Time Charters corrected on underperformance
High Court narrows shipowners' defences to an underperformance claim
The importance of performance warranties in the maritime industry is well documented. Charterers (and shippers) wish to ensure that a vessel will be able to perform to the specifications warranted. Failure to do so may have serious consequences, including missed laycans, cargo damage claims and so forth.
The High Court has recently examined a continuing performance warranty in the context of hull fouling arising in the ordinary course of trading [FN1]. In an unexpected decision, the Court held that Owners remained responsible for underperformance which was caused by hull fouling.
The "ANNY PETRAKIS" (subsequently renamed the "CORAL SEAS") was chartered for about 23 to 25 months on an amended NYPE form.
The Charterparty contained the following vessel description:
"About 14.5 knots ballast/about 14 knots laden on about 33.5 mts ISO 8217:2005 (E)RMG 380 plus about 0.1 mts ISO 8217:2005 (e) DMA in good weather condition up to Beaufort scale four and Douglas sea state three and calm sea without adverse current …"
The Charterparty also contained the following performance warranty:
"Throughout the currency of this Charter, Owners warrant that the vessel shall be capable of maintaining and shall maintain on all sea passages, from sea buoy to sea buoy, an average speed and consumption as stipulated in [the clause cited above], under fair weather condition not exceeding Beaufort force four and Douglas sea state three and not against adverse current."
While trading in accordance with Charterers' orders, the Vessel waited for a berth off Brazil for almost a month.
By by the time she departed on her next (laden) voyage, the performance had dropped significantly. It soon became apparent that the propeller had become fouled during the long stay in tropical waters.
Charterers made deductions from hire, as set-off for their damages claim for breach of the performance warranty cited above.
Owners commenced arbitration to recover the hire deducted.
The Tribunal found as matters of fact (which could not be challenged on appeal) that:
● the Vessel did not maintain the warranted speed, extending the voyage by 90.345 hours;
● the cause of the Vessel's reduced speed was hull fouling in Brazil;
● the hull fouling could not be regarded as unusual or unexpected, but constituted fair wear and tear incurred in the ordinary course of trading.
The Tribunal found in favour of Charterers, holding that Owners had assumed the risk of hull fouling.
Permission was granted to Owners to appeal on the following question of law:
"Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?"
Owners contended that the decision of the Tribunal contradicted the statement in "Time Charters" (7th Ed., 2014) paragraph 3.75, that:
"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..."
Owners argued that the Tribunal had been wrong to focus on the implied indemnity for compliance with Charterers' orders, which it was generally accepted did not apply (see The "KITSA" [FN2]).
Instead, Owners argued that the performance warranty only to applied to a clean (or 'unfouled') hull and propeller.
In support, Owners cited the extract from "Time Charters" quoted above, as well as The "PAMPHILOS" [FN3], in which the Court had refused to grant permission to appeal from an Award holding that:
● marine growth was an ordinary incident of trading in accordance with the charterer's orders, and charterers had therefore complied with their redelivery obligations;
● however, charterers' underperformance claim was unjustified.
The Court rejected Owners' arguments, and noted that it would have been open to the parties to agree that the warranty would not apply after prolonged stays in warm water ports.
In the circumstances, the continuing performance warranty continued to apply where the Vessel's performance was affected by fair wear and tear in the course of contractual trading.
It is hard to put the ratio of the case any better than the Court itself (at paragraph 31 of the Judgment):
"Where a vessel has underperformed, it is not a defence to a claim on a continuing performance warranty for the owners to prove that the underperformance resulted from compliance with the time charterers' orders unless the underperformance was caused by a risk which the owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers."
This decision differs from The "PAMPHILOS", although the Judge was quick to highlight that the Court's decision in that case was made in the context of refusing permission to appeal on the grounds that the decision was not 'obviously wrong'.
It also marks a rare judicial correction to the text of "Time Charters", universally acknowledged as the leading authority on the law on period and trip time charters.
Charterers will no doubt welcome the decision as clarification that they do not forfeit the benefit of the performance warranty if the vessel becomes fouled following their orders.
Owners may take some comfort from the fact that, where the charter contains a clause paramount, they may be able to rely on one of the Hague Rules defences. Alternatively, there are many commonly used clauses which shift responsibility for hull fouling to charterers.
FN 1: Imperator I Maritime Company v Bunge SA  EWHC 1506 (Comm)
FN 2:  1 Lloyd's Rep. 432
FN 3:  2 Lloyd's Rep. 681