DMC Category Rating: Developed

Background
The case was concerned with back-to-back appeals on questions of law arising out of two arbitration awards in head-charter and sub-charter references dated 19 March 2008 and made by Michael Baker-Harber, Colin Sheppard and Patrick O’Donovan.

The vessel concerned was the Silver Constellation, a Capesize gearless single deck self-trimming bulk carrier of 146,351 m.t. built in 1986.

At the time of the arbitration references, which were heard together (as were these appeals), the shipowner was Seagate Shipping Limited ("Seagate"), the charterer was Glencore International AG ("Glencore") and the subcharterer was Swissmarine Services SA ("Swissmarine").

The central issues which the arbitrators were asked to determine (and which were the focus of this appeal) were:

1. whether pursuant to line 38 (for the meaning of this reference, see below) and/or clause 31 of the charterparties, the shipowner was obliged to provide a vessel with RightShip approval and to maintain such approval for the currency of the charterparties; and/or
2. whether the shipowner was obliged to permit a RightShip inspection of the vessel and other RightShip vetting procedures, as and when required by the charterer, pursuant to clause 8 of the charterparties and/or pursuant to implied duties of co-operation.

The arbitrators found in favour of Glencore and Swissmarine, as charterers, on both issues. Seagate appealed to the High Court.

RightShip, which was set up in 2001, is a ship approval/vetting information system maintained by the three major players in the coal and iron ore markets: BHP Billiton, Rio Tinto Shipping and Cargill Ocean Transportation. The aim is to identify those vessels that are suitable and safe for the carriage of iron ore or coal cargoes. The clients of the system are said to include shipowners, charterers, terminal operators, port state control authorities and insurers. RightShip is effectively a dry cargo equivalent to the "oil majors’" vetting/approval systems invariably demanded by charterers of oil and petroleum products tankers.

The system rates vessels in three principal categories. The rating is based on an analysis using "algorithm software". This involved a "complex analysis" taking account of no less than 50 factors, which include: yard, owner operator/manager, vessel age, casualty history, port state control history, condition of class and class changes, trading patterns and cargo history, terminal inspections and ISP certificate data. Any vessel with a 1 star or 2 star risk rating will not obtain approval without the submission of an approval form by the "subscriber" to the system and subsequent processing by a RightShip vetting officer, including, where appropriate, inspection of the vessel. Significantly, vessels over the age of 18 years, such as the Silver Constellation, are automatically downgraded to a 2* rating, which subjects them to greater RightShip scrutiny.

The arbitrators had accepted evidence to the effect that "RightShip approval today is necessary in order to be able to trade effectively in the iron ore and coal industries." The charterers sought damages of US$900,000 per month, which was indicative of the reduced freight and/or hire chargeable for vessels without RightShip approval.

The key terms of the charterparties (text in bold is added wording and/or clauses) were:

"1. That whilst on hire the Owners shall … and maintain her class and seaworthiness and keep the vessel in a thoroughly efficient state in hull, holds and hatch covers machinery and equipment with all certificates necessary to comply with current requirements of all ports of call and canals for the service and at all times during the currency of this Charter, also see Rider Clauses [collectively referred to as Line 38]…

8. That the Captain shall prosecute his voyages with the utmost despatch, and shall render all customary assistance with ship's crew and boats. The Captain (although appointed by the Owners) shall be under the orders and directions of the Charterers as regards employment….

31. Certificates, Laws and Regulations
a) It is a condition of this Charter that the vessel is and will remain in all respects eligible for trading to the ports, places or countries specified or not excluded in this Charter and that at all necessary times vessel and/or Owners shall have all valid certificates records and other documents required for such trade. Furthermore, it is a condition of this Charter that the vessel complies and will continue to comply with all applicable laws and regulations of the ports, places and countries specified or not excluded in this Charter.

b) It is a condition of this Charter that the vessel is and will remain during the currency of this Charter in possession of the necessary valid equipment and all certificates, records and documents necessary to comply with safety and health regulations, international regulations and all current requirements at all ports of call, Suez Canals included."

