DGM Commodities Corp v Sea Metropolitan SA

This is an appeal brought with leave under section 69 of the Arbitration Act 1996 against the award of three maritime arbitrators in a dispute under a voyage charterparty dated 17 October 2007.

At the time of the events with which the award was concerned, the vessel MV Andra (“the Vessel”) was owned by Sea Metropolitan S.A. (“the Owners”) and chartered to DGM Commodities Corp (“the Charterers”) under a voyage charterparty on the Gencon form for the carriage of a cargo of frozen chicken leg quarters in cartons from the United States to St. Petersburg. The tribunal awarded the Owners the sum of US$ 3,605,630 as demurrage in respect of a period of delay at St. Petersburg between 19 May 2008 and 25 November 2008. The Charterers unsuccessfully submitted before the tribunal that the charterparty was frustrated by 19 May 2008, alternatively at various subsequent dates. On this appeal the Charterers contend that the arbitrators made an error of law in rejecting that submission.

The Vessel sailed from the loadport on 4 December 2007 and arrived at St. Petersburg on 26 December 2007. There was a delay in berthing, and laytime expired on 4 January 2008 before the commencement of discharge. The delay in discharge arose because the Charterers had sold the cargo to Russian receivers under contracts of sale which provided for release of the cargo only upon payment; the receivers only paid for the cargo after the Vessel’s arrival and then only piecemeal.

Discharge from the Vessel commenced on 23 February 2008. On 8 April 2008 discharge commenced in Hold No 2. Shortly thereafter some of the cargo in Hold No 2 was found to be stained and wet from gasoil, and discharge from that hold was interrupted. It was soon established that the gasoil had leaked from an adjacent deep bunker tank. The Tribunal found that the leak was caused by the unseaworthiness of the Vessel, for which under the terms of the charter owners were responsible irrespective of the exercise of due diligence. Discharge of the cargo from the other holds continued.

On 14 April 2008 the discharge of the Vessel was completed, apart from the cargo in Hold No 2 which included the contaminated cargo. There was a dispute as to the extent to which the cargo in Hold No 2 was affected by the gasoil.

Demurrage had been running since the expiry of laytime. From 14 April 2008, the Charterers’ liability for demurrage was interrupted because the delay was due to the Owners’ fault, due to the unseaworthiness of the Vessel.

On 15 April 2008 the receivers demanded a cash settlement of US$2 million in relation to the damaged cargo. The Owners offered security for the cargo claim in the form of a P and I Club letter of undertaking, or a letter of undertaking from the Owners’ parent company. Receivers were, however, unwilling to accept security for the claim and insisted on being paid a sum in settlement of the claim; in the meantime they did not take any further steps to discharge the remaining cargo from Hold No 2. This remained their stance throughout the Vessel’s stay at St Petersburg until the Owners’ agreement to pay a cash sum in October 2008.

On the 21 April 2008 the local Veterinary Service imposed an order entitled “Report No. 554 on the suspension of movement of cargo subject to the control of veterinary authorities”. It was issued following attendance on board the Vessel by one of the Service’s inspectors. Its operative part stated that part of the cargo in Hold 2B was contaminated with oil products but the exact number of damaged boxes was unknown; and that it was impossible to determine the overall condition of the cargo in Hold 2C, which was over stowed by the cargo in Hold 2B. The order recorded that the movement of the cargo was suspended.

The Tribunal found that the Veterinary Service order was an order whose effect was temporarily to prohibit discharge; the prohibition was capable of being brought to an end only by the Veterinary Service giving an order stipulating the damaged cargo’s “change of usage”, or by revoking or otherwise varying the order to allow the cargo to be discharged. It was temporary in the sense that it would continue to prevent discharge of the cargo until it was revoked or otherwise superseded, subject to the receivers’ right to challenge the order if they considered the Veterinary Service to be acting unlawfully.

The Tribunal found that the receivers should have been prepared to agree to a Club letter of undertaking, but that a reasonable period for agreeing the terms of such LOU would not have expired until 25 April 2008. Accordingly from 15 April until 25 April 2008 the cause of the delay to the Vessel was not the Charterers’ failure to unload the cargo but the necessity for the terms of the LOU to be negotiated and agreed. In respect of that period, the Owners’ breach was still causative of delay and the Charterers were not liable for demurrage.

