DMC/SandT/05/13
Asil Gida Ve Kimya Sanayii Ve Ticaret A.S., as Owner of the m.v. "Mustafa Nevzat" v. Cosco Qingdao, as Charterers
Arbitration Award: Society of Maritime Arbitrators New York: Louis P Sheinbaum, Chairman, Lucienne Bulow and Alexis Nichols, arbitrators: 2 January 2004
Tisdale & Lennon LLC, Patrick F Lennon and Charles E Murphy, of Counsel, for the Owners
Healy & Baillie LLP, John C Koster of Counsel, for the Charterers
TIMECHARTERPARTY: NYPE FORM; DAMAGE TO CARGO: LEGAL PROCEEDINGS AT DISCHARGE PORT: OWNER HELD RESPONSIBLE: OWNER SEEKS INDEMNITY FROM TIME CHARTERERS: INHERENT VICE: INTER-CLUB AGREEMENT ("ICA"): WHETHER BILL OF LADING "AUTHORISED": WHETHER CLAIM WITHIN "ALL OTHER CLAIMS WHATSOEVER" OF CLAUSE 8(b) OF ICA

Facts
The Owner of the ship "Mustafa Nevzat", a self-trimming Panamax bulk carrier built in 1995, time-chartered her to the Charterers, Cosco Qingdao, under a time-charter on the New York Produce Exchange Form (1946), dated 25 June 1999, for worldwide trading. By a charterparty dated 12 April 2000, the time-charterers sub-chartered the ship on the Norgrain 1973 (Amended 1974) Form for a voyage with a cargo of soyabeans in bulk from Brazil to one or two safe ports North China, later named as Tianjin and Zhangjiagang. The ship completed loading at Itacoatiara in Brazil on 9 May 2000, with 53,232 tonnes of soyabeans in bulk in all seven holds. Bills of lading, incorporating the Norgrain charterparty, were signed by the Charterers’ agents on behalf of the Master. The ship was fitted with "natural" ventilation openings, one fore and one aft on each of the two hatch cover panels at each hatch.

On arrival at Tianjin on 21 June 2000, the surface of the cargo was found mildewed and rotten and, on completion of discharge, the receivers claimed that approx. 24% of the cargo for that port had sustained damage ranging from 30 to 80%. The ship was arrested on 13 July and subsequently released when security was posted for US$1.57 million approx. Receivers then commenced proceedings against the Owner on 11 August 2000 and, on 18 July 2001, the Tianjin Maritime Court entered judgment against the Owner for US$740,000 approx. The court held that the damage was not due to the inherent vice of the cargo (too high a moisture content upon loading) but to the Owner’s failure to ventilate the hatches appropriately. This judgment was confirmed by the Tianjin court of appeal in a judgment dated 25 December 2001.

Further similar damage was evident at the second port of discharge, Zhangjiagang. The receivers there also commenced a court action against the ship and the Owner. However, the Owner was able to stay that action, pending arbitration in London. In the event, the arbitrator found that there was no fault on the part of the Owner and that the cause of the damage was the inherent vice of the cargo, in particular its moisture content and temperature on loading.

In the present arbitration, Owner claimed an indemnity from the time-charterers for the damages awarded against it by the Tianjin Court, together with hire that the Charterers had deducted for the period during which discharge in China had been delayed by the damage found to the cargo. In addition, Owner claimed the legal costs and experts’ fees that it had incurred in respect of the Tianjin claim and in the arbitration itself.

Earlier in the arbitration, the Charterers had brought a motion before the arbitrators to dismiss the Owner’s claim on the grounds of "issue preclusion" or "collateral estoppel". That doctrine would have precluded Owner from arbitrating (re-litigating) the issue of the cause of damage to the Tianjin cargo, since the Tianjin Maritime Court had already concluded that the cause of the damage to the goods was not the inherent vice of the cargo but the failure of the Owner properly to ventilate the cargo to avoid the risk of sweat damage.

