Shipping disputes: the Kos – bailment and causation

Petroleo Brasiliero S.A. -v- E.N.E. Kos 1 Limited (Kos) [2012] UKSC 17

The Supreme Court decision in the ‘Kos’ is often cited as a key case dealing with causation and effective cause of loss. However, the Kos also involved a successful claim in bailment.

It is relatively common in shipping disputes for claimants to bring a claim in bailment alongside a contractual claim or a claim in tort for negligence. Therefore, a clarification from the Supreme Court of the parameters of the law of bailment in a shipping context is to be welcomed.

This article summarises the facts of the case and the findings of the Supreme Court and looks at some subsequent cases addressing similar issues.

Bailment

Before turning to the Kos, it is worth looking briefly at the core principles of bailment. In simple terms, a person who voluntarily takes another person’s goods into his custody holds them as bailee of the owner of the goods. While bailment can arise pursuant to a contract, the bailor/bailee relationship can also exist independently of any contract.

In the carriage of goods by sea context, the bailee is usually the shipowner or bareboat charterer because a time charterer is not in physical control of the vessel even if he gives employment orders.

Bailment is either gratuitous, for reward or involuntary. Bailment for reward is the most common form in carriage of goods by sea cases. It sometimes happens, however, that a contractual bailment turns into a non-contractual bailment after the contract ends. In all cases, however, the bailee must take reasonable care of the goods and must also redeliver the goods to the bailor or to his order either on demand or according to the terms of the bailment.

If the goods are damaged during the bailment, the bailor may bring a claim against the bailee. If the bailor refuses to take redelivery of the goods, the bailee may have a claim against the bailor for any losses it suffers as a result and/or a right to remuneration for storage/carriage costs.

In ‘China Pacific SA -v- Food Corp of India (Winson) [1982] AC 939’, the House of Lords held that salvors who had taken steps to prevent the deterioration of cargo after the salvage agreement had ended had a corresponding right to charge the cargo owners for storage and other expenses reasonably incurred in doing so. A gratuitous bailment relationship continued to exist between the salvors and the cargo owners after the salvage agreement contract came to an end.

The Kos

On 2 June 2008, the vessel was lawfully withdrawn by the owner pursuant to a clause in the time charterparty permitting withdrawal for non-payment of hire. At the time of withdrawal, the vessel was loading cargo at a Brazilian port.

During 2 to 3 June 2008, the time charterer tried to convince the owner to cancel the withdrawal, but the owner refused. The charterer then made arrangements for the cargo on board the vessel to be unloaded, which took till 5 June.

The vessel was, therefore, detained for 2.64 days. Had the cargo been unloaded immediately on withdrawal, the vessel would have been detained for one day. The owner sought to claim for the costs of the service of the vessel for the 2.64 days, including bunkers consumed. The claim was brought on a number of different bases, including an express contractual indemnity and bailment.

By a majority, the Supreme Court allowed the contractual indemnity claim. It also unanimously upheld the claim in bailment.

Express indemnity

Clause 13 of the charterparty was a standard form employment and indemnity clause, which provided that the charterer would indemnify the owner against all consequences or liabilities that arose from the master complying with the charterers’ or their agents’ orders.

The issue was whether the effective cause of the costs incurred by the owner was the charterer’s order to load the cargo or the owner’s decision to withdraw the vessel. The majority decided that the detention of the vessel after the charter had come to an end was not an ordinary incident of the chartered service, nor was it a risk that the owner had agreed to bear under the charter terms.

The owner’s decision to withdraw the vessel was not an independent cause of the need to discharge the cargo onboard; it merely determined where discharge had to take place. The owner’s expenses, therefore, fell within the indemnity and the owner could recover the market hire rate for 2.64 days as well as the cost of bunkers consumed.

The dissenting Supreme Court Justice disagreed, finding that the owner’s loss was not caused by compliance with the charterer’s employment orders. Rather, the proximate or determining cause was that the charter was at an end. The owner’s decision to withdraw the vessel superseded the charterer’s instructions to load the cargo.

Bailment

The majority conclusion on the indemnity issue made it strictly unnecessary for the Supreme Court to consider the other bases put forward in support of the owner’s claim. Nonetheless, the Supreme Court considered whether the owner was also entitled to succeed at common law as non-contractual bailee of the cargo after the withdrawal of the vessel.

The Supreme Court relied on the Winson in finding that the owner had become the non-contractual bailee of the cargo after the charter ended. There was a contractual bailment while the charter continued. When the vessel was withdrawn, the cargo was still in the owner’s possession, and it was obliged to take reasonable care of the cargo until arrangements were made to discharge it. As bailee, the owner was entitled to the costs of the bunkers and the opportunity cost of the vessel remaining at the Brazilian load port.

