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Covid 19- Force majeure defence to Kostas Melas- type application failed

Various disputes arose under an amended SUPPLYTIME 2005 form, as described below, that the parties referred to a panel of three arbitrators for determination. The three arbitrators were Members of the Baltic Exchange in the City of London and Full Members of the London Maritime Arbitrators Association (“the LMAA”). The reference proceeded by the exchange of written submissions (Claim Submissions, Defence and Reply submissions). With the Reply submissions, Owners made an application for the immediate determination of their claims. By way of analogy to the case of The “Kostas Melas” [1981] 1 Lloyd’s Rep. 18, the Owners submitted that they were entitled to a prompt determination of their claim for hire and disbursements, akin to applications for partial awards for hire on The Kostas Melas principles. The Charterers advanced separate grounds to resist this application. In the light of their findings, the tribunal made an award in the Owners’ favour.

What follows is only a brief reference to the issues. The decision/ analysis was quoted almost as contained in the award.

The dispute referred to the arbitration was the Owners’ claim for US$3,998,167.80 as outstanding sum under the charter party, together with interest at the contractual rate of 2% per month after the due date of each of the outstanding principal invoices. Alternatively, the Owners said they were entitled to interest to be assessed pursuant to section 49 of the Arbitration Act 1996. They also claimed their costs.

The Charterers denied liability for the sum(s) claimed or any sum and asked the tribunal to make an Award in their favour:

(a) declaring that the Charterers were entitled to rely on the force majeure provisions in Clause 32 of the charterparty as a defence to the Owners’ claims;

(b) dismissing the Owners’ claims in full; and

(c) ordering the Owners to pay all of the Charterers’ costs incurred in connection with this arbitration, including fees and expenses of the Tribunal, legal fees and expenses, witnesses’ expenses, and interest on all costs awarded.

For completeness, the Clause 32 “Force Majeure” read as follows:

Neither party shall be liable for any loss, damage or delay due to any of the following force majeure events and/or conditions to the extent the party invoking force majeure is prevented or hindered from performing any or all of their obligations under this Charter Party, provided that they have made all reasonable efforts to avoid, minimize or prevent the effect of such events and/or conditions:

(b) any Government requisition, control, intervention, requirement or interference;

(e) epidemics;

(i) any other similar cause beyond the reasonable control of either party.

The party seeking to invoke force majeure shall notify the other party in writing within 2 working days of the occurrence of any such event /condition.

Tribunal’s decision and findings

The starting point was to determine whether it was appropriate to entertain the application for an immediate determination of the Owners’ claim on the basis of the submissions served to date. The Owners’ application was expressed to be pursuant to paragraph 22 of the Second Schedule of the LMAA Terms which provides:

“22 Parties are at liberty to apply to a tribunal for directions which differ from those contemplated above, but any such application should clearly explain why it is appropriate for some different course to be followed.”

In their response to the application, the Charterers raised four objections and that the tribunal dealt with each in turn.

First, they said that the application was made in contravention of the procedural requirements set out in the LMAA Terms in that it had not previously been discussed with them.

The Owners’ response was that their concern in this case was that procedural directions (specifically an order for exchange of LMAA Questionnaires) would be ordered before their application had been received by the Tribunal, thus defeating the application before it had been made. For that reason, the application was served simultaneously with the Reply Submissions.

That seemed to the tribunal to be eminently reasonable in that, had an order for directions (i.e., for service of Questionnaires) been made in the interim, that would have defeated the application before it had been heard.

Accordingly, the tribunal rejected this submission.

The Charterers’ second objection was that, in the absence of an agreement between the parties to depart from the procedure set out in the Second Schedule, there was an obligation on both parties to complete the Questionnaires.

The tribunal agreed with the Owners that, in this case, it was appropriate for a “different course to be followed” because they had all the information and submissions necessary to determine the Owners’ claim for unpaid hire and disbursements.

The Charterers third argument, namely that the application was inappropriate, given the issues in dispute between the parties, and that it was appropriate that there be an oral hearing, the tribunal agreed with the Owners that each of the defences advanced by the Charterers in the Defence Submissions (including the “force majeure” defence) were capable of being determined on the basis of the submissions and the exhibits served to date and that no further evidence or submissions were required. The tribunal did not consider that an oral hearing was required for the fair determination of this matter. The Owners’ claim was based on uncontested invoices for hire and disbursements and determination of the legal defences asserted by the Charterers did not require an oral hearing. Therefore, the tribunal agreed with the Owners that the application was analogous to the determination of claims for unpaid hire under The Kostas Melas principles.

