Sino East Transportation Ltd v Grand Amazon Shipping Ltd (The Grand Amanda) is an important judgment on the scope of the implied indemnity in a time charter in allocating losses relating to the shipment of cargo suffering from inherent vice. Summary by Francesca Koenders, Associate.
The recent decision in Sino East Transportation Ltd v Grand Amazon Shipping Ltd, (The Grand Amanda), revisits the scope of the implied indemnity under an NYPE time charter. This decision examines whether an owner may recover losses arising from a foreign court judgment under the implied indemnity. The High Court ultimately upheld the tribunal’s finding that the implied indemnity applied, and the owner could in fact recover such losses. This judgment has raised interesting questions not only about the implied indemnity, but also on the Inter-Club Agreement and inherent vice.
Factual Background
Grand Amanda was time chartered on an amended NYPE 1946 form. The charterparty provided for the carriage of lawful and harmless cargoes from the East Coast of South America to Asia. Owners delivered the vessel for loading in Uruguay, where Uruguayan soybeans were loaded. A few days later the vessel proceeded to Argentina to load a further parcel of soybeans for carriage to China.
During the voyage, the cargo loaded in Uruguay (referred to in the judgment as the “Montevideo cargo) began to show signs of deterioration, including discolouration, caking and self-heating. By the time the vessel arrived in China for discharge, surveys confirmed that the Montevideo Cargo was significantly damaged. Although the true cause of the damage was later accepted to be inherent vice, the cargo interests in China did not accept this explanation.
Cargo interests commenced proceedings in the Wuhan Maritime Court against both Grand Amazon Shipping Ltd (the Owners) and the registered owner. The Owners’ P&I Club decided to defend the proceedings on their merits in China rather than challenge jurisdiction or seek relief in England. The local court held Owners liable for having failed properly to care for the cargo. That decision was upheld on two successive appeals which ended up in the PRC Supreme Court and over USD 6 million was paid in damages and associated costs.
Owners then sought to recover those sums from Charterers either under the ICA, with apportionment under Clause 8(d) being 100% for Charterers or alternatively, under the implied indemnity in clause 8 of the NYPE form. The dispute proceeded before an experienced LMAA Tribunal, and the Owners advanced the two possible routes to recovery.
The Tribunal on the ICA
Charterers defended the claim under the ICA on the basis that the requirements in Clause 4(c) had not been met, i.e. the claim had not been “properly compromised or settled and paid”. Charterers also argued that, in the instance that the Tribunal found that the ICA did apply, the claim should be apportioned under Clause 8(d) with Charterers only responsible for 50% of the claim.
The Tribunal held that the ICA did not apply because it requires a cargo claim to have been “settled, compromised or paid” in the sense of a mutual settlement and therefore, a foreign court judgment did not fall within that language. However, the Tribunal expressed the view that, if the ICA had applied, the cargo claim would have fallen entirely on Charterers because the “act” giving rise to the claim was the shipment of an unstable cargo. It is notable that the Tribunal considered a challenge to the jurisdiction of the PRC Courts having no realistic prospect of success as well as commenting that, in light of the evidence of the crew’s actions to care for the cargo, it was not unreasonable for the Owners to have defended the cargo claims in China.
This finding by the Tribunal was not subject to appeal. The Court did not need to decide this point, and this finding is therefore not binding on future Tribunals. This scenario has now been addressed by the latest amendments to the ICA, whereby clause 4(c) now includes the wording, “Settled includes but is not limited to, claims adjudicated by any court or tribunal, or those resolved through an amicable settlement between the parties”. However, this argument may still arise if a charterparty incorporates the ICA without wording that incorporates subsequent amendments.
The Tribunal on implied indemnity
The primary battleground between the parties in the Court became the recovery under the implied indemnity. Charterers argued that Owners had assumed the ordinary risks of carrying lawful and permitted cargoes under the charter, and that inherent vice was one such ordinary risk. They maintained that the foreign courts wrongful judgment broke the chain of causation and that Owners had acted unreasonably in defending the claim in China. They also relied heavily on the decision in The Island Archon, which held that an owner could not recover where the nature of the foreign legal system and the risk of unpredictable local judgments was notorious at the time of contracting.
