FACULTY OF LAWLund University

Ognyan Savov

Calculating laytime – problematic arrivals in port charter parties

JASN09 Essay

Master´s Programme in Maritime Law

Private Shipping LawCONTENTS

1. INTRODUCTION 1

2. LAYTIME 1

3. ARRIVAL AND NOTICE OF READINESS 2

4. PORT BOUNDARIES 3

4.1 THE OLDENDORFF TEST 3

4.2 THE OLDENDORFF AND THE MARATHA

ENVOY CASES COMPARED 5

5. POSSIBLE SOLUTIONS TO THE PROBLEMS

CREATED BY THE OLDENDORFF 7

6. CONCLUSION 10

5. BIBLIOGRAPHY 11

1. INTRODUCTION

Subject of research in this paper will be the most problematic area in defining the

moment at which laytime starts running in a port charter party – the time of

arrival within the port. The essay starts with a definition of laytime and notice of

readiness and subsequently narrowing the application of the latter term only to

matters relating to port charter parties. Following a discussion and analysis of

American and English cases relating to the issue at stake, it is shown as to why

the former approach is to be preferred in finding out when a ship is arrived. At

the end of the paper certain proposals are made as to how costly litigation relating

to the discussed issue could be avoided.

2. LAYTIME

Laytime (laydays) is defined as the time necessary for a ship to load/ discharge its

cargo.1 The procedures of calculation laytime are normally stipulated in the

voyage charter party.2 The importance of defining it in specific terms is owing to

the fact that the narrower this period, the more profitable for the shipowner. On

the other hand, the wider the laytime, the better for the charterer. The reasoning

behind these words is that should the laytime period be over before the loading/

disharging finishes, the charterer compensates the ship owner with a sum of

money commonly known as demurrage. Should it be the other way around, that is

should the loading/ discharge operations finish before the end of the laytime, the

ship owner compensates the charterer in the form of dispatch money.

Regulating laytime in such strict terms is for commercial reasons – demurrage

money compensates the ship owner for cargo services brought on expiration of

the agreed period after which he is normally entitled to earn freight. On the other

hand, dispatch money is seen as an incentive to make the charterer perform its

duties more quickly than agreed. With the cargo operations finishing before the

laytime expires, the ship owner could be seen to be at a loss as being obliged to

1 http://www.merriam-webster.com/dictionary/layday?show=0&t=1290072083.2 Z. Mokia and J. Dinwoodie’ Spatial aspects of tanker lay-times’ 10(1) (2002) Journal of Transport Geography 39 at 39.

pay demurrage. However, on a close scrutiny payment of dispatch would also

mean that the ship owner would start earning freight earlier.

3. ARRIVAL AND NOTICE OF READINESS

Most of the disputes concerning laytime arise as to the event that triggers it, that

is the notice of readiness. In Glencore Grain Ltd v Goldbeam Shipping Inc (The

Mass Glory)3 notice of readiness is defined as

”given to start laytime running [as provided by the charter party]4 not merely to

provide charterers with information which in many cases will be in their

possession. As such it represents an essential step in the contractual mechanism

for allocating the risk of delay in loading or discharging”.

For a notice of readiness to be considered valid the following two main factors

must be present: the vessel must be an arrived ship at the destination and she must

be ready to load/ discharge in all respect.5 To these prerequisites could be added

the obligation on the ship to comply with certain additional requirements of the

charter party, for instance that the ship be in possession of free pratique and

customs clearance certificates.6 While the readiness to load/ discharge cargo may

sometimes cause more problems than the issue of arrival, 7 it will not be discussed

in this paper.

In the Johanna Oldendorff case it was held that a ship is deemed to be an arrived

ship if she is at the disposal of the shippers. 8 However, distinction between berth

and port charter party has to be made at this point. In the case of a berth charter

