Reporting on two recent London arbitration awards. When is a claim “properly settled or compromised” and what is the time bar?
Or: When is a claim “properly settled or compromised” and from what time does time start to run when a party asks to be indemnified under the Inter-Club Agreement?
Many times C/Ps expressly incorporate the Inter-Club NYPE Agreement if the C/P is drawn up in the NYPE 1946 form. The newer 1993 version of the NYPE form already includes as a printed clause (clause 27) that cargo claims are to be settled between owners and charterers in accordance with the 1984 version of the Inter-Club Agreement or any subsequent modification replacement thereof. The most current version of the Inter-Club Agreement is dated 1996.
The Inter-Club Agreement was drawn up and is intended to be a somewhat easier way of allocating liability for cargo claims between owners and charterers and, although there is still scope for disputes to arise, the Inter-Club Agreement does in fact to some extent make the allocation of liabilities for cargo claims easier.
The Inter-Club Agreement includes (in its 1996) version a requirement that claims shall be notified in writing to the other party to the C/P within 24 months of the date of delivery of the cargo (or the date the cargo should have been delivered) or 36 months where Hamburg Rules apply.
Depending on what has caused the claim to arise, claims may be allocated by 100% to either owners or charterers or a 50/50 percent allocation.
One of the requirements for the agreement to apply is that the claim has been “properly settled or compromised”.
In November 2004, two arbitration awards were published with one award dealing with the issue as to whether the claim had been properly settled or compromised and the second award dealing with the issue of whether the claim to be indemnified was time barred.
The London Arbitration 29/04 LMLN [2004] 653 accepted that claims – in certain circumstances – must be indemnified under the Inter-Club Agreement even when the claim is settled for commercial or expedient reasons. The London Arbitration 32/04 LMLN [2004] 653 held the indemnity in the Inter-Club Agreement to be a general indemnity where time will not start to run until the underlying liability has been established and ascertained (typically paid). It is important to note that the notification within 24 (or 36) months must still be complied with.
In London Arbitration 29/04, the vessel discharged a bulk cargo of wheat in Yemen and when discharge was completed, the Yemen receivers claimed that there was a shortage, and they also threatened to have the vessel detained unless their claim (in the relatively minor amount of approx. USD 18,350) was settled in full. The cargo receivers even refused to accept any kind of security.
The owners had to face the fact that if they went to a Yemen court with this claim, the vessel would inevitably be delayed, perhaps for a substantial period of time, with the vessel being off-hire. Bearing in mind the relatively modest amount of the alleged shortage claim, any off-hire would relatively quickly exceed the amount of the claim.
The owners consequently decided to settle the claim in full and subsequently requested a full indemnity from their charterers (plus costs) in reliance on the Inter-Club Agreement (in this case in the 1984 version).
The charterers did accept that the B/L incorporated the Hague Rules (which is another requirement under the Inter-Club Agreement ), but they nevertheless denied that they should indemnify under the Inter-Club Agreement, arguing that there was no “recognisable cargo claim” and that any claim (if it did exist) had not been properly settled or compromised.
The charterers argued that it would be standard procedure to provide security, to request “proper” claim documentation in order to decide whether there was indeed a liability for the vessel and charterers argued that no steps had been taken by the owners in this regard. The charterers also argued that the owners did not dispute with the receivers that the voyage charter (which was incorporated into the B/L) was on a “free out” basis so that accordingly owners would have no liability for such losses as were caused by the receivers’ own stevedores (it was alleged that stevedores were indeed responsible for most of the losses).
The charterers therefore argued that although they fully appreciated that the claim had been settled for “commercial expedience” in order to have the vessel leave without delay, they also argued that such a claim could not be passed to charterers under the Inter-Club Agreement.
Alternatively, the charterers argued that they could not be liable for any more than 50% of the claim.
