Expert commentary: Bunkers claim – notification requirement under contract and time limitation

This article is authored by Edward Liu and Maggie Lee of Hill Dickinson Hong Kong and first appeared in Lloyd’s Shipping and Trade Law (Informa Law) on 13 March 2020 and has been reproduced here with kind permission.

This piece forms part of a series of articles looking important cases which were seen before the Hong Kong courts in 2019, which you can find here.

Chimbusco Pan Nation Petro-Chemical Co Ltd -v- Arkstar Ship Management Ptd Ltd [2019] HKCFI 57; [2020] Lloyd’s Rep Plus 40

A dispute arose between the plaintiff and the defendants as to the quality of bunkers. The plaintiff had sold bunkers to the defendant and claimed for the price thereof. The bunkers were delivered to a vessel, “ARKSTAR VOYAGER” by a third party, Palmstone Marine Services Pte Ltd, from which the plaintiff had purchased the bunkers prior to selling them on to the defendant. Upon delivery, samples had been taken by the third party and the defendant respectively and they appeared to be clear. Following an engine breakdown, the remaining fuel and one of the delivery samples were tested. One of the three samples of the remaining fuel, but not the other two and not the delivery sample, showed microbiological contamination. The defendant argued that the bunkers were contaminated with microbiological organisms and not of merchantable quality or reasonably fit for their purpose.

The plaintiff claimed full payment of the price and asserted that the defendant was not entitled to make any deduction, on the basis that the defendant had failed to notify any dispute as to quality within the 30-day period mandated by the provisions of the contract. The plaintiff also argued that the defendant’s counterclaim in the main action in Hong Kong was time-barred as the defendant did not commence any legal proceedings before the Hong Kong courts pursuant to the exclusive jurisdiction clause within the 12 months mandated by the contract.

The defendant for its part relied on the Control of Exemption Clauses Ordinance (Cap 71) (the CECO) that the provisions requiring the defendant to give a notice of claim within 30 days after the bunker delivery and give a notice of protest and inform such claims to the plaintiff within 21 days as condition precedent were unreasonable. The defendant claimed that it could not have known that the bunkers were defective within the 30-day period because the microbacterial contamination had not become apparent. Therefore, it was unable to issue the notice of protest within the deadline.

The judge ruled in favour of the plaintiff and dismissed the defendant’s counterclaim. The clauses were reasonable as they were relatively common within the industry. It was noted that the Singapore Code of Practice contained a similar clause and there were good reasons for such clauses: (1) the composition of distillate fuel could change rapidly over time; (2) the existence of water as a contaminant was a constant threat on any ship, and the water did not come only from the bunkers delivered to the ship. It could come from numerous sources and the contamination risk by other sources would increase over time; and (3) significant numbers of bunkers were delivered and it would be a significant task to maintain samples for all bunkers for any time significantly longer than a month.

As for the CECO, the judge did not think the Ordinance applied. Section 17(1) of the CECO stated that: ‘Where the proper law of a contract is the law of Hong Kong only by choice of the parties (and apart from that choice would be the law of the jurisdiction other than Hong Kong) section 7 to 12 do not operate as part of the proper law’.

Given that the contract provided for the exclusive jurisdiction of the Hong Kong courts and it was chosen because the parties had agreed that Hong Kong law should apply to the contract, in view of section 17 of the CECO, there were no restrictions upon exclusion clauses.

The judge disagreed with the defendant’s argument that the microbacterial contamination was not apparent. There was no evidence that the bacteria was present at the time of delivery and could not have been discovered. The only evidence was that it was not, in fact, discovered. That was a very different proposition. The defendant did not adduce any evidence that it was not possible to discover the bacterial infection within the 30-day period. Of four tests taken on fuel from the vessel, only one indicated microbacterial contamination, and that was a sample taken three months after the bunkers were delivered, not in the prescribed method in that it was not taken from the manifold of the vessel at the time of delivery, and it was taken after a considerable distance had been travelled by the vessel.

Considering the above and relying on the bunker examination reports, the judge took the view that the defendant had not established that the bunkers delivered were not of merchantable quality. In the absence of a notice of protest within 30 days, the defendant’s claim was extinguished and the counterclaim would be dismissed.

Comment

Sale and purchase contracts for bunkers frequently include a clause requiring the buyer to notify the seller of complaints regarding bunker quality, before the buyer is entitled to bring a claim against the seller. Failure to comply with the condition precedent may be fatal to the buyer’s case as its claim against the seller may be extinguished. Buyers should take sufficient steps to examine bunker quality as soon as they are delivered and give prompt notice to preserve any claim.