Note: the decision in this case has been upheld by the Court of Appeal in a judgment given on 23 May 2008. For a note on the Court of Appeal decision, click here

DMC Category Rating: Confirmed / Developed

It was common ground that the effect of Regulation 13H of MARPOL, when read with the requirements of Regulation 13F, was that fuel oil cargoes could only be carried in double-hulled vessels after 5 April 2005, subject only to the exemptions which arose as a result of Regulation 13H (5), (6) and (7). However, because the slop tanks were not protected from the outer hull of the ship by either void spaces or ballast tanks for their full length, they did not comply with the Regulation 13H(5) exemption and the Flag State of the vessels would not grant an exemption under Regulation 13H(6). Even if exemptions applied, Regulation 13H(8)(b) allowed a party to MARPOL to deny entry of oil tankers, operated in accordance with the exemptions of Regulation 13H(5) or (6), into the ports or onshore terminals under its jurisdiction.

The question of who was to bear the commercial risk was to be construed in the context of the relevant terms of the charters.¹

Judgment
Clause 3
The judge noted that "clause 3 provides for [Golden] … to exercise due diligence to maintain or restore [Elli and Frixos] to the stipulated delivery conditions set out in clause 1… Furthermore, the second paragraph of clause 52 provides a continuing warranty on the part of [Golden] of full compliance with all applicable conventions, laws and regulations of any international, national, state or local government entity having jurisdiction, specifically including MARPOL 1973/1978 as amended and extended …"

The judge held that "if, as at the date of delivery of [Elli or Frixos] …, either vessel had, by virtue of MARPOL regulations, been unable to carry fuel oil to any of the places permitted by clause 4 and special condition 4, the vessel would not have been ‘in every way fit’, either for the service defined in clause 4 or for the carriage of fuel oil as a dirty petroleum product. There would then have been "a breach of clause 1(b) and 1(c). Equally, if [Elli or Frixos] did not have on board the relevant documents to enable [them] to load, discharge and carry cargo to such places, there would be a breach of clause 1(g) ..."

It was in this context that clause 3 fell to be construed. The judge stated that clause 3 required Golden "to ‘exercise due diligence to maintain or restore the vessel’ to the condition stipulated in clause 1, whenever ‘any event’, whether or not it is an event which gives rise to an exception to [Golden’s] liability …, requires steps to be taken for that purpose." The judge considered that "that obligation is not in any way limited to the physical condition of the vessel but also covers the documentary position. The words ‘any event’ undoubtedly cover a change in MARPOL regulations and the second paragraph of clause 52 constitutes a continuing warranty of compliance with MARPOL 1973/1978 as amended and extended." The judge therefore held that "absent a frustrating event, the obligations of clause 3(i) and clause 52 require steps to be taken to ensure compliance with MARPOL and fitness, both legal and physical, to carry fuel oil to and from places within the charters’ trading limits." (The "Madeleine" [1967] 2 Lloyd’s Rep 224, 241, per Roskill J, established that the lack of necessary certification constituted a lack of fitness for ordinary cargo service; to the like effect is The "Derby" [1985] 2 Lloyd’s Rep 325 (CA).)

Golden argued that the time charters could not be read as requiring them to rebuild the vessel in any way, which, Golden said, was what was essentially required by Lloyd’s Register (the vessels’ classification society), in order to render the vessel fully double-sided, so that there was no part of any tank used for the carriage of oil which was unprotected by void or ballast space on the outside.

The judge rebutted Golden’s submission by stating "whilst the absolute obligation set out in clause 1 is replaced by the qualified obligation in clause 3, ‘due diligence’ is equivalent to the common law duty of care and contains no limit on the expense involved in exercising that duty. Due diligence requires the exercising of reasonable care and skill so that, once [Golden became] aware of a deficiency or, more accurately, once they should have become aware of a deficiency, the duty to exercise reasonable skill and care to remedy the position arises. There may be some element of latitude about when, where and how the work is done but there cannot be a financial limit to the obligation, unless issues of frustration arise, which is not here suggested." (See Snia v Suzuki (1924) 17 LlLRep 78, 88, per Greer J – no question of "proportionality in terms of financial expenditure arises".)

Clause 52
Golden argued that, given the vessels’ characteristics, they were warranting that they would comply with relevant MARPOL requirements by not loading fuel oil once the April 2005 amendments took effect, but not that the vessels would, under MARPOL regulations, be able to continue to carry fuel oil.

The judge considered this to be turning the charters’ obligations on their head. In dismissing Golden’s submission, the judge agreed with ST’s succinct submission that "what matters is that the vessel is unable to carry all cargoes specifically mentioned in the charter itself. Compliance with MARPOL is in itself a meaningless concept unless it relates to compliance whilst performing the charter party services which include the carriage of fuel oil." So that, in the judge’s words, "there can be no compliance with MARPOL where compliance is with the minimum standards which are applicable to a different ship or a different charter party service."

Conclusion
The judge held that, once the Lloyd’s Register ruling was know about the vessels, Golden were bound to exercise due diligence to restore the vessels to a condition where they could carry cargoes of fuel oil and obtain the necessary documentation to enable them to trade in fuel oil between the ports and places permitted by the charters. This Golden failed to do after being given notice by ST requiring them to do so. As a result Golden were in breach of both charters.

Comment
This case highlights the potential impact on a vessel’s commercial revenue-earning activities when it fails to comply with mandatory regulatory requirements. The judgment also makes clear that the risk of failure to comply with necessary regulations, to enable the vessel to carry out the charter, falls on the shipowner. This makes sense because it is the shipowner who is responsible for ensuring the vessel complies with mandatory regulations, both physically and documentarily.

3. (i) Throughout the charter service Owners shall, whenever the passage of time, wear and tear or any event … requires steps to be taken to maintain or restore the conditions stipulated in Clauses 1 and 2(a), exercise due diligence so to maintain and restore the vessel. …

4. Owners agree to let and Charterers agree to hire the vessel … for the purpose of carrying all lawful merchandise crude and/or dirty petroleum products … in any part of the world, as Charterers shall direct, subject to the limits of the current British Institute Warranties limits and any subsequent amendments thereof. …

SPECIAL PROVISIONS: …
DOUBLE SIDE: YES
SBT [Segregated Ballast Tanks]: YES …

4. TRADING: WORLDWIDE ALWAYS WITHIN BRITISH INSTITUTE WARRANTY LIMITS INCLUDING US …

52. ELIGIBILITY & COMPLIANCE
Owners warrant that the vessel is in all respects eligible under application (sic) conventions, laws and regulations for trading to and from the ports and places specified in Clause 4 of the Charter Party and that she shall have on board for inspection by the authorities all certificates, records, compliance letters and other documents required for such services...
Owners further warrant that the vessel does, and will, fully comply with all applicable convention, laws, regulations and ordinances of any international, national, state or local government entity having jurisdiction including, but not limited to, … MARPOL 1973/1978 as amended and extended …
Any delays, losses, expenses or damages arising as a result of failure to comply with this Clause shall be for the Owners’ account …"