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Australia – Slow Steaming: Setting The Right Heading.

17 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Shipping, Maritime & Aviation

 

WHAT YOU NEED TO KNOW

 

  • The short term outlook for the global shipping industry is for the market to remain soft due to oversupply.
  • The practice of slow steaming has been adopted as a means of cost optimisation. However, this practice needs to be reconciled with the obligations ship owners may have contractually and at law.
  • In Bulk Shipping Union SA v Clipper Bulk Shipping Limited, the High Court of England and Wales upheld an arbitral award under which the charterers of a vessel were able to withhold a portion of the hire because of slow steaming by the chartered vessel.
  • Where parties are agreeable to slow steaming, the terms of the charterparty will need to specifically reflect this.

 

As the short term outlook for the global shipping industry is for the market to remain soft (essentially due to the supply of vessels outweighing demand for most shipping services), shipping companies have had to innovate to competitively position themselves. While some have taken a long term view of the shipping industry (and its well-known boom and bust cycles) and purchased newer, larger and more efficient vessels at lower prices, other approaches, such as the optimisation of current business practices to lower rates and remain competitive, have been more widely implemented. One such optimisation measure is the utilisation of slow steaming.

 

Slow Steaming

 

Broadly, slow steaming involves the operation of a vessel significantly below its maximum speed. The claimed benefits of slow steaming include decreasing both:

 

  • fuel consumption of the vessel (which depending on the contractual arrangements with the charterer, may or may not be a direct cost pass through); and
  • CO2 emissions.
 

A shipping company which is able to demonstrate decreases in both costs and CO2 emissions through the application of slow steaming may be able to offer charterers a commercially attractive prospect. Though there is no consensus yet on the benefits of slow steaming, some shipping companies have announced the adoption of slow steaming as part of their business practices.


It is very important that global shipping industry participants keep in mind the various obligations (both contractually and at law) that may apply to them and the need to reconcile these obligations with the implementation of any new business practices such as slow steaming.


The decision of the High Court of Justice, Queen’s Bench Division, Commercial Court which was handed down last year in Bulk Shipping Union SA v Clipper Bulk Shipping Limited [2012] EWHC 2595 (Pearl Sea Decision) provides useful guidance on some of the key issues that are relevant to slow steaming. Though the Peal Sea Decision dealt with other issues as well, for the purposes of this alert we only consider the aspects of the decision dealing with slow steaming.

 

The Pearl Sea Decision

 

Between October 2006 and December 2007, the Bulk Ship Union SA (Union) let their vessel, the Pearl Sea, to Clipper Bulk Shipping Limited (Clipper) under the terms of an NYPE93 time charterparty for 9 to 12 months. During this period, the Pearl Sea performed sixteen laden or ballast voyages.

 

In the charterparty, Union warranted that the Pearl Sea had a Maximum Continuous Rating (MCR) of 95 rpm and a Normal Continuous Rating (NCR) of 92 rpm. The MCR and NCR are respectively the maximum and the normal revolutions that the vessel’s propeller is capable of continuously operating at, in normal conditions, over a year.


Union and Clipper fell into dispute and in accordance with the charterparty, this dispute was referred to arbitration in London (with English law to apply).

 

The Decision

 

The Arbitral Award

 

In the arbitral proceedings, Union claimed US$624,276.77 (plus interest) in respect of unpaid hire due.


In response, Clipper claimed that on three voyages the vessel proceeded at a speed of between 77 and 82 rpm, and due to this slow steaming, Clipper was entitled to:

 

  • damages for breach of clause 8 of the charterparty (which required the master to prosecute the voyage with the utmost dispatch); and / or
  • deduct time lost from the hire under the Off-Hire clause in the charterparty (which though amended, still provided for delays attributable to deficiencies in either ship or crew to be borne by Union).
 

After considering submissions the tribunal awarded Union a sum of US$505,302.08, however, the tribunal upheld Clipper’s claims and the difference between the sum claimed by Union and the amount awarded (US$118,974.69) represented what the tribunal considered Clipper was entitled to withhold from the hire otherwise payable.


