War and Piracy – who pays?

A London arbitration award was recently published covering a number of interesting issues mainly associated with war and piracy and Charterers’ obligation to reimburse Owners in respect of certain costs incurred to trade in dangerous areas.

The vessel was chartered on an amended NYPE form. Four different voyages were performed involving certain ports and areas that required payment of additional war risk premium and the engagement of security personnel and equipment.

The first issue related to the amount that Charterers had to pay to Owners in respect of such additional war premium. While Charterers accepted they were liable to reimburse Owners under the terms of the charter, they claimed that Owners had not made a full honest disclosure of the discounts they had been offered by their insurers. They further argued that Owners failed to obtain additional quotes from alternative underwriters. Owners on their part argued that the discount that they were given (25%) was only given by reason of their reputation, fleet size and large volume of insurance policies placed with their long standing underwriters. They further denied failing to make a full disclosure of their correspondence with their war risk insurers. The tribunal had no sympathy with Charterers arguments’ which they felt lacked documentary evidence or input from an independent expert. The tribunal held that Owners’ position with regards to the discounts was credible and consistent with their own experience and Charterers therefore were ordered to reimburse Owners in full.

The second issue at stake was whether pursuant to Clause 112 of the charterparty (the BIMCO Piracy Clause for Time Charters – March 2009), Owners could claim from Charterers the cost of employing armed guards AS WELL AS additional security equipment or whether the two were mutually exclusive options.

Clause 112 of the charter provided:

(c) If the Owners consent or if the Vessel proceeds to or through an area exposed to risk of piracy the Owners shall have the liberty:

  • To take reasonable preventive measures to protect the vessel, her crew and cargo including but not limited to taking reasonable alternative route, proceeding in convoy, using escorts, avoiding day or night navigation, adjusting speed or course, or engaging security personnel or equipment on or about the vessel,

 

Charterers pleaded that the above clause would only entitle Owners to claim either the cost of employing security personnel OR the cost of supplying equipment but not both.

The tribunal disagreed with Charterers’ interpretation and held that clause 112 (c) (i) was not disjunctive and therefore did not limit Owners’ right to, both, order equipment and employ armed guards at Charterers’ expense. Charterers also challenged the level of costs incurred by Owners to engage security guards, having failed to make sufficient market research. Again, the tribunal found that on the evidence available, these costs were reasonable and in line with market rates.

A third issue revolved around reimbursement of crew bonuses paid on the third and fourth voyages where the vessel transited a high risk area known as the “Extended Risk Zone”. Charterers asserted that Owners were not contractually obliged to pay any bonuses to the crew. Owners relied on Clause 57 of the charter (Trading Exclusions) which provided that extra war insurance and crew bonus for trading in the Gulf of Aden was for Charterers’ account. Owners’ case was the only condition of clause 57 was that the crew war bonuses must have actually been paid to the crew whether or not they were due to them contractually. The tribunal disagreed with Owners and held that Clause 112 (ii) was applicable to this case:

“If the Owners become liable under the terms of employment to pay to the crew any bonus or additional wages in respect of sailing into an area which is dangerous in the manner defined by said terms, then the actual bonus or additional wages paid shall be reimbursed to the owners by the charterers at the same time as the next payment of hire is due, or upon redelivery, whichever occurs first.”

The arbitrators found that the rules of the Philippine Overseas Employment Administration provided that Owners were under no obligation to pay bonuses to the crew for a transit of the Extended Risk Zone unless the vessel had been attacked. Since the vessel had not been the tribunal held that crew bonuses were not contractually due to the crew.

A fourth issue concerned Owners’ right to claim reimbursement of additional war risk premium and certain security expenses incurred in a voyage when Charterers had instructed Owners to avoid a high risk area. Charterers denied liability on grounds they had expressly instructed the Master to proceed via territorial waters between Jubail and Richards Bay to avoid war/piracy areas and therefore incurring certain expenses. Owners nonetheless engaged armed guards for 11 days when the vessel had actually remained in a high risk area for 3 days, arguing they had the liberty to take all reasonable preventive measures to protect the vessel, crew and cargo pursuant to clause 112 (c) (i) above and to insure the vessel against war risks as per the provisions of the War Risks Clause for Time Charters 2004 which provides:

(d)…

(ii) If the Underwriters of such insurance should require payment of premiums and/or calls because, pursuant to the Charterers’ orders, the Vessel is within, or is due to enter and remain within, or pass through any area or areas which are specified by such Underwriters as being subject to additional premiums because of War Risks, then the actual premiums and/or calls paid shall be reimbursed by the Charterers to the Owners at the same time as the next payment of hire is due, or upon redelivery, whichever occurs first.

(e) If the Owners become liable under the terms of employment to pay to the crew any bonus or additional wages in respect of sailing into an area which is dangerous in the manner defined by the said terms, then the actual bonus or additional wages paid shall be reimbursed to the Owners by the Charterers at the same time as the next payment of hire is due, or upon redelivery, whichever occurs first.

The arbitrators found that pursuant to the above clause Owners had to take all reasonable measures to protect the vessel  at a time when Charterers should have known piracy activity was at its peak. They further found that the vessel could not have avoided a piracy risk area when sailing from Jubail to Richards Bay because Pakistani waters and, in particular, the Gulf of Oman was unavoidable. The tribunal therefore accepted Owners’ explanation that, while diverting to use the 12-mile strip of territorial waters, the vessel had in any event to pass through waters where there was danger of piracy. The arbitrators also found that the period the armed guards remained on board was reasonable under the circumstances.

A final issue in dispute was whether Owners were in breach of clause 8 in failing to follow Charterers’ orders as to employment or failed to prosecute a (fourth) voyage from Richards Bay to Mina Saqr with utmost despatch. The Charterers argued that since Owners had engaged armed guards and ordered security equipment , it was not unreasonable to expect a direct route to Mina Saqr. Owners instead had decided to take a route that skirted the border of the high risk area. The tribunal held that this issue turned to the question of whether it was reasonable under clause 112 (c) (i) to take that route given the anti-piracy measures that had been taken. The tribunal agreed with the Charterers that in circumstances where the vessel had the maximum level of security measures as set out in Best Management Practices 4 for certain high risk transits, Owners had been unreasonable in their chosen route particularly as they had shown no hesitation in sending the vessel through the Gulf of Aden and Red Rea twice on the first voyage with the same level of security. Owners were therefore found to be in breach of clause 8.

The arbitration also covered other issues unrelated to war and piracy which are not covered by the article.

In conclusion, while arbitrations do not set a legal precedent this award shows how London tribunals are likely to approach disputes of this nature. Owners are generally given a degree of sympathy when taking certain measures to avoid danger to the ship, crew and cargo at Charterers’ expense. BIMCO clauses certainly help Owners to achieve this.

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