party the ship is deemed to be arrived when she has berthed.9 Thus the risks of

delays caused by unavailability of berths rest with the ship owner.10

3 [2002] 2 Lloyd's Rep. 244.4 ’Laytime commencement clause’ available on http://www.shipinspection.eu/index.php?action=page_display&PageID=149 (accessed 17.11.2010)5 D Davies Commencement of laytime 4th ed (2006) 1.6 W Packard Laytime calculating 2nd ed (1983) 16.7 If there are cargoes carried under different consignments and in order to discharge the necessary cargo, first has to be unloaded the cargo from the other consignment. In that case the ship may not be considered as ready to unload – see Governement of Ceylon v. Société Franco-Tunisienne d'Armement -Tunis (The Massalia No 2) [I960] 2 Lloyd's Rep. 352. 8 Johanna Oldendorff & Co GmbH v Tradax Export SA [1974] AC 479at 535.9 North River Freighters Ltd. v President of India [1955] 2 Lloyd’s Rep 668.10 C Lacey ‘Berth or port charter party?’ (2-2002) Freight Demurrage & Defence / Crew, The Swedish Club letter 2-2002 13 at 14, available http://www.oldendorff.com/unloaders/fleet_details.html (accessed 14.12.2010).

In a port charter party, laytime is triggered when the ship enters the port area and

serves a notice of readiness. Any of the losses caused by unavailable berths are

born by the charterer. However, this scenario is more complicated than the berth

charter party because the boundaries of a port are not as distinguishable as the

location of a designated berth.

In order to make things more certain, the parties may state in their contracts that

the laytime starts running on service of a notice of readiness upon passing a

certain geographical point. Another solution would be that the laytime runs from

the moment the pilot boards the ship even though the boarding occurs outside the

port boundaries.

4. PORT BOUNDARIES

4.1 THE JOHANNA OLDENDORFF TEST

The word port is a nebulous concept and causes much concern when it comes to

defining its boundaries. In The Oldendorff 11the House of the Lords had to

determine when the laytime started running in a voyage charter party contract.

Under it The Johanna Oldendorff had to carry a load of grain from the USA to a

port in the UK. Upon her arrival there were no available berths so the port

authorities ordered the Master to anchor at the ordinary place for grain ships

waiting to discharge their cargo. The anchorage was located within the port

boundaries but some 17 miles from the docks.

The Johanna Oldendorff was ready in all respects to load, however, almost three

weeks passed while she waited for an available berth. The ship owner claimed

demurrage. The court agreed that the contract was a port charter party. However,

it was concerned with the moment at which the ship had arrived for the purpose

of determining the start of the laytime.

In The Aello12 which had similar facts to the latter case, the House of Lords

considered a ship not to be an arrived ship even though waiting for a berth within

11 Ibid.12 Agrimpex Hungarian Trading Company for Agricultural Products (The Aello) [1961] AC 135 HL

the boundaries of the port. The reason behind the court’s decision was that the

ship was anchored outside the commercial boundaries of the port in question. The

commercial area had been understood to be as the part of the port where a ship

can perform cargo operations when a berth is available and in determining it the

distance between the anchorage and berth had been of great importance.13

In The Oldendorff their Lordships held that The Aello case was outdated because

the geographical position of a ship should be treated as of secondary importance

in determining her arrival time.14 She should be considered to be arrived

whenever two conditions are met. The first is that she should be within the

administrative boundaries of the port, that is where the port authorities could

exercise their authority.15 The second is that she should be at the ’immediate and

effective disposition of the charterer’.16

While the interpretation of the first requirement causes little concern, the second

is subject to different views. How can a ship be at the immediate disposition of

the charterer if she has not made her way to the berth? In The Oldendorff the

court held that as long as she is at anchor within the port boundaries, she is at the

charterer’s immediate and effective disposition. But this statement seems to be

wrong. Because if there are no available berths, it is difficult to see how she will

be able to conduct cargo operations whenever the charterer pleases. Therefore,

she cannot be said to be at the charterer’s ‘immediate’ disposition due to being

obstructed in performing her duties.

While at anchor she would be only at the charterer’s effective disposition.

Consequently, it would be better to narrow down the phrase in The Oldendorff

test to read ‘the ship has to be at the effective disposition of the charterer’.

Furthermore, the ship might be at its effective disposition but not be within the

control of the port authorities – for instance where the anchorage is far away from

the port where the authorities do not exercise jurisdiction and the ship cannot

make it to the port due to it being congested. Therefore, it is correct to state that

The Oldendorff test puts a very hard burden on the ship owner to prove that the

ship is an arrived ship.

