Cancellation damages

Argonaut Shipping Inc v. Iron Ore Company of Canada.

Arbitrators: Lloyd С Nelson. Robert A Small, Hammond L Cederholm(chairman).

Appearances: Freehill Hogan & Mahar for Argonaut Shipping by Philip V Moyles; Haight Gardner Poor & Havens for Iron Ore Company by Gordon W Paulsen, John J Reilly

This dispute arose out of a time charter dated July 24, 1972, on the New York Produce Exchange form, originally for a period “minimum 58 months to maximum 62 months exact period in charterers’ option”, between Argonaut Shipping Inc. as owners of the Argo Leader, and Iron Ore Company of Canada as charterers. The vessel was a Liberian-flag gearless bulk carrier, built in 1958 and s trengthened for heavy cargoes. The vessel delivered to IOC on September 1,1972, and carried cargoes until May 1976 under a five-year contract IOC had executed simultaneously with the time-charter for the importation of cargoes of bentonite from Milos, Greece, to their mills in Canada. In between those cargoes, the vessel was employed on casual business to defray ballast voyages or fill occasional gaps in the bentonite movements. On one such voyage, enroute from Canada to load alumina in the Virgin Islands, the vessel suffered engine damage on May 4,1976 and proceeded to New York for repairs, arriving there on May 11.

Skaarup Shipping Corporation had been asked by IOC on April 13 to consider taking over management and husbandry of the vessel because IOC had been dissatisfied with the vessel’s performance for some time and felt they were not experienced in the shipping business and needed the expertise of Skaarup to cope with the situation. IOC formally appointed them to do so on May 6.

On May 12, promptly after the vessel arrived in New York, a Skaarup representative boarded to investigate the engine breakdown and probable repair delay. He took with him a surveyor who was also principal surveyor for Germanischer Lloyd in the US to ascertain the cause of the engine damage in view of similar past engine breakdowns and at the same time to make a condition survey of the entire vessel to re-confirm a derogatory survey carried out on May 1, 1976. The vessel had side wingtanks the full length and both sides of all holds which served as continuous tunnels for piping systems and could be walked through from one hold to another when not ballasted. The hatches were open and the surveyor had previously sighted the holds, so he proceeded to point out to the Skaarup representative widespread wastage in the interior bulkheads of the wing tanks in the form of gaping holes, and similar deterioration and collapse of the floors of the wing tanks that were really the tops of double-bottom ballast tanks, thereby comprising the watertight integrity of holds, wing-tanks and double-bottoms. Main deck web-frames and internals in many places were wasted and holed. The bilge pumping system did not exist because it had been cemented over. In its absence, portable pumps were being utilised when required. Longitudinal seams in bulkheads were separated and open in some places. Hatch covers leaked at all joints in all holds. The surveyor said he could not consider the vessel seaworthy with these defects.

The Skaarup representative was concerned that the condition of the ship rendered it impossible to meet the warranty of seaworthiness in the alumina charter, nor did the holds appear clean and watertight enough to accommodate such a sensitive cargo. After relaying his and the surveyor’s views to the charterers, the Skaarup manager consulted with owners’ managing agents in New York and sent them a telex on May 13 outlining all the above deficiencies and requesting that they have their classification society, Bureau Veritas, conduct an immediate examination for the purpose of issuing a Hull Intermediate Survey Certificate to verify the seaworthiness of the vessel. Owners declined to do so. Skaarup then contacted direct, in turn. Bureau Veritas, the local office of the vessel’s Liberian registry and the US Coast Guard, explaining the true conditions found on the ship and asking each to intervene because it was obvious that any current Safety Construction Certificate the ship might have did not reflect her present status. All declined to intercede without Owner’s permission which was not granted. At another conference with owners and their representatives on May 20, Skaarup again explained the widespread defects of the ship and requested that a seaworthy survey be authorised. Owners’ representative refused with the remark that he could not put the ship in seaworthy condition because to do so “he would go broke”. Further calls to the Liberian authorities while the ship continued to repair the engine all failed to obtain the desired examination of the ship. On May 25. the owners telexed that the engine repairs were unpredictable, indicating an indefinite off-hire period. The owners were willing to agree to a survey in “due course” regarding stevedore damages to which they attributed the vessel’s condition, despite the master’s acknowledgement on May 2 of the repair of all such damages. On May 26, Skaarup, on behalf of the charterers, served notice to owners that due to the impossibility of being able to warrant the seaworthiness of the vessel, charterers were terminating their charterparty with the owners.

Argonaut repudiated the contract and after engine repairs were completed about June 6, sailed the vessel to Baltimore to load a cargo for Europe, the first of two voyages they made to mitigate damages for the unused remainder of the time-charter which was not due to expire until September, 1979. In August, 1976, Argonaut sold the vessel. At arbitration (which progressed over 15 hearings between July 1977 and February 1985) Argonaut claimed, among other things, damages suffered as a result of the charterparty cancellation in the amount of $1,214,592.