The delay caused by the Owners’ breach did not end on 25 April 2008. The Owners’ breach had foreseeably caused the intervention of the Veterinary Service, to whom notification of the cargo damage would have been made irrespective of disputes over accepting a letter of undertaking. The Veterinary Service was under a legal obligation to take samples and arrange for the examination of the goods and to determine whether the Owners were obliged to arrange for their re-export or destruction. The parties’ experts agreed that the Veterinary Service could have been expected to have carried out its legal duties reasonably promptly. However it failed to do so. The Tribunal found that it was reasonably foreseeable that the Owners’ breach of charterparty would cause a delay in the Veterinary Service resolving the position up to, but not after, 19 May 2008. From that date, the Owners’ breach ceased to be causative of foreseeable delay. Accordingly, on the Tribunal’s findings, the Vessel was on demurrage from that date, and further delay thereafter was too remote to be recoverable as damages for the Owners’ breach in relation to the seaworthiness of the Vessel.

On 21 October 2008 the Owners and receivers finally reached agreement for the cargo to be re-exported on the Vessel. This involved the Owners agreeing to pay to the receivers a cash settlement of US$ 2.3 million in order to secure release of the ship. On 13 November 2008 the Veterinary Service granted permission authorising the re-export of the cargo, and the Vessel departed from St Petersburg on 25 November 2008.

On these findings, the Tribunal awarded demurrage at the charterparty rate in respect of the period between 19 May 2008 and 25 November 2008.

In relation to the Charterers’ argument that the charterparty was frustrated, the Tribunal’s findings were expressed in the following terms:

“Was the Charter-party frustrated?

136… the Charterers argued that on a date (see below) following the April order temporarily preventing the discharge of the cargo, the Charter-party was frustrated by the continuing (in)actions of the Veterinary Service and the delays engendered by them. The Charterers argued not that the April order was a frustrating event when it was made but that it proved not to be temporary; it remained in place until October 2008.”

……………….

“139.

The Charterers submitted that although the Veterinary Service’s April order was supposed to be temporary, in the event it was not – it went “…on and on…” Counsel for the Owners described it as “shocking” and the Russian law experts in their joint memorandum said the Veterinary Service acted “…unreasonably and, unexpectedly…” and in breach of the law. The essence of the Charterers’ case as expressed by counsel for the Charterers in her skeleton argument was that “…The continuation of the April Order, and the absence of any decision countermanding it, resulted in delays which made performance of the Charterparty in accordance with its terms impossible (or at least radically different from that contemplated)…”

140.

The essence of the Owners’ case was that this was not a situation in which the Charterers were prevented by some outside event from unloading the cargo. On the contrary, the Receivers chose to interrupt the discharge; the underlying reason for their continued failure to discharge the cargo was the continuation of their efforts to achieve an immediate cash settlement of their cargo claim and not to be left with a P and I Club LOU. As Mr Weiss-Lev said: “…it was all about money…” and “… we wanted either to get our cargo or to get our money…”

141.

In the course of her closing submission, counsel for the Charterers invited us to consider a number of possible dates on which it could be said that the Charter-party was frustrated. The dates with the Charterers’ comments were as follows.

(a)

29 April 2008…

(b)

Early May 2008…

(c)

Early May or early June 2008…

(d)

Early July 2008…

(e)

Late July 2008…

142.

In the end what broke the impasse so as to enable the Vessel to sail away (albeit with the cargo still aboard) was in fact the cash settlement of the Receivers’ cargo claim. As mentioned above, the option of re-exporting the cargo was not a new idea. …

143.

