Bad vibrations lead to costly dispute for ship manager

International Transport Intermediaries Club (ITIC) has emphasised the importance of ship managers using the right contracts and having appropriate insurance in place to cover the legal costs of defending even weak claims.

In the latest edition of its Claims Review, ITIC relates the case of a ship manager which took on the management of a vessel. One of its duties under the BIMCO Shipman 98 management agreement was to provide crew for and on behalf of the owners. In 2004, while the vessel was heading towards Shanghai, the master reported that it had experienced “excessive vibration” after passing close to a buoy marking a wreck.

After the master had left the ship at Shanghai and returned home, the ship manager received an anonymous fax from the vessel, advising that it had actually hit a wreck. When the vessel reached its final destination it was drydocked, and damage was noted. Under the terms of the management agreement, the shipmanager was a co-assured under the hull policy, but the owner started arbitration proceedings against it, claiming that substantial additional costs had been incurred. The claim was based on an allegation that the shipmanager was vicariously liable for the actions of the master.

Wide-ranging allegations were also made to the effect that there had been significant tension, distrust and acrimony between the master and some of the vessel’s officers, which were a direct cause of the damage to the ship. The defence of the shipmanager was that, under the terms of the management agreement, it had no liability for the negligence of the crew. Rather, the manager’s sole obligation was to provide an appropriately qualified crew.

Negotiations and investigations by experts and lawyers continued for the next five years, and substantial costs were incurred. The arbitration hearing was scheduled to take place in early 2010 but, by late 2009, the owner (probably realising that its claim for crew negligence was unlikely to succeed) served an entirely revised claim, backed up by a lengthy report from an expert. The claim was fundamentally altered and was now focused on the shipmanager’s application of the ISM code and the role of the ‘designated person ashore’. A further allegation was made that the bridge team, or at least the principle members of it, were suffering from fatigue at the time of the incident and that the shipmanager should have been aware of this.

By this time, the costs of investigation and preparing the defence had reached $659,000. A defence was submitted on behalf of the manager that, on the evidence available, there was no error in navigation and so the claimant’s case could not be proven. Although ITIC’s lawyers were confident that the claim could be successfully defended, it was recognised that the hearing could last up to seven days, resulting in legal costs in the region of $560,000, in addition to $659,000 already spent preparing the defence.

In 2011, the owner made an offer to settle the claim on a ‘drop hands’ basis, with each side bearing its own costs. Although the shipmanager felt that it had been presented with an extremely weak case, it was not possible to completely rule out the possibility of adverse findings. Accordingly, the offer was accepted.

ITIC says, “This case shows how important it is to use the right contract and to have insurance and knowledgeable assistance to cover the legal costs and support and time to defend even weak claims. The defence of a shipmanager is always expensive and very time consuming.”

Copies of the ITIC Claims Review can be requested from: chris@merlinco.com

ITIC is managed by Thomas Miller. More details about the club and the services it offers can be found on ITIC’s website at www.itic-insure.com.

September 2011

ITIC Press Release PR0611