FACULTY OF LAW Lund University Ognyan Savov Calculating laytime problematic arrivals in port charter parties

JASN09 Essay

Masters Programme in Maritime Law

Private Shipping Law

CONTENTS

1.

INTRODUCTION LAYTIME ARRIVAL AND NOTICE OF READINESS PORT BOUNDARIES 3 5 7 10 11 3

1 2. 1
3.

2
4.

4.1 THE OLDENDORFF TEST 4.2 THE OLDENDORFF AND THE MARATHA ENVOY CASES COMPARED 5. POSSIBLE SOLUTIONS TO THE PROBLEMS CREATED BY THE OLDENDORFF 6. CONCLUSION 5. BIBLIOGRAPHY

1. INTRODUCTION Subject of research in this paper will be the most problematic area in defining the moment at which laytime starts running in a port charter party the time of arrival within the port. The essay starts with a definition of laytime and notice of readiness and subsequently narrowing the application of the latter term only to matters relating to port charter parties. Following a discussion and analysis of American and English cases relating to the issue at stake, it is shown as to why the former approach is to be preferred in finding out when a ship is arrived. At the end of the paper certain proposals are made as to how costly litigation relating to the discussed issue could be avoided.

2.

LAYTIME

Laytime (laydays) is defined as the time necessary for a ship to load/ discharge its cargo.1 The procedures of calculation laytime are normally stipulated in the voyage charter party.2 The importance of defining it in specific terms is owing to the fact that the narrower this period, the more profitable for the shipowner. On the other hand, the wider the laytime, the better for the charterer. The reasoning behind these words is that should the laytime period be over before the loading/ disharging finishes, the charterer compensates the ship owner with a sum of money commonly known as demurrage. Should it be the other way around, that is should the loading/ discharge operations finish before the end of the laytime, the ship owner compensates the charterer in the form of dispatch money. Regulating laytime in such strict terms is for commercial reasons demurrage money compensates the ship owner for cargo services brought on expiration of the agreed period after which he is normally entitled to earn freight. On the other
1

http://www.merriam-webster.com/dictionary/layday?show=0&t=1290072083. Z. Mokia and J. Dinwoodie Spatial aspects of tanker lay-times 10(1) (2002) Journal of Transport Geography 39 at 39.
2

hand, dispatch money is seen as an incentive to make the charterer perform its duties more quickly than agreed. With the cargo operations finishing before the laytime expires, the ship owner could be seen to be at a loss as being obliged to pay demurrage. However, on a close scrutiny payment of dispatch would also mean that the ship owner would start earning freight earlier.

3. ARRIVAL AND NOTICE OF READINESS Most of the disputes concerning laytime arise as to the event that triggers it, that is the notice of readiness. In Glencore Grain Ltd v Goldbeam Shipping Inc (The Mass Glory)3 notice of readiness is defined as
given to start laytime running [as provided by the charter party]4 not merely to provide charterers with information which in many cases will be in their possession. As such it represents an essential step in the contractual mechanism for allocating the risk of delay in loading or discharging.

For a notice of readiness to be considered valid the following two main factors must be present: the vessel must be an arrived ship at the destination and she must be ready to load/ discharge in all respect.5 To these prerequisites could be added the obligation on the ship to comply with certain additional requirements of the charter party, for instance that the ship be in possession of free pratique and customs clearance certificates.6 While the readiness to load/ discharge cargo may sometimes cause more problems than the issue of arrival, 7 it will not be discussed in this paper. In the Johanna Oldendorff case it was held that a ship is deemed to be an arrived ship if she is at the disposal of the shippers. 8 However, distinction between berth and port charter party has to be made at this point. In the case of a berth charter
3
4

[2002] 2 Lloyd's Rep. 244. Laytime commencement clause available on http://www.shipinspection.eu/index.php? action=page_display&PageID=149 (accessed 17.11.2010) 5 D Davies Commencement of laytime 4th ed (2006) 1. 6 W Packard Laytime calculating 2nd ed (1983) 16. 7 If there are cargoes carried under different consignments and in order to discharge the necessary cargo, first has to be unloaded the cargo from the other consignment. In that case the ship may not be considered as ready to unload see Governement of Ceylon v. Socit Franco-Tunisienne d'Armement -Tunis (The Massalia No 2) [I960] 2 Lloyd's Rep. 352. 8 Johanna Oldendorff & Co GmbH v Tradax Export SA [1974] AC 479at 535.

