The Club regularly advises members who find themselves in the middle of a charter chain in which a dispute has arisen. This topic has been addressed in previous articles – see Charterparty Chains - exposure to costs and Costs recovery in charterparty chain arbitrations -but because of the potential cost consequences and a recent decision underlining the issues, it is worth revisiting this subject. Although the member in such a chain may be in a neutral position in regard to the underlying claim (theoretically winning one arbitration and losing the other) members may unwittingly find themselves out of pocket when it comes to costs. As explained below, a member that finds itself in the middle of a charter chain dispute should speak to The Club about how to protect its position.
A working example
The potential exposure and risk in these circumstances is best illustrated by way of an example whereby:
- The member has time-chartered a vessel from head owners and then subsequently sub-chartered on voyage terms;
- A dispute has arisen and head owners have issued a claim against the member for breach of charter (the “Head Reference”);
- The member has, in turn, brought the same claim against the sub-charterers in an attempt to protect its position (the “Sub-Reference”);
- Head owners refuse to agree to consolidate the proceedings so each claim is to be decided by a different London Tribunal.
Head owners’ claim in the Head Reference was unsuccessful.
As the “winning” party, the member would be entitled to recover their legal costs from head-owners. Members' legal costs would probably be relatively modest as, in reality, the claim would have been defended by sub-charterers with members simply passing the defence up the line.
Provided the tribunal in the Sub-Reference reaches the same decision as the tribunal in the Head-Reference, then members’ claim against sub-charterers would also be unsuccessful. Members would be responsible for their own legal costs incurred pursuing the claim and for the legal costs incurred by sub-charterers defending it. Sub-charterers’ legal costs are likely to be substantially more than members’ own costs as they have effectively been responsible for defending head owners’ claim.
Claiming Costs as Damages
As a matter of English law, parties are entitled to claim costs incurred in previous proceedings as damages in another set of proceedings, provided this is expressly included in the claim.
Where members find themselves in a chain arbitration they should ensure they plead a separate cause of action for any costs liability to which they may be exposed. This claim would be subject to the usual rules of causation and remoteness. In the example above, members would need to show that it was foreseeable that they would both sub-charter the vessel and that should head owners advance a claim under the head charterparty this would lead members to commence proceedings against sub-charterers. Furthermore, it was foreseeable that members would be responsible for sub-charterers’ legal costs if the sub-charterers successfully defended the claim.
However, this is the nub of the risk to the member because even if the member reserved its right to claim for legal costs incurred in another set of proceedings, there is no guarantee that a court or tribunal will allow the claim. It may instead conclude that the “proximate” cause of members’ loss was its decision to commence proceedings against sub-charterers down the chain. If members had sufficient information to determine that the claim flowing down the chain from head owners was a “bad” claim, and therefore that they had a good defence, they may not be able to recover the costs paid to sub-charterers having pursued that same “bad” claim down the charter chain.
The Chada Naree
In Occidental Chartering Inc v Progress Bulk Carriers Ltd [2012] EWHC 3515 (Comm) (the “Chada Naree”) the court was asked to consider which party was responsible for paying legal costs in a charterparty chain arbitration.
Head owners had time chartered their vessel to a company called Occidental Services Corp (“OSC”). The crucial factor in this particular dispute was that OSC had then re-let the vessel to another company in its corporate group called Occidental Chartering Inc (“OCI”). OCI subsequently time chartered the vessel to Progress Bulk Carriers (“Progress”) who had in turn entered into a voyage charter with CNAN. The various charterparties were on materially identical terms. A claim was made by head owners against OSC and was passed down the charterparty chain. In this case the references were heard concurrently by the same tribunal.
Three separate arbitrations were commenced during the course of which the tribunals and the parties treated OSC and OCI as the same company. In the head reference the tribunal found for head owners against OSC. The associated company, OCI, then sought to claim against Progress both for the legal costs incurred defending owners’ claim plus the costs paid to head owners in the head reference. In this regard the tribunal noted that the parties’ written submissions had not dealt with the familiar issues that arise when costs in one arbitration are claimed as costs in another. It seemed therefore that there was a general acceptance that costs could be recovered as a head of damages.
Progress subsequently argued that, as the vessel had been re-let by OSC to OCI, OCI could not be considered a party to the arbitration with head owners and so had not incurred any costs liability which could be passed on. This argument was raised very late in the procedural timetable and the arbitrators stated that this “came as a complete surprise”. Despite that, the tribunal was persuaded by the argument and concluded that the gap in the chain of references was fatal to OCI’s claim for costs as damages.
OCI appealed to the High Court under section 69 of the Arbitration Act 1996 seeking to recover as damages from Progress the costs paid to head owners. The court found that the various parties and the tribunal had always considered OSC and OCI collectively as “Disponent Owners” and that throughout the arbitration proceedings they had been treated as one and the same.
The court also found that the tribunal’s reasoning was flawed because it had allowed the damages claim to pass down through the charterparty chain despite the break in the arbitration references. It was the same breach of charterparty which gave rise to the claim for the costs to be recovered as damages and, according to the High Court Judge, these heads of damages (i.e. principal claim and costs) could not be distinguished.
On the basis of this reasoning the Judge allowed the appeal and concluded that OCI could recover from Progress the costs paid by OSC to head owners in the head arbitration.
Conclusion
When members face a claim up or down the charter line the temptation is often to immediately commence back-to-back proceedings against a third-party. While (depending on the circumstances) this may indeed be the correct choice, as can be seen from the above, this is a complicated area. Members should therefore take advice from The Club before making a decision which they may live to regret.
We are grateful to Matthew Montgomery of Holman Fenwick Willan LLP for contributing this article.
