SHIPPING E-BrIEfJULY 2012

CONTENTS

SHIPPING

Supreme Court rules on owners’ rights of remuneration post-withdrawal 02

Commercial Court confirms principle in White and Carter applies to a time charterparty 04

Iran calling…? Reducing the risks 06

Commercial Court clarifies the nature of charterparty liens 08

Vessel arrest in Hong Kong: an analysis of the recent decision in the MV Jimrise 09

Can a ship-owner recover the costs of exercising a lien if he does not have a contractual right to do so? 10

The Commercial Court considers various issues relating to the conclusion of binding contracts of carriage and the commencement of arbitration proceedings 11

Dubai Court of Cassation rules on incorporation of charterparty terms into a bill of lading 13

Court construes meaning of “cargo tanks” in charterparty 15

SHIPPING rEGULATION

The Bribery Act and the shipping industry: complying with a “zero tolerance” approach to facilitation payments in an imperfect world 16

SHIPPING LITIGATION/ArBITrATION

Dishonest but not disowned: despite the High Court finding one party guilty of fraudulent conduct in an arbitration, the arbitral award was allowed to stand 19

Construing the BIMCO US Tax Reform 1986 clause: parties must live with the case they have made 20

Commercial Court confirms arbitral tribunal can award damages for breach of the obligation to arbitrate 22

EMPLOYMENT

Social media: Can employers afford to switch off? 24

OTHEr NEWS

Ince & Co partner Albert Levy chairs Superyacht UK (SYUK) 24

Ince & Co celebrates 20th anniversary in Singapore and boosts Asia Financial Lines Insurance practice with new senior lawyer hire 25

Asian Legal Business names Ince & Co SE Asia Shipping Law Firm of the Year 25

02 SHIPPINGe-brief

SHIPPING

Supreme Court rules on owners’ rights of remuneration post-withdrawal

Petroleo Brasileiro S.A. v. E.N.E. Kos 1 Limited [2012] UKSC 17

E.N.E. 1 Kos Limited v. Petroleo Brasilero S.A. [2010] EWCA Civ 772

In a judgment handed down on 2 May 2012, the UK Supreme Court has made a significant ruling on the rights of remuneration of the owners of a time-chartered ship after the ship has been lawfully withdrawn for non-payment of hire. The decision is particularly interesting for ship-owners and time charterers, since there is no previous direct authority on the issue in question.

The Supreme Court (Lords Phillips, Walker, Mance, Clarke and Sumption) has held that the owners were entitled to compensation for the detention of the ship while the charterers’ cargo remained onboard and for bunkers consumed after the ship was withdrawn, although Lord Mance differed from the remaining Law Lords as to the basis on which the owners were entitled to bring their claim.

The background factsThe M/T Kos was time-chartered by her owners to the charterers for 36 months plus or minus 15 days at the charterers’ option. The charterparty was on the Shelltime 3 form, containing a standard form of withdrawal clause providing that, if hire was not paid when due (in this case, monthly in advance), the owners had the right to withdraw the vessel. Unusually, the charterparty contained no anti-technicality clause, requiring notice to be given before the right of withdrawal was exercised.

The vessel was delivered into the charterparty in July 2006. In June 2008, the owners withdrew the vessel when that month’s hire instalment was not received in time. At the time of withdrawal, the vessel was at Angra dos Reis, Brazil, where she had been ordered to proceed by the charterers for discharge and back-loading and where she had already taken on bunkers and loaded a parcel of cargo. There were a number of exchanges between the parties to try to resolve the situation to the satisfaction of both sides but these proved fruitless. Ultimately, the charterers made arrangements with the terminal to receive back the cargo on board, which was then discharged. Had the charterers made arrangements for the discharge of their cargo as soon as they had received the owners’ notice of withdrawal, the vessel would have been detained at Angra dos Reis for one day. Instead, she was detained there for 2.64 days (at a cost to the owners of US$410,274.00) and consumed some 80.11 mts of IFO at a cost of US$504.50/mt (US$40,415.00) before she was cargo free and sailed.

The owners claimed for the service of the vessel for those 2.64 days and for bunkers consumed during that period. This claim was put forward on the following four bases:

> Under clause 13 (employment and indemnity clause) in the charterparty;

> Under an express or implied new contract, made after the vessel was withdrawn, to pay for the time and bunkers;

> On the grounds of unjust enrichment; and > Under the law of bailment.

It should be noted also that the charterers had initially challenged the validity of the withdrawal and sought to assert a counterclaim against the owners for wrongful termination of the charterparty. As a result, they obtained from the owners a first class bank guarantee as security for the counterclaim, which the owners had provided in order to avoid the ship being arrested. In the event, the counterclaim was dismissed on summary judgment and the owners sought additionally an indemnity for the expenses they had incurred in providing and maintaining the bank guarantee.

The Commercial Court decisionWe reported in detail on the decision of Mr Justice Andrew Smith in the Commercial Court in our October 2009 Shipping E-Brief (at www.incelaw.com). In essence, the judge held that the owners were entitled to succeed in their claim for time and bunkers in their capacity as gratuitous bailees of the cargo. Relying on the House of Lords decision in The Winson [1982] AC 939, Mr Justice Andrew Smith held that the owners were entitled to be compensated for the costs incurred in fulfilling their duties as bailees, which costs extended to cover not only their out of pocket expenses, but also the time incurred during the relevant period of bailment. As regards the bank guarantee expenses, the judge held that the owners could recover these pursuant to Section 51 of the Senior Courts Act 1981, which grants the court a discretion to award the “costs of and incidental to” proceedings in the High Court. Mr Justice Andrew Smith found that the original provision of the guarantee and the expenses of doing so were “incidental to” the proceedings within the meaning of Section 51 and were, therefore, recoverable as litigation costs.

The Court of Appeal decisionOn appeal, the Court of Appeal agreed with Mr Justice Andrew Smith that the owners should recover the bunkers consumed during discharge but found in favour of the charterers in respect of the owners’ claim for remuneration for the 2.64 days spent at Angra dos Reis and the balance of bunkers consumed during this period.

With regard to the costs of putting up the guarantee, the Court of Appeal rejected the charterers’ argument that if the costs incurred by the owners in having their ship under arrest are not recoverable as costs of the action, then the costs of putting up a guarantee should be equally irrecoverable. Rather, Sir Mark Waller stated that there was a distinction, albeit a narrow one, between the two types of expenditure. He concluded that the costs incurred by an owner of a ship arrested form the basis of a damages claim, whereas the costs of putting up a guarantee are akin to costs incurred to protect the subject matter of an action and are consequently costs “incidental to” the proceedings. This part of the Court of Appeal judgment stands as it was not appealed to the Supreme Court.

03SHIPPINGe-brief

The Supreme Court decision

New contract

Lord Sumption (with whom Lord Walker agreed) held that, on the facts, no new contract had come into existence between the parties after withdrawal. He therefore dismissed this basis for the claim.

Clause 13

Lord Sumption, however, rejected the charterers’ argument that any delay or loss arising from the need to discharge the cargo resulted from the owners’ decision to withdraw for their own commercial purposes and that they should consequently bear the adverse as well as the beneficial consequences of an optional decision made in their own interest. Rather, Lord Sumption confirmed that the reasons for the owners’ withdrawal of the vessel were not a relevant factor impacting on their right to recover. The fact that they withdrew their vessel because it might have been in their commercial interest to do so was irrelevant for present purposes.

His Lordship went on to find that the owners’ claim came within the scope of the indemnity in clause 13 of the charterparty. The indemnity was to protect the owners against losses arising from risks or costs which they had not expressly or implicitly agreed in the charterparty to bear and which were caused by complying with the charterers’ orders. He held that the charterers’ order to load the parcel of cargo which was on board the vessel when it was withdrawn was an effective cause of the owners’ loss in the present case. The need to discharge the cargo in the owners’ time arose from the fact that the cargo had been loaded pursuant to the charterers’ order and the purpose for which it had been loaded had come to an end with the termination of the charterparty. In simple terms, the cargo was on board because the charterers had put it there.

His Lordship added that, whilst it was fair to say that it was only because of the withdrawal of the vessel that the subsequent discharge at Angra dos Reis had to be done in the owners’ time and without earning contractual hire, that was the very reason why the detention of the vessel fell within the indemnity. The need to discharge the cargo in the owners’ time and at their expense was not an ordinary incident of the chartered service and was not a risk that the owners assumed under the contract. It arose after the chartered service had come to an end in accordance with the withdrawal clause in the contract.

Lord Sumption held, therefore, that the whole of the 2.64 days during which the vessel was detained resulted from the cargo being on board on the charterers’ order at the time of the withdrawal and that the owners were entitled to recover the market rate of hire for those 2.64 days. He also held that they were entitled to the value of bunkers consumed during the whole period of detention.

Bailment

Whilst this conclusion made it unnecessary to address the owners’ case on bailment, Lord Sumption nonetheless proposed to deal with the question of whether the owners were also entitled to succeed at common law as non-

contractual bailees of the cargo after the withdrawal of the vessel. He held that they were. His Lordship distinguished between cases where there was no previous contractual relationship between the parties and the present case where the original bailment of the cargo had occurred under the charterparty contract. Relying on The Winson, he held that the circumstances which entitled the owners to recover in bailment in the present case were that: (i) the cargo was originally bailed to the owners under a contract which came to an end while the cargo was still in their possession; (ii) as a matter of law, their obligation to look after the cargo continued notwithstanding the termination of the charterparty; and (iii) the only reasonable or practical option open to them once the charterparty had come to an end was to retain the cargo until it could be discharged at the port where the vessel was then located.

Unjust enrichment

Finally, as regards the case on unjust enrichment, Lord Sumption thought that the owners might be entitled to succeed on this basis also but decided not to make a conclusive determination on this aspect.

Lord Mance

Lord Phillips concurred with Lord Sumption, as did Lord Clarke. Lord Mance, on the other hand, agreed that the owners were entitled to recover for their claim in bailment but disagreed with the majority that the claim fell within the indemnity in clause 13. In his view, an indemnity like clause 13 only applies where there is a direct causal link between the orders and the consequences and, pursuant to cases such as The White Rose [1969] 1 WLR 1098, it is necessary to establish “an unbroken chain of causation”. In Lord Mance’s view, the owners’ loss was not suffered as a result of complying with the time charterers’ order, rather it was caused because the charter was at an end. He held, therefore, that the direct or unbroken causal link required was lacking in this case.

Lord Phillips

Lord Phillips agreed with Lord Mance that there must be a causal link between the order and the consequences relied on and no break in the chain of causation between the two. He disagreed though with any suggestion that there can only be one cause. Rather, depending on the circumstances, he stated that there may be more than one effective cause of a loss and that, in the present case, there were two effective causes of the owners’ expense and loss, namely the withdrawal and the fact that the cargo had been loaded. In those circumstances, he saw no reason why the claim for an indemnity under clause 13 should not succeed.

CommentThe judgment provides very interesting clarification in relation to the scope of contractual indemnities in a time charter context and the rights and responsibilities arising out of a non-contractual bailment where a time charter has come to an end.

04 SHIPPINGe-brief

A perhaps unusual feature of the case was that no bill of lading had been issued, with the charterers remaining the owners of the cargo. It remains to be seen what effect the issue of a bill of lading and ownership of the cargo by persons other than the charterers might have in similar circumstances.

Michael Volikas, Jeremy Biggs and Catherine Earnshaw of Ince & Co LLP represented the successful owners in this litigation. In the event of any query with regard to this article or generally in respect of this case, please contact Michael Volikas or Jeremy Biggs.

Commercial Court confirms principle in White and Carter applies to a time charterparty

Isabella Shipowner SA v. Shagang Shipping Co Ltd (Aquafaith) [2012] EWHC 1077 (Comm)

In a judgment handed down on 27 April 2012, Mr Justice Cooke has held that, in circumstances where the time charterers were in repudiatory breach of charterparty in purporting to redeliver the vessel early, the owners were entitled to refuse early redelivery, affirm the charterparty and hold the charterers liable for hire for the balance of the minimum period of the charterparty. The judge rejected the argument that the owners were bound to accept early redelivery and sue instead for damages.

