Ship Misdescription in Charterparty

As a general rule, the details provided in the description of the ship are integral to the charterparty contract.

Thus, if the ship fails to meet the provided description, the Charterer is entitled to claim damages for any losses incurred due to the Shipowners’ breach of contract in misdescribing the ship.

Additionally, if the ship’s description persuaded the Charterer to enter into the contract, the Charterer might also claim that the Shipowners misrepresented the ship, leading to a potential claim for damages due to misrepresentation.

Typically, the terms used in the Charter Party to describe the ship are not mere representations but constitute the terms of the Charter Party itself. Therefore, if the ship does not match its description and this discrepancy causes the Charterers to incur losses, they are entitled to claim damages.

Moreover, if the Misdescription in the Charterparty is considered a Condition—a crucial term of the charterparty—then the charterers might have the right to terminate the charterparty if the ship fails to meet the warranted description.

In recent years, courts have focused on the description’s overall impact on the contract’s functionality. Therefore, a minor deviation from the ship’s warranted performance, such as speed, might lead to a damages claim but would not necessarily allow the Charterers to terminate the Charter Party.

Conversely, a significant misrepresentation of the ship’s performance, especially in scenarios where the ship is expected to operate in a liner service and adhere to strict schedules, might be viewed as a fundamental breach of the charterparty. This could entitle the Charterers to both terminate the Charter Party and Claim Damages.

Ship Consumption Misrepresentation Case

SK Shipping Europe Ltd v. Capital VLCC 3 Corp (MT C Challenger)

In February 2017, the Charterers engaged in a charterparty agreement with the Shipowners of MT C Challenger for two years. The charterparty included a clause guaranteeing bunker (fuel) consumption and speed. However, due to complications with a turbocharger, the Charterers alleged that the Shipowners had misrepresented the MT C Challenger’s performance capabilities.

During a meeting in London on 21 March 2017, the Charterers raised concerns regarding the potential misrepresentation of the chartered ship’s capabilities. Strikingly, it was not until 19 October 2017 that the Charterers purported to rescind the contract due to misrepresentation or terminate it for a repudiatory breach. Throughout the months from March to September 2017, the Charterers continued to utilize the MT C Challenger intermittently, arranging sub-fixtures, periodically deducting from hire, and preserving their rights.

Subsequently, the Shipowners attempted to terminate the charterparty, asserting that the Charterers’ message was tantamount to renunciation.

In the ensuing legal proceedings, the trial judge Justice Foxton concluded that there was no actionable misrepresentation.

Additionally, it was held that the Charterers’ conduct, particularly fixing the MT C Challenger for a sub-charterer’s voyage to Tunjung Pelapas in July 2017, was inconsistent with an attempt to reserve rights to invalidate the charterparty for misrepresentation. This was despite the Charterers expressly indicating that they “reserve their rights” after alleging that the Shipowners had misrepresented the MT C Challenger’s capabilities, including speed and consumption, during the charter negotiations.

Subsequently, Charterers appealed on both grounds. The crux of the charterers’ appeal lay in a letter sent on behalf of the Shipowner during pre-contract negotiations on 22 November 2016. Charterers contended that the representations made in that letter concerning the chartered MT C Challenger’s past three voyages, the ship’s average speed, and performance, encompassed a representation of future performance. Charterers argued that this representation was reiterated in subsequent communications between the parties. The trial judge, according to the Charterers, erred in concluding that there was no inducement.

Upon careful examination, the Court of Appeal found that an objective reading of the 22 November 2016 letter would lead a prospective charterer to understand it as saying, “This is how my vessel has performed on its most recent voyages, and these are the warranties I am willing to provide,” without any additional implications. Therefore, it was safely concluded that there was no representation regarding the ship’s future performance, be it concerning speed or consumption.

