London Arbitration looks at ICA issues

The award published in the Lloyd’s Maritime Law Newsletter as London Arbitration 10/22 deals with important issues arising under the Inter-Club Agreement (ICA), the latest version of which is the ICA 2011.

Facts

The arbitration concerned two cargoes of soyabeans loaded at Uruguay and Argentina, destined for discharge at China.  It appears the Argentinian cargo showed physical damage at the time of discharge whereas the Uruguayan cargo deteriorated whilst in warehouses ashore.

The Chinese receivers’ insurers claimed RMB 10m and, although Owners tried to defend the claims before the Chinese courts and made offers to settle, Owners were found liable for almost 100% of the claim plus interest at first instance.

The parties settled ahead of an appeal for a relatively small discount.  Owners sought to recover 100% of their exposure from charterers under the ICA.

Issues under the ICA for determination

The arbitration tribunal dealt with questions about which version of the ICA applied under the charter; whether the claim advanced by cargo receivers was a “Cargo Claim” within the meaning of the ICA; what the ICA means by the requirement that underlying claims must be “properly settled or compromised”; how ICA Clause 8(b) works; and, responsibility for damage by inherent vice.

Issue 1: Which version of the ICA applied?

There have been a number of different versions of the ICA since it was first devised in 1970.  The first issue for the tribunal was which version of the ICA applied given the charterparty incorporated the ICA “1984 and any amendments thereto”.

Charterers argued the 1996 version (and therefore by extension the 2011 version) was not an amendment to the 1984 version but was instead a reprint, replacement or other species of revision or reincarnation.

The tribunal preferred not to take a technical approach to the language used and held the 1996 version of the ICA was an amendment to the 1984 version for the purposes of the charter incorporation clause.

Issue 2: Was the underlying claim within the scope of the ICA?

Charterers argued that the claim did not fall within the scope of the ICA because the Uruguayan cargo did not arrive damaged. Owners pointed out that the damage was allegedly caused during the voyage.

The tribunal decided that, since cargo interests had alleged in the Chinese proceedings that the Uruguayan cargo had been damaged on the voyage, the claim fell within the scope of the ICA.

Issue 3: The meaning of “properly settled or compromised”

Charterers argued the underlying cargo claim had not been properly settled or compromised as required by ICA Clause 4(c) because Owners had failed to challenge the cargo receivers’ argument that the Uruguayan cargo was damaged at the time of discharge and so Owners had in effect conceded responsibility for the alleged damage.

This argument was rejected by the tribunal on the basis that the requirement to properly settle or compromise claims did not involve the sort of delicate, nuanced or detailed assessment required to satisfy the test of reasonableness for general indemnity claims, nor did it require re-litigation of the underlying cargo claim or second guessing how the cargo claim had been defended.

The Chinese cargo claim had been settled in good faith and for reasons founded upon a genuine perception of the merits of the claim, therefore it had been properly settled and compromised for the purpose of the ICA.

Issue 4: Application of ICA Clause 8(b)

Clause 8(b) of the ICA makes the charterer responsible for cargo damage resulting from cargo damage. Owners argued this provision applied even though the damage resulted from inherent vice.

That novel argument was rejected, and the tribunal held that, for Clause 8(b) to apply, the damage had to be attributable to more than the mere act of loading the cargo. There had to be a cargo handling aspect to the damage to the cargo which was improperly performed.

Owners had not alleged any aspect of cargo handling had caused the damage to the cargo and so therefore ICA Clause 8(b) was not engaged.

Issue 5: Were Charterers 100% responsible on the grounds of inherent vice?

In a number of previous cases, Charterers have been held 100% responsible for cargo damage arising from the pre-shipment condition of the cargo under ICA Clause 8(d).

In this arbitration, even though the tribunal decided the inherent characteristics of the soyabeans were such that they were bound to spoil over time and though they concluded there was no evidence that pointed to a cause other than inherent vice, they nevertheless said they were “not persuaded that inherent vice was sufficient to make a 100 per cent apportionment under clause 8(d) absent some contributory act or neglect of one or other party which compounded the situation”.

The default 50/50 apportionment applied.

Comments

The decisions of this tribunal on the first three issues are welcome since they disposed of a number of technical defences to the claim under the ICA which were not in keeping with the spirit of the ICA. It is encouraging that the tribunal found that the parties, by agreeing to incorporate the latest amendments to the ICA into their charterparty, had thereby contracted to follow the ICA 2011.

Equally it is sensible to focus on how the underlying cargo claim is presented to determine if it falls within the ambit of the ICA, rather than debate points of fine distinction.

Finally, the decision is the last in a line of awards which avoid putting undue weight on the requirement to properly settle the underlying claims and is a timely reminder that one refrain from just second guessing the original claims handlers.

The decision also sets out useful guidance on when ICA Clause 8(b) is engaged by focusing the mind on whether cargo handling was in fact performed properly or not.

The decision on the impact of cargo damage resulting from the pre-shipment condition of the cargo may be more controversial.  The tribunal heard arguments about the meaning of the requirement for “clear and irrefutable evidence” before the default 50/50 apportionment under ICA Clauses 8(c) and (d) will be disturbed, but we do not know how the tribunal approached the meaning of those words in light of the parties’ arguments.

Although the tribunal decided it was not satisfied the evidential threshold had been crossed, it seems they decided to apply the 50/50 apportionment as a matter of principle – and not as a matter of evidence – given the decision that “some contributory act or neglect of one of other party which compounded the situation” beyond the state of the cargo is required to place 100% responsibility on either the owner or charterer.

The tribunal said that it could distinguish the case before them from the facts of The Yangtze Xing Hua and it may be that this was a reference to the orders by the charterer in that other case to drift off the discharge port for a prolonged period.  Whether the tribunal was correct to draw that principled distinction is questionable.

At present, the risk for a charterer who causes shipment of cargo suffering from inherent vice in the future is at least 50% of any eventual cargo claim and up 100% depending on the tribunal and the evidence.

Cargo care

Grain cargoes in general – and soya beans in particular – have a risk of going mouldy on board the ship during the voyage. Most cargoes are loaded in apparent good order and condition but there is an inherent vice; the soya beans have a tendency to deteriorate unless cargo loading temperatures are low and average moisture content is low. There are known limits for temperature and moisture content. Cargoes above these limits are unstable, therefore at risk of damage from self-heating.

North Members can find out more about the carriage of soybean cargoes in our loss prevention briefing Soya Beans – Cargo Damage Claims in China.