The background factsThe vessel was chartered by the owners to the charterers on an amended NYPE form for a duration of 59 to 61 months. The charterparty contained an express warranty that the vessel would not be redelivered before the minimum period of 59 months. Nonetheless, the charterers sought to redeliver the vessel just over three months before the earliest permissible date for redelivery. There was no dispute that this constituted a repudiatory breach of the charterparty. The parties disagreed, however, as to what the owners were required by law to do as a result and whether they could elect to keep the charterparty alive even where the charterers had indicated that they were no longer prepared to perform.

The matter went to arbitration and the sole arbitrator held that the owners were required to take redelivery of the vessel, trade the vessel on the spot market by way of mitigation and claim damages in respect of their loss. The owners appealed to the court under section 69 of the Arbitration Act 1996. Mr Justice Cooke allowed the appeal and varied the arbitration award accordingly. He has also refused the charterers leave to appeal so the matter can go no further on appeal.

The Commercial Court decisionThe relevant issue of law turned on the following principle as enunciated in the House of Lords decision in White and Carter (Councils) Limited v. McGregor [1962] AC 413, namely: if one party to a contract repudiates it, the innocent party has the option of either accepting that repudiation and suing for damages for breach of contract, or refusing to accept the repudiation and affirming the continuation of the contract. If the innocent party can then complete the contract himself, without the need for any action on the part of the contract breaker, he will be in a position to sue for the agreed price. In that case, Lord Reid stated that where it could be shown that the innocent party had no legitimate interest, whether financial or otherwise, in performing the contract rather than claiming damages, it might well be that he should not be allowed to enforce the contract. In other words, an absence of legitimate interest could, in appropriate circumstances, operate as an exception to the general rule. Lord Reid also stated that there was no requirement on an innocent party to exercise his rights reasonably, so that the conduct of the innocent party would have to amount to something more than unreasonable.

White and Carter did not involve a time charterparty and the arbitrator in The Aquafaith held in essence that time charters fell outside the scope of the rule in White and Carter in that a

Michael VolikasPartner, Londonmichael.volikas@incelaw.com

Jeremy BiggsPartner, Londonjeremy.biggs@incelaw.com

reema ShourProfessional Support Lawyer, Londonreema.shour@incelaw.com

Catherine EarnshawSolicitor, Londoncatherine.earnshaw@incelaw.com

05SHIPPINGe-brief

time charter was not a contract that could be performed without the charterers needing to do anything i.e. the owners required the charterers’ co-operation to perform the charter and further, he decided that the owners had no legitimate interest in performing the contract rather than claiming damages.

Mr Justice Cooke, having reviewed both the decision in White and Carter and subsequent case-law, disagreed.

In the judge’s view, whilst a time charterparty might be a contract for services, the earning of hire by the owners after the purported redelivery was not dependent on any performance by the charterers of their obligations. In other words, the owners did not need the charterers to do anything in order for them to earn the hire in question. The judge distinguished the Court of Appeal decision in The Puerto Buitrago [1976] 1 LLR 250 on the basis that a time charter differs from a demise charter; the essence of a demise charter is that the demise charterer takes possession of the vessel and, as soon as the owner retakes possession, he can no longer be entitled to hire. Unlike a time charterparty situation, therefore, owners could not fulfil a demise charter without the co-operation of demise charterers. Mr Justice Cooke also made reference to the judgment of Mr Justice Kerr in The Odenfeld [1978] 2 LLR 357, who found in that case that the owners were entitled to hold the ship at the charterers’ disposal and claim hire for a certain period though he indicated that this right could be lost by the passage of time thereafter, depending on events. In coming to that conclusion, Mr Justice Kerr dismissed the idea that a time charterparty is a type of contract involving a high degree of co-operation between the parties such that the owners could not choose to maintain the contract in the face of the charterers’ repudiation.

Mr Justice Cooke found that the arbitrator had applied the wrong test when considering whether the owners had a legitimate interest in maintaining the charterparty for the balance of 94 days and claiming hire, as opposed to accepting the charterers’ repudiatory breach as bringing the charterparty to an end, trading on the spot market to mitigate their loss and claiming damages for the difference. Citing with approval the judgment of Mr Justice Simon in The Dynamic [2003] 2 LLR 693, the judge stated that the exception to the general rule in White and Carter applies only in extreme cases where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable. As per Mr Justice Simon, the burden of proof is on the contract breaker to show that the innocent party had no legitimate interest in performing the contract rather than claiming damages and this burden would not be discharged merely by showing that the benefit to the innocent party is small in comparison to the loss to the contract-breaker.

The judge also referred to The Alaskan Trader [1984] 1 All ER 129, involving early redelivery by eight months under a two-year time charterparty. Mr Justice Lloyd in that case considered that, whilst there comes a point at which it would be inequitable for the court to allow an innocent party to enforce his contract according to its strict legal terms, defining that point involves drawing a line between conduct which is “merely unreasonable” and conduct which is “wholly unreasonable”.

In the present case, Mr Justice Cooke concluded that the effect of the authorities was that an innocent party would have no legitimate interest in maintaining the contract if damages were an adequate remedy and his insistence on maintaining the contract could be described as “wholly unreasonable”, “extremely unreasonable” or even, in Mr Justice Cooke’s words, “perverse”.

Applying these principles to the facts of this case, the judge noted the owners’ submissions that damages would be an inadequate remedy because the charterers were in financial difficulty and the owners were, therefore, at risk of the charterers directing their limited funds to meet obligations to other parties, whilst delaying payment of any sums owing to the owners until the end of the charterparty and the assessment of what was due in damages. Alternatively, the charterers might become insolvent. The judge also drew attention to the fact that the charterers were seeking to shift the burden onto the owners of trading in a difficult spot market, where a substitute time charter was impossible, in circumstances where the charterers had the ability to sub-let the charter themselves. In his view, the charterers had the same opportunities to use the vessel as the owners, but were instead seeking to be shot of the difficulties in trading the vessel by imposing that burden on the owners, as well as depriving the owners of the assured income of advance hire.

Consequently, the judge concluded that it would be impossible to characterise the owners’ stance in wishing to maintain the charterparty and a right to hire as unreasonable, let alone wholly unreasonable or perverse. This was not an extreme case to which the exception to the rule in White and Carter should apply.

CommentThis judgment is a helpful clarification from the Commercial Court that the rule in White and Carter applies to time charterparties, and that the exception to that rule will only operate in extreme cases. It is welcome news for owners faced with early redelivery in an adverse market.

Paul Herring and Livvi Zen-McDonald of Ince & Co LLP represented the successful owners in this case. In case of any query, please contact Paul Herring.

reema ShourProfessional Support Lawyer, Londonreema.shour@incelaw.com

Paul HerringPartner, Londonpaul.herring@incelaw.com

Livvi Zen-McDonaldSolicitor, Londonlivvi-zen.mcdonald@incelaw.com

06 SHIPPINGe-brief

Iran Calling…? reducing the risks

Ship-owners will be acutely aware of the risks involved in permitting their vessels to call at Iranian ports. Those risks are real, and the penalties for being in breach of the numerous sanctions regimes are severe. What sometimes gets lost in all of the warnings, however, is that the sanctions regimes do not prohibit all trade with Iran. For careful (and brave) ship-owners, there is money to be made in accepting voyage orders to call at Iranian ports. This article addresses some of the steps that ship-owners must take before accepting such voyage orders and outlines the additional protections that should be put in place before any voyage to Iran commences.

Two very important general points should be made about what follows. First, the steps set out below will reduce the risks involved for ship-owners considering permitting their vessels to call at Iranian ports, but will certainly not eliminate the risks: for the reasons set out in this article, it is not possible to eliminate the risks in full. Second, if ship-owners are considering permitting their vessel to call at Iranian ports, then it is strongly recommended that legal advice is obtained at an early stage: this article is not a substitute for that legal advice.

Step 1 – necessary due diligence

Who is the charterer?

The starting point for ship-owners considering permitting their vessels to call at Iranian ports is to identify exactly who is seeking to charter the vessel for the particular Iranian voyage. This is because if the vessel is required to call at Iran, then it is likely that the charterer is either an Iranian entity, or has some connection with an Iranian entity or person. That entity/those entities/the Iranian person should be checked very carefully against both the US and EU list of sanctioned companies/people . Given the consequences of being in breach of sanctions, it is strongly recommended that lawyers are instructed to carry out those checks. If the charterer(s) appears on either of those lists, then ship-owners will be in breach of the sanctions if they allow their vessel to be chartered to the sanctioned entity.

What is the cargo?

If the charterer is not a sanctioned entity, then the next step for ship-owners is to identify exactly what cargo the charterer wants to be carried on the voyage. The ship-owner must consider the types of cargoes that are completely prohibited, the types of cargoes that may only be imported or exported under licence, the particular issues surrounding “dual-use cargo”, and the different restrictions that apply for imports and for exports. The relevant provisions of the US and EU sanctions regimes must be consulted to determine whether the cargo the charterer wants to be carried is a sanctioned cargo or not. If the cargo is listed, then ship-owners will be in breach of sanctions if they permit their vessels to call at Iranian ports while carrying that cargo. Ship-owners should also be aware that they will be in breach of sanctions if they carry a sanctioned cargo to a neighbouring country, knowing that the ultimate destination is Iran – the use of “front countries” is a real risk.

Who are the cargo interests?

The next step for ship-owners is to identify all of the cargo interests. If the vessel is required to call at Iran, then it follows that at least one of the cargo interests (shipper, receiver, consignee, buyer, seller, etc.) is going to be an Iranian entity. That entity must be checked against both the US and EU list of sanctioned companies/persons, in just the same way as the charterer was checked. If any of the cargo interests appear on the lists, then ship-owners will be in breach of sanctions by allowing the cargo to be carried on their vessel.

What is the Iranian load/discharge port?

Although the sanctions do not prevent vessels from calling at any particular geographical location, some Iranian port operators appear on the US and EU list of sanctioned companies, and are therefore sanctioned entities. This effectively prevents vessels from calling at any Iranian port as, where the port operator is a sanctioned entity, any payment made to them will be a breach of sanctions. Ship-owners must, therefore, identify the charterers’ intended Iranian port(s) of call before agreeing to perform the voyage, in order to identify the particular port operators. The port operators must then be checked against both the US and EU list of sanctioned companies and, if they appear on the list, ship-owners will be in breach of sanctions by allowing their vessel to call at that port.

Who are the Iranian load/discharge port agents?

Just as the charterer, cargo interest or port operator may be a sanctioned entity, so may be the particular Iranian port agents. The port agents must, therefore, also be identified and checked against both the US and EU list of sanctioned companies.

Step 2 – additional protections

If all of the above checks come back squeaky clean, then it will probably (but by no means certainly) be the case that ship-owners will not be in breach of sanctions by permitting their vessel to call at the specified Iranian port(s) to carry the specified cargo for the specified voyage. We say “probably” the case, rather than certainly the case, for the following reasons:

1. The sanctions regimes are changing regularly and changes happen with little or no prior notice. An entity or person that was not sanctioned when the checks were originally carried out may become sanctioned by the time the voyage commences, or a cargo that was not previously prohibited may become prohibited during carriage.

2. The reality of carrying cargo by sea is that unforeseeable events sometimes occur during carriage. For example, the vessel may suffer a breakdown and need to divert unexpectedly. If the vessel had to divert, even for issues of safety, to an Iranian port of refuge that was operated by sanctioned port operators, or if the agents or repairers at the port were sanctioned entities, then ship-owners would find themselves in breach of sanctions.