party the ship is deemed to be arrived when she has berthed.9 Thus the risks of delays caused by unavailability of berths rest with the ship owner.10 In a port charter party, laytime is triggered when the ship enters the port area and serves a notice of readiness. Any of the losses caused by unavailable berths are born by the charterer. However, this scenario is more complicated than the berth charter party because the boundaries of a port are not as distinguishable as the location of a designated berth. In order to make things more certain, the parties may state in their contracts that the laytime starts running on service of a notice of readiness upon passing a certain geographical point. Another solution would be that the laytime runs from the moment the pilot boards the ship even though the boarding occurs outside the port boundaries.

4. PORT BOUNDARIES 4.1 THE JOHANNA OLDENDORFF TEST The word port is a nebulous concept and causes much concern when it comes to defining its boundaries. In The Oldendorff
11

the House of the Lords had to

determine when the laytime started running in a voyage charter party contract. Under it The Johanna Oldendorff had to carry a load of grain from the USA to a port in the UK. Upon her arrival there were no available berths so the port authorities ordered the Master to anchor at the ordinary place for grain ships waiting to discharge their cargo. The anchorage was located within the port boundaries but some 17 miles from the docks. The Johanna Oldendorff was ready in all respects to load, however, almost three weeks passed while she waited for an available berth. The ship owner claimed demurrage. The court agreed that the contract was a port charter party. However, it was concerned with the moment at which the ship had arrived for the purpose of determining the start of the laytime.
9

North River Freighters Ltd. v President of India [1955] 2 Lloyds Rep 668. C Lacey Berth or port charter party? (2-2002) Freight Demurrage & Defence / Crew, The Swedish Club letter 2-2002 13 at 14, available http://www.oldendorff.com/unloaders/fleet_details.html (accessed 14.12.2010). 11 Ibid.
10

In The Aello12 which had similar facts to the latter case, the House of Lords considered a ship not to be an arrived ship even though waiting for a berth within the boundaries of the port. The reason behind the courts decision was that the ship was anchored outside the commercial boundaries of the port in question. The commercial area had been understood to be as the part of the port where a ship can perform cargo operations when a berth is available and in determining it the distance between the anchorage and berth had been of great importance.13 In The Oldendorff their Lordships held that The Aello case was outdated because the geographical position of a ship should be treated as of secondary importance in determining her arrival time.14 She should be considered to be arrived whenever two conditions are met. The first is that she should be within the administrative boundaries of the port, that is where the port authorities could exercise their authority.15 The second is that she should be at the immediate and effective disposition of the charterer.16 While the interpretation of the first requirement causes little concern, the second is subject to different views. How can a ship be at the immediate disposition of the charterer if she has not made her way to the berth? In The Oldendorff the court held that as long as she is at anchor within the port boundaries, she is at the charterers immediate and effective disposition. But this statement seems to be wrong. Because if there are no available berths, it is difficult to see how she will be able to conduct cargo operations whenever the charterer pleases. Therefore, she cannot be said to be at the charterers immediate disposition due to being obstructed in performing her duties. While at anchor she would be only at the charterers effective disposition. Consequently, it would be better to narrow down the phrase in The Oldendorff test to read the ship has to be at the effective disposition of the charterer. Furthermore, the ship might be at its effective disposition but not be within the control of the port authorities for instance where the anchorage is far away from
12

Agrimpex Hungarian Trading Company for Agricultural Products (The Aello) [1961] AC 135 HL Leonis SS v Rank [1908] 1 K.B. 57. 14 At 535. 15 Davies D (n 5) at 13. 16 TheOldendorff case (n 8) at 535.
13

the port where the authorities do not exercise jurisdiction and the ship cannot make it to the port due to it being congested. Therefore, it is correct to state that The Oldendorff test puts a very hard burden on the ship owner to prove that the ship is an arrived ship. Although The Oldendorff was welcome by the shipping business, some of the drawbacks in this decision were recognized by the legal writers soon after it was brought to light. William Wilson in a 1974 article comments that it would be quite difficult to comply with the requirements of the test if the port is very wide and the normal waiting area within the boundaries of the port is 50 or 100 miles from the docks.17 It is submitted that the author is quite right and the House of Lords decision is wrong or at least is worded in very narrow terms to exclude situations to be discussed later.

