Dolphin Tanker Srl v Westport Petroleum Inc

The Claimants (‘the Owners’) appeal in respect of questions of law arising out of an arbitration award dated 22 July 2010 (‘the Award’) of Lionel Persey QC, sitting as a sole arbitrator. The Arbitrator held that the Defendants (‘the Charterers’) were entitled to terminate a five year time charterparty (‘the Charterparty’) by which the Owners let the MT ‘Savina Caylyn’ to the Charterers at a daily rate of US$27,000, on the terms of an amended ‘Shelltime 4’ form dated 9 July 2007.

The decision was based on the proper construction of clause 50 of the Charterparty and, in particular, the provision,

On 26 February 2010 the Charterers gave notice of the cancellation of the Charterparty on the basis of 10 consecutive rejections which met the criteria set out in clause 50 (‘Qualifying Rejection’). The Owners disputed their right to cancel and the matter was referred to Arbitration at an expedited hearing. In the course of the arbitration the Charterers abandoned a number of the Qualifying Rejections they had initially relied on, and the Arbitrator found that the Charterers had established four Qualifying Rejections in a consecutive run, and consequently held that the Charterers were entitled to terminate the Charterparty.

The matter comes before the Court because clause 41(c)(ii) provided that either party could appeal to the High Court on any question of law arising out of the award.

Three issues of law arise directly on this appeal.

First, what was intended by the reference to ‘oil major’ in the relevant part of clause 50. The Owners contended that it meant one of the five major oil companies named in an earlier part of clause 50, namely: BP, Shell, ExxonMobil, Chevtex and Total Fina Elf. The Charterers argued that it meant one of the six established oil majors as generally understood: ConocoPhillips, in addition to the five major oil companies identified in the earlier part of clause 50. The Arbitrator accepted the Charterers’ submissions on this point. The significance of this finding is that one of the rejections identified by the Arbitrator, and found by him to be a Qualifying Rejection, was by ConocoPhillips.

The second issue concerns the meaning of the phrase ‘failed on three (3) consecutive oil major vetting reviews/inspections’ in the relevant part of Clause 50. The Owners argued that if (as happened) there were a ‘pass’ in what would otherwise have been three consecutive failures it would interrupt that run of failures. The Charterers argued that any pass had to be the result of a vetting review or inspection following a ‘nomination by the Charterers to an oil major.’ The pass which the Owners relied on was the result of a unilateral approach to BP by the Owners, and not by a nomination by the Charterers to BP. The Arbitrator also found in favour of the Charterers on this issue.

The third issue relates to the tanker vetting system as found by the Arbitrator; and in particular, the significance of the Ship Inspection Report (‘SIRE’) system in the vetting review. The Owners contended that there could only be a Qualifying Rejection following a vetting review where the latest SIRE inspection report was the (or an) effective cause of the rejection. The Owners point out that in none of the 3 Qualifying Rejections found by the Arbitrator (as being relevant to the issue) was there a reference to the review of the SIRE Inspection Report being the (or an) effective cause of the rejection. The Charterers argued that it was sufficient to found a Qualifying Rejection if the latest SIRE Inspection report had been considered by the oil major as part of the process. The Arbitrator found in Charterers’ favour on this point.

It is convenient to set out clause 50, adopting the format used by the Arbitrator. This involves breaking up the clause into a number of enumerated subdivisions which do not exist in the original. The Arbitrator adopted this approach for convenience; but it is right to note that clause 50 (as drafted) is very much less tidy, being broken up into sub-paragraphs which do not follow any clear pattern. I take into account Mr Lord’s warning that one should not lose sight of the rough nature of the clause as it appears in the Charterparty, which he accurately described as ‘lengthy and somewhat opaque’.

At §9 of his Reasons the Arbitrator set out his approach to the construction of Clause 50 by reference to the commercial background, including the expert evidence relied on by the parties about the process of tanker vetting and approval. From §11 he described the SIRE system established by the Oil Companies International Marine Forum (OCIMF)

The Arbitrator noted a distinction between a SIRE inspection and vetting (§15). A SIRE Vessel Inspection Report (or VIQ) described the inspection and reporting element of the SIRE Report, which involved both inspection findings and the operator’s responses.

At §19 of the Reasons the Arbitrator set out his findings in relation to the vetting process, which included consideration of the latest SIRE inspection report and other material; with different oil companies giving different weightings to particular pieces of information in their vetting databases.

