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Article: The Inter-Club Agreement

17 March 2021

Introduction

The Inter-Club Agreement (ICA) first came into force on 20 February 1970. It was revised in 1984, in 1996 and again in 2011[1].

The ICA was formulated by the International Group of P&I Clubs (IG) to provide a simple mechanism for the resolution and apportionment of liability in disputes under charterparties between Owners and Charterers as to the cause of loss and damage to cargo. The ICA anticipates that the charterparty in question is in the form of the New York Produce Exchange (NYPE) or Asbatime form charterparties.

This article deals with the incorporation of the ICA into charterparties, the claims to which the ICA applies, how the ICA apportions such claims and deals with the securing of these claims.

Incorporation of the ICA

The parties to a charterparty have to incorporate the ICA, in whole or in part, into the charterparty. It does not apply unless incorporated.

The words used to incorporate the ICA need to be considered with care. By way of example, in one decision [2], a tribunal held that a clause providing “Liability for cargo claims… shall be apportioned/settled as specified by the InterClub New York Produce Exchange Agreement effective from 1996 and its subsequent amendments”, was insufficient to incorporate the 2011 ICA as a whole, but only incorporated those provisions of the ICA dealing with liability and not those concerning security for Cargo Claims (as defined below). In light of this development, guidance from the International Group of P&I Clubs (IG) suggests that the ICA be incorporated into charterparties with the following clause:

“Cargo claims as between Owners and the Charterers shall be governed by, secured, apportioned and settled fully in accordance with the provisions of the Inter-Club New York Produce Exchange Agreement 1996 (as amended 2011), or any subsequent modification or replacement thereof. This clause shall take precedence over any other clause or clauses in this charterparty purporting to incorporate any other version of the Inter-Club New York Produce Exchange Agreement into this charterparty”.

The NYPE standard forms from 1993 onwards expressly provide that Cargo Claims (as defined below) are to be settled in accordance with the version of the ICA current at the time. It is possibly the case that this wording will be sufficient to incorporate the entirety of the ICA (there have been reports that an arbitration award has been obtained - but not reported - finding that the traditional incorporation clause was sufficient). However, in light of the above referenced arbitration decision, the safer course of action is to incorporate the IG-recommended clause into a charterparty, should a party wish to rely on the entirety of the current ICA.

The ICA is also incorporated by Owners and Charterers in charterparty forms other than the NYPE and Asbatime forms. Care should be taken when doing so, to ensure the terms of the ICA are consistent with the charterparty as a whole.

How does it work?

Apportionment under the ICA

The ICA lays down a relatively simple formula for the apportionment of cargo indemnity claims between Owners and Charterers for such claims which have been paid out by one or the other to the underlying Cargo Claimant. When referring to a Cargo Claimant, we refer to a party that initially presented a Cargo Claim (as defined below) against the Owner or Charterer.

For the apportionment provisions of the ICA to apply, the claim must fall within the definition of a Cargo Claim and fulfil further criteria relating to: i) the form of the contract of carriage under which the original claimant brings the claim against either the Owner or the Charterer; ii) the terms of that contract of carriage; and iii) settlement of the Cargo Claim.

A Cargo Claim

A Cargo Claim under the ICA means:

“claims for loss, damage, shortage (including slackage, ullage or pilferage), overcarriage of or delay to cargo including customs dues or fines in respect of such loss, damage, shortage, overcarriage or delay and include:


(a) any legal costs claimed by the original person[3] making any such claim;
(b) any interest claimed by the original person making any such claim;
(c) all legal, Club correspondents’ and experts’ costs reasonably incurred in the defence of or in the settlement of the claim made by the original person, but shall not include any costs of whatsoever nature incurred in making a claim under this Agreement or in seeking an indemnity under the charterparty.”

There has been some confusion as to what costs are recoverable in successfully defending a Cargo Claim. This has arisen from two conflicting arbitration decisions [4]. On one hand the argument is that costs incurred in defending an unsuccessful Cargo Claim should not be recoverable, as in the ordinary course of things the successful defendant would get their costs back. However, that assumes a great deal (for instance if a claim is brought in a jurisdiction where costs are borne by each party), and leads to the perverse result that rather than defend a bad claim, a party may be better off settling first and then look to recover under the ICA. With that in mind, the better view is probably that the unrecovered costs of successfully defending a bad Cargo Claim are recoverable.

