Hold cleaning terms: More Clarity, More Uncertainty?

There are a myriad of clauses in both time and voyage charterparties that are likely drafted either partially or entirely with the aim of quickly settling many areas ripe for disputes. Examples range from stevedore damage clauses to certain laytime/demurrage/off-hire clauses. These clauses can be incredibly helpful when dealing with disputes when facts are murky and could, therefore, be seen as advance settlements that prevent owners and charterers from spending a significant amount of time, energy and costs in lengthy disputes and/or litigation.

One area of dispute the Club regularly advises on is hold cleanliness on delivery of a vessel into a charterer’s service. A clause seeking to address the consequences of the vessel’s holds failing inspection was considered by the Commercial Court in Pan Ocean Co Ltd v Daelim Corporation [2023], ‘The DL Lilac’. This article discusses the decision and the relative success of the clause.

The Case

Daelim Corporation (the “Owners”) had chartered the DL Lilac (the “Vessel”) to Pan Ocean Co Ltd (the “Charterers”) on a single trip Time Charterparty. This Charterparty contained a term which stated that the Vessel was to be delivered with clean/swept holds, which were to be inspected by an independent surveyor. If the holds failed inspection, the Vessel was to be placed off-hire until the holds passed reinspection.

Shortly after delivery, the Vessel’s holds were failed by the surveyor, and the crew set to work cleaning the holds. Unfortunately, just prior to cleaning completing, the Port Authority ordered the Vessel to move off berth. Although the Master issued a notice confirming the holds were clean and ready for inspection an hour after moving off berth, the Vessel did not re-berth for another 12 days, after which the holds passed reinspection.

Charterers deducted hire and bunkers from the time of the first failed inspection until the time of reinspection. Owners disputed the deduction, and claimed there was an implied term for Charterers to arrange reinspection with “reasonable diligence” and without “any undue delay” which Charterers breached by taking too long to arrange the reinspection. As such, Owners claimed that any time lost after the Master issued his notice that the holds were ready was for Charterers’ account. In response, Charterers claimed that the decision to move the Vessel off berth was not within their control, that the terminal only allowed reinspection at berth, and that there was no such implied term as it was inconsistent with the Charterparty and burdened Charterers with the actions of a surveyor that was meant to be independent.

The Tribunal found in favour of Owners and issued an award for Charterers to repay the time/bunkers deducted from the Masters’ notice until reinspection took place. The primary reasoning provided was that there would otherwise be no obligation on Charterers to expedite re-berthing the Vessel and any interpretation that didn’t have such an implied term would allow Charterers to leave the Vessel without instructions for however long they wish and not be liable for hire.

This decision was appealed by Charterers to the Commercial Court. Charterers based their position on three grounds:

1. That the Tribunal had applied the wrong test to determine an implied term;

2. That the implied term should not impose a strict obligation on Charterers as this conflicted with the express terms of the Charterparty (given the surveyor was to be independent/jointly appointed); and

3. That the Tribunal had erred in awarding hire/bunkers commencing from the moment the Master’s notice was issued.

The Commercial Court allowed the appeal in part.

With regards to the first two points, the Court determined that Charterers were correct but, nevertheless, the Tribunal’s award, when read holistically with all submissions, did not conflict with these points.

With regards to the third point, however, the Court agreed that the Tribunal should not have counted time immediately after the Master’s notice, as the implied term did not require immediate reinspection of the holds, nor were parties immediately in breach if they failed to do so. Instead, the Court found that reinspection should have taken place without undue delay and that, therefore, the Tribunal should have determined the earliest point that reinspection could have taken place had the implied term not been breached, with hire recommencing from that point.

Having reached this decision, the Court remitted the matter back to the tribunal for reconsideration on the facts.

More uncertainties?

The decision of The DL Lilac reflects a view that some previous tribunals have held regarding an implied term for hold condition clauses – see, for example, London Arbitration 17/10, which had also been considered by the tribunal in this dispute. However, the decision carries with it several immediate consequences for owners and charterers which could lead to new uncertainties.