Significantly in the context of the third issue, the Arbitrator recorded,

At §28(2) of the Reasons he identified the findings at §§21 and 22 as being of ‘particular relevance’ to the issues which he had to determine.

The Vessel wasdelivered into service in June 2008 and traded successfully for almost eighteen months without any vetting problems. The first indication that there was an issue with the Vessel’s vetting status was in early December 2009 following an inspection by Shell on 2 November 2009. The first Qualifying Rejection found by the Arbitrator was by ChevTex on 1 December 2009. On 9 December 2009, the Vessel undertook a SIRE inspection carried out by BP. The inspection did not follow a nomination to BP by the Charterers; it was carried out at the Owners’ request. The result of that inspection was a pass, as communicated to Owners on 12 January 2010.

The Vessel was involved in a collision in the Malacca Straits on 23 December 2009. The Owners contend that the collision was either the reason or one of the reasons for at least some of the subsequent vetting failures.

The Arbitrator found that the Vessel suffered three further Qualifying Rejections, two on 12 February 2010 (by Total and ConocoPhillips), and one on 24 February 2010 by ChevTex.

On 26 February the Charterers wrote to the Owners giving notice of cancellation under Clause 50.

The admission of evidence on the hearing of an appeal under s. 69 has been the subject of two recent statements of principle by Judges of the Commercial Court. In Great Western Trains Co. Ltd v Network Rail Infrastructure Ltd[2010] EWHC 117 (Comm) [89], and Sylvia Shipping Co Ltd v. Progress Bulk Carriers Ltd (The ‘Sylvia’)[2010] EWHC 542 (Comm) [85-88], Gross and Hamblen JJ gave clear guidance as to the material which should be placed before the Court on an appeal under s.69 of the Act. In each case the comments were made by way of postscript. In the present case the issue arises starkly since the Owners seek to rely on a number of documents, apart from the Charterparty and the Award, in support of their arguments on the appeal.

Mr Lord QC (on behalf of the Owners) accepted that the Courts have taken a restrictive view of the documents which may properly be considered at the hearing of an arbitration appeal, see for example Colman J’s observation in Foley’s Ltd v City and East London Family and Community Services [1997] ADRLJ 401 (an appeal under the Arbitration Act 1979), that the only admissible documents were the award and the reasons. He accepts that this restrictive approach has been followed in relation to appeals under s.69 of the 1996 Act, see HOK Sport v Aintree Racecourse [2002] EWHC 3094 (TCC). However, he submitted that recent authorities have departed from this strict approach so as to widen the ambit of admissible material: Kershaw v Kendrick [2006] 4 All ER 79 (TCC) Jackson J, and White Young Green v. Brooke House Sixth Form College [2007] EWHC 2018 (TCC) Ramsey J. He further relied on the revised CPR Practice Direction 62 - arbitration.

For the Charterers Mr Southern QC submitted that there has been no loosening of the strict approach as to the admissibility of extraneous material and that the cases relied on by Mr Lord do not permit the admission of evidence on which reliance is placed in the present case.

Having considered the submissions and cases relied on, I have come to the following conclusions.

(1) There has been no relaxation of the general rule which has existed for many years that only the award and the relevant contract should be put before the Court. The principle is conveniently summarised in the judgment of Hamblen J in The ‘Sylvia’ (see above):

The rule applies whether the appeal is brought by agreement under s.69(2)(a) or with leave under s.69(2)(b), since in each case the appeal to the court must be ‘on a question of law arising out of an award,’ see s.69(1).

The revised Practice Direction 62 states

This is plainly not intended to widen the scope of documents which may be placed before the court.

(2) There is a confined category of case where either the Award has set out the relevant contractual terms in an abbreviated form, or has summarised the effect of an identified contractual exchange or has identified particular documents as having contractual effect without setting out their terms. These are circumstances in which it may be appropriate for a party to invite the Court to view additional material. It was these categories which Jackson J had in mind in Kershaw v. Kendrick (see above).

The same principles apply both to an application for permission (as in the White Young Green Consulting case) or for a substantive appeal hearing (as in Kershaw v. Kendrick); and can be framed as the admissibility of documents which have a high degree of relevance to the identified question of law and without which the court cannot carry out its appellate function. To adopt the language of the Practice Direction, they must be documents which the Court needs in order to determine the question of law.

