In contracts, an implied indemnity provides protection that is not explicitly stated but is understood to exist by operation of the law. In shipping, such indemnities play a key role - under a time charter, the owners must follow the charterers' instructions on how to use the vessel. If there’s no specific indemnity clause in the contract, English law implies that charterers must compensate the owners for any losses resulting from following these instructions. These indemnities can lead to disputes since they are not expressly outlined, especially regarding their applicability and timing. Therefore, understanding how and when they apply is essential.
Understanding Employment Orders in Charterparties
Employment orders are instructions from charterers on how to use the vessel, covering aspects like ports to visit, loading and unloading methods, and routes. These orders might require the vessel to operate in ways or visit places that could be unsafe, potentially causing losses for the ship owners.
For instance, the New York Produce (NYPE) 1993 and 2015 charterparty forms state that the “Master… shall be under the orders and directions of the Charterers as regards employment and agency.” This means that unless the ship or cargo is at risk, the master (captain) must follow charterers' instructions without undue question[1].
While charterers can direct the vessel’s use, they may also need to cover any losses that arise from following those instructions. English law implies a right for owners to be indemnified for losses due to compliance with charterers' orders, though this is often complex and varies in scope.
When will a term be implied?
An implied indemnity is, at its most fundamental level, an implied term in a contract requiring compensation for an innocent party. While a full consideration of implied terms is beyond the scope of this article, it is important to bear in mind that the UK Supreme Court has consistently made it clear that a term can only be implied if it is necessary for business efficacy or alternatively be so obvious that it goes without saying[2].
Examples of Implied Indemnities
Examples of the application of an implied indemnity include:
1. Indemnity for Signing Bills of Lading
A bill of lading (BL) is usually signed by the master on the charterer’s order or by the charterer/their agents. In The Island Archon[3], the court suggested that if a master is instructed to sign a BL that increases the owner’s liability beyond the charterparty terms, an implied indemnity might apply.
However, in practice, owners often request a letter of indemnity (LOI) from charterers when issuing clean BLs, delivering cargo to alternative ports, or delivering without BL presentation. Yet, LOIs are only enforceable if the issuing party is financially reliable, and some courts may not honour them. Owners are advised to consult with their P&I club and/or legal advisers to confirm the validity of an LOI.
2. Indemnity for Unsafe Ports
Claims arising out of employment orders to call at an unsafe port or berth are not uncommon, and charterparties often include an express warranty to address this risk. However, where this is not the case, English courts may imply one in time charters, as occurred in the Evaggelos Th[4]. With regards voyage charters, there is more uncertainty in this area of law. It is generally regarded that a safe port warranty will not be implied[5], except perhaps in circumstances where the charter grants a wide degree of liberty over the range of potential ports of call[6]. Given the wide degree of uncertainty around implied indemnities for unsafe ports, it is strongly recommended that an express warranty is always included in any charterparty. Without one, parties may be at the mercy of the courts as to whether such an indemnity is needed for ‘business efficacy’.
When Owners Cannot Be Indemnified: Ordinary Expenses and Losses
Ship owners are generally not entitled to indemnity for routine expenses or trading losses, even if these arise from following charterer’s orders. For example, losses from bad weather or additional ballasting are considered part of ordinary navigation[7] and aren’t covered under implied indemnities.
Requirements for Claiming Under Implied Indemnities
Under English law, owners must prove two key points to claim an implied indemnity:
- Causation: The owners must show a direct link between the charterers’ order and the resulting loss. For example, if a charterer directs a vessel to an unsafe port, the owner must prove that the port’s conditions directly caused damage or delay[8].
- Agreed risks: The risk must not be one that the owners have expressly or impliedly agreed to bear under the charterparty. For example, hull cleaning costs resulting from fouling caused by the charterers’ lawful orders would generally be indemnifiable, except where the fouling was an unforeseeable and direct consequence of the order.
Conclusion
The relationship between owners and charterers involves intricate responsibilities and expectations, which can often lead to disputes over damages and losses incurred from following charterers’ orders. While it is of course preferable to have express terms clearly defining any risks and/or liabilities that may give rise to disputes, this is not always the case. In some circumstances, an implied indemnity may serve as a safeguard. However, these circumstances are limited and owners should not rely on implied indemnities to always protect them from liability incurred by following an employment order.
Our Members are reminded that if they are concerned about a legal issue arising out of the
points discussed in this article, they may be entitled to some initial legal advice free of charge from a select panel of external lawyers under the Club’s Legal Advice Benefit. If Members wish to take advantage of this benefit, please contact the Claims team to discuss.
[1] Portsmouth Steamship v. Liverpool & Glasgow Salvage Association (1929) 34 Ll.L.Rep. 459
[2] Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72
[3] The Island Archon [1994] 2 Lloyd’s Rep. 227
[4] The Evaggelos Th [1971] 2 Lloyd’s Rep 200
[5] The Stork, Compania Naviera Maropan S/A v. Bowater's Lloyd Paper Mills, [1955] Vol. 1
[6] The Reborn, [2009] 2 Lloyd's Rep 639
[7] Weir and Others v. Union Steamship Co. Ltd. [1900] A.C. 525
[8] The “Evia (No 2)” [1982] 2 Lloyd’s Rep. 307