Charter Party Crashers: The Fifth Circuit's Recent Decision Examining a Time Charterer's Escape from Liability and No Legal Duty to Vet the Owner

Author: Bridget Wallis

Grand Famous Shipping Limited, et al v. China Navigation Company Pte. v. TPC Group, No. 22-20002 (5th Cir. 2022).

A recent opinion from the United States Court of Appeals for the Fifth Circuit declared that a time charterer, China Navigation Company, did not serve as a cargo vessel’s de facto owner, and that China Navigation properly performed its duties as a time charterer. The opinion was on appeal from the United States District Court for the Southern District of Texas following the trial judge’s grant of a summary judgment motion in favor of China Navigation.

One June night in 2018 while navigating the Houston Ship Channel, a helmsman aboard the cargo vessel YOCHOW was sleep deprived and did not properly follow the captain’s orders. Instead of turning right, he turned left- causing the YOCHOW to crash into the OSG 243 barge, which subsequently collided into a dock. Following this allision, the barge owner, OSG 243, and the barge’s manager, Overseas Shipholding Group, as well as the lessee of the nearby dock, TPC Group, sued Grand Famous, the vessel’s owner, and China Navigation Company, the time charterer. Following the damages suit, Grand Famous and the YOCHOW’s technical manager, Beikun Shipping Tianjin Co., brought a limitation of liability action in federal court. The district court then consolidated both of the actions before China Navigation subsequently filed a motion for summary judgment, which was granted. The district court found that China Navigation was not the YOCHOW’s de facto owner, and that China Navigation “did not act as a negligent time charterer because it did not owe a duty to vet Grand Famous’ finances or the YOCHOW’s safety protocols.”

On appeal to the Fifth Circuit, the court heard TPC’s arguments on behalf of the other interested parties. However, TPC’s legal arguments again did not hold water. The appeal court affirmed the district court’s ruling in favor of China Navigation. A summary of the main two issues examined by the Fifth Circuit follows.

First: Did China Navigation exercise sufficient operational control over the YOCHOW such that it should be considered her de facto owner? No. In its reasoning, the court found that the very nature of the five-year time charter party relayed the limited extent of China Navigation’s control over the YOCHOW as a cargo carrier. In a standard time charter, the owners are responsible for all material aspects of the management and navigation of the vessel. Had the charterer desired more control over such aspects of the vessel, it likely would have entered into a demise or bareboat charter party and not a time charter. Also, even though China Navigation painted the vessel its house colors and used its reporting software aboard the ship, such facts alone did not hold the charterer responsible as owner of the vessel. In conclusion, China Navigation did not have contractual control or operational control such that it should be considered the YOCHOW’s de facto owner.

Second, the Fifth Circuit then asked: Does a time charterer have a duty to vet a vessel owner prior to executing a charter party? No. TPC argued that China Navigation acted in a negligent manner because it had a duty to vet Grand Famous’ finances and safety management protocols prior to executing the charter party. Had China Navigation done so, TPC argued, it would have discovered that Grand Famous and Beikun did not have the ability to support the YOCHOW. Ultimately, the Fifth Circuit held that China Navigation was not negligent via the general maritime negligence rule, nor from the “independent negligence” theory.

The general rule is that “a time charterer who has no control over the vessel assumes no liability for negligence of the crew or unseaworthiness of the vessel absent a showing that the parties to the charter intended otherwise.” In re P & E Boat Rentals, Inc., 872 F.2d 642, 647 (5th Cir. 1989). Next, it is possible for a time charterer to be independently liable in tort to third parties for negligence. This negligence route is limited, however, only to negligent actions that take place “within the sphere of activity over with they exercise at least partial control.” Hodgen v. Forest Oil Corp., 87 F.3d 1512, 1520 (5th Cir. 1996). In sum, China Navigation had no duty to ensure the competence of a contractual counterparty because such an action does not fall within a traditional sphere of activity over which time charterers exercise control. Therefore, no duty existed to vet Grand Famous’ finances or the YOCHOW’s safety management protocols prior to entering the time charter.

China Navigation’s control over the YOCHOW was limited to the confines of the time charter previously entered into in 2013. Such a contract did not grant China Navigation the control needed to render it a de facto owner of the cargo vessel. Further, because the element of duty fails, China Navigation cannot be found liable in negligence for the injuries that occurred during that night in the Houston Ship Channel.