Those lists can be found at http://eeas.europa.eu/cfsp/sanctions/consol-list_en.htm and http://www.treasury.gov/ofac/downloads/t11sdn.pdf1

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07SHIPPINGe-brief

3. It is not uncommon for certain cargoes to be sold afloat and without the knowledge of ship-owners. If the cargo was sold to a sanctioned entity in this way, then ship-owners would be in breach of sanctions, possibly without even being aware that they were in breach.

4. It is possible that the sanctions regimes will be made even more stringent in due course, and that those more rigorous sanctions are then given retrospective effect. This would result in a voyage that was not subject to sanctions at the time it was agreed or undertaken becoming a sanctioned voyage after the event. If an issue then arose in respect of the completed voyage (for example, a cargo claim just before the one year time-limit), that claim would be affected by the sanctions introduced after the voyage had been completed.

As such, careful ship-owners should also take the following further steps to protect their position.

Incorporate provisions into the charterparty allowing ship-owners to refuse to comply with voyage orders at any stage of the voyage

As a voyage which is not subject to sanctions can become a sanctioned voyage overnight, ship-owners should insert a provision in the charterparty allowing them to refuse to follow voyage orders at any stage of the voyage, including when the cargo has been loaded and is being carried, if to do so would otherwise place them in breach of sanctions. Paragraph (b) of the BIMCO Sanctions Clause for Time Charterparties sets out wording to achieve this. In particular, that Clause entitles the ship-owner to discharge the cargo being carried at any safe port . It is recommended that the Clause be included as a term of any fixture by ship-owners to permit their vessels to call at Iranian ports. Paragraph (d) of the BIMCO Clause (requiring charterers to procure that Paragraph (b) of the Clause be incorporated into all sub-charters and all bills of lading) should also be inserted into the relevant charterparty.

Ensure that an alternative “all risks” insurance policy is taken out for the voyage

If a voyage is not subject to sanctions, then the ship-owners’ P&I cover with the Club will remain intact. For all of the reasons mentioned above, however, ship-owners may inadvertently find themselves in breach of sanctions and consequently without cover. Therefore an alternative “all risks” cover – including P&I and H&M cover – should be entered into before every voyage calling at Iranian ports is commenced. Although a point for negotiation between ship-owners and charterers, it would not be uncommon for the obligation to arrange alternative insurance to be on charterers in this situation, and also for their account.

Regarding the alternative insurance, the following important points should be noted in particular. First, the insurance company providing the alternative insurance would have to be based outside the US/EU, otherwise the alternative insurer would not be able to cover sanctionable voyages, just as a Club cannot. Second, even if an appropriate non-US/EU insurer willing to offer “all risks” cover were found, it is unlikely that the

alternative insurer would be able to provide adequate levels of cover for pollution incidents. This is because the level of compulsory pollution insurance cover is so high that the necessary reinsurance required is currently unavailable outside the EU/US. Third, in the event that alternative cover were taken out, and the voyage were not subject to sanctions, then in the event of a typical P&I loss (e.g. a cargo claim), there may be issues of double insurance to consider. Finally, whatever the insurance arrangements, no US/EU insurer or bank would be able to provide security, e.g. in the event of an arrest, without the authorisation of the relevant authorising body (in the UK, that would be Her Majesty’s Treasury) and that is the position whether the Iranian entity is sanctioned or not. It is important, therefore, that the alternative insurer has the facility to be able to put up adequate security, e.g. in the event of an arrest.

Obtain a LOI from charterers

In addition to procuring an all risks insurance policy from charterers via alternative insurers, ship-owners should also obtain a LOI from charterers, indemnifying them against all of the risks and consequences of permitting their vessel to call at Iranian ports. To the extent that ship-owners have any doubts at all about the ability (or willingness) of charterers to honour the LOI, then they should also require that it be countersigned by a first class bank. Specific legal advice should be sought on the wording of the LOI.

Ian CranstonPartner, Monacoian.cranston@incelaw.com

Liam HowardSolicitor, Monacoliam.howard@incelaw.com

That wording can be found at https://www.bimco.org/Chartering/Clauses/Sanctions_Clause.aspx2

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Commercial Court clarifies the nature of charterparty liens

Western Bulk Shipowning III A/S v. Carbofer Maritime Trading ApS & others (The Western Moscow) [2012] EWHC 1224

In the May 2009 edition of our Shipping E-Brief, we wrote about the issue of charterparty liens and arbitrations (see http://incelaw.com/ourknowledge/publications/charterparty-liens-and-arbitration). In that article, we discussed the different approaches taken in previous cases when analysing the legal basis of a lien on sub-freight and/or sub-hire. In The Western Moscow, Mr Justice Clarke has looked in detail at the issue and has given a clear view on the nature of such liens.

The background factsThe Western Moscow was the subject of a long charterparty chain which included the claimant as owner and the three defendants, CMT, OceanTask and SeaTask, as charterer, sub-charterer and sub-sub-charterer respectively. The owner terminated its charterparty with CMT due to the non-payment of hire and exercised a lien on sub-hire. CMT gave notice that it was exercising its lien to OceanTask and SeaTask.

The owner asserted that it was entitled to be paid all the hire due under the CMT/OceanTask charterparty and under the OceanTask/SeaTask charterparty.

The Commercial Court decision

Nature of lien

Having considered all the previous authorities, Mr Justice Clarke decided that a lien on sub-freight/sub-hire creates an assignment by way of a charge. The same conclusion had been reached by the court in The Ugland Trailer [1985] 2 Lloyd’s Rep 372. That decision has come under attack in a number of subsequent cases, which put forward an alternative interpretation that the right is a personal contractual right of interception. Nonetheless, Mr Justice Clarke upheld the “assignment by way of charge” analysis.

The most important consequence of this analysis is that, as a security interest, an equitable charge may require registration in certain jurisdictions. For example, security interests must be registered against UK companies within 21 days of their creation to be binding in the event of an insolvency. For a UK company, therefore, a lien on sub-freight will be void against a liquidator or creditor if not registered within 21 days of the charterparty being entered into. Similar rules may exist for companies incorporated in other jurisdictions.

Set-off

SeaTask was able to argue that, as an assignment is taken “subject to equities”, the amount payable to the owner by virtue of the lien could be reduced by sums which OceanTask/SeaTask could legitimately set off from charter hire. The right of set-off, however, in the OceanTask/SeaTask charterparty had to be exercised before such a right arose. Since that right of set-off was not exercised before the owner gave notice of the lien, set-off did not apply in this case.

“No lien” clause

The effect of the lien clause was that CMT had assigned to the owner not only hire due to it from OceanTask but also any sub-hire due under any sub-charterparties. The OceanTask/ SeaTask charter, however, had deleted the standard clause permitting a lien on sub-freight. In its place, the charterparty provided “no lien”. The judge held that the effect of this clause was to preclude the owner from asserting its lien against those below SeaTask in the charter chain. However, it did not affect the owner’s rights against SeaTask.

Comment

This case represents the most comprehensive recent review of the legal nature of a lien on sub-freights/hires and firmly follows the view that such a lien constitutes an equitable charge. Whilst the position will not be certain until the Court of Appeal rules on the issue, it is now prudent to assume that the English courts will follow Mr Justice Clarke’s judgment. It follows that, where a charterer is based in a jurisdiction where floating charges are registrable within a limited period of creation of the charge, vessel owners should be aware that the lien on sub-freights/hires may not be effective unless the charge is registered against the charterer on or shortly after conclusion of the charterparty. In most cases, this is impractical and can result in the ship-owner losing one of its potential avenues to obtain payment of hire due. Ship-owners are therefore well advised to carry out due diligence on the solvency of their charterers and to obtain properly worded (and, where necessary, registered) parent company guarantees from more solvent companies where appropriate.

John SimpsonPartner, Singaporejohn.simpson@incelaw.com

David richardsSolicitor, Londondavid.richards@incelaw.com

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Vessel arrest in Hong Kong: an analysis of the recent decision in the MV Jimrise

The Owners and/or Demise Charterers of the Ship or Vessel “Jimrise” HCAJ 180/2011

In this article, we examine the recent Hong Kong case, MV Jimrise, and consider what guidance it offers on when the courts in Hong Kong will set aside a ship arrest and order damages for wrongful arrest.

Arresting vessels for charterparty claims in Hong KongThe legal system in Hong Kong is based on the English common law system as enshrined in the basic law of Hong Kong. Claims for which a vessel can be arrested are set out in section 12A(2) of the High Court Ordinance (the “Ordinance”). By virtue of this Ordinance, it is possible in Hong Kong to arrest a vessel for a claim arising out of an agreement relating to the use or hire of that vessel. In order to effect such an arrest in these circumstances, the claimant must show that:

1. The person who would be liable on the claim in an action in personam (i.e. the claimant’s counterparty to the charterparty) was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the vessel; and

2. At the time when the action was brought (i.e. the writ issued by the court), that relevant person was either the beneficial owner as respects all the shares in the vessel or the demise charterer of the vessel.

In order to effect an arrest, both of the above conditions must be met.

It was the second of these requirements that was the subject of the dispute in the case of the MV Jimrise. The court gave some helpful guidance as to the approach it will take when assessing the ownership of the vessel. It also re-affirmed the Hong Kong Court’s attitude to awarding damages for wrongful arrest: that they are only granted in the (rare) circumstance where there is evidence of malicious negligence on behalf of an arresting party.

The background factsCosmotrade and Jimei Hua Shipping Ltd (“Jimei”) entered into a time charterparty dated 4 August 2009 (the “charterparty”) for the use of the vessel. Jimrise Shipping Pte Ltd (“Jimrise”) were defined as “Original Owners” in the charterparty.

There was a dispute under the charterparty and, on 23 December 2011, Cosmotrade had the vessel arrested on the basis that:

1. Jimei were the vessel’s charterers at the time of Jimei’s alleged breach of charterparty; and

2. Jimei were, at the time the writ was issued by the court, the demise charterers of the vessel.

That Jimei satisfied part (1) of the test was not disputed, but Jimei argued that they were not the demise charterers of the vessel at the time that the writ was issued.

In support of their assertion that Jimei were the demise charterers of the vessel, Cosmotrade relied on the following evidence:

1. Jimei had been registered as “Co-assured” on an insurance cover note for the vessel dated 16 January 2009;

2. In the charterparty, Jimei were described with the expression “OWNS/MANAGERS/FULL STYLE”;

3. That in an escrow agreement between Jimei, Cosmotrade and their own sub-charterers Jaldhi, Jimei were described as “the Owners”;

4. That after London arbitration had been commenced under the charterparty, Cosmotrade’s lawyers had sought confirmation from Jimei’s previous solicitors as to whether they or Jimrise were the owners of the vessel and the answer that they received was that “Owners are Jimei”;

5. That at the time of the Hong Kong arrest hearing, the same firm of solicitors acted for both Jimei in the London arbitration proceedings and Jimrise in the Hong Kong Court proceedings;

6. An Infospectrum report obtained by Cosmotrade stated that “anyone wanting to charter the four ships will have Jimei…, not the ship’s registered owners, as their counter party”; and

7. Emails from the vessel’s master were routinely copied to Jimei.

Against this evidence, Jimrise pointed to the following to argue that Jimei were not the demise charterers of the vessel:

1. Jimrise were registered as the owners of the vessel in the Panamanian Registry;

2. Jimei were identified in Lloyd’s List only as the vessel’s commercial operators;

3. Cosmotrade had signed letters of indemnity in favour of Jimrise which had identified it as “the Owners of the MV JIMRISE”;

4. Jimrise had entered into a Crewing and Vessel Management Agreement with a third party; and

5. Shortly after the arrest, Jimei and Jimrise’s solicitors provided Cosmotrade’s solicitors with a copy of a time charterparty between Jimei and Jimrise.

The court decisionThe court found no evidence that Jimei were the demise charterers of the vessel. Rather, it found that all the evidence consistently pointed towards Jimrise being the owners and Jimei being only the commercial operators.

