Time Charterers: limiting the scope of the implied indemnity

Time Charters: the implied indemnity

The rationale for an implied indemnity in a time charterparty, covering loss, damage, or liability resulting from compliance with Charterers’ orders, is based on principles of business and commercial efficiency of the contract. Owners place their vessel and crew at Charterers’ disposal and are required to obey Charterers lawful employment orders, and in exchange for so doing are indemnified by Charterers against the adverse consequence of compliance with those orders.  

Accordingly, the implied indemnity serves to balance the Owner Charterer relationship by ensuring that Charterers bear the financial consequences of risks arising from their employment orders provided the particular risk is not a risk Owners agreed to bear when entering into the charterparty.

What is the employment clause?

Most dry cargo time charters (e.g. NYPE) place the Master “under the orders and directions of the Charterers as regards employment”, giving Charterers commercial control over the vessel’s trading, subject always to the charter limits and Owner’s responsibilities for navigation and safety.  However, not every order given by Charterers will attract an implied indemnity (see Steamship Mutual - Employment Orders: FAQs).

Is the right to an implied indemnity automatic and how far does it extend?

The right to an implied indemnity was articulated in The Island Archon [1994] 2 Lloyd’s Rep 227 where the Court of Appeal confirmed that such a right may arise from the nature of the parties’ relationship and the commercial need for Charterers to direct the vessel’s employment without unfairly burdening Owners. However,  whether an implied indemnity arises in any given case is a question of fact assessed against the underlying terms of the charterparty and the nature of the instructions given by Charterers.  

An indemnity will not be implied if it is inconsistent with the express terms of the charterparty. In The Berge Sund [1993] 2 Lloyd’s Rep 453, the court refused to imply an indemnity because the charter expressly allocated the relevant risk to Owners. Conversely, the fact that the charterparty already contains an express indemnity clause in relation to specific, more limited, matters will not preclude such implication.  In Royal Greek Corp v Minister of Transport [1948/49] 82 Lloyd’s Rep 196, the court confirmed that implied rights can coexist with express terms provided they are complementary and not contradictory. Similarly, in The Sagona [1984] 2 Lloyd’s Rep 180, the court found that an express indemnity against the consequences of signing bills of lading does not exclude an implied indemnity against the consequences of complying with Charterers’ orders to deliver the cargo without production of bills of lading to a party not entitled to it.

As to its extent, the implied indemnity covers losses that are the direct and proximate consequence of complying with Charterers’ lawful orders within the scope of the charter. As confirmed by the Court of Appeal decision in The Island Archon [1994], the indemnity applies to both lawful orders that expose Owners or the ship to risks they have not consented to bear and unlawful orders which they are entitled to refuse to obey.  In practice, this means that instructions relating to the vessel’s employment, such as an order to load a particular cargo, can fall within the scope of the indemnity, even if the cargo is not dangerous or unusual (The Ann Stathatos (1949) 83 Lloyd’s Rep 228). 

However, no indemnity will be implied where Charterers have no choice in the cargo and Owners have contracted to carry that specific cargo (The Athanasia Comninos and The Georges Chr. Lemos [1990] 1 Lloyd’s Rep 277 -see below).  Similarly, expenses incurred in the course of ordinary navigation, such as the cost of ballasting, are not recoverable under the implied indemnity, even if they are incurred as a consequence of complying with Charterers’ orders (Weir v. Union Steamship Co. Ltd. [1900] A.C. 525).

By contrast, the implied indemnity does cover extraordinary liabilities arising from routing decisions or port calls that expose Owners to unforeseen risks. In The Evia (No. 2) [1982] 1 Lloyd’s Rep 334, Owners were indemnified when the vessel became trapped in a war zone following Charterers’ instructions.

How is the scope of an implied indemnity limited by the courts?

Given the potentially wide-ranging scope of the implied indemnity and the significant liabilities it may entail, the courts have sought to limit its application.

Causation: Charterers’ order must be the “effective cause”

An implied indemnity is not triggered merely by the fact that a loss occurs during the performance of Charterers’ instructions. For Owners to succeed in an indemnity claim, they must show there was an unbroken chain of causation between the loss suffered and Charterers’ order. Charterers’ order must be an effective cause of the loss, although it need not be the sole cause of the loss (see The Kos [2012] 2 Lloyd’s Rep. 292 discussed in more detail see Charterparty Indemnities – Express or Implied?).   Causation is analysed as a mixture of fact and law, and any intervening acts can break the chain of causation to relieve Charterers of liability to indemnify.

