The Coral Seas: Commercial Court upholds LMAA arbitration finding that fouling constituted fair wear and tear under a continuing performance warranty.

Under English law, Owners are not entitled to an indemnity for complying with charterers’ orders where the vessel’s performance is affected by fouling arising from a long stay in a warm water port.  The Commercial Court has upheld an LMAA arbitration finding that this constituted fair wear and tear under a continuing performance warranty.

The Coral Seas (“the Vessel”) was chartered by the claimant Owners on an amended NYPE 1946 form for about 23 to 25 months and sub-chartered on back-to-back terms.  On the Charterers’ instructions, the Vessel spent a few weeks in tropical waters off Brazil.  Upon leaving the port, it became clear that the Vessel’s performance had significantly fallen off, making it necessary to take on emergency bunkers.  An underwater inspection found light fouling of the flat bottom and heavy fouling of the propeller by barnacles.  Consequently, the Charterers made deductions from hire, asserting their right to set off damages for breach of the continuing speed warranty contained in clause 29(b) of the charterparty.  The Owners on the other hand, said that it was a defence for them to prove that the underperformance resulted from compliance with the Charterers’ orders.

Under clause 29(b), the speed clause, the Owners warranted that throughout the currency of the charter the Vessel would be capable of maintaining a certain average speed on all sea passages, under fair weather conditions.

The arbitrators found that the Vessel had not maintained the warranted speed and that this was caused by the underwater fouling of the hull and propeller by marine growth which had developed during a lengthy stay in tropical waters.  They further found that the marine growth could not be regarded as unusual or unexpected but constituted fair wear and tear incurred in the ordinary course of trading.

The point of law the Commercial Court was asked to consider was whether, in the circumstances, it was a defence for Owners to prove that the underperformance resulted from compliance with the Charterers’ orders.

The court analysed the relevant authorities.  Generally, a shipowner has an implied right of indemnity against a time charterer in respect of the consequences of complying with the charterer’s orders as to the employment of the ship, even if the orders were ones the charterer was contractually entitled to give.  However, it is equally well established that such indemnity does not extend to the usual perils of the voyage in respect of which the owner must be taken to have accepted the risk.  The Island Archon [1994] 2 Lloyd’s Rep 227, The Kitsa [2005] 1 Lloyd’s Rep 432, The Kos (No 2) [2012] 2 Lloyd’s Rep 292; [2012] 2 AC 164 and The Rijn [1981] 2 Lloyd’s Rep 267.

The court rejected the Owners’ argument that the continuing performance warranty was given on the basis that the Vessel continued to have a clean hull.  The only defence to a claim on a continuing performance warranty is to prove that the underperformance was caused by a risk which the owners had not contractually assumed.

In the great majority of cases, the accretion of growth is simply a natural consequence of the ship remaining in service, with nothing fortuitous about it.  The owners are not entitled to an indemnity against things for which they are being remunerated by the payment of hire.  This case draws attention to the limits on owners’ implied indemnity for loss or liability suffered as a result of complying with charterers’ orders.  An indemnity has no application in respect of the ordinary risks and costs associated with the performance of the chartered service and which owners have expressly or implicitly agreed to bear under the charterparty.  Parties can exclude the warranty in respect of voyages after the vessel has been waiting in warm water ports, but express words to this effect need to be included in the speed warranty under the charterparty.

At the end of the judgment, Mr Justice Phillips concludes that the proposition in Time Charters at para 3.75 is too widely stated.  For ease of guidance, para 3.75 of Time Charters reads as follows:

“Continuing capacity and level-of-performance clauses

3.75 Where the owners give a continuing undertaking as to performance of the ship, and the ship has in fact underperformed, it is a defence for the owners to prove that the underperformance resulted from their compliance with the charterers’ orders: see The Pamphilos [2002] 2 Lloyd’s Rep. 681, per Colman, J., at page 690. In that case, the ship’s failure to achieve the promised performance resulted from marine fouling, which was in turn the result of the owners’ complying with the charterers’ order to wait for 21 days at a tropical port.”

The full citation of the case is Imperator I Maritime Co v Bunge SA (The Coral Seas) [2016] 2 Lloyd’s Rep 293.

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