The Tribunal rejected these submissions. It found that a cargo with a propensity to self-heat fell outside the risks Owners could be taken to have accepted. The liability imposed by the Chinese court flowed directly from Charterers’ order to load that cargo and to carry it to China. The Tribunal distinguished The Island Archon on the basis that the situation in China in 2014 was not comparable to the extreme dysfunction of the Iraqi court system at the time of that earlier case. The cargo claim was not “almost inevitable” in the way it had been in Iraq. It therefore concluded that Owners were entitled to recover their losses under the implied indemnity.
The Appeal
Charterers were granted leave to appeal under s. 69 of the Arbitration Act 1996 on a single question of law: whether the implied indemnity can cover liability wrongly imposed by a foreign court in circumstances where the cargo loaded was lawful, harmless and permitted, but later turned out to be affected by inherent vice.
Charterers argued before Henshaw J firstly that the express terms of the charter did not exclude this cargo and this voyage, and therefore the risks of inherent vice were risks Owners had accepted. Second, they contended that the ICA provided a comprehensive framework for allocating cargo claim liabilities, leaving no room for the implied indemnity. Third, they sought to revive the reasoning in The Island Archon by arguing that Owners must be taken to have known of the risk of adverse, even erroneous, cargo decisions in China. Finally, they submitted that inherent vice is a classic cargo risk, one which Owners accept as a consequence of carrying lawful, permitted, harmless cargo.
Owners contended that the Tribunal’s award should be upheld because the decision was rooted in factual determinations about the scope of the risk and the causal link between Charterers’ orders and the loss. Those findings were properly made and fully supportable. In addition, Owners argued that the Tribunal’s analysis of the authorities, including The Island Archon, was correct. Further, that the terms of the charterparty allocate the risk to Charterers, given that this was not an ordinary trading risk that Owners had agreed to bear.
Lastly, Owners argued that the incorporation of the ICA in the charterparty did not preclude a claim under the implied indemnity where the ICA did not apply.
The High Court’s decision
Henshaw J dismissed the appeal. He emphasised that section 69 of the Arbitration Act 1996 permits appeals only on points of law, and that a court should be slow to interfere with an experienced maritime tribunal’s evaluation of whether a particular risk falls inside or outside the scope of the implied indemnity.
The judgment reaffirmed the two core limitations on the implied indemnity identified in The Kos, i.e. (i) it is not available for risks that Owners have expressly or implicitly agreed to bear, and (ii), the loss must be effectively caused by Charterers’ orders. Applying those principles, the judge held that the Tribunal had been entitled to find that the risk in question was not one Owners had assumed. A cargo with a latent propensity to self-heat and deteriorate was not an “ordinary” cargo risk in this context, and nothing in the express terms of the charter indicated that such risk was transferred to Owners.
Henshaw J agreed that the chain of causation was not broken by the wrongful Chinese judgment. Owners had acted reasonably in defending the claim where they did, and there was nothing unforeseeable or extraordinary about their decision to do so. The liability ultimately imposed on them still originated in Charterers’ decision to load that particular cargo.
With regard to The Island Archon, the judge accepted the Tribunal’s analysis that the Iraqi court system at the time had presented an extreme, notorious and almost unavoidable risk. That factual backdrop was essential to the reasoning in that case; it could not be transposed to modern China, where cargo claims were not “almost inevitable”. The foreign legal risk in this case was therefore not one Owners could be taken to have accepted.
Lastly, the suggestion that the ICA excluded the implied indemnity was rejected on the basis that the ICA applies only where its own conditions are satisfied. It does not operate as a comprehensive code displacing other entitlements unless in circumstances where the ICA does not apply.
Conclusion
The judgment confirms the existing position under the case law that the implied indemnity under an NYPE time charter remains a robust mechanism for allocating losses that arise because an owner has complied with the charterer’s orders. Provided that the loss originates in the charterer’s employment orders, and does not fall within the ordinary risks which the owner has agreed to bear, the indemnity shall apply. It illustrates the continued importance of the implied indemnity in protecting owners from exceptional and unallocated risks, especially in the context of cargo claims litigated in foreign courts whose findings may not reflect the true underlying cause of damage.
The case has also clarified the application of The Island Archon, confining that decision to specific factual scenarios where the risk of wrongful or arbitrary foreign decisions is notorious and effectively unavoidable. The position that ICA does not exclude the implied indemnity in situations where its own provisions are not triggered is maintained.
Leave to appeal on the question of the apportionment of an inherent vice claim under the ICA was denied. Therefore, while the arbitrators may have held that such apportionment would have been 100% for Charterers, this is not binding on other arbitration tribunals. and remains a point open to clarity from the Court.