What is a Clause Paramount?

Clause Paramount integrates either the United States Carriage of Goods by Sea Act or the Hague/Hague Visby Rules into a contractual agreement. Although primarily designed to shape the legal relationships between carriers and shippers, found typically on the reverse side of Bills of Lading (B/L), the Hague/Hague Visby Rules are also applicable to Charterparties. For example, the Clause Paramount is included in the NYPE (New York Produce Exchange Form) for time charters. For Voyage Charterparties, it appears in forms such as Asbatankvoy, Baltimore 1976, Amwelsh 1993, and Norgrain 1989. If a charterparty, be it a Voyage Charterparty or a Time Charterparty, explicitly states the intent to incorporate a Clause Paramount, English courts will enforce this inclusion, even if it necessitates adjusting the language of the Clause Paramount or omitting some terms it references.

Upon delivering the ship to Charterers at the start of the Charterparty, how does including a Clause Paramount influence the shipowners’ rights and duties?

 

a. Ship condition: an absolute obligation versus due diligence: Under English common law, Shipowners are tasked with the absolute duty to provide a seaworthy ship upon delivery to the Charterers. This liability is regardless of fault. However, when a Charterparty includes a Clause Paramount integrating the Hague/Hague Visby Rules, Shipowners are only liable if they fail to perform due diligence to ensure the ship’s seaworthiness at the start of the voyage (The Fjord Wind [2000] 2 Lloyd’s Rep 191).

 

b. The rigor of Shipowners’ due diligence under a Clause Paramount: Due diligence requires that Shipowners conduct all necessary inspections, repairs, or other preparations that a prudent Shipowner would deem appropriate under the circumstances to ensure the ship’s seaworthiness. Additionally, any performed work must meet standards of reasonable skill, care, and competence (Union of India v Reederij Amsterdam [1963] 2 Lloyd’s Rep 223). Hiring competent contractors does not automatically fulfill the Shipowners’ due diligence obligation; it is fulfilled only if due diligence is evidenced by every involved party, whether they are employees, agents, or independent contractors (The Muncaster Castle [1961] 1 Lloyd’s Rep 57). The shift from an absolute warranty of seaworthiness to a due diligence obligation absolves Shipowners from liabilities for latent defects undiscoverable by diligent Shipowners or experts (The Muncaster Castle [1961] 1 Lloyd’s Rep 57). Under most charterparty forms, the ship must be delivered ready to receive cargo with clean swept holds that are “tight, staunch, strong, and in every way fitted for the service,” which constitutes a stringent obligation. Thus, the Shipowner breaches this obligation if the ship is not “in every way fitted for service,” irrespective of fault. Yet, with the integration of a Clause Paramount, this “absolute duty” morphs into a mere obligation to exercise due diligence for ensuring the ship is seaworthy for loading and transporting the cargo. For example, if the ship’s cranes fail upon delivery and the charter lacks a Clause Paramount, the Shipowner is liable regardless of fault. However, if the charter includes a Clause Paramount, the Shipowner might defend against claims from the Charterers if he can prove that he performed due diligence in making the ship “in every way fitted for service.”

 

c. Under a Clause Paramount, is it necessary for Shipowners to exercise due diligence at the start of every voyage or only at the beginning of the charter? In time charters involving successive voyages, the obligation of seaworthiness is initially required only at the charter’s start when the ship is delivered. However, if the Charterparty’s time charter includes a Clause Paramount, the Shipowner must perform due diligence at every voyage’s start. Nevertheless, courts have not fully endorsed the view that due diligence must be performed at every voyage start when the Hague/Hague Visby Rules are part of a charterparty (The Hermosa [1980] 1 Lloyd’s Rep 638). Therefore, Shipowners should be vigilant to ensure due diligence at every voyage commencement if a Clause Paramount is present in the charterparty.

 

d. How does a Clause Paramount affect the Shipowner’s obligations when issuing an NOR (Notice of Readiness)? The inclusion of a Clause Paramount in a charterparty does not alter the prerequisites for issuing a valid NOR (Notice of Readiness). Therefore, even if Shipowners perform due diligence but the ship’s holds remain unclean and unready for cargo, the NOR (Notice of Readiness) submission fails to initiate laytime or compel Charterers to accept ship delivery.

