Oil & Gas: Marine Vessels and Drilling Units - Venturing into warm waters

Marine Vessels, including drilling units, sometimes work in environments that are potentially hostile to their performance. Warm water may result in a number of undesirable effects. In Imperator I Maritime Company v Bunge SA and Bunge SA v C Transport Panamax Ltd (“The Coral Seas”) [2016] EWHC 1506 (Comm) the High Court considered whether it was a defence to claim under a performance warranty that under-performance resulted from the time-charterer’s instructions to keep the vessel in a warm water location.

Facts

By consecutive time charters on the NYPE 1946 form (as amended) with additional rider clauses, the MV ANNY PETRAKIS (“the Vessel”) was chartered by its then owners to Bunge SA (“the Head Charterers”) for about 23 to 25 months. Under an agreement dated 5 October 2007, ownership of the Vessel was transferred to Imperator I Maritime Company (the “Owners”) and the charterparties were novated accordingly. The Vessel was renamed THE CORAL SEAS.

Subsequently, the Head Charterers fixed the Vessel to C Transport Panamax Ltd (the “Sub-Charterers”) under a sub-charterparty, the terms of which were effectively back-to-back with the head charterparties (except rates), for a time charter with one or two laden legs, at the Sub-Charterers' option.

The charterparties each contained the following terms:

“Clause 29

(b) Speed Clause

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 Clause 29(a) above, under fair weather condition not exceeding Beaufort force four and Douglas sea state three and not against adverse current. [In the case of the sub-charterparty the equivalent provision concluded “… not exceeding Beaufort Force 4 and Douglas Sea State 3 with not against adverse current (sic)”].

(c) Weather Routing and Speed/Consumption Deficiencies

Charterers may supply Ocean Routes advice to the Master [the sub-charterparty stated “May supply Ocean Routes or equivalent advice”] during voyages specified by the Charterers. The Master to comply with the reporting procedure of the routing service selected by Charterers ...”

In accordance with the Sub-Charterers' instructions, the Vessel discharged cargo at Praia Mole (Tubarao) Brazil, completing her first laden leg. The Vessel then sailed for Guaiba Island (near Rio de Janeiro). It was immediately apparent on departure from Guaiba Island that the Vessel’s performance had fallen off significantly, as a result of which it became necessary for her to call to take on emergency bunkers at Jakarta on 14 March 2008.

An underwater inspection found light fouling of the flat bottom and heavy fouling of the propeller by barnacles. The propeller was cleaned underwater. The Vessel then proceeded to Mawan, PRC, completing her second laden leg.

The Sub-Charterers thereafter 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 charterparties. The Head Charterers took the same stance against the Owners. Each claim was referred to London arbitration under LMAA terms pursuant to the BIMCO dispute resolution clause contained in each of the charterparties. The references were determined concurrently by common arbitrators.

Arbitrators’ Awards

The arbitrators decided:

• that the Vessel did not maintain the warranted speed, resulting in an increased length of voyage of 90.345 hours;
• that the cause of the Vessel's reduced speed was underwater fouling of the Vessel’s hull and propeller by marine growth which developed during the Vessel’s lengthy stay in tropical waters at Guaiba Island; and
• 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 arbitrators further decided that, on a true construction of the charterparties, the speed warranty applied to all sea voyages, including those after a prolonged wait in tropical waters and that it was the Owners/Head Charterers that had assumed the risk of a fall-off in performance as a result of bottom fouling consequential upon compliance with the Head Charterers’/Sub Charterers’ lawful orders.

The Owners appealed the above finding of law to the High Court.

Court Decision

The question under appeal to determine was:

“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?”

The Owners contended that the arbitrators’ reasoning was wrong, being directly contrary to the principle of law as stated in Time Charters 7th Ed. (2014) paragraph 3.75 as follows:

“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 Court rejected the Owners appeal for the following reasons:

1. The speed warranty in clause 29(b) of the contract was expressed in wide and unqualified terms. As the warranty was that the Vessel “shall be capable of maintaining and shall maintain on all sea passages” the specified performance, it was clear that the warranty was not limited to the Vessel’s capacity as newly built, but related to her actual continuing performance.

2. Further, the parties included an express restriction on the extent of the performance warranty, limiting it to passages under fair weather conditions. It would have been open to the parties also to have excluded the performance warranty in respect of voyages after the Vessel had been waiting in warm water ports, and such clauses are now commonly included in time charters. The Owners were therefore seeking to construe the warranty as containing a restriction which the parties chose not to include.

3. Marine fouling is a usual and expected risk. The fact that the Owners were seeking to avoid liability on the warranty in relation to a risk they have assumed demonstrates that holding them liable is neither unfair nor flouts business common sense.

For the above reasons, the Court considered that the proposition stated in paragraph 3.75 of Time Charters is too widely stated. 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.

Comment

The decision of the Court is consistent with the Supreme Court’s decision in ENE Kos Ltd v Petroleo Brasileiro SA (No. 2) [2012] 2 AC 164 where Lord Sumption stated that:

1. Owners are not entitled to an indemnity from charterers against things for which they are being remunerated by payment of hire;
2. There is therefore no implied owner indemnity in respect of “ordinary risks and costs” associated with performance;
3. The purpose of the implied owner indemnity is to protect them against “losses arising from risks or costs which they have not expressly or implicitly agreed in the charterparty to bear”; and
4. Owners will usually be taken to have contractually assumed the risks for their own negligence/breach of contract and the consequences of marine fouling that is incidental to the service for which the vessel was required to be available.

In the context of sophisticated oil and gas industry contracts, drilling units will usually include a ‘country of operation’ clause that permits the drilling unit to be used in a specified location. The drilling unit owner/contractor will then give a warranty that the drilling unit can satisfactorily operate in that location. If the drilling unit is to be used elsewhere it will usually trigger a change of country of operation clause, which will require the parties to use reasonable endeavours to negotiate any required changes to be included, such that the owner/contractor’s financial situation should neither be adversely affected nor advantaged by the change of country of operation.

This case is an important reminder that changing the location of operations can impact more than the taxation position of the parties. Absent agreement dealing with the impact of differing water or climatic condition, the drilling unit owner/contractor will, on most contract terms, be liable for underperformance caused by the change in agreed location.