Laying up the lay up agreement

The first reported London arbitration decision in 2016 raises a number of interesting points in connection with lay up agreements and how much can be claimed for continuing to provide services after the original contract has been terminated.

The background to the case was that a lay up agreement was terminated in March 2013 following a failure by the owners of vessels to pay lay up fees due under the contract. The lay up facility was in the Far East and its owner initially went to the local courts in order to try and secure payment of the sums due from the vessel owner. The claim included fees due after the period of termination given that the vessel owner had ignored a direction to remove the vessels from the facility. Six months after termination the facility unilaterally increased the monthly fees for the vessels. Subsequently the facility brought an arbitration claim in London seeking an award for USD2,275,825 in respect of the unpaid fees.

Arbitrators’ decision

The arbitrators started by considering what was the nature of the legal relationship between the parties in the period following the termination of the agreement. They concluded that the lay up facility was required to continue providing services as a matter of local law, and that they were also an involuntary bailee of the vessel. As bailees the facility were under a duty to provide and maintain the same level of service as provided under the original lay up agreement.

As for payment for these continuing services, the arbitrators decided that the standard fee terms in the lay up agreement did not apply after termination, but even if they did, the facility could not claim the unilateral increase that they had imposed because this increase would not have been permitted under the contract which limited the facility to increases in inflation and costs. However, the arbitrators held that the contract terms allowing the facility to recover its “costs and expenses” for the failure to follow the order to remove the vessels from the facility after termination did continue to apply.

The next issue was whether these costs and expenses were limited to direct costs of USD 6,000 per month (excluding a generator) or whether the facility could also claim indirect costs, with a profit element, which took the value up to USD 18,000 per month. The arbitrators decided the increased value claim was allowable. Furthermore the arbitrator’s held that even if the contract had no terms for costs and expenses post termination then the facility would have been entitled to recover these costs and expenses as damages for breach of the order to remove the vessel as well as under the rules of bailment and/or quantum meruit which apply in the absence of a contract. The same principle also applied to the generator costs, which were allowed as post termination costs and expenses with the bonus that while the facility could not claim a profit element on the diesel used before termination, it could do so as an indirect cost after termination.

By terminating the lay up contract, the facility ended up being able to claim a significantly higher monthly fee than if the contract had continued.

The outcome therefore was that by terminating the lay up contract, the facility ended up being able to claim a significantly higher monthly fee than it would have received had the contract continued and the facility been limited to claiming the contractual remuneration due.
In their award the arbitrators also dealt with two interesting procedural issues:

  • The vessel owners complained about the original court cases brought against them, saying these too should have been arbitrated and had this happened, they would have saved about USD 83,000 in legal fees not otherwise awarded to them in the local courts. They claimed this sum in damages for the breach of the arbitration agreement and the tribunal accepted the claim, on the basis that there had been a breach of the arbitration agreement and was no proper taxation of costs in the local courts.
  • The facility asked for an order for the removal of the vessels, subject to local court injunctions preventing the vessels from leaving the local jurisdiction. Practically speaking, arranging such a removal was close to impossible due to lack of funds and internal disputes between the owning interests. As such, while the arbitrators accepted that they had the power to make an order for removal they declined to do so because it could not be complied with or enforced.

The arbitration decision has brought clarification as to the nature of costs and expenses recoverable after contract termination either as a result of the original lay up agreement or more generally for a bailee, with the effect that the claimant was able to recover more than if the original contract had continued. In addition, we have had confirmation that foreign proceedings started in breach of London arbitration agreements can permit a recovery of costs incurred in the foreign proceeding in excess of the costs recovery in those proceedings. Finally, the ability to give orders for removal of vessels was accepted in principle, but also subject to the condition that such orders will not be given if there is no prospect of compliance.

In all, this was a good result for the lay up facility, and one which will be of interest to others who see their unpaid charges increasing, as well as to other involuntary bailees, such as vessel owners left holding cargo with no bills of lading binding them after their charterers have ceased operations. In these difficult times, a claim for direct and indirect costs plus a profit margin may well be more rewarding compensation than claiming the market rate normally associated with time spent on an involuntary bailment.