The burden is on Owners claiming the indemnity to establish that Charterers’ orders caused the loss. In The Aquacharm [1982] 1 Lloyd’s Rep 7, the vessel arrived at the Panama Canal with a draft exceeding the permissible limit, and part of the cargo had to be transhipped and reloaded after the Vessel had transited the canal. The Court of Appeal rejected Owners’ claim for an implied indemnity in respect of transhipment costs, which, the court held, were incurred due to the Master negligently overloading the vessel, rather than as a direct consequence of complying with Charterers’ orders.  

The two Vessels in The “Athanasia Comninos” and “Georges Chr. Lemos” [1990] 1 Lloyd’s Rep 277 were chartered to the same charterers and both were ordered to load coal. There was an explosion on both vessels which caused damage to the ships.  While the owners of the George Chr. Lemos claim for the damage to their vessel succeeded  no indemnity was available to the owner of the Athanasia Comninos.  A crew member had lit a match for a cigarette, which was held to be an intervening act that broke the chain of causation.

Similarly in The White Rose [1969] 2 Lloyd’s Rep 52, the court found no causal link between the charterers’ order to load cargo and the loss suffered by the owners. The vessel was ordered to load cargo at Duluth, USA, where a stevedore employed by the charterers was injured when he fell through an unfenced hold.  The owners were held liable for substantial damages under the local law, even though there was no fault on their part. The owners were not successful in recovering their loss under the implied indemnity because the loss did not flow directly from the charterers’ order. If the local law had not been so unusual  , so that the port was legally unsafe port or the stevedore were incompetent the chain of causation would have remained intact, and the outcome could have been different.

In a recent case, the Commercial Court upheld the Tribunal’s decision in The Afra Oak [2024] 2 Lloyd’s Rep 609 that the Master’s decision to anchor the vessel outside Singapore port limits, in contravention of the charterers’ orders to “proceed to Spore EOPL for further orders”, broke the chain of causation.  The vessel remained under arrest for eight months by the Indonesian authorities.  The Court held that the Master had failed to exercise good navigation and seamanship by not taking into account the risk of anchoring in Indonesian territorial waters. The owners’ claim for indemnity was therefore rejected.  

Forseeability

Foreseeability operates at two distinct stages:

1. At the time the charterparty is concluded, it is relevant to risk allocation. If at that time a risk is foreseeable, Owners may be taken to have accepted that risk and no implied indemnity will arise in relation to liabilities flowing from that risk – see The Kitsa below. In contrast, if compliance with charterers orders gives rise without any fault on the part of the owner to a type of loss that was unforeseen at the time the charter was concluded that loss should be within the scope of an implied indemnity.
2. At the time Charterers' orders are given, foreseeability is relevant to causation (see effective cause above). If, at that point in time, the loss is a foreseeable consequence of complying with the order, it will ordinarily fall within the scope of the indemnity. A good example is The Island Archon [1994], where the vessel was ordered to discharge at Basra under the “Iraqi system” of issuing short landing certificates with, in consequence, almost inevitable cargo shortage claims. Although the “Iraqi System” was not well known at the time the charterparty was concluded, and therefore was not a foreseeable risk the owner had accepted, it was well known and the risk of shortage claims was foreseeable when the order was given to discharge at Basrah. As such, the resulting liability flowed directly from compliance with the charterer’s order. The Court of Appeal therefore held that the chain of causation was intact and Owners were entitled to an implied indemnity.

Therefore, foreseeability can pull in different directions. The more foreseeable consequence of an order the more likely it is that a resultant loss was caused by the order, and will be within the scope of the implied indemnity. But in the context of assumption of risk, the more foreseeable the loss or damage the more likely it is that loss or damage will not be within the scope of the indemnity.

Consent to bear the risk: what Owners have agreed in the charter

If the loss in respect of which the indemnity is sought arises from a risk which, on the true construction of the charter, Owners themselves have agreed to accept, then it will fall outside the scope of the indemnity.  This remains the case even if the loss occurs as a result of complying with Charterers’ lawful orders (The Island Archon [1994]).