In a Interim Decision and Partial Final Award, the arbitration tribunal held that issue preclusion did not apply in the facts of this case, dismissed Charterers’ motion and ordered that the case be tried on its merits. The case note on the Partial Final Award is available on this website; click here to access it.

In addition to providing for arbitration in New York, the timecharter contained the following clauses:
"8 …The Captain (although appointed by the Owners) shall be under the orders and directions of the Charterers as regards employment and agency; and Charterers are to load, stow, trim, tally or checking weight of the cargo, separate, secure, lash, unlash and discharge the cargo at their expense under the supervision of the Captain, who is to sign or to authorise in writing Charterers’ agent to sign Bills of Lading for cargo as presented, in conformity with Mate’s or Tally Clerk’s receipts in accordance with the terms, conditions and exceptions of the Charter Party concluded between Owners and Charterers."

"83 Any cargo claims to be settled in accordance with the NYPE Inter Club Agreement."

The Issues
Owner’s claim for a full indemnity from the Charterers was based principally on the following arguments:

1. The damage to the cargo was caused by its "inherent vice"; it was not caused by or contributed to by any unseaworthiness of the ship or any failure to care for the cargo and, in particular, no lack of care in how the ship ventilated the cargo holds on the voyage.
2. The damage resulted from the negligence of the shipper in failing properly to prepare/dry the cargo for shipment on the voyage in question in that the cargo was "overmoist" and that this negligence was imputable to the Charterers.
3. Charterers were obliged, under cl.8 of the timecharter - leaving aside the charter’s incorporation of the ICA - to indemnify Owner for the results of the Tianjin cargo claim. The damage to the cargo was caused by Charterers by reason of their ordering the vessel to carry the cargo on the voyage in question.
4. The ICA was not applicable to determine whether Charterers were liable to indemnify Owner for the results of the Tianjin litigation because (i) the bill of lading under which the Tianjin claimants claimed was not "authorised" within the terms of the ICA, in that it was signed by sub-agents at Singapore, rather than by the agent in Itacoatiara appointed by the Charterers (the original bills were substituted by a second set signed in Singapore); and did not expressly incorporate the terms of the timecharter; (ii) it did not incorporate the terms of the Hague Rules and (iii) the ICA was not applicable to claims resulting from the inherent vice of the cargo.
5. If the ICA were applicable, the result of the Tianjin claim was 100% the responsibility of the Charterers because (i) it was a claim "in fact arising out of the act or neglect of the Charterers under cl.8(b) of the ICA (for the text of this provision, see below) and (ii) there is "clear and irrefutable evidence that the claim arose out of the act or neglect of the Charterers" under cl.8(d) of the ICA, in that the Charterers had improperly prepared/dried the cargo for shipment and had then ordered the ship to carry it.

The Charterers contended that:

1. the cargo damage was caused by the unseaworthiness of the vessel in not being equipped with a hygrometer to determine the relative humidity and dew point of the air in the void spaces in the cargo holds, and in being manned by a crew that was incompetent with respect to the ventilation of the cargo;
2. the cargo damage was caused by the failure of the vessel to take proper care of the cargo, in particular, the failure of the crew to ventilate the cargo holds properly;
3. the ICA does apply to determine the question whether Owner is entitled to indemnity from the Charterers for the results of the Tianjin litigation;
4. under the ICA, Owner is 100% responsible for the Tianjin cargo claim, since it was a claim caused by "unseaworthiness and/or error or fault in…management of the vessel;
5. alternatively, under the ICA, Owner is entitled to recover only 50% of the claim since (i) the cargo damage did not arise "out of the loading, stowage, lashing, discharge, storage or other handling of the cargo" within cl.8(b) of the ICA and (ii) under cl.8(d) of the ICA, there is not clear and irrefutable evidence that the claim arose out of the act or neglect of [the Charterers] (including their servants or subcontractors)"

The Award
The Tribunal examined first the question of the applicability of the ICA to Owner’s claim for indemnity. It noted that it is "beyond dispute that when the ICA is incorporated into charterparties it governs the allocation of the results of litigation brought by cargo receivers against owners and/or charterers, as well as settlements made by owners or charterers with cargo interests." Given the date of the charterparty, the relevant version of the ICA was the 1996 one.