4.2 THE OLDENDORFF AND THE MARATHA ENVOY CASES COMPARED A similar to The Oldendorff case scenario, The Maratha Envoy, 18 came before the same court several years later. In it Lord Diplock, bringing the judgment on behalf of the court, applied The Oldendorff test and came, it is submitted, to a wrong decision. In this case the chartered vessel had to discharge her cargo in a port on the river of Weser. Although the Maratha Envoy was in all respects ready for cargo operations, due to her size and unavailability of berths to accommodate her, she was ordered to anchor at the Weser lightvessel located outside the port area. In order to make her fall within The Oldendorff test and be considered an arrived ship in terms of the port charter party, she made two voyages upriver and after that returned to the lightvessel. The issue before the court was to decide whether by making the short trips she was an arrived ship for the purpose of determining the validity of the notice of readiness. In bringing its decision, the House of the Lords unanimously upheld the claim of the voyage charterer that the vessel could not be considered an arrived ship.
17

W Wilson British Assspects of Chartering problems: some recent developments, 49 (1974-75) Tul. Law Review 1065 at 1067. 18 Federal Commerce and Navigation Co Ltd v Tradax Export SA[1978] AC1.

Of more interest to the present discussion is the decision of the court of appeal. It, although going against the conclusion of the House of the Lords,19 is to be preferred as putting a right balance on the rights and duties of the contractual parties. The charterer is the one who decides the most suitable place for the delivery of the ship and is supposed to have the necessary expertise in relation to the ports to which it wants its cargo delivered/ loaded. Therefore the charterer should bear all the expenses incurred by the shipowner due to unavailability of berths. In addition, should one consider that in terms of a charter party it is the ship owner who is bound to deliver the vessel at a certain period of time and to make his ship ready for cargo operations otherwise he will incur penalties, the burden imposed on him by the contract and common law20 is too high. The charterer gets everything even if at fault while the ship owner incurs expenses even if innocent. When the appeal court heard The Maratha Envoy, Lord Denning and Shaw L.J. took the pragmatic approach by stating that the meaning of the port boundaries is the one as understood by the people in the shipping business and few miles outside the boundaries of the port should not affect the courts decision.21 What the two judges considered of importance was that The Oldendorff test was based solely on the vessel being "as effectively at the disposal of the charterer for [cargo operations] while at that waiting place as she would have been if waiting in the immediate vicinity of the berth.22 A further argument worth noticing is that had the court of appeal taken a different approach in upholding the shipowners claim, its reasoning would have led to absurdity. The ship, by making these trips back and forth, met the strict requirements of The Oldendorff test. However, if the court reviewed the issue from that perspective, Lord Denning stated that it would cause exposing the law to ridicule.23

19 20

Ibid (n 8). Eg. The Oldendorff and The Maratha envoy cases. 21 Federal Commerce and Navigation Co Ltd v Tradax Export SA[1977] QB 324 at 339D-E and 347B-D. 22 Ibid(n 8) at 561.See also The Maratha Envoy(n 18) at 13F. 23 Ibid (n 21) at 336 F.

The court of appeal cited with approval decisions of US arbitrators24 who even notifying the existence of The Oldendorff case, did not dare to follow it due to the unjust outcome it would bring.25 In the view of the arbitrators whenever the vessel has reached the nearest possible point to her berth and it can be proved that it is impossible or impractical to get nearer, then the physical and geographical location of the waiting point is of no relevance. The US arbitrators decision seems commercially viable and makes the negotiations of charter party contracts much easier. Otherwise, should the shipowners want to deviate from an unwanted Oldendorff outcome, they should elaborate on the contractual clauses. Such are the clauses allowing a notice of readiness to be given as soon as the vessel reaches the normal waiting place before berthing.26 The decision of the appellate court in The Maratha envoy struck a right balance in confirming that it is not the physical boundaries of the port that have to determine the validity of a notice of readiness. What matters is the fact that the ship is obstructed in some way from proceeding to the berth due to no fault of the crew and/ or the ship owner and is in all respects ready to perform the cargo operations. However, the good was undone when the House of the Lords took the matter into its own hands. Their decision seems unsound and lacking reasonable explanation. The House of the Lords is the highest court and the validity of the doctrine of stare decisis in England makes the lower courts there bound by their decisions and thus bring injustice, rather than justice to the litigants rights and duties.

