SHIPPING E-BRIEFOCTOBER 2012

CONTENTS

SHIPPING

Invoking the CONWARTIME clause: limitations or liberties? 2

Liability for freight: beware “….the risk of being required to pay twice” 3

The courts retrace their steps on lifting the corporate veil in relation to puppeteer’s contractual liability 5

Construing the strike exception in an AMWELSH charterparty 6

Paid by mistake: can I have my million back? 8

Charterers’ liability for demurrage where receivers refuse to discharge cargo 9

The BIMCO Solid Bulk Cargoes Clause 11

Australian Federal Court rules against foreign arbitration when carrying goods from Australia 12

Liability for demurrage under a “liner out” voyage charter: construing the provisions of a voyage charterparty 14

Ship owners beware: liability for unlawful means conspiracy 15

Arbitration tribunal decides deadfreight and despatch claims 17

The evolving seascape of Indian shipping 18

SHIPPING REGULATION

IMO Emissions Regulations: are you ready for 1 January 2013? 20

Merchant Shipping (Compulsory Insurance of Ship owners for Maritime Claims) Regulations 2012 come into force 22

COMMERCIAL

When is it unreasonable to withhold your consent? 22

OTHER NEWS

Ince & Co opens office in Beijing 24

Head of Ince & Co’s yacht group hosts reception to launch Large Yacht Code (LY3) at Monaco Yacht Show 24

Ince & Co wins China Shipping & Maritime Law Firm of the Year Award 24

Ince & Co lawyers participate in India Shipping Summit 2012 24

02 SHIPPINGE-BRIEF

SHIPPINGInvoking the CONWARTIME clause: limitations or liberties?

Taokas Navigation SA v. Komrowski Bulk Shipping KG (GmbH & Co) and others (The Paiwan Wisdom) [2012] EWHC 1888 (Comm)

This case involved an appeal from an arbitration award, the issue being whether the owners were precluded from relying on the CONWARTIME 2004 clause to justify their refusal to follow the charterers’ orders to conduct a voyage to Mombasa, Kenya.

The background factsThe vessel was chartered on three back-to-back charterparties on materially identical terms. The lead appellant was the sub-sub-charterer, Solym Carriers Ltd (“charterers”) and the lead respondent was the head owner, Taokas Navigation SA (“owners”). The sub-sub-charterparty was concluded on 25 March 2010 and, on 23 April 2010, the charterers instructed the vessel to proceed on a laden voyage from Taiwan to Mombasa, Kenya. Those orders were conveyed up the line to the owners, who refused to perform them, relying on the CONWARTIME 2004 clause (which was incorporated into all three charterparties). The clause provided as follows:

“The Vessel, unless the written consent of the Owners be first obtained, shall not be ordered to or required to continue to or through any port, place, area or zone...where it appears that the Vessel, her cargo, crew or other persons on board the Vessel, in the reasonable judgment of the...Owners, may be or are likely to be exposed to War Risks.”

When the owners refused the instructions to proceed to Kenya, they indicated that piracy in the Indian Ocean was becoming more severe and extending further along the coast/waters of East Africa. The refusal was passed down the line and the charterers were forced to charter another vessel to perform the voyage at a cost of US$815,000. The resulting dispute was referred to arbitration and, as a preliminary issue, the arbitrators were asked to determine whether, on the true construction of the charterparty, the owners were precluded from relying on the CONWARTIME 2004 clause to justify their refusal to perform the charterers’ voyage instructions.

For the purposes of the preliminary issue hearing, the tribunal was asked to assume that: (a) the owners had exercised their right to determine that there was a real likelihood that the vessel would be exposed to piracy in good faith; and (b) there was no material change in the risk of carrying out the voyage between the date of the charterparty and the date of the order.

The arbitrators, by a majority, determined that the owners were entitled to refuse the order. The charterers were granted leave to appeal under Section 69 of the Arbitration Act 1996.

The Commercial Court decisionThe charterers relied on the Court of Appeal decision in The Product Star No. 2 [1993] 2 Lloyd’s Rep. 397. In that case, it was held that if, in the owners’ reasonable judgment, there is a real likelihood of exposure to war risks, the owners are only

entitled to refuse the voyage order if they can establish that there has been a material increase in the risk between the date of the charterparty and the date of the voyage order. In other words, there must be (a) a likelihood of war risks in the owners’ reasonable judgment; and (b) those risks must have increased since the date the charterparty was concluded.

The charterers also argued that the CONWARTIME 2004 clause should be read in light of the charterparty as a whole. Specifically, they relied on the provisions of Clause 50 (Trading Limits/Exclusions), which excluded certain ports (not including Mombasa/Kenya) and allowed the vessel to pass through the Gulf of Aden, provided H&M underwriters’ consent was obtained. As the reason for the reference to the Gulf of Aden was to preclude the owners from refusing an order to go there due to piracy risks, the charterers submitted that the risk of piracy was considered at the outset and only the countries named in Clause 50 were excluded from trade. The charterers argued that this meant that the owners had accepted the risk of piracy in proceeding to Kenya. They further argued that a construction which allowed the owners to permit trading to a certain port on the creation of the charterparty and then entitled the owners to refuse to trade to the same port the next day, without a material change in risk, would not make commercial sense.

The court disagreed with the charterers’ arguments. Mr Justice Teare concluded that the CONWARTIME 2004 clause should be read in light of the charterparty as a whole and, as such, the owners could not rely on the CONWARTIME 2004 to justify a refusal to pass through the Gulf of Aden if H&M insurers’ consent had been obtained. The owners’ agreement, however, to pass through the Gulf of Aden (which was likely due to the presence of naval forces and the use of the convoy system) did not mean that the piracy risks had been considered at the outset or that the owners had implicitly agreed to trade to ports other than those expressly excluded in Clause 50. The charterers could direct the vessel to proceed to Kenya, but the owners were within their rights to refuse to do so if, in their view and within the meaning of the CONWARTIME 2004, there was a real likelihood of the vessel being exposed to acts of piracy en route.

The judge further disagreed with the charterers’ submission that The Product Star applied. The key difference between the two cases was that the owners of The Paiwan Wisdom did not appear to have accepted the war risk involved in the particular trade, whereas it appeared that the owners in The Product Star had.

Mr Justice Teare did not accept that there is a lack of commercial sense in a construction of the charterparty which permits trading to a port on day one but which entitles the owners to refuse an order to trade to the same port on day two. Additionally, there was no suggestion in the words of the CONWARTIME 2004 that there should be a material change in risk between the date of the charterparty and the date of the order, in order for the owners to be able to rely on the CONWARTIME clause. As such, whilst trading to Kenya was permitted under clause 50 of the charterparty, the CONWARTIME 2004 entitled the owners to refuse the order as a result of piracy risks which they might encounter en route to Kenya.

03SHIPPINGE-BRIEF

CommentThe decision in The Paiwan Wisdom clarifies the question of when owners are able to rely on piracy clauses, by removing the requirement in The Product Star that there should be a material change in risk between the date of the charterparty and the date of the order. This requirement could result in complications when applying the rule to back-to-back charterparties with different dates and the clarification is therefore welcome. The result is that owners can more readily rely on the terms of a war risks clause to refuse voyage orders to ports which are subject to such risks.

Charterers who think, however, that they have contracted for worldwide trading will doubtless feel aggrieved that owners are able to decline otherwise legitimate voyage orders to ports which are not excluded from trading, in circumstances where nothing has changed since the date of the charterparty. As a result, no doubt charterers will start inserting detailed clauses setting out which countries/ports are allowable at the outset of the charterparty. At the same time, owners will likewise seek to ensure that the trading exclusions cover their interests, although charterers may have the upper hand in the current commercial climate.