 

How does incorporating a Clause Paramount impact Shipowners’ Rights and Obligations?

a. Obligation to maintain the ship:

The inclusion of a Clause Paramount into a time charter modifies the Shipowners’ absolute obligation of seaworthiness at delivery into a due diligence obligation at the start of each voyage under the charter. This new obligation of due diligence complements the pre-existing duty under the NYPE Clause 1 (New York Produce Exchange Form) to sustain the ship’s hull, machinery, and equipment throughout the charter duration. Thus, Shipowners should be aware that the continuous duty to maintain the ship persists under the NYPE (New York Produce Exchange Form) despite the Clause Paramount.

b. Can Shipowners leverage the liability exclusions in the Hague/Hague Visby Rules to avoid liability?

i) Article IV Rule 2 of the Hague/Hague Visby Rules includes a list of liability exclusions. One key provision states, “Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from… (a) act, neglect, or default of the master, mariner, pilot or the servants of the carrier in the navigation or the management of the ship…”. Shipowners can invoke all additional exceptions provided by the Hague/Hague Visby Rules if they can substantiate their applicability. An illustrative case involved Charterers instructing the shipmaster to load maximum cargo to maintain adequate draught for Panama Canal passage. Upon arrival, the ship was denied canal entry due to excessive draught. Although Charterers sought damages, their claim was negated because the loss stemmed from the shipmaster’s navigational or managerial neglect (an exception under the Hague/Hague Visby Rules), thus exempting the Shipowners from liability (See The Aquacharm [1980] 2 Lloyd’s Rep 237). Similarly, in a scenario where Shipowners breached a speed warranty in a Voyage Charterparty due to engine failure, they could rely on the Hague/Hague Visby Rules’ exceptions to evade liability (The Leonidas [2001] 1 Lloyd’s Rep 533). However, Shipowners should note that these cases are specific to their facts, and similar outcomes should not be presumed in differently factored cases.

ii) Deviation: Standard form Charterparties like the NYPE (New York Produce Exchange Form) generally allow the ship to deviate to save life and property but do not specify exclusion of Shipowners’ liability resulting from such deviation. In contrast, the Hague/Hague Visby Rules explicitly state that Shipowners are not liable for losses or damages resulting from reasonable deviations. Thus, a Clause Paramount incorporating the Hague/Hague Visby Rules can serve as a valuable tool for excluding liability for reasonable deviations.

iii) Limitation of liability (financial limit): Shipowners might also benefit from the limitation regime provided by the Hague/Hague Visby Rules, although this is confined to their liability concerning loss of or damage to goods carried under the charter (The Kapitan Petko Voivoda [2003] 2 Lloyd’s Rep 1).

iv) Limitation of Liability (Time Limit): Given that the Hague/Hague Visby Rules originated within Bills of Lading (B/L), the one-year time bar under the Hague/Hague Visby Rules was designed specifically for cargo claims. Thus, when the Hague/Hague Visby Rules are incorporated into a Charterparty, the one-year time bar applies only to cargo-related claims arising between Shipowners (or Disponent Owners) and Charterers under the Charterparty (See The Agios Lazarus [1976] 2 Lloyd’s Rep 47). In this context, “claims in relation to cargo” extend beyond mere cargo damage or shortage claims to include financial losses from loading delays, additional tank cleaning costs, and cargo pumping expenses, as these are considered related to goods and hence subject to the one-year time bar due to the Hague/Hague Visby Rules’ integration into the Charterparty (See The Ot Sonja [1993] 2 Lloyd’s Rep 435 and The Stolt Sydness [1997] 1 Lloyd’s Rep 273). Moreover, damages or loss claims concerning Charterers’ property stored on board may fall under the one-year time bar if regarded as “goods” to be delivered later. However, claims for loss of Charterers’ Bunkers on Board (BOB) would not be subject to the one-year time bar as such bunkers are intended for consumption, not delivery (See The Seki Rolette [1998] 2 Lloyd’s Rep 638). Similarly, claims for damages due to Shipowners’ delays in issuing Bills of Lading (B/L) are not time-barred after one year due to the Hague/Hague Visby Rules’ incorporation into the Charterparty (see The Standard Ardour [1988] 2 Lloyd’s Rep 159). It should be noted, however, that most Charterparties incorporate the Inter-Club New York Produce Exchange Agreement (ICA), which will prevail over the Hague/Hague Visby Rules concerning liability and time bar. It is also crucial to recognize that the one-year time bar applies only to claims from Charterers against Shipowners, not covering proceedings initiated by Shipowners against Charterers (see The Khian Zephry [1982] 1 Lloyd’s Rep 73).

