Kyla Shipping Company Ltd v Bunge S.A.

The question for the court is whether the applicants can challenge Flaux J’s refusal of permission to appeal from his own decision on a question of law arrising from an arbitration award of Mr Simon Rainey QC.

The award was made pursuant to an arbitration clause in a charterparty on the New York Produce Echange Form with an additional clause 41 containing a continuing warranty that the Owners would ensure that the vessel was covered by insurance throughout the currency of the Charterparty; the clause set out the type of insurance, the limit of indemnity and the markets providing cover. The limit of indemnity in respect of hull and machinery cover was stated as being US$16 million.

On 4^th May 2009, while docked at a port in Brazil, the vessel was struck by another ship and considerable damage was caused. On 3^rd July 2009, the Owners tendered notice of abandonment to their hull and machinery underwriters, asserting that the vessel was a constructive total loss. On the same day, the Owners informed the Charterers that the cost of repairing the vessel was uneconomical and that, as a result, the voyage could not be completed because the charterparty was frustrated.

Arbitration commenced in February 2010. The arbitrator heard evidence on the issues and determined that a reasonable person in the position of the Owners would have concluded that the probable cost of repairing the vessel was US$9 million. It was common ground between the parties that the sound market value of the vessel was US$5.75 million.

The arbitrator considered the relevant clauses in the charterparty and came to the conclusion that the insurance and/or repair clause did not create an obligation on the Owners to use the insurance proceeds for any particular purpose. The arbitrator, therefore, concluded that the charterparty was frustrated by virtue of the fact that the cost of repair exceeded the value of the vessel, so that continued performance of the Owners’ obligations under the charterparty would be radically different or commercially impossible.

The Charterers sought permission to appeal the arbitrator’s award on a point of law under section 69 of the Arbitration Act (“the 1996 Act”). Hamblen J gave permission to appeal on the following point of law:-

“What is the effect on the doctrine of frustration of a clause in a time charterparty which requires Owners maintain H & M insurance at a stipulated level? In particular, is the insured value res inter alios acta when considering the Owners’ obligation to repair damage or does it create an assumption of risk and responsibility on the Owners to repair hull damage up to this figure?”

He dealt with the application (as is usual) on the papers and said that the question of law:-

“raises a question of general public importance. I do not accept that it will only arise on unusual facts. I am satisfied that the decision of the arbitrator on this question is open to serious doubt and that the statutory requirements are met.”

The reference is to section 69(3) of the 1996 Act.

The substantive appeal was heard before Flaux J. Having considered the case law, he found that the modern doctrine of frustration should not be treated as establishing an inflexible rule that, where the cost of repair exceeds the value of the vessel, the charterparty would automatically be frustrated. The tendency in the modern application of the law of frustration had been to move away from inflexible rules, such as cost versus value, to a multi-factorial approach.

Flaux J said that the correct approach is to start by considering whether the contract provided for the event or contingency which had occurred, and in doing so, allocated the risk of that event or contingency to one of the parties. He then found that the charterparty went a good deal further than the equivalent clauses in the NYPE standard form document. The fact that the charterparty contained an express continuing warranty as to the insurance and the limit of liability made it impossible for the Owners to contend that the damage had been sufficient to frustrate the charterparty. The parties allocated risk in the charterparty such that, where the vessel was damaged and the cost of repair was within the insured value, the cost of repair would be borne by the Owners (albeit using the insurance proceeds). Accordingly, and contrary to the arbitrator’s conclusion, the contract was not frustrated.

The Owners then made an application for permission to appeal to the Court of Appeal under section 69(8) of the 1996 Act. Flaux J refused permission, giving the following reasons:-

Section 69(8) of the 1996 Act provides that “no appeal lies without the leave of the court which shall not be given unless the court considers that the question is one of general importance or is one which for some other special reason should be considered by the Court of Appeal”. “The Court” in the sub-section is the High Court not the Court of Appeal, see Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd [2001] QB 388 and Athletic Union of Constantinople v National Basketball Association (No. 2) [2002] 1 WLR 2863.

The Court of Appeal cannot therefore entertain an application for permission to appeal from a refusal of a High Court judge to grant permission to appeal from his or her decision on a question of law arising from an award. There is, however, a residual jurisdiction to set aside a refusal of permission if the decision to refuse that permission has come about as a result of unfair or improper process such that the decision to refuse permission cannot be categorised as a decision at all. As Mustill LJ said in Aden Refinery Co Ltd v Ugland Management Co Ltd [1987] QB 650, 666:-

“I can envisage that if a judge had in truth never reached “a decision” at all on the grant or refusal of leave, but had reached his conclusion, not by any intellectual process, but through bias, chance, whimsy or personal interest, an appellate or other court might find a way to intervene.”

In CGU Insurance Plc v AstraZeneca Insurance Co Ltd [2007] Bus L.R. 162 at 173 para 45 Rix LJ regarded Mustill LJ

“as seeking to express a distinction between a decision however flawed by error and an apparent decision which, because of something which has gone fundamentally wrong in the process, cannot properly be called a decision.”

This residual jurisdiction has, since the Human Rights Act 1998, been very slightly amplified or perhaps expressed slightly differently by requiring a decision to refuse permission to appeal to be (as every other decision of a judge) compliant with the requirements of the European Convention on Human Rights so that, for example, an unreasoned decision can be set aside. As Tuckey LJ put it in North Range Shipping Ltd v Seatrans Shipping Corporation [2002] 1 WLR 2397, para 14:-

“If, as is accepted, there is a residual jurisdiction in this court to set aside a judge’s decision for misconduct then there can be no reason in principle why the same relief should not be available in the case of unfairness. Each is directed at the integrity of the decision-making process or the decision-maker, which the courts must be vigilant to protect, and does not directly involve an attack on the decision itself.”

