Maersk Line v. US Ship Management

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Maersk Line Limited, as Charterers v. U.S. Ship Management Inc. as Disponent Owner of the "Sealand Express"
United States: Arbitration Award of the Society of Maritime Arbitrators of New York: Jack Berg, Chairman, Robert S. Duffy and Emery W. Harper, Arbitrators: 6 February/19 July 2004
Morgan Lewis & Bockius LLP, for Maersk Line
Burke & Parsons for U.S. Ship Management

This arbitration was conducted in two phases. In the first, the panel was asked to determine – on the assumption that the cause of the casualty was crew negligence – whether the unavailability of the chartered vessel during the repair of damage sustained in grounding in Table Bay, South Africa, was an Event of Default under the charter, entitling the charterer to terminate the charter. In an unanimous award, the tribunal found that it was. In the second phase, the tribunal determined that the grounding had indeed been caused by crew negligence and that, as a matter of construction of the termination clause, it was not necessary for the charterer to establish, as a condition of its right to terminate, that such an Event of Default had caused a "failure by [the charterer] to realise the material benefits intended to be conferred on it by the charterparty taken as a whole"

DMC Category Rating: Confirmed

As part of the purchase by A.P. Moeller of the international business of Sea-Land Service Inc. from CSX late 1999, the bareboat charters of the "Sealand Express" and eighteen other ships were assigned to U.S. Ship Management ("USSM"), which in turn chartered them to Maersk Line Limited ("MLL") as time charterers for a period of approximately six years. The charterparty did not contain any off-hire provisions but did make provision for early termination on the occurrence of an "Event of Default". Thus Article 29(c) provided:
"The following events shall constitute Events of Default by [USSM], whether any such event shall be voluntary of involuntary….(except if caused solely by [Maersk’s] breach under this Time Charter that had not been cured.

  1. The Vessel shall not be available to [Maersk] for any reason other than as permitted in the Time Charter or as customarily required for operation, maintenance and repair; or
  2. [USSM]’s Management Personnel shall materially fail to perform or observe any other material covenant, condition or agreement to be performed or observed by it hereunder and such failure shall continue unremedied for a period of 60days after receipt of written notice thereof….."

Article 29(d)(i) provided:

"Upon the occurrence of any Event of Default by [USSM]… and at any time thereafter so long as the same shall be continuing… [MML] may, at its option, declare this Time Charter to be in default, and at any time thereafter, so long as [MML] (sic) shall not have remedied all outstanding Events of Default, [MML] may do, and [USSM] shall comply with one or more of the following, as [MLL] in its sole discretion shall so elect…

(i) Upon A; the occurrence of an Event of Default under clauses (c)(i),…. [MML] may terminate this Time Charter… In such case, upon written demand, [MLL] may cause [USSM] at [USSM’s] expense to, and [USSM] hereby agrees that it will, promptly deliver the vessel to…. [MLL]."

On the morning of 19 August 2003, the vessel, whilst anchored in Table Bay awaiting a berth at the container terminal in Cape Town, dragged her anchor in heavy weather and ran aground just off Sunset Beach. Salvage efforts to refloat the vessel lasted nearly a month and it was only on 13 September that she was finally refloated and towed to a berth in Cape Town. An inspection revealed that the vessel was severely damaged and she was accordingly towed to Durban, where repairs were effected over the period from early October to late December. On 26 November 2003, MML advised USSM that it had concluded from information that it had received, that the grounding was the result of crew negligence. Furthermore, MLL advised USSM that the subsequent continued unavailability of the vessel constituted an Event of Default under Article 29(c)(i) of the charter and that it elected to terminate the time-charter in accordance with Article 29(d). MML accordingly directed USSM to deliver the vessel promptly to it. USSM did not react to this message, nor to a reminder dated 12 December 2003. Arbitration followed.

Phase One
The issues between the parties were divided into two and the tribunal dealt with them in two phases. The first phase focussed on the question whether vessel unavailability due to crew negligence gave rise to an Event of Default under the time charter entitling MLL to terminate the charter and to require the delivery of the vessel to them. For the first phase, the tribunal was asked to assume that the stranding of the vessel, and its subsequent unavailability, resulted from crew negligence. In the second phase the tribunal concentrated on the issue whether that assumption was correct.

MLL argued that the vessel’s unavailability because of a grounding caused by crew negligence constituted an Event of Default unless it fell within the two exceptions enumerated in Article 29(c)(i). In this regard, MLL argued that such an unavailability was not for a reason "expressly permitted in this Time Charter", nor was it required for the "operation, maintenance and repair" of the vessel. The latter was restricted to "usual, ordinary or habitual maintenance or repairs". That was not the case here.

USSM for its part, maintained that it could rely on Article 31 of the time charter, an Exceptions clause, and in particular on the words "delay or failure in performance due to a cause beyond its reasonable control" Crew negligence, it argued, should be considered a cause beyond its control. Further it maintained that, under the wording of Article 29(d)(i), an Event of Default giving MML the option to terminate, must have caused "a failure by MLL to realise the material benefits to the conferred on MLL by this time charter, in the context of the transactions contemplated by this time charter taken as a whole with respect to the vessel". Finally, USSM claimed that it was obliged under the time charter to drydock and repair the vessel even after extraordinary events such as the grounding in question, and that such repairs fell within the "expressly permitted" exception language and were also within the scope of the words "as customarily required for operation, maintenance and repair".