Liability for freight: beware “…the risk of being required to pay twice”

Dry Bulk Handy Holding Inc. and another v. Fayette International Holdings Ltd and another (The Bulk Chile) [2012] EWHC 2107 (Comm)

The Commercial Court has recently determined a dispute concerning an attempt by owners to intercept freight payable by sub-charterers. The case illustrates the risks of a sub-charterer failing to heed a warning that, should he pay his disponent owner despite being put on notice of the ship-owner’s rights, he runs the risk of having to pay twice. The court also dealt with a claim for payment for services rendered post withdrawal.

The background factsThe vessel was, at the material times, subject to the following charterparty chain: DBHH – CSAV – KLC – Fayette – Metinvest.

In early 2011, KLC entered “rehabilitation” proceedings in Korea to restructure their debt obligations. The charterparties in the chain between DBHH and Fayette were all on terms which included clause 18 of the NYPE form which provides that “Owners shall have a lien upon all cargoes and all sub-freights for any amounts due under this Charter….”.

Bills of lading were issued by Metinvest as shippers stating “freight payable as per Charterparty” and “freight prepaid”. In fact, the freight had not been prepaid.

The head owners, DBHH, issued a number of invoices to KLC for hire until in excess of US$700,000 was outstanding. On 1 February 2011, notices were sent on behalf of DBHH to Fayette and Metinvest, directing the sub-charterers to pay freight or hire due under “charters, bills of lading, or other contracts of carriage” directly to the owners. A second notice was sent on 5 February 2011, which sought to extend the lien to cargo onboard.

On 26 February 2011, DBHH withdrew the vessel from KLC’s service. On 1 March 2011, Fayette gave five days’ notice of the vessel’s redelivery. Even though DBHH had withdrawn the vessel from KLC, they continued to perform the voyage and discharged the cargo at Jakarta. On 12 April 2011, Metinvest paid about US$2.5 million in freight to Fayette.

Various claims arose and came before the Commercial Court.

The Commercial Court decisionClaim under the bills of ladingDBHH argued that, under the contract of carriage between DBHH and Metinvest as evidenced by the bills of lading, Metinvest were liable to pay freight to DBHH. Mr Justice Andrew Smith held that the right of DBHH to intercept or to intervene so as to require payment of freight was distinct from any right they might have to exercise a lien over sub-freight.

It was irrelevant that the bills of lading stated that freight was prepaid in circumstances where the freight was in fact unpaid. The judge dismissed arguments that the owners could not

John SimpsonPartner, Singaporejohn.simpson@incelaw.com

Anushka KarunaratneTrainee Solicitor, Singaporeanushka.karunaratne@incelaw.com

04 SHIPPINGE-BRIEF

intercept the freight once it had been paid by Metinvest to Fayette. He stated that, unless the contract of carriage provides that payment to a charterer discharges the shipper’s liability to pay freight directly to the carrier, any agreement to pay freight under a charterparty ceases to be effective once the ship owners have demanded that freight be paid directly to them.

Mr Justice Andrew Smith also made it clear that the right to intervene to have freight paid directly to the owners does not depend upon whether the head charterers have defaulted in paying hire or whether any sums are yet due to the owners. Therefore, as Metinvest had paid freight after DBHH’s notice intercepting that freight, the judge held that they were liable to pay the freight again.

The lien claimThe judge then dealt with the lien claim against Fayette and the arguments as to why the lien did not work in this case.

1. The sub-charterers disputed whether the standard clause 18 wording, which refers to the right to intercept “sub-freights”, could apply (without amendment) to intercept sub-hire. Although the judge’s own view was that the phrase “sub-freights” was wide enough to cover sub-hire, he felt bound to follow previous authority to the effect that the unamended NYPE lien clause does not provide for a lien covering sub-hire. This is therefore a statement of the present law until it is reviewed by an appellate court.

2. There was an issue as to whether a lien could intercept sub-sub-freights but it was eventually accepted by all parties that (as per the decision in The Western Moscow [2012] EWHC 1224), a lien on sub-freight confers on an owner the right to intercept sub-sub-freight provided that an appropriate lien clause is included in all charters in the chain.

3. The sub-charterers asserted that a lien clause could not be effective if the notice misstates the date of the assignment or the amount of the debt to be transferred. They relied on strict rules that apply to assignments concerning the transfer of title. The judge decided, however, that these strict rules did not apply to equitable assignments. The only conditions for an effective notice to invoke a lien on sub-freights is that it must inform the charterers: (i) that the owners are assignees of a debt owed or to be owed by the sub-charterers; (ii) what debts are assigned; (iii) that an amount is due to the owners under the head charterparty and (iv) that the owners require that the assigned debt be paid directly to them. Other than this, no particular form of words is required and the judge held that the owners were not required to state exactly what amount was due to them under the head charterparty.

4. The sub-charterers contended that sub-freights due from Metinvest to Fayette could only be assigned if they were due for payment. Mr Justice Andrew Smith rejected this argument holding that, provided a sum was due under the head charterparty, the lien could relate to sub-hire or sub-freight due in the future.

5. The sub-charterers sought to rely on the Korean court orders in respect of KLC’s rehabilitation proceedings to prevent the owners from enforcing their claims on the basis that this would give them an advantage over KLC’s other creditors. The judge rejected these arguments and held that those proceedings did not have extra-territorial effect and did not, in any event, provide any answer to the lien claims made against the sub-charterers.

The post withdrawal claimsThe judge finally dealt with a claim against Fayette and Metinvest for a payment in respect of the continued use of the vessel after its withdrawal from KLC.

1. The judge first rejected a claim that a new contract came into existence because Fayette continued to accept the vessel’s services. On the facts, Fayette’s conduct did not amount to an intention to enter into a new agreement for the continuing hire of the vessel.

2. The judge applied the test laid down by the Commercial Court and confirmed by the Supreme Court in The Kos [2012] UKSC 17 that where, after a valid withdrawal, owners performed further services at the request of charterers, they may become entitled to remuneration for performing those services. On the facts, he concluded that Fayette had impliedly requested the vessel to continue to perform services by serving re-delivery notices and giving further instructions to the vessel.

3. Alternatively, Mr Justice Andrew Smith held that, in principle, the owners could be entitled to a quantum meruit payment for providing “freely accepted” services. He was not persuaded, however, that Fayette were liable on that basis in this case because the owners were obliged to perform their contractual obligations under the bills of lading to deliver the cargo to destination – Fayette had no option as to whether to accept those services or not.

4. Given his decision on the bill of lading claims and the post-withdrawal contractual claim for reasonable remuneration, the judge did not have to decide CSAV’s alternative claim of unjust enrichment. He said, however, that he would have allowed the claim against Metinvest for unjust enrichment in continuing to use the vessel after its withdrawal, as per the Supreme Court decision in The Kos.

CommentThe judge’s analysis of liens over sub-freight and sub-hire is in line with the recent decision of Mr Justice Clarke in The Western Moscow. Mr Justice Andrew Smith’s decision is also noteworthy for applying the principles recently laid down by the Supreme Court in The Kos with regard to owners’ rights of remuneration post-withdrawal of a vessel.

Nick BurgessPartner, Londonnick.burgess@incelaw.com

David RichardsSolicitor, Londondavid.richards@incelaw.com

05SHIPPINGE-BRIEF

The courts retrace their steps on lifting the corporate veil in relation to puppeteer’s contractual liability

Antonio Gramsci Shipping Corporation and Others v. Recoletos Limited and Others including Aviars Lembergs [2012] EWHC 1887 (Comm)

In the latest of a flurry of decisions on piercing the corporate veil, the Commercial Court (Mr Justice Teare) has provided welcome clarification on the extent to which the courts will permit claimants to go behind a company’s corporate veil in order to hold those controlling the company liable under the contracts entered into by that company.