The tribunal also discovered that the explanation in the 22 November 2016 letter, about the average performance of the MT C Challenger on its last three voyages, was deliberately omitted once the negotiation process commenced. As a result, these details did not become part of the negotiations upon which the disputed charter was based nor became embedded in the charterparty. Considering the Court’s earlier finding that the letter did not contain a representation of the future, this particular discovery had no impact on the judgment.

Furthermore, the Court firmly maintained that the trial judge committed no legal error in concluding that there was no inducement.

Reservation of Rights in Charter Party

The aspect of the judgment that carries significant practical implications for the shipping industry revolves around the reservation of rights. Until recently, a prevailing belief in the shipping industry was that the inclusion of the words “Reserving My Rights” would serve as a surefire protection for an innocent party during disputes or litigation that might arise.

However, the Court of Appeal concurred with the general notion that “a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract.”

Nevertheless, the Appeal Court, similar to the First-Instance Judge, emphasized that this rule was not absolute. It was clarified that the Charterer’s actions and the nature and consequences of any demand for future performance could, in some instances, be incompatible with a reservation of rights.

By considering all the relevant circumstances surrounding the order to proceed to Tanjung Pelapas, such as the two-month duration of the voyage and the general reservations made at that time, which encompassed complaints beyond the misdescription of the ship, the Court of Appeal endorsed the Commercial Court’s decision that the order constituted inherently affirmative conduct.

In conclusion, this judgment serves as a significant reminder that the construction of representations from an objective standpoint is vital in determining whether there exists an actionable misrepresentation. However, this principle is not groundbreaking. The more crucial message to the shipping industry is not to assume that the use of “Reservation of Rights” language will always guarantee the preservation of an innocent party’s rights. The effectiveness of such language will be contingent upon the surrounding circumstances and the future actions of the innocent party.

Ship Description Misrepresentation in Charter Party

A Charter Party is a legal contract between the shipowner and the charterer, outlining the terms and conditions under which a vessel is chartered. Misrepresentation in a Charter Party can lead to serious disputes and potential legal issues.

One common type of misrepresentation relates to the description of the ship in the Charter Party. This typically involves the ship’s physical attributes or capabilities, such as the size, speed, condition, capacity, fuel consumption, or any equipment onboard. The description of the ship forms an essential part of the Charter Party, as it greatly influences the charterer’s decision to enter the contract.

Misrepresentation can occur when the shipowner provides inaccurate or misleading information about the ship. For example, the shipowner might claim that the ship can reach a certain speed or carry a certain amount of cargo, but in reality, the ship is not capable of these claims. This would be a clear case of misrepresentation.

The consequences of misrepresentation in the Charter Party can be severe. If the Charterer can prove that Charterers were induced into the charter party based on false information about the ship, they may have grounds to terminate the contract and claim damages. They may also have the right to claim compensation for any additional costs incurred as a result of the misrepresentation.

To avoid misrepresentation, shipowners should ensure that they provide accurate and complete information about their ships. If there are any changes or updates to the ship’s specifications or condition, these should be promptly communicated to the charterer. It is also advisable for charterers to conduct their own inspections or hire a professional surveyor to verify the ship’s condition and capabilities before entering into a Charter Party.

Misrepresentation of the ship description in a Charter Party is a serious issue that can lead to legal disputes and financial losses. Both shipowners and charterers should take necessary steps to ensure that all information provided is accurate and up-to-date.

Implications of Ship Misrepresentation in a Charter Party

The potential implications of a misrepresentation in a Charter Party can be broad and far-reaching. Misrepresentation can undermine the trust and integrity of the contractual relationship between the shipowner and the charterer, leading to legal and financial complications.

