UK: Could Owners Be Liable For Conversion By Retaining Bunkers On Board The Vessel After Withdrawal?

Last Updated: 2 July 2013
Article by Fionna Gavin and Murphy Mok

Daebo Shipping Co Ltd v. The Ship GO STAR [2012] FCAFC 156

The Federal Court of Australia recently considered whether, as a matter of English law, Head Owners could be liable to Disponent Owners for conversion or detinue as a result of retaining bunkers on board the vessel after lawful withdrawal from the head charter. The Court also dealt with a claim for interference with Disponent Owners' contractual relations, arising from various notices sent by Head Owners to the Charterers at the end of the chain.

The background facts

The vessel was chartered under a string of time charters on the 1981 NYPE form in the following charterparty chain: SA - BMS - Bluefield - Daebo - Nanyuan.

All charters were on substantially back-to-back terms, with English law to apply and Clause 31 reading:

 "31. Charterers to take over and pay together with first hire payment bunkers upon vessel's delivery. ... On redelivery bunkers same quantities and same price both end."

Daebo chartered the vessel to Nanyuan in December 2008, with delivery on 3 January 2009. The vessel sailed to the loading port between 3 - 8 January 2009. By that time, BMS had defaulted in hire payment under the head charter. Given this, SA informed Nanyuan of their intention to withdraw the vessel and advised Nanyuan "not to pay any sum as [they] may be called upon to pay twice over such sum".

Nanyuan accordingly withheld payment of the first hire sum and the value of bunkers on board, which had become due under the sub-charter. They also purported to cancel or withdraw from the sub-charter, arguing that SA's threat to exercise a lien on sub-hire meant the vessel was not lawfully ready in all respects at the time of delivery and, therefore, was never lawfully delivered.

Shortly thereafter, SA withdrew the vessel under the head charter. Daebo demanded redelivery of the bunkers on board the vessel (for which they had not been paid by Nanyuan), but SA refused.

 Daebo commenced proceedings against SA for:

  1. Damages in conversion and detinue in respect of the vessel's bunkers; and
  2. Damages in respect of the payments withheld by Nanyuan, on the basis that SA had unlawfully interfered with the performance of the sub-charter.

At first instance, the primary Judge dismissed Daebo's action on both counts. Daebo appealed.

The Federal Court of Australia decision

(1) Claim for conversion and detinue

The Judges on appeal upheld the primary Judge's decision that Daebo had no claim for conversion or detinue since they had no title in the bunkers at the time of the alleged conversion.

In reaching this decision, the Judges set out the position under English law regarding NYPE and similar forms of charter that, on delivery of the vessel, property in the bunkers passes to the charterers together with the obligation to pay for bunkers. Delivery occurs when owners place the vessel at charterers' disposal.

This position was found to be consistent with the operation of Clause 31 in the sub-charter, which required Nanyuan to "take over and pay together with first hire payment bunkers upon vessel's delivery". The Court found that once the vessel was delivered by Daebo to Nanyuan, Nanyuan did not have to perform any particular act to "take over" the bunkers under Clause 31. Neither could Nanyuan assert that they had not taken over the vessel and its bunkers by then.

The Court also dismissed Daebo's argument that property in the bunkers did not pass since Nanyuan did not pay for the bunkers within three banking days of delivery as required under the recap. Such clause, in the Court's view, merely reflected a commercial allocation of risk for any non-payment that fell on Daebo; it did not delay the passing of property in the bunkers under Clause 31 until the bunkers were paid.

Accordingly, Nanyuan obtained title to the bunkers upon the vessel's delivery on 3 January 2009, and Daebo's appeal on this issue was dismissed.

(2) Claim for interference with Disponent Owners' contractual rights

The Court reversed the primary Judge's finding on this point and held that SA unlawfully interfered with Daebo's contractual rights under the sub-charter by urging Nanyuan not to pay the sums owing under that charter.

In the Court's reasoning, the first question to be decided was where, as a matter of fact, the relevant communications took place. The Court found that SA communicated with Nanyuan's agents in both China and Singapore, but it was the latter instance that was relevant to this issue. As such, the law of China did not apply. Furthermore, in the absence of proof by SA that the laws of Singapore and Australia differed in respect of interference with contractual relations, the Court applied the latter in default of the law of some other place.

Applying Australian law to the facts, the Court found SA's conduct in urging Nanyuan to refrain from making payments constituted unlawful interference with Daebo's rights under the sub-charter. The Court was satisfied that SA had the necessary intention to, and did, induce the breach of the sub-charter whilst knowing that such a breach would interfere with Daebo's contractual rights. To this end, the Court highlighted two points:

  1. SA had no claim to a lien over payment for bunkers under the sub-charter, which was not in the nature of freight or hire but a debt due on a sale of property; and
  2. SA did not assert any lien directly by requiring Nanyuan to pay hire. The statement to "not to pay any sum" did not amount to a notice of exercise of any lien that SA had.

Given this, the Court allowed the appeal on this issue and Daebo were entitled to recover damages in the sum covering unpaid hire and unpaid value of the bunkers at the rates under the sub-charter, plus interest.

Comment

The case is a useful reminder that when contracting on standard NYPE and similar forms, the property in bunkers on board will pass to charterers at the time of the vessel's delivery, but will not pass back to owners if the vessel is withdrawn rather than redelivered. Owners, therefore, risk claims from third party owners of bunkers after withdrawal unless the charter provides for property in the bunkers to revert to owners in this event.

Whilst the Charterers succeeded in recovering both for bunkers and unpaid hire in this case, the decision also highlights the risk that, if a vessel is withdrawn under a head charter, where charterers lower down the chain do not themselves have title to the bunkers (despite having paid for them), they may be unable to recover the bunker costs from owners. Given the growing use in time trip charters of provisions entitling charterers to pay for bunkers consumed at the end of the voyage, it is important for disponent owners to ensure they are adequately protected in this situation.

Finally, although the facts of this case are unusual, they illustrate that head owners should exercise caution in drafting communications to sub-charterers.

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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