The courts’ willingness to pierce the corporate veil in special circumstances (such as when the corporate structure is used as a sham for fraudulent purposes) represents an exception to the principle of separate legal personality, pursuant to which claimants are unable to go behind the corporate veil in order to hold those controlling the company liable in addition to, or instead of, the company itself.

The background facts The claimant ship owners (“owners”) were the victims of a fraudulent scheme under which five offshore companies (“the corporate defendants”) chartered a number of vessels from the owners under charterparties below the market rate and then sub-chartered the vessels at the market rate, thereby depriving the owners of the difference between the market rate and the charter rate and keeping the profits for themselves.

The Commercial Court had jurisdiction in respect of the claims against the corporate defendants by virtue of the express jurisdiction provisions contained in the charterparties. The owners obtained judgment against the corporate defendants but, in addition, sought to pursue a claim in respect of the diverted profits against two individuals, Mr Stepanovs (“S”) and Mr Lembergs (“L”), who lived in Latvia. It was alleged that S and L controlled the corporate defendants and used them as a device for the purposes of diverting the profits and, therefore, that the owners should be permitted to pierce the corporate veil and pursue the same claims against S and L.

It was contended by the owners that they were entitled to pierce the corporate veil to the extent that the charterparties should be regarded as contracts with S and L as the individuals controlling the corporate defendants and entitled to rely on the English jurisdiction clause contained in the charterparties against them.

The owners proceeded first against S. With respect to S, Mr Justice Burton held that there was no reason why the victim could not enforce the agreement against both the puppet company and the puppeteer who all the time was pulling the strings. Accordingly, the claimants were able to enforce the jurisdiction clauses contained in the charterparties entered by the corporate defendants against S, despite the fact that he was not ostensibly a party to those contracts.

The owners then proceeded against L and obtained a worldwide freezing order which L attempted, and failed, to have set aside. The present application before Mr Justice Teare was an application by L challenging the jurisdiction of the Commercial Court to hear the owners’ claim against him.

The Commercial Court decision In order to lay the foundation for their argument that the corporate veil should be pierced, the owners had to establish that there was a good arguable case that L controlled the corporate defendants and that the corporate structure had been abused for the purpose of diverting profits from the owners. The judge concluded that the evidence relied on by the owners was sufficiently strong in this respect. That, however, was only the first hurdle and the judge then had to consider whether the owners’ case on the law was correct, namely whether the owners were entitled to raise the corporate veil so that L could be treated as a party to the charterparties.

The owners obviously relied on the judgment in respect of their claim against S (Antonio Gramsci and others v. Stepanovs [2011] 1 Lloyd’s Rep. 647). In the intervening period between that decision and the hearing of this application, however, the Court of Appeal had issued judgment in an unrelated case involving similar legal issues (VTB Capital PLC v. Nutritek and others [2012] EWCA Civ 808). In that case, the Court of Appeal held that Mr Justice Burton’s decision in Antonio Gramsci v. Stepanovs was wrong and should not be followed.

The judge referred at length to the judgment of the Court of Appeal in VTB Capital including the conclusions, inter alia, that (i) treating the “puppeteer” as a party to the “puppet’s” contract when that had not been the intention of any of the parties would amount to a fundamental inroad into the basic principle of law that contracts are the result of a consensual arrangement between, and only between, those intending to be parties to them; and (ii) whilst the courts may, in appropriate cases, pierce a company’s corporate veil, there is no basis for the proposition that, once the veil is pierced, it is open to the courts to hold that the puppet company was a party to the puppeteer’s contract, or vice versa.

The judge concluded that he was bound by the decision in VTB Capital with the result that the owners’ contention that, by piercing the corporate veil, they should be permitted to identify L as the true party to the charterparties was doomed to fail. Accordingly, even if the owners could establish their factual case, the judge held that they had no arguable legal case that L should be treated as a party to the charterparties entered into by the corporate defendants.

CommentWhilst the Commercial Court decision in Antonio Gramsci v. Stepanovs indicated an extension of the principle of piercing the corporate veil such that a puppeteer company may be treated as a party to contracts entered into by a puppet company under its control, the decision in this case following the Court of Appeal in VTB Capital v. Nutritek has firmly rejected this proposition.

06 SHIPPINGE-BRIEF

Carl WalkerSolicitor, Londoncarl.walker@incelaw.com

Stuart ShepherdPartner, Londonstuart.shepherd@incelaw.com

As a result, the current position is that English law will permit claimants to pierce the corporate veil in appropriate cases. Piercing the corporate veil will not, however, enable claimants to create a contractual liability nor to rely upon contractual jurisdiction clauses other than against the actual contracting party. It should be noted that the unsuccessful claimants in VTB Capital have been granted permission to appeal to the Supreme Court, so watch this space for further developments.

Construing the strike exception in an AMWELSH charterparty

Carboex SA v. Louis Dreyfus Commodities Suisse SA [2012] EWCA Civ 838

The Court of Appeal in this case has decided an appeal in relation to an important question in the context of voyage charterparties, namely whether a strike exception to the running of laytime applies to stop laytime running (i) where the vessel is delayed by the after-effects of a strike which has ended; (ii) where the vessel has arrived after the strike has ended and (iii) where the vessel is delayed in berthing due to congestion that has arisen as a result of the strike.

The Commercial Court decision, which was appealed to the Court of Appeal, was reported in our July 2011 Shipping E-Brief.

The background factsFour vessels were chartered by the defendant owners to the claimant charterers under a Contract of Affreightment dated 6 March 2008 (the “COA”) for the carriage of coal from Indonesia to Puerto de Ferrol in Spain. The COA was on an amended version of the AMWELSH voyage charterparty form and was a berth, as distinct from a port, charter. The relevant clauses of the COA were clauses 9 and 40.

Clause 9 provided for the rate of discharge of cargo and for payment of demurrage. The last sentence of the clause read:

“in Case of strikes, lockouts, civil commotions ... beyond the control of the Charterers which prevent or delay the discharging, such time is not to count unless the vessel is already on demurrage.”

Clause 40 stated:

“At port of discharge…. If the berth is not available when vessel tenders Notice of Readiness, but provided vessel/Owners not at fault in relation thereto, then laytime shall commence twelve (12) hours after first permissible tide, Notice of Readiness received and accepted, whether in berth or not, whether in free pratique or not, whether in customs clearance or not, unless no customs clearance or no free pratique due to vessel’s fault, unless sooner commenced in which case only time actually used to count...”

When the vessels reached Puerto de Ferrol in Spain, there was congestion at the port due to a nationwide haulage strike and the vessels were delayed getting into berth.

The charterers contended that the discharge of the four vessels was delayed by reason of the strike and that these periods were excluded from computation of laytime by virtue of clause 9. The owners contended that the combined effect of clauses 9 and 40 was that the charterers took the risk of delay caused by congestion at the port, so that it was only delay suffered once the vessel had berthed by reason of a strike in progress that was excluded by clause 9. Since the strike was over when each of the vessels eventually berthed, they argued that time was to count in full, and that the demurrage as calculated was due.

07SHIPPINGE-BRIEF

The establishment of that general regime, however, by using the words “whether in berth or not”, did not preclude the parties from transferring the risk of delay due to specific causes back to the owners, if they so agreed.

In the Court of Appeal’s view, clause 9 was intended to transfer the risk of some delays caused by strikes from the charterers back to the owners, and there was nothing in the language of clause 9 that indicated an intention to restrict its operation solely to the period during which the vessel was alongside the quay.

The Court of Appeal also did not accept the owners’ alternative argument, that clause 9 should not apply to the delay caused by congestion, which was in turn caused by the strike. The natural meaning of the language of clause 9 showed that it was concerned only with the consequences of the excepted causes and not their duration.