Seagate’s position was that:

1. there was no express reference to RightShip approval;
2. it was not necessary to imply an obligation in that respect;
3. line 38 was only concerned with questions of seaworthiness and with official certificates such as arise from classification or flag state requirements;
4. clause 31, given its heading, was solely concerned with compliance with official or legal requirements and documents demonstrating compliance with such;
5. an obligation as regards RightShip could easily have been expressly included and the numerous express provisions with regard to such matters as the Australian Port Call clause were inconsistent with any construction that additionally requires RightShip approval;
6. the references to certificates were not to the point as RightShip does not issue certificates;
7. since clause 31 was a condition, the outcome of any temporary and/or minor basis on which RightShip approval might be withheld or withdrawn would have a wholly disproportionate effect; and
8. the word "eligible" meant either "legally qualified" in which case RightShip approval would not be relevant; alternatively it meant "fit to be chosen" in which case it was well established that being "in every way fitted for service" was solely directed to the physical state of the vessel and thus not concerned with compliance with the whole range of factors on which the RightShip approval was based.

Glencore and Swissmarine’s position, as charterers, was that:

1. as a matter of construction, the requirements of eligibility and certification included RightShip approval;
2. questions of implication did not arise: if they did, it was necessary to imply an obligation with regard to RightShip approval so as to give the charterparties business efficacy;
3. line 38 encompassed the current requirements of all ports regardless of whether they concerned such matters as class, seaworthiness and flag state requirements or not: in any event, RightShip certification did relate to seaworthiness;
4. clause 31 was not confined to official or legally required documents: the heading did not lead to such a restriction; the express reference to other certificates or compliance with other requirements did not establish that RightShip approval was excluded;
5. the absence of hard copy certificates or documentation was not determinative: certification and/or approval was satisfactorily evidenced by entries on the RightShip website or otherwise online;
6. categorisation of clause 31 as a condition did not give rise to any disproportionate impact;
7. in its ordinary and natural meaning, the word "eligible" simply meant that the vessel was fit for selection by reason of meeting the pre-conditions for selection.

The case also dealt with an interesting pre-contractual negotiations issue in the head reference but that is not be dealt with here for the sake of brevity (see the judgment at paragraphs [17]-[19] and [44]-[62]).

Judgment
Line 38 & Clause 31
The first issue the judge considered was whether, as the charterers contended, RightShip approval was a pre-requisite to the vessel being ‘eligible’ to trade to the ports not excluded in the charter within the meaning of clause 31(a). The judge thought that the word ‘eligible’ was "a straightforward word. It means that the relevant person or object is fit for selection as satisfying the relevant conditions for selection." The judge, however, noted that when taken in isolation, "the concept of eligibility is potentially apt to encompass conditions imposed by shippers and/or ports in Australia and elsewhere in respect of the acceptance of only those vessels with RightShip approval." The judge then referred to the decision in The "Derby" [1984] 1 Lloyd’s Rep. 635 (Comm Ct) and [1985] 2 Lloyd’s Rep. 325 (CA), which decided that line 22 of the NYPE form related only to matters of seaworthiness or the ability of the shipowner to comply with the orders given to it by the charterer. In particular, that case decided that there was no analogy between an ITF blue card and, for example, a deratisation certificate. The absence of the latter would affect the fitness of a vessel; the absence of the former would not.

On the basis of the Court of Appeal’s decision in particular, the judge was of the opinion that the focus of line 38 and clause 31 was "upon requirements legally imposed either by the law of the flag, the law of the country to which the vessel has been ordered or by the laws of the port of call." This was "further emphasised by the heading to clause 31 ‘Certificates, Laws and Regulations’." Equally it was not suggested "that RightShip approval is ‘lawfully’ required by the ports at which coal or iron ore may be loaded … it is simply a commercial requirement ..."

As the judged noted "the RightShip scheme does not give rise to the provision of any documentary form of certification." He considered that it was "not an answer … that approval (or lack of it) is recorded in the computer hard drive of the RightShip vetting organisation." He also considered that this feature was "a further reflection of the extra-legal and private nature of the system". The judge was concerned also that because the "basis of any approval remained obscure" this meant that the secrecy of the methodology in evaluating vessels rendered "the scope and standard of the requirement difficult to comply with and exposes the owners to the unpublished requirements of a third party".