The relevant part of the ICA read as follows:

"Scope of Application
(2) The terms of this Agreement shall apply notwithstanding anything to the contrary in any other provision of the charterparty…

(3) For the purposes of this Agreement, Cargo Claim(s) means claims for loss, damage…and include:

1. any legal costs claimed by the original person making any such claim;
2. any interest claimed by the original person making any such claim;
3. all legal, club correspondents’ and experts’ costs reasonably incurred in the defence of or in settlement of the claim made by the original person, but shall not include any costs of whatsoever nature incurred in making a claim under the charterparty;

(4) Apportionment under this Agreement shall only be applied to Cargo Claims where:

1. the claim was made under a contract of carriage, whatever its form,
1. which was authorised under the charterparty; or….

4. the contract of carriage… incorporated terms no less favourable to the carrier than the Hague or Hague-Visby Rules or, where compulsorily applicable by operation of law to the contract of carriage, the Hamburg Rules or any national law giving effect thereto.

The Apportionment
(7) The amount of any cargo claim to be apportioned under this Agreement shall be the amount in fact borne by the party to the charterparty seeking apportionment.

(8) Cargo claims shall be apportioned as follows:

(a) Claims in fact arising out of unseaworthiness and/or error or fault in navigation or management of the vessel: 100% Owners

(b) Claims in fact arising out of the loading, stowage, lashing, discharge, storage or other handling of the cargo: 100% Charterers…

(d) All other claims whatsoever (including claims for delay to cargo):

50% Charterers, 50% Owners

unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors) in which case that party shall bear 100% of the claim."

A majority of the Tribunal held that, contrary to the Owner’s submission, the bill of lading under which the Tianjin cargo claim was made was an "authorised" bill within the meaning of clause 4(a)(i) of the ICA. The Singapore sub-agent, in signing the bill of lading, was acting under the authority given to the timecharterers’ agents at the port of loading. Furthermore, there was evidence that, at the time the bill was signed in Singapore, the Owners were aware of what was happening and had raised no objection to it. The majority held that the Owner’s reliance on the English case of The Holstencruiser [1992] 2 Lloyd’s Rep.378 was misplaced, in that the judgment in that case "can very reasonably [be] read to mean that in order for the ICA to apply, the technically unauthorised nature of the bill of lading can be explained away or excused". Furthermore, the majority believed that the reasoning and weight of the judgment in The Holstencruiser had to be considered in the light of the critical comments made upon it in other English decisions - The Hawk [1999] 1 Lloyd’s Rep.176 and The Elpa [2001] 2 Lloyd’s Rep.596. In summary, the majority agreed with the reasoning and results of the latter two cases and concluded that the issue of the bills signed at Singapore "had nothing to do with the cause of the damage sustained by the Tianjin cargo or Owner being held liable in the PRC".

The majority also held that the additional words in cl.8 of the timecharter, requiring bills of lading to be "in conformity with Mate’s and/or Tally Clerk’s receipts in accordance with the terms, conditions and exceptions of the Charterparty concluded between Owner and Charterers" (emphasis added) did not require the Charterers to see to it that all bills of lading incorporated the head timecharter. Accordingly, the bill of lading was not "unauthorised" on this ground.

Nor did the bill render the ICA inapplicable by reason of its failure to incorporate the Hague or Hague-Visby Rules, as required by clause 4(a)(iv) of the ICA. The bill of lading in question was on the Gencon 1994 Form; that form includes on the reverse of the bill, the General Paramount Clause. That clause provides that where, as here, neither the country of shipment, Brazil, or the country of destination, China, has enacted the Hague Rules, the bill is to be governed by the terms of the Convention (the International Convention for the Unification of certain rules relating to Bills of Lading, dated Brussels 25^th August 1924) itself.

