Trends in shipping case law

Two noteworthy shipping cases heard during 2017 have placed contractual interpretation under the spotlight. This year, we have seen the English Courts adopting a literal interpretation of contractual provisions¹, with a noticeable shift away from arguments around commercial common sense that, until recently, have been readily argued by parties to litigation following the 2011 Supreme Court decision in Rainy Sky².

The Supreme Court has emphasised that in any case where it is interpreting a contract, it must balance the indications given by the language and the commercial implications of competing constructions. Where the language used in the contract is clear and unambiguous, the Court will seek to give the words used their ordinary meaning. The Court will bear in mind that one party might simply have made a bad bargain and a construction of a contract which might appear uncommercial, is not necessarily incorrect where the language used is clear.

This case involved a dispute regarding the question of what level of demurrage was payable by the charterer. The issue for the Court's determination was whether the owner was entitled to claim demurrage at an escalated rate over 64.708 days during which the ship was waiting to discharge cargo at Rotterdam. The owner, relying on its interpretation of additional clause 11 of the charterparty, contended that the ship was to be considered as being used for floating storage if stopped for more than five days and, in those circumstances, the charterer was obliged to pay demurrage at the escalated rate. The charterer, on the other hand, argued that clause 11 was not applicable, because no instruction to stop and wait was ever given. The owner argued that it did not make any commercial sense if the charterer could avoid demurrage at the escalating rate by not giving a stop and wait order, as indicated in the charterparty.

Unfortunately for the owner, the Court adopted a literal interpretation of the charterparty and rejected the owner’s arguments. The Court held that the contract clearly provides that the escalating demurrage rate only applies where there is a stop and wait order given to the ship and this must be given effect to. In the present case, no stop and wait order was given - the charterer simply delayed giving berthing instructions. The judge did not accept that a passive failure to give orders fell within the meaning of the words used in the charterparty.

The Court's reasoning shows that arguments about following commercial common sense or that it must be obvious how the contract was intended to work, will not always succeed. The case also highlights the importance of clear drafting, particularly where the parties are using a fixture recap and previously drafted terms, which may not have been recently reviewed or amended.

In June of this year, the Court of Appeal issued its judgment in this case, known as the MSC Eugenia case. In its decision, the Court cautioned carriers about the risks of using technological shortcuts without first reflecting this in their contracts.

Between January 2011 and June 2012, Glencore shipped 70 consignments of cobalt briquettes with MSC, to be delivered to Antwerp. On the 70th consignment, two out of three of the containers had gone missing. The containers had been stolen by third parties who had somehow managed to penetrate the release procedures. Glencore were successful in their claim against MSC for misdelivery and MSC appealed to the Court of Appeal.

The bill of lading contract provided that “one original bill of lading must be surrendered by the Merchant to the Carrier….in exchange for the goods or Delivery Order”.

The port of Antwerp operates an Electronic Release System (ERS) pursuant to which a PIN code is used to secure the release of goods from the terminal. One of the issues which the Court had to consider was whether provision of the PIN codes, in exchange for the bill of lading, constituted symbolic delivery of the goods, or alternatively, whether provision of the PIN was provision of a “Delivery Order” under the contract and was therefore sufficient.

The Court rejected both of these arguments. On the question of the meaning of the term “Delivery Order”, the Court held that in this context it must be understood to mean a ‘ship’s delivery order’ as defined in section 1(4) of the Carriage of Goods by Sea Act 1992. As a consequence, the delivery order should have the key attribute of a bill of lading, namely a contractual promise by the carrier to deliver goods to the person identified in the order. The release note provided by MSC, which contained the PIN codes, did not satisfy this test.

The decision serves as an important reminder to carriers that if they use the ERS, they must still comply with their delivery obligations under the bill of lading contracts. It is up to the carrier to ensure that the delivery procedure that they are using meets their contractual requirements, or otherwise to take steps to update their agreements to reflect developing practices.

On 31 January 2018, Emma Burrage and Elizabeth McArthur will host a webinar on a number of recent shipping cases. In this article, we touch upon the key themes arising from two of those cases – find out more by signing up to the webinar.