Supreme Court reiterates principles applicable to incorporation of charterparty terms into bills of lading

Supreme Court reiterates principles applicable to incorporation of charterparty terms into bills of lading

Herculito Maritime Ltd & others -v- Gunvor International BV & others (POLAR) [2024] UKSC 2

The UK Supreme Court decision in this case has been much written about and discussed for the guidance it provides on charterparty war risks provisions. 

One issue that arose for the Supreme Court’s consideration was whether the material parts of the charterparty war risks regime were effectively incorporated into the bills of lading. The Supreme Court’s summary of the applicable law on incorporation in this context is of general relevance and provides a useful reminder of the applicable principles.

The background facts

In October 2010, the vessel was seized by Somali pirates while transiting a designated “High Risk” area in the Gulf of Aden and was only released 10 months later following a ransom payment to the pirates by or on behalf of the vessel’s owners.

The owners declared general average (GA) and the ransom payment was a major component of the subsequent average adjustment. The cargo interests contended that they were not liable for any GA contribution in respect of the ransom payment. 

The voyage charterparty incorporated a war risks clause that provided for any additional insurance premia to be for charterers’ account. The additional Gulf of Aden clause in the charterparty also provided for any additional insurance premia to be for charterers’ account, but up to a maximum of US$40,000. Clause 39 of the charterparty defined war risks as including acts of piracy and granted the owners certain liberties.

The six bills of lading had the following general words of incorporation:

“…pursuant and subject to all terms and conditions, liberties and exceptions as per TANKER VOYAGE CHARTER PARTY indicated hereunder, including provisions overleaf.”

Five of the bills of lading provided for GA to be settled according to the York-Antwerp Rules 1974, the sixth bill of lading provided for the York-Antwerp Rules 1994.

The defence

The cargo interests’ arguments were as follows: 

1. The war risks and additional Gulf of Aden clauses in the charterparty precluded the owners from claiming against the charterers in respect of losses for which additional insurance had been obtained
    
2. The material parts of those clauses (ie those relating to the payment of insurance premia) were validly incorporated into the bills of lading
    
3. On the proper interpretation of those clauses in the bills of lading, they precluded the owners from claiming in respect of those losses against the bill of lading holders
    
4. If necessary, the wording should be manipulated to substitute “charterers” for “holders of the bills of lading” in the part of the clauses that allocated payment for the additional insurance premia to the charterers

The arbitral tribunal found that the cargo interests did not have to contribute to GA. The Commercial Court allowed the owners’ appeal. The Court of Appeal dismissed the cargo interests’ appeal and held that they had to contribute to GA.

The Supreme Court decision

Insurance code

The Court rejected the argument that the charterparty provided for an insurance code or insurance fund such that the owners could only claim their losses in respect of the ransom payment against insurers rather than the charterers.

There was, therefore, no such insurance code that could be incorporated into the bills of lading. Nonetheless, since the case was decided below on the basis that there was or was assumed to be an implicit understanding that the charterparty contained such a code, the Supreme Court addressed the further issues on that assumed basis, as the Court of Appeal did.

Incorporation – the law

As to whether the material parts of the war risks clauses (ie those that related to the payment of insurance premia) were incorporated into the bills of lading, the relevant principles on incorporation in this context are in summary:

1. What matters is the incorporating wording in the bill of lading, not provisions relating to incorporation that may be found in the charterparty. If the incorporating wording in the bill of lading is not wide enough to incorporate the provision in question, then that is the end of the inquiry
    
2. General words of incorporation in the bill of lading will be effective to incorporate only those terms of the charterparty that directly relate (or are germane) to the shipment, carriage or discharge of the cargo or the payment of freight. This excludes ancillary agreements such as an arbitration or jurisdiction clause, as well as terms inapplicable in the bill of lading context (eg those relating to the approach voyage or to matters after discharge)
    
3. Where general words of incorporation are used, some degree of manipulation of the charterparty term wording to make it fit in the bill of lading context is allowed where the term relates to shipment, carriage or delivery but not otherwise
    
4. Where specific words of incorporation are used, they are effective to bring about a prima facie incorporation even if the term in question does not relate to shipment, carriage or discharge, and even if some degree of manipulation of the wording is required
    
5. A greater degree of manipulation may be allowed in relation to specific incorporation wording. For example, if the bill of lading states that “all terms, conditions and exceptions including the arbitration clause of the charterparty are incorporated”, then the arbitration clause will be incorporated even if it only refers to disputes between owners and charterers and its language has to be adapted to refer to bill of lading holders
    
6. If the incorporating clause is wide enough to effect a prima facie incorporation of the term in question, nonetheless if that term does not make sense in the context of the bill of lading (eg if it deals with hire under a time charterparty) or if it is inconsistent with the express terms of the bill of lading, it will be rejected.

These are not rigid rules, however, and the Court must test any conclusions it reaches against the terms of the contract and business common sense. 

Applying the law

Applying these principles to the facts of this case, the Supreme Court agreed with the lower courts that there was a prima facie incorporation of the charterparty clauses relating to the payment of insurance premia. They were not, as cargo interests submitted, ancillary provisions that were not directly relevant to the loading, carriage or discharge of the cargo. Rather, they were clearly relevant to carriage in that they were clauses relating to the route to be taken and they provided the owners with important protection in relation to voyage war risks. 

In the Supreme Court’s view also, the parties must have intended to incorporate the entirety of the relevant war risks contractual regime in the charterparty into the bills of lading rather than to have only partial or incomplete incorporation. The Gulf of Aden clause and the war risks clause restricted the owners’ liberties under clause 39, such that those liberties could not be relied on in relation to the known piracy risk of transiting the Gulf of Aden. The charterers’ obligation to pay insurance premia was an important element of the owners’ agreement to accept that risk. Therefore, in order to give effect in the bills of lading to the agreed allocation of risk to transiting the Gulf of Aden, all of these provisions should be regarded as incorporated in the bills of lading.

Manipulation of the wording

If the incorporated wording was not manipulated, then the obligation to pay the insurance premia rested on the charterers alone. There was no such obligation on the bill of lading holder, who would not then have been able to rely on an insurance code, had it existed.

The Supreme Court additionally found that there was no need to manipulate the wording of the charterparty clauses in order to fit the bill of lading. They made perfectly good sense in the context of the bills of lading as a record of the terms on which the owners had agreed to transit the Gulf of Aden. It was also implausible that bill of lading holders would have accepted a potential liability to pay unknown and unpredictable amounts. 

The appeal was, therefore, dismissed.

Comment

The Supreme Court’s decision provides a useful summary of the law regarding incorporation and manipulation of charterparty terms into bills of lading contracts.  It recognises too that cargo interests often have no knowledge of the charterparty terms and no ready means of finding out when accepting negotiable documents under their purchase contracts - a common issue for cargo receivers finding themselves in litigation/arbitration with owners. 

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