The Inter-Club Agreement – A "NO FAULT" REGIME?

In Transgrain Shipping (Singapore) Pte Ltd v Yangtze Navigation (Hong Kong) Ltd [2017] EWCA Civ 2107 the Court of Appeal recently provided important clarification in relation to the apportionment of liability for cargo claims as between shipowners and charterers under the Inter-Club Agreement ("the ICA").

The issue before the Court of Appeal was whether the word “act” in the phrase “act or neglect” in Clause 8(d) of the ICA means a culpable act in the sense of fault or whether it means any act, whether culpable or not. In upholding Teare J’s decision at first instance, the Court of Appeal unanimously held that the word “act” should be given its natural meaning and there was no need to confine it to “culpable act”.

Background

The issue before the Court arose on an appeal from an award of arbitrators in London. The claimants in the arbitration were the owners of the “Yangtze Xing Hua” (“the Owners”) which they had chartered to the respondents in the arbitration (“the Charterers”) for a time charter trip carrying a cargo of soya bean meal from South America to Iran.

Charterers ordered the vessel to wait off the discharge port for over 4 months as they had not been paid by the receivers. During this period, the cargo overheated and when it was finally discharged, a claim was presented against Owners for damage to the cargo. Owners settled the cargo claim and sought an indemnity against Charterers under the ICA, which had been incorporated into the Charterparty.

The Court of Appeal reiterated that the Inter-Club Agreement’s primary role is the mechanical apportionment of liability

The parties agreed that liability was to be settled in accordance with the ICA and in particular Clause 8(d). Clause 8(d), sometimes known as the “sweep up” clause, provides for a 50/50 liability split between owners and charterers for all other cargo claims not covered by Clauses 8(a) to (c) of the ICA, unless there was clear and irrefutable evidence that the claim arose out of the “act or neglect” of either the owner or the charterers in which case they will bear 100% of the claim.

In the arbitration, the Tribunal found that the cause of the damage was a
combination of inherent vice of the cargo together with the prolonged period waiting off the discharge port. The Tribunal rejected all allegations made against the Owners and their crew that they had not properly monitored the cargo temperatures. Instead, it concluded that Charterers decision to delay discharge was an “act” falling within Clause 8(d) of the ICA and so they should bear 100% of the cargo claim liability.

The critical factual question is that of causation of the underlying claim in question without consideration of legal or moral culpability

On appeal to the High Court, Charterers argued that the Tribunal’s construction of “act” was wrong as the word “act” in Clause 8(d) of the ICA had to be a “culpable act”. Therefore as the Tribunal did not find that Charterers had been at fault in ordering the vessel to wait off the discharge port, the proviso to Clause 8(d) did not apply and the correct apportionment should be 50/50. Teare J disagreed and held that, as a mechanism for assigning cargo claim liability by reference to the cause of the cargo damage, the clause was not concerned with fault. Charterers appealed.

Court of Appeal Decision
In upholding the High Court’s finding on the construction of the word “act”, the Court of Appeal reiterated that the ICA’s primary role is the mechanical apportionment of liability where the critical factual question is that of causation of the underlying claim in question, without consideration of legal or moral culpability.
Comments

This decision is in line with the founding purpose of the ICA, which is to provide a “mechanistic” formula for the apportionment of cargo claim liability between owners and charterers so as to avoid protracted and costly litigation. The introduction of a requirement of culpability would inevitably have added a layer of complexity to the apportionment of cargo claims under the ICA and so this recent Court of Appeal decision will be welcomed by P&I clubs.

That said, and as the Court of Appeal acknowledged, issues of causation can be just as difficult to determine as ones of culpability. Take for example the Ann Stathatos (1949) 83 LLR 228 referred to by the Court of Appeal in its decision. In that case, Devlin J accepted causation was an issue of fact for the arbitrator to decide, and that the arbitrator could not be faulted in holding that the cause of the coal gas explosion on board the vessel that lead to the litigation was not charterers’ order to load coal, but the spark during repair work organised by owners after the coal was loaded. Then consider the Anthanasia Comninos and Georges Chr Lemos [1990] 1 LLR 277, where there were almost identical coal gas explosions during voyages of the two vessels which owners said were caused by charterers order to load coal, but in one case the explosion was linked to a crewman smoking a cigarette, which broke the chain of causation, while in the other, charterers also alleged a cigarette had caused the explosion but could not prove it, so their order to load was the proximate cause, even though a spark still had to somehow be caused to ignite the gas. As such, there may well be much to argue about when it comes to causation and whose act/neglect was the proximate one when applying the Court of Appeal’s new test for interpreting Clause 8(d) of the ICA.

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