DMC Category Rating: Confirmed

Background
In December 2001, the vessel the "Greek Fighter" was detained by the coastguard of the United Arab Emirates ("UAE") at Khorfakkan. The vessel and its cargo of oil were subsequently confiscated and sold at public auction in March 2003. The UAE authorities claimed that at least part of the cargo was oil of Iraqi origin, which Fal and/or its holding company were dealing with in contravention of UN sanctions.

Fal consistently denied that any oil of Iraqi origin had been transferred to the vessel, which it was using as a storage facility. Fal claimed that the vessel had been detained on false grounds and that analysis reports relied on by the coastguard had clearly been concocted to support the detention. Even if the oil had originated in Iraq, it was not illegal because it had been sold at public auction in the UAE and was being blended and stored for the purchaser.

During the period of detention, Fal pursued a number of claims in the UAE court to try to bring about the release of the cargo, without success.

The owners, Ullises Shipping Corporation, initially tried to negotiate with the UAE authorities but eventually came to the conclusion that at least part of the cargo was contraband. Ullises now claimed damages from Fal for breach of the time charter, alternatively for an indemnity in respect of their losses.

The time charter, entered into on 23 January 2001, was for an initial period of 3 months, extended at the charterer's option until 30 January 2002. The broker's fixture message to Fal of 18 January 2001 confirmed:

"THREE MONTHS TIME CHARTER FOR TRADING ALWAYS AFLOAT WITHIN IWL VIA SAFE PORTS/ANCHORAGES AG/GULF OF OMAN AREA EXCL. IRAN/IRAQ WITH LAWFUL CARGOS OF FUEL OIL/CRUDE OIL"

On 16 February 2001, an addendum was agreed which provided "vessel only to perform storage operations in the Khorfakkan area".

The charter incorporated Shelltime 4. Clause 4 of Shelltime stated that the charter was "for the purpose of carrying all lawful merchandise (subject always to clause 28)…" and provided that the charterer would use due diligence to ensure the vessel was "only employed between and at safe places… Charterers do not warrant the safety of any place to which they order the vessel and shall be under no liability in respect thereof except for loss or damage caused by their failure to exercise due diligence as aforesaid".

Clause 28 provided "No voyage shall be undertaken, nor any goods or cargoes loaded that would expose the vessel to capture or seizure by rulers or governments".

The time charter included the usual implied indemnity against the consequences of complying with the charterers’ orders, unless the loss was caused by a subsequent intervening event or arose from a risk that the owners had agreed to bear. Clause 13(a), however, provided that the charterers would not only indemnify the owners against consequences and liabilities arising from complying with the charterer’s orders, but also arising from any irregularities in papers supplied by the charterers. Clause 27(a), the "restraint of princes" clause, however, stated that, unless expressly provided, neither the owners nor the charterers would be liable for any losses resulting from (amongst other things) "seizure under legal process".

Judgment
Contraband
After considering the evidence, the judge concluded that at least part of the cargo transferred on to the vessel was contraband, although it had not been conclusively established that Fal had known this was the case. It seemed to be implicitly accepted by the experts, however, that discovery of contraband cargo on board would justify confiscation, even if Fal was unaware of its origin.

Clause 4 warranted the lawfulness of the cargo. To load on board contraband oil was to load "unlawful merchandise". The warranty was absolute, so it made no difference whether or not Fal knew the cargo was contraband.

Clause 28 reinforced and expanded the lawful merchandise warranty, in that the cargo must not be such that it presented a risk of future seizure, even if it had been lawfully loaded. In the judge's view, this obligation, too, was absolute. Deciding whether or not a particular cargo presented such a risk would involve applying an objective test that would take into account not only the cargo's physical attributes and documentation but also its place of origin and destination viewed with regard to the intended voyage.

The judge, however, disagreed with the owners’ contention that, since some of Fal's previous cargo operations had aroused the suspicions of the UAE authorities, the mere fact that the cargo was associated with Fal created a risk of seizure, even if the cargo itself was lawful. On the evidence, the judge was not satisfied that Fal had been involved in smuggling Iraqi oil on other vessels but, in any event, he thought the argument gave too wide a meaning to clause 28. The fact that cargo was shipped by charterers who themselves were the subject of suspicion by the UAE authorities would not be a breach of clause 28, which expressly defined the exposure to risk by reference to the characteristics of the cargo, not the charterers.

