Saturday, September 23, 2023

Issue 7: Speed and Consumption figures without guarantee

The words “without guarantee” (WOG) have a comparatively well-settled meaning viz that there is to be no liability in the absence of fraud or bad faith. However, similar disputes occasionally come before arbitral tribunals or – under specific circumstances– are settled in practice. For example, this was an unreported (up to recently) decision issued in 2012 dealing again with this matter.

The readers may find the decision regarding the unsuccessful defence on “duress” interesting since there are limited published LMAA decisions on this point (https://charterpartydisputes.com/london-arbitration-14-22-duress-special-agreement-extra-bunker-costs-and-premiums/), and commonly this defence failed.

*This practice area cites part of this award (after removing the parties’ names) and general observations from other settled claims.

The underperformance claim (Award)

The charterers claimed $23,524.82 on the basis that there was underperformance on a voyage from Ponta Madeira to the South West Pass. They relied upon a X company’s report. D’s first response was that there was no speed or consumption warranty in the charter and therefore no claim could lie. This was because in Appendix A to the charter, which set out the description of the ship’s performance, appeared the words “all details about and without guarantee”.

Y sought somehow to suggest that the charter did not accurately reflect the parties’ agreement. However, they did not claim rectification, a failure which itself would seem to be fatal to this contention. In any event, there was no basis for the argument. The fixture recap, although not containing the phrase in question, confirmed that all the terms and details were to be as per the “BTB” charter, i.e. the head charter which itself incorporated the “without guarantee” provision. That is enough to dispose of this point.

In addition, the X report did not approach the matter properly. Y referred to D’s
criticisms of this report as being “doubtless well-trodden”. Whilst that description may be correct, if somewhat sarcastic, it is right because the criticisms are right. So, even absent the “without guarantee” point, Y had no basis for this claim.

General comments and observations

This dispute arose in 2008 under strong market conditions when the hire rate was USD 70,000.00 per day. That assists in understanding that the speed reduction was minor to produce a claim of $23,524.82 since the distance between these two ports is about 3,250 nm. Likely, such speed reduction cannot justify technical or mechanical issues- a similar observation was made in London Arbitration 4/94.

Under English law, three very short judgements deal with the words “without guarantee” or “WOG”, with the more recent being The Lipa [2001] 2 Lloyd’s Rep 17, which emphasised construction issues; the word “details” was a linguistic stumbling block. It seems that construction issues arose in the above LMAA award when the description was incorporated by reference to the charter as Appendix A and in another LMAA award published in 2006 that the tribunal found the relevant provision as not “the most carefully drafted”. While in a more recent LMAA award, the charterers sought disclosure of documents to indicate that the speed and consumption figures were given in good faith, the claim again failed for many reasons. Notably, the ship was slightly underperforming, and the methodology applied was incorrect (albeit not discussed in the summary). So, even absent the “without guarantee” point, the claim would likely fail in any event.

The previous awards and decisions involved largely matters of interpretation, but there is also a factual element regarding the loss calculation, and owners’ statements about speed and consumption are bona fide. However, it has not been considered in the above cases -as it did not arise- how the loss would be calculated when there is an established breach under the off-hire provision, maintenance clause or the due despatch clause and the speed/consumption figures were given on a WOG basis. One way suggested was to consider the difference in the hire rate, as the charterers would pay less hire if the vessel had been adequately described. In general, the loss calculation- what the actual performance of the vessel is measured against- has been a constant debate during settlement negotiations.

Thought-provoking views

For example, it was stated in a journal law article: “This case has caused considerable debate within the shipping industry… the arbitrators are required to follow the law unless the charter party in a dispute has sufficient provisions distinguishing it from The Lipa decision”.

The author raised an important question: What if the ship performed at 9 knots where she was described at about 13 knots? He expressed the view that that would be enough to lend the owner in giving the description in bad faith.

