Hybrid Work and Time Charter for the Use of a Dredger in Inai Kiara Sdn Bhd & Anor v Macon Charter BV [2022] MLJU 1274

Introduction

The Inai Kiara case was first litigated in the High Court. This article is about the subsequent appeal in the Court of Appeal. The appellate bench consisted of Justices of the Court of Appeal Lee Swee Seng, Hadariah Syed Ismail and See Mee Chun. An interesting nugget of information here is that the Respondent in this case was represented by Jeremy Joseph (former President of IMSML) and Vinodhini B Samuel (current Secretary of IMSML).

The Facts of Inai Kiara

The Respondent owned the dredger, the "Enola Gay". On 17 January 2015, it was chartered to the Second Appellant (A2) subject to an 'Agreement of Hire of Dredging Equioment of Enola Gay at Samalaju Port Development Project, Bintulu'. Under the terms of the charter, the hire period was 5 weeks, and up to a maximum of 8 weeks.

The parties agreed that the Charter came to an end on 15 October 2015. However, on the next day, on 16 October 2015, an Addendum was executed. This Addendum was between the Respondent and the First Appellant (A1), and described as 'Amendment to the Charter Contract for the "Enola Gay" working at Samalaju Port'. The Addendum extended the Charter to 1 December 2015. The Respondent asserted that the terms of the Addendum has in effect continued until its termination on 18 April 2016.

Five invoices each totalling €7,491,012.08 each were submitted by the Respondent. No invoices were produced for three sums owed for €301,900 each.

A Summary of the High Court Judgment

First, the High Court had to deal with the unusual fact that the main Charter was signed with A2, but the Addendum was signed by A1. Under this arrangement, A1 was contractually liable under both the Charter and the Addendum to the Respondent. Therefore, A2 at all material times acted as agents for A1, thus binding its principal in a contract with the Respondent. It is submitted that this is consistent with the facts and eliminates the need for a more complex analysis. For example, both A2 and A1 being jointly and severally liable to the Respondent by lifting the corporate veil on the basis that both A2 and A1 are a single economic unit.

Second, there was no reason why the terms of the Charter via the Addendum could extend all the way to 18 April 2016. The Addendum had specifically stipulated that the extension of the Charter ended on 1 December 2015.

Third, for the period after the Charter extension via the Addendum had come to an end, ie between 1 December 2015 and 18 April 2016, the Respondent could only make a claim based on quantum meruit for work done as the express Charter and/or Addendum terms were not applicable. Hence, the Respondent could not claim for standstill charges or hire charges as these were express terms that existed only in the Charter and/or Addemdum.

Fourth, Article 8 of the Charter only dealt with 'usual repair and maintenance' when there was stopping of work. Therefore, when the dredge 'Enola Gay' broke down this did not fall within the terms of Article 8.

Fifth, A1 and A2 had asserted that the quantity / volume of hard rock dredged, was less than the performance quantity prediction in the Charter, by relying on a hydrographic survey. A1 and A2's counterclaim that the Respondent misrepresented the performance of the dredger was dismissed. The hydrographic survey method was not an agreed methodology agreed between the parties to the Charter.

The Decision of the Court of Appeal

This author will commence explaining the Court of Appeal's decision by first looking at the 'Nature of the Charter' (and the Addendum) that was signed between the Respondent and A2 as well as A1. Strangely, the Court of Appeal only starts to discuss this issue at para [49] of the transcript. (Note, the transcript is available at [2022] MLJU 1274 from the LexisNexis database. This is not a case that is officially 'reported' in the Malayan Law Journal. The MLJU citation tells you that this is the transcript of a judgment). The Court of Appeal's actual decision starts Para [16] of the transcript.

The fundamental nature of the Charter is the foundation on which this case is built on., and one would have thought that the Court of Appeal would have started here. It is submitted that an Appellate decision on this point would created a domino effect on the rest of the judgment. Yet however, a string of issues are dealt with before the Court of Appeal even deals with this issue in Para [49]. These issues include:

[1] Item 2 - invoices amounting to €301,900 not produced, Para [18]-[22];

[2] Item 3 - Petronas invoices of €1,725,704.52, Para [23]-[42];

[3] Item 5 - expunged supporting documents, Para [43];

[4] Items 6 and 7- operator and coordinator hourly cost and travelling time for when the Dredger was not working, Para [44]-[45];

[5] Item 8-consumables, Para [46]-[48].

The Nature of the Charter Between The Respondent and A2 as well as A1

At one end of the spectrum of legal arguments, the Appellants submitted that this was a contract for 'work done'. This is based on Article 5(1) of the Charter that payment is only triggered when work is done. At the opposite end of the spectrum, the Respondent argued that Article 1(1) of the Charter describes the contract being one where the Dredger was hired by the Respondent to the Appellants. Therefore, the Respondent argued that this could not be a contract for service, where no work meant nopay was forthcoming. The Respondent further argued that Articles 1.1, 2, 5.1 and 5.3 show that the dredger was Chartered for hire with a crew. Article 10C also allowed a standstill rate when the dredger is not working.

