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Implied obligation to re-inspect without delay

In the Pan Ocean Co Ltd v. Daelim Corporation (DL Lilac) [2023] EWHC 391 (Comm) charterparty dispute, the arbitral tribunal found that the charterer was in breach of an implied obligation to have the holds re-inspected without delay after a failed inspection and they were not, therefore, entitled to claim the vessel was off-hire for any of the 12 days between the Master calling for reinspection and when the reinspection eventually took place.

On appeal, the Court found that the tribunal should not have found that the vessel was immediately back on-hire as soon as the Master gave notification that the hold cleaning had been completed. Rather, it should have considered when the reinspection would have taken place if both parties had exercised reasonable diligence to ensure it took place without delay.

The parties entered into a trip time charterparty on an amended NYPE 1993 form for the carriage of urea in bulk.

Clause 69 was the BIMCO Hold Cleaning/Residue Disposal for Time Charter Parties clause, which states: “Vessel’s holds on delivery or on arrival 1st load port to be clean swept/washed down by fresh water and dried so as to receive Charterers intention cargoes in all respects free of salt, rust scale and previous cargo residue to the satisfaction of the independent surveyor.

“If vessel fails to pass any holds inspection the vessel to be placed off-hire until the vessel passes the same inspection and any expense/time incurred thereby for Owners’ account.”

The vessel arrived at Jubail on February 13, 2017 and the hold inspection took place on February 16, 2017. It failed the inspection due to the presence of rust, paint flakes and cargo residue in the holds. On February 19, 2017, the Master notified the charterer’s agents that the vessel had been cleaned and requested reinspection. The vessel had been ordered off-berth that day and the reinspection was only carried out when it reberthed 12 days later, on March 4, 2017. The charterer claimed the vessel was off-hire during that entire period. The owner disagreed and also contended that the delay was in fact due to the cargo not being ready to load.

Arbitration outcome

In arbitration, the tribunal agreed with the owner that it should be an implied term of the charterparty that once the Master called for reinspection, the charterer was obliged to have the vessel reinspected without delay. Keeping the vessel at anchor for 12 days was unreasonable. As the charterparty did not provide for such a situation, without such an obligation the charterer would not be obliged to keep any delay to a minimum and to re-berth as soon as possible. The owner’s claim succeeded in full.

The Court found that the tribunal had applied the right test for implying a term as set out by the Supreme Court in Marks & Spencer plc v. BNP Paribas [2016] AC 742. It involves determining, objectively, whether the term to be implied is necessary to give business efficacy to the contract or is so obvious that it goes without saying that it should be included in the contract. The charterer contended that the tribunal’s reference to the implied term being “reasonable” meant that it had applied the wrong test because reasonableness was not of itself sufficient. However, the Court thought that if the award was read as a whole, it was clear that the tribunal did in fact apply the right test notwithstanding the reference to reasonableness.

Implied term disagreement

The Court also disagreed with the charterer that the tribunal’s findings meant that the implied term placed a strict obligation on the charterer alone in circumstances where they needed the owner’s co-operation. There was no dispute that the charterparty required the owner to agree to the appointment of an independent surveyor, the owner had indicated that they would readily have done so and the tribunal found on the evidence that there was nothing left for the owner to do and the onus was on the charterer to arrange for the reinspection with reasonable diligence. The Court detected no error on the tribunal’s part.

However, it was common ground that the tribunal was wrong to find that the charterer was in breach of the implied obligation from the time when the Master called for a reinspection. The implied term required reasonable diligence to have the vessel reinspected without undue delay, but did not oblige an immediate reinspection upon the Master’s notification.

Consequently, the tribunal should not have held that the vessel was immediately back on hire once the Master called for reinspection. This would contradict both clause 69 of the charterparty as well as the implied term found by the tribunal. Instead, the tribunal should have determined by when the reinspection should have taken place if both parties had exercised reasonable diligence to have the vessel reinspected without undue delay. The vessel would be back on hire at that date. The issue was remitted back to the tribunal for its reconsideration in light of the Court’s decision.

The Court emphasised that arbitral awards should be read in a commercial and reasonable manner and as a whole. Where possible, the Court will strive to uphold an award.

In this case, a fair reading of the award led to the conclusion that the experienced tribunal had applied the correct test for implying a contractual term even though the finding on breach of that term required reconsideration.
Source: Baltic Exchange

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