Express warranty in the charterparty: elements required to prove damages for breach of warranty by the owners

Al Dawood Shipping Lines Limited v Dynastic Maritime Incorporated (MT Napa) [2010] EWCA Civ 104

This decision of the Court of Appeal highlights the elements of a claim that charterers need to prove in order to succeed in an action against owners for breach of express warranty by the owners. Faced with the owners' claim for unpaid hire and damages, the charterers put forward the defence of breach of warranty and counterclaimed for the loss of profit that they would have made on the sub-charter had the owners complied with the warranty. To succeed, charterers needed to demonstrate that the owners breached the warranty, that they would have been able to have concluded the sub-charter but for the breach and that the hire rate of such sub-charter would have been higher than the charter hire rate.

The case is also an important illustration of the fact that a party who fails to comply with procedural deadlines and court orders risks losing an opportunity to put forward its case.

Facts

The MT Napa charterparty was for a period from November 2006 to November 2007 on BPTime 3 form. The original cancelling date of 30 November 2006 was later amended to 8 December 2006.

The charterparty stated that it included "OCIMF Vessel Particulars Questionnaire or Q88 current at the date hereof (together referred to as the "Questionnaire") as attached hereto."

Clause 9.6.5 of the charterparty expressly provided that the certificates confirmed by the owners "shall be maintained in force during the currency of the Charter." The Q88 was attached to the charterparty and included the International Oil Pollution Prevention Certificate ("IOPP Certificate") in the list of certificates confirmed by the owners. The Q88 also contained a reference to paragraph 2.6 of the OCIMF Revised Ship Inspection (SIRE) Programme form (the "SIRE form"). The standard SIRE form was completed for MT Napa and contained paragraph 2.6 which stated that the IOPP Certificate was issued on 20 November 2006 and that it expired on 20 November 2009. The Court found that the SIRE form was most likely completed after the charterparty was signed.

On 6 December 2006, the owners produced the IOPP certificate, which was called an "Interim Certificate" and which was valid until 15 May 2007. Prior to the certificate being provided, in November 2006, the charterers chased the brokers for the certificate and told them that the potential sub-charterer was awaiting it prior to making a decision whether or not to sub-charter the vessel.

The vessel was delivered on 8 December 2006. The first instalment of hire was not received by the owners and the vessel was withdrawn shortly afterwards.

Procedural history

The owners commenced an action for hire due, the cost of bunkers and damages for wrongful repudiation.

The charterers' main defence was that the owners breached an express warranty that the vessel's IOPP Certificate would be issued on 20 November 2006 for a period of validity of three years until 20 November 2009 and that as a result of such breach, the charterers were unable to sub-charter the vessel, which led to their inability to pay the hire. In effect, the charterers alleged that any failure to pay hire by them was the result of the owners' own breach of the charter.

The charterers also counterclaimed damages arising from their inability to secure a sub-charter due to the owners' failure to provide an IOPP Certificate in accordance with the charterparty.

Following the exchange of pleadings between the parties, the charterers took no further part in the proceedings. This ultimately resulted in a court order dismissing their counterclaim and ultimately in judgment being entered in favour of the owners for the sum of US$ 3,034,970.75 plus interest.

This judgment prompted the charterers into action and they applied to set aside the court order dismissing their counterclaim and also to set aside the judgment entered against them. Mr Justice Cooke commented that the charterers brought this situation on their own heads by their own actions and that they were "reckless in allowing judgment to be entered against them." Whilst he refused to set aside the order dismissing the counterclaim on the basis that it had no prospect of success, he agreed to set aside the judgment entered against the charterers on condition that part of the claim relating to unpaid hire (about US$136,000), costs to date and future costs of the action be paid by the charterers. The charterers failed to comply with these conditions, but applied for and obtained permission to appeal the decision of Mr Justice Cooke setting aside their counterclaim and laying down conditions for setting aside the judgment.

The Court of Appeal decision

In the Court of Appeal, the charterers had to persuade the Court that they had a reasonable prospect of success in demonstrating their entitlement to damages arising from the alleged breach by the owners of the express warranty to provide a valid IOPP certificate. The charterers accepted that the correct measure of damages for such a claim would be the loss of profit that they would have made if they had been able to sub-charter the vessel.

The Court of Appeal found that the SIRE form was not incorporated into the charterparty by mere reference to paragraph 2.6 in Q88. That was found to be a reference to a standard SIRE form and not the form as completed for this particular vessel. Therefore, the owners did not warrant that there would be a single IOPP Certificate valid for 3 years from 20 November 2006 to 20 November 2009.

The only warranty given by the owners was a clause in the charterparty that stated that certificates confirmed by the owners in Q88 "shall be maintained in force during the currency of the Charter." The "currency of the charterparty" means the time from delivery of the vessel under the charter until its expiry. The above wording of the clause does not require a valid IOPP certificate in advance of delivery of the vessel or that there must be one single IOPP certificate that is valid from start to finish of the charter period as long as the owners maintain the certificate in force throughout the charter period.

The Court of Appeal proceeded to state that even if there was such a warranty as alleged by the charterers and the owners breached it, then the charterers still failed to prove that this breach meant that they were unable to conclude a sub-charter for the vessel for this very reason. In particular, there was no recap exchanged between charterers and potential sub-charterers indicating that agreement was reached between them and was subject to satisfactory production of the vessel's IOPP certificate.

Furthermore, the Court of Appeal found that even if the charterers could demonstrate that sub-charterers would have sub-chartered the vessel, they still failed to demonstrate that the failure to sub-charter the vessel resulted in a loss, i.e. that the sub-charter rate of hire would have been higher than the charter rate of hire.

In light of this, the Court of Appeal confirmed that Mr Justice Cooke was right to conclude that the charterers' counterclaim had no prospect of success. The Court of Appeal also held that the judge had been correct in setting down conditions that charterers had to comply with before being able to argue their defences. The appeal was therefore dismissed.

Express warranty in the charterparty: elements required to prove damages for breach of warranty by the owners

By: Ince & Co

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