The fourth argument advanced by the Charterers, namely that they were entitled to make out the remaining elements of their claim “by reference to the evidence and submissions required” was ill-founded. The tribunal agreed with the Owners that this was a straightforward claim and one easily capable of determination on the basis of the submissions and documents before them. The tribunal bore in mind that, of course, section 1 of the Arbitration Act 1996 provides:

“The object of arbitration is to obtain a fair resolution of disputes by an impartial tribunal without unnecessary delay or expense.”(out emphasis added)

The Charterers have already had an opportunity to put forward their case in full through their Defence Submissions and the tribunal was in a position now to determine the merits of the Charterers’ defences.

Accordingly,  the tribunal had no hesitation in concluding that they should consider the application on its merits and on the basis of the submissions and documents presently before them.

Thus, the tribunal turned to consider the three limbs of the Charterers’ defence.

I “The commencement of arbitration proceedings was premature.”

The tribunal agreed with the Owners that there are no preconditions to the valid commencement of arbitration proceedings set out in clause 34; it simply provides that “a party wishing to refer a dispute to arbitration shall appoint its arbitrator and send notice of such appointment in writing to the other party requiring the other party to appoint its own arbitrator within 14 calendar days of that notice.

There were numerous exchanges between the Owners and the Charterers in which the Owners sought a resolution of the dispute prior to the commencement of arbitration proceedings. In no way could it be said that the commencement of arbitration proceedings was premature.

The tribunal rejected the Charterers’ assertion that they “replied constructively and honestly” to the Owners’ requests for payment. Their various responses did not explain when payment would be made and simply represented an attempt to delay (or, as the Owners said justifiably, “stall”), making payment.

The tribunal noted the Owners’ position that they were entitled to commence and progress arbitration proceedings in order to obtain arbitration awards against the Charterers, in order that they can use the awards to claim under the Parent Company Guarantee issued by the Charterers’ Parent Company. Given the cash flow difficulties asserted by the Charterers, the Owners were plainly entitled to obtain arbitration awards so that they could then seek to obtain payment in respect of sums owed by the Charterers from the Charterers’ Parent Company.

Therefore, the tribunal agreed with the Owners that not only were they entitled pursuant to clause 34 to commence arbitration proceedings against the Charterers to pursue their claim, but they were also justified in so doing.

II “The commencement of arbitration proceedings is contrary to UK Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by COVID-19”

The tribunal agreed with the Owners (for the reasons given by them) that the UK COVID-19 Guidance:

(a) was not applicable to the contractual relationship between the Owners and the Charterers (neither party being a UK party);

(b) was a guidance only, and did not affect the Owners’ rights and remedies available under the charterparty or at law;

(c) in any event, even if the UK Covid-19 Guidance was applicable, it had not been breached by Owners.

The Guidance was directed at UK companies and the UK economy, not to an international contract between the Owners and the Charterers, neither of which were UK entities. Moreover, the Guidance expressly stated that “it is not non-statutory guidance” and it was not intended to override “any specific … relief available …in the relevant contract … [and]… in law, custom or practice”. Even had the Guidance been applicable, the tribunal did not consider that the Owners were in breach of it. In refusing to make payment of the outstanding invoices (despite their contractual obligation to do so) and by failing to give any indication of the timeframe when payment would be made, the Charterers were effectively seeking an indefinite extension in the period for making payment of outstanding invoices, during which the Owners could not take any steps to obtain payment. That cannot have been the intention behind the Guidelines.

III Force Majeure

The tribunal agreed with the Owners that there was a need to establish a causal link between the force majeure event and the inability to perform. In this case there was no causal link between the alleged force majeure events complained of by the Charterers and the Charterers’ failure to pay the Owners’ invoices. The vessel was redelivered on 17th January 2020, before there had been any global impact of COVID-19 and before the initial lockdowns on Wuhan and other cities in Hubei Province in China were imposed on 23rd January 2020. The charterparty had been performed and concluded before the impact of COVID-19 and the only outstanding obligation is for the Charterers to make payment of the Owners’ outstanding invoices, which is not an obligation affected by clause 32.

Most of the invoices fell due prior to 31st January 2020. There was no basis on which the Charterers could contend that payment of those invoices was “due to” or “prevented or hindered” by the impact of COVID-19.

It was apparent from the Charterers’ Defence Submissions that the real reason that they failed to make payment to the Owners (the dominant and effective cause) is that they have “insufficient cash reserves” because of issues regarding the projects between them and [ x- Redacted]. “Insufficient cash reserves” is not a force majeure event and any delay in the “resolution of numerous change orders and related claims” or failure to receive payment from [ x- Redacted] cannot excuse the Charterers’ failure to pay the Owners’ invoices due under the charterparty. Thus, the tribunal agreed with the Owners that they are entirely separate contracts and the parties did not agree that the Charterers’ liability to pay the Owners’ invoices would be contingent on the Charterers receiving payment from third parties.

Award accordingly.

Final Arbitration Award, 2 September 2020

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