Here are some additional potential effects:

Delay and Disruption: If the ship’s actual capabilities do not meet the representations, it could cause significant delay and disruption. For example, if the vessel is represented to have a specific speed and it fails to meet this, it could result in missed deadlines, late arrivals, and knock-on effects on the charterer’s business operations.
Financial Loss: The charterer may incur additional costs if the misrepresented ship does not perform as stated in the Charter Party. These costs might include extra fuel consumption, hiring additional or replacement vessels, storage costs for cargo, or even lost business opportunities.
Reputation Damage: Both parties could suffer damage to their reputations. For the shipowner, a proven misrepresentation can tarnish their credibility in the market. For the charterer, the inability to deliver cargo on time or meet contractual obligations due to the misrepresented ship can harm their reputation among clients and partners.
Legal Proceedings: Misrepresentation could lead to litigation. This is a costly and time-consuming process that could have significant financial implications for both parties. It may also strain the relationship between the shipowner and charterer, making future cooperation difficult.

To mitigate these risks, it is crucial for the parties involved to conduct thorough due diligence before entering into a Charter Party. For shipowners, this means being completely transparent and honest about their vessel’s capabilities and condition. For charterers, this involves verifying the information provided and possibly investing in independent surveys or inspections of the vessel. If in doubt, legal advice should be sought to understand the potential implications of misrepresentation in a Charter Party and the appropriate steps to take to avoid such situations.

Moreover, it may be helpful to include clauses in the Charter Party that specify what happens in the event of misrepresentation. These might include conditions for termination, compensation, or other remedies. Such provisions can provide clarity and help prevent disputes.

While misrepresentation of a ship’s description in a Charter Party can lead to serious legal, financial, and operational challenges, careful planning, due diligence, and transparent communication can significantly reduce these risks.

Types of Misrepresentation that may occur in a Charter Party

Types of misrepresentation that may occur in a Charter Party, which can provide a clearer picture of how to prevent or resolve them:

Innocent Misrepresentation: This happens when a false statement is made without any intention to deceive, and the person making the statement believes it to be true. Even though the misrepresentation is not intentional, it can still lead to contract termination or a claim for damages.
Negligent Misrepresentation: This is when a false statement is made carelessly or without proper consideration for its truth. In this case, the person making the statement may be liable for any losses or damages caused by the misrepresentation.
Fraudulent Misrepresentation: This is the most serious type of misrepresentation, where a false statement is knowingly made with the intention to deceive. The repercussions for fraudulent misrepresentation are severe and can include punitive damages in addition to compensatory damages.

Legal Remedies Available in Case of Ship Misrepresentation in Charter Party:

Rescission: This is the cancellation of the contract, putting the parties back into the position they were in before the contract was formed. Rescission can be claimed in cases of any type of misrepresentation, provided it has induced the contract.
Damages: In some cases, the injured party may also be entitled to claim damages. This is typically the case in negligent or fraudulent misrepresentation.

In order to avoid disputes related to misrepresentation in the Charter Party, it’s recommended that all communication and promises made between the charterer and the shipowner be documented. This can include correspondence, advertising materials, and ship specifications. Clear, well-drafted contracts that outline all aspects of the agreement, including the characteristics of the ship, can also help to minimize misunderstandings or misrepresentations.

Insurance is another safeguard that can be used to protect against financial losses stemming from misrepresentation. Depending on the type of coverage purchased, marine insurance policies may cover some of the potential losses associated with misrepresentation in a Charter Party.

While misrepresentation of the ship’s description in a Charter Party is a complex issue with potential legal and financial consequences, there are numerous strategies to manage and mitigate these risks. By understanding the different types of misrepresentation and potential remedies, parties can better protect their interests and maintain smoother business operations.

Cubic Capacity Misrepresentation in Charter Party

In the case of London Arbitration (18/06 2006 702 LMLN 3), the Tribunal deliberated on the acknowledged misrepresentation by the Shipowners regarding the ship’s cubic capacity and the date when the fixture became legally binding.

Initially, the Shipowners presented the ship to the Charterers during negotiations, stating its grain capacity as 59,421 cbm (cubic meters). As the negotiations approached conclusion on 23 December 2005, the Charterers’ shipbroker sent an email outlining the agreed terms and requested the completion of a questionnaire and description page before 1500 hours London time on 24 December 2005. Charterers provided a blank questionnaire and description page, explicitly stating that it was to be fully incorporated into the resulting Charter Party.

