Factual and Procedural Background
This appeal arises from an arbitration award dated 14 December 2010 made by three LMAA arbitrators concerning the risk of pirate attacks on merchant vessels transiting the Gulf of Aden. The dispute involves the construction and application of the CONWARTIME 1993 clause incorporated into a time charterparty for the vessel "Triton Lark," a bulk carrier chartered by the Plaintiff ("Pacific") from the Defendant ("Bulkhandling"), the disponent owner.
Pacific instructed the vessel to carry a cargo of potash from Hamburg to China via the Suez Canal and the Gulf of Aden. Bulkhandling refused to comply with the routing through the Gulf of Aden due to piracy risks and instead ordered the vessel to proceed via the Cape of Good Hope, incurring additional costs of US$462,221.40. The arbitrators held that Pacific, as charterer, should bear these extra costs. Pacific challenged this decision on legal grounds.
The arbitration also involved a chain of charters, with the head owners chartering to an intermediate charterer, who then chartered to Bulkhandling, who in turn chartered to Pacific. The relevant charter incorporated the CONWARTIME 1993 clause, which defines war risks broadly, including piracy, and sets out the rights and obligations of owners and charterers regarding routing in dangerous areas.
The arbitration tribunal found that the risk of piracy was objectively serious and that Bulkhandling acted reasonably and in good faith in refusing to transit the Gulf of Aden. The tribunal ruled that Bulkhandling was entitled to deviate via the Cape of Good Hope and awarded them the additional costs incurred. Pacific appealed on several points of law regarding the interpretation and application of the CONWARTIME 1993 clause.
Legal Issues Presented
- The proper construction of the phrase "may be, or are likely to be, exposed to War Risks" in sub-clause (2) of CONWARTIME 1993, particularly concerning the degree of risk required to justify refusal to proceed.
- Whether the Owners' (Bulkhandling's) judgment regarding the risk was reasonable and properly formed.
- Whether the Owners had a duty to make reasonable enquiries before exercising their discretion under the clause.
- Whether Bulkhandling was entitled to order the vessel to proceed via the Cape of Good Hope, and whether such deviation was lawful under the charter and clause 75.
Arguments of the Parties
Appellant's (Pacific) Arguments
- The arbitrators erred in law by adopting an incorrect interpretation of the phrase "may be, or are likely to be, exposed to War Risks," arguing for too high a threshold of risk.
- The Owners' judgment was not reasonable or properly informed, as they had made insufficient enquiries.
- The Owners were not entitled to deviate via the Cape of Good Hope and should have awaited proper orders at Gibraltar.
- The phrase "may be" and "likely to be" should be distinguished temporally, with "may be" referring to present exposure and "likely to be" to future exposure.
Respondent's (Bulkhandling) Arguments
- The phrase "may be, or are likely to be, exposed to War Risks" connotes a serious or real risk, sufficient to justify refusal to proceed through dangerous areas.
- The Owners' judgment was reasonable, made in good faith, and based on sufficient information and evidence.
- The deviation via the Cape of Good Hope was not a breach or deviation but a lawful exercise of the Owners' rights under CONWARTIME 1993 and the duty to proceed with due despatch to the destination.
- The arbitrators correctly applied the law and commercial realities in upholding the deviation and awarding costs.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Socimer International Bank v Standard Bank [2008] 1 Lloyd's Rep 558 |
Implied terms regarding the exercise of contractual discretion honestly, rationally, and after enquiries. |
Considered but not applied as the court found the express clause requiring reasonable judgment obviated the need for implication. |
| The Product Star (No.2) [1993] 1 Lloyd's Rep. 397 |
Standards for implied terms on discretion and reasonableness in contractual powers. |
Referenced in argument but not directly applied due to express contractual language. |
| Government of Spain v North of England SS Co (1938) 61 Ll.L.Rep. 44 |
Standards for implied terms on discretion and reasonableness. |
Referenced in argument; court relied on express clause instead. |
| The Hill Harmony [2001] 1 Lloyd's Rep. 144 |
Charterer's key right to give employment directions and the need for clear limits on that right. |
Used to emphasize that limitations on charterer’s rights must be clear and that CONWARTIME 1993 clause is to be strictly construed. |
| The Heron II [1969] 1 AC 350 |
Interpretation of likelihood and probability in contract law. |
Used to clarify the meaning of "likely" as including less than a 50% chance but requiring a real likelihood. |
Court's Reasoning and Analysis
The court carefully analyzed the wording of sub-clause (2) of CONWARTIME 1993, focusing on the phrase "may be, or are likely to be, exposed to War Risks." It rejected a dual standard interpretation and held that the phrase should be understood as expressing a single standard of risk, best captured by the concept of a "real likelihood" or "real danger" of exposure to piracy. This standard is less than "more likely than not" but more than a bare possibility, requiring an objectively reasonable judgment based on evidence.
The court noted the importance of the charterer's right to direct employment of the vessel, emphasizing that any restriction must be clearly expressed and reasonably construed to enable the master to protect the vessel, crew, and cargo from harm.
The arbitrators had adopted a "serious risk" standard, which the court found not entirely wrong in principle but applied incorrectly, conflating the seriousness of the risk with the likelihood of its occurrence. This misapplication constituted an error of law.
Regarding the reasonableness of the Owners' judgment, the court held that the arbitrators' conclusion was premised on the wrong legal test. Thus, the finding that the judgment was reasonable was also legally flawed.
On the question of whether there was a duty to make reasonable enquiries before exercising the discretion, the court held that the express requirement of a "reasonable judgment" in the clause made the implication of additional terms unnecessary. The Owner's judgment must be made in good faith and objectively reasonable, but failure to make all possible enquiries does not automatically render the judgment unreasonable if it was objectively reasonable in the circumstances.
Concerning the deviation via the Cape of Good Hope, the court upheld the arbitrators' conclusion that this was not a deviation. The unlawful part of the charterers' order was only the route via the Gulf of Aden, not the ultimate destination. The Owners' refusal to comply with the unlawful route and their decision to proceed via the Cape was consistent with their duty to prosecute the voyage with due despatch and was permitted by sub-clause (8) of CONWARTIME 1993.
The court recognized that it could not reassess facts on appeal and that the arbitrators had evidence on the risk and mitigation measures. It indicated that the award should be remitted to the arbitrators to reconsider the question of whether there was a "real likelihood" of exposure to acts of piracy applying the correct legal test.
Holding and Implications
The court found that the arbitrators erred in law in their interpretation of the CONWARTIME 1993 clause, specifically concerning the risk threshold for refusing to proceed through dangerous waters and the reasonableness of the Owners' judgment. However, the court did not overturn the entire award but indicated that the matter should be reconsidered by the arbitrators applying the correct legal standard.
The appeal is allowed in part, and the award is to be remitted to the arbitrators for reconsideration in light of the court's legal findings.
This decision means the arbitrators must reassess whether, on the evidence, Bulkhandling reasonably judged that there was a real likelihood of exposure to piracy, applying the proper legal test. No new precedent was set beyond clarifying the interpretation of the relevant clause and the standards for reasonableness and deviation under the charterparty.