If, on the proper construction of the charterparty, the loss arises from a risk which Owners have agreed to accept, it will fall outside the scope of the implied indemnity. This reflects the contractual allocation of risk at the time the charterparty is concluded and applies even where the loss occurs as a result of complying with Charterers’ lawful orders. (In The Island Archon [1994] the implied indemnity was not excluded notwithstanding that the loss arose from compliance with Charterers’ orders. This was because the relevant risk was not foreseeable at the time of contracting and therefore not one assumed by Owners.)

Whether when agreeing a charterparty a particular risk is sufficiently foreseeable such that an Owner may have agreed to accept that risk can be difficult to determine. In The Grand Amanda [2025] EWHC 1990 (Comm), (see The Grand Amanda: The Implied Indemnity Revisited) the fact that cargo claims in the PRC were not “almost inevitable”, did not mean that, at the time of contracting, Owners had agreed to accept the risk of such liabilities. Mere foreseeability (or the absence of inevitability) was insufficient to establish an assumption of risk. As the losses arose from compliance with Charterers’ orders and without any fault on the part of Owners, the implied indemnity was not excluded.  An indemnity will only be excluded  if the relevant risk can properly be said to have been assumed by Owners at the time of contracting.

Owners are generally deemed to have accepted the ordinary risks of trading such as the  cost of ballasting and navigational risks. For example, Owners cannot recover for heavy weather damage on the basis that, had Charterers ordered the vessel on a different voyage, the vessel would not have encountered such weather conditions.  These are risks inherent in navigation and assumed under the charterparty

Regard must be had to the specific terms of the charterparty and whether the type of risk is one that Owners agreed to bear at the time the charter party was concluded. If a particular risk is foreseeable when the charter is signed, while not conclusive, would be a potent factor in determining the scope of the implied indemnity. If the risk was reasonably foreseeable as a result of the order given by Charterers,  an indemnity would usually be barred on the basis of Owners’ acceptance of the risk.  

In The Kitsa [2005] 1 Lloyd’s Rep 432 the court held that the risk of hull fouling after the vessel remained at a warm-water port for three weeks was “foreseeable and foreseen” by both parties at the time the charterparty was concluded, and therefore one the owners had agreed to bear. Thus,  no implied indemnity was available, even though the hull fouling resulted from the charterers’ order. (see Hull Fouling - Charterparty Issues).

Similarly, in The Dimitris L (No 2) [2012] 2 Lloyd’s Rep 354, the court held that an order to proceed to the US did not give the owners the right to claim an indemnity for US Gross Transportation Tax. The tax was considered “an ordinary expense” of trading to US, and the charterparty contained a BIMCO US tax clause by which the owners had accepted the risk.

In The Darya Tara [1997] 1 Lloyd’s Rep 42, the owners were held to have accepted losses and associated risk which arose from heavy weather. Under the time trip charter, the charterers had an option to load cargo on the deck.  When heavy weather caused the cargo loaded on deck to shift, the Vessel had to deviate and restow the cargo on deck.  The owners were unsuccessful in recovering their losses because the risk was inherent in the agreed trading pattern.  

The principle of consent to bear risk is also consistent with the reasoning in The Hill Harmony [2001] 1 Lloyd’s Rep 147, where the House of Lords confirmed that Owners are obliged to comply with Charterers’ lawful orders within the scope of the charterparty, including directions on routing. While the case did not concern indemnity, it illustrates that Owners cannot refuse orders merely because compliance may expose them to ordinary trading risks.

It should be noted that if, at the time of the relevant order by Charterers, the risk has materially increased from that existing at the date of the charterparty, an indemnity may be available, provided that Charterers’ order is the “effective cause” of the loss. This was confirmed by the Supreme Court in The Polar [2024] UKSC 2.

Conclusion

The implied indemnity in time charterparties plays a crucial role in balancing the respective interests of Owners and Charterers.  Its application, however, is carefully restricted to losses that are the direct consequence of Charterers’ orders and does not extend to risks that Owners have agreed to  accept under the charterparty. Ordinary trading hazards and other foreseeable trading risks fall outside the scope of the indemnity. By contrast, the implied indemnity applies where compliance exposes Owners to unforeseen or materially increased risks.