Customs fines paid by the original Cargo Claimant and which are indemnified by the Owner or the Charterer fall under the ICA.

Contract of Carriage, Responsibility for the Cargo and Settlement

Once a Cargo Claim is established, it will only be apportioned under the ICA if:

a. The claim is made under a contract of carriage (whatever its form) and that contract of carriage:

i. Was authorised under the charterparty;

ii. Incorporated terms no less favourable than the Hague or the Hague Visby or, when compulsory applicable, Hamburg Rules;

b. The cargo responsibility clauses in the charterparty have not been materially amended; and

c. The claim has been properly settled or compromised.

The term ‘contract of carriage’ is very wide and ICA claims may therefore arise under any type of contract of carriage, including bills of lading, waybills, through bills and charterparties.

In earlier versions of the ICA, there was no express requirement that the contract of carriage be authorised under the charterparty; it merely required that it be carried under a bill of lading subject to the Hague or Hague Visby Rules. This allowed the Court to take a rough and ready approach and not be compelled to consider too closely whether the bill of lading (contract of carriage) was defective for some reason. It is now an express requirement that the contract of carriage (typically a bill of lading) is authorised under the Charterparty. This can potentially give rise to complex questions about the nature of the contact of carriage and if it has been properly made. For instance, if the bill of lading was incorrectly dated, then the ICA may be disapplied. If there is an issue concerning authority, then it is likely to require close consideration.

The ICA will not apply if a cargo responsibility clause in the charterparty has been materially amended. This is a slightly misleading term, as nearly all charterparties are heavily amended. A material amendment is in fact shorthand for an amendment which makes clear which party is to be responsible for cargo loss (though an amendment falling within 8(b) of the ICA, discussed below, will not be considered material). This makes sense as otherwise the ICA would in fact override a deliberate commercial bargain between the parties as to apportionment of risk.

For apportionment to apply, the original claim must not only have been properly settled but also paid out, not merely ascertained or the sum recoverable agreed with the Cargo Claimant. An Owner or Charterer (as the case may be) may settle the claim with the Cargo Claimant and need not necessarily have to show that any defence was hopeless. However, it will be necessary to show that there was some merit to the Cargo Claim and the weaker the merits the harder it will be to satisfy this condition before apportionment. With this in mind the Cargo Claimant may be prudent to put those it will seek an indemnity from on notice of the original claim and the approach that is to be adopted in order to afford that party the opportunity to raise any objection it may have to the approach. This has the practical benefit that having been afforded an opportunity to object or to propose alternatives, the party from whom an indemnity is sought may find it challenging to suggest a particular approach is unreasonable.

Through Transport or Combined Transport

The ICA can apply to Through Transport or Combined Transport contracts of carriage. In order for the ICA to apply, all of the above criteria are relevant, save that, while the contract of carriage need be authorised in all other respects, it is not necessary for the Charter to authorise the contract of carriage to be in the form of a Through Transport or Combined Transport carriage contract.

If the ICA does apply when the contract of carriage is for Combined Transport or Through Transport, it is only applicable to the relevant sea carriage leg from the time of loading of the cargo to discharge of the cargo.

Apportionment

Having established the preconditions to the ICA, apportionment of liability between the owner and the charterer is split according to the actual cause of the loss (not necessarily the basis on which the Cargo Claim was settled).

The following table sets out the cause of the Cargo Claim and relevant apportionment:

Clause

Cause of cargo claim

Apportionment

8(a)

Claims in fact arising out of unseaworthiness and/or error or fault in navigation or management of the vessel… save where the Owner proves that the unseaworthiness was caused by the loading, stowage, lashing, discharge or other handling of the cargo, in which case the claim shall be apportioned under sub-clause (b).