13 Leonis SS v Rank [1908] 1 K.B. 57.14 At 535.15 Davies D (n 5) at 13.16 TheOldendorff case (n 8) at 535.

Although The Oldendorff was welcome by the shipping business, some of the

drawbacks in this decision were recognized by the legal writers soon after it was

brought to light. William Wilson in a 1974 article comments that it would be

quite difficult to comply with the requirements of the test if the port is very wide

and the normal waiting area within the boundaries of the port is 50 or 100 miles

from the docks.17 It is submitted that the author is quite right and the House of

Lords’ decision is wrong or at least is worded in very narrow terms to exclude

situations to be discussed later.

4.2 THE OLDENDORFF AND THE MARATHA ENVOY CASES COMPARED

A similar to The Oldendorff case scenario, The Maratha Envoy, 18 came before the

same court several years later. In it Lord Diplock, bringing the judgment on

behalf of the court, applied The Oldendorff test and came, it is submitted, to a

wrong decision. In this case the chartered vessel had to discharge her cargo in a

port on the river of Weser. Although the Maratha Envoy was in all respects ready

for cargo operations, due to her size and unavailability of berths to accommodate

her, she was ordered to anchor at the Weser lightvessel located outside the port

area. In order to make her fall within The Oldendorff test and be considered an

arrived ship in terms of the port charter party, she made two voyages upriver and

after that returned to the lightvessel.

The issue before the court was to decide whether by making the short trips she

was an arrived ship for the purpose of determining the validity of the notice of

readiness. In bringing its decision, the House of the Lords unanimously upheld

the claim of the voyage charterer that the vessel could not be considered an

arrived ship.

Of more interest to the present discussion is the decision of the court of appeal. It,

although going against the conclusion of the House of the Lords,19 is to be

preferred as putting a right balance on the rights and duties of the contractual

17 W Wilson ‘British Assspects of Chartering problems: some recent developments’, 49 (1974-75) Tul. Law Review 1065 at 1067.18 Federal Commerce and Navigation Co Ltd v Tradax Export SA[1978] AC1.19 Ibid (n 8).

parties. The charterer is the one who decides the most suitable place for the

delivery of the ship and is supposed to have the necessary expertise in relation to

the ports to which it wants its cargo delivered/ loaded. Therefore the charterer

should bear all the expenses incurred by the shipowner due to unavailability of

berths. In addition, should one consider that in terms of a charter party it is the

ship owner who is bound to deliver the vessel at a certain period of time and to

make his ship ready for cargo operations otherwise he will incur penalties, the

burden imposed on him by the contract and common law20 is too high. The

charterer gets everything even if at fault while the ship owner incurs expenses

even if innocent.

When the appeal court heard The Maratha Envoy, Lord Denning and Shaw L.J.

took the pragmatic approach by stating that the meaning of the port boundaries is

the one as understood by the people in the shipping business and few miles

outside the boundaries of the port should not affect the court’s decision.21 What

the two judges considered of importance was that The Oldendorff test was based

solely on the vessel being "as effectively at the disposal of the charterer for [cargo

operations] while at that waiting place as she would have been if waiting in the

immediate vicinity of the berth.”22

A further argument worth noticing is that had the court of appeal taken a different

approach in upholding the shipowner’s claim, its reasoning would have led to

absurdity. The ship, by making these trips back and forth, met the strict

requirements of The Oldendorff test. However, if the court reviewed the issue

from that perspective, Lord Denning stated that it would cause exposing the law

to ridicule.23

The court of appeal cited with approval decisions of US arbitrators24 who even

notifying the existence of The Oldendorff case, did not dare to follow it due to the

unjust outcome it would bring.25 In the view of the arbitrators whenever the vessel

has reached the nearest possible point to her berth and it can be proved that it is

20 Eg. The Oldendorff and The Maratha envoy cases.21 Federal Commerce and Navigation Co Ltd v Tradax Export SA[1977] QB 324 at 339D-E and 347B-D.22 Ibid(n 8) at 561.See also The Maratha Envoy(n 18) at 13F.23 Ibid (n 21) at 336 F.24 The Polyfreedom (1974) New York Arbitration.25 Ibid (n 21) at 346F.

impossible or impractical to get nearer, then the physical and geographical

location of the waiting point is of no relevance.

