Rania Tadros Managing Partner
Deviation and the right to rely on contractual time bars
Dera Commercial Estate v. Derya Inc (MV Sur)  EWHC 1673 (Comm)
The English Court has recently handed down a judgment considering whether parties are able to rely on contractual time bars, such as Article III Rule 6 of the Hague Rules, in circumstances where owners have ordered the vessel to deviate without the agreement of charterers.
The judgment also gives useful guidance on the principles applicable to s. 41(3) of the Arbitration Act 1996 (the “Act”) and the power conferred on an arbitral tribunal to dismiss a claim (or counterclaim) for “inordinate” or “inexcusable” delay.
The background facts
Dera purchased a cargo of Indian maize to be carried from ports in India to be discharged in Aqaba, Jordan. The cargo was loaded on board the vessel and bills of lading were issued, incorporating the Hague Rules and providing for disputes to be settled in accordance with English law and London arbitration.
The vessel arrived at Aqaba in August 2011 and the Jordanian customs authorities took samples for analysis. Following the analysis, the Jordanian customs authorities issued a letter, in September 2011, indicating that the cargo was damaged, would not be permitted to enter Jordan and must be returned to its country of origin.
Accordingly, Dera commenced proceedings against the Owners in Jordan claiming US$8 million for cargo damage and Derya (the “Owners”), in turn, commenced LMAA arbitration in London by appointing an arbitrator. The Owners’ P & I Club put up a letter of undertaking (the “LOU”) in connection with all disputes and differences arising under the bills of lading for the sum of US$9 million.
The Owners focused on arranging for the cargo to be re-exported and urgent applications were made to the Jordanian Court for an order, obliging Dera and the Jordanian customs authorities to grant the permissions necessary for the Vessel to sail from Aqaba to another port to discharge the cargo. Notwithstanding that the application had been dismissed and applications made for the appropriate authorities to reconsider the decision, the Owners instructed the vessel to sail from Aqaba to Turkey without first obtaining the Jordanian customs authorities’, or Dera’s, permission to leave the port. The Vessel sailed on 8 November 2011.
No formal procedural steps were taken in the arbitration by either side until March 2015, when the Owners served particulars of their claim seeking, among other things, a declaration of non-liability for the cargo claim and an order that the LOU be released. Accordingly, a period of three and a half years had been allowed to pass between the Owners appointing an arbitrator and serving particulars of claim.
A further three months passed until Dera served particulars of its cargo claim in June 2015, meaning that a period of three years and eight months had been allowed to pass between the appointment of Dera’s arbitrator and the service of their particulars of claim.
In January 2016, the Owners asked the Tribunal to consider a preliminary issue, namely whether Dera’s claim should be struck out for want of prosecution pursuant to section 41(3) of the Act. The Tribunal found that it should. Dera appealed.
The Commercial Court decision
Firstly, the Court held that a claim that is particularised within the six-year limitation period applicable to contractual claims may be struck out for inordinate delay in the event that the parties have contracted for a shorter period, such as the one-year time bar under Article III Rule 6 that applied in this case. However, the relevant limitation period was not “the” yardstick against which the delay should be assessed, but, rather, “a” yardstick. Whether or not delay was inordinate would always be a fact-sensitive exercise in each case.
Secondly, the Court confirmed that a geographical deviation precluded a carrier from relying on the one-year time bar created by Article III Rule 6. It was bound to follow the 1936 House of Lords decision in Hain Steamship v. Tate & Lyle, which made it clear that the effect of a geographical deviation, without the express agreement of the other party, allowed the innocent party, upon discovering that deviation, to declare itself retrospectively no long bound by any of the contractual terms.
The Court undertook a thorough review of English case-law on geographical deviation, noting that the common law had developed in such a way as to deprive a ship-owner of the benefit of any limitation or exemption in the contract of carriage in the event of geographical deviation. Decisions subsequent to Hain Steamship indicated that the applicability of an exclusion or limitation of liability clause in the event of a breach of contract should be determined as a matter of construction, rather than on the basis of “fundamental breach”, whereby a party could not rely on an exemption clause where it was guilty of breaching a fundamental term of the contract. The Court in this case thought that this approach should apply equally to geographical deviation cases. However, it considered itself bound by the decision in Hain Steamship, which appeared to be based on fundamental breach but which had not been subsequently overruled. Otherwise, the Court stated that it would have decided this point differently, as the Tribunal had done.
Thirdly, the Court considered whether, where the one-year time bar applies, the period between a) the time that the cause of action arises; and b) the expiry of the contractual time limit is to be taken into account when assessing whether the delay is ‘inordinate’ for the purpose of s.41(3). It held that it is normally appropriate for periods of delay to be assessed separately and distinctly, allowing for a cumulative period of delay to be identified. However, on the facts of this case, it was not appropriate to take this cumulative approach, as there had been no substantive procedural activity in the arbitration. The Tribunal had not, therefore, erred in its approach.
Finally, the Court confirmed that the legal burden of proof lies at all times on the applicant on a section 41(3) application to show that there was both an inordinate, but also an inexcusable, delay.
The appeal was dismissed.
The Court made clear its view that the decision in Hain Steamship and the proper approach to geographical deviation cases merit consideration by the Supreme Court in an appropriate case. In the meantime, owners will need to be aware that they may well lose the benefit of the shorter contractual time bar protection should they deviate without the express agreement of the charterers.
This may, in turn, have an impact on how P&I Clubs administer their files. If Clubs currently rely on the one-year limitation period when closing their cargo claim files, they should note that there is now a risk that cargo claimants will seek to allege geographical deviation almost six years after the cause of action arose in order to pursue a legal claim. P & I Clubs may, therefore, need to consider their position with regard to placing reserves on such claims.
On the procedural side, this is the second recent case in which the Court has upheld a tribunal’s decision to strike out a claim for inordinate delay. Parties to disputes should remain alert to the importance of getting on with the proceedings or, alternatively, agreeing a stay.
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