The Respondent also put forward the following additional reason why the Charter was not a contract for work done: Such Charter contracts are commonly used in the dredging industry. These contracts are commonly on either a bareboat terms (equipment only, the Charterer need to use his/her own crew), or on a time charter basis (where the owner also supplies the crew to operate the dredger). Article 5(3) stipulates that hirer is to pay the Owner hire charges from the commence of the period of hire, to the termination of the hire period.

The Court of Appeal held that the Charter was a hybrid time charter. Reading Article 5(1) as a whole, charges can only be imposed when the dredge is able to perform work. This flows from the words 'double shift operation' and 'rock dredging'. These words are descriptions of how work is to be done, not a mere description of activity under the Charter. The Court of Appeal emphasised that this 'fortifies that charges are based on operations or work done'. Article 5(3) must be read as only allowing hire when work is done, ie hire is is based on operations. The standstill rates in Article 10C are to be confined to the limited circumstances specifically described in that clause.

The Court of Appeal acknowledged that as a general rule, the Owner of a dredger under a time charter is not liable for delay not caused by the ship. However, this general rule is subject to modification based on the actual terms of the dredging Charter. On the facts of this case, this Charter was a hybrid of work and time based. As hire rates were subject to double shift operations, this necessarily points to weekly hire rates being subject to dredging work being done.

Maintenance and Repair of the Dredger

As the days of stop work was continuous, due to the dredger not functioning, this could not fall under Article 8 of the Charter which is only applicable to 'maintenance and repair'. The Respondent had contended for an expanded interpretation of 'maintenance' to enable the continuous stoppages to fall with the clause. However, this was not consistent with Article 8(6) which describes that 'daily maintenance will be executed during operation hours and the structural maintenance, for which machineries will have to be stopped, is normally done during one shift per week, or max. 1 day per week'. The continuous stoppage could not have been for the purposes of maintenance.

Invoices Issued for Two Different Projects

The Respondent's claim was for the Samalaju Bintulu Port Project (SBPP). However, in its claim, it also included invoices for the Petronas Bintulu Project (PBP). The Respondent argued that this was done because a single account was maintained for both projects, and payment was by the first in first out (FIFO) method, examplified by the single Statement of Account (SOA) which was the only reference document for the parties. The PBP invoices were used to make the correct payments due under the Charter. The Appellants objected to this because the FIFO practice was not pleaded. The Appellants pointed to 'Sections 60 to 62 of the Contracts Act 1950 that the creditor may apply payment at his discretion and once apportionment is made, the Respondent cannot withdraw'.

The Court of Appeal held that as the Petronas invoices have been fully paid, the Respondent was confining its claim to the Samalaju Project. Thus there was no need to plead this in the Statement of Claim. The Court of Appeal also found that the Appellants were not surprised or misled by evidence based on the SOA which was the single account for both projects. This is especially the case when there was a failure to object by the Appellants.

Consumables

Article 8(6) of the Charter stipulates that the Respondent is responsible for all consumables used in the operation of the Dredger as it is included in the hire rate. However, the Respondent contends that the damage was caused by 'exceptional wear and tear' and this falls outside normal wear and tear, thus falling on the account of the Appellant under Article 10B(7) and 10B913) of the Charter. The Court of Appeal held that exceptional wear and tear could technically be claimed. However, in order to do this, the Respondent is required to put an expert report to prove the claims. During the course of this dispute, the Respondent did not adduce any expert report to support these claims.

Conclusion

To conclude, there are several lessons that could be learnt from this case. First, take due care in the drafting of Charter contracts for dredging. Make sure that the activities are specified in a separate clause (other than the payment for hire clause). Expressly state that these are meant to be merely activities identified under the Charter contract, not contributing to the Charter ending up being a contract for 'work done'. This should ensure that a dredging contract properly remains a time charter and does not go down the rabbit hole of hybrid charters. Second, when contracts come to an end, have it properly documented. The Addendum is a good example. However, there was no agreement to sign a further extension after the Addendum had come to an end. Third, diligently issue invoices for work done. This undoubtedly saved the Respondent in this case. Fourth, if the dredger broke down, get it assessed by an expert, and then use the expert report to determine one's next course of action. Last but not least, keep separate statements of accounts for separate projects. This will keep invoicing and accounting transparent and easier to manage.

Thank you for reading IMSML Website Article 14/2022

Stay tuned for the next IMSML Website Article 15/2022:

The Number of Times a Writ in Rem May be Extended in Malaysia in Fimbank Plc v The Owners and/or Demise Charterers of The Ship or Vessel ‘Nika’ Now Known As ‘Bao Lai’ [2022] MLJU 1352 (High Court, Kuala Lumpur) per Azlan Sulaiman JC

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

25 October 2022

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my