Passing Costs Liability Down A Charterparty Chain
Occidental Chartering Inc v. Progress Bulk Carriers Ltd (The Chada Naree) [2012] EWHC 3515 (Comm)
The judgment in this case deals with the recoverability of the costs of an arbitration as damages in a series of arbitration references, notwithstanding the absence of an arbitration reference for one of the links in the charterparty chain. The Commercial Court, on appeal from an arbitration award, held that where there was a claim being passed down through a chain of charterparties and there was a break in the arbitration references, this would not necessarily prevent the liability from being passed on through the chain. The decision is significant because of the frequency with which charterparty chain disputes arise in maritime arbitration.
The background facts
The vessel, Chada Naree, was the subject of a string of charterparties. Precious Garnets Ltd ("PG") were the registered owners and they time-chartered her to Occidental Services Corporation ("OSC"). OSC re-let her to a company within its corporate group, Occidental Chartering Inc ("OCI") and OCI time-chartered her on to Progress Bulk Carriers ("PBC"). Finally, PBC voyage chartered the vessel to CNAN. All of the charters were on materially identical terms.
PG commenced arbitration against OSC claiming damages for breach of the safe port warranty. This claim was passed down the charterparty chain and this gave rise to the following three arbitrations, in which the same tribunal was appointed for each case:
- Under the head charter between PG and OSC;
- Under the time charter between OCI and PBC; and
- Under the voyage charter between PBC and CNAN.
There was no arbitration reference in relation to the internal re-let between OSC and OCI, the two being related companies. However, there was an agreement for an extension of time to preserve rights between the two.
The arbitration awards
In June 2010, the tribunal issued their first award in all three references, finding that there was a breach of the safe port warranty in all of the charters in the string and that damages were recoverable from the respondent in each of the references. In this award, they referred to "Disponent Owners" and no distinction was drawn between the two Occidental companies.
The disponent owners also claimed as damages their own liability for costs in the arbitration with the registered owners, PG. When making their award, the tribunal reserved jurisdiction to deal with the disponent owners' claim for their costs.
Subsequently, an amending award was handed down to address a number of errors in the first award. At that stage, and for the first time since the dispute arose, PBC submitted that OCI was not a party to an arbitration with the registered owners and it had not therefore incurred any liability for costs that could be passed on as a claim for damages to PBC.
As a result of these further submissions, the tribunal then published a second award and held that OCI were not entitled to recover, as damages, the costs incurred in the head arbitration between OSC and PG as it was impossible to show that OCI had sustained a loss. Their reason for reaching this conclusion was that "this gap in the chain of references seemed to us to be fatal to OCI's claim for costs as damages. If the loss had not been suffered by the party claiming it in the arbitration over which we had jurisdiction, then that seemed to us to be the end to the matter."
The Commercial Court decision
OCI were granted permission to appeal this second award to the Commercial Court under s.69 of the Arbitration Act 1996 and the matter was then considered by Mr Justice Teare. The key issue before the court was the ability of a party to recover, as damages, sums for which it had not been liable to pay to a third party.
The Judge found that, in reaching its decision, the tribunal had overlooked the background to the award and, in particular, that any sensible reading of the first award shows that the two Occidental companies were treated as one and the same for the purpose of passing liability down through the charter chain.
The Judge also considered that there was an inconsistency in the tribunal's reasoning. The claim made by PG against OSC was a claim for damages based upon the breach of the safe port warranty and the arbitrators found that this claim could be passed down through the charterparty chain to CNAN, the ultimate voyage charterer, despite the break in the arbitration references. If the arbitrators had not found that liability flowed down the chain from OSC to OCI, OCI would have been unable to recover from PBC in respect of the substantive losses. The same breach of the safe warranty obligations also gave rise to a claim for the costs to be recovered as damages and, according to Mr Justice Teare, there was no difference in the nature of those two heads of damages (i.e. substantive losses and costs).
The Judge therefore allowed the appeal and concluded that OCI could recover the costs incurred by OSC in the head arbitration from PBC.
Comment
One of the key points that was taken into consideration by the Judge was the background and the fact that the parties had treated the two Occidental companies as being one and the same and that no point had been made in relation to the break in the chain of arbitrations until after publication of the first award.
Contract chain disputes, which arise on a frequent basis in the maritime sector, can be problematic because the tribunal cannot make costs orders against third parties, and the costs must therefore be claimed down the chain as an indemnity or damages. However, this judgment suggests that technical arguments will not be allowed to prevent liability for costs flowing up and down a chain of contracts as long as a breach is established.
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