The judge also thought that it was significant that the charterparties had specific provision for a whole range of certificates required by law and regulations. He stated that "this gives rise to a strong inference that, given the absence of RightShip approval (something the tribunal would expect to be included) no such approval is required under the charterparty. This is all the more so where the charterparty focuses almost exclusively on iron ore and coal cargoes and thus involves trading to the ‘hotbeds’ of the RightShip system such as Australia."

Seagate had argued also that clause 31 was a condition and as such would enable Glencore to terminate the charterparty for non-compliance with any RightShip approval required – this being a "commercial nonsense". However, the judge thought that there was "no want of commercial realism in treating the provision of RightShip approval, if applicable, as a condition strictly so called." He considered that in any event it was "by no means clear that the clause is a condition. Line 35 describes all the terms of the charter as conditions yet it is clear that some are mere warranties or at most innominate terms."

The judge nonetheless concluded that "the tribunal erred in concluding that on its proper construction the charterparty required the owners to obtain and retain RightShip approval."

Clause 8
The arbitrators had concluded that the words "under orders and directions of the Charterers as regards employment" in clause 8 were apt to oblige the shipowner to permit a RightShip inspection for the purpose of RightShip approval. The parties’ submissions revolved around The "Hill Harmony" [2001] 1 Lloyd’s Rep. 147, which concerned a direction to a master to proceed on a Great Circle route as opposed to a Rhumb Line route. The arbitrators had relied on two passages from that case to conclude that an order requiring a vetting questionnaire to be completed or to permit RightShip inspection were orders "as regards employment". The judge noted that Seagate had accepted as much until February 2007, having previously co-operated with the charterers by permitting RightShip vetting and inspection in the course of 2003 to 2006.

The judge considered that it could "be assumed that the owners have complied with their obligation to maintain seaworthiness of the vessel. But if RightShip vetting is excluded, the charterers would be stymied as to nominating any loading port and/or any cargo: in short although hire would remain payable, the vessel would be unemployable."

Seagate contended that RightShip approval was a stand-alone obligation akin to Class. So, merely because the charterer might be concerned about the state of the vessel’s Class, this was not accompanied by any entitlement to insist on an inspection by a Classification surveyor. However, the judge was of the mind that "RightShip approval is to be obtained voyage by voyage. It is dependent on the requirements of the relevant shipper/loading terminal. Classification in contrast is a continuous survey system by the society selected and paid for by the owners and conducted in accord with the rules of the selected society. A much closer analogy is the need to allow shore inspectors on board to inspect the cleanliness of holds."

On this basis the judge held that the arbitrators were correct in their interpretation of the shipowner’s obligation under clause 8. As a result, the judge did not consider it necessary to decide the issue of an implied duty of co-operation.

Comments
First Issue
The wording of the charterparties clearly indicated that there was no express obligation to require RightShip vetting and inspection. Had the charterers wanted to secure such a right then case law concerning private vetting and inspection of vessels under oil and petroleum time charters highlights the need for clear express terms to achieve this result.

Second Issue
With all due respect to the judge, it is highly questionable whether an order requesting the master to co-operate with the vetting and inspection of his vessel is an order as to the employment of the vessel. Such an order goes to the management and maintenance of the vessel, which is the prerogative of the vessel’s owner and manager. The speech of Lord Bingham in The "Hill Harmony" itself makes clear what employment concerns: "where the vessel shall go and what she shall carry, how (in short) she shall be used …" On that basis, it can be strongly argued that an order to allow a vessel to be inspected and vetted does not relate to her use in trading but to her management and maintenance.

In The "Hill Harmony" Lords Bingham and Hobhouse expressly approved the speech of Lord Porter in Larrinaga Steamship Co Ltd v The King [1945] AC 246. Lord Porter made a distinction between orders as to the employment of a vessel (which charterers are entitled to make) and orders as to how a vessel shall act in the course of employment and in relation to things incidental to employment (which charterers are not entitled to make). It follows that the speeches of Lords Bingham and Hobhouse cannot be read as contradicting Lord Porter’s distinctions.

One can readily accept that the RightShip vetting and inspection regime may be pertinent to the employability of a vessel (viz. its attractiveness to potential charterers and the rates of hire and freight achievable) but orders as to vetting and inspection more clearly relate to how a vessel shall act in the course of employment and in relation to things incidental to employment than a vessel’s employment in the natural sense of that word.