100% Owner

8(b)

Claims in fact arising out of the loading, stowage, lashing, discharge, storage or other handling of cargo

100% Charterer

unless the words “and responsibility” are added in clause 8 or there is a similar amendment making the Master responsible for cargo handling[5]

50/50

save where the Charterer proves that the failure properly to load, stow, lash, discharge or handle the cargo was caused by the unseaworthiness of the vessel

100% Owner

8(c)

Subject to (a) and (b) above, claims for shortage or overcarriage

50/50

unless there is clear and irrefutable evidence that the claim arose out of pilferage or act or neglect by one or the other (including their servants or sub-contractors)

100% to the party whose act or neglect gave

rise to the claim

8(d)

All other cargo claims whatsoever (including claims for delay to cargo):

50/50

unless there is clear and irrefutable evidence that the claim arose out of the act or neglect of the one or the other (including their servants or sub-contractors)

100% to the party whose act or neglect gave

rise to the claim


The cause of the loss is paramount to the apportionment. The ICA does not take into account issues of fault and culpability. So if the loss arose from unseaworthiness, then the fact that the owner exercised due diligence at the outset of the voyage (if the Hague Rules or similar applied) would not prevent the Owner being held 100% liable for the Cargo Claim (though the Charterer would still need to show the claim was properly settled).

A further example is where a Charterer was not paid for a cargo and so ordered the vessel to hold off discharge until payment was made. Payment for the cargo was then made some four months later and the cargo was discharged. However, before discharge was complete a claim was made by the cargo receivers. The cargo receivers alleged that the cargo had been damaged and the Cargo Claim was settled for around $2.5 million. The Owner successfully recovered this in full under ICA paragraph 8(d) as while the Charterer was within its rights to instruct the vessel to hold off the discharge, this was still an ‘act’ for which they were entirely responsible[6].

Time bars and the ICA

Caution should be observed when dealing with time bars.

The Hague and Hague Visby Rules provide that the carrier is discharged from all liability whatsoever in respect of goods, unless suit is brought within one year of delivery of the goods[7]. The provisions of these conventions are often incorporated into charterparties. It is worth noting that the one-year time bar for claims against the Carrier in both these rules is applicable to claims that may be outside of the scope of Cargo Claims as defined by the ICA.

The ICA, at clause 6, requires the Cargo Claim to be notified to the other party to the charterparty within 24 months (or 36 months if the Hamburg Rules apply) of the date of delivery or the date the cargo should have been delivered (it is worth noting that the date of delivery may not be the same as the date of discharge, the contract of carriage will need to be considered to determine this). If no notification is given within this time, the claim will be time barred.

The question arises as to how the ICA claim notification provisions interact with other time bars. It will always be a question of contractual construction, so there is always room for exceptions to the following general rules. Clause 2 of the ICA states that it is to apply notwithstanding anything to the contrary in the charterparty.

Absent any amendment to the ICA time bar regime, the ICA notification provisions effectively impose a requirement to notify, but not start proceedings against, the other party of the claim before the two-year notification period passes. Once the Cargo Claim has been notified the party seeking recourse will have the remainder of the limitation period in which to bring the claim.

Under English law, unless the contract provides otherwise, the limitation period for breach of contract is six years from the date on which the cause of action accrued.

When notifying another party of a Cargo Claim, it is necessary to give as clear and unambiguous a description of the Cargo Claim as possible, in particular providing details of the contract of carriage, the nature of the claim, and the amount claimed.

These issues were explored in the club’s article ‘Protecting time under the ICA’ in the Standard Bulletin, December 2015.

Security

The IG introduced a new provision in September 2011 concerning the provision of security.

In a situation where one party has secured the Cargo Claim, that party (defined as the “First Party” for the purpose of this section) is permitted to demand security from the other party (defined as the “Other Party” for the purpose of this section) in the equivalent amount. This right is contingent on the First Party:

i) Notifying the Other Party of the Cargo Claim; and

ii) Providing security to the Other Party if requested to do so.

The Other Party is entitled to reciprocal security from the First Party.

These rights arise before the Cargo Claim has been settled and apportioned. Given the reciprocal nature of the rights provided by clause 9 (with all parties being secured at each stage), ideally the parties should not as a rule get into deep debate as the level of security provided or the merits of the underlying claim.

Summary

The ICA represents a pragmatic approach to apportioning cargo liabilities. However, disputes still arise with regard to scope, application and apportionment. The Courts and tribunals tend to uphold a straightforward and formulaic interpretation of the ICA without necessity for detailed factual investigations or protracted legal proceedings. It has been reviewed and revised and it will continue to be scrutinised so that it remains appropriate. The IG clubs (and their members) are discouraged from taking technical points against one another, and instead encouraged to follow the spirit of the ICA.