(3) An appeal on a question of law is confined to facts found by the Award. Steyn LJ conveniently summarised the position under the 1979 Act in Geogas SA v. Trammo Gas Ltd, The ‘Baleares’[1993] 1 Lloyd’s Rep 215, at 227:

(4) Although all contracts must be construed against the commercial background which would have been available to the parties at the time the contract was made, see ICS v. West Bromwich BS [1998] 1 WLR 896, Lord Hoffmann at 912-913, the only admissible findings in relation to the commercial background are those in the award.

The documents which the Owners seek to adduce starkly demonstrate the importance of applying these principles rigorously.

The 26 February Notice of Cancellation is relied on as showing that the Charterers were asserting that a particular company was a Major Oil Company, although they no longer do so. This is said to be ‘important factual background necessary for the court to consider’ on the first issue.

The Expert Reports are relied on because ‘the Award does not encapsulate all of the expert evidence necessary to determine the issue of construction.’

‘Intertanko documents’. These are relied on to show that there are standard clauses which refer to oil majors by name.

The BP ‘Pass’ email to Owners dated 12 January 2010. In the Owners’ skeleton argument they submit ‘simply that it is necessary for the Court to see this document, which lies at the heart of the second ground of appeal.’

The Q88 questionnaire which was referred to in §25 of the Award. It is said that ‘it is necessary for the Court to see how the oil major approvals are communicated in the industry as part of the commercial background.’

The evidence of two rejections which were found not to be Qualifying Rejections, but which are relied on as directly contradicting the Arbitrator’s finding about the evidential difficulties which would arise if the Charterers were right in their construction on the third issue.

For these reasons I find that the new material is irrelevant and inadmissible. I turn then to the questions of law arising from the Award.

As already noted, the Arbitrator held that the expression ‘oil major’ in §§3.2 and 3.3 of clause 50 referred to six recognised major oil companies or ‘majors’: this being common ground between the experts.

It was submitted on the Owners’ behalf that the expression ‘oil major’ has a meaning which is confined by §2.2 to the five named companies (excluding ConocoPhillips). It is irrelevant how the expression might generally be used: the contract provided its own definition of the expression. The five companies named in §2.2 were the oil majors for all purposes in clause 50, including §§3.2 and 3.3.

For the Charterers, Mr Southern QC submitted that the Arbitrator’s analysis was correct and for the reasons he gave. Clause 50 contains two approval regimes: an on-delivery regime and an in-service regime. The former applies to inspection and approvals in the first 120 days after delivery of the vessel; and the latter applies after the vessel has obtained its initial approvals. Within the on-delivery regime, §§1.1-3 on the one hand, and §2.2 on the other distinguish between initial ‘major oil company approvals’ and initial approvals by the named 5 companies. By requiring the Owners (i) to use best endeavours to obtain the approval of 3 major oil companies within 60 days, and (ii) obliging them to obtain such approval within 120 days of delivery, but separately requiring the Owners to use best endeavours to obtain approvals from 3 of the 5 named companies within 60 days of the delivery, clause 50 treats ‘major oil companies’ and the 5 named companies as different, if potentially overlapping, sets. The 5 named companies are a sub-set of the major oil companies. Thus the effect of §2.2 is to identify those companies from whom the Charterers would prefer at least some of the initial approvals to be obtained. It does not restrict the scope of the major oil companies from whom the Owners may obtain approvals in order to comply with §§1.1 or 1.2. Further, the Owners’ obligation under §2.2 only applies within the first 60 days of the charter. On that basis it has nothing at all to do with §§3.2 and 3.3 which would ordinarily be invoked long after the first 60 days of the charter.

In my judgment the Arbitrator was correct in his conclusion. The starting point is the clear finding in §34 of the Reasons that there are six recognised oil majors.

