions as an “act” falling within clause 8(d) and bear 100% of the consequences.

The High Court decision

Charterers submitted to the judge that the tribunal’s construction of “act” was wrong. They submitted that “act” means “culpable act” and that the phrase “act or neglect” compendiously means “fault”. The argued the tribunal was wrong to hold that any act, whether culpable or not, is sufficient to constitute an “act” for the purposes of clause 8(d) of the ICA. The judge upheld the award of the arbitrators essentially because he considered that clause 8 of the ICA was not concerned with fault but was rather a mechanism for assigning liability for cargo-claims by reference to the cause of the damage to the cargo regardless of fault. He gave permission to appeal.

The Court of Appeal decision

Charterers made six main submissions in support of their contention that the judge was wrong:-

  1. the first and second versions (1970 and 1984) of the ICA were predicated on fault; if it had been intended to drop the concept of fault in the 1996 version, that would have been clearly expressed;
  2. sub-clauses (a) and (b) in the 1996 version still require fault; it would be consistent with those provisions to construe “act” as requiring fault;
  3. if “act” meant “any act” in sub-clauses (c) and (d), that would be inconsistent with and cut across sub-clauses (a) and (b);
  4. if any “act” of the charterers sufficed for the purposes of sub-clauses (c) and (d), the initial order to load the cargo would count as an “act”; the only constraint on such interpretation would be some doctrine of “effective” or “proximate” cause which would be difficult to assess and contrary to the intended mechanistic application of the ICA;
  5. the judge’s interpretation amounted to an automatic indemnity being given by charterers to owners; if that was intended sub-clause (d) would have provided for charterers to be 100% liable; and
  6. such authority as there was supported his submissions.

Owners supported the judge and also submitted that if “act” was to be interpreted as “culpable or faulty act” there was no criterion by which the existence of such fault could be determined. It could not be breach of the underlying charterparty because the ICA was intended to cut through the liabilities under the charter and “fault” vis-à-vis the bill of lading holders would be highly elusive.

All three Court of Appeal judges agreed with the arbitrators that the word “act” in the context of the ICA should be given its natural meaning; there is no need to confine it to “culpable act”. Charterers’ appeal was dismissed for the following reasons.

  • The natural meaning of the word “act” is something which is done. It does not connote culpability.
  • “Neglect” does connote culpability.
  • The general context of the “archaeology” of the ICA does not assist. On any view, the 1996 ICA involved substantial redrafting of and changes to the ICA.
  • The specific context of the other apportionment provisions of the ICA does not suggest that culpability is required since, in various circumstances, they apply regardless of culpability. For example, claims “in fact arising out of”:
  • “unseaworthiness” under clause 8(a) are 100% for Owners’ account regardless of whether there was a failure to exercise due diligence by Owners, their servants or agents or other culpable fault.
  • “error” in navigation or management of the vessel under clause 8(a) are 100% for Owners account under clause 8(a) even if no negligence or culpable fault is involved.
  • “loading, stowage, lashing, discharge, storage or other handling of the cargo” are 100% for Charterers’ account under clause 8 (b). No mention of fault is made. Even if the reference to a failure to do so “properly” (in the proviso to the 50%/50% division where the words “and responsibility” are added) governs the meaning of the main part of the clause, it is referring to a state of affairs rather than culpable fault.
  • The critical factual question under clause 8 is that of causation. Does the claim “in fact” arise out of the act, operation or state of affairs described? It does not depend upon legal or moral culpability, nor is there any stated or obvious criterion against which such culpability is to be judged.
  • This does not result in uncertain and difficult issues of causation. Causation is always central to the operation of the ICA when proof “in fact” is required. The issue of causation is the same whether one is considering the consequence of an identified act or an act of neglect, although proof of effective causation may be more difficult.
  • Nor does it lead to unacceptably wide liability. Causation is an important limiting factor, as is the need for “clear and irrefutable evidence”. Further, clause 8(d) is a sweep up provision which only applies where there is no apportionment under clause 8(a), (b) or (c).

Conclusion

The Court of Appeal’s judgement upholding the arbitrators award is a sensible one and therefore will be welcome by users of the ICA. Charterers should be alert to the potential consequences of their commercial decisions resulting from the employment orders conferred to them under the NYPE form which may cause them to be 100% responsible for loss or damage to cargo under clause 8 of the ICA even if such decisions do not constitute an actionable breach of charter.

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