Another author proposed (for the previous cases before the Lipa) another way to approach the WOG by breaking down the kind of obligations and then identifying when the without guarantee applies. First, there is an obligation to exercise reasonable care in giving an estimate. Second, there is an obligation to provide the estimate in good faith; e.g., if he did not genuinely believe that his estimate is correct, it would be in bad faith. And third, there is an additional obligation to meet the estimate- once given- at the time the other party is required to perform. The WOG can only apply on the last part to safeguard for unforeseen events after giving the estimate (examples are found below). To exclude the obligation of reasonable care requires more precise words than “WOG”. Otherwise, there may be an abuse of the estimate, or it will act as a shield to claims even when the estimate was seriously wrong. Can this work by analogy to “WOG” speed and consumption description?

Another author expressed the view that these words are damaging the rational purpose of commercial contracts. The author suggests that a better way forward is to depart from the judgement of Longmore J (The Lendoudis Evangelos II) and construe the words as requiring the presentation to be made in good faith and on reasonable grounds.

Another author provides practical (but short) guidance on the alternative ways to pursue a claim in case the speed & consumption description are given on a “WOG” basis. As explained, this is not the last word for the Charterers; still an uphill challenge.

Another author referred to the effect of the UK Misrepresentation Act 1967 that was not in place in the Japy Freres (CA) and not considered later in the Lipa. He recognised that WOG description as a representation of fact under s 2(1) is yet to be tested, and there can be some uncertainty associated with the future of “WOG” qualifications. Another recent judgement confirms that it is challenging to succeed in an actionable misrepresentation of performance warranties. Many practical examples prove that a vessel was delivered with a hull fouled for reasons beyond the parties’ control, i.e., sudden delays at ports, non-availability of divers, port restrictions to carry out underwater cleaning (muddy waters), etc.

Settlement negotiations

Again, even relying on alternative ways, it remains “without guarantee” that a party will succeed in arbitration. For reasons explained, the published summaries offer no guidance on what happens in cases of hull fouling or engine issues, while the description was given on a “WOG” basis. In a previously settled case in arbitration, the charterers sought disclosure of documents proving the vessel’s performance before entering the charter since an underwater survey showed excessive hull fouling. The tribunal rejected the charterers’ request for disclosure. It highlighted that a breach of a good faith qualification amounts to an allegation of bad faith; a serious allegation. The tribunal was unwilling to assist a party in gathering evidence retrospectively to support this allegation. The lack of corresponding RPM made the charterers’ case more difficult. Since the disclosure request failed, the prospects of success were substantially reduced, which prompted settlement.

Of interest, Charterers would produce a report from technical experts as persuasive material before the tribunal to use as a guideline to assess the quantum of loss. The alternative loss analysis compared the time under a clean hull (corrected distance using current corrected speed/average speed on hull clean) and the actual time per vessel’s logs. By analogy, see the Divinegate-https://charterpartydisputes.com/eastern-pacific-chartering-inc-v-pola-maritime-ltd-2022-ewhc-2095-comm-slow-steaming-hull-fouling-positive-currents-performance-methodology/

Construction issues

Some construction issues that arose during the settlement negotiations were:

1-whether the terms from a previous CP incorporated in full or in part, and could be read sensibly together with the terms in the host document.

2- whether the provision in the recap is to be read together with the printed version or in substitution for it.

3- whether the recap terms entirely replace the performance clause in the questionnaire/ separate document forming part of the CP by reference.

4- the parties tried to distinguish the Lipa, as it was a decision under a Baltime form, and the parties had not raised any arguments about hull fouling or other technical issues affecting performance. For example, it was argued that the position is different under container vessels’ contracts, given the entirely different nature and characteristics of such agreements.

5- the speed and consumption figures were linked to a specific RPM, and the vessel was not proceeding with that RPM. The point was that the speed might not be warranted, but the RPM is. As a result, some claims were settled.

A right balance?

The words “without guarantee” provide a strong defence for owners. As sometimes suggested, if it cannot be removed, a special clause could be added to strike the right balance. For example, charterers request evidence of prior performance as a condition to agree on the ‘WOG” description, or the “WOG” in speed and consumption does not apply in cases of fouling or other mechanical/ technical issues affecting performance. Then, the described speed will be used for calculating loss, etc.

Note: the LMAA award was published in Jus Mundihttps://jusmundi.com/en/conflict-checker. Such awards mostly come into the public domain through enforcement under the NYC 1958; the operative provisions of the Convention have been transposed into the law of England and Wales by Part III of the Arbitration Act 1996.

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