UK: Destruction By Fire Not Covered By "Mechanical Breakdown" Clause

Last Updated: 21 November 2012
Article by Marcia Perucca and Elizabeth Turnbull

In ED&F Man Sugar Ltd v Unicargo Transportgesellschaft MBH [2012], the Commercial Court held that a charterer could not rely on a clause which excluded from laytime time lost due to delays in loading, caused by "mechanical breakdowns at mechanical loading plants", where the loading system had been completely destroyed by a fire.

This was an appeal under s.69 of the Arbitration Act 1996 against an arbitration award. The underlying claim was brought by Unicargo ("Owners"), the Owners of the mv "LADYTRAMP" (the "Vessel"), against ED&F Man ("Charterers") for demurrage during a period when the Vessel was at Paranagua, Brazil, waiting to load a cargo of sugar.

The facts were as follows: on the date of the fixture (9 June 2010), the Charterers declared Paranagua as the loading port. On 4 June 2010, one week before the Vessel arrived at the loadport, local agents advised that a fire had occurred at the terminal they had initially scheduled the Vessel to load. The fire had destroyed the conveyor-belt system linking the terminal to the warehouse. On 15 June, the agents advised the parties that they were instructed to change the Vessel's berthing programme to another terminal. The Vessel arrived on 20 June 2010. In the absence of an available berth, the Vessel remained off the port until 14 July, when she entered the inner roads of the port awaiting berthing instructions. The Charterers could not get sugar to the second, alternative, terminal and a third one was instead used in the end. Loading commenced on 18 July 2010 and was completed on 20 July 2010.

For the purposes of the appeal, the most relevant terms of the charterparty (on the "Sugar Charter Party 1999" form) were as follows:

"Clause 3:...the said vessel...shall...sail and proceed to 1-2 safe berth(s), 1 safe port (intention Santos) but not south of Paranagua..."

"Clause 28 : In the event that whilst at or off the loading place...the loading... of the vessel is prevented or delayed by any of the following occurrences: strikes, riots, civil commotions, lock outs of men, accidents and/or breakdowns on railways, stoppages on railway and/or river and/or canal by ice or frost mechanical breakdowns at mechanical loading plants, government interferences, vessel being inoperative or rendered inoperative due to the terms and conditions of appointment of the Officers and crew time so lost shall not count as laytime."

The Owners claimed demurrage, and the Charterers tried to rely on Clause 28, saying that the destruction of the conveyor-belt system was covered by "mechanical breakdowns at mechanical loading plants."

The Tribunal's decision

The Tribunal found that the Owners were entitled to demurrage. The Tribunal's main conclusions, against which the Charterers sought to appeal, were:

  1. When the terminal intended to be used by Charterers became unusable due to the fire, the Charterers were still under an obligation to nominate "1-2 safe berths". The Owners could only rely on Clause 28 if the terminal affected by the fire had been "named" in the charterparty so as to render the Charterers unable to nominate an alternative berth ("the safe berth point")
  2. In any event, Clause 28 made no mention of "fires" as an excepted peril and "in common sense terms", the inoperability of the conveyor belt appeared to have been the result of the physical damage due to the fire rather than any mechanical breakdown ("the fire and mechanical breakdown point")
  3. The decision of the Port Authority of Paranagua to re-schedule loading and discharging in the light of the fire was not "government interferences". This term in Clause 28 related to such things as embargoes and export bans and not simple administrative decisions ("the government interference point")

The Commercial Court decision

Although the Court disagreed with the Tribunal in relation to "the safe berth point", it agreed with the Tribunal's decisions in relation to the other two points and the appeal was, therefore, dismissed. The Court's conclusions were as follows:

  1. In relation to "the safe berth point", the Court concluded that the Tribunal had looked at this the wrong way. This was not a case about berth nomination but about whether there was prevention or delay in loading caused by a relevant excepted peril. The Tribunal's view that the Clause 28 exceptions could only apply if the terminal affected by the fire had been "named" in the charterparty was, as a matter of law, incorrect. The Court relied on Reardon Smith v Ministry of Agriculture (The Vancouver Strikes Cases) [1963], to say that the Charterers would have been entitled to require the Vessel to wait until the terminal affected by the fire was again usable and the only question would have been whether there was "prevention or delay" caused by one of the relevant provisions of Clause 28. The fact that a party can make alternative arrangements (such as in this case re-directing the Vessel to another terminal) does not mean that the excepted peril cannot in law cause delay
  2. Most of the Court's judgment was focused on "the fire and mechanical breakdown point". The Charterers argued that the Tribunal's view was contrary to the reasoning of the Court of Appeal in The "AFRAPEARL" [2004], where it was held that the cause of the breakdown is immaterial and that there is a breakdown if the equipment does not function or if it malfunctions. The Court rejected Charterers' argument because: (i) as a matter of ordinary language and common sense, the destruction of an item is not within the scope of the term "breakdown", still less within the term "mechanical breakdown"

(ii) this view was supported by The "THANASSIS A" [1982, unreported], in which it was held that the complete destruction of a facility involved something more than a breakdown

(iii) although another part of the judgment in The "THANASSIS A" appeared to support Charterers' argument that the cause of the malfunction was to be regarded as irrelevant, the conclusion in that case turned on the particular wording of the clause under consideration, which referred to "breakdown of machinery and equipment". Had the judge been considering only a clause encompassing "breakdown of machinery", he would have applied the "colloquial" meaning to which he referred, namely some inherent defect of the machinery which resulted in the item breaking down. It was only the inclusion of the words "and equipment" which compelled a different and broader construction. In addition, the inclusion of the word "mechanical" served to restrict the scope of the "breakdown" which must be established for the purposes of the exception, rendering the nature of the breakdown relevant

(iv) Clause 28 made reference to "accidents and/or breakdown on railways". The inclusion of the word "accidents" is intended to broaden the scope of that exception to railways, but there is no similar word in relation to mechanical loading plants. Likewise, Clause 6 provided expressly for an exception in respect of "fire on board, in hulk or craft, or on shore". Clause 28, however, contains no reference to fire

(v) although the Court's decision rested on the basis that the words should be read naturally according to their wording and not be over-restrictive, if necessary, the Owners could properly rely upon the contra proferentem principle, which establishes that, when there is doubt, the words will be construed against the party relying on them.

3. In relation to "the government interference point", the Court said that the Charterers' argument had to fail because there was no finding in the award that the port authority at Paranagua was a government entity and no finding that permission to berth was suspended. In addition, the Court agreed with the Tribunal that the phrase "government interferences" was not intended to encompass "an administrative re-scheduling of cargoes due to a fire". What was required was an act by a port authority (which was also a government entity) which amounted to the discharge of a sovereign function and which was different from an administrative act of which any port authority would be capable in the day-to-day management of a berth. There was no such act in the present case

Comment:

The case highlights the level of scrutiny that the courts are prepared to take when looking at exception clauses. Clauses apparently similarly drafted will not necessarily lead to the same conclusion. Here, the Court placed considerable importance on the presence of the word "mechanical" before breakdown to reach the conclusion that the nature of the breakdown was therefore relevant, unlike in previous cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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