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Pan Ocean Co Ltd v Daelim Corporation (the "DL Lilac") [2023] EWHC 391 (Comm) (24 February 2023)

Claimant Charterers, Pan Ocean Co Ltd, appealed against an arbitration award in favour of the Vessel Owners, Daelim Corporation.

The parties had entered into a time charter trip in early 2017 on amended NYPE 1993 terms for the carriage of a cargo of bulk urea.

The Vessel arrived at Jubail and berthed on 15 February 2017. On 16 February, the Vessel was inspected by SGS and the holds were failed due to the presence of rust, paint flakes and cargo residue.

Clause 69 of the C/P provided: 

“Vessel's holds on delivery or on arrival 1st load port to be clean swept/washed down by fresh water and dried so as to receive Charterers intention cargoes in all respects free of salt, rust scale and previous cargo residue to the satisfaction of the independent surveyor.

If Vessel fails to pass any holds inspection the Vessel to be placed off-hire until the Vessel passes the same inspection and any expense/time incurred thereby for Owners' account."

The Vessel did not pass re-inspection until 1100hrs on 4 March 2027 after a period at anchorage. The Master had said that the Vessel was clean and ready to re-inspect at 1530hrs on 19 February 2017 (some 12 days before).

In the arbitration Owners had contended that it was an implied term that Charterers must carry out any reinspection with reasonable diligence and without any undue delay and that Charterers were in breach of that implied term because reinspection took so long to arrange.

Owners said that Charterers were not entitled to treat the Vessel as off-hire after 1530hrs on 19 February because any loss of time after then was caused by Charterers’ breach of their obligation to arrange a reinspection with diligence.

The arbitration panel found in Owners’ favour and decided that once the Vessel advised that cleaning had been completed and the Master called for a reinspection, it was reasonable for the Charterers to be under an implied obligation to have the Vessel re-inspected without delay. This meant they said that Owners’ claim for USD$106,611.92 (US$110,765.63 less 3.75% address commission) in respect of hire plus US$16,308.93 in respect of bunkers succeeded in full.

The court said that the tribunal had made a considered decision that once the Master notified the Charterers that the Vessel had been cleaned the Charterers were in breach even though an inspection had not yet taken place. The court said this was wrong as a matter of law. It was inconsistent with the term the Tribunal implied into the contract and with clause 69 of the C/P, which provided for the Vessel to be off-hire until it passed reinspection.

It was common ground that the test for the implication of a term into a charterparty was whether, on an objective basis, the term to be implied is necessary to give business efficacy to the contract or is so obvious that it goes without saying and that it must also comply with the five requirements for an implied term:

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that it goes without saying;

(4) it must be capable of clear expression; and

(5) it must not contradict any express term of the contract.

Charterers contended that there was an error made by the Tribunal when at para 25 they said that it was "reasonable" for the Charterers to be under the implied obligation they identified. Reasonableness, they said, by itself was not enough.

The court said that the award could be read in such a way that the Tribunal did in fact apply the correct legal test for implied terms notwithstanding the reference to "reasonable" in para 25 of the Award. It held that the term mentioned at para 25 of the Award was “shorthand” for saying that the implied term obliged both parties to take reasonable steps to cooperate to organise a reinspection, without undue delay, and this was the proper implied term consistent with necessity, business efficacy and clause 69 of the C/P.

It was simply the case that on the facts the Charterers had to do the running because the original SGS inspector had been appointed by shippers. Owners for their part said they would have readily agreed to the appointment of a surveyor under clause 69 of the C/P on a joint basis as necessary.

The court found that the Tribunal had, however, erred in the application of the implied term. What the Tribunal should have done (instead of finding an immediate breach once the Master had notified Charterers that the holds were ready for reinspection) was to decide by when the reinspection should have taken place to fulfil the obligation to exercise reasonable diligence to have the Vessel reinspected without undue delay. It would follow, so said the court, that the Vessel would be back on hire from that moment in time.

The court therefore remitted matters back to the arbitrators with the clearer exposition of the implied term as put forward by the court available to the Tribunal. Both parties apparently accepted that in this scenario the Tribunal would then need to decide what could and should have been done by the parties regarding reinspection, whether either party was in breach and the relevant timescales plus the financial consequences of any breach.

So all in all the Tribunal had got the implied term right but misapplied it and the matter was remitted for their further consideration with the Tribunal to deal with all aspects of costs in the arbitration.

A link to the judgment can be found at the start of the article.