As Rix LJ pointed out in CGU v AstraZeneca para 50:-

“What [is] in question [is] not the correctness of the reasons but their adequacy”

and at para 79:-

“What one is looking for is not merely an error of law, but such a substantial defect in the fairness of the process as to invalidate the decision.”

As Rix LJ also pointed out at para 80:-

“perversity … is not enough.”

Lastly it is necessary to remind oneself of the dangers of the residual jurisdiction being misused. In Rix LJ’s words again (para 100):-

“There may be a temptation, even an unconscious one, to present an unfavourable decision as one which is not wrong but arrived at unfairly. But in the nature of things it is likely to be an exceptionally rare case where the submission of unfairness is justifiably advanced. The courts will not permit the residual jurisdiction, which exists to ensure that injustice is avoided, to become itself an unfair instrument for subverting statute and undermining the process of arbitration.”

It is evident from these citations that a litigant complaining of a refusal of permission under s.69(8) of the 1996 Act has an extraordinarily high hurdle to surmount. Neither counsel was aware of a case in which this court has, in fact, exercised the residual jurisdiction which has been recognised in the decided cases.

Mr Iain Milligan QC for the Owners had two basic submissions. First that, once Hamblen J had decided on the papers that the question of law raised a question of general public importance, Flaux J had no business to say that, in his view, the case turned on either the construction of the particular charterparty or on its own facts in giving his first and third reasons for refusing permission to appeal. The second submission was that, whatever the evidence before the arbitrator may have been, there was no finding that the underwriters were “prepared and amenable to the repair of the ship” and the judge had no business to make that finding himself when refusing permission to appeal.

Neither of these submissions come anywhere near justifying the necessary requisite that “something has gone fundamentally wrong with the process” or that there be “such a substantial defect in the fairness of the process as to invalidate the decision”. Each of them is just a complaint that the judge gave reasons which are open to criticism.

The decision of Hamblen J that the Charterers had shown (ironically, against stout resistance from the Owners at that stage of the appellate process) that the question of law was one of general public importance was a decision reached by him on perusal of the papers only without the assistance of oral argument. Flaux J had the benefit of a one and a half day oral argument by leading counsel and about twenty days of reflection during which he prepared a powerful 85 paragraph judgment. To say either that he was bound by the preliminary decision of Hamblen J on the question of general importance or that he was not entitled to depart from it without giving more reasons than he did borders on the nonsensical. By the time he refused permission to appeal he knew far more about the case than Hamblen J could have known when he dealt with the matter on the papers. It is worth adding

Mr Milligan sought to argue, by reference to the current 6th edition of what used to be Wilford on Time Charters that the judge’s decision was contrary to the understanding of the profession, and was out of line with previous authority. The judge would disagree since he asserted (para 3) that “he had loyally applied” the modern approach adopted in The Sea Angel [2007] EWCA Civ 547. But in any event that takes one straight into the merits or the demerits of the substantial decision which is an impermissible exercise on the invocation of the residual jurisdiction.

The second submission is even more hopeless than the first. The judge’s main point was that the Owners had chosen to walk away from the charterparty without repairing the ship. As a statement of fact that remark of the judge was unexceptionable. Mr Milligan complained that the Owners might have been compelled to do so by reason of terms in the ship’s mortgage or other circumstances of which the judge could not know. But whatever reasons there might be internal to the Owners and their arrangements, the fact is that they did walk away from the charterparty. The phrase added by the judge “in circumstances where the evidence before the arbitrator suggests that the hull and machinery underwriters were quite prepared and amenable to the repair of the ship” is merely a pendant to the judge’s original observation and, as Mr Kendrick QC for the Charterers was able to point out, in any event, could justifiably be inferred from paras 5(30) and (31) of the award.

Mr Milligan attempted to improve his submissions by saying, as an alternative, that Flaux J had no jurisdiction either to disagree with Hamblen J on “general public importance” or “general importance” or to rely on matters not expressly found by the arbitrator in his award. That alternative way of putting the case is no more attractive or forceful than the first. No doubt this court’s residual jurisdiction could be exercised in a case where the High Court truly acted in excess of jurisdiction. But it is very difficult to imagine such a case and to say that Flaux J acted in excess of his jurisdiction when he refused leave to appeal after adversarial argument is completely unjustified.

Mr Milligan several times insisted that the court should understand how aggrieved his client felt that he should have won the arbitration, have been worsted in his argument that there was no question of law of general public importance, have lost the appeal and then been told that there is no question of general importance to justify an expedition to the Court of Appeal. This was apparently a reason to exercise the residual jurisdiction more readily than in other cases. Of course the court recognises that the result is very disappointing for Kyla Shipping but, if shipowners wish to be sure that they have readier access to the expertise of this court, they should agree to the High Court resolving their disputes in the first place.

It seems that in my capacity as supervising judge of Commercial matters I caused this application to be listed as an application to decide whether there was jurisdiction in this court to grant permission to appeal. There is no such jurisdiction and, for the avoidance of doubt, it would be sensible, if Gloster LJ and Sir Robin Jacob agree with my judgment, so to declare. Nevertheless Mr Milligan accepted, in accordance with para 78 of CGU that this court cannot decide whether to grant or refuse leave to appeal to itself. This court can only decide whether or not to set aside the original decision to refuse leave to appeal to this court. If that were done, the successful party would then be free to re-apply to the Commercial Court for a fresh decision. Mr Milligan’s true application is to set aside the decision of Flaux J to refuse permission to appeal. I would, therefore, also refuse expressly to set aside that order. For the avoidance of further doubt, I would give permission for our decision to be reported and cited in other cases.

I agree.

I also agree.