From the contemporaneous correspondence, the role played by the Veterinary Service in achieving the breakthrough appears to us to have been necessary (in a bureaucratic way) but not sufficient and it was passive, not active. It responded (or failed to respond) to the parties’ requests, rather than initiated anything. It appears to us that after the Owners and Receivers had reached their settlement agreement, on being requested to do so, the Veterinary Service merely granted the official permission. The correspondence reveals a simple request for permission to re-export the cargo and the granting of that request on 13^th November 2008. Apart from the agreement of the Charterers to take the cargo back, there is no evidence that the Veterinary Service imposed any conditions or made any requests or otherwise exerted any directing influence.

144.

Given the Veterinary Service’s role in bringing about the resolution – essentially bureaucratic rather than instrumental, as we have found and described it above – we have concluded that we cannot agree with the Charterers’ submission that it was “…The continuation of the April Order, and the absence of any decision countermanding it…[that] …resulted in delays which made performance of the Charter-party in accordance with its terms impossible (or at least radically different from that contemplated)…”. On the evidence we have seen, there is no reason to suppose that, had the Owners and Receivers reached an accommodation earlier than they in fact did, the Veterinary Service would have been any less willing to grant the required permission than it was on 13^th November 2008.

145.

We agree with the Owners’ submission that the real reason for the continued failure to discharge the cargo was the Receivers’ desire to have a cash settlement of the cargo claim and the continuation of their efforts to achieve one, to the exclusion of other possibly more normal forms of settlement. That desire and efforts do not constitute a frustrating event. We do not consider that there was any obligation on the Owners to enter into any or any particular settlement with the Receivers and so it cannot be said that the Owners ought to have acceded to the Receivers’ demands earlier. Had the Receivers been prepared to deal with what was prima facie a legitimate cargo claim by accepting proper security as was offered in the form of a P & I Club LOU (subject to establishing liability and quantum in the usual way), then apart from the delay in discharge that we have decided above would have occurred in any event [footnote: by reason of the Owners’ breach] the subsequent delay would not have occurred.

146.

In those circumstances we consider that the ingredients necessary for a finding of frustration are not present and accordingly we find and hold that the Charter-party was not frustrated either on any of the dates suggested by the Charterers or on any other date.”

The Charterers were granted permission to appeal in respect of the following question of law:

“Where a voyage charterparty is delayed without the fault of either party, in circumstances that would otherwise amount to frustration, but where those delays are in part caused and/or contributed to by the action or inaction of the cargo receivers (not being parties to the charterparty), is the charterparty frustrated? Or does that action or inaction mean that what would otherwise be frustration is “self induced” by charterers, such that charterers cannot contend that the charterparty is frustrated”.

Ms Cockerill QC on behalf of Charterers argued that :

On behalf of the Owners, Mr Priday submitted:

The Adelfa is distinguishable.

I reject Mr Priday’s first submission. It is true that paragraphs 144 and 145 of the award deal with the question of causation by identifying the “real reason for the continued failure to discharge the cargo” as being the receivers’ conduct in relation to the cargo claim. However it is clear from the findings made by the Tribunal, taken as a whole, that what was being said was that the Veterinary Service’s order prevented discharge throughout the relevant period. This was found as a fact in the award: see paragraphs 27, 28, 110, 112 and 114. It was this which was the immediate cause of the delay in discharging the cargo because the cargo could not be discharged whilst the order remained in place. What the Tribunal found was that the real and effective cause of that order remaining in place, and not being lifted, was the receivers’ unwillingness to procure its lifting because of their conduct in relation to the cargo claim; and that had the receivers wished to have the April order lifted at an earlier stage, in order to discharge the cargo at an earlier stage, they would have been able to do so. It is in this sense that the Tribunal found that the receivers’ conduct was ultimately the real reason for the cargo not being discharged, because it was the reason why the event which was relied upon as the frustrating event, namely the continued existence of the Veterinary Service’s order, was in place. Although not couched in the language of fault or self-induced frustration, the Tribunal’s process of reasoning was that the event which was relied upon as the frustrating event was itself caused by the conduct of the receivers.

