Fehn Schiffahrts GmbH & Co KG v Romani SPA

This is an appeal by the appellant, under section 69 of the Arbitration Act 1996 (the “Act”) against an award dated 4 December 2017 made by Mr Graham Perry, Mr Richard Faint and Mr Kevin Heylock (the "Award") pursuant to which the appellant was ordered to pay damages to the respondent in respect of damage to a cargo of sunflower seeds and wheat.

By an order dated 9 March 2018, Cockerill J granted permission to appeal.

The Appellant is the head owner (the "Owners") of the MV Fehn Heaven (the "Vessel"). By a charterparty dated 29 March 2012, the Owners chartered the Vessel to the respondent (the "Charterers").

The charterparty was for a voyage from Reni (Ukraine) to Rotterdam (the Netherlands) for a cargo of approximately 1,300 mt of organic sunflower seeds and 1,800 mt of organic wheat (the "Charterparty"). The cargo was loaded at Reni under two straight bills of lading dated 3 and 4 April 2012. The consignee named in the bills of lading was SC Justorganic Srl ("Justorganic").

It is common ground that at some point after completion of the loading at Reni, and prior to discharge at Rotterdam, the cargo was fumigated.

In the arbitration, the Charterers claimed that, as a consequence of the fumigation, the cargo could not be sold as organic and therefore it had to negotiate a discounted price with the two Dutch buyers to whom it had on-sold the cargo (Greenford International BV and Spack Trading BV). The Charterers therefore sought inter alia to recover the amount of the negotiated discounts from the Owners.

The Award concluded, at paragraph 62, that the Owners were liable for any damages found to have been caused by the unauthorised fumigation of the cargo whilst it was in the Owners' care and custody. The tribunal awarded damages to the respondent relating to the downgrading of the cargoes from organic to conventional cargoes; the amounts claimed being €171,353 against the feed wheat cargo and €153,400 against the sunflower seed cargo.

On 22 December 2017, the Owners applied to the Tribunal under section 57(3) of the Arbitration Act 1996 for clarification of the evidence relied upon by the Tribunal which led to the finding (at paragraph 64 of the Award) that the Charterers had title to sue.

On 30 December 2017, the Tribunal responded as follows:

The grounds of the appeal are that the tribunal erred in law when answering the following question in the affirmative and finding that the respondent had title to sue:

The Award, at paragraph 26, records that:

The Tribunal's findings relevant to damages are set out at paragraphs 63 to 68 of the Award:

The court is concerned to decide, on the hearing of the appeal, whether the award can be shown to be wrong in law. In a case such as the present, the answer is to be found by dividing the arbitrator's process of reasoning into three stages: (1) The arbitrator ascertains the facts. This process includes the making of findings on any facts which are in dispute; (2) The arbitrator ascertains the law. This process comprises not only the identification of all material rules of statute and common law, but also the identification and interpretation of the relevant parts of the contract, and the identification of those facts which must be taken into account when the decision is reached; (3) In the light of the facts and the law so ascertained, the arbitrator reaches his decision.

Stage (2) of the process is the proper subject matter of an appeal under the Act. In some cases an error of law can be demonstrated by studying the way in which the arbitrator has stated the law in his reasons. It is, however, also possible to infer an error of law in those cases where a correct application of the law to the facts found would lead inevitably to one answer, whereas the arbitrator has arrived at another.

For the avoidance of doubt (and contrary to the written submission for the appellant), I make clear that the question for this court is whether or not an error of law has been established. The question of whether the decision is “obviously wrong or at least open to serious doubt” is a threshold question on the application for permission to appeal. It is not the test for this court hearing the appeal.

I also note the general approach to be adopted by the court in seeking to establish what has been decided in an arbitral award, mainly to read it in “a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault to find with it” and without approaching it “with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults in awards, and with the objective of frustrating the process of arbitration” (Polaris Shipping Co Ltd v Sinoriches Enterprises Co Ltd [2015] EWHC 3405 (Comm) at [2]).