The court also recognised, however, that the matter was not free from authority. In Central Argentine Rly Ltd v. Marwood [1915] AC 981, the House of Lords had considered the effect of a substantively identical provision to clause 9. The case was authority for two related propositions: (i) that “such time” in clause 9 meant time lost to the vessel in completing discharging by reason of one of the excepted causes; and (ii) that, in order to obtain the protection of clause 9, the charterers had to establish that the event on which they relied fell within the clause and was the effective cause of delay to the vessel. Marwood was not, however, authority for the proposition that clause 9 protected the charterers only once the vessel had reached her discharge berth. That narrow construction had not been submitted in argument and it would be surprising if the House of Lords had intended to decide such an important question without inviting argument and without making it clear in their speeches that they intended to do so. Accordingly, Marwood did not prevent the Court of Appeal in this instance from giving clause 9 the meaning which it, in their view, naturally bore.

CommentThe Court of Appeal upheld the previous decision of the Commercial Court, which had set aside the tribunal’s award. The approach to the construction of clause 9, as with any contractual clause, depended upon the exact wording used. It is open to parties to transfer the risk of delay on a vessel’s arrival at a load or discharge port due to specific causes from the charterers back to the owners. If the parties wish to restrict the operation of that allocation of risk solely to specific periods, such as when the vessel is alongside the quay, or to the duration of specific causes (and not the knock-on effect of those specific causes), specific and clear wording must be used.

The claim for demurrage was referred to arbitration. Two preliminary issues were decided by the tribunal. First, whether clause 9 of the COA applied in the case of a vessel which was delayed by the after-effects of a strike which had ended; and, second, whether clause 9 of the COA applied in the case of a vessel which had arrived after the strike had ended. The tribunal answered both questions in the negative. They found that clause 9 was ambiguous and was to be construed contra proferentem, applying Central Argentine Rly Ltd v. Marwood [1915] AC 981. The charterers appealed under S. 69 of the Arbitration Act 1996 (appeal on a point of law).

On appeal to the Commercial Court, the newly formulated question before the court was whether the strike exception in clause 9 applied to a vessel which was unable to berth due to berth congestion caused by a strike. The owners’ argument was that the effect of the “whether in berth or not” provision in clause 40 meant that the risk of delay due to congestion at the discharge port was to be borne by the charterers. The charterers argued that the existence of the “whether in berth or not” provision could have no effect on altering the construction of the demurrage exceptions clause in order to shift liability to the charterers. The court found for the charterers and held that the tribunal’s award should be set aside. The owners appealed.

The Court of Appeal decisionThe owners submitted that the charter was worded as a berth charter, which meant that, as a starting point, the owners took the risk of congestion preventing the vessel from reaching the berth. The inclusion, however, of the “whether in berth or not” provision at clause 40, means that the notice of readiness can be given from the usual waiting place, whether in berth or not, and that, even if a berth is not then available, laytime proceeds to commence anyway as stipulated. The owners argued that the effect of this is that the risk of congestion at the port of discharge was transferred to the charterers, despite the wording of clause 9. In addition, the owners submitted that the wording of clause 9 was such that the phrase “the discharging” had to be given a narrow meaning, as in Central Argentine Rly Ltd v. Marwood [1915] AC 981. Finally, the owners argued that clause 9 should only operate during the continuation of the strike and should not extend to delay caused by congestion which was itself a consequence of the strike.

The charterers, on the other hand, accepted that, by agreeing that the vessel could give notice of readiness “whether in berth or not”, the parties had consciously transferred the general risk of congestion at the discharging port from the owners to the charterers. However, the charterers submitted that it remained open to them to make exceptions to that general position by excluding certain periods of time from the running of laytime. Insofar as they had done so, they had transferred the risk back to the owners.

The Court of Appeal found for the charterers and dismissed the appeal. The Court of Appeal started by considering the significance to be attached to the expression “whether in berth or not” and the extent to which it affected the construction of clause 9. The appeal judges stated that it is equally true to say, first, that the purpose of including those words in a berth charter is to transfer the general risk of congestion from the owners to the charterers and secondly, that the words operated in order to start the laytime clock running.

Jamila KhanPartner, Piraeusjamila.khan@incelaw.com

Ruth MonahanSolicitor, Monacoruth.monahan@incelaw.com

08 SHIPPINGE-BRIEF

Paid by mistake: can I have my million back?

BP Oil International Ltd v. Target Shipping Ltd (The Target) [2012] EWHC 1590 (Comm)

BP sought repayment of transatlantic overage freight alleged to have been paid by a mistake of their demurrage department. The dispute was as to the cargo quantities for which overage freight (freight on the cargo loaded in excess of the minimum charter quantity) was payable. The owners contended that they were entitled to full transatlantic overage freight on all of the cargo carried in excess of the minimum quantity. The charterers contended that on a proper interpretation of the charterparty terms, they were not liable for any overage freight.

The Commercial Court concluded that there was no agreement between the parties as to the amount of overage freight payable for the voyage and that, in these circumstances, a reasonable amount of overage freight was payable. On the facts, BP was entitled to claim repayment of the sum paid in excess of what was reasonable as the payment was made by mistake and not to close the transaction.

The background factsThe charter recap, which incorporated the BPVoy 4 Form with various additions and amendments, provided for a minimum cargo of 80,000mts of fuel oil. The freight rate was to be a lump sum for Singapore discharge or calculated on various different Worldscale percentages for other discharge ports. There was also a provision that overage freight was “50% applicable for Euromed discharge only”, which had been agreed when the only discharge options were Singapore and the European Mediterranean. Subsequently, BP had requested and the parties agreed additional discharge options in the USG and USAC. The vessel loaded a cargo of fuel oil at Odessa first and then, on the charterers’ instructions, at Marmara. The cargo was discharged at Galveston and Houston.

The owners’ invoiceof US$3,651,215 was calculated on the basis freight was payable on the total cargo loaded (86,821.957 MT at Odessa and 26,021.543 at Marmara). After requesting that the invoice be revised to reflect a technical error on address commission, BP’s demurrage department had authorised payment. The owners had calculated freight on the basis that 100% overage freight was payable, save where the Singapore lump sum applied or where discharge was within the Euromed range where the rate had been agreed at 50%. Subsequently, BP contended that this was incorrect. Their primary case was that freight was payable only on the minimum cargo quantity of 80,000 MT (US$2,635,862), with overage freight (at 50%) being payable only for Euromed discharge and 0% for discharge elsewhere.

The Commercial Court decisionWhat rate of overage freight was payable?The judge, rejecting both parties’ contentions as to what was agreed to be payable, held that the court was not restricted to choosing between two interpretations, both of which it considered wrong. He held that the parties did not make any relevant agreement and, in those circumstances, the owners were entitled to reasonable overage freight. This was on the basis of Section 15 of the Supply of Goods and Services Act 1982, which provides that:

“Where, under a contract for the supply of a service, the consideration for the service is not determined by the contract…. there is an implied term that the party contracting with the supplier will pay a reasonable charge”.

The judge held that this applied not only where no consideration had been agreed but also when one element of consideration contemplated by the parties has been agreed but another has not.

Could the charterers recover any excess freight paid by mistake for which they were not liable?There is no general principle of English law that a party is entitled to recover money that he has paid when he was not obliged to do so. He must establish that his case falls within one of the recognised categories of recovery. A payment made by mistake is one such category but can only be relied upon in certain limited circumstances. The owners ran several arguments to counter BP’s claim for repayment on the grounds of mistake:

1. The parties reached a compromise agreement about the amount payable to BP in the course of exchanges about the owners’ invoice. This argument was based on the request by BP that the invoice be revised to account for an additional deduction for address commission and that, in consideration of that deduction, the parties agreed settlement on the basis of the revised invoice. The judge rejected this, as he concluded that the exchanges about the invoice were no more than administrative procedures to correct a technical invoicing error and did not demonstrate an intention to resolve any dispute.