I also reject Mr Priday’s second submission. Paragraph 146, commencing with the words “in those circumstances”, is to be interpreted as meaning that it is for the reasons given in the preceding paragraphs that the frustration argument fails. It does not seem to me, upon a fair reading of that paragraph, that the Tribunal was purporting to reject the frustration case on any other grounds, or to deal with any other grounds upon which the Owners relied to defeat the frustration argument (which included, for example, that the period of delay was insufficient to be frustrating delay). The only point decided by the Tribunal in relation to frustration, which it treated as sufficient to dismiss the Charterers’ reliance on the doctrine, was that if the continued existence of the Veterinary Order would otherwise have been a frustrating event, the Charterers were not entitled to rely upon it because it was the conduct of the receivers which was the effective cause of it remaining in place.

However, I accept Mr Priday’s further submission that the Tribunal has found that the relevant conduct of the receivers, which precluded the Veterinary Service’s order operating as a frustrating cause, was a failure to discharge the cargo. That is apparent from three aspects of the award:

That is sufficient to dispose of the appeal. As stated at paragraph 95 of the award:

“Clause 5 of the Charterparty provided for the cargo to be discharged by the Charterers or their agents and clause 18 provided that the Vessel was to be discharged by the receivers’ stevedores. It was common ground that, however the Charterers might choose to fulfil their obligation under clause 5, they were under a non-delegable duty to discharge the cargo. Therefore even if, as between the Charterers and Receivers, it was the Receivers’ obligation to discharge the cargo, the position under the Charterparty remained that for the purpose of performing the Charterers’ obligation to discharge the cargo, the Receivers were the agents or delegates of the Charterers and the Charterers remained responsible.”

Ms Cockerill QC sought to argue that the only realistic option in relation to the cargo was its re-export, rather than its discharge. But the Tribunal’s findings were that the effect of the Veterinary Service’s order was to prevent discharge of the goods from the vessel, not to prevent their re-export: paragraphs 109, 112 and 114. The award refers at paragraph 47 to a request as late as 15 July 2008 by the receivers to the Veterinary Service requesting permission for the cargo to be discharged. There is no finding in the award that at any stage re-export was the only realistic option. On the contrary the finding in paragraph 145 of the award is that the conduct under consideration was the reason for the continued failure to discharge the cargo. This is not therefore a case about the vessel being prevented from sailing away, or the delay being caused by something preventing the re-export of the cargo, as was The Adelfa. It is a case about conduct preventing the cargo being discharged, the relevant conduct being that of the receivers as part and parcel of their failure to discharge the cargo.

The Adelfa does not assist the Charterers. In that case, a cargo of maize arrived at Tripoli with some superficial wet damage due to condensation. Before the beginning of discharge laytime had expired and the vessel was on demurrage. As soon as some wetting was observed, on commencement of discharge on October 20, 1981, the receivers refused to take delivery of the cargo. On October 28, 1981, the receivers arrested the ship. On November 2, 1981, the local authorities imposed a ban on the landing of the maize. On November 26, 1981, the receivers’ claim in the local court was upheld and judgment was granted imposing liability on the owners and the ship for US$ 3.7 million. The umpire in that case described the judgment as signalling “the death-knell” of any remaining hopes that the ban against discharge might be lifted and of the cargo being discharged in Libya. There followed prolonged negotiations between the owners and the receivers and a third party, which only resolved the position in March 1982 with the owners having to pay US$ 2.5 million to enable the vessel to leave the port. In the meantime she was precluded from doing so by the arrest. The owners claimed demurrage from the expiry of the laytime (September 12, 1981) until the vessel finally left Tripoli in March 1982. That claim was settled by agreement on terms which are not disclosed by the award or the report. The claim which was the subject matter of the decision of Evans J was a claim for the US$ 2.5 million as a damages claim (or restitutionary claim) in addition to demurrage.

The claim for damages was for what was said to be a repudiatory breach starting with the Charterers’ admitted breach when the vessel was not completely discharged during the laytime and became a repudiatory breach by the subsequent events culminating in the court judgment. The umpire had rejected this contention because he held that the charterparty had become frustrated by November 26 when the court judgment was issued. His finding of frustration was upheld by Evans J, who confirmed that its effect was to prevent owners from claiming that a repudiatory breach was operative thereafter.