In practical terms, owners and charterers will need to ensure that they take swift action to arrange reinspection if holds are failed following delivery. Those who work in operations, however, will have already noted that is not always a simple task – there are multiple factors that may need to be taken into consideration with regards to how quickly a surveyor can be arranged, and what is considered ‘reasonable diligence’ or ‘undue delay’ could vary significantly depending on each parties’ views as well as the facts at the time (and to what degree the parties were aware of these facts).

For example:

• Weather – High wind or swell could make reaching and inspecting a vessel at anchor dangerous, and the appetite for risk could vary significantly from one surveyor to another.

• Surveyor availability – Some ports may have no immediately available surveyors to attend or be so remote that the surveyor requires a certain amount of travel to reach a vessel. This also raises the question of how far parties would have to search for an available surveyor before they can be said to have acted with reasonable diligence.

• Port restrictions and local labour laws – while these may be known to parties, how they would impact inspection could be unknown, especially when combined with the other factors. For example, if a dispute relates to a port that closes at night or only allows surveys at certain locations/hours, it may be difficult to determine whether a surveyor would have been available to attend on reopening.

Further, there is also the question of costs to consider. Sending surveyors out to a vessel at anchorage may be significantly more expensive than having them attend at berth; would there be a point at which the cost would be so high that a party can be said to have acted with reasonable diligence if they choose not to arrange a surveyor, or is there no limit to a cost a party must incur to satisfy this requirement?

There certainly may be other factors that could also arise and may lead to disputes as to whether the operator acted with reasonable diligence and avoided undue delay.

Does this decision achieve balance?

Charterers may be of the view that the intention of a hold condition clause is to ensure that, if there is a breach of owners’ obligation to deliver a vessel with clean holds, they are returned to a position where they would have been had Owners not breached this obligation (i.e. with a vessel that has clean holds at berth and is ready for inspection). The implied term’s requirement to reinspect at the earliest opportunity could, therefore, be seen as ‘unfair’ by charterers.

If the fundamental objective of these clauses is to ensure owners deliver a vessel with clean holds, then charterers may argue that they should not be subjected to an implied term that puts them at a disadvantage if owners breach this obligation.

Owners, on the other hand, may point out that, per the case of The Athena, this decision follows well established principles of English law: only delays that are expressly stated to be off-hire and interrupt service ‘immediately required’ can be deducted from hire. Delays that are consequential to these would therefore be on-hire unless stated otherwise. As such, The DL Lilac could also be argued to follow The Athena, as it requires parties to reach a position that limits the amount of consequential off-hire without undue delay.

Are hold condition clauses still fit for purpose?

It is important to note that while there may be some hold condition clauses commonly used in the industry, there are no industry standard wordings, so variations in how the clauses are drafted could also impact how the implied term is interpreted. One significant reason for hold condition clauses such as the one contemplated in The DL Lilac is that, for better or worse, they can provide a point of certainty for all parties as to how costs would be dealt with should a vessel’s holds fail inspection on delivery.

However, the need for parties to act with ‘reasonable diligence’ and without ‘undue delay’, brings forth with it a multitude of factors that could render anything but the most straightforward scenario open to interpretation, meaning a quick and cost-effective resolution may be difficult to achieve.

Owners and charterers may therefore wish to review their hold condition clauses and consider whether they remain suitable for their needs. One point in particular that either party may wish to think about is whether they are willing to take the risk of assuming the implied term will apply, given that there may be further decisions on the implied term and/or the facts of The DL Lilac might not match those of their dispute.

If the uncertainties mentioned are a concern, then one approach for parties might be to agree how they wish to deal with consequential delays if the hold condition clause is breached to specifically exclude the implied term, such as allowing consequential off-hire up to a limited number of days or on a reduced hire rate.

In any event, this is an interesting decision regarding hold condition clauses, and one that will be worth monitoring in the future.