Accordingly, the majority held that the ICA was applicable to determine Owner’s indemnity claim against Charterers for the damage to the Tianjin cargo. The next task was therefore, to determine the cause(s) "in fact of the cargo damage covered by the Tianjin judgment".

The majority concluded, on the preponderance of the evidence, including the evidence of the two experts produced by each side, that the damage to the Tianjin cargo was caused by the self-heating of the cargo; that no damage of any consequence was caused by any improper ventilation of the holds on the voyage and that no unseaworthiness, fault, neglect or lack of due care or error of management on the part of the Owner, crew or vessel caused or contributed to that damage. A key point was the caked condition of the cargo throughout all the vessel’s holds. The panel accepted the view of Owner’s expert witness to the effect that "the damage producing process was initiated by the micro-biological growth of fungi which resulted in the self-heating of the cargo.

The panel rejected, however, the Owner’s contentions that the cause of the cargo damage was the negligence of the Shipper in failing properly to prepare/dry the cargo for shipment - in that the cargo had an average moisture content of 12.7% - and that such negligence should be imputed to the Charterers. The panel did not find any proof of negligence; the evidence showed that "an average moisture content range of 11 to 13% and maximum 14% was broadly used and accepted in the industry as appropriate and safe for trade, export and import regulation, sale/purchase and shipping purposes". Further, the question of imputing negligence to the Charterer under other provisions of the charterparty simply did not arise, as "the regime of the ICA is controlling."

As regards the ICA, the majority of the panel rejected Owner’s view that the cargo claim "in fact [arose] out of the loading, stowage, lashing, discharge, storage or other handling of cargo" under clause (8)(b), thereby entitling Owner to a 100% indemnity. In the majority’s view, clause (8)(b) refers to "claims arising out of some fault or neglect in the way the cargo was loaded, stowed, lashed, discharged, stored or handled…It does not attach 100% responsibility to the Charterer from the mere fact that a claim arose after a cargo was in fact loaded, stowed and stored on a vessel, or simply because damage occurred during the period of stowage or storage of a cargo on board a vessel."

As regards clause (8)(d) of the ICA, the panel noted that the 1996 version of the ICA, unlike the previous versions, did not make special reference to "condensation" or "improper ventilation", these claims now falling within the category of " All other cargo claims whatsoever…" The panel had to determine whether the claim in this case, relating to the inherent vice of the cargo, fell within these words. There was authority in the English case of Newcastle P&I v. Gard [1998] 2 Lloyd’s Rep.387 to the effect that where – as between Owner and Charterer - it has been proved that the damage was caused by the inherent vice or unsafety of the cargo and not by any defect in stowage, the ICA is not applicable. But this case was decided on the basis of an earlier version of the ICA, which did not include a clause in the terms of (8)(d). In the absence of any relevant authority, either in the United States or in England, the panel determined that the words "all other claims whatsoever" should be given their plain language meaning and the clause was therefore applicable to the claim paid by the Owner, "regardless of the label put on the condition or nature of the cargo and/or the cause of the damage, as variously described by Owner, including "inherent vice."

The majority did not find that on the evidence, there was "clear and irrefutable evidence that the claim arose out of the act or neglect of [the Charterers] (including their servants or sub-contractors). Accordingly, Owner was entitled to recover only 50% of what it had paid in satisfaction of the Tianjin claim.

Having held that the vessel was not at fault, the panel further held that Owner was entitled to recover the hire that Charterers had deducted for the delay at the Chinese discharge ports arising from the cargo claims.

Owner accordingly recovered

• 50% of the payment it had made in satisfaction of the Tianjin cargo claim, together with 50% of the costs and expenses it had incurred in that regard, plus interest at 6%
• the hire deducted by Charterers in respect of the delay in China, together with the cost of bunkers consumed during the off-hire period, plus interest at 6%
• 75% of its costs and expenses incurred in the arbitration.