The fact that Jimei were co-assureds on the policy was not held to be compelling evidence. Rather, it was considered that Jimei had become co-assureds because, as commercial operators and time charterers of the vessel, they had an insurable interest akin to that of an owner.

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Further, Jimrise having not been party to the escrow agreement could not be considered to have represented that they either: (i) were not the owners of the vessel; or (ii) had bareboat chartered it to Jimei.

Being the commercial operators of the vessel, it was unsurprising that Jimei had been copied into correspondence from the master.

Overall, on the balance of probability, the court decided that Cosmotrade had been unable to establish that, at the time the action was brought, Jimei had been either the owners or demise charterers of the vessel. Accordingly, the arrest was set aside.

The court refused, however, to order an inquiry in respect of damages for wrongful arrest because it found that there had been no material non-disclosure in relation to the arrest. Although the court accepted that, soon after the arrest, Jimei and Jimrise’s solicitors had provided information clarifying the relationship between Jimrise and Jimei, the court refused to find that there had been malicious negligence on the part of Cosmotrade. There was genuine confusion as to the ownership of the vessel at the time of the arrest which had been compounded by the statements of Jimei’s previous solicitors in the London arbitration. In such circumstances, Cosmotrade’s actions post-arrest could not be described as being in bad faith or cavalier.

CommentThe court has shown once again its reluctance to issue orders inquiring into damages for wrongful arrest in Hong Kong. The test for showing that an arresting party has acted in bad faith or with malicious negligence sets a high threshold and is difficult for an arrested party to satisfy, even if it is successful in having an arrest order set aside.

Can a ship-owner recover the costs of exercising a lien if he does not have a contractual right to do so?

Metall Market OOO v. Vitorio Shipping Company Ltd (Lehmann Timber) [2012] EWHC 844 (Comm)

This colourful case provides a good reminder of the importance for ship-owners of having an express contractual right to recover the costs of exercising a lien over cargo. Without this, such costs are not recoverable at common law.

The background factsThe M/V Lehmann Timber did not have a happy start to life. In May 2008, on her maiden voyage from China to Russia, she was captured by Somali pirates. A ransom was paid but, four days after her release, her main engine broke down and she needed towing to a port of refuge. The ship-owner declared General Average (“GA”), but only 10% of her steel coil cargo was insured. The cargo insurers provided a GA guarantee in respect of the 10%, but the cargo receivers at St. Petersburg ignored the ship-owner’s demands for a GA bond in respect of the 10% and the balance of the cargo. Furthermore, they refused to provide a cash deposit that was sought in the amount of US$920,000 in respect of the 90% not covered by the GA guarantee.

The ship-owner decided to exercise a lien over the cargo. The ship waited for five days off St. Petersburg, and then sailed to the nearby port of Hamina in Finland, where the entire cargo was discharged into a warehouse. The ship-owner has been incurring storage/insurance costs of US$20,000 a month ever since, as well as berthing costs, handling charges and legal fees (“the storage charges”). By the time the case reached the Commercial Court, the storage charges would have been at least US$800,000.

The bills of lading were on the Congen form 1994. This says nothing about liens, but the bills did incorporate the terms of a voyage charter that provided for GA to be adjusted in London and in accordance with the York Antwerp rules. As the bills did not give the ship-owner an express contractual right to exercise a lien to obtain security for GA, never mind the right to recover the costs of this exercise, the issue was whether the storage charges were recoverable under English common law, i.e. based on previous court decisions.

In arbitration proceedings, the tribunal held that such charges were recoverable, but the Commercial Court reversed this decision and found in favour of the cargo receivers.

The Commercial Court decisionUnfortunately for the ship-owner, the judge felt that he was bound to follow the decision of the House of Lords in Somes v. British Empire Shipping Co (1860) 8 HL Cas. 338. In Somes, a repair yard exercised a lien over a ship for 27 days, until the repair bill was paid, and the yard included in its claim a charge of £21 per day for occupying the dock. The ship-owner paid the entire claim under protest and then successfully sued the yard to recover the £21 a day. The House of Lords found in favour of the ship-owner because it is a general rule that the costs of retaining possession of goods in the exercise of a lien are not recoverable from the owner of the goods.

Max CrossPartner, Hong Kongmax.cross@incelaw.com

William BlagbroughSolicitor, Hong Kongwilliam.blagbrough@incelaw.com

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In the present case, the ship-owner ran various arguments to try to get around this rule, but after carefully reviewing all the modern case law, the judge was not persuaded. His decision was that the costs of preserving the cargo being kept from the cargo receivers were costs which should properly be regarded as incurred for the benefit of the ship-owner, who was exercising the lien, rather than for the benefit of the cargo receivers. When considering whether the cargo receivers were in breach, the judge noted that the ship-owner was withholding delivery and so it could not be said that the cargo receivers were refusing to take delivery. Further, the failure to provide reasonable GA security did not sound in the damages the ship-owner was seeking to recover, because of the principle in Somes.

There was also a dispute as to whether the ship-owner should have delivered the 10% of the cargo (for which the GA guarantee was given). The cargo receivers, who had refused to provide a GA bond, argued that the ship-owner waived any right to exercise a lien over this portion of the cargo when it accepted the GA guarantee from cargo underwriters. The judge accepted that it was possible to waive the right to exercise a lien if the ship-owner did something that was “unequivocally inconsistent” with the continued existence of the lien. He held, however, that the GA guarantee was intended to operate as a matter of practice in conjunction with a GA bond (which had not been given). On the facts of this case, the acceptance of the GA guarantee on its own was not sufficiently clear to result in a loss of the right to lien the cargo.

CommentThe facts of this case are unusual. There is no explanation as to why the cargo receivers refused to provide a GA bond. Perhaps it was due to the collapse in steel prices after the ship’s arrival? In our view, however, the case illustrates the importance of ship-owners having the right to rely on well worded lien clauses in their bills of lading and charterparties. In the liner trade, most carriers are alive to this and have devised robust clauses that explicitly refer to the right to recover storage costs/expenses incurred when exercising a lien and which expressly give them rights to sell the cargo. In the bulk trade, some lien clauses refer to “the cost of recovering the same”, but often they do not, and generally they are silent about rights of sale. It is suggested that ship-owners should check the wording of the lien clauses in their contracts of carriage to see what express rights they have if they were to exercise a lien over cargo and this failed to provoke adequate security or payment.

The Commercial Court considers various issues relating to the conclusion of binding contracts of carriage and the commencement of arbitration proceedings

Finmoon Limited and OOO Megafruit v. Baltic Reefers Management Ltd and ors [2012] EWHC 920 (Comm)

In this case, the Commercial Court looked at the parties’ long-standing chartering arrangements and at the way bills of lading were issued to determine what types of contractual relationship they intended to create between them. In doing so, the court held that a binding contract of affreightment (“COA”) came into existence by virtue of the parties’ conduct. Mr Justice Eder also recognised the practise of surrender, cancellation and re-issue of bills of lading, confirming that the re-issued bills were still effective to transfer rights of suit to the consignee. Finally, the court adopted a broad and flexible approach with regard to whether or not the claimants had effectively commenced arbitration proceedings. It confirmed – in line with the decision in The Voc Gallant [2009] EWHC 288 (Comm) - that so long as it is objectively clear that a communication is intended to refer a dispute to arbitration and to require the relevant steps to be taken, then it will generally be considered to have complied with the necessary formalities and to have validly commenced arbitration.

The background factsThe claimants chartered weekly reefer tonnage pursuant to a COA to carry shipments of “green bananas” during the winter 2006/2007 season. The original COA was signed by the defendants, Baltic Reefers Management (“BRM”), as “owners”. Tonnage continued to be provided into the 2007 summer season “as per present COA until next one is finalised” and on into the winter 2007/2008 season without a formal extension to the 2006/2007 COA or a replacement COA being drawn up.

BRM were the managers of a fleet of vessels pursuant to SHIPMAN agreements with each of the individual owners. They were instructed to nominate vessels from their managed fleet to perform under the COA each week, but were neither the legal nor the beneficial owners of any of the performing vessels.

The bills of lading were issued at the loadport identifying the fruit sellers as shippers. After receiving payment, the sellers returned the loadport bills to the ships’ agents marked “NULL AND VOID”. BRM’s agents would then be instructed to prepare fresh bills at the discharge port and provide these to the claimants as the named consignees.

During the winter 2007/2008 season, 12 cargoes of bananas were damaged. The claimants notified their claims to BRM and the individual owners of the vessels by reference to both the COA (a draft written version of which was attached to the letter) and the bills of lading. The claimants subsequently served arbitration notices on the defendants purporting to commence proceedings by reference to both the names of the vessels that carried the damaged cargoes and the individual voyage charterparties referred to in the bills of lading (which never came into existence), but without reference to the COA.

Ted GrahamPartner, Londonted.graham@incelaw.com

Carl WalkerSolicitor, Londoncarl.walker@incelaw.com

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expressly to the COA. Those issued during the winter 2007/2008 season did not refer to the COA, but to the voyage charters pursuant to which each individual vessel was performing. On a few occasions, the claimants also shipped cargoes other than “green bananas” as agreed under the previous COAs. The defendants argued that this was because tonnage continued to be provided on a spot trading basis and not under the COA. The court disagreed, noting that “in any long-term arrangement such variations are to be expected or at least not unexpected” and that the proper approach is to look at the overall conduct of the parties.

Status of bills of lading

The court recognised that there are various reasons why parties might adopt a practice of surrendering, cancelling and reissuing bills of lading, and that this is not uncommon. It might be done, for example, because a shipment is to be split between a number of sub-buyers. In this case, it was done to ensure that the bills were available at the discharge port in time to avoid any delay in discharge formalities.

The defendants argued that the loadport bills lacked the necessary features to create a contract between the carriers and the holder of the bills, namely they were not intended to change hands, enter into the banking system, secure delivery or even leave the loadport. The court disagreed, and saw no reason why this commercially convenient practice should negative the intention to create legal relations.

The piece of paper that is the bill is not necessarily the actual contract of carriage, but may merely be evidence of that contract. It was held that the loadport bills evidenced a contract of carriage between the carrier and the shipper until they were surrendered and cancelled. At that point, the discharge port bills took on the features of a valid and binding bill of lading within the definition of the Carriage of Goods by Sea Act 1992. Once this happened, they were capable of transferring rights of suit to the claimants as consignees pursuant to the provisions of that Act.

Commencement of arbitration

Section 14(4) of the Arbitration Act 1996 provides that:

“…arbitral proceedings are commenced in respect of a matter when one party serves on the other party or parties a notice in writing requiring him or them to appoint an arbitrator or to agree to the appointment of an arbitrator in respect of that matter.”

The modern view of this statutory provision is that it should be interpreted broadly and flexibly. The courts have recognised in the past that arbitration notices are often given by international traders and businessmen in a shorthand manner that is nonetheless objectively clear. In this case, the court held that the substantive nature of the claims in respect of which arbitration was being commenced should have been objectively clear to the defendants, namely charterparty as well as bill of lading claims in respect of the damaged cargo. In particular, the COA had been referred to in previous correspondence and the names of the relevant vessels carrying the damaged cargoes were specified in the notices themselves. The claimants’

The issues for the courtThe defendants sought to defend the claims on several grounds including the following:

1. BRM did not sign the original COA as principal, but as agent on behalf of the individual ship-owners pursuant to the SHIPMAN agreements;

2. the COA did not continue into the winter 2007/2008 season and the tonnage that continued to be provided was done basis spot trading;

3. the rights of suit under the contract of carriage were incapable of being transferred to the claimants because the loadport bills were “straight bills”; and

4. proceedings were not validly commenced because no reference was made to the COA in the arbitration notices.

In arbitration, the claimants succeeded on issues (a) and (b), but the tribunal found for the defendants on issues (c) and (d). The claimants appealed to the Commercial Court.

The Commercial Court decision

In summary, the court found as follows:

Agency

The court considered the internal management arrangements of the vessels to be of little relevance to the legal effect of the COA. BRM had signed the original COA as “owners” without any qualification and were thus deemed to have been contracting as principal. The court noted that if they had wished to avoid personal liability, BRM should have added wording to make that clear.