5. POSSIBLE SOLUTIONS TO THE PROBLEMS CREATED BY THE OLDENDORFF The facts of The Oldendorff and The Maratha Envoy are similar so it would not have been easy for the highest court to accept that its judges had been very restrictive in delivering their speech in The Oldendorff. Furthermore, the majority of the adjudicators in the two cases were the same meaning that their state of
24 25

The Polyfreedom (1974) New York Arbitration. Ibid (n 21) at 346F. 26 D.Davies (n 5) at 30.

minds must have been the same when they brought the two decisions. The second case was a test in which they could elaborate on the issue and rectify their approach. But how could they do so without overruling their previous decision? One of the options was to agree with the decision of the Court of Appeal by stating that when relying on The Oldendorff test the consideration whether the ship is at the effective disposition of the charterer is of utmost importance while the location of the ship being within or outside the boundaries of the port is secondary and should not be taken into account in situations such as The Maratha Envoy. A second alternative, as was done in the arbitration cases Antico Elias27and London Arbitration 5/90,28 is to extend artificially the boundaries of the port area. In the former award a vessel anchored outside the port area of the port of Alexandria, Egypt as determined by The Mediterranean Pilot. In addition, there was no legislation defining the boundaries of the port. However, the port authorities did in fact exercise jurisdiction over the ships anchoring there. In addition, there were domestic regulations controlling the movement of ships in an area within which was the disputed anchorage. It all meant that The Antico Elias was in a place where the port exercised its jurisdiction. Even though the arbitrator applied The Oldendorff test successfully and the result was just, it is clear that the basis for such a decision was the actual control of the port authorities and the existence of laws. However, it is uncertain how the arbitrator would have adjudicated had the port authorities not exercised control over vessels anchored there or had there been no domestic legislation. It could be argued (and such an argument would be commercially sound) that for determining whether she was an arrived the issue of her safety and not whether she was 10 or 15 miles off the port area was to be the guiding light for the adjudicators. Because when an area is congested in an attempt to make her an arrived ship, the integrity of the ship and crew would be endangered. And one cannot contend that their safety is of less importance than the issue of her arrival. Furthermore, the ship must be considered an arrived ship since she has reached

27 28

1977. LMLN 274.

the nearest possible point to the berth and any further proceeding would be impossible and unsafe.29 In the London Arbitration 5/90 award, the ship was voyage chartered to carry a load of cargo to Haldia, India. The issue was whether she could be considered an arrived ship at Haldia on condition she anchored in an area, Sandhead, outside the port limits a factor which was undisputed by the litigants. Although the nautical chart showed an anchorage waiting area outside Haldia, ships usually waited at Sandheads and tendered their notices of readiness from there. However, the charterers argued that the fact that the custom created by the use of Sandheads as a waiting area and by tendering notices of readiness from that position, did not bring that location within the boundaries of the port. Still the arbitrators did not agree with them. The reason for their decision might have been based on the fact that the vessels normally waited there and upon their tender of notice of readiness they came under the control of the port authorities which immediately provided a pilot or gave orders as to anchoring.30 That is even though outside the port, the authorities had full control over them. What is obvious from the arbitration cases decided after The Oldendorff and The Maratha Envoy is that when applying the test, the adjudicators try to interpret it in the most just way. The arrival test could be summarized as having one of the following features: the ship must be at the effective disposition of the charterer or; the custom of the port area is to be taken in consideration. Furthermore, the control exercised by the port authorities should also be considered but it is of secondary importance. In addition to the above-mentioned elements, it is the safety of the ship that is to be the main regulator in determining whether a ship can be said to be arrived in the port. Another approach to be taken towards the rectification of the situation and avoidance of contentious issues discussed in this paper is to put a clause in the charter party contract regulating the passing of risk whenever there is a delay in getting to the place of destination. By place of destination is meant the nearest and most practical and safe waiting position, determined by custom or law. In such a case whenever the ship reaches that waiting position, the notice of
29 30