Award on Phase One
The tribunal unanimously held that the unavailability of the vessel resulting from the grounding did constitute an Event of Default under Article 29(c)(i) of the time charter, assuming – as was agreed for the purposes of this phase of the dispute – that the cause of the grounding was crew negligence. The tribunal further held that such an Event of Default entitled MLL to exercise its right under Article 29(d) to terminate the charterparty and to require the ship to be delivered to it.

The tribunal noted that the charterparty was unusual in not containing an off-hire clause. In consequence, MLL was virtually bound to continue paying hire "come hell or high water". MLL had argued that it had accordingly bargained for the termination provisions of Article 29(c)(i) as an alternative. The tribunal said that it considered this "an important factor in determining the weight to be given to the argument of USSM which would extend the exceptions in Article 29(c)(i) to periods of unavailability considered periods of off hire under a traditional off hire clause."

The tribunal held that USSM could not rely upon the Exceptions Clause to relieve it from the consequences of crew negligence, in particular because, under Article 3(b), "the Master, officers and crew of the Vessel shall be engaged and employed by [USSM]… shall remain the servants of [USSM]… navigating and working the Vessel on behalf of and at the risk of [USSM]…"

The tribunal concluded that a period of Vessel unavailability resulting from a grounding caused by crew negligence, including the time required for repair of the damage caused by such grounding, is not a period of unavailability "customarily required for operation, maintenance and repair" under Article 29(c)(i) of the charterparty.".

The tribunal left over for Phase two the materiality argument that USSM had raised, regarding it as "factual in nature".

Phase Two
The questions left over for phase two were the following:

  1. Was the stranding in fact the result of crew negligence?
  2. Was the Event of Default subject to the "material benefit" requirement of Article 29(d)(i)?

On the first issue, the tribunal unanimously concluded that the grounding in Table Bay was the result of crew negligence, characterising the Master as reckless in his blatant regard of the obvious perils to which his vessel would be exposed in Table Bay. The Chief Officer, on watch from 0400 to 0800hrs on the morning the vessel grounded, and the Second Officer, on watch from midnight to 0400hrs that day, were – the tribunal found – "derelict in their duties as watch standing officers."

The Master was criticised for anchoring close to a lee shore in the Bay, in conditions of high winds. The bottom of Table Bay is soft sand and does not provide safe holding ground in the winter months when strong winds prevail. These warnings were highlighted in the Admiralty Sailing Directions, with which the Master was familiar but he regarded them as not relevant to his vessel. Contrary to the specific warning in the Sailing Directions, the Master ordered the engines secured on anchoring, which meant that they could be readied for emergency manoeuvring only in some 15 to 20 minutes. Despite accurate weather forecasts of gale force winds for the relevant time, the Master elected to remain at anchorage rather than ride out the storm at sea. On retiring for the night on August 18/19, the Master left orders that he was to be called if the vessel dragged anchor. In fact, the vessel did drag anchor during the Second Officer’s watch, but he did not inform the Master until shortly before 0400hrs. When he did so, he did not tell the Master the distance, duration or direction of the drag, nor did the Master enquire. He simply checked the position of the ship relative to the shore from his cabin window and again retired to bed.

The Chief Officer, who came on watch at 0400hrs, was briefed by the Second Officer. He became increasingly concerned at the vessel’s predicament, as the winds were picking up and he was sure that the anchor would not hold. He began taking GPS and radar fixes every fifteen minutes but it was only shortly before 0600hrs, when the vessel swung parallel to the shore, that he called the Master. Although the Master then came to the bridge and ordered the engines to be readied, it was already too late and an hour later the vessel grounded.

As for the material benefits issue, the full wording of Article 29(d)(i) was as follows:

"Upon (A) the occurrence of an Event of Default under clauses (c)(i), (iii), (v), (vi), (vii), (ix) or (x) of this Article 29, or such similar event of default under any time charter of any other Related Vessel resulting in the termination of such time charter, or (B) the occurrence of an Event of Default under clauses (c)(ii), (iv) or (viii) of this Article 29, or such similar event of default under any such other time charter resulting in the termination of such time charter, if such Event of Default (or event of default) would cause a failure by [MLL] to realise the material benefits intended to be conferred on [MLL] by this Time Charter taken as a whole with respect to the Vessel, terminate this Time Charter, and the exercise by [MLL] of its remedies under this clause (i) shall be without prejudice, and in addition to, any of [MLL’s] other remedies referred to in this Article 29(d)…."(highlights added).

The issue between the parties was whether the highlighted text modified only the Events of Default listed under (B) – as argued by MLL - and applied only when an event on that list occurred, or whether it modified the Events of Default listed under both (A) and (B) – as argued by USSM.

The Award on Phase Two
The tribunal found that there was no ambiguity in the language of the provision; that the grouping of the Events of Default into two categories, separating them into an (A) list and a (B) list was intended to have a substantive effect, and this effect can only be accomplished if the material benefits clause is read as applying to one list of Events of Default and not the other. "Neither party has suggested that the material benefits clause would apply to the (A) events and not the (B) events. Indeed, the placement of the clause, immediately following the (B) list, requires that the material benefits clause apply when an Event of Default on the (B) list occurs". In consequence, the tribunal found that upon the occurrence and during the continuance of an Event of Default under Article 29(c)(i) of the charterparty, as was the case here, MLL was entitled to declare the time charter in default and to exercise its remedies under Article 29(d), including termination of the charter, without the need to establish the failure to realise the material benefits in question

Had the material benefits provision been relevant, the tribunal would have taken the view that the benefits related only to the particular ship covered by the charterparty, and not to all 19 ships involved in similar charter arrangements.

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