Concluded COA

The court held that the original 2006/2007 COA was extended on the same terms for the 2007 summer season. Although there was no response to the claimants’ email proposing to do the same for the winter 2007/2008 season, both parties were found to have proceeded on the basis that BRM was obliged to make weekly nominations of vessels that the claimants were obliged to accept and that the claimants were obliged to ship and BRM was obliged to carry the quantities stipulated in the claimants’ email. The court therefore held that the claimants’ offer had been accepted by conduct and that a winter 2007/2008 COA had entered into existence.

The concept of concluding a contract by conduct is nothing new. The test is whether the cumulative effect of both parties’ conduct is enough to demonstrate an intention to create legal relations. In this case, the court clarified that a party alleging the existence of such a contract does not need to be able to point to an exact day when the contract was concluded in order to succeed.

It also did not matter, in the court’s view, that slight alterations to the parties’ business practices emerged after the previous COA had come to end. The bills of lading issued during the winter 2006/2007 and summer 2007 seasons referred

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arbitration notices were therefore held to be effective notwithstanding that they referred to non-existent voyage charterparties instead of the concluded COA.

CommentThis decision is a good example of the court’s ability to look in detail at the commercial conduct of parties to find that a binding agreement was concluded between them, even where there is no single written document comprising the contract in question. In this case, the commercial relationship was long-standing, although the same principles could be applied equally to one on a more short-term basis. Notwithstanding this decision, those who wish to ensure that any agreement upheld by the court reflects their true intentions should put that contract in writing up front and preferably sign it to avoid any subsequent (and potentially costly) dispute as to what terms, if any, were agreed. In addition, those who intend to enter into contracts as agents only, especially those who do so on a regular basis such as ship-managers, should sign expressly “as agents only”.

Finally, notwithstanding Mr Justice Eder’s pragmatic approach to the effectiveness of the arbitration notices in this case, it remains best practice to ensure that a notice purporting to commence arbitration is carefully and accurately drafted and contains all the necessary and available information about the dispute in respect of which the arbitrator is being appointed. If in doubt, it is advisable to take legal advice when drafting such notices.

Dubai Court of Cassation rules on incorporation of charterparty terms into a bill of lading

Al Buhaira National Insurance Co. v. The Shipping Corporation of India Limited (Cassation No. 363 of 2011, Civil Appeal)

Dubai’s highest court, the Court of Cassation, has considered a further case on the incorporation of charterparty terms into a bill of lading under UAE law and, in particular, the incorporation of an arbitration clause from that charterparty.

The background factsThis dispute concerned a subrogated cargo claim in respect of alleged damage to cargo that was carried on board the defendant owners’ vessel, the Desh Bhakt. The claimant cargo insurers paid out in full under a marine open insurance policy in respect of the damaged cargo and sought to reclaim the amount of around US$2.3m from the owners under the relevant bill of lading. The owners sought to dismiss the claim and objected to the UAE court proceedings on the grounds that the arbitration clause in the head charterparty between the owners and their charterers had been incorporated into the bill of lading.

Charterparty/bill of lading termsThe clauses of the charterparty dealing with arbitration stated, where relevant, as follows:

“78. LMAA / Arbitration Clause

All disputes or differences arising out of or under this contract, which cannot be amicably resolved, shall be referred to arbitration in London.…This contract is governed by English law and there shall apply to all proceedings under this clause the terms of the London Maritime Arbitrators’ Association current at the time when the arbitration proceedings were commenced.

105. General Average and Arbitration in London. English Law to apply.”

The incorporation wording of the bill of lading stated as follows:

“All terms, conditions and exceptions (including but not limited to Due Diligence, Negligence, Force Majeure, War, Liberties and Arbitration clauses) contained in which charter are herewith incorporated and form part hereof.”

The bill of lading did not contain the details of the particular charterparty that was to be incorporated into the bill of lading. In particular, details as to the parties to the charterparty and the date of the charterparty were left blank.

Arbitration clauses and bills of lading in the UAEUnder UAE law, an arbitration clause may be drafted in any language, form or style. There must, however, be a clear indication that the parties have agreed to submit to arbitration any dispute arising out of the applicable agreement.

The UAE court will not hear a case if the parties have agreed to refer the matter to arbitration. Under UAE law, however, a party wishing to rely on an arbitration clause in order to stay or prevent the court from hearing a case must raise an objection to the court’s jurisdiction at the first hearing of the case,

Elliot WoodruffPartner, Londonelliot.woodruff@incelaw.com

Alex ChisholmSolicitor, Hamburgalex.chisholm@incelaw.com

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incorporated into the bill of lading by way of specific reference. This was sufficient to demonstrate that the parties to the bill of lading intended to refer the disputes to arbitration according to the arbitration clause contained in the charterparty.

CommentThis is an important case because it determines that the UAE court will recognise and uphold the incorporation of a charterparty/foreign arbitration clause into a bill of lading even where the details of the charterparty in the bill of lading are left blank. In this case, the UAE court held that, where the words of incorporation in a bill of lading include a clear reference to the arbitration clause of a charterparty, then that arbitration clause will be deemed to be incorporated into the bill of lading. Mere reference in a bill of lading to the conditions of a charterparty, without express reference to the arbitration clause, is not sufficient to incorporate the arbitration provisions into the bill of lading, as was noted by the Dubai Court of Cassation in this case.

It should also be noted that if a party wishes to object to the jurisdiction of the UAE court on the grounds of an arbitration clause, this must be done at the very first hearing, otherwise the right to object will be lost and it will be assumed that the parties have submitted to the jurisdiction of the UAE court.

The UAE is a civil law jurisdiction and there is, therefore, no system of binding precedent. However, the decisions of the Dubai Cassation Court can be persuasive when used as the basis for legal argument in subsequent cases. Only in rare cases will the judges of lower courts contradict the findings of the Cassation Court. Cassation Court decisions are, therefore, a form of guidance as to the courts’ likely attitude in similar matters. This judgment will form part of such guidance and is likely to be relied upon in any cases where either party is seeking to object to court proceedings on the basis that arbitration provisions from a charterparty have been incorporated into a bill of lading.

Bob Deering, Graham Crane, Pavlo Samothrakis and Khalid Hamed of Ince & Co Middle East LLP acted for Shipping Corporation of India Limited, the successful owners in this litigation.

mentioning the relevant arbitration clause or agreement. If such objection is not raised at the first hearing, the court will proceed with the action and the parties will be taken to have waived their rights to refer the matter to arbitration. On some occasions (as happened in the present case), the UAE court will request the parties to make submissions on both jurisdiction and the merits of the case, rather than only ruling on the jurisdiction challenge at the outset of the proceedings. In practice, this means that the UAE court will instead rule on all the issues involved in the case, including any jurisdictional objection, only after the case reaches full judgment stage, which can be a lengthy process.

Under Article 257 of the UAE Maritime Code, a bill of lading will be treated as evidence of the contract of carriage on the grounds that it contains all of the conditions specifying the obligations of both parties, including the obligation and liability of the carrier. Accordingly, in the absence of evidence of a separate contract of carriage, it has previously been held by the Court of Cassation that the bill of lading contains all terms and conditions governing the carrier’s obligations towards the consignor and is, therefore, the only document that governs this contractual relationship.

The Court of first Instance decisionThe claimant insurers succeeded at first instance. At the first hearing in the case, the owners objected to the proceedings on the basis that the arbitration clause of the charterparty had been incorporated into the bill of lading and that, accordingly, the claim should be dismissed on the grounds that the parties had agreed to refer any disputes to arbitration in London. The claimant argued that the terms of the bill of lading did not establish the intent of the parties to refer any disputes between them to arbitration, primarily since the sections of the bill of lading dealing with the details of the charterparty were left blank.

The court concluded that the wording of the bill of lading, together with clause 105 of the charterparty dealing with governing law and arbitration, was not sufficient to establish the mutual intent of the contracting parties to refer their disputes to arbitration (the court was, however, silent as to the provisions of clause 78 of the charterparty, being the more extensive clause dealing with arbitration). The court, therefore, found in favour of the claimant and ordered the owners to reimburse the insurers for the full amount of their claim plus interest and court fees.

The Court of Appeal decision The owners appealed to the Dubai Court of Appeal. The Court of Appeal concluded that clause 78 of the charterparty was a valid arbitration clause and that the bill of lading specifically incorporated that clause by reference. The owners were, therefore, entitled to rely on the same provisions as against the claimant insurers and accordingly, the court overturned the decision at first instance, finding in favour of the owners and rejecting the insurers’ claim on the grounds of the arbitration clause.

The Court of Cassation decisionThe insurers then appealed this decision to the highest court, the Dubai Court of Cassation. The Court of Cassation upheld the decision of the Court of Appeal, concluding that the arbitration clause contained in the charterparty had been validly

Bob DeeringPartner, Londonbob.deering@incelaw.com

Pavlo SamothrakisSolicitor, Dubaipavlo.samothrakis@incelaw.com

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Court construes meaning of “cargo tanks” in charterparty

VTC v. PVS [2012] EWHC 110 (Comm)

The Commercial Court has recently considered an appeal from an arbitration award on the issue of whether a reference to “all cargo tanks” in a time charterparty extended to slop tanks, with the result that a crack in the port side slop tank meant that the owners were in breach of their contractual warranty that the vessel would arrive at each load port with “all cargo tanks, pumps and lines” suitable to load the intended cargo to the satisfaction of the charterers’ representative and/or independent surveyor. Mr Justice Hamblen agreed with the arbitrators that, for the purposes of this charterparty, “all cargo tanks” did not cover slop tanks and so there had been no breach of the warranty in question.

The background factsThe parties entered into a time charter on an amended Shelltime 4 form for a period of about 10 years. Among other things, the time charter contained a general maintenance obligation (clause 3). In addition, clause 64 provided as follows:

“Owners warrant that vessel will arrive at each load port with all cargo tanks, pumps and lines suitable to load the intended cargo as per Charterers’ representative and/or independent surveyor’s satisfaction which always is subject to tank cleaning / squeeging Clause 102. All damages, time lost and costs incurred due to noncompliance will be for Owners’ account and deducted from monthly hire.”

Approximately five years into the time charter, the vessel was sub-chartered to load a cargo of gasoline in Rotterdam for carriage to ports in Mexico, the USA and the Caribbean. During her voyage to Rotterdam, oil was found on the surface of the ballast water in one of the ballast tanks owing to a crack in the slop tank. The owners advised the charterers that permanent repairs were required because of the crack but that they could not be done before the cancelling date under the sub-charter. As a result, the sub-charterers cancelled the sub-charter. The vessel sailed to Rotterdam and was repaired there. As Rotterdam was no longer a load port, however, the tanks were not inspected by charterers’ representative or an independent surveyor pursuant to clause 64. The charterers subsequently made deductions from hire on the basis of an alleged breach of clause 64.

The arbitration tribunal found in favour of the owners that there had been no such breach. According to the tribunal, clause 64 had to be seen in the context of the charter as a whole, including that it was for 10 years’ trading. It contained an obligation that was not absolute but that “bit” at each load port and was dependent only on satisfying charterers’ representative or the independent surveyor as to the cleanliness in respect of cargo tanks, pumps and lines. “Cargo tanks” could not be read as including slop tanks or ballast tanks because, as a matter of common sense, an inspector going to inspect the tanks into which cargo is going to be loaded, essentially for cleanliness, is not going to go around checking all the other spaces on the ship.

In the tribunal’s view, maintenance of the other parts of the ship, such as slop and ballast tanks, was covered by clause 3. There was no suggestion, however, that the owners were in breach of clause 3. The charterers had not, therefore, been entitled to make deductions from hire.

The charterers appealed on the sole ground that the arbitrators should have held that “all cargo tanks” in clause 64 encompassed the vessel’s slop tanks and that the owners were therefore in breach of the charter by reason of the crack in the port side slop tank.

