Shipping - Time bars and demurrage claims – the need for strict compliance

March 2011

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In the recent decision of AET Inc. Limited v Arcadia Petroleum Limited [2010] EWCA Civ 713 (the Eagle Valencia) the Court of Appeal took the opportunity to highlight the difficulties and procedural issues owners may be presented with when attempting to recover demurrage from charterers. With tanker freight rates at historic lows, and with both charterers and owners interested in maximising their economic return from any given transaction, the case serves as a timely reminder that where a charterparty makes clear provision for how demurrage claims are to be submitted to owners, it is essential that such provisions be strictly complied with.

The facts can be stated succinctly. The Eagle Valencia (Vessel) was chartered on a Shellvoy 5 form (Charterparty). For present purposes, demurrage was stated to be “60,000 USD PDPR” and the material sections of Charterparty are as follows:

[13.1.a1] Time at each loading or discharging port shall commence to run six hours after the vessel is in all respects ready to load or discharge and written notice thereof has been tendered by the master or Owners’ agents to Charterers or their agents or the vessel is securely moored at the specified loading or discharging berth whichever first occurs.

[15.3] Owners shall notify Charterers within 60 days after completion of discharge if demurrage has been incurred and any demurrage claim shall be fully and correctly documented, and received by Charterers, within 90 days after completion of discharge. If Owners fail to give notice of or to submit any such claim with documentation, as required herein, within the limits aforesaid, Charterers’ liability for such demurrage shall be extinguished.

[22.1] If Owners fail

  • to obtain Customs clearance; and/or
  • free pratique; and/or
  • to have onboard all papers/certificates required to perform this Charter,

either within the six hours after Notice of Readiness originally tendered or when time would otherwise normally commence under this Charter, then the Original Notice of Readiness shall not be valid.

[22.2] A Notice of Readiness may only be tendered when Customs clearance and/or free pratique has been granted and/or all papers/certificates required are in order in accordance with relevant authorities requirements.

[22.5] The presentation of the notice of readiness and the commencement of laytime shall not be invalid where the authorities do not grant free pratique or customs clearance at the anchorage or other place but clear the vessel when she berths.

The Vessel arrived at Escravos, the second load port, and tendered Notice of Readiness (NOR) at 11.48 on 15 January 2007. Free pratique was granted by the port health authority at 08.30 the following morning. That afternoon the master sent charterers and others two e-mails stating that, without prejudice to the NOR tendered on 15 January, the Eagle Valencia had arrived, is ready in all respects to load and that free pratique had been granted. Three days later, on 19 January, the Vessel departed the anchorage and proceeded to the berth where she duly commenced loading. Loading was completed on 21 January and the Vessel departed Escravos on the same day.

Owners contended that laytime began six hours after the original notice of readiness was tendered, relying on clause 22.5 of the Charterparty. Shortly before the hearing owners also claimed in the alternative that the e-mails sent after free pratique had been granted amounted to giving fresh notice of readiness. Whilst the primary case had been properly notified to charterers, together with all supporting documentation within the 60 day time limit, the alternative, and lesser value demurrage claim, had not been properly notified or documented.

Charterers disagreed and contended that laytime did not begin until the Vessel had berthed since the original NOR was invalidated by clause 22 as free pratique was not obtained within six hours. Further, charterers contended that in any event owners could not place reliance on the alternative claim because no such claim based on the e-mails of 16 January had been submitted within 90 days as required by clause 15.3.

In allowing the appeal, the Court found that the whole scheme of clause 22 in relation to free pratique is to implement a different arrangement from the position as it was under clause 13. To find otherwise would render there being no point in having a special additional clause, in the form of clause 22, at all. In essence, there was nothing in clause 13 which prevented a NOR being tendered in the absence of free pratique – effectively a practice mirroring the position at common law. Nonetheless, clause 22 provided that clause 13 would continue to be applicable if free pratique was granted within six hours of the tender of NOR; if however it was not granted within six hours of the NOR being tendered then the original NOR would not be valid. This would not prevent an owner from tendering a fresh NOR once free pratique has been granted (see clause 22.2) and time will then run after six hours from the tender of this fresh notice. It necessarily follows that up to this point time, costs and expense will be for owners’ account.

The Court also held that there was no legal requirement for a NOR to be in any prescribed form. Save for contractual requirements to the contrary, the NOR merely has to be a statement that a vessel is ready, in the premises, to load or discharge and that it must be accurate in stating that the vessel is so ready.

In the e-mail correspondence of 16 January the master was stating that the vessel was ready to load and as such that correspondence constituted a fresh NOR. Reliance by owners on that notice was, however, barred as clause 15.3 of the Charterparty required any demurrage claim to be fully and correctly documented, and received by charterers, within 90 days after completion of discharge. The Court held that the NOR was an essential document in support of every demurrage claim and that in the absence of submission of the NOR, a claim cannot be said to be fully and accurately documented within the wording of clause 15(3). It followed that owners’ alternative claim for demurrage had been extinguished.

A clause (in the form of clause 15.3) which provides that claims must be brought within a defined time limit, failing which charterers would be released from all liability to owners, is an exclusion clause. Exclusion clauses must be clear and have been subject to special scrutiny by the courts. The usual practice by the courts to the interpretation of exclusion clauses is to apply the contra proferentem approach to their interpretation: that is the wrongdoer bears the burden of proof with any doubt or ambiguity being resolved in favour of the innocent party. In shipping cases, however, the courts have permitted a firm stance in favour of charterers seeking to rely on the exclusions available to them.

In the matter of Babanaft International Co SA v Abant Petroleum Inc (the Oltenia) [1982] 1 Lloyds Rep 448 the Court held:

The commercial intention was to ensure that claims were made by the owners within a short period of final discharge so that claims could be investigated and if possible resolved while the facts were still fresh. This could only be achieved if the charterers were put in possession of all the factual material which they required in order to satisfy themselves whether the claim was well founded or not. The expression “all supporting documents” did not debar owners from making factual corrections to claims presented in time nor from putting a different legal label on a claim previously presented.

Similarly, in Waterfront Shipping Company Limited v Trafigura AG (The Sabrewing) [2008] 1 Lloyd’s Rep. 286, which concerned a time bar clause, the court stressed that strict compliance with a time bar clause was necessary.

In light of the court’s approach, the question then becomes: what should a prudent owner do to ensure that an alternative case is not struck out by a time bar? One answer to this question is found in the judgment of the Eagle Valencia itself, where the Court stated:

That is not necessarily to say that alternative laytime statements and invoices would always have to be submitted to avoid the extinction of an alternative claim but merely to say that the documents to be submitted pursuant to the clause must include a valid notice of readiness. It is not unreasonable for charterers to require such a notice nor is it unreasonable to expect owners to supply it.

It necessarily follows that owners, in addition to following the good practice of always tendering NOR’s without prejudice to the validity of earlier tendered NOR’s, should submit to charterers all NOR’s tendered together with all alternative case supporting documents to ensure that their claim is fully and accurately presented. It is suggested that the same considerations apply equally to claims for deviation and detention. To submit anything less in the circumstances may leave an owner exposed at their own peril.