Polestar Maritime Ltd v YHM Shipping Co Ltd & Anor

This is an appeal on three questions of law arising out of an arbitration award dated 15^th June 2010 by which the arbitrator, Mr. Richard Rayfield, held that the Defendants (“the Buyers”) were entitled to cancel an MOA on an amended Norwegian Saleform 1993 for the sale of the “Rewa”. Two of these questions of law raise issues of general public importance, the Norwegian Saleform being a very widely used set of terms for the sale and purchase of ships around the world.

The “Rewa” was a grain-fitted bulk/lumber carrier of 25,332 tons deadweight owned by the Claimant (“the Sellers”). She was registered under the Indian flag and classed by Lloyd’s Register as well as the Indian Register of Shipping. In early 2008 she was put on the market for sale and was inspected by surveyors who made a report on 2^nd April 2008. Another pre-purchase survey was also carried out which led to a second report. The Buyers had possession of both reports before they signed the MOA dated 23^rd July 2008 and paid a deposit of US $1.9 million, the contract price being US $19 million. The second report made it clear that the vessel did not comply with Annex IV of the International Convention for the Prevention of Pollution from Ships (“MARPOL”) and would require an International Sewage Pollution Prevention (“ISPP”) Certificate by 27^th September 2008, the date when Annex IV began to apply to The Rewa. There was also attached to the MOA a Lloyd’s Register printout which noted inter alia that ships over 400gt carrying more than 15 crew and passengers had to comply with Annex IV from 27^th September 2008.

Vessels subject to Annex IV are required to have an approved system of a sewage plant, or comminuting and disinfecting system, or holding tank.. To ensure compliance vessels are required to be surveyed and if compliance is established the flag state issues an ISPP certificate. A very large number of countries are signatories to MARPOL Annex IV, including India, China and the Buyers’ prospective flag state of St Vincent and the Grenadines.

The MOA delivery window was 20^th August 2008 to 30^th September 2008 at the Sellers’ option. On 19^th August 2008, the parties executed Addendum No 1 to the MOA in which they listed the documents the Sellers agreed to deliver to the Buyers. Included in the list was a bill of sale transferring all rights, title to and interest in the vessel from the Sellers to the Buyers and stating that the vessel is free from mortgages, encumbrances, maritime liens and any debts whatsoever. In the event, the bill of sale executed by the Sellers included the covenant that the vessel was free not only from mortgages, encumbrances, maritime liens and any debts, but also “detentions”. This wording was agreed by the parties.

From 18^th August 2008 the Sellers gave the Buyers four notices of estimated times of arrival at Hong Kong, the place of delivery. Due to delays caused by bad weather and slow discharge at Kaohsiung the Sellers found it necessary to give a revised seven day approximate notice of expected delivery on 29^th September 2008, two days after Annex IV would begin to apply to the vessel. The parties had proceeded on the basis that the vessel would be delivered before 27^th September 2008 and that the buyer would carry out the necessary work to obtain an ISPP certificate. Now it was inevitable that on the date of delivery the vessel would be in breach of Annex IV if it intended to engage in international voyages.

The vessel in fact arrived at Hong Kong anchorage on 30^th September 2008 and at 14.06 local time notice of readiness for delivery under the MOA was tendered to the Buyers. The previous day the Sellers had made application to the Indian authorities for a dispensation from the requirements of Annex IV but the dispensation was not received from the Indian authorities until the morning of 1^st October. In the meantime, the completion meeting contemplated by clause 8 of the MOA took place at DnB NOR Bank shortly after 14.00 hours. (Hong Kong and Singapore are in the same international time zone). At this meeting the Buyers refused to take delivery of the vessel on the ground that she had no ISPP certificate.

By this date there had been a serious downturn in the market for ships and The Rewa was worth about half the agreed price of $19 million.

Subsequent to the completion meeting the vessel was detained at 15.30 hours by the Hong Kong Port State Control Authority (“the PSC”). The following morning (1^st October) the Buyers gave notice of cancellation under clause 14 of the MOA on the ground that the vessel had no ISPP certificate and was detained contrary to the covenant in the bill of sale that she would be free of detentions. Later that morning the vessel was released from detention by the PSC, the dispensation letter granted by the Indian authorities having by now become available.