The relevant argument for present purposes was that of the owners to the effect that the charterers could not rely upon the frustrating events because they were substantially brought about by the receivers, for whom the charterers were responsible under the charterparty. At page 471 column 2 Evans J dealt with this argument in the following terms:

“(ii)

Receivers’ Acts

The second submission is that the charterers are vicariously liable for the delay caused by the receivers and their various actions described above. This argument in my judgment is misconceived. The charterers having undertaken, subject to exceptions, that the cargo will be discharged within the agreed period, they will clearly be liable if this is not done, notwithstanding that the discharging operation has become the responsibility of the receiver or of some other party and the charterer plays no part in it himself. Even if this can properly be described as delegating the charterers’ contractual duty, it does not follow that the charterer becomes responsible, vicariously or otherwise, for the receivers and all that they do, or fail to do. The charterer can only be liable when there has been a failure to achieve what the charterers undertook to the shipowner would be done. There was, of course, a failure to discharge within the laytime, for which the charterers are liable in damages or demurrage. The vessel was detained by her arrest and the subsequent judgment. There is no undertaking in the charterparty, express or implied, that cargo receivers will not arrest the vessel, or seek to do so, at the discharging ports.”

It is important to note that in that case the claim being addressed in this passage was not a claim for demurrage, or for detention of the vessel by virtue of a failure to discharge the cargo (an argument that all the loss was to be treated as flowing from the failure to discharge was rejected at page 472). In several passages in the judgment it is recorded that the detention of the vessel was caused by its arrest, and the umpire had found that from the moment of the judgment (which he held to be the date of frustration), there was no further possibility of discharge; the Court had decided that the receivers were entitled to a money sum representing the value of the cargo, rather than the (as the Court found wet damaged) cargo itself. The Adelfa was not, therefore, a case in which the relevant activity of the receivers was a failure to discharge the cargo. On the contrary the claim by owners was in respect of the receivers’ conduct in arresting the vessel and was a claim for the cost to the owners of securing release from arrest to allow the vessel to leave the port. It was a claim for the consequences of the vessel being prevented from sailing away, not being prevented from discharging her cargo, and it was not a demurrage claim. A charterer undertakes in the charterparty to discharge the cargo, and will be liable in demurrage or damages for detention if the cargo is not discharged, notwithstanding that the function of discharging has been delegated to receivers as its agent. By contrast, the charterer gives no undertaking that cargo receivers will not arrest the vessel, and such arrest is not attributable to charterers. The distinction drawn by Evans J in the quoted passage is between a failure to discharge, for which a charterer is liable because it is his personal contractual undertaking, and an arrest preventing the vessel sailing away, in respect of which the charterer gives no undertaking vis a vis the conduct of receivers.

The Adelfa does not assist the Charterers in the present case because the present case is not concerned with a frustrating event which prevented the sailing away of the vessel. The findings by the Tribunal in this case were that the conduct of the receivers prevented the cargo being discharged. It falls fairly and squarely within the category identified by Evans J of a failure to discharge within the laytime “for which the charterers are liable in damages or demurrage”.

The question of law as formulated for this appeal is not capable of a simple yes or no answer, as was apparent from the dichotomy drawn in Ms Cockerill QC’s oral submissions between conduct in failing to discharge and other conduct. Mr Priday is correct in saying that the dichotomy as formulated was not an argument advanced before the Tribunal, or in the arbitration claim form, or in the formulation of the point of law for which permission to appeal was granted. In Ms Cockerill QC’s skeleton argument on the appeal she suggested that the question of law should be answered in black and white terms “yes” to the first question and “no” to the second question. But in her oral submissions she argued that as a question of law the answers might be yes or no, depending on the particular facts of any individual case, and in particular whether the action or inaction of the cargo receivers in any given case could properly be categorised as action or inaction in discharging the cargo. In the event, the Tribunal’s finding that the relevant conduct of the receivers, causing what would or might otherwise have been a frustrating event, was a failure to discharge the cargo means that the relevant question of law is whether such conduct on the part of receivers prevents charterers from relying on what would otherwise be a frustrating event as relieving it from the obligation to pay demurrage. The answer to that question is yes.

For the above reasons the appeal is dismissed.