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FREEHILL OBTAINS ARBITRATION AWARD ON CHARTERER’S OBLIGATION TO EXERCISE DUE DILIGENCE TO NOMINATE A SAFE BERTH

In March 2018 Freehill partners Mike Unger, Manuel Molina and Eric Matheson, representing the Charterer of a vessel, obtained a dismissal of the vessel Owner’s claim after the presentation of the Owner’s case-in-chief. A critical issue was the standard for due diligence to be exercised by a charterer in nominating a safe berth.

In re the Arbitration Between L.R. Mimosa Ltd. and Panamax Int’l Shipping Co., SMA No. 4338, the vessel Owner sought to hold the Charterer responsible for direct damages of $2,310,897 and claimed indemnity for damages in excess of $100M resulting from an oil spill. The vessel M/T MIMOSA was chartered under a Shelltime 4 form of charter in which Clause 4 required the Charterer to exercise “due diligence” in designating safe place for the vessel to “safely lie always afloat.”

The parties’ dispute stemmed from an oil spill that occurred in Quintero Bay, Chile in the early morning of September 24, 2014 during a tug changeover maneuver. The vessel was secured to a Single Point Mooring (“SPM”) by two mooring hawsers with an assist tug located aft to hold the vessel in position. Crude oil was pumped from the vessel to the SPM through two flexible floating hoses. Immediately after a change of tugs the mooring hawsers both parted as the new assist tug was moving the vessel back into position. Unfortunately, no one aboard the vessel was immediately aware the hawsers had broken. As a result, the new assist tug continued to pull the vessel astern and the flexible cargo hoses were ripped away from the vessel’s manifold. Fortunately the crew had shut the vessel’s pumps and closed the ship valves before this occurred but the oil in the hoses spilled into the water.

The Owner commenced arbitration claiming that the Charterer had breached its charter party obligation to exercise due diligence to nominate a safe berth for the vessel. Owner then proceeded to present its prima facie case on liability, bearing the burden of proving that: (1) the SPM was an unsafe berth when the vessel called there; (2) the oil spill could not have been averted by the exercise of prudent seamanship; and (3) the Charterer had failed to exercise due diligence in nominating the SPM as a safe discharge berth. At the conclusion of the Owner’s case-in-chief Freehill, under Section 21 of the SMA Rules, moved for the dismissal of Owner’s claim on the grounds that the Owner had failed to satisfy its prima facie case for liability. A majority of the panel agreed and dismissed the Owner’s claim.

The arbitrators unanimously ruled that the SPM was unsafe at the time of the incident, relying upon the findings of a Chilean governmental investigation after the oil spill. The arbitrators were also in agreement that crew and pilot negligence contributed to the spill and that comparative fault principles would apply. In the critical ruling in the case, the Panel majority found that the Charterer had properly exercised due diligence in nominating the berth. The Panel rejected the Owner’s argument that the Charterer had “an implied obligation to vet the terminal before nomination” because such vetting constitutes a “best practice” in the tanker industry. Click here for the full decision.