In search of clarity – calculation of performance warranties

This article first appeared in the September 2022 edition of The Marine Insurer digital magazine, which covers news and analysis in the marine industry.

A common problem encountered between vessel owners and charterers is, when there is an allegation that a vessel has underperformed, how that alleged underperformance is to be calculated.

The starting point will be the speed and consumption warranties which are inevitably found in most time charterparties. In these clauses, the owners will warrant the speed and fuel consumption of vessel however they will also inevitably only give that warranty on a ‘good weather’ day – they do not wish to be exposed for claims when the vessel encounters heavy weather. Further to that, a charter will inevitably specifically set out what constitutes a ‘good weather’ day, e.g. “no adverse currents, Douglas Sea State up to level 3, Beaufort force up to 4”.

Speed and performance claims

How aspects of speed and performance claims are to be treated was recently considered by the High Court in Eastern Pacific Chartering v Pola Maritime in a decision which provides some clarification on what, until then, had been slightly contradictory reported arbitration decisions. Useful commentary was also provided in relation to performance warranties generally.

The reason why the law has been at times somewhat unclear with respect to how speed and consumption warranties are to be interpreted is that in most cases, these matters are subject to arbitration and it is rare that there might be an appeal in respect of them which might place them before the Courts where a decision can then become binding. Arbitration reports, which are not binding, have led to differing decisions. However in Eastern Pacific, the charter somewhat unusually, provided for High Court jurisdiction.

Amongst a number of issues in the case, Ms Clare Ambrose sitting a Deputy Judge of the High Court (but also well known maritime arbitrator) considered the effect of currents within the meaning of a ‘good weather’ description.

To provide some background, charterers will often ask specialist weather routing companies to assess the vessel’s speed and performance (as it was in the current case). They are required to evaluate the vessel’s speed and consumption only on good weather days but are then entitled to extrapolate that data to apply it to the whole charter, on the basis that if the vessel was underperforming to a certain level on good weather days, it was probably doing the same to that level on bad weather days (The Didymi [1987] 2 Lloyd’s Rep. 166).

No adverse currents

When it comes to ‘no adverse currents’, such companies frequently would include days where there were adverse currents as good weather days but would add in a ‘current factor’ in order to negate the effect of the adverse current in their calculation. Moreover, where nothing was said to the charter about favourable currents, such companies might use that as a factor in the performance of the vessel (e.g. if the vessel was performing at a certain speed with a favourable current, the actual performance would be deemed less). On these points, there have been conflicting arbitration decisions.

On the question as to whether any day with any adverse current should not be deemed a ‘good weather day’, the general view has been that they should not (eg. London Arbitration 12/14; London Arbitration 6/19) but other reported decisions have suggested that current factors could be used in calculations (eg. London Arbitration 4/12). Equally in when incorporating favourable currents into speed and performance calculations, various arbitration decision had allowed that (eg. London Arbitration 15/05) but generally it was deemed not appropriate unless specifically provided for in the charter (eg. London Arbitration 15/07; London Arbitration 26/19).

On the first question, whilst not directly a question for the High Court, the strict adherence to what the charter provides was endorsed.  Referring to previous decisions, Ms Ambrose stated “where the parties have adopted a performance warranty based on good weather performance then applying the warranty will be the primary method for assessing any claim since it reflects the chosen benchmark for performance” (paragraph.93) and also that “the authorities show that the warranty is tested against actual performance at sea during the charterparty rather than a paper calculation of the engine’s capability” (paragraph.100). She went on to endorse the fact that where there was agreement for ‘no adverse currents’  this meant “that time spent sailing with adverse currents was not to be treated as good weather against which the performance warranty was agreed” (paragraph.102).

This reasoning in turn led on to the more direct question for the Court, which was, in the absence of anything stated about positive currents, how they should be dealt with when assessing performance. Whilst the Court acknowledged that where the charter might provide for ‘no adverse currents’ (to the benefit of owners), the ‘dramatic’ effect of positive currents (which, it was suggested could be as high as 25% on a ballast voyage) should not also be to the owners’ benefit, this was ultimately rejected by the Court.

Ms Ambrose stated at paragraph.100:

The judgment therefore makes clear that, unless the charter says otherwise, the common usage by weather routing companies of current factors in speed and performance calculations is not permissible.

Primary method

However it will be noted above that Ms Ambrose, in paragraph 93, referred to the application of the warranty as the primary method for assessing any claim. That means that there remains other methods to calculate the vessel’s speed and performance but on the basis that “any alternative method must be established as reliable and consistent with the express performance warranty, especially in circumstances where the conventional method has been adopted for many years in an area of significant expertise, resources and innovation” (paragraph.94).

Eastern Pacific Chartering v. Pola Maritime is a useful summary of the status of English law when assessing performance warranties. They remain bound, primarily, bound to the performance on good weather days which are to be construed strictly. This can mean that even the smallest deviation from the minimum requirements of a good weather day will exclude that day from calculation. That can mean that assessment of the vessel’s performance might be difficult at times but a ‘current factor’ cannot be used to address that problem.

Read other items in Marine Brief - October 2022