The ordinary and natural meaning of the unqualified words ‘oil major’ in §3.2 includes all six major oil companies. This meaning is supported by the reference in §3.3 which provides that,

The question then is whether it was intended to confine the natural meaning of the expression? There was a clear and express intention to confine the meaning in the early part of the clause by the reference to approval from a minimum of three out of five major oil companies. While one can argue (as Mr Lord did) that the drafting of clause 50 does not fit neatly into the Charterers’ analysis of separate on-delivery and in-service regimes, for example one would have expected §2.2 to come within §1, the analysis is internally consistent and commercially sound. As the Arbitrator found in §34(4) of the Reasons,

Following its inspection on 9 December 2009, BP sent an email to the owners indicating that the vessel had passed a SIRE inspection. There is no doubt that if this had followed the Vessel’s nomination to BP it would have constituted a qualifying approval which would have broken the chain of three consecutive Qualifying Rejections. It would, to use Mr Lord’s phrase, ‘reset the clock.’ The Arbitrator found that since it was not an inspection which came about as a consequence of a nomination by the Charterers it did not break the run of consecutive rejections.

Mr Lord submitted that the Arbitrator’s conclusion was wrong. The commercial purpose of Clause 50 was to make provision for the procurement of oil major approvals aimed at (i) testing the Vessel’s up-to-date condition, and (ii) improving the Vessel's marketability. The latter objective would be achieved through listing approvals and making them available to parties interested in the Vessel. It would be nonsensical for an approval which accorded with this commercial purpose of the clause not ‘to count’ so as to break a run of Qualifying Rejections.

For the Charterers it was argued that the ‘vetting review/inspection’ which can give rise to a right of termination under §3.2 is specifically defined in §3.3, and is dependent upon a nomination by the Charterers. These clear words admit of only one possible meaning. The Arbitrator found as a fact that the BP inspection was commissioned by the Owners ‘off their own bat’ and did not follow from any nomination by the Charterers.

I agree with the Charterers’ submission. The words of §3.3 are clear.

It is necessary at this stage to address the Owners’ argument that this construction leads to a commercially absurd result. As Mr Lord noted, §3.2 entitles the Charterers alternative remedies: one of which is to place the vessel off-hire. He submitted that if the Charterers exercised this option rather than cancelling the Charterparty (as they might in appropriate market conditions), unless the Owners were able to procure an approval without a requirement for a Charterers’ nomination the vessel would be left in a permanent mercantile limbo.

It seems to me that he is entitled to test the Arbitrator’s construction in this way. In Gan Insurance v Tai Ping Insurance[2001] EWCA Civ 1047 at [16], Mance LJ emphasised the importance of considering the implications of two competing constructions.

There is little ambiguity in the relevant terms as they applied to the facts of the present case. The potentially unbusinesslike consequences would come from the operation of an option that was not exercised. The off-hire clause in the Charterparty provided the Charterers with an option to add any offhire period to the 5 years of the time charter, provided the option was exercised within 30 days. The point does not arise for decision, but the answer may be that a term would be implied that, if the Charterers exercised the off-hire option, they would be bound to nominate to an oil major under §3.3 within a reasonable period.

Clause 50 defined a vetting review/inspection in §3.3

The Owners submitted that the plain wording of this provision is such that a vetting failure can only give rise to a Qualifying Rejection where the latest SIRE Report is the (or an) effective cause of that failure, since a review has to be by either a physical inspection or latest SIRE inspection report. In none of the Qualifying Rejections found by the Arbitrator could it be shown that the BP SIRE Report was either the effective cause or an effective cause of the vessel’s failure.

Mr Southern submitted that the key to this issue lies in the last words of §3.3

I do not accept the Owners’ argument that Charterers must prove that the latest SIRE Report was either the effective cause or an effective cause: neither the language of the clause nor the factual background found by the Arbitrator justify such a construction.

It is clear from §§21-22 of the Reasons that oil majors have recourse to the latest SIRE report as part of the information used to vet the vessel. This point was re-emphasised later in the Reasons.

The Qualifying Rejections found by the Arbitrator and which are challenged under this issue did not expressly refer to the BP Sire report. However, he made the following findings:

Rejection on 1 December 2009, ChevTex ‘probably referred to the latest SIRE report,’ (Reasons §68)

Rejection on 9 February 2010, ConocoPhillips ‘probably did review the SIRE report,’ (Reasons §88) and

Rejection on 24 February 2010, ChevTex ‘would have considered the latest report ...’

In my view the findings that the latest SIRE report was considered as part of the process of nomination and review are sufficient to show that the rejections were Qualifying Rejections within the meaning of §§3.2 and 3.3 of clause 50.

For these reasons I do not consider that the Arbitrator made any error of law and the Owners’ appeal is accordingly dismissed.