The question before the arbitrator was whether the Buyers were entitled to terminate the MOA. The relevant clauses in the MOA provide:

The arbitrator found that the Buyers were entitled to cancel the MOA. He held that an ISPP certificate is an international trading certificate for the purposes of clause 11 of the MOA and that under that provision the seller had to deliver international trading certificates that the vessel required, whether or not there was such a requirement when the vessel was inspected. The Sellers say that in so deciding the arbitrator erred in law and have obtained leave to appeal the arbitrator’s decision on the following question of law:

Mr. Kenny for the Sellers submitted that the obligation under clause 11 to deliver national or international trading certificates, valid and unextended at the date of delivery, was limited to those certificates the Vessel had at the time of inspection. He argued that the possessive pronoun “her” in clause 11 is apt to denote certificates the vessel actually has and is inapt to describe certificates she does not have, even though the law might require them. He further submitted that the word “other” in the phrase “other certificates the vessel had at the time of inspection” indicates that that her national/international trading certificates are implicitly those she had at the time of inspection. He submitted that the syntax is the same as in the phrase “Lambeth, Westminster and Camden, as well as other London boroughs”. He contended that, if the arbitrator’s construction were right, a far-reaching requirement would have been introduced that the ship must comply with all applicable laws physically and in terms of documentation at the date of delivery and this was very unlikely to have been intended given the laconic nature of the phrase “with her national/international trading certificate … valid and unextended.” Mr. Kenny also argued that the court should prefer his construction because it gave rise to commercial certainty, whereas the arbitrator’s construction had the opposite consequence. In his submission, there was considerable doubt as to what was meant by “national” and “international” certificates required by law.

The arbitrator rejected Mr. Kenny’s textual submissions on the ground that the words between the commas in clause 11 (“as well as all other certificates the vessel had at the time of inspection”) describe a category of documents different from the vessel’s national and international trading certificates. He held that the purpose of stipulating that when the vessel is delivered she should possess her national and international trading certificates was not to introduce new documentary requirements additional to those required by clause 8, but to evidence the vessel’s physical condition which underlies those certificates. On or after 27^th September 2008, the vessel should have been equipped with necessary sewage facilities and in possession of an ISPP certificate. Accordingly, it was for the Sellers to ensure that the vessel complied physically with the requirements of Annex IV and was in possession of a valid ISPP certificate. It was only the Sellers who could have done the necessary work to secure compliance which was mandatory, but on their construction not only could they have avoided complying with the regulations but also, on their own case, they would have been prohibited from doing so. Further, the Sellers’ construction was commercially unsound. There was no difference in principle between a certificate that requires renewal shortly before delivery and a certificate which requires to be issued for the first time shortly before delivery. It was not commercially acceptable for an owner, even if the vessel is shortly to be sold, to trade her without ensuring that she complies with international legal requirements.

Mr. Coburn QC for the Buyers sought to uphold the arbitrator’s reasoning. He was at pains at the outset to emphasise that the arbitrator construed the MOA against the background of Annex IV and the parties’ knowledge that an ISPP certificate would be required by 27^th September 2008. He argued that by inserting the words “international trading” before certificates in the standard form the parties must have intended that phrase to mean something different from “other certificates the vessel had at the time of inspection”. He contended that, the words “valid and unextended” signified that the scheme of clause 11 was that the eligibility of the ship to trade should be maintained down to the time of delivery, so that if a new eligibility requirement arose between inspection and delivery, the seller was obliged to satisfy that requirement prior to delivery. Accordingly, “her” should be read as encompassing certificates known to be necessary as well as certificates actually in existence at the time of inspection; and “other” signifies a class of certificates different from national and international trading certificates.

In Mr. Coburn’s submission, the arbitrator’s construction was not as far-reaching as Mr. Kenny would have the Court believe. In most cases there would be adequate time to comply with an eligibility requirement that arose post-completion. The instant case was exceptional because the Sellers had allowed the delivery date to slip past 27^th September 2008. Mr. Coburn also submitted that the obligation to deliver a new eligibility certificate was limited to such certificates as the parties knew would be required between inspection and completion. So construed, clause 11 did not give rise to the uncertainty relied on by Mr. Kenny. Finally, Mr. Coburn sought to test the rival constructions by raising the following hypothetical situation. Suppose delivery was going to be a couple of months after Annex IV applied to the vessel, and the Sellers did the necessary work and obtained an ISPP certificate. On the Sellers’ construction the Buyers could refuse to take delivery of the ISPP and the vessel when she was delivered pursuant to the MOA, which seemed a bizarre outcome.

I agree with Mr. Kenny that the arbitrator’s construction gives rise to considerable uncertainty. Thus, if the Sellers’ obligation extends to procuring new certificates rendering the vessel eligible to trade, what are the “national” certificates required by law? And which nation is being referred to? Is it every nation to which the vessel might trade? Is she required to have a US Coast Guard grain certificate, which is required for loading grain in the US? Is she required to have an Australian livestock certificate, required for lifting livestock from Australia? Or is she only required to have certificates required by the law of the current flag state, or only those required by her prospective flag state? Similarly, what “international certificates” are covered by clause 11? Suppose the flag state or the prospective flag state is not party to a particular international treaty, what then?

