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Mercuria Energy Trading Pte v Raphael Cotoner Investments Limited (The ‘Afra Oak’) [2023] EWHC 2978 (Comm)

Key Points

The High Court has upheld the decision of the Arbitral Tribunal that Owners were permitted to rely on the negligent navigation defence under Article IV(2) of the Hague Rules, in circumstances where, in breach of Charterers’ employment orders, the Master failed to demonstrate good navigation and seamanship and anchored in territorial waters, in breach of local law.

Background Facts

Mercuria Energy Trading Pte (“Charterers”) chartered the m/t Afra Oak (the “Vessel”) from Raphael Cotoner Investments Limited (“Owners”) and gave orders to “proceed to Spore EOPL for further orders. Discharging plan still not known yet”. The meaning of this acronym was that the Vessel was to wait for further orders outside Singapore port limits. This area was known to include off the east coast of Malaysia, and off the coast of Bintan, Indonesia (outside of the Straits of Malacca and Singapore, but within the territorial waters of Malaysia and Indonesia).

The Vessel anchored in Indonesian waters, which it was not entitled to do under the United Nations Convention of the Law of the Sea 1982, as this was prohibited by Indonesian law. The Vessel was arrested on 12 February 2019 by the Indonesian navy and detained for 8 months until criminal proceedings were concluded, and the Master was convicted of a criminal offence.

Substantial claims and counterclaims arose out of the detention of the Vessel.

Arbitration Hearing

The Owners advanced a claim in arbitration for breach of the safe port warranty. This claim failed on the facts.

Charterers then advanced a counter claim for inter alia a breach of Charterers’ employment orders. In response to this counterclaim, Owners relied on the exception in Article IV(2)(a) of the Hague Rules incorporated into the charterparty. The Tribunal determined that Owners were allowed to rely on this exception.

It was this decision that gave rise to the appeal pursuant to s.69 Arbitration Act 1996.

Appeal

Charterers’ position on appeal was that – relying on the decision in the Hill Harmony [2001] 1 AC 638 - section IV(2)(a) Hague Rules did not afford a defence to Owners in the absence of a good reason for departing from their employment order.

Owners argued that the choice of route was a navigational decision for which liability was excluded under Article IV (2)(a).

Sir Nigel Teare, sitting as a Judge of the High Court held that the Hill Harmony was a different category of case to the case at hand.

In the Hill Harmony, Charterers ordered the Vessel to proceed by a route recommended to them by a weather routing service. The Master disregarded this order, having previously experienced bad weather on this route, and instead took a longer route. Charterers refused to pay for the extra time and bunkers consumed and Owners claimed these sums in London arbitration.

Charterers maintained that Owners breached their obligation to prosecute the voyage with the utmost despatch and comply with Charterers’ orders.

The arbitrators held that owners were in breach of their obligation under the Charterparty and decided that the planning of the voyage was not a matter of navigation.

The case was ultimately appealed to the House of Lords who held that Charterers’ order as to routing was an employment order which the Master must follow unless it compromises the safety of the ship. Lord Hobhouse held: ““Employment” embraces the economic aspect – the exploitation of the earning potential of the vessel. “Navigation” embraces matters of seamanship”.

Sir Nigel Teare in the present case distinguished the Hill Harmony on the basis that it established a different proposition; that if there is a choice not to comply with employment orders, that cannot without more then be described as negligent navigation. In The Hill Harmony, there was nothing more. By contrast, in the Afra Oak the Master failed to display good navigation and seamanship by not taking into account the risk of anchoring in territorial waters.

Sir Nigel Teare concluded that the Article IV(2) defence did apply in the present case: “because the master’s decision to anchor where he should not have done was caused by his error in navigation and seamanship. That does not expand the defence. It merely applies the defence.”

The Charterers’ s.69 Arbitration Act 1996 challenge was therefore dismissed.

Comment

The ability to rely on the negligent navigation defence for breach of an employment order will be largely fact specific, however Owners should be mindful of the distinction between the employment of the Vessel (which relates to economic factors) and the navigation of the vessel (which relates to matters of seamanship), when seeking to rely on the “error of navigation” defence.