The Commercial Court decisionAmong other things, the charterers argued that slop tanks can be used to carry oil cargoes as if they were one of the main cargo tanks. The judge noted that the tribunal had not found that cargo could never be loaded in the slop tanks. This was not a case, however, where cargo was going to be loaded into the slop tanks. The charterers’ representative or independent surveyor was not going to inspect the slop tanks. So, in that context, the slop tanks were not cargo tanks for the purpose of clause 64.

There was, in the judge’s view, an important distinction between the cargo tanks and other parts of the ship such as slop tanks. Clause 64 was generally to be read as referring to the cargo tanks only.

By way of clarification, the judge set out the scheme of the charterparty as follows:

1. The owners were subject to a general maintenance obligation pursuant to clause 3. This was a continuing obligation which applied throughout the duration of the charter but it imposed a due diligence, not an absolute, obligation on the owners.

2. Clause 64 imposed an additional obligation separate to the general maintenance obligation but was not a continuing obligation. It only applied at each load port.

3. The clause 64 obligation on the owners was to ensure that when the vessel arrived at each load port, her cargo tanks, pumps and lines were suitable to load the intended cargo to the satisfaction of the charterers’ representative or surveyor. The obligation was therefore to satisfy the charterers’ representative or independent surveyor, nothing more. So even if the cargo tanks were not fit to load the cargo, there would be no breach if they had been passed by the charterers’ representative/surveyor.

In the present case, Rotterdam was no longer a load port and so the cargo tanks were never inspected pursuant to clause 64. The owners could not, therefore, be in breach of clause 64.

CommentThe judge found that the “natural reading” of clause 64 was that it intended to distinguish cargo tanks from other ship’s tanks. His view reflected that of the tribunal, which had stated in the Reasons for its award that any protection the charterers required as to other parts of the ship, such as slop and ballast tanks, was provided for in clause 3. Had the charterers wished

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SHIPPING rEGULATION

The Bribery Act and the shipping industry: complying with a “zero tolerance” approach to facilitation payments in an imperfect world

In July 2011, shortly after the Bribery Act (the “Act”) came into force, we highlighted in an article that the Act had made facilitation payments a minefield for the shipping industry (see Ince Shipping E-Brief July 2011 at www.incelaw.com). The Act has been described as the most draconian anti-corruption legislation in the world and, unlike the Foreign Corrupt Practices Act (“FCPA”) in the US, does not provide any exceptions for facilitation payments, but rather takes a zero tolerance approach.

The difficulty for the shipping industry is that facilitation payments are often a predictable evil in foreign jurisdictions as a means of convincing public officials (e.g. port entry and customs officials) to properly and expeditiously perform the services that they should in any event be doing as part of their job. The incentives demanded are often of low value (typically, cigarettes or some alcohol). A recent report from the British Chamber of Shipping (“BCS”), discussed in more detail below, observes that these payments should be distinguished from the use of financial incentives to secure an (unfair) advantage at a foreign port, for example to jump a queue. This is arguably not proper performance by the relevant official of his role but more an example of “classic bribery”, which is also covered by the Act. The BCS recommends rebuffing demands for such payments.

Where facilitation payments are an entrenched feature of a foreign port, a ship-owner (or his representative in the person of the master or local agents) is faced with a dilemma as to how to proceed: to resist attempts by local officials to extort payments and run the risk of delays and lack of co-operation on the ground or, alternatively, to give in to pressure and make a payment in cash or kind that may contravene the Act and potentially lead to prosecution. In view of these very grave concerns, members of the shipping industry entered into discussions with the UK government in a bid to obtain guidance for the industry on reconciling its competitive position in the global market with its obligations under the Act.

We summarise below some of the guidance and advice that has since been issued by various bodies, which will be of use to those in the shipping industry.

The Serious fraud Office In a bid to address the shipping industry’s and similar industries’ concerns, the Director of the Serious Fraud Office (“SFO”), the lead UK agency for the Act, recently stated that he had not expected facilitation payments to end the moment the Act came into force. What was expected was that corporates who did not yet have a zero tolerance approach to such payments should commit themselves to such an approach and to work on how to eliminate them over a period of time. He also invited corporates to approach the SFO to discuss these issues where necessary. From this statement, it would appear that the SFO has decided to take a more nuanced approach to the eradication of facilitation payments and that companies are expected to phase out the making of facilitation payments over a period of time, rather than go “cold turkey”. This might give some comfort to those in the shipping industry who had noted

to extend the scope of clause 64 to tanks other than cargo tanks, “it would have been the easiest thing to delete the word “cargo”.”

The case highlights that the court will construe a charterparty as a whole and read related clauses together to establish the scheme of rights and liabilities under the contract. It is important, therefore, that the parties ensure that the charterparty accurately and comprehensively reflects the allocation of risk that they want to agree.

Jonathan ElveyPartner, Piraeusjonathan.elvey@incelaw.com

Joshua WilliamsTrainee Solicitor, Londonjoshua.williams@incelaw.com

SHIPPINGe-brief

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the prosecuting authorities’ original stance, which required prosecutors to exercise any doubt in favour of prosecution.

Additionally, the SFO has set out some guidelines that may help in avoiding prosecution for those who continue to make small facilitation payments. The SFO will consider:

1. whether the company has a clear issued policy regarding such payments;

2. whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments;

3. whether such procedures are being followed by employees;

4. if there is evidence that all such payments are being recorded by the company;

5. if there is evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries concerned that such payments are being demanded; and

6. whether the company is taking what practical steps it can to curtail the making of such payments.

Where the SFO answers these questions to its satisfaction and if the SFO believes that the company has a real commitment to phasing out these payments over time and arriving at a zero tolerance position, this can only help to avoid prosecution. The bottom line is that the SFO retains a discretion on how it should proceed in any individual case but transparency appears to be the best means of ensuring it exercises its discretion in a corporate’s favour.

It is also worth noting that the SFO has produced a standard form letter designed to be handed out to local officials who persist in their demands for facilitation payments. The letter makes it clear that facilitation payments are prohibited under the Act and that individuals and companies who make them risk criminal prosecution. Presumably the letter is intended to convince those demanding such payments to back off, although it remains to be seen whether it will be sufficiently persuasive.

The British Chamber of ShippingIn March 2012, the BCS issued its “Guidelines to the Bribery Act 2010”, providing additional useful advice for the shipping industry. The BCS highlights the fact that the Foreign and Commonwealth Office (“FCO”) has issued advice to overseas diplomatic posts on the purpose and implications of the Act and is encouraging embassies and consulates to engage with local politicians and officials to emphasise the UK’s firm stance in relation to the practice of using intimidation tactics to extract payment in cash or kind for fulfilling otherwise routine operations or duties.

Shipping companies with overseas representatives are also urged to assist local consular officials in their discussions and, where possible, provide evidence of corrupt behaviour. Consular officials have also been made aware of the importance of providing concrete diplomatic support and assistance in the event of deliberate delays, harassment of crew, purported irregularities with paperwork or manufactured deficiencies in

the ship or equipment. Where individuals or companies prefer, the BCS offers to act as the conduit for reporting demands for facilitation payments or other unacceptable behaviour to the FCO. This may be useful where a company does not wish to be “blacklisted” in some way in a particular port or country for being a whistleblower.

The BCS Guidelines also give some practical advice as to what companies should do in order to comply with the Act. Amongst other things, companies are advised to provide regular training to all employees, agents and subcontractors to explain company anti-bribery policies and how to react to facilitation payment demands. Companies with overseas operations should ensure that their corporate policies are extended to cover the local situation. Where company activities are out-sourced, third party contractors should be required to provide necessary assurances of their own anti-corruption policies and how they are policed and enforced. Of particular interest to ship-owners with established trading patterns, the BCS suggests that there is likely to be more scope for diplomatic intervention at a port that represents an important element in a local economy.

OECD reportAlso in March 2012, the Organisation for Economic Co-operation and Development (“OECD”) Working Group issued a report on implementation of its Anti-Bribery Convention in the UK. The Report is lengthy and it is beyond the remit of this article to discuss its findings in detail. In essence, however, the Report acknowledges positive aspects of the UK’s fight against bribery such as allocating significant financial resources for foreign bribery investigations. The Report also commends the UK for the significant increase in its foreign bribery enforcement actions, as well as its efforts to increase awareness of the Act and of foreign bribery-related issues.

At the same time, the Report expresses concern that the UK has made slow progress in extending the OECD Anti-Bribery Convention to its overseas territories, some of which are offshore financial centres at risk of being used to facilitate corrupt transactions. The UK is encouraged to adopt a roadmap for remedying this deficiency.

Specifically in relation to facilitation payments, the Report recommends that the UK:

1. adopts firm criteria for assessing whether companies are indeed moving towards a zero tolerance policy within a reasonable timeframe;

2. ensures prosecutorial discretion is exercised coherently, specifically that the UK prosecuting agencies, the SFO, the Crown Prosecution Service (CPS) and the Scottish Crown Office and Procurator Fiscal Service co-ordinate their approach on facilitation payments (the SFO has now undertaken to do so); and

3. use a consistent definition of facilitation payments in published guidance.

The underlying concern of the OECD Working Group about facilitation payments seems to be that the Act imposes a zero tolerance policy, yet the various guidelines issued by the UK authorities suggest a more flexible approach allowing for a transitional phase and adjustment to zero tolerance over a

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period of time. Whilst the latter approach arguably makes more commercial sense and is more realistic in view of the cultural and practical barriers that need to be overcome, the Working Group seems alive to the risk that potentially conflicting approaches could make affected companies complacent in complying with the Act’s clear objective of eradicating the practice of facilitation payments quickly and completely. On the other hand, it was always clear that facilitation payments were not going to disappear overnight and it may well be that a gradual eradication of such payments might be a more achievable goal.

CommentIn 2011, an administrative clerk in a magistrates’ court became the first person to be prosecuted under the Bribery Act for requesting and receiving a bribe to improperly perform his official functions. He was sentenced to six years’ imprisonment last November. This conviction is the only one reported so far but it demonstrates that the courts will take a tough stance over offences under the Act and it is expected that they will do so particularly in the case of corporates, when such cases come before them, so as to provide a strong deterrent to others.

It is not too late for companies who have not yet introduced effective anti-corruption procedures to do so but they should not delay. Indeed, it has very recently been reported in the press that an oil major has put a global chartering manager on leave of absence as it investigates claims that he offered favourable freight rates to a ship-owner in return for cash. There were, at the time of writing, few details available regarding this matter but it appears that the investigation of the individual concerned follows on from claims made by a whistleblower both to the corporate concerned and to the SFO directly. It may be, therefore, that this will lead to the first prosecution relating to the shipping industry.

Another new development is that the SFO has a new director, David Green QC, as of 23 April 2012. Mr Green is a former head of the Revenue and Customs prosecution office and a leading barrister. He replaced Richard Alderman and is reported to be pursuing a more aggressive crime-fighting strategy. In his first interview as SFO director, Mr Green promised to investigate “significant strategic targets” suspected of committing the most complex financial crime and overseas corruption. It is therefore likely to be only a matter of time before we see corporates being prosecuted under the Act.

These developments should act as a wake-up call for companies who do not have adequate anti-corruption procedures in place as yet. Those companies that already have robust anti-corruption procedures may also wish to revisit their existing procedures in the light of the latest guidelines from the SFO and the BCS.

Since this article was first published, the magistrates’ court clerk has had his sentence reduced on appeal by two years.