The US arbitrators’ decision seems commercially viable and makes the

negotiations of charter party contracts much easier. Otherwise, should the

shipowners want to deviate from an unwanted Oldendorff outcome, they should

elaborate on the contractual clauses. Such are the clauses allowing a notice of

readiness to be given as soon as the vessel reaches the normal waiting place

before berthing.26

The decision of the appellate court in The Maratha envoy struck a right balance in

confirming that it is not the physical boundaries of the port that have to determine

the validity of a notice of readiness. What matters is the fact that the ship is

obstructed in some way from proceeding to the berth due to no fault of the crew

and/ or the ship owner and is in all respects ready to perform the cargo

operations. However, the good was undone when the House of the Lords took the

matter into its own hands. Their decision seems unsound and lacking reasonable

explanation. The House of the Lords is the highest court and the validity of the

doctrine of stare decisis in England makes the lower courts there bound by their

decisions and thus bring injustice, rather than justice to the litigants’ rights and

duties.

5. POSSIBLE SOLUTIONS TO THE PROBLEMS CREATED BY THE

OLDENDORFF

The facts of The Oldendorff and The Maratha Envoy are similar so it would not

have been easy for the highest court to accept that its judges had been very

restrictive in delivering their speech in The Oldendorff. Furthermore, the majority

of the adjudicators in the two cases were the same meaning that their state of

minds must have been the same when they brought the two decisions. The second

case was a test in which they could elaborate on the issue and rectify their

approach. But how could they do so without overruling their previous decision?

26 D.Davies (n 5) at 30.

One of the options was to agree with the decision of the Court of Appeal by

stating that when relying on The Oldendorff test the consideration whether the

ship is at the effective disposition of the charterer is of utmost importance while

the location of the ship being within or outside the boundaries of the port is

secondary and should not be taken into account in situations such as The Maratha

Envoy.

A second alternative, as was done in the arbitration cases Antico Elias27and

London Arbitration 5/90,28 is to extend artificially the boundaries of the port area.

In the former award a vessel anchored outside the port area of the port of

Alexandria, Egypt as determined by ‘The Mediterranean Pilot’. In addition, there

was no legislation defining the boundaries of the port. However, the port

authorities did in fact exercise jurisdiction over the ships anchoring there. In

addition, there were domestic regulations controlling the movement of ships in an

area within which was the disputed anchorage. It all meant that The Antico Elias

was in a place where the port exercised its jurisdiction.

Even though the arbitrator applied The Oldendorff test successfully and the result

was just, it is clear that the basis for such a decision was the actual control of the

port authorities and the existence of laws. However, it is uncertain how the

arbitrator would have adjudicated had the port authorities not exercised control

over vessels anchored there or had there been no domestic legislation. It could be

argued (and such an argument would be commercially sound) that for

determining whether she was an arrived the issue of her safety and not whether

she was 10 or 15 miles off the port area was to be the guiding light for the

adjudicators. Because when an area is congested in an attempt to make her an

arrived ship, the integrity of the ship and crew would be endangered. And one

cannot contend that their safety is of less importance than the issue of her arrival.

Furthermore, the ship must be considered an arrived ship since she has reached

the nearest possible point to the berth and any further proceeding would be

impossible and unsafe.29

In the London Arbitration 5/90 award, the ship was voyage chartered to carry a

load of cargo to Haldia, India. The issue was whether she could be considered an 27 1977.28 LMLN 274.29 As held by the US arbitrator cited by the appellate court in The Maratha Envoy.

arrived ship at Haldia on condition she anchored in an area, Sandhead, outside the

port limits – a factor which was undisputed by the litigants. Although the nautical

chart showed an anchorage waiting area outside Haldia, ships usually waited at

Sandheads and tendered their notices of readiness from there. However, the

charterers argued that the fact that the custom created by the use of Sandheads as

a waiting area and by tendering notices of readiness from that position, did not

bring that location within the boundaries of the port. Still the arbitrators did not

agree with them. The reason for their decision might have been based on the fact

that the vessels normally waited there and upon their tender of notice of readiness

they came under the control of the port authorities which immediately provided a

pilot or gave orders as to anchoring.30 That is even though outside the port, the

authorities had full control over them.

What is obvious from the arbitration cases decided after The Oldendorff and The

Maratha Envoy is that when applying the test, the adjudicators try to interpret it

in the most just way. The arrival test could be summarized as having one of the

following features: the ship must be at the effective disposition of the charterer

or; the custom of the port area is to be taken in consideration. Furthermore, the

control exercised by the port authorities should also be considered but it is of

secondary importance. In addition to the above-mentioned elements, it is the

safety of the ship that is to be the main regulator in determining whether a ship

can be said to be arrived in the port.