2. A paying party could not recover a payment made under a mistake if he was uncertain whether or not he was liable to pay but paid anyway. On this issue, it was held that mere passing doubt about whether there is liability in the mind of the payor or his “activating agent” or “authorised persons” (in this case, the demurrage department employees who authorised the payment) when considering what to do does not amount to doubt of the kind that precludes recovery. The situation would be different where the payor has persisting doubt when the decision to pay was taken and acted upon. In this case however, neither BP’s demurrage negotiator nor senior demurrage negotiator (who cleared the invoice) had doubts of that or any relevant kind.

3. If the individual at BP Shipping who was responsible for the charterparty (“F”), knew that if he did not object to the payment there was a risk it would be made, then his decision not to object was the cause of the payment, not the mistake. Here, the owners’ argument was essentially that BP “assumed the risk of error” because they did not have procedures to ensure that the demurrage department was aware of the views of BP Shipping’s Chartering Department on matters such as the charterparty provisions with regard to overage freight. The judge considered that, if F knew or suspected that BP would or might pay more to the owners than they would be liable to pay, did not object to it and decided not to prevent it, then it could not be said that BP had made a mistake. The judge accepted on the evidence, however, that it had not occurred to F that those responsible for

09SHIPPINGE-BRIEF

Charterers’ liability for demurrage where receivers refuse to discharge cargo

DGM Commodities Corp v. Sea Metropolitan SA (MV Andra) [2012] EWHC 1984 (Comm)

Owners claimed US$3.6 million of demurrage from their charterers when the receivers at St. Petersburg refused to discharge all the ship’s cargo of frozen chicken legs, claiming quite rightly that some of this had been contaminated by gasoil. A six month “stand-off“ followed, until the owners eventually gave in to the receivers’ demand for a cash settlement of US$2.3 million. The charterers argued that they were not responsible for the receivers’ conduct and that the charterparty had been frustrated, but this argument failed. The judge found that the charterers had a non-delegable duty under the charterparty to discharge the cargo. The receivers acted as the charterers’ agents in discharging the cargo and the charterers remained responsible for the receivers’ conduct. The outcome would, however, probably have been different had the receivers arrested the ship and prevented her from sailing.

The background factsThe vessel was voyage chartered on the Gencon form for the carriage of a cargo of frozen chicken leg quarters from the US to St. Petersburg. There was a delay in berthing and the vessel was already on demurrage before discharge commenced on 23 February 2008. On 8 April, discharge of hold no. 2 started. Some of the cargo was found to be contaminated by gasoil and discharge from that hold was immediately interrupted. The vessel completed discharge on 14 April except for the cargo in hold no. 2. On 21 April, the local Veterinary Service imposed an order suspending the movement of cargo subject to their control.

There was subsequently a dispute between the parties as to how to deal with the damaged cargo. The receivers insisted on a cash settlement, whilst the owners offered security in the form of a P&I Club Letter of Undertaking (“LOU”). Discharge of the cargo only resumed once the owners had agreed to pay cash on 21 October 2008. On 13 November 2008, the Veterinary Service gave permission authorising the re-export of the cargo (although it appears that the vessel was never prevented from sailing) and the vessel finally sailed from St. Petersburg on 25 November 2008.

The owners claimed demurrage. The charterers sought to argue that the charterparty had been frustrated.

The tribunal’s decisionThe tribunal held that the contamination was due to the unseaworthiness of the vessel, for which the owners were strictly liable under the charterparty. From 14 April, when discharge of the remaining holds (bar hold no. 2) had been completed, the charterers’ liability for demurrage was interrupted because the delay was due to the owners’ fault.

The receivers should have accepted a Club LOU, rather than demand a cash settlement and a reasonable period to agree the terms of the LOU would not have expired until 25 April. Consequently, the period from 15 to 25 April did not count as time on demurrage because the cause for the delay was not the failure to discharge the cargo, but the need to negotiate and agree the terms of a LOU.

Fionna GavinPartner, Londonfionna.gavin@incelaw.com

David GoldsmithSolicitor, Londondavid.goldsmith@incelaw.com

checking the owners’ invoice might not interpret the recap as he had done or that they might authorise payment. He was confident that no overage freight was payable (wrongly confident as it subsequently transpired), that BP was not liable and would not be paying it.

CommentOn the facts of this case, BP was held to be entitled to recover such element of the overage freight as exceeded what was reasonable. It was crucial, however, both that those responsible for making the payment had not appreciated that there was an issue as to whether BP was liable for the full freight invoiced and that the individual who was aware of the issue did not appreciate that payment would be made. If it had been otherwise, the outcome would almost certainly have been different and the case is a useful reminder that English law does not generally permit recovery where payment has been made in the face of uncertainty as to liability.

10 SHIPPINGE-BRIEF

What is unclear to us from the law report is why the ship did not sail, given that the contaminated chicken was presumably of very little value. Perhaps the charterers will be able to pass on this liability to the receivers under their sale contract, so at the end of the day, the receivers will pay for their failure to discharge the cargo or accept a Club letter to secure the claim.

Furthermore, the owners’ breach had caused the intervention of the Veterinary Service and it was reasonably foreseeable that this would cause a delay up to 19 May. From that date onwards, the vessel was back on demurrage. Any further delay after that was too remote to be recoverable as damages arising out of the unseaworthiness of the vessel.

Whilst the order of the Veterinary Service had prevented discharge, the real and effective cause of that order remaining in place, and not being lifted, was the receivers’ unwillingness to have it lifted because they were insisting on a cash settlement. Had the receivers wished to have the order lifted sooner, in order to discharge the cargo at an earlier stage, they would have been able to do so. Neither the Veterinary Service order nor the receivers’ conduct was held to be a frustrating event, as the charterers argued, and the charterers were liable to pay demurrage in respect of the delay from 19 May 2008 to 25 November 2008. The charterers appealed.

The Commercial Court decisionThe appeal was dismissed. The judge held that, under the terms of the charterparty, the charterers had a non-delegable duty to discharge the cargo. The charterparty provided that the vessel was to be discharged by the receivers’ stevedores and the receivers acted as the charterers’ agents in discharging the cargo. The charterers, therefore, remained responsible for the receivers’ conduct. The judge also dismissed the argument that the Veterinary Service order frustrated the charterparty.

The judge distinguished The Adelfa [1988] 2 Lloyd’s Rep 466. That was a case where the receivers of cargo, which had sustained wet damage, had refused to take delivery and had arrested the ship. The vessel was eventually released and allowed to leave the port after the owners had settled the claim. In The Adelfa, the charterparty was held to be frustrated. In the present case, the judge said that a failure to discharge cargo was something for which a charterer is liable in demurrage or damages for detention because he has undertaken in the charterparty to discharge the cargo, even if he uses the receiver as his agent to do so. On the other hand, the charterer does not undertake in the charterparty to prevent the receivers from arresting the ship and an arrest is not attributable to the charterer. The frustrating event in The Adelfa was the arrest of the vessel, not the failure to take delivery of the cargo. There was, therefore, no frustration in this case.

CommentThis case is a good illustration of the importance of trying to contain the quantum of such cargo claims and, for that matter, all disputes. The contamination of about US$2 million of frozen chicken was unfortunate, but the failure to get the ship out of St. Petersburg for six months added a further US$3.6 million or so to the dispute. The owners eventually won, but it took them an arbitration and a court hearing to do so. Had the order from the Veterinary Service prevented the vessel from discharging or exporting the cargo, then the result may well have been different.

This case also illustrates the difficulty for owners in negotiating with receivers in such circumstances. The original demand from the receivers to settle was for US$2 million. Having dug in and waited six or so months, the owners were eventually forced to settle for US$2.3 million.