The Owners say is that it is implicit in the Tribunal's finding that the Charterers had title to sue by virtue of an assignment from Justorganic, that the Charterers suffered the loss and Justorganic did not.

The Owners argue that in the Award the Tribunal conflated the issues of: (a) whether the Charterers (as assignee) had title to sue; and (b) whether Justorganic (as assignor), and therefore the Charterers (as assignee), had suffered loss. In essence, the Owners' case is that the Tribunal's finding that the Charterers had title to sue is separate to the question of whether they suffered loss and were thus entitled to substantial damages.

The following legal principle was common ground (Chitty on Contracts (32nd edition at paragraph 19-075):

The Owners case is that, applying this general principle, the Charterers were not entitled to substantial damages because Justorganic (as assignor) would not have been able to claim damages itself. A consignee under a straight bill of lading who suffers no loss cannot bring a claim in respect of damage to the cargo. The assignment purported to transfer proprietary interests after the breach causing loss or damage to the goods.

The Owners claim that, contrary to the general principle, the Tribunal implicitly found that the Charterers could claim substantial damages in circumstances where Justorganic was not entitled to do so. As such, they say that the Tribunal misdirected itself as to the question of law and its answer is therefore obviously wrong.

The Charterers' primary case is that the damages awarded by the Tribunal were the loss that Justorganic was entitled to recover as the consignee under the straight bills of lading which it assigned to the Charterers, and therefore the question of law does not arise at all. In support of this, the Charterers point to the fact that there is no finding in the Award that Justorganic did not suffer loss.

Alternatively, the Charters argue that, if Justorganic did not in fact suffer loss, then the loss was suffered by the Charterers and the Charterers had title to sue the Owners independent of the assignment i.e. under the Charterparty. They say that the case of The Fjord Wind [1999] 1 Lloyd's Rep. 307 is analogous and shows that the Charterers had title to sue the Owners as a party to the Charterparty (and therefore the straight bills of lading and the assignment are irrelevant).

In the further alternative, the Charterers contended (in written submissions) that, if they did not have title to sue but did suffer loss, they can still recover the loss as an exception to the general principle. Counsel relied on a line of authorities to demonstrate that the loss suffered by the Charterers may be treated as a loss of Justorganic, which the Charterers are entitled to recover so that the loss does not disappear into a "legal black hole". The court was referred to Mann J's analysis of the authorities in Pegasus Management Holdings SCA v Ernst & Young [2012] EWHC 738 (Ch), which culminated in his conclusion at paragraph 30 that:

However in oral submissions, counsel for the respondent submitted that if Justorganic suffered recoverable loss then the question of law does not arise; alternatively if the loss was suffered by the respondent, it had title to sue. Counsel therefore submitted on the findings of the Tribunal the position must be either the first or second alternative and the third alternative of the “legal black hole” does not arise. I accept that submission and do not therefore propose to deal with the line of authority relating to the third alternative.

Paragraphs 63 and 64 of the Award does appear to be a finding by the Tribunal the Charterers suffered loss:

This appears to be consistent with paragraph 35 of the Reply Submissions which stated:

I accept there is no express finding in the Award that Justorganic did not suffer loss. If Justorganic suffered loss, there was no error of law.

Counsel for the respondent submitted that Justorganic was entitled to recover full loss under the straight bills of lading. Counsel submitted that it was that loss that it assigned to the respondent. Counsel relied on The Sanix Ace [1987] 1 Lloyd’s LR 465 Hobhouse J as authority for the proposition that an owner of goods was entitled to sue and recover damages in respect of loss or damage to those goods. The fact that the plaintiff had contracts of sale or purchase which enabled him to collect the price from his buyer or obtain compensation from a seller did not disentitle him from recovering from damages: The Baltic Strait [2018] EWHC 629 (Comm). It was the loss to the proprietary or possessory interest that was compensated.