 

Implementing the Paramount Clause

A General Paramount Clause or the incorporation of a General Paramount Clause is interpreted as follows:

There are minor variations in the wording of various Clauses termed General Paramount Clause, yet each embodies these fundamental provisions:

(1) If the Hague/Hague Visby Rules are enacted in the country of shipment, they apply as enacted;

(2) If the Hague/Hague Visby Rules are not enacted in the country of shipment, then the corresponding legislation of the destination country applies, or, if no such legislation exists, the Convention terms containing the Hague/Hague Visby Rules apply;

(3) If the Hague-Visby Rules are mandatorily applicable to the trade in question, then the legislation enacting those rules applies.

Therefore, it’s crucial to examine the specific voyage and the relevant rules implemented by statute concerning Bills of Lading (B/L) to ascertain which Hague/Hague Visby Rules apply when a General Paramount Clause states their incorporation into the Charterparty. Additionally, the Hague/Hague Visby Rules are sometimes introduced into a Charterparty by referencing the specific legislation that enacted them in one of the signatory countries. It’s common to see Paramount Clauses referencing the incorporation of the Hague/Hague Visby Rules as enacted by the United States Carriage of Goods by Sea Act 1936, which generally enacted the Hague/Hague Visby Rules. However, there are slight variations between the Hague/Hague Visby Rules as outlined in the Convention and as enacted under the United States Carriage of Goods by Sea Act 1936. Courts apply the Hague/Hague Visby Rules as stipulated in the applicable legislation but governed by the contract’s specified country’s law to resolve Charterparty disputes. Therefore, concerning the United States Carriage of Goods by Sea Act 1936, initiating a lawsuit to halt time under the provisions of the Hague/Hague Visby Rules necessitates adhering to English procedures for initiating Arbitration or High Court Proceedings when the Charterparty is subject to English law and jurisdiction. Adhering to American Rules would not satisfy the court. It is also imperative to consider the extent of the Hague/Hague Visby Rules’ incorporation into any Charterparty. For instance, in the ‘Stena Pacifica’ 1990 case, which involved a dispute under Shelltime 4 related to a clause identical to one in the Shellvoy 5 voyage charterparty form concerning cargo claims, the applicability of the Hague/Hague Visby Rules time limit was contested. The court determined that the Hague/Hague Visby Rules, as incorporated into the Charterparty, did not apply to claims falling outside the scope of the Hague/Hague Visby Rules. Consequently, a claim stemming from the ship’s underperformance regarding pumping was unrelated to cargo and thus did not fall under the one-year time limit introduced by the Hague/Hague Visby Rules.

 

Conclusion:

Given the potentially extensive implications of a Paramount Clause as outlined above, Shipowners are encouraged to thoughtfully consider whether to include such a Paramount Clause in their Time Charterparties or Voyage Charterparties. Generally, Shipowners are advised to incorporate the Paramount Clause into their Charterparties because:

(1) Shipowners may be entitled to rely on the exceptions under the Hague/Hague Visby Rules,

(2) Shipowners’ absolute duty of Seaworthiness is reduced to one of exercising due diligence, and

(3) Shipowners may be able to rely on the one-year limitation period for cargo claims under the Hague/Hague Visby Rules. The only potential downside for Shipowners (and Disponent Owners) in incorporating a Paramount Clause into a Charterparty is that Shipowners’ obligation to ensure Seaworthiness and Cargoworthiness of the ship then arises at the start of each voyage under a Time Charter, not merely upon delivery of the ship to Charterers. However, if the charter is under NYPE (New York Produce Exchange Form) terms, Shipowners (and Disponent Owners) will, regardless, be subject to a continuous warranty of Seaworthiness and Cargoworthiness.