Ted GrahamPartner, Londonted.graham@incelaw.com

Silvia MahringerSolicitor, Londonsilvia.mahringer@incelaw.com

11SHIPPINGE-BRIEF

The BIMCO Solid Bulk Cargoes Clause

The backgroundCargo liquefaction and its consequences for safe navigation remains an issue of great importance to ship owners, charterers and insurers, as the loss of vessels such as the Vinalines Queen in recent times show. Efforts are underway at IMO-level to change the regulatory regime, namely the IMSBC Code, with the goal of preventing future incidents of this kind.

We will in due course provide an update on those efforts. In the meantime, this article addresses an interesting related development. BIMCO, in a Special Circular dated 25 July 2012, has published the “BIMCO Solid Bulk Cargoes that can Liquefy Clause for Charter Parties” (“the Clause”), which has been developed in collaboration with the International Group of P&I Clubs. We outline the main features of the Clause and consider what impact those features could have, particularly on owners and charterers.

The aim of the ClauseThe Clause is aimed at dealing with the disputes that can arise between owners and charterers during the loading and carriage of cargoes such as nickel ore and iron ore fines which may be subject to liquefaction. It is also directed towards the common scenario in which owners are prevented from sampling cargo prior to loading, often by means of pressure or intimidation from shippers at load ports and/or their charterers. In our experience, charterparty disputes frequently arise in relation to the proper mode for sampling and testing of cargo, and as regards what the parties’ respective legal positions are where there are contradictory test results. As discussed below, the Clause demonstrates potential to prevent such disputes.

The ClauseThe Clause reads as follows:

a. The Charterers shall ensure that all solid bulk cargoes to be carried under this Charter Party are presented for carriage and loaded always in compliance with applicable international regulations, including the International Maritime Solid Bulk Cargoes (IMSBC) Code 2009 (as may be amended from time to time and including any recommendations approved and agreed by the IMO).

b. If the cargo is a solid bulk cargo that may liquefy, the Charterers shall prior to the commencement of loading provide the ship’s Master, or his representative, with all information and documentation in accordance with the IMSBC Code, including but not limited to a certificate of the Transportable Moisture Limit (TML), and a certificate or declaration of the moisture content, both signed by the shipper.

c. The Owners shall have the right to take samples of cargo prior to loading and, at Charterers’ request, samples to be taken jointly, testing of such cargo samples shall be conducted jointly between Charterers and Owners by an independent laboratory that is to be nominated by Owners. Sampling and testing shall be at the Charterers’ risk, cost, expense and time. The Master or Owners’ representative shall at all times be permitted unrestricted and unimpeded access to cargo for sampling and testing purposes.

If the Master, in his sole discretion using reasonable judgement, considers there is a risk arising out of or in connection with the cargo (including but not limited to the risk of liquefaction) which could jeopardise the safety of the crew, the Vessel or the cargo on the voyage, he shall have the right to refuse to accept the cargo or, if already loaded, refuse to sail from the loading port or place. The Master shall have the right to require the Charterers to make safe the cargo prior to loading or, if already loaded, to offload the cargo and replace it with a cargo acceptable to the Master, all at the Charterers’ risk, cost, expense and time. The exercise by the Master of the aforesaid rights shall not be a breach of this Charter Party.

d. Notwithstanding anything else contained in this Charter Party, all loss, damage, delay, expenses, costs and liabilities whatsoever arising out of or related to complying with, or resulting from failure to comply with, such regulations or with Charterers’ obligations hereunder shall be for the Charterers’ account. The Charterers shall indemnify the Owners against any and all claims whatsoever against the Owners arising out of the Owners complying with the Charterers’ instructions to load the agreed cargo.

e. This Clause shall be without prejudice to the Charterers’ obligations under this Charter Party to provide a safe cargo. In relation to loading, anything done or not done by the Master or the Owners in compliance with this Clause shall not amount to a waiver of any rights of the Owners.

DiscussionSub-clause (a) is largely self-explanatory. It is worth noting, however, that it makes compliance with the IMSBC Code an obligation of the charterers, even though the Code itself addresses the obligations of shippers (who are very often not the charterers). In practice, this may not substantially alter the position, as a cargo which was not Code-compliant would likely be viewed as a dangerous cargo. The vast majority of charterparties proscribe the loading of dangerous cargoes. Even if the charterparty itself does not do so expressly, Article IV Rule 6 of the Hague/Hague-Visby Rules (the “Rules”) will have broadly the same effect. The Rules could potentially apply, whether because of a clause paramount or of another method of contractual incorporation. Similarly, the Rules will generally apply to shippers/consignees under a contract of carriage contained in a bill of lading.

Sub-clause (b) deals with the provision of documentation prior to loading. Again, this has the effect of making the fulfilment of the shippers’ obligations under the IMSBC Code the responsibility of the charterers.

The first half of sub-clause (c) gives owners the right to sample and test the cargo prior to loading. The crucial point to note is that the costs of this, as well as the time used, will be for charterers’ account. This will be the case even if owners have made an entirely unilateral decision that this testing is required, regardless of the outcome of that testing.

The second half of this sub-clause grants the Master a wide discretion to refuse to accept a cargo or to refuse to sail with it on board. The charterers may be required to take steps to make a cargo safe or to replace it with a different cargo which is acceptable to the Master.

SHIPPINGE-BRIEF

12

Australian Federal Court rules against foreign arbitration when carrying goods from Australia

Dampskibsselskabet Norden A/S v. Beach Building and Civil Group Pty Ltd [2012] FCA 696

In this recent decision, the Australian Federal Court has refused to enforce a London arbitration award.

The background factsThe case concerned a voyage charterparty on the AMWELSH 93 form between disponent owners, Dampskibsselskabet Norden A/S (“DKN”) and charterers, Beach Building and Civil Group Pty Ltd (“Beach”). The charterparty provided for the carriage of coal from Australia to China and included at clause 32 an arbitration clause as follows:

“All disputes arising out of this contract shall be arbitrated at London and, unless the parties agree forthwith on a single Arbitrator, be referred to the final arbitrament of two Arbitrators carrying on business in London who shall be members of the Baltic Mercantile & Shipping Exchange and engaged in Shipping, one to be appointed by each of the parties, with power to such Arbitrators to appoint an Umpire. No award shall be questioned or invalidated on the ground that any of the Arbitrators is not qualified as above, unless objection to his action be taken before the award is made. Any dispute arising hereunder shall be governed by English Law.”

A dispute arose between the parties in relation to demurrage payable under the charterparty in respect of delays to the vessel at both the load and discharge ports. In accordance with the charterparty, the dispute was referred by DKN to arbitration in London, and the parties subsequently agreed to the appointment of a sole arbitrator to hear the disputes between them.

Beach participated fully in the arbitration and the sole arbitrator was asked during the course of the arbitral process to determine a preliminary issue regarding his jurisdiction to hear the dispute. The arbitrator found in an award on that preliminary issue that he had jurisdiction to hear the substantive dispute between the parties.

In due course, the arbitrator determined the substantive dispute finding in a further award that Beach was liable to DKN in the amount of US$824,663.18 plus interest and costs. DKN then sought to have the awards recognised in Australia.

Australian Carriage of Goods By Sea Act 1991As a general rule, Australian law recognises and will enforce foreign arbitration awards. The Australian International Arbitration Act 1974 does, however, provide for exceptions to this general rule, including where it is found that the relevant arbitrator lacked jurisdiction to make the award.

