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Invoking the CONWARTIME clause: limitations or liberties?

By • Nov 13th, 2012 • Category: Shipping Law

Maritime Law Podcast from Coracle Online and international law firm Ince & Co

In this podcast we look at invoking the CONWARTIME clause: limitations or liberties?

Taokas Navigation SA v. Komrowski Bulk Shipping KG (GmbH & Co) and others (The Paiwan Wisdom) [2012] EWHC 1888 (Comm)

This case involved an appeal from an arbitration award, the issue being whether the owners were precluded from relying on the CONWARTIME 2004 clause to justify their refusal to follow the charterers’ orders to conduct a voyage to Mombasa, Kenya.

The background facts

The vessel was chartered on three back-to-back charterparties on materially identical terms. The lead appellant was the sub-sub-charterer, Solym Carriers Ltd (“charterers”) and the lead respondent was the head owner, Taokas Navigation SA (“owners”). The sub-sub-charterparty was concluded on 25 March 2010 and, on 23 April 2010, the charterers instructed the vessel to proceed on a laden voyage from Taiwan to Mombasa, Kenya. Those orders were conveyed up the line to the owners, who refused to perform them, relying on the CONWARTIME 2004 clause (which was incorporated into all three charterparties).

The clause provided as follows:
“The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through any port, place, area or zone…where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgment of the…Owners, may be or are likely to be exposed to War Risks.”

When the owners refused the instructions to proceed to Kenya, they indicated that piracy in the Indian Ocean was becoming more severe and extending further along the coast/waters of East Africa. The refusal was passed down the line and the charterers were forced to charter another vessel to perform the voyage at a cost of US$815,000. The resulting dispute was referred to arbitration and, as a preliminary issue, the
arbitrators were asked to determine whether, on the true construction of the charterparty, the owners were precluded from relying on the CONWARTIME 2004 clause to justify their refusal to perform the charterers’ voyage instructions.

For the purposes of the preliminary issue hearing, the tribunal was asked to assume that: (a) the owners had exercised their right to determine that there was a real likelihood that the vessel would be exposed to piracy in good faith; and (b) there
was no material change in the risk of carrying out the voyage between the date of the charterparty and the date of the order.

The arbitrators, by a majority, determined that the owners were entitled to refuse the order. The charterers were granted leave to appeal under Section 69 of the Arbitration Act 1996.

The Commercial Court decision

The charterers relied on the Court of Appeal decision in The Product Star No. 2 [1993] 2 Lloyd’s Rep. 397. In that case, it was held that if, in the owners’ reasonable judgment, there is a real likelihood of exposure to war risks, the owners are only
entitled to refuse the voyage order if they can establish that there has been a material increase in the risk between the date of the charterparty and the date of the voyage order. In other words, there must be (a) a likelihood of war risks in the owners’ reasonable judgment; and (b) those risks must have increased since the date the charterparty was concluded.

The charterers also argued that the CONWARTIME 2004 clause should be read in light of the charterparty as a whole. Specifically, they relied on the provisions of Clause 50 (Trading Limits/Exclusions), which excluded certain ports (not including Mombasa/Kenya) and allowed the vessel to pass through the Gulf of Aden, provided H&M underwriters’ consent was obtained. As the reason for the reference to the Gulf of Aden was to preclude the owners from refusing an order to go there due to piracy risks, the charterers submitted that the risk of piracy was considered at the outset and only the countries named in Clause 50 were excluded from trade. The charterers
argued that this meant that the owners had accepted the risk of piracy in proceeding to Kenya. They further argued that a construction which allowed the owners to permit trading to a certain port on the creation of the charterparty and then entitled the owners to refuse to trade to the same port the next day, without a material change in risk, would not make commercial sense.

The court disagreed with the charterers’ arguments. Mr Justice Teare concluded that the CONWARTIME 2004 clause should be read in light of the charterparty as a whole and, as such, the owners could not rely on the CONWARTIME 2004 to justify a refusal to pass through the Gulf of Aden if H&M insurers’ consent had been obtained. The owners’ agreement, however, to pass through the Gulf of Aden (which was likely due to the
presence of naval forces and the use of the convoy system) did not mean that the piracy risks had been considered at the outset or that the owners had implicitly agreed to trade to ports other than those expressly excluded in Clause 50. The
charterers could direct the vessel to proceed to Kenya, but the owners were within their rights to refuse to do so if, in their view and within the meaning of the CONWARTIME 2004, there was a real likelihood of the vessel being exposed to acts of
piracy en route.

The judge further disagreed with the charterers’ submission that The Product Star applied. The key difference between the two cases was that the owners of The Paiwan Wisdom did not appear to have accepted the war risk involved in the particular trade, whereas it appeared that the owners in The Product Star had.

Mr Justice Teare did not accept that there is a lack of commercial sense in a construction of the charterparty which permits trading to a port on day one but which entitles the owners to refuse an order to trade to the same port on day two. Additionally, there was no suggestion in the words of the CONWARTIME 2004 that there should be a material change in risk between the date of the charterparty and the date of the order, in order for the owners to be able to rely on the CONWARTIME clause. As such, whilst trading to Kenya was permitted under clause 50 of the charterparty, the CONWARTIME 2004 entitled the owners to refuse the order as a result of piracy risks which they might encounter en route to Kenya.

Comment

The decision in The Paiwan Wisdom clarifies the question of when owners are able to rely on piracy clauses, by removing the requirement in The Product Star that there should be a material change in risk between the date of the charterparty and the
date of the order. This requirement could result in complications when applying the rule to back-to-back charterparties with different dates and the clarification is therefore welcome. The result is that owners can more readily rely on the terms of a war risks clause to refuse voyage orders to ports which are subject
to such risks.

Charterers who think, however, that they have contracted for worldwide trading will doubtless feel aggrieved that owners are able to decline otherwise legitimate voyage orders to ports which are not excluded from trading, in circumstances where nothing has changed since the date of the charterparty. As a result, no doubt charterers will start inserting detailed clauses setting out which countries/ports are allowable at the outset of the charterparty. At the same time, owners will likewise seek to
ensure that the trading exclusions cover their interests, although charterers may have the upper hand in the current commercial climate.