Upon receipt from the Shipowners, the description page stated the ship’s grain capacity as 57,208.40 cbm (cubic meters), an oversight missed by the Charterers. On 24 December 2005, Charterers confirmed the agreement, and the subjects were lifted.

Shipowners promptly noticed the error in the original description and brought it to the attention of the Charterers. Later on, Charterers claimed a loss of freight and made a deduction from hire. In response, Shipowners claimed for the hire deducted, arguing that no fixture had been concluded until Charterers lifted the subjects on 24 December 2005, by which time the correct grain capacity was stated in the description page, forming a part of the Charter Party. Charterers, however, contended that since the main terms were agreed upon by 23 December 2005, Shipowners had no right to change any of those thereafter.

The key issue before the Tribunal was whether there existed a binding fixture as of 23 December 2005 concerning grain capacity, or if the completed description page superseded the previous agreement.

The Tribunal concluded that the reconfirmation subject imposed by the Charterers allowed them to reject the ship based on the ship’s description, hence there could have been no binding fixture on 23 December 2005. The reconfirmation subject itself was subject to the provision of the questionnaire and description page. In essence, the Charterers were stating that they would reconfirm and enter into a binding fixture if the requested information was provided and deemed satisfactory.

According to English law, a fixture that is subject to details is not considered legally binding. Therefore, the Charterers’ argument was rejected.

This ruling aligns with a long line of English authority, notably the case of Junior K (1988 2LLR 583). Even if essential terms are agreed upon, the inclusion of the phrase subject details indicates that the parties do not intend to be legally bound until all the specific details are settled. This remains true even if a standard form is mentioned and is subject to logical amendments. Most standard forms are customized by the parties and may contain options within the form itself. However, the effect of the phrase subject details can be nullified by subsequent conduct showing a clear intention to waive its application, and it is further displaced by the actual agreement on those specific details, even if not recorded in a formal contract.

As an interesting side note, the United States courts hold a fundamentally different stance on the subject details issue. American precedent establishes that a charter comes into existence when the parties agree on the Main Terms of the Charter Party, as seen in the case of Great Circle Lines Ltd v Matheson & Co (681 F.2d 121 1982 AMC 2321). Agreement on every single term doesn’t need to be reached before a binding contract is formed. The determination of what constitutes essential terms is subject to the factual circumstances of each case, and there is an abundance of precedent to support this notion.

Shipowners Misdescribing Ship in Charter Party

In SK Shipping Europe plc v Capital VLCC 3 Corp Capital Maritime Trading Corp 2020 Case, the time charter of a colossal crude carrier known as the “C Challenger.” The Charterer of MT C Challenger alleged that Charterers were led to enter the charter due to misrepresentations made by the Shipowner before the contract was finalized.

Under English law, a party has the right to terminate a contract if one party induces the other party through false statements of fact or law. The court examined various issues related to misrepresentation, focusing on two particular aspects:

Whether a party offering to enter a contract on specific terms implicitly makes representations concerning those terms that could lead to a misrepresentation claim.
The impact of an “express reservation of rights” communicated by one party to the other following a misrepresentation or a breach of contract by the other.

During the negotiations leading to the charter party, the Shipowner provided the Charterer, through a shipbroker, with a document detailing the ship’s speed and fuel consumption. The information was based on the ship’s last three voyages. However, it later became evident that the figures provided were from different voyages.

Consequently, the ship’s actual performance did not meet the stated details in the negotiations or the warranty provisions in the charterparty. Charterer declared the charterparty rescinded due to fraudulent misrepresentation and sought damages. Additionally, Charterer claimed that the Shipowner’s actions amounted to a repudiatory breach of the charter party, allowing the Charterer to terminate it.