The justification for the detention and the trigger for the events that followed was the presence on board of oil of Iraqi origin. The fact that the UAE coastguard then embarked on a course of falsification of evidence was beside the point. Consequently, Fal was liable to indemnify the owners in damages for breaches of clauses 4 and 28.

Fal argued that the owners had failed to mitigate their loss because they did not take any steps in the UAE courts to obtain the release of the vessel. The judge disagreed. The owners found themselves in a highly delicate position. A balance had to be struck between action that would secure release of the vessel and action that would merely antagonise the UAE authorities and jeopardise the welfare of the crew. In the particular circumstances of this case, the course adopted by the owners was not unreasonable.

Indemnity Provisions
The conclusion on the contraband point made it unnecessary to look into further issues raised by the parties, but the judge went on to consider whether, had he reached a different conclusion on the nature of the cargo, the owners would, nevertheless, have had a claim to be indemnified under clause 13(a) and/or the implied indemnity.

If, contrary to the judge's finding, the cargo had been lawful, the owners argued that the indemnity would have applied because the charterers had ordered them to load cargo which aroused suspicion and so caused the arrest and confiscation of the vessel. Fal, however, said that there had been a break in the chain of causation. The cause of the detention was not the order to load the cargo but the (on this hypothesis, wrongful) intervention by the UAE authorities. The judge agreed with the owners.

In identifying the proximate or predominant cause of the loss, it was necessary to take into account the contractual context - specifically, the distribution of risk between the parties under the time charterparty. If the risk was one that the owners had agreed to bear, they could not now claim an indemnity from the charterers.

In this case, the risk of the vessel being detained in such circumstances was not foreseeable at the outset, so it could not be said that it was a risk that the owners had agreed to bear. There was no evidence to suggest that, at the date the time charter was entered into, the parties knew that Fal was suspected by the UAE authorities of dealing unlawfully with Iraqi oil or that those authorities had a propensity to pounce on innocent charterers (or on Fal in particular) on specious grounds.

For the indemnity to apply, however, the loss had to have been proximately or predominantly caused by the charterers’ orders. Had the cargo been legitimate and the vessel unjustifiably detained on the basis of a bogus analysis report and unsubstantiated suspicions, the actions of the UAE authorities (not Fal's orders to load) would have been the predominant cause of the loss. Consequently, neither the express nor the implied indemnity could apply.

Safe Port Warranty
On the hypothetical basis that the UAE authorities had acted illegally, was Fal in breach of the safe port warranty? Was there a safe port warranty at all? Fal argued that, although the time charter originally included such a warranty, this had been superseded by the addendum ("Vessel only to perform storage operations in the Khorfakkan area") because it pre-selected the place of performance.

The judge disagreed. Limiting the charterers’ choice as to the location of performance by naming the port is not inconsistent with a warranty that it is safe: The "Helen Miller" [1980] 2 Lloyd's Rep 95. In any event, the addendum expressly provided that all other terms and conditions of the timecharter remained unaltered. In those terms and conditions, the standard safe port obligation yielded to the wider, express safe port warranty given in the fixture fax. The real issue was whether Khorfakkan was "unsafe" because of the risk of illegal confiscation and the lack of any effective remedy.

Safety in the context of a safe port warranty includes political and similar risks that have a bearing on the safety of the vessel: The "Evia" No 2 [1982] 2 Lloyd's Rep 307. But the question had to be considered objectively. In the judge's view, Khorfakkan was not unsafe. There was no evidence that other vessels had been detained and confiscated in similar circumstances, nor was he persuaded that the judicial system in the UAE was such that there was no effective remedy to be had in the court.

Had the cargo been legitimate, therefore, Fal would not have been in breach of the safe port warranty nor liable under the express or implied indemnities. In addition, on the same hypothesis, the "restraint of princes" provision would have applied and so Fal would not have been liable for breach of its redelivery obligations.

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