The answer to these questions is far from clear and in my opinion the problem cannot be solved by limiting the Sellers’ obligation to comply with requirements that both parties knew would have to be met before delivery. I say this because this limitation does not appear in clause 11 and also because it may be far from certain which future requirements were in the mutual contemplation of the parties when entering into the contract. Compliance with clause 11 in Sale Form 1993 is a condition precedent to the entitlement to the price. It is accordingly particularly important that its scope and operation is certain. In my judgment the draftsman of clause 11 cannot have intended that the clause should bear the meaning given to it by the arbitrator. I also think that the arbitrator’s construction is unjustifiably inconsistent with the emphasis placed by the Saleform on the “as was” nature of the sale (see lines 217 to 219 of clause 11). It is true that under clause 11 existing certificates may have to be renewed which could involve the doing of prescribed work to the vessel, but an obligation to obtain a completely new certificate is a significant further derogation from the principle that the buyer is bound to take the vessel as she was when inspected. This, to my mind, clearly suggests that the arbitrator’s construction was not the meaning intended by the draftsman.

In my opinion, when the draftsman refers specifically to national and international certificates as well as other certificates the vessel had at the time of inspection, he was doing no more than highlighting two important categories of documents that one would expect to find among the certificates that had to be delivered, namely certificates that the vessel had at the time of inspection. It was not the draftsman’s intention to distinguish between national and international certificates, whether or not the vessel had them at the time of inspection, and any other certificates which the vessel had when she was inspected. I am not persuaded to depart from this conclusion by Mr. Coburn’s hypothetical situation where the vessel has to have a new certificate an appreciable time before delivery. The potential problem this gives rise to is not so compelling as to show that the draftsman was prepared to sacrifice certainty to avoid it. If such an unlikely situation did occur I think the buyer would be subject to an implied term obliging him at the behest of the seller to elect between taking the vessel as altered with the new certificate or taking the vessel in her unaltered form. I would therefore answer question 1 “no”; the seller is only obliged to deliver the vessel with such certificates as she had when she was inspected, valid and unextended at the time of delivery.

The second question of law for which permission was given to appeal is:

My conclusion on question one makes it strictly unnecessary to answer question 2 but I think I should do so, albeit briefly. The relevant parts of Addendum No 1 are as follows:

In the arbitration the Sellers argued that item 12 under Part II qualified the effect of lines 220 to 224 of the MOA. They submitted that by this wording the parties agreed that the Sellers would deliver the vessel with original copies of only those trading/class national and international certificates which had already been passed to the Buyers. The arbitrator was unpersuaded by this submission. He held that item 12 did no more than record the fact that the vessel’s then existing trading and other certificates had been passed to the buyer. An ISPP certificate was not amongst those recorded certificates because no such certificate existed as of the date of Addendum No 1, nor was such a certificate then required by law. Accordingly the Sellers’ documentary obligations as defined in clause 8 of the MOA and Addendum No 1 did not include an ISPP certificate.

Question 2 proceeds on the assumption that leaving aside Addendum No 1, the Sellers were indeed obliged to deliver the ship with an ISPP certificate if delivery occurred after 27^th September 2008, as in fact turned out to be the case. In my judgment, clear words would be necessary to extinguish that obligation in any Addendum to the MOA, and such wording is absent in Addendum No 1. Accordingly, I conclude that Addendum No 1, for the reasons given by the arbitrator, did not modify clause 11 of the MOA.

The arbitrator also held that the Buyers were additionally entitled to cancel the MOA on the ground that the vessel was not free from detention and accordingly the Sellers were unable to complete the legal transfer of the vessel. He rejected a submission advanced by the Sellers that under clause 14 they had three banking days after the NOR to make arrangements rendering the bill of sale a presentable document by securing the vessel’s release from the PSC detention, as in fact happened during the morning of 1^st October 2008. His reasoning is contained in paragraph 57.5 of the award:

The question of law for which leave to appeal was given in respect of this finding is:

The Sellers could only complete the transfer of the vessel if they delivered a bill of sale in the agreed form (see clause 8, Part II, item 4 of Addendum No 1). However, whilst the vessel was detained the bill of sale could not be tendered because to do so would be to put the Sellers in breach of the covenant contained therein that the vessel was free from all detentions, and it was the inability to tender the bill of sale, not the detention of the vessel per se, which the Buyers relied on as their second ground for cancelling the contract (see paragraph 56 of the award). In my judgment, the words “make arrangements for the documentation set out in clause 8” are not confined to the execution or procural of the necessary documentation, but extend to arrangements that have to be made to enable the Sellers to be able to tender the stipulated documents. It follows that the release of the vessel from detention was, in my opinion, an arrangement for the documentation required by clause 8 and the arbitrator erred in holding otherwise. I shall accordingly answer question 3 in the affirmative.

For the reasons given above, I find that the arbitrator should have held that the Buyers were not entitled to cancel the MOA but instead are liable in breach of contract for their refusal to complete the transaction by paying the balance of the price. The award must therefore be remitted to the arbitrator and I shall hear argument as to the precise terms of the remission.