July 31, 2019

Charterers Liable for Demurrage Despite Invalid NOR

A recently reported arbitration, London Arbitration 13/19, is a cautionary tale for charterers, and highlights the manner in which a defective Notice of Readiness could result in charterers being liable for demurrage and in repudiatory breach of the charterparty. Fanos Theophani acted for the successful disponent owners.

Background

Owners chartered the vessel from her head owners for one time-trip charter, from South West Pass to one safe Moroccan port. Owners, in turn, chartered her out to the charterers on an amended Norgrain 1989 form, for carriage of soya meal and soya beans from Myrtle Grove, Louisiana, to Casablanca, with a laycan of 24 August to 2 September.

The charterparty provided:

Clause 4:

"Should the vessel’s notice of readiness not be tendered and accepted as per Clause 18 before [23.59] hrs on the [2nd] day of September. [Carrying charges if any to be settled directly between Shippers and Owners, case need Charterers to assist in solving the matter without any financial responsibility to] charterers have the option of cancelling this charterparty any time thereafter, but not later than one hour after the tender of notice of readiness as per Clause 18. [Time used prior commencement of laytime not to count]"

Clause 18(a):

["Notice of Readiness to be tendered whether in berth or not/whether in port or not/whether custom cleared or not/whether in free pratique or not via cable/telex/vhf/within office hours:

At load port ... 07:00:16:00 ..."]

Clause 18(b):

"If the vessel is prevented from entering the limits of the loading/discharging port(s) because the first or sole loading loading/discharging berth or a lay berth or anchorage is not available within the port limits or on the order of the Charterers ... or any competent official body or authority, and the Master warrants that the vessel is physically ready in all respects to load or discharge, the Master may tender vessel’s notice of readiness, by radio if desired, from the usual anchorage outside the limits of the port, whether in free pratique or not, whether customs cleared or not. If after entering the limits of the loading port, vessel fails to pass inspections as per Clause 18(e) any time so lost shall not count as laytime or time on demurrage from the time vessel fails to pass inspections [up to USDA and/or FGIS and/or NCB and/or Shippers Surveyor satisfaction the Notice of Readiness to be considered not valid and Master shall tender valid notice of readiness after vessel passing inspection all time prior to vessel acceptance will not be considered as laytime.]"

Clause 18(c):

"Following receipt of notice of readiness laytime will commence at 0800 on the next day not excepted from laytime."

The vessel arrived at South West Pass and tendered Notice of Readiness ("NOR") at 01:15 on 24 August. She then proceeded to enter the Mississippi at 01:40, changed pilots at Pilottown at 03:15, before anchoring at Point Celeste Anchorage at 07:32 awaiting a berth.

At 09:00, a National Cargo Bureau ("NCB") surveyor rejected the cargo holds because of rust and paint scale on the hatch covers.

The parties had agreed a bespoke clause, Clause 77, which provided:

"Vessel’s cargo holds on arrival [at] load port to be clean, swept, dried up, free of loose paint/rust scale, free of cargo residues from previous voyage and in every respects ready to load the intended cargo to the satisfaction of shippers’ independent surveyor. Should the vessel fail to pass the hold inspection, Owners to arrange cleaning at their time and expenses. Notice of Readiness to be considered not valid and Master to re-tender Notice of Readiness after Vessel passing inspection and approved by ship’s surveyors."

The vessel's holds were subsequently approved by the NCB at 17:00 and at 18:10 charterers' agents delivered the berthing approval, with documents including the NCB certificate and NOR, to the loading terminal.

However, on 25 August, the US Coast Guard implemented the Maritime Hurricane Contingency Port Plan due to an approaching tropical storm. When the tropical storm struck, it drove the vessel aground.

On 2 September, the laycan expired. Charterers complained that the vessel was not yet ready for cargo on 4 September, before sending a further message on 6 September purporting to declare force majeure because the storm, an Act of God, had water-damaged the cargo.

The vessel was refloated on 15 September and, on 16 September, proceeded to South West Pass for an underwater inspection, which revealed no issues.

On 3 October, charterers informed owners that they considered the NOR tendered on 24 August invalid because (a) the vessel was not an arrived ship, and (b) she was not in all respects ready to load.

On 4 October, upon the vessel's arrival at Port Celeste, owners sent charterers a further copy of the NOR from 24 August. Charterers advised that the NOR was invalid for the reasons they had previously given and purported to cancel the charterparty because the NOR was re-tendered (on 4 October) after the cancelling date.