More specifically, section 11 of the Australian Carriage of Goods by Sea Act 1991 (“ACOGSA”) provides that:

1. All parties to:

The key phrase used is “in his sole discretion using reasonable judgment”. This means charterers seeking to characterise a Master’s conduct in refusing a cargo as a breach of charter would have to show that the Master had not used reasonable judgment. Not only is this an inherently high bar to clear, but tribunals and courts can also be expected to be sympathetic to a Master who, if he has even slight doubts, errs on the side of caution. The facts are bound to differ from case to case, but it is difficult to envisage circumstances in which, absent some ulterior motive, a Master would refuse to load or carry a cargo which he had no reason to believe to be unsafe.

The final point to note in respect of sub-clause (c) is that all actions required by a Master under the clause are, once again, at charterers’ cost and time.

Sub-clause (d) makes charterers liable for all costs, delays and so forth arising out of compliance with either the applicable regulations (i.e. the IMSBC Code) or their charterparty obligations, or indeed arising out of their non-compliance with the same. It also grants owners a broad indemnity against claims arising out of compliance with charterers’ instructions.

Finally, sub-clause (e) makes clear that the clause does not affect charterers’ other charterparty obligations and that compliance with the clause on the part of owners or the Master shall not be construed as a waiver of owners’ rights. The latter aspect is certainly noteworthy: we have encountered cases of this type in which charterers have raised waiver arguments. Whilst such an argument was always difficult to make out, this clause precludes charterers from even attempting to do so.

CommentAs the above discussion demonstrates, this clause is very beneficial to owners, who will no doubt wish to introduce it into their new fixtures. Whilst any attempt to allocate risks and liabilities contractually, thereby preventing future disputes, has its merits, it is perhaps difficult to imagine charterers being content with the clause as drafted. This is all the more significant given the current state of the market, with the Baltic Dry Index declining to 661 points on 12 September 2012, lower than the 663 points registered on 5 December 2008 when the financial crisis was at its height. It remains to be seen, therefore, to what extent this clause will make its way into new fixtures.

Wai Yue LohPartner, Beijingwaiyue.loh@incelaw.com

Ruaridh GuySolicitor, Shanghairuaridh.guy@incelaw.com

13SHIPPINGE-BRIEF

a. a sea carriage document relating to the carriage of goods from any place in Australia to any place outside Australia; .… are taken to have intended to contract according to the laws in force at the place of shipment.

2. An agreement (whether made in Australia or elsewhere) has no effect so far as it purports to:

b. preclude or limit the effect of subsection (1) in respect of a bill of lading or a document mentioned in that subsection; .…

Beach argued before the Australian Federal Court that the charterparty was a “sea carriage document” within the meaning of section 11(1)(a) of ACOGSA such that the reference to London arbitration was ineffective.

The Federal Court decisionWith no definition of “sea carriage document” stated in ACOGSA, the court looked to the changes that have been made over time to ACOGSA and also considered the ordinary English language usage of that phrase. The court concluded that a charterparty is a “sea carriage document” and that clause 32 of the charterparty had no effect because its purpose (leaving aside the last sentence, which is a choice of law provision) was to preclude or limit the jurisdiction of the Australian court.

UncertaintyThis decision is striking, given the apparently clear wording of the arbitration clause in the charterparty and the participation by both sides in the London arbitration.

There is, however, a 2011 decision of the Supreme Court of South Australia in Jebsens International (Australia) Pty Ltd v. Interfert Australia Pty Ltd, where a charterparty was found not to be a “sea carriage document”. In Jebsens, the finding was that a “charterparty is a document of a different genus”. This decision was not raised before the Federal Court in Dampskibsselskabet Norden. So there is some uncertainty as to what the position will be should Dampskibsselskabet Norden be challenged in a future case.

CommentAs a result of Dampskibsselskabet Norden, parties to any voyage charterparty or contract of affreightment that concerns the carriage of goods from Australia should consider afresh the arbitration provisions in their contracts. Until the law is clarified, there remains a risk that the arbitration provisions in any such contracts, even if apparently clearly worded, will be held invalid if they do not provide for arbitration in Australia.

Despite the decision in Dampskibsselskabet Norden, it is possible that an arbitration under English or some other foreign law may be enforceable in Australia if the parties to the relevant sea carriage document agree that the arbitration shall take place in Australia. This is because Section 11(3) of ACOGSA, provides as follows:

3. An agreement, or a provision of an agreement, that provides for the resolution of a dispute by arbitration is not made ineffective by subsection (2) (despite the fact that it may preclude or limit the jurisdiction of a court) if, under the agreement or provision, the arbitration must be conducted in Australia.

Bob DeeringPartner, Londonbob.deering@incelaw.com

Shawn KirbySolicitor, Londonshawn.kirby@incelaw.com

This would, however, be a convoluted state of affairs and, until the position is clarified, we urge caution.

The authors of this article are not qualified Australian lawyers and nothing in this article should be relied on as advice on Australian law.

14 SHIPPINGE-BRIEF

Liability for demurrage under a “liner out” voyage charter: construing the provisions of a voyage charterparty

London Arbitration 1/12, LMLN 3 August 2012

This arbitration concerned owners’ claim for loss of time due to delay in obtaining a berth at the port of discharge.

The background facts The parties had entered into a voyage charter for the carriage of steel bars from Poland to Luanda in Angola. En route, the vessel also picked up a part cargo in Scotland. When the vessel dropped anchor in Luanda, a notice of readiness (NOR) was tendered. Shortly thereafter, the Scottish cargo was discharged at a private jetty. The vessel then had to wait some 11 days before a suitable berth became available, so that the cargo carried under the present charter could be discharged. Once at the berth, discharging was also delayed for a total of 10 hours waiting for trucks for the cargo. The owners claimed that the time spent waiting for the berth after completion of discharge of the Scottish cargo, together with the time lost waiting for the trucks during discharging, was for the charterers’ account.

The charterparty was contained in a recap and the charterers’ executed Gencon 94 pro forma. The dispute hinged on the fact that the terms of the recap were apparently at odds with the terms of the pro forma. The recap contained the provision “Freight eur 72,50 – pmt free in lsd/liner out under hook” (our emphasis). “Liner out” generally means that the freight rate includes the cost of discharging at the port of discharge. “Under hook”, in the context of discharging, means that the owners/shipper will arrange for discharge over the ship’s side.

The tribunal’s decisionThe tribunal found that there was a “fundamental conflict” between the provisions of the recap and the charterers’ executed Gencon pro forma. On the one hand, the recap contained provisions for the counting of laytime and demurrage at the loading port, but no such provisions for the discharge port. That position, in addition to the “liner out” provision, clearly indicated that the owners should undertake responsibility for discharging, including time involved in waiting for berth, although not during the discharging operation. On the other hand, the Gencon pro forma indicated there should be a NOR and laytime at the discharging port, thereby imposing obligations on the charterers in those respects and giving rise to a liability for damages (i.e. demurrage) if they were breached.

The tribunal could see no way of reconciling the conflicting provisions. They found that the only sensible way to interpret the contract was on the basis that the recap recorded the parties’ most specific intentions and, accordingly, that this should take precedence over the pro forma in case of conflict between the two. This was consistent with the term of the recap stating “Rest of terms as per chrts exec gcn 94 c/p, logically amended as per main terms [i.e. the recap]…”. On this basis, the owners’ claim for the time spent waiting for the berth failed.

The owners’ claim did succeed, however, in respect of the time lost during discharging because of the unavailability of the trucks. The tribunal determined that the inclusion of the words “under hook” in the recap provision meant that the owners’ responsibility ceased once the cargo was placed on the pier apron or, in the context of the present case, on to the trucks. From that point on, it was the charterers’ responsibility to remove the cargo, from which it followed that any delay in providing trucks to take the cargo away was also their responsibility. The charterparty did not contain any agreed demurrage rate for discharging, so damages were to be quantified on the basis of the vessel’s daily market rate at the time. On the basis, however, of the parties’ agreement as to loading demurrage (set out in the recap) and the evidence adduced by the owners as to the losses they claimed to have suffered, the tribunal ultimately awarded damages at the loading demurrage rate of EUR 10,000 per day.