Kevin Cooper regularly writes and speaks on Bribery Act matters and has advised clients on how to minimise their potential exposures in respect of anti-corruption legislation. In the event of any query relating to this article or in respect of compliance with the Bribery Act generally, please contact your usual contact at Ince & Co or Kevin Cooper.

reema ShourProfessional Support Lawyer, Londonreema.shour@incelaw.com

Kevin CooperPartner, Londonkevin.cooper@incelaw.com

Lauras rambinasTrainee Solicitor, Londonlauras.rambinas@incelaw.com

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SHIPPING LITIGATION/ArBITrATION

Dishonest but not disowned: despite the High Court finding one party guilty of fraudulent conduct in an arbitration, the arbitral award was allowed to stand

Chantiers de l’Atlantique SA v. Gaztransport et Technigaz SAS [2011] EWHC 3383

In this recent case, the Commercial Court held that despite Gaztransport et Technigaz SAS (“GTT”) committing fraud in the underlying arbitration, the arbitral award should not be set aside as the fraud probably did not affect the result of the arbitration.

The background factsThe arbitration arose out of a licence agreement between Chantiers de l’Atlantique SA (“CAT”) and GTT for the use by CAT of a new LNG containment system on LNG carriers being built by CAT. The arbitration was subject to French law and ICC Rules and heard in Paris. However, as the licence agreement provided for the place of arbitration to be London, the English courts retained supervisory jurisdiction.

Issues arose between the parties as to whether the cause of apparent defects in the first vessel constructed by CAT under the licence agreement was the workmanship of CAT or the design of GTT. Because of the terms of the licence agreement, CAT had to allege and prove “gross fault” as a matter of French law.

In an award dated 3 February 2009, the tribunal dismissed all of CAT’s claims. Some were dismissed on the grounds that they were factually misconceived but, in respect of those where there was some factual foundation, they were denied on the grounds that CAT could not establish “gross fault” as a matter of French law. In particular, the tribunal decided that even if CAT could establish the design fault or economic fault which it alleged, CAT could not satisfy the test imposed by French law as to the circumstances in which a licensor will be liable to a licensee for a design fault or an economic fault.

In considering the parties’ allegations, the tribunal was presented with technical evidence by both parties, including analysis of tests conducted by GTT.

A few weeks after the issuance of the tribunal’s award, CAT received a tip off from a whistleblower at GTT that CAT should look at the results of various tests carried out and that CAT had been the victim of a fraud. Then, in late 2010, another whistleblower provided CAT with a GTT internal email which referred to the results of tests carried out by GTT which had not been disclosed to CAT.

The Arbitration Act 1996 requires an application seeking leave to appeal an arbitration award to be made within 28 days of the award. In this case, however, CAT did not make such an application until six months after the award, during which time it had investigated the tip off from the first whistleblower at GTT. In the circumstances, the court found it entirely proper for CAT to take time to investigate the tip off before launching an application and granted CAT an extension of time to do so.

The essence of CAT’s case was that the tribunal was misled by GTT and, in particular, by a Mr. M Chapot, who was employed by

GTT and acted as a quasi-expert at the hearing and who CAT alleged gave deliberately misleading evidence to the tribunal.

The Commercial Court decisionIn unusually strong language, the court held that Mr. Chapot’s evidence “both before the Tribunal and before this court was dishonest”. In particular, the court found that in his expert report and in oral evidence before the tribunal “he deliberately and dishonestly” concealed the existence of certain tests carried out and the results of those tests, as well as the nature of other tests, and that his evidence before the court “represented a masterclass in evasion and obfuscation and not the evidence of an honest witness”.

However, to succeed in its appeal, CAT had to satisfy the court that the disclosure of the true position “would probably have affected the result of the arbitration”. This it was not able to do, as the court found that if the true position had been known to the tribunal, it would not in all probability have made any difference to its decision. This was because the tests which were concealed or misrepresented were followed by further comprehensive tests which were disclosed and analysed by experts for both parties and also because the tribunal had decided that even if CAT could establish the design fault or economic fault which it alleged, it could not satisfy the test imposed by French law as to the circumstances in which a licensor will be liable to a licensee for a design fault or economic fault.

CommentIn refusing to set aside the tribunal’s award, the court has reaffirmed the position that even where an innocent party can show some fraud by the other party to an arbitration, that will not automatically mean that the award shall be set aside. The fraud perpetrated by the other party must have some causal link with the tribunal’s decision. If there is no causal link, then the fraudulent conduct is for all practical purposes irrelevant (although in some jurisdictions it might give rise to criminal prosecution).

This might seem unfair to many, as it might be argued that if the fraud had been uncovered during the course of the arbitration, the tribunal may have formed different views as to the strength of GTT’s case and evidence. Given the clear wording of the tribunal’s award regarding the relevant French law test, however, the court was not willing to interfere with the overall result. If the tribunal’s award had been dependent on the factual position, then the court may have been more willing to set aside the award.

Simon HemsPartner, Londonsimon.hems@incelaw.com

Shawn KirbySolicitor, Londonshawn.kirby@incelaw.com

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Construing the BIMCO US Tax reform 1986 clause: parties must live with the case they have made

Navios International Inc v. Sangamon Transportation Group (Dimitris L) [2012] EWHC 166 (Comm)

The disputes in this case arose out of a chain of time charterparties on back-to-back terms and went to arbitration. The arbitration awards were subsequently appealed to the court. A decision on the substantive issues, relating to the construction of a charterparty clause dealing with liability for US Gross Transportation Tax (“US GTT”), has not yet been handed down. This article relates to the decision of Mr Justice Hamblen on an interim application made under Section 70(4) of the Arbitration Act 1996 (“the Act”), which allows a party seeking permission to appeal an arbitration award to apply for an order that the tribunal provide sufficient reasons for its decision, in order to enable the court properly to consider the appeal. The judgment is interesting because it is the first case to consider the scope of the court’s jurisdiction to order a tribunal to give further reasons under Section 70(4). The decision makes it clear that the court will only exercise its discretionary power to make a Section 70(4) order sparingly and that a significant delay in making the relevant application is likely to be a strong factor against granting the requested order, especially where it will have consequences in terms of costs and delay.

The background factsThe time charterparties were on an amended NYPE form, which incorporated the US GTT clause as follows:

“US Tax Reform 1986 Clause

Any U.S. Gross Transportation Tax as enacted by the United States Public Law 99-514 (also referred to as the U.S. Tax Reform Act of 1986), including later changes or amendments, levied on income attributable to transportation under this Charter Party which begins or ends in the United States, and which income under the laws of the United States is treated as U.S. Source Transportation Gross Income, shall be reimbursed by the Charterers.”

As a result of complying with voyage orders given by Sangamon, the third sub-charterer at the bottom of the chain, the vessel called at US ports on three occasions and the head owners at the top of the chain incurred liabilities for US GTT. STX, the head charterer, reimbursed the head owner and then sought to pass the liability down the chain. In each case, the disponent owner sought to rely on the US GTT clause.

The parties disagreed as to how the US GTT clause allocated liability for the tax in the context of a charterparty chain. The three charterparty disputes were referred to arbitration but the arbitrations were not heard concurrently and there were two different tribunals who came to opposite conclusions. The losing party in each reference applied to the court for leave to appeal and permission to appeal was granted. Almost six months later, Sangamon issued a Section 70(4) application for an order that the tribunal in the relevant arbitration provide sufficient reasons for its findings on the construction of the US GTT clause so that the court could properly consider the appeal.

To limit costs, it was agreed that back to back applications would be assumed to have been made in the other two actions.

The terms of the order sought were as follows:

1. Where there is a chain of charterparties and the vessel performs a voyage to or from the US, which parties in the chain are potentially liable for the US GTT?

2. In what circumstances may a party potentially liable for US GTT be exempted from that liability?

3. What kind or kinds of income are treated as “US Source Transportation Gross Income” under US law?

The Commercial Court decisionThe court dismissed the Section 70(4) application. Section 70(4) only applies if reasons are required in order to enable the court to properly consider the application or appeal – in other words the court would otherwise be unable to properly consider the application or appeal. This means showing that the provision of such reasons is necessary and it is not enough that it would merely be helpful for the court to have such reasons. Further, the court’s power to make such an order is discretionary and, in Mr Justice Hamblen’s view, should be exercised very sparingly because applications for reasons are costly, incur delays and run counter to the purpose and policy of the Act of conferring finality on awards.

In the present case, the judge took into consideration the following factors in deciding not to exercise his discretion to make the Section 70(4) order:

1. The sum in dispute was small and regard had to be given to the proportionality of costs.

2. Significant delay had already been suffered; the awards were already approximately one year old and a remission to the tribunals for further findings would cause further significant delay.

3. It would be burdensome for the tribunals to be requested to give further reasons for their awards given the interval that had since elapsed.

4. The application was made late and should have been made at the time the application for leave to appeal was made. Failure to make the application promptly is likely to be a strong factor against granting the application, especially where it will result in significant additional costs and delay.

5. The order sought was not simply for further reasons from the tribunals, but was in reality an opportunity to present further evidence to the tribunals and seek further findings from them. That was not an appropriate case for a Section 70(4) order; Section 70(4) was not designed to allow the parties to re-open the evidence in the arbitration.

In addition, the judge thought that the order sought was not necessary for the court properly to consider the appeal. The findings Sangamon sought were all aimed at establishing which parties in the charterparty chain were potentially liable for US GTT. In considering this issue and coming to their conclusions

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on how the charterparty clause deals with liability for US GTT, both tribunals had considered the BIMCO Circular, which had been issued to explain why BIMCO had drafted the clause after the US Freight Tax Reform Act 1986 came into force. Among other thing, the Circular states how, by inserting the clause into a charterparty “it.… transfers the tax liability from the owner to the charterer, be it the bareboat charterer, the time charterer or the voyage charterer as the case may be.”

One tribunal reached the conclusion that the charterer (regardless of whether it is the first charterer in the contractual chain or sub-charterer) was required to reimburse the owner (regardless of whether or not it is the head owner or disponent owner down the contractual chain) for any US Freight Tax which is levied against the vessel whilst trading under the charterparty, subject only to its payment being a reimbursement of the owner.

The other tribunal, however, concluded that it was only US GTT which was levied on income attributable to transportation under the charterparty to which the claimant owner and respondent charterer was party for which the charterer is liable to the owner. In their view, the charterer would not be liable for US GTT for which the owner or disponent owner is liable under a charterparty higher up the charterparty chain. This tribunal was of the view that its construction of the clause reflected the method of implementation envisaged by the BIMCO Documentary Committee.

One argument advanced by the parties contesting the Section 70(4) applications was that the tribunals’ findings were insufficient because they relied on the BIMCO Circular and the Circular was inadmissible. Their reasoning was that there was a difference between a finding about how the tax is currently levied and a finding about how BIMCO thought it might be levied (according to the Circular). The contrary argument put forward was that the BIMCO Circular was relevant background knowledge as regarded the interpretation of the clause. The court appeared inclined to the view that the BIMCO Circular was part of the relevant factual matrix but Mr Justice Hamblen stated that, even if it were inadmissible, the court could form its own conclusion on the basis of the wording of the clause.

The judge added that whilst it might have been of assistance to have findings on the further questions raised, it did not appear to have been considered necessary at the time of the arbitration. Evidence was not led on the specific questions forming the basis of the request for the Section 70(4) order and no findings were invited to be made on them. The judge who had granted permission to appeal did not appear to have considered that any further reasons were necessary for the appeal as he granted leave without indicating any need for such reasons.

CommentThis decision highlights the importance of avoiding delays in making court applications, even where no specific time limit for making an application (as in the case of Section 70(4)) is laid down.

The decision also emphasises that parties who are hoping for a “second bite at the cherry” are unlikely to find that Section 70(4) assists them in this regard. As Mr Justice Hamblen said:

Jamila KhanPartner, Londonjamila.khan@incelaw.com

Silvia MahringerSolicitor, Londonsilvia.mahringer@incelaw.com

“The parties must live with the case which was put at the time. There is no room for later further and better thoughts and it would be plainly contrary to the policy of finality for this to be allowed or encouraged.”

