Supplying Bunkers - Implied Contractual Terms

December 2004

Fitness for Purpose

A term as to fitness for purpose has been implied into contracts for sale and supply of goods and services for many years either by common law or statute*. However, this implied term has only recently been applied to the supply of bunkers. In a recent London arbitration** the tribunal held that in addition to an express term that the bunkers supplied had to comply with contractual specifications, it was to be implied that they should also to be fit for their purpose. This meant that the bunkers should be fit to be burned in the particular engine on board the particular vessel.

Supply to be lawful

Time charterers' obligations have been further extended by another recent arbitration award (London arbitration 13/04). In this case the arbitrators implied a term into the charter party that any bunkers supplied to the vessel during the currency of the charter should be lawfully purchased and supplied so as not to expose the vessel to the risk of detention.

The Charterers in this case had chartered the vessel for one time charter trip on an amended NYPE form for an intended UN approved cargo from the Black Sea to Iraq. The vessel was to be redelivered with approximately the same quantity of bunkers as on delivery. Prior to redelivery at Umm Qasr, the Charterers supplied the vessel with about 425mt IFO and about 94mt MDO, both Iraqi fuel and, at that time, both subject to the Hydropac 170/01 (GEM) Iraq embargo provisions. The Owners also supplied about 200mt IFO at Umm Qasr. To avoid falling foul of the embargo provisions, prior approval from the Maritime Interception Forces (MIF) was required. However, neither the Charterers nor the Owners had sought such approval and following redelivery the vessel was detained for 35 days by MIF on exiting Umm Qasr. The Owners brought a claim against the Charterers for loss of earnings on subsequent fixture, MDO consumed during the detention, legal fees relating to the vessel's release and the balance of hire.

Although both Owners and Charterers had supplied the vessel with bunkers subject to the embargo provisions and, therefore, both parties had contributed to the detention of the vessel, it did not necessarily follow that both parties should share that loss which flowed from the detention. Under English law where two or more breaches of contract operate simultaneously and with equal effect leading to loss suffered by one party to the contract, the party responsible for the breach is liable to the other party for that loss. The arbitrators had to determine whether

1. there was, in fact, a breach of the charter party by the Charterers and 

2. that breach was an effective cause of the loss claimed by the owners.

In answer to the second question the arbitrators had no doubt concluding the Charterers' failure to obtain authorisation before supplying the embargoed bunkers was an effective cause of the loss.

However, did the failure to obtain the necessary authorisation amount to a breach of the charter party? The arbitrators held that it made commercial sense that the Charterers should be responsible for any delay to the vessel after redelivery if that delay was attributable to their failure to obtain the necessary authorisation. The situation was similar to action taken against the vessel if the Charterers fail to pay for bunkers supplied during the charter period. In this case the Charterers had paid for the bunkers but had made the vessel susceptible to detention by MIF because of their failure to purchase the bunkers in the authorised manner. Out of commercial necessity a term would be implied into the charter that any bunkers supplied to the vessel by the Charterers during the currency of the charter should be lawfully purchased and supplied and not expose the vessel to the risk of detention.

Accordingly, the Charterers were held to be in breach of the implied term of the charter party but the Owners' recovery was limited to their reasonable costs of procuring the vessel's release and the balance of hire. This is because Owners were not able to show that the vessel would have been employed during the detention period.

Although the Iraq embargo provisions no longer apply, the decision underlines the far reaching nature of a time charterers' obligations with regard to the supply of bunkers.

*Sale and Supply of Goods and Services Act 1994 

**Not yet reported