Owners treated the purported cancellation as a repudiatory breach, which they accepted at 12:30 on 9 October. They redelivered the vessel to head owners on the same day and agreed to forfeit the bunkers remaining on board (equating to US$217,134.10) in settlement of any claims from head owners for early/wrongful redelivery.

Owners commenced proceedings against charterers to recover demurrage, the forfeited bunkers, and their lost profits. Charterers counterclaimed to recover their loss of income on the sale, lost profits on the resale of the substitute cargo, and barge demurrage, on the basis that owners had breached Clause 77 by presenting the vessel without clean holds.

Decision

The Tribunal agreed with charterers that the NOR was invalid. For it to have been valid, the master should have tendered it when the vessel was at the immediate disposal of charterers and could proceed no further. Had there been no berths or river anchorages available, the Tribunal would have considered the vessel an "arrived ship", but when the NOR was in fact tendered, the vessel was continuing to proceed upriver.

Further, the NOR was invalidated by Clause 18(b) and Clause 77, which both required the Master to retender NOR once the holds had been passed by NCB.

However, the invalid NOR was submitted to the loading terminal by charterers' agents, once the holds had been passed for loading, and this constituted acceptance by the charterers of the NOR and a waiver of any right to object.

The Tribunal determined that the first weather working day following the hurricane was 22:00 on 31 August, at which point laytime commenced.

The charterers' force majeure argument was also rejected, with the Tribunal noting that, absent clear wording, the general exceptions clause, on which charterers relied, didn't apply to laytime or demurrage in any event.

Charterers were found to be in repudiatory breach. Demurrage accrued from the expiry of laytime at 15:14 on 5 September until owners accepted the repudiation at 12:30 on 9 October.

Further, charterers' counterclaim was rejected on the basis that Clause 77 was a complete code which set out the consequences of breach (i.e. owners were to clean the holds at their own time and expense). Charterers were not entitled to seek damages in addition to the consequences set out in Clause 77.

Comment

The Tribunal was critical of the apparent "mistaken belief", common amongst masters, that NOR is to be tendered at the first pilot station at the end of a sea passage, which is not correct.

There are a number of ways that owners can protect themselves from the risk of lost demurrage and/or cancellation from an invalid NOR:

  • Always ensure masters are instructed to only issue the NOR when the vessel is an "arrived ship". In this respect, the vessel must have gone as far as it can and be at the immediate disposal of the charterer.
  • Beware of charterparty provisions that invalidate a NOR, such as Clause 77, and ensure that such clauses clearly specify a complete code of consequences of breach (e.g. by providing that owners will remedy the breach at their own cost and time) to avoid spurious claims from charterers following a breach.
  • Ensure the master is aware of any provisions in the charterparty that may invalidate a NOR, and ensure he is instructed to re-tender the NOR once any breach has been remedied. In this case, the Tribunal noted that much of the dispute could have been avoided by better communication between owners and the master, and between charterers and their agents.
  • If a dispute as to the validity of a NOR arises, take care when considering the documents the charterer submits to the loading terminal, as submission of an invalid NOR may amount to acceptance of an invalid NOR and a waiver of any right to object.
  • Clause 18(b) of Norgrain 1989 allows the master to tender NOR from the "usual anchorage outside the limits of the port" if the vessel cannot enter the port in certain circumstances, including if "the first or sole loading/discharging berth or a lay berth or anchorage is not available within the port limits". Owners should consider incorporating a WIBON (whether in berth or not) or a WIPON (whether in port or not) clause into the charterparty. Such clauses transfer the risk of congestion to the charterer, by allowing NOR to be tendered, and laytime to commence, in circumstances where the vessel cannot reach the berth (in a berth charter) or enter the port limits (in a port charter) due to congestion.
  • Owners may seek to include a "reachable on arrival" or "always accessible" clause in the charterparty, which goes beyond a WIBON/WIPON clause, and beyond Clause 18(b) of Norgrain 1989. "Reachable on arrival" requires the charterer to warrant that the Vessel will be able to proceed directly to the berth on arrival. "Always accessible" requires them to warrant that the vessel will be able to both proceed directly to the berth and leave the berth once cargo operations are complete. If the vessel cannot do so (for any reason, including, as with a WIBON/WIPON clause, congestion, but also, for example, bad weather), owners may be entitled to damages for detention of the vessel, and/or if the vessel is an arrived ship, laytime will run and demurrage can begin to accrue.