Appeal To The High Court

 

Union appealed the tribunal’s decision, claiming the tribunal had made errors in law by:

 

  • reasoning and concluding that Union was in breach of the charterparty solely because the vessel did not achieve the warranted speed;
  • failing to apply Article 4 Rule 2(a) of the Hague Rules (which removes responsibility from the owner for loss or damage from the act, neglect or default of the master in navigating the vessel); and
  • finding the off-hire clause applied to slow steaming.
 

The Reasoning


In his judgement, Justice Popplewell found no errors of law on the part of the tribunal in respect of:


a) the process of reasoning, as not only was the warranted speed considered, but so was the vessel itself and the conditions that were encountered, following which no realistic explanation for the failure to achieve the warranted speed could be identified and based on this reasoning, the tribunal’s conclusion that Union breached clause 8 was sustainable;


b) not applying Article 4 Rule 2(a) of the Hague Rules, as Rule 2(a) has no application where clause 8 is breached due to a deliberate decision not to proceed with utmost despatch (as opposed to a breach which is caused by a negligent error in a vessel’s navigation); and


c) finding that the off-hire clause applied to slow steaming because, in his Honour’s view, the offhire clause was a “net loss of time clause” and covered both delays attributable to deficient service (as was the case here) and loading/discharge delays.


Accordingly, Justice Popplewell dismissed the appeal and upheld the tribunal’s decision.

 

Implications For Australia

 

Though debate continues within the global shipping industry regarding the actual benefits of slow steaming, the practice has already been widely adopted and the reality is that slow steaming is likely to become a more common commercial consideration for both Australian shipowners and charterers.

 

Many widely used time charterparties in Australia include express obligations for voyages to be prosecuted with the utmost despatch (for example, see clause 2(b)(i) of ShellLNGTime1 and clause 8 of NYPE93).


Equally, time charterparties usually contain a clause under which the shipowner gives an undertaking as to the speed capabilities, MCR and NCR of the vessel (for example, see clause 26 of ShellLNGTime1 and clause 29 of NYPE93).


As was the case in the Pearl Sea Decision, where there is no explanation for a vessel proceeding below its warranted speed (eg. vessel or weather conditions), a shipowner may be in breach of the obligation to prosecute voyages with the utmost despatch (where not otherwise excluded). Importantly, when considering a vessel’s progress, the undertakings as to speed, MCR and NCR may be used as a benchmark.

 

Exclusion Of The Utmost Despatch Obligation


The most straightforward way for parties to utilise slow steaming whilst circumventing potential liability is for the parties to expressly allow slow steaming in the charterparty. An example of such a clause is the BIMCO slow steaming clause (available here).


However, it should be noted that including the BIMCO slow steaming clause in a time charterparty may not address all issues relevant to the shipowners and charterers on this point and the interaction of the amended time charterparty and other carriage documents needs to be closely considered (particularly in relation to bills of lading and the implied obligations of the carrier).


The Limits Of The Hague Rules’ Nautical Defence


Justice Popplewell’s examination of the application of Article 4 Rule 2(a) of the Hague Rules is a relevant reminder of the exclusions that apply in Australia. Article 4 Rule 2(a) of the amended Hague Rules that are in force in Australia is identical to Article 4 Rule 2(a) of the Hague Rules that Justice Popplewell considered in the Pearl Sea Decision.


It is well established that the exclusion for negligent navigation applies where goods are damaged or lost as a result of negligence in the navigation or management of a ship. As reiterated in the Peal Sea Decision, it is important to note the distinction between a deliberate decision and a negligent error in the navigation of the vessel resulting in a breach of the obligation to proceed with the utmost despatch, as the application of this exclusion is likely to turn on this distinction.

 

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For further information, please contact:

 

Shane Bosma, Ashurst
[email protected]


Paul Newman, Partner, Ashurst
[email protected]


David Morgans, Ashurst
[email protected]

 

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