Petroleo Brasileiro S.A. v E.N.E. Kos 1 Limited

A time-charter indemnity for consequences arising from compliance with charterers’ employment orders is broad, but excludes ordinary risks and costs assumed under the charter. It applies where an order is an effective, though not necessarily sole, cause of an unassumed loss. A merely historical or “but for” connection is insufficient.

Where contractual bailment ends while goods remain with the bailee, the continuing duty to care for them carries a correlative right to recover reasonable expenditure if there is no reasonable or practical way to discharge that duty without incurring loss. The lawful exercise of a contractual termination right is legally neutral; the terminating party’s commercial motive does not alter rights arising under the contract or general law.

Petroleo Brasileiro S.A. v E.N.E. Kos 1 Limited concerned a time-chartered tanker which the owners lawfully withdrew after hire was not paid. The failure to pay was not repudiatory. Cargo loaded under the charterers’ orders remained on board and detained the vessel for 2.64 days while its removal was arranged.

Andrew Smith J awarded the owners recovery under the law of bailment but rejected claims under the charterparty indemnity, a new contract and unjust enrichment. The Court of Appeal, [2010] EWCA Civ 772, rejected all four grounds, save for the value of bunkers consumed in physically discharging the cargo.

The Supreme Court considered whether the owners could recover the vessel’s market-rate value and bunkers for the detention under clause 13 of the charterparty, a post-withdrawal contract, unjust enrichment or the law of bailment.

1. Disposition. The Supreme Court unanimously allowed the appeal and restored the order of Andrew Smith J. Lord Sumption delivered the leading judgment, with which Lord Walker agreed. Lord Phillips and Lord Clarke agreed that clause 13 applied. Lord Mance agreed with recovery under bailment but disagreed about clause 13.

2. Contractual indemnity. By a four-member majority, clause 13 entitled the owners to recover. An employment indemnity protects shipowners from consequences of following charterers’ orders which fall outside the risks and costs assumed under the charter. It does not cover ordinary incidents of the chartered service, navigation, the owners’ breach or other contractually assumed risks.

   The relevant inquiry was whether the order to load was an effective cause of the owners bearing an unassumed cost. It need not be the sole effective cause, but a merely historical or “but for” connection is insufficient. The cargo had to be discharged because it had been loaded and remained aboard when the charter ended. Withdrawal fixed the time and place of discharge but did not break the causal connection. The owners’ commercial reason for exercising their express right of withdrawal was irrelevant.

3. Measure of indemnity. The whole 2.64-day detention resulted from the cargo remaining aboard under the charterers’ order. The charterers’ delay in arranging removal did not change the character or cause of the loss. As no different measure was argued, the opportunity cost was the contemporary market rate of hire. The owners were also entitled to the value of bunkers consumed throughout the detention.

4. Bailment. The Court also accepted recovery under the principle applied in China Pacific SA v Food Corpn of India (The Winson) [1982] AC 939. The cargo had originally been bailed under a contract which ended while it remained in the owners’ possession. Their duty to take reasonable care continued, and retaining it until discharge was their only reasonable or practical course. That duty carried a correlative right to recover the reasonable cost thereby incurred. The restrictions governing an agent of necessity who contracts with third parties did not defeat the bailee’s claim for its own costs.

5. Other grounds. No post-withdrawal contract arose because each side rejected the other’s terms. The Court did not determine unjust enrichment; Lord Sumption considered that it raised wider issues better decided in another case.

1. United Kingdom Supreme Court: Unanimously allowed the owners’ appeal from [2010] EWCA Civ 772 and restored the order of Andrew Smith J.
2. Court of Appeal: Rejected the claims under clause 13, a new contract, unjust enrichment and bailment, but permitted recovery for bunkers consumed in physically discharging the cargo.
3. High Court: Andrew Smith J upheld the owners’ claim under bailment but rejected the other asserted bases of recovery.