Charterparty - Arbitration - Claimant company chartering vessel from defendant owner

Pacific Basin IHX Ltd v Bulkhandling Handymax AS: Queen's Bench Division, Commercial Court (Mr Justice Teare): 8 November 2011

The claimant company chartered a vessel from the defendant, the disponent owner of the vessel, and instructed the vessel to carry a cargo of potash in bulk from Hamburg to China via Suez and the Gulf of Aden. The defendant refused to proceed via Suez and the Gulf of Aden on account of a risk from pirates and instead proceeded via the Cape of Good Hope. The extra cost of proceeding via the Cape was $462,221.40. The charter included the Voywar 2004 clause, parts of which were for all material purposes the same as Conwartime 1993.

Sub-clause 2 of Conwartime 1993 stated, inter alia, that, 'The vessel, unless the written consent of the owners be first obtained, shall not be ordered or required to continue to or through, any port, place, area or zone (whether of land or sea) or any waterway or canal, where it appears that the vessel, her cargo, crew or other persons on board the vessel, in the reasonable judgement of the master and/or the owners, may be, or are likely to be, exposed to war risks.'

In the arbitration that followed, the defendant claimed for unpaid hire and the claimant counterclaimed for the additional expenses incurred by reason of the vessel having proceeded via the Cape of Good Hope. At the hearing it was not disputed that the risk of the vessel being hijacked was about one in 300 transits. The arbitrators concluded that the defendant was entitled to refuse to obey the order to proceed to China via Suez and the Gulf of Aden pursuant to Conwartime 1993. The claimant was not obliged to have the vessel proceed to Suez, because that was prohibited by Conwartime 1993, or wait at Gibraltar until a lawful order was given, because that was not commercially realistic.

Thus there had been no deviation in proceeding via the Cape of Good Hope. The defendant was therefore awarded the agreed sum of $462,221.40. The claimant appealed against that award pursuant to section 69 of the Arbitration Act 1996. The claimant submitted that the arbitrators had erred in law in their construction of sub-clause 2 of Conwartime 1993, in particular, as to: (i) the meaning of the words 'may be'; (ii) the reasonable judgement of the owners; and (iii) whether the clause gave the defendant a discretion and if so whether it was obliged to make proper enquiries before exercising it. They further submitted that the arbitrators had erred in law in holding that the passage round the Cape of Good Hope was not a deviation.

The court ruled: (1) The phrase 'may be, or are likely to be exposed to war risks' was intended to express a single degree of possibility or probability. The natural construction of the phrase was that 'may be' was to be understood as 'likely to be', the word 'or' being used in the sense of 'that is'. The phrase connoted a serious risk in the sense of one which it could be said that there was a real likelihood or real danger that the vessel would be exposed to acts of piracy.

There was a distinction between a serious risk that an event would occur, namely being exposed to acts of piracy, and a risk that a serious event, being exposed to acts of piracy, would occur. The phrase required an assessment as to whether there was a real likelihood of the vessel being exposed to acts of piracy. Thus there was no requirement in sub-clause (2) to consider importance in the sense of the importance of the harm threatened by exposure to acts of piracy in any other sense (see [38], [44]-[45] of the judgment).

In the instant case, the arbitrators had understood 'a serious risk' to be a risk of an important event, demanding of consideration. Although the arbitrators had adopted the concept of a serious risk as expressing the meaning of 'may be or are likely to be', which it would be difficult to say was the wrong legal test, they had understood and applied that test in a manner which was not warranted by the true construction of the clause. Therefore, they had erred in law (see [44], [46] of the judgment).

(2) In the circumstances, as the arbitrators had been wrong in law as to their understanding of the phrase 'may be, or are likely to be exposed to war risks' it followed that their conclusion that the defendant had formed a reasonable judgement had to also have been wrong in law (see [49] of the judgment).

(3) Assuming that Conwartime 1993 conferred a discretion or power on owners to make a decision which could effect both parties there was no necessity to imply any term as to how that discretion or power had to be exercised because the clause said expressly that the owners' judgement had to be 'reasonable'. The effect of that clause was that the owners had to make a judgement. It had to be made in good faith and had to be objectively reasonable.

An owner who wished to ensure that his judgement was objectively reasonable would make all necessary enquiries. If he made no enquiries at all then it might be concluded that he did not reach a judgement in good faith. However, if he made those enquiries which he considered sufficient but failed to make all necessary enquiries before reaching his judgement, his judgement would not on that account be judged unreasonable if in fact it was an objectively reasonable judgement and would have been shown to be so had all necessary enquiries been made (see [55] of the judgment).

In the instant case, the arbitrators had considered that the defendant had made all necessary enquiries. However, what had been necessary enquiries depended upon the arbitrators' understanding of the phrase 'may be, or are likely to be, exposed to war risk'. If, as was the case, their understanding had been in error then their conclusion that sufficient enquiries had been made had to also be wrong in law. That was not a further error, merely a reflection of the first and only error (see [56] of the judgment).

Abu Dhabi National Tanker Co v Product Star Shipping Ltd, The Product Star (No 2) [1993] 1 Lloyd's Rep 397 considered; Socimer International Bank Ltd (in liq) v Standard Bank London Ltd [2009] 3 All ER 237 considered.

(4) On the evidence, the arbitrators' reasoning, though brief, did not reveal an error of law. As commercial arbitrators they had reached a firm conclusion of that part of the case, expressed in terms which the court should be slow to overturn (see [60] of the judgment). No order would be made for a remission until after the parties had studied the terms of the judgment (see [62] of the judgment).

Michael Nolan (instructed by Swinnerton Moore LLP) for the claimant; Julian Kenny (instructed by Ince and Co LLP) for the defendant.