As held by the US arbitrator cited by the appellate court in The Maratha Envoy. M Lax, Laytime and demurrage recent developments 1992 Marine policy 118 at 119.; see also Davies (n 5) at 29.

readiness or, much better to state notice of arrival is always to be considered valid. 31 As such the parties will know not only their rights and duties and the moment they start but will also avoid the long and costly litigation.

6. CONCLUSION The purpose of this essay was to show how the courts of England have interpreted one of the requirements for serving a valid notice of readiness to the voyage charterers the arrived ship prerequisite. What is to be noticed is that the leading case of The Oldendorff was adjudicated in the 1970s and is still binding on the parties who agree their contracts to be regulated by the laws of England. When Oldendorff was decided the seas were not as congested as today and it might be argued that at the time this was good law although its restricted application was visible even then32. Nowadays when the shipping business is on the rise, the seas are getting more and more congested. It becomes more difficult for a ship to drop anchor within the port areas and in order to avoid the great congestions in the harbor areas and decrease the risk of incidents, sometimes the ships are advised to anchor outside the port areas or be drifting for some time. However, because the Oldendorff decision is still binding on the parties, it could cause unnecessary litigation as regards the moment of start of the laytime. For the purpose of avoiding such from occurring, in the last part of the paper a decision was proposed as to how The Oldendorff test should be applied and how with easy and inexpensive measures the concerned parties could determine the exact moment of the arrival of the ship.

BIBLIOGRAPHY
31

Francesco Berlingieri The allocation of risk of delay in voyage charter parties, 8 (1976-77) J. Mar.L.&Com. 497 at 505. 32 As shown by the appeal court in the Maratha Envoy (n 18); see also .Wilson (n 17) at 1067.

CASES: Agrimpex Hungarian Trading Company for Agricultural Products (The Aello) [1961] AC 135 HL. Federal Commerce and Navigation Co Ltd v Tradax Export SA[1978] AC1. Federal Commerce and Navigation Co Ltd v Tradax Export SA[1977] QB 324. Glencore Grain Ltd v Goldbeam Shipping Inc (The Mass Glory) [2002] 2 Lloyd's Rep. 244. Governement of Ceylon v. Socit Franco-Tunisienne d'Armement -Tunis (The Massalia No 2) [I960] 2 Lloyd's Rep. 352. Johanna Oldendorff & Co GmbH v Tradax Export SA [1974] AC 479. Leonis SS v Rank [1908] 1 K.B. 57. North River Freighters Ltd. v President of India [1955] 2 Lloyds Rep 668.

The Polyfreedom (1974) New York Arbitration. Antico Elias(1977) London arbitration. London Arbitration 5/90 (LMLN 274).

ARTICLES AND BOOKS: Charlotte Lacey Berth or port charter party? (2-2002) Freight Demurrage & Defence / Crew, The Swedish Club letter 2-2002 13 available
http://www.oldendorff.com/unloaders/fleet_details.html

(accessed 14.12.2010).

Donald Davies Commencement of laytime 4th ed (2006) Informa, London. Francesco Berlingieri The allocation of risk of delay in voyage charter parties, 8 J. Mar.L.&Com.(1976-77) 497. Laytime commencement clause available on http://www.shipinspection.eu/index.php?
action=page_display&PageID=149 (accessed

17.11.2010).

Michael Lax, Laytime and demurrage recent developments 1992 Marine policy 118. William Packard Laytime calculating 2nd ed (1983) Fairplay Publications,London. William Wilson British Assspects of Chartering problems: some recent developments, 49 (1974-75) Tul. Law Review 1065. Z. Mokia and J. Dinwoodie Spatial aspects of tanker lay-times 10(1) (2002) Journal of Transport Geography 39.

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14.12.2010