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Construction of charterparty terms: choose your words carefully!

News / / Piraeus

Gard Shipping AS v. Clearlake Shipping Pte Ltd (MV Zaliv Baikal) [2017] EWHC 1091 (Comm)

The Commercial Court has recently considered the meaning of various demurrage regimes in a voyage charterparty in order to deterGard Shipping AS v. Clearlake Shipping Pte Ltd (MV Zaliv Baikal) [2017] EWHC 1091 (Comm)mine whether the Owners were entitled to earn demurrage at an escalated rate. The Court held that the charterparty contained different demurrage regimes, each with different triggering events. In the circumstances, the only triggering event was the tendering of a notice of readiness and, as such, the Owners were not allowed to recover demurrage at an escalated rate.

The background facts

The parties entered into a voyage charterparty based on BPVOY4 terms. A formal charterparty was not drawn up, but a fixture recap made a number of amendments to the terms of a previous fixture between the parties. The charterparty contained the standard laytime and demurrage provisions but also incorporated specifically agreed terms, pursuant to which the Charterers had the liberty to order the vessel to stop and wait for orders. If they did so, the time spent by the vessel waiting for the Charterers’ orders was to count as laytime and demurrage and was payable at an enhanced rate. In some of the instances contemplated in the charterparty, bunkers had to be paid in addition to demurrage. 

It was common ground between the parties that the vessel departed from the loading port on 31 December 2015, stopped at various ports en route (any delay arising being paid for pursuant to the charterparty), arrived at Rotterdam on 26 January 2016 and there tendered notice of readiness on the same day. The vessel then waited for instructions from the Charterers for 64.708 days. The parties agreed that demurrage should be paid during this period, but they disagreed as to the actual level of demurrage payable.

The Owners claimed that they were entitled to an escalated rate of demurrage pursuant to additional clause (AC) 11 of the Gard/Clearlake terms, which formed part of the charterparty. Specifically, they contended that the terms of the charterparty meant that the Charterers were not permitted to instruct the vessel to stop and wait for orders for longer than three days, were not entitled to use the vessel as a floating storage unit and that the vessel was to be considered as being used for floating storage if stopped for more than five days over the course of the voyage, whether before or after reaching the discharge port or giving notice of readiness. The Owners argued that the clear commercial purpose of the charterparty was to make the Charterers pay at the enhanced rate if the vessel was being used as a floating storage unit. In the Owners’ view, it did not matter that the Charterers did not give an order to the vessel after the notice of readiness was tendered, as opposed to giving a “stop and wait” order. From a commercial point of view, they were both the same thing and the Charterers’ failure to give orders should not absolve them from liability to pay demurrage at the enhanced rate.

In the alternative, the Owners argued that it was commercially necessary to imply into the charterparty a term that meant that if the vessel was waiting for longer than five days then she was considered to be used as a floating storage unit.

The Charterers argued instead that the charterparty provided for a series of different situations where payments in the form of demurrage and/or payment for bunkers used, or other costs, were imposed. Each constituted a separate regime and the question was which regime was the operative one for the situation at the discharge port. The Charterers submitted that the relevant regime was the one applying the standard rate of demurrage and nothing over and above that. As the contractual wording was clear, the Charterers argued that there was no need to imply a term into the charterparty.

Both parties relied on the well-known Supreme Court decisions (Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900, Arnold v. Britton [2015] AC 619 and Wood v. Capita Insurance Services Ltd [2017] 2 WLR 1099), which are authorities for the proposition that, when faced with issues of construction, the Court’s task is to balance the language used by the parties with the commercial consequences of competing constructions.

The Commercial Court decision

The Court rejected the Owners’ arguments. It agreed with the Charterers that the charterparty provided for a series of different regimes, the existence of which meant that the key to working out what the contract provided in respect of any given situation or event was to identify under which regime the event or situation fell. That in turn required the identification of the trigger for each regime, as provided for by the terms of the charterparty.

The Court concluded that the charterparty wording required a “stop and wait” order to be given for the enhanced demurrage rates to be triggered. As no such order had been given by the Charterers, the enhanced rates were not triggered and the ordinary demurrage rate applied.

The Court also rejected the Owners’ alternative argument based on the existence of an implied term on the grounds that it lacked commercial necessity.

Comment

The decision illustrates that even where a party’s contentions as to what was intended are supported by commercial common sense, the Court will give more weight to the written words and will not imply terms to achieve the more “commercial” result. Those entering into charterparty and other shipping contracts should ensure that they use clear wording in their contracts. This is particularly important when departing from assumed standard positions, such as the number of different demurrage regimes provided for in the charterparty in this case.    

Jamila Khan

Jamila Khan Partner and Head of Office, Piraeus

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