Counsel for the appellant submitted that it was not apparent on the face of the award whether Justorganic were the owners at the time the physical damage occurred. Counsel submitted that The Sanix Ace and Baltic Strait can be distinguished because in that case property and risk was split and that here property and risk “must have passed” prior to the on sale. There is however no statement in the Award which would justify such an inference.

On the authorities Justorganic may have suffered a loss as the holder of the straight bills of lading but there was no implicit finding by the Tribunal to this effect and this court cannot infer on the facts impliedly or expressly found by the Tribunal, that the Tribunal found that there was substantial loss to Justorganic.

In the alternative counsel for the respondent submitted that the respondent had a right to sue in its own right. Counsel relied on The Fjord Wind [1999] 1 Lloyd's Rep. 307 as analogous and showing that the Charterers had title to sue the Owners as a party to the Charterparty and therefore the straight bills of lading and the assignment were irrelevant.

Counsel for the appellant submitted that the Tribunal did not find that the respondent had a right to sue in its own right: in the clarification the Tribunal referred to the submissions in the reply submissions at paragraphs 32 and 33.

Although in the reply submissions the Charterers refer to the written assignment being executed as “a belt and braces exercise”, at paragraph 26 of the Award (quoted above) the Tribunal referred expressly to the fact that Justorganic as holders of the bill of lading had assigned any interest in the cargo in favour of the charterers and in the clarification the Tribunal referred to the assignment letter. In my view the natural inference from the Award is that the Tribunal based its finding that the respondent had title to sue based on the assignment rather than under the charterparty in its own right.

The Owners contend that, to the extent the court cannot determine whether the Tribunal answered the question of law incorrectly on the face of the Award, the court should remit the Award back to the Tribunal in accordance with the decision of Tomlinson J in Pentonville Shipping Ltd v Transfield Shipping Inc m.v. "Johnny K" [2006] EWHC 134 Comm. In Pentonville, the critical question was whether a decision to order the relevant vessel to leave a berth before it was fully loaded was one for which the charterers were responsible or which could be attributed to the charterers. Tomlinson J found that there was no clearly or consistently expressed finding by the arbitrators on the question by whom the order to sail was given; if the order to sail had in fact been given by the shippers then it was accepted that the arbitrator’s award could not stand. The judge concluded that he was unable to establish whether the arbitrators had addressed the question and if they did address the question, whether they directed themselves correctly. He therefore remitted part of the award to the arbitrators for reconsideration.

In this case the court cannot determine whether the Tribunal answered the question of law correctly on the face of the Award: it is to be inferred from the Award (for the reasons discussed above) that the Tribunal’s decision was based on the finding that the respondent had title to sue based on the assignment, rather than the charterparty, but having proceeded on this basis, this court cannot determine whether the Tribunal determined that Justorganic suffered a loss. The Tribunal does not appear to have distinguished between the issue of title to sue and the issue of whether Justorganic suffered a loss. If in fact there was no substantial damage suffered by Justorganic, then the Tribunal has incorrectly applied the law and assumed that the respondent could recover the losses, even though no loss had been suffered by Justorganic as assignor.

In relation to the alternative argument advanced by the charterers, that the Award may be upheld for reasons not expressed in the Award, the respondent contends that the respondent suffered loss and is entitled to recover under the charterparty. The respondent contends that if the respondent had title to sue and Justorganic did not suffer loss, then the loss was suffered by the charterers and it had title to sue. In my view this court cannot uphold the Award on the basis that the respondent suffered loss which would entitle it to recover under the charterparty. There is no basis in the Award for upholding the Award on this alternative basis given in particular the finding in paragraph 36 of this judgment that the tribunal’s decision was based on the finding that the respondent’s title to sue was based on the assignment rather than the charterparty.

For the reasons set out above the appeal succeeds and in the circumstances the matter must be remitted to the Tribunal.