The arbitration panel held that it was a matter of principle that although a party may settle a claim for reasons which, in the circumstances and at the relevant time, were “purely commercial”, a party could still recover under the Inter-Club Agreement if it could be shown that a failure to settle would incur a liability to the claimant for an amount equal to or greater what was paid in settlement to the claimant.
Put another way, the requirement that claims should be “properly settled or compromised” does not include a requirement that a party must, before settling or compromising, necessarily investigate in full detail the claim and/or negotiate the claim. It was added that in most cases this would of course be very desirable and in many cases it would be essential, but the decision reflects the pragmatic approach that the ordinary way of dealing with claims may not be appropriate in some jurisdictions.
It came to light that the owners had in fact taken local legal advice in Yemen before settling the claim, and they had been advised that if they had allowed the matter to go to court, the owners would in fact have been held liable for the claim. The charterers, on their part, did not offer any contrary evidence to this advice.
It is also noteworthy that the tribunal referred to their own experience with cargo claims in Yemen and it was recognised that it could be almost impossible to resist a cargo claim in circumstances such as those in the present case. There was, however, no clear and irrefutable evidence that the shortage was due to act, neglect or default on the part of the charterers’ servants or agents, and for this reason the charterers were held liable for only 50% of the claim.
The award (London Arbitration 32/04) dealt with the issue of whether an indemnity claim was time barred.
This particular case concerned a vessel delivering a cargo of pipes in Abu Dhabi. Upon discharge, it was found that some of the pipes were damaged, and during a subsequent call at Abu Dhabi (under a different C/P) the vessel was arrested by the underwriters of the pipe cargo. The owners provided a bank guarantee in favour of the claimants before an action pending in the Abu Dhabi local court.
The Abu Dhabi Court of First Instance found in favour of the local claimants (against both the vessel’s owners and its charterers), but the owners appealed on the basis that under the relevant B/L any liability was solely that of charterers. The Appeal Court accepted owners’ argument and held that owners were not liable for the claim and that decision was subsequently upheld by the Higher Federal Court in Abu Dhabi.
In the meantime, however, the Abu Dhabi Court of Execution had ordered that payment be made to the claimants under the bank guarantee and in spite of being successful before the higher courts, the owners nevertheless suffered a loss.
The owners asked to be indemnified by the charterers for these losses and the matter was referred to arbitration.
The C/P included a clause 50 with owners agreeing that liability for cargo claims should be apportioned in accordance with the Inter-Club Agreement 1984 and any subsequent amendments.
The owners argued that they should be indemnified i.e. a claim for an indemnity but also claimed that they had a claim for damages for breach of contract.
Opposed to this, the charterers argued that the owners’ claim was time barred pursuant to the UK Limitation Act which has a 6-year time bar. The discharge took place in August 1995 and the bank guarantee was provided by owners in March 1996. The drawdown of the bank guarantee (payment) was effected in January 2003 whereas the arbitration was commenced only in August 2003.
The arbitrators held that the point at which time began to run depended on whether the particular indemnity was construed as being either a so-called “indemnity against liability” or a “general indemnity”. In case of an “indemnity against liability” time would start to run as soon as the underlying liability was incurred. In the case of a “general indemnity” time would start to run only when the underlying liability had been “established and ascertained” typically by payment to discharge it.
The arbitrators took the view that clause 50 (incorporated in the Inter-Club Agreement) was an implied indemnity and also a general indemnity so that time would not begin to run until the underlying liability had been established and ascertained.
The fact that the notification requirement (i.e. the notification of claims under the Inter-Club Agreement) ran from the date of discharge or the date when the goods should have been discharged made no difference.
Accordingly, the owners’ claim against charterers was not time barred. The notification within 24 (or 36 months) must always be made in order to protect the position under the Inter-club Agreement but the actual finalisation of the claim can obviously take some time before the claim is settled vis-a-vis claimants by way of agreement, court decision or arbitration award and only then (when payment is made) will time start to run with respect to the indemnity under the Inter-Club Agreement. The indemnifying party may therefore expect to be exposed for such an indemnity claim for a considerable period of time.