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Commercial Court confirms arbitral tribunal can award damages for breach of the obligation to arbitrate

West Tankers Inc v. (1) Allianz SpA (formerly known as Riunione Adriatica Sicurta) and (2) Generali Assicurazioni Generali SpA (Front Comor) [2012] EWHC 854 (Comm)

On an appeal from an arbitration award, the Commercial Court was asked to consider whether an English arbitral tribunal is deprived of jurisdiction, by reason of European law, to award damages (and/or an indemnity) for breach of an obligation to arbitrate. More specifically, the question was whether a tribunal has jurisdiction to award damages against a party who starts judicial proceedings in breach of an obligation to arbitrate, when those proceedings are commenced before a court in the EU pursuant to the Brussels Regulation.

In a judgment handed down on 4 April 2012, Mr Justice Flaux has held that the tribunal did in fact have such jurisdiction.

The background factsThis is yet another chapter in the widely reported Front Comor litigation, which reached the European Court of Justice (“ECJ”) in 2009 on the issue of whether it was incompatible with the Brussels Regulation (Council Regulation (EC) No.44/2001) for the court of one EU member state to grant an anti-suit injunction restraining court proceedings brought in another EU member state, on the ground that those proceedings were contrary to an arbitration agreement. The ECJ, concurring with the earlier opinion of the Advocate General, held that such injunctions were incompatible with the Brussels Regulation.

The original dispute arose out of a collision between the laden tanker vessel, Front Comor, owned by West Tankers (‘the ship-owners’), and a pier in Italy belonging to Erg Petroli SpA, the vessel’s charterers. Erg Petroli asserted claims for substantial damages arising from the collision and obtained security. Those claims for damages were referred to arbitration in London, pursuant to the arbitration agreement in the charterparty. Notwithstanding the ongoing London arbitration proceedings, the charterers’ subrogated insurers (Allianz and Generali) subsequently commenced proceedings in tort in the Italian Court against the ship-owners.

The ship-owners applied for and obtained an anti-suit injunction from the English Court to restrain the insurers from pursuing their claims in Italy, in the course of which Mr Justice Colman in the Commercial Court in London (after hearing full argument from the insurers) declared that the insurers were obliged to arbitrate their claims in London. Mr Justice Colman’s declarations were not appealed by the insurers (though his jurisdiction to grant an injunction was), and the declarations were affirmed by the House of Lords, after the ECJ ruling. While the arbitration in London has continued to progress, the Italian Court has not yet determined its own jurisdiction.

The arbitral tribunal issued an award in 2008 declaring that it had jurisdiction and further that the ship-owners were under no liability to the insurers in respect of the collision. In January 2012, the Court of Appeal ruled that the ship-owners were entitled to enforce that arbitration award as an English Court judgment and to enter judgment in terms of the award, pursuant to Section 66 of the Arbitration Act 1996.

Damages for breach of the arbitration agreement

The majority arbitration tribunal

Two issues were originally stood over by the arbitration tribunal pending the ECJ’s judgment, these being whether the ship-owners were entitled to damages from the insurers for the latter’s breach of their obligation to arbitrate and to an indemnity in respect of any future judgment given against the ship-owners in Italy.

In April 2011, the tribunal issued its award concluding, by a majority, that it did not have jurisdiction, by reason of EU law, to award damages or an indemnity to the ship-owners for the insurers’ breach. Submissions had been made by the insurers that the arbitration tribunal’s jurisdiction to award damages was constrained by fundamental EU principles “of effectiveness” and “of effective judicial protection” that had been referred to by the Advocate General and the ECJ earlier in this case. The majority arbitrators recognised there was a strong argument that an arbitral Tribunal should not be bound by the constraints of the Regulation in the same way as an EU national court, because arbitration is completely excluded from the Regulation. Nonetheless, the majority arbitrators took the view that the ECJ ruling meant that the insurers had the right under the Regulation to commence proceedings in tort in Italy, being the place where the collision occurred, and that this right was entitled to judicial protection. The majority arbitrators decided that, while they were exercising a parallel jurisdiction, an award by them for damages against the insurers for failing to arbitrate would in effect “punish” that party for pursuing a course that the ECJ itself had to that extent approved. The arbitrators concluded that EU law would not, as a result, allow them to do this and so they did not have jurisdiction to award damages in the ship-owners’ favour.

The Commercial Court decision

The ship-owners appealed and there were three main issues for the court to consider.

The first issue was that, while EU law principles of effectiveness and of effective judicial protection existed to protect the right of the insurers under the Regulation to commence court proceedings in Italy, could those principles circumscribe the jurisdiction of an arbitration tribunal when the Regulation does not apply to arbitration?

The second issue, if the answer to the first question was yes, was whether an award of damages or an indemnity by the tribunal would in fact interfere with the insurers’ rights under EU law.

The third issue was whether, if the tribunal was right to say that it had no jurisdiction to award damages or an indemnity while the Italian Court proceedings are pending, it should not have dismissed the insurers’ claim for damages as the Italian Court has not yet determined if it has jurisdiction.

Mr Justice Flaux has allowed the appeal and has decided that the majority arbitrators erred in law, his conclusions on the three issues being these:

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1. The Advocate General in her opinion recognised that an arbitration tribunal could reach a different conclusion from that of the court first seised under the Regulation, both in relation to the scope of the agreement to arbitrate and as to the merits of the case. The Regulation does not apply to arbitration and the tribunal is not required to apply the principle of effective judicial protection, which is only engaged between courts of member states. That being so, the tribunal was wrong to decide that it did not have jurisdiction to award damages (or an indemnity) for breach of the obligation to arbitrate.

2. In case he was wrong on the first point, the judge went on to consider whether an award of damages or an indemnity constituted illegitimate interference with the Italian Court proceedings. He concluded that it did not. He commented that were such an award to constitute an illegitimate interference with the Italian Court action, so too would the declaration of non-liability obtained by the ship-owners and yet that declaration had been granted. Furthermore, neither the Advocate General nor the ECJ had contemplated that the London arbitral tribunal should decline jurisdiction altogether until the Italian Court had ruled. On the contrary, the Advocate General had expressly recognised that the arbitral tribunal was free to make an inconsistent award on the merits. The indemnity was a logical consequence of the declaration of non-liability and there was no sound basis for distinguishing between the two types of relief.

3. On the third issue, Mr Justice Flaux held that by dismissing the claim for damages (rather than, at the very least, deferring a decision on that claim), the tribunal had shut out a strongly arguable claim in the future. Were the Italian Court to decide in due course that it did not have jurisdiction, there could be no question of an award of damages interfering with the insurers’ right of access to the Italian Court. There would be nothing objectionable in the ship-owners being allowed to recover any loss sustained as a result, which they were not able to recover in the Italian proceedings.

CommentMr Justice Flaux’s decision reflects the fact that the Regulation unifies jurisdictional rules only between courts of EU member states, but has no application to arbitration proceedings since arbitration is completely excluded from the Regulation by Article 1(2)(d). The decision also reflects the fact that it is inherent in the scheme of the Regulation, as was expressly recognised by the Advocate General and by the ECJ in this case, that an arbitral tribunal is not prevented from ruling on its own jurisdiction. Nor is it prevented from reaching a conclusion that may be inconsistent with a decision reached by a court first seised under the Regulation.

Mr Justice Flaux’s decision that arbitrators, exercising parallel jurisdiction, can award damages in this situation will be welcomed by arbitration practitioners.

Permission has been granted for the insurers to appeal to the Court of Appeal.

Ian Chetwood and Clare Kempkens of Ince & Co LLP represent West Tankers, the successful appellants in this matter.

Ian ChetwoodPartner, Londonian.chetwood@incelaw.com

Clare KempkensPartner, Londonclare.kempkens@incelaw.com

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EMPLOYMENT

Social media: Can employers afford to switch off?

Social media has revolutionised the way people share information in their personal and professional lives. While this offers numerous business advantages, in the professional arena employers must also be alive to the risks of employee misuse. Typical issues include:

> What can be done to prevent employees Tweeting, or posting Facebook comments about the organisation, colleagues or clients, that create liabilities for the employer and form the basis of claims against it, that conflict with its commercial interests, or cause reputational harm?

> Who owns the connections stored in an employee’s personal LinkedIn account? What if those relationships were made during the course of the employee’s employment using the employer’s resources? How can the employer “police” what happens to those LinkedIn connections when the employee leaves?

> The surge in popularity of smartphones, owned by employees and operated using a mobile network to which the employer has no access, means that “traditional” methods of employer control such as monitoring of emails and blocking of specific websites may fail to work. What steps may be taken to mitigate this?

There have been relatively few reported cases on these issues to date, but a lesson is emerging. Employers best protect themselves from the risks of reputational or financial harm, and from claims by disgruntled employees or third parties who believe they may have suffered such loss, when they have a social media policy in place. The policy should balance a number of factors including the employer’s attitude to the use of social media at work, the nature of the employer’s business, and individuals’ rights to privacy and freedom of expression. The policy should also clearly communicate what social media usage the employer considers to be acceptable and unacceptable and, if worded appropriately, the policy can apply to employees both during and outside of working hours and whether they are accessing social media using their own or their employer’s equipment.

It is also important that the policy is backed up with staff training, tied into other HR policies of the employer, such as those covering computer use and disciplinary matters, and reinforced with suitable terms in employment contracts.

If your organisation would like guidance on social media issues, please contact Charlotte Davies, Nick Wilcox or your usual Ince & Co employment law contact.

OTHEr NEWS

Ince & Co partner Albert Levy chairs Superyacht UK (SYUK)

Ince & Co partner Albert Levy has been selected to serve as committee chairman of Superyacht UK (SYUK), part of the British Marine Federation, for the forthcoming year.

Albert comments: “As head of the firm’s global superyacht practice and a keen sailor, I am delighted to be appointed to serve as chairman of Superyacht UK. My experience as a committee member over the years has further provided me with first-hand understanding of many of the issues and challenges our members face, particularly in light of global economic events and their impact on our members’ markets. As chairman, I will be seeking to steer the best course for members. In particular, sharing knowledge and boosting opportunities to work together.”

SYUK is a membership association that champions innovation, excellence and heritage as well as disseminating technical knowledge to its members be they builders, designers, equipment manufacturers, as well as providers of legal and financial, crew, training and management services relevant to the creation, maintenance and operation of superyachts.

Charlotte DaviesPartner, Londoncharlotte.davies@incelaw.com

Nick WilcoxSenior Associate, Londonnick.wilcox@incelaw.com

Albert LevyPartner, Londonalbert.levy@incelaw.com

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Ince & Co celebrates 20th anniversary in Singapore and boosts Asia financial Lines insurance practice with new senior lawyer hire

In the year the firm celebrates the 20th anniversary of the Singapore office, Ince & Co has boosted its standing in Asia by hiring lawyer Aruno Rajaratnam. Aruno joins as Financial Lines insurance practice group leader for Asia and is based in the firm’s Singapore office. Aruno will work with the firm’s existing Financial Lines team within and outside Asia, partnering with both the international and regional markets, as they continue to develop their products across the region.

richard LovellPartner, Singaporerichard.lovell@incelaw.com

Aruno rajaratnamConsultant, Singaporearuno.rajaratnam@incelaw.com

Asian Legal Business names Ince & Co SE Asia Shipping Law firm of the Year

Ince & Co has been named Asian Legal Business SE Asia Shipping Law Firm of the Year for four consecutive years, having now received the honour for 2011, 2010, 2009 & 2007.

The awards recognise the excellence and outstanding achievements of SE Asia’s leading law firms and in-house legal teams as well as the top deals and dealmakers of 2011.

Richard Lovell, managing partner of Ince & Co’s Singapore office comments: “It is a privilege to receive this honour that reflects our long-standing commitment and expertise to our clients in this region. We also celebrate a successful year in which we have operated as a Formal Law Alliance (FLA), the Ince Law Alliance, with newly established Singapore law practice Incisive Law LLC.”

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LEGAL ADVICE TO BUSINESSES GLOBALLY fOr OVEr 140 YEArSThe information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to make them accurate and up to date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact.

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