CASE STUDY

A ship, Bulker 1, is on a long-term time charter to a charterer on the NYPE 1993 form with additional riders. The date of the charterparty is 1 May 2014 and it applies English law and London arbitration. Under the terms of the charterparty, the charterer is responsible for loading and discharge, i.e. clause 8 has not been amended. The charterparty provides for worldwide trading excluding well known sanctioned countries, but includes trade to West Africa.

In an earlier voyage, the charterer gave orders to load a cargo of rice in bags in Ho Chi Minh City, Vietnam for discharge in Port Harcourt, Nigeria under owner’s bills of lading. The cargo was loaded in apparent good order and condition, and the bills of lading were issued on 20 May 2015. The cargo was carried without any incident and arrived at the nominated discharge port on 12 June 2015, when discharge operations were commenced. During ongoing discharge operations on 14 June 2015, the master alleged that there was cargo damage/ shortage principally due to local stevedores’ rough handling of the bags. Shortly before discharge operations were completed, cargo interests presented a claim for cargo damage/shortage worth $60,000 and threatened to arrest the ship. They were not willing to accept a club LOU.

The owner appointed local correspondents to assist in negotiating settlement of the cargo claim for $42,500. The owner paid the settlement funds on 18 June 2015 and thereafter the ship sailed.

In preparing an owner’s ICA recovery from its charterer, the following considerations are reviewed:

1. What notice should the owner give to its charterer and what is the time limit for doing so?
As a matter of best practice, the owner should place its charterer on notice as soon as it is reasonably practicable to do so. There is no prescribed form that the notice under the ICA should take, although there will be certain minimum information requirements. Clause 6 of the ICA refers to the relevant time bar provision. This sets out the requirement to give written notice “of the Cargo Claim… within 24 months of the date of delivery of the cargo or the date the cargo should have been delivered…” In this case where discharge operations began on 12 June 2015, notice should be given to the charterer before 11 June 2017.

2. What is the time bar for any recovery action against the charterer?
Bearing in mind that English law applies under the charterparty, the usual six-year limitation will apply under the provisions of the Limitation Act 1980. The date to be adopted as the start date for the relevant time bar calculation is the date that the underlying liability for the cargo claim has been established (i.e. when the claim is settled and paid), not from the date of discharge or delivery (London Arbitration 32/04). In this example, as the owner paid and settled the claim on 18 June 2015, the time bar date will be 17 June 2021.

3. How will the claim be apportioned under the terms of the ICA?
See clause 8(b), where the charterer is to be held 100% liable where the claim arises from cargo discharge operations. However, there may also be an argument that clause 8(d) of the ICA should instead apply, such that the party seeking to rely on this clause should provide ‘clear and irrefutable evidence’ that the cargo claim arose from neglect by the charterer’s servants for 100% of the liability to rest with the charterer. However, this evidence may sometimes prove difficult to adduce. On these facts it is immaterial, but it could make a difference on different facts.

The club wishes to thank CJC for their assistance in the preparation of this article.

[1] See 24 August 2011, Standard Bermuda Circular: Inter-Club New York Produce Exchange Agreement 1996 (as amended September 2011)

[2] London Arbitration 18/18. The decision was reached on the specific wording which referred to “apportioned / settled” only and did not refer to security or incorporation of the 2011 ICA as a whole.

[3] Defined in this article as the “Cargo Claimant”.

[4] London Arbitration 30/16 and London Arbitration 10/15. The 2016 award concluded that the costs of a successful defence are recoverable. The 2016 award expressly declines to follow the 2015 decision.

[5] In the "MARIA" [2018] EWHC 1055 (Comm), where the Owner had agreed to be responsible for one aspect of the loading, the stowage in that case, but not the entire operation, the Court declined to conclude that liability should be split 50/50.  The court held that all aspects (save perhaps for a possible de minimis) needed to be transferred.    

[6] Yangtze Xing Hua [2017] EWCA Civ 2107

[7] Though note that for the Hague Visby Rules there is the right to seek an indemnity against a “third party” within three months or the time allowed by the court first seized for such actions (which ever is the greater) from the date of settlement or service of process against the party seeking the indemnity.