The judgment referred to a few authorities that had previously addressed whether a party offering to contract on specific terms is deemed to make implicit representations.

In Kingscroft Insurance Co Ltd v Nissan Fire & Marine Ins Co Ltd (1999) Case, Moore-Bick J observed that:

An offer made by a party generally does not contain terms that are intended to be representations in the contract. The party’s offer is not considered to make any representation about the subject matter of those terms.
However, it is usually implied that a party offering to contract on certain terms represents its intention to perform the contract as offered, understanding those terms, and believing it can do so.

The only previous case that considered whether an offer to include a speed and consumption warranty in a charterparty involved implicit representations was The Larissa (1983) Case. In that case, the Shipowner’s shipbroker stated to the charterer:

“Performance: Owners to guarantee 14.6 knots in moderate weather but max Beaufort scale No. 5 which inclusive, consumption of 42 L tons HVF (max 1500 redwood No1.) plus 2 L Tons D.O”.

The arbitrator agreed with the Charterer, considering this a representation of the ship’s actual speed and consumption, on which the Charterer relied when entering the charter, allowing them to rescind it.

However, the award was set aside on appeal to Hobhouse J, who held that those words were a contractual offer, relating to a contractual term, and thus words of obligation rather than representation. Therefore, Shipowner did not induce the Charterer to enter the contract.

In the present case, counsel for the Charterers urged the judge to distinguish or not follow The Larissa’s (1983) decision. They contended that an offer of a speed and consumption warranty does imply a representation that the figures accurately reflect the ship’s consumption. Nevertheless, Justice Foxton declined to do so, as there were compelling reasons why a mere offer of a speed and consumption warranty should not imply any implicit representation of the ship’s performance:

A warranty is inherently promissory language, expressed concerning the future performance during the chartered service.
Ship performance varies over time due to factors like hull fouling and engine efficiency. It is challenging to pinpoint the specific time of representation.
Warranties in a charter party are typically negotiated, considering factors like weather conditions and agreed margins. This contradicts an implied representation of the ship’s actual consumption.

Therefore, statements about contractual terms are unlikely to involve implicit representations that could support a misrepresentation claim. If a party is concerned about specific matters in the contract that are crucial to their decision to enter the contract, they should ensure those matters are expressly represented before entering the contract. Furthermore, they should address them within the contract itself as contract conditions, allowing them to terminate the contract for repudiatory breach if those conditions are not met.

The Effect of an Express “Reservation of Rights”

The judgment also considered the impact of an explicitly communicated “reservation of rights” by a party, which is often used during disputes concerning significant contractual rights, while the parties seek further information or determine their course of action. However, Justice Foxton warned against assuming that a party’s rights are preserved as long as they communicate with the other party subject to an express reservation of rights.

The court reviewed various approaches in the case law on this matter. The key question was whether certain acts could affirm the contract, even if performed under a reservation of rights. Justice Foxton’s conclusions on this issue were as follows:

A reservation of rights can often prevent subsequent conduct from constituting an election between treating the contract as terminated or continuing it, but this is not a fixed rule.
In determining whether an election has occurred, the court should consider all relevant material, including any communicated reservation of rights.
If conduct is consistent with reserving the right to rescind the contract while still relying on contractual rights to obtain information or fulfilling contractual obligations while assessing the situation, an express reservation will prevent an election.
However, if a party unconditionally demands the other party to perform a substantial part of the contract, leading the other party or third parties to significantly change their positions, even with a reservation of rights, the court is likely to consider this an election to continue the contract.
Ultimately, the effectiveness of a “reservation of rights” in avoiding an election depends on a legal characterization of the party’s actions, rather than the label attached to the conduct.

In shipping business, Shipowners and Charterers should be cautious as a reservation of rights can provide time for assessment, but there are limits to its effect. Care should be taken to avoid inadvertently affirming a charter party and irrevocably waiving the right to terminate the contract if needed.