What happened?
Episode 1: No Signs of Trouble
Ukrainian fleet owner time-chartered a tanker ship (“Vessel”) to import diesel fuel from the EU to Ukraine. In March 2024, an affiliated company of this fleet owner (“Charterers) procured the diesel fuel in Greece and voyage-chartered the Vessel to deliver the fuel to Ismail, Ukraine.
By the end of March 2024, the fuel was loaded in Greece, and the shipping documents confirming its good quality were tendered to the Charterers. The Charterers were holders of the “to order” bill of lading, which provided that the cargo had been loaded in “apparent good condition” and contained the “clean on board” inscription. The title and risk to the cargo passed on to the Charterers.
Importantly, the head owners of the Vessel represented the time charterers that she was seaworthy and cargoworthy. The Vessel’s voyage to Greece and, later, from Greece to Ukraine was her first after she was tendered to the time charterers.
Episode 2: Water Instead of Fuel
In April 2024, the Vessel arrived at the discharge port. The discharge commenced via the cargo manifold (main pump). However, it was stopped soon since instead of the diesel fuel, an emulsion containing a significant amount of water was pumped out from the Vessel. The string buyer’s surveyors submitted letters of protest regarding this.
At the same time, the head owners of the Vessel precluded surveyors of the Charterers and the string buyer from inspecting the quality of the goods, while the vessel’s master, subordinated to the head owners, refused to pass on to surveyors the samples of the cargo taken at the loading port and tore the receipt of acceptance of the said samples.
The samples at the discharge port were eventually taken, and it turned out that the fuel contained more than 27% of water, as well as 6.5% of admixtures, including salt. Surveyours suggested that the cargo manifold was damaged, causing the contamination of the fuel during the discharge.
Considering this, the discharge port fuel terminal prohibited the discharge through the cargo manifold, and the discharge continued through the cargo stripping lines. Due to the low output of the stripping lines, the discharge was significantly delayed and lasted for almost a month.
At the same time, surveyors inspected the Vessel, but her master and crew hindered the inspection by precluding them from accessing the pump room and prohibiting the photo- and video fixation of the inspection. Despite this, the survey revealed multiple violations of the head owners, namely, the presence of water in the cargo discharge pipelines, dirty water in several cargo tanks, lack of the manifold’s tightness and unfilled log book. Accordingly, the Vessel was apparently not cargoworthy.
Episode 3: Damages and Legal Action
Due to the contamination of the cargo, a part of it was spoiled completely, resulting in significant losses for the Charterers. Additionally, the Charterers incurred costs for utilisation of the spoiled fuel, the demurrage of the tank cars onto which the fuel should have been loaded and faced a claim from the string buyer. The total amount of damages was estimated by the Charterers at around USD 2.6 million.
The Charterers commenced the vessel arrest proceedings in Ukraine, arguing that the head owners, the carriage contract with whom was evidenced by the master’s stamp on the bill of lading, breached their duty to tender the cargoworthy vessel and maintain her cargoworthiness.
Particularly, the vessel was not suitable to carry and discharge the cargo of fuel due to (1) technical problems with the cargo manifold and the discharge pipelines, and (2) uncooperative conduct of the master and crew, who concealed the problems and obstructed inspections.
What was the outcome of the dispute?
The court arrested the Vessel without requesting the Charterers to pay the deposit, securing the possible head owners’ losses.
Facing a risk of the prolonged idling of the vessel under arrest, the head owners, who previously disregarded the Charterers’ demands for compensation of damages, entered into negotiations with them. Negotiations resulted in a settlement on terms favourable for the Charterers, and the vessel was released.
Key takeaways
This case highlights the following essential lessons for the shipping industry:
- Bill of Lading is Enough to Claim Damages From the Head Owner. Bills of lading are considered to be the proper evidence of contractual relations between the charterer and the head owner when there is an intermediate (disponent) owner. They allow the charterer to sue the head owners directly in cargo contamination cases.
- Vessel Arrest is the Charterer’s Trump Card. Shipowners often bear losses disproportionate to the value of charterers’ claims and usually try to negotiate a settlement when facing vessel arrest.
- Arrest Without a Deposit is Possible. Although courts usually demand a deposit from charterers as a counter-security, in a case when the charterers’ claims look well-grounded, the court may not demand payment of the deposit.
Stay tuned for more valuable insights from our recent shipping practice!
Prepared by Yurii Bedenko, senior associate, and Viktor Pasichnyk, associate.