Incofe v. Mermaid

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International Coffee and Fertilizer Trading Co. v. Mermaid Shipping Co. Ltd.

New York Arbitration: 2 April 2002
A.J Siciliano, Stephen H Busch and Michael A van Gelder, Chairman, as arbitrators 
In this award, arbitrators from the Society of Maritime Arbitrators in New York ruled that damages flowing from a breach of a voyage charter were not limited to those necessary to put the aggrieved party where it would have been had there been no breach. Damages could also include costs incurred by third parties in arranging substitute cargo – where they were reasonably foreseeable - and legal fees incurred in protecting the interests of the voyage charterers in court proceedings over the judicial sale of the carrying ship. The award also stated that SMA arbitrators had the power to award legal costs to the successful party, even in cases where the arbitration was not governed by SMA Rules and there was no provision regarding the award of costs in the arbitration agreement.

DMC Category Rating: Developed

This is an award of the Society of Maritime Arbitrators in New York

On November 18 1997, a charterparty on an Incofe private form was agreed between Mermaid Shipping Co, as disponent owners of the vessel Atlantis Two, and International Coffee and Fertilizer Trading Co. (Incofe) as charterers. The charterparty provided for the carriage of a cargo of about 25000 tonnes of fertilizer from Vancouver, British Columbia and Lazaro Cardenas in Mexico, to ports in Guatemala and Costa Rica.

The ship arrived in Vancouver on 25 November 1997 and loaded three grades of Muriate of Potash totalling 16,524 tonnes. Bills of lading for the cargo were issued on 28 November, but not released. Incofe paid its supplier, Campotex Ltd, in May 1998, in accordance with the 180 days credit terms of the sale contract.

Although loading was completed on 28 November, the ship was not permitted by the Canadian authorities to sail, until certain repairs had been effected to make her seaworthy. Delays occurred for reasons beyond the control of either Mermaid or Incofe. On 10 December 1997, Incofe notified Mermaid that receivers were pressing to know the vessel’s expected departure date and, in the event of further delay, the receivers would have to use other means to transport the cargo intended for loading at Lazaro Cardenas. Delays continued throughout December ánd into January. On 26 January 1998, various unpaid vendors arrested the ship. The owners were unable to pay the vendors and the ship remained under arrest.

In May 1998 the Canadian court ordered the ship to be sold to satisfy the creditors. This was duly done. In August 1998, Incofe entered into a new charterparty with the successful buyer of the vessel, now named World Amber, to carry the cargo to Puerto Quetzal in Guatemala and Caldera in Costa Rica. Bills of lading for this voyage were signed on 27 August 1998.

Incofe’s Arguments
Incofe contended that Mermaid were in breach of charter by presenting a vessel that was unseaworthy and were therefore liable for all of Incofe’s damages resulting from this breach. The damages for breach of contract sought by Incofe were such as to put it in the same position as if Mermaid had in fact performed the contract.

The Items of Claim
Incofe’s claim was divided into the following main headings:
1. US$ 160,780 costs incurred by the receivers, Abopac - and deducted from amounts due to Incofe – in buying some 1,968 tonnes of potash from third parties, in replacement of part of the cargo intended for loading at Lazaro Cardenas.
2. US$ 116,897 interest paid by Incofe on its purchase contract with Canpotex. The purchase contract provided for payment to be made 180 days from the bill of lading date. Under the normal terms of sale between Incofe and Abopac, Incofe would have been paid about the same date. Incofe in fact paid Canpotex US$1,786,386 in May 1998, 180 days after the first set of bills of lading had been issued in Vancouver. After the ship sale ordered by the court, fresh bills of lading were issued and the cargo was again sold to Abopac, on the same 180 days payment terms. It was only on 24 February 1999, therefore, that Incofe received payment from Abopac. Incofe accordingly claimed interest for the 281 days delay at the rate of 8.5%.
3.Incofe also claimed loss of profit in respect of the shipment that the vessel failed to carry within 1997. This element of the claim amounted to US$63,041.
4. Incofe’s contract with Canpotex for 1998 provided for a total of 95,000 tonnes. Due to the repeated promises of Mermaid that the ship would perform under the charterparty, Incofe delayed chartering other tonnage to fulfil its commitmentsand therefore lost its profit on the sale of some 15,366 tonnes of cargo. This part of the claimi amounted to US$53,781.
5. Finally, Incofe claimed the costs of hiring Canadian and US counsel to protect its interests in the legal proceedings in Canada regarding the sale of the vessel. This element of the claim amounted to US$117,344.