Impact and subsequent cases

Indemnity

There are a number of authorities pre-dating the Kos that emphasise the need for an unbroken chain of causation as between charterers’ orders and any loss suffered or damage sustained by owners. Absent this, there is no right to the charterparty indemnity.

The Kos, however, makes it clear that it is not necessary to demonstrate that charterers’ orders are the sole effective cause, so long as they are an effective cause of the loss or damage. This principle extends beyond the circumstances encountered in the Kos.

For example, in ‘London Arbitration 11/22’, charterers sought to deduct 1.05 days’ hire and the cost of bunkers when the vessel encountered bad weather after departure from a Vietnamese port to which the vessel had deviated by agreement for a crew change. The dispute turned on the true construction of the deviation clause.

The tribunal found that the deviation ended when the crew change was completed and the vessel resumed the voyage. As to post-deviation time and costs, owners were not liable because the bad weather was not caused by the deviation. Therefore, any delay encountered after the vessel departed the Vietnamese port did not come within the scope of the deviation clause.

In ‘ST Shipping and Transport Pte Ltd -v- Space Shipping Ltd (CV Stealth) [2017] EWHC 2808 (Comm)’, the vessel was detained in Venezuela on 19 September 2014 pursuant to a court order. At the time, she was waiting to load cargo pursuant to charterers’ employment orders. The vessel remained detained for some considerable time despite attempts to have the detention lifted and ultimately owners declared the vessel a CTL.

The arbitrator found in his first partial final award that the charterers’ employment orders were an effective cause of the detention at least up till 21 July 2015. In his second partial final award, he implicitly found the detention was causative at least up to 23 September 2015. In his subsequent partial final awards, the arbitrator found owners were entitled to recover the expenses of detention beyond 21 July 2015.

The charterers argued that the arbitrator should have held that there came a point in time when the sole effective cause of the vessel's detention was the perverse refusal of the Venezuelan courts to order the release of the vessel.

On appeal, the Court dismissed the charterers’ appeal. The arbitrator had made an unchallengeable factual finding that the detention had causative potency up to July/September 2015. He had also found that the attitude and approach of the Venezuelan Court had not changed thereafter and were “of a piece” with what happened before. It could, therefore, be legitimately concluded that the detention remained of causative potency and the chain of causation had not been broken.

Bailment

In ‘Volcafe Lt & others -v- Compania Sud American de Vapores S.A. [2018] UKSC 61’, the Supreme Court did not specifically reference the Kos, but it considered a cargo damage claim brought in bailment as well as under the Hague Rules.

Cargo interests, whose cargoes of coffee beans sustained condensation damage during carriage, contended that the carrier was liable as bailee of the goods, alternatively in breach of its obligations under Article III Rule 2 of the Hague Rules in failing to properly care for the cargoes.

The carrier relied on the inherent vice defence under Article IV Rule 2 (m) of the Hague Rules on the basis that coffee beans have an inherent propensity to emit moisture. Cargo interests contended that the condensation damage could have been mitigated if the carrier had lined the container walls with paper or card.

The Supreme Court held that the carrier, as bailee of the cargoes under the contracts of carriage, had a legal burden of proof that required it to prove that the damage was not caused by any breach of the required standard of care, or unless it could bring itself within one of the Hague Rules defences. The Hague (and Hague-Visby) Rules were not exhaustive of all aspects of the carrier’s legal responsibility for the cargoes.

In ‘Metall Market OOO -v- Vitorio Shipping Company Limited (Lehmann Timber) [2013] EWCA Civ 650’, the Court of Appeal specifically referenced the Kos in reiterating the general principles applicable to bailment and considering them in the context of a claim by owners for the costs of storing cargo ashore while exercising a possessory lien for general average security.

The Court of Appeal decided that having lawfully exercised the lien, the owners were bailees of the goods after they discharged them into storage ashore and were entitled to be indemnified for the reasonable costs of preservation and storage.

Comment

There has been some criticism of the majority decision in the Kos regarding the applicability of the express indemnity to the circumstances in question. Nonetheless, it is a Supreme Court decision on the important issue of causation.

Ultimately, a key consideration will be whether, on the true construction of the relevant clause and other charterparty terms, owners have contractually assumed a particular risk, in which case the indemnity will not apply.

Our specialist Shipping team combines deep legal expertise with practical industry insight to help you navigate the whole spectrum of contractual and non-contractual issues arising in shipping disputes. Explore how we can support you.