Another approach to be taken towards the rectification of the situation and

avoidance of contentious issues discussed in this paper is to put a clause in the

charter party contract regulating the passing of risk whenever there is a delay in

getting to the place of destination. By place of destination is meant the nearest

and most practical and safe waiting position, determined by custom or law. In

such a case whenever the ship reaches that waiting position, the notice of

readiness or, much better to state – notice of arrival – is always to be considered

valid. 31 As such the parties will know not only their rights and duties and the

moment they start but will also avoid the long and costly litigation.

30 M Lax, ‘Laytime and demurrage – recent developments’ 1992 Marine policy 118 at 119.; see also Davies (n 5) at 29.

31 Francesco Berlingieri ‘The allocation of risk of delay in voyage charter parties’, 8 (1976-77) J. Mar.L.&Com. 497 at 505.

6. CONCLUSION

The purpose of this essay was to show how the courts of England have

interpreted one of the requirements for serving a valid notice of readiness to the

voyage charterers – the arrived ship prerequisite. What is to be noticed is that the

leading case of The Oldendorff was adjudicated in the 1970’s and is still binding

on the parties who agree their contracts to be regulated by the laws of England.

When Oldendorff was decided the seas were not as congested as today and it

might be argued that at the time this was good law although its restricted

application was visible even then32.

Nowadays when the shipping business is on the rise, the seas are getting more

and more congested. It becomes more difficult for a ship to drop anchor within

the port areas and in order to avoid the great congestions in the harbor areas and

decrease the risk of incidents, sometimes the ships are advised to anchor outside

the port areas or be drifting for some time. However, because the Oldendorff

decision is still binding on the parties, it could cause unnecessary litigation as

regards the moment of start of the laytime. For the purpose of avoiding such from

occurring, in the last part of the paper a decision was proposed as to how The

Oldendorff test should be applied and how with easy and inexpensive measures

the concerned parties could determine the exact moment of the arrival of the ship.

BIBLIOGRAPHY

CASES:

Agrimpex Hungarian Trading Company for Agricultural Products (The Aello) [1961] AC 135 HL.Federal Commerce and Navigation Co Ltd v Tradax Export SA[1978] AC1.

Federal Commerce and Navigation Co Ltd v Tradax Export SA[1977] QB 324.

32 As shown by the appeal court in the Maratha Envoy (n 18); see also .Wilson (n 17) at 1067.

Glencore Grain Ltd v Goldbeam Shipping Inc (The Mass Glory) [2002] 2 Lloyd's Rep.

244.

Governement of Ceylon v. Société Franco-Tunisienne d'Armement -Tunis (The Massalia

No 2) [I960] 2 Lloyd's Rep. 352.

Johanna Oldendorff & Co GmbH v Tradax Export SA [1974] AC 479.

Leonis SS v Rank [1908] 1 K.B. 57.

North River Freighters Ltd. v President of India [1955] 2 Lloyd’s Rep 668.

The Polyfreedom (1974) New York Arbitration.

Antico Elias(1977) London arbitration.

London Arbitration 5/90 (LMLN 274).

ARTICLES AND BOOKS:

Charlotte Lacey ‘Berth or port charter party?’ (2-2002) Freight Demurrage & Defence /

Crew, The Swedish Club letter 2-2002 13 available

http://www.oldendorff.com/unloaders/fleet_details.html (accessed 14.12.2010).

Donald Davies Commencement of laytime 4th ed (2006) Informa, London.

Francesco Berlingieri ‘The allocation of risk of delay in voyage charter parties’, 8 J.

Mar.L.&Com.(1976-77) 497.

’Laytime commencement clause’ available on http://www.shipinspection.eu/index.php?

action=page_display&PageID=149 (accessed 17.11.2010).

Michael Lax, ‘Laytime and demurrage – recent developments’ 1992 Marine policy 118.

William Packard Laytime calculating 2nd ed (1983) Fairplay Publications,London.

William Wilson ‘British Assspects of Chartering problems: some recent developments’,

49 (1974-75) Tul. Law Review 1065.

Z. Mokia and J. Dinwoodie’ Spatial aspects of tanker lay-times’ 10(1) (2002) Journal of

Transport Geography 39.

INTERNET

http://www.merriam-webster.com accessed 14.12.2010