Mermaid’s Arguments
Mermaid argued that the damages claimed were unrecoverable as a matter of law. The measure of damages, they maintained, for a breach of a voyage charter is the difference between the cost of performing under the original charter and the cost of substitute performance. Mermaid further argued that damages are only recoverable when they were within the contemplation of the parties at the time of chartering, the burden of proof in this respect lying on the party seeking damages.

In relation to Item 1, Mermaid contended that the deductions made by Abopac in relation to the procurement of replacement cargo were not foreseeable and so not recoverable, since the sale contract between Incofe and Abopac, the receivers, had been entered into some to ten days after the date of the charterparty itself. As for item 2, Mermaid accepted that interest was payable but asserted that the rate claimed was too high. Mermaid rejected both items 3 and 4 - the claims for loss of profits – on grounds of unforeseeability. As for item 5, the costs of counsel, Mermaid maintained that whilst an indemnified party may recover fees incurred in defending a claim against which it is indemnified, it may not recover fees incurred in order to establish the right to indemnity. Mermaid asserted that, in the Canadian proceedings, Incofe was not defending claims against it but was actively litigating its right to collect against the vessel.

The Award
On Item 1, the panel found that, at the time of fixing, Mermaid was, or should have been, able to foresee that an extended and uncertain delay in the ship’s ability to perform the contract could give rise to a need for the ultimate receiver to replace all or part of the expected cargo. The panel considered that it was reasonable for Abopac to do this and to charge Incofe the costs involved. By a majority, the panel awarded Incofe US$148, 814 in respect of this part of the claim, together with interest

On item 2, the panel upheld the 8.5% rate of interest claimed by Incofe, as it represented the prime rate charged by US banks during the relevant period.

As regards the claims for loss of profits, a majority of the panel awarded Incofe its loss of profits for 1997, since this was a reasonably foreseeable consequence of the vessel’s inability to deliver the cargo loaded in November of that year. On the other hand, the panel unanimously rejected the claim for loss of profits in 1998, on the grounds that this was totally unforeseeable by Mermaid. Incofe’s lost profit for 1998 ‘had more to do with its own decision how best to deal with a perceived possibility of market disruption than any default on the part of Mermaid’.

As regards the legal costs under Item 5, the panel found that, in the Canadian proceedings, Incofe was in fact defending its rights and interest as to the value of its cargo on board Atlantis Two. The panel regarded the action taken by Incofe in Canada not as one of establishing a right to indemnity. Rather, it was an effort to mitigate damages. The panel found that a large portion of the costs were imposed on all parties by the behavior of the owner. Had it been necessary to discharge, store and reload the cargo, these expenses, the panel found, would have fallen on Mermaid and would have far exceed the sum claimed under Item 5. The panel therefore allowed these legal expense claims in full, with interest from 1 December 1999 to the date of the award.

The panel also awarded Incofe US$20,000 in respect of its legal fees in the arbitration. Mermaid had contended that the panel was not entitled to make a costs award because, firstly, there was no enabling provision in the charterparty arbitration clause itself and secondly, the arbitration was not being conducted under the Rules of the Society of Maritime Arbitrators of New York. In dismissing this contention, the panel noted that it had been ‘the practice in New York for several years that arbitrators have awarded legal fees to the successful party, regardless of whether the SMA Rules were applicable.’


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