The Panel delivered a majority decision (Mr. Cederholm dissenting) on the issue of whether or not IOC had the right to cancel in anticipation of Argonaut being in breach of their charterparty obligations. It was noted that Addendum 3 to the contract, agreed to on October 8, 1974, in part provided IOC with an option to cancel the contract should the vessel be off-hire for an aggregate of 36 days or longer within any twelvemonth period due to mechanical breakdown excluding certain force majeure exceptions. The addendum further provided that the cancellation option was to be effective as of October 8, 1977, for the remaining term of the contract.

IOC cancelled the charter on May 26, 1976, telexing Argonaut that, “In view... your statement that repair time unpredictable and your acknowledgement that it is not economically feasible to make repairs necessary so that vessel could pass classification survey, all of which constitute present and anticipatory breaches... you are hereby advised charter is considered to be frustrated and terminated...”

On the day of cancellation, the vessel was off-hire undergoing repairs and the conduct between the parties was being governed by the off-hire clause. IOC elected to conclude that Argonaut could not or would not restore the vessel to a stage of being “... tight, staunch, strong and in every way fitted for the service... during the then-existing off-hire period.”

The right to cancel, said the majority, does not exist in these circumstances. It was pointed out that if the vessel was in as poor a condition as was claimed by IOC’s surveyors, IOC should have waited until Argonaut gave notice of the vessel’s readiness to return to service and should thereupon have called for surveys to confirm the vessel’s condition. If at that time deficiencies were found, said the majority. Argonaut were entitled to have an opportunity to correct same, this being especially true since the contract had more than two years to run.

“It is equally true,” concluded the Panel, “that when the period required for restoring the vessel to a state of seaworthiness and readiness requirements would give IOC a legal right to of accuracy, IOC could have considered whether or not this period was of such duration that the period itself commercially frustrated the purpose for which they entered into a contract for hire of the vessel. In any event, nothing short of affording owners the opportunity of complying with the seaworthiness and readiness requirements would give IOC a legal right to cancel. IOC’s notice of May 26 was premature and therefore improper.”

Having found that IOC’s action in terminating the contract was a wrongful breach, the majority held that Argonaut were entitled to their provable damages. It was held that Argonaut were entitled to the difference between the market rate on the date of the cancellation and the charter rate for the remaining term of the contract. “However”, added the majority, “it does not appear that there was a market for a time charter for a period of about two-to-three years upon which damages could be calculated and therefore it must be presumed that the market rate at the date of cancellation was $...0.00. In calculating a claim for damages, moneys earned by the vessel must be credited to the calculation of charter hire lost. It must also be determined with as much expertise as possible the number of days during the unexpired term of the charter when owners would have had the vessel on hire. We... consider that the calculation resulted in net damages of $366,627...”

In a very forthright dissenting opinion, Mr Cederholm noted, amongst other things, that “The majority decision is not an appropriate one in this matter which is a casebook example of willful disregard by the owner of his contract obligations and duties. All agencies of the law and legal forums, such as this arbitration proceeding, are supposed to be dedicated to protecting the innocent and seeing that justice is meted out to those who are guilty of imposing injustice on the innocent. Even murder is justified under some circumstances and judges and juries have often confirmed such a finding. In my opinion, there is a certain “rightness” that exists in life, including business, and men should not avoid upholding that right on some technical legal parameters that do not promote justice, equity and fairness which arbitrators are supposed to dispense. We are not bound by the constraints of the courtroom where rules of evidence and narrow interpretations of the law commonly preclude true justice. The majority decision purports to uphold the law but certainly it does not embrace justice, equity or fairness. Men in our position, entrusted to do the right thing, should not uphold the law at the expense of justice.”

Mr. Cederholm said there was ample support for what was a justifiable cancellation by IOC due to Argonaut’s frustration of the contract. He noted that the material and fundamental breach by Argonaut was the unseaworthiness and rapidly deteriorating condition of the vessel, which in turn produced extended off-hires.

“However”, added Mr. Cederholm, “the owner absolutely refused to remedy the situation and this became a refusal to perform as contemplated by the contract, thus resulting in a frustration of the main purpose for which the charter was entered into...”

“Any objective analysis of the total facts of this case does not justify the narrow technical basis the majority rests its decision upon. It has been said that first there was morality and then there was law. All law exists so that people will know what they can do, and can’t do, without penalty. A decision like this ignores moral and ethical standards and vitiates respect for law because it says that contract duties, obligations and responsibilities can be 99 per cent ignored by the law grants vindication so long as claim can be made to one per cent of legal absolution.”

Case № 2