In case it was wrong on the conflict between the recap and pro forma, the tribunal went on to find that the NOR given on dropping anchor at Luanda was defective. The ship was not ready at the time the NOR was tendered, because the Scottish cargo had not yet been discharged. A fresh NOR was required, but none was given. On that alternative basis, therefore, the owners could not have succeeded in their claim for loss of time spent waiting for the berth.

The tribunal further held that congestion or occupation of a berth was not covered by the exceptions in the following charterparty clause:

“Time lost by reason of all or any of the following clauses [sic] shall not be computed in the loading or discharging time viz: War, Rebellion, Tumult, Civil Commotions, Political Disturbances, Riots, Strikes, Stoppage of lighterman, tugboatmen or other hands essential to the working, carriage, delivery, shipment or discharge of the said cargo whether partial or general, bad weather, intervention of customs and/or constituted Authorities or partial or total stoppage on railways, or any other causes beyond the control of Charterers.”

The closing words “or any other causes beyond the control of Charterers” had to be interpreted in the context of what preceded them and the occupation of a berth or congestion could not be considered as being similar to the matters enumerated earlier in the provision. Therefore, the time lost would not have been excluded by that clause.

CommentThis case is a stark example of the application of the principle that, where a contract is entered into on the basis of specific negotiated terms which incorporate by reference some form of standard terms, in case of conflict between the two the specific terms will generally take precedence. In this case, the inclusion of just two words, “liner out”, in the recap were, in conjunction with the other terms of the recap, a crucial factor in essentially negating some substantial obligations of the Gencon pro forma.

15SHIPPINGE-BRIEF

Ship owners beware: liability for unlawful means conspiracy

The Dolphina [2012] 1 SLR 992, Singapore High Court

In this case, the plaintiffs, a Chinese bank (“the bank”), commenced in rem proceedings against the owners of The Dolphina. Initially, the bank’s cause of action against the owners was for delivery of cargo without production of the original bill of lading (“BL”). During the trial, the bank amended its claim to include a claim for unlawful means conspiracy against the owners. The bank failed on the mis-delivery claim but succeeded on the conspiracy claim.

The background factsThe decision turned very much on the somewhat unusual facts of the case. In January 2008, the seller, KOSB, contracted to sell a parcel of RBD Palm Olein to the buyer, Zhongguang. Under the contract, shipment was to be effected during March 2008 and in any event before 31 March 2008 and payment was to be made by draft at 90 days after sight by Zhongguang opening an irrevocable letter of credit (“L/C”) seven days before shipment.

KOSB had in turn purchased the Palm Olein to be supplied to Zhongguang from Felda. The cargo was shipped onboard the owners’ vessel, Dolphina, (which was chartered by KOSB) on 23 March 2008 for shipment from Kuantan, Malaysia, to Huangpu, China. The owners issued 4 BLs (including BL4) for the cargo; Felda was named as the shipper, the cargo was consigned “To Order”, and the notify party was Dongma. Despite Zhongguang failing to open the LC prior to shipment, the cargo was shipped to Huangpu and, by 1 April 2008, had been completely discharged. The cargo was discharged against KOSB’s Letter of Indemnity (“LOI”) to the owners; KOSB had, in turn, obtained an LOI from the notify party, Dongma. The cargo was thereafter released to various end-buyers between April to June 2008.

In relation to BL4, the court found that Felda had indorsed BL4 in blank on or before 1 April 2008 before it was handed to Maybank (as Felda’s collecting agent), who indorsed BL4 to KOSB on or about 2 or 3 April 2008, after receiving payment for the cargo (on behalf of Felda) from KOSB. The court held that KOSB retained BL4 thereafter until KOSB endorsed BL4 in blank sometime between 4 April 2008 and early June 2008.

Belatedly, on 6 June 2008, Zhongguang applied for an LC from the bank in favour of KOSB, purportedly to pay for the cargo (which had already been shipped and discharged in March/April 2008 and released to various end-buyers between April to June 2008). The bank approved the application. The documents that had to be presented under the LC included the signed commercial invoice indicating the LC and contract numbers and a full set of the clean on board ocean BLs (“the relevant documents”). On 9 June 2008, KOSB drew a bill of exchange (“BE”) on the bank to the order of Maybank at 90 days after sight. Maybank, in turn, presented the BE and the relevant documents to the bank for payment under the LC. Upon receiving the BE and the relevant documents from Maybank, the bank handed the relevant documents to Zhongguang, which confirmed, in writing, that it had received the relevant documents, examined them and instructed and authorised the bank to make payment to the presenting bank (Maybank) and deduct its account with the bank.

Daniel JonesPartner, Hamburgdaniel.jones@incelaw.com

Peter HazellSolicitor, Hamburgpeter.hazell@incelaw.com

The tribunal’s findings in respect of the NOR given at the anchorage in Luanda, although not ultimately decisive of the award, follow established judicial precedent, in particular the Court of Appeal decision in The Happy Day [2002] 2 LLR 487, and underline the importance of tendering a fresh NOR if the first one is defective.

16 SHIPPINGE-BRIEF

Instead, KOSB, despite knowing that it was not entitled to deal with BL4, indorsed BL4, thus falsely misrepresenting that it still had legal effect. The court further held that KOSB’s indorsement was part of “a raft of measures to defraud third parties”.

As KOSB’s indorsement of BL4 was ineffective, the bank did not become a “holder” of BL4 and therefore did not acquire the requisite rights of suit to sue the owners in contract under BL4.

Bank’s claim for unlawful means conspiracyBased on the evidence which emerged late into the trial, the bank was given leave to amend its claim to include an alternative claim for unlawful means conspiracy against the owners. To succeed on this cause of action, the bank had to prove that “two or more parties combined to commit an unlawful act with the intention of injuring or damaging the plaintiff, and the act is carried out and the intention achieved”.

On the evidence, it was held that one SK, a common director of the owners, KOSB and Dongma, knew, inter alia, that the cargo had been discharged against a LOI and that BL4 had been fraudulently indorsed by KOSB to Maybank in order to secure payment under the LC. The court reached this conclusion on the basis that SK had, in interlocutory proceedings, given affidavit evidence on matters such as the movement of BL4, the owners’ commercial and operational affairs as well as the terms of KOSB’s LOI, that SK was copied in on correspondence in relation to the operation of the vessel, that he authorised the payment by KOSB to Felda for the cargo as well as the presentation of documents (including BL4) for payment under the LC.

Under the doctrine of identification (or “directing mind and will” or “alter ego” doctrines), the trial judge found that SK’s knowledge of the conspiracy was attributable to the defendants. In this regard, the court also highlighted that the other directors of the owners had testified at the trial and said that they were not involved in the operations of the owners or the vessel, which gave rise to the inference that SK was the only person managing the owners. Moreover, SK, by not giving evidence at the trial itself, had failed to rebut the adverse inference drawn against the owners that, for the purposes of the unlawful means conspiracy, SK’s knowledge and state of mind ought to be treated as those of the owners.

Having imputed SK’s knowledge to the owners, the court then considered whether the tort of unlawful means conspiracy had been made out. The court held that, even though there was no evidence that the owners had been a party to the conspiracy to defraud the bank at the stage when Zhongguang (with the conspiracy of KOSB) applied for the LC, the owners knew (through SK’s knowledge) of the conspiracy and participated in it by allowing BL4 to be presented to the bank for payment under the LC. In this regard, the court held that an omission can constitute the requisite unlawful act (in this case, the owners’ omission to take BL4 out of circulation).

The bank accepted the BE, but was left in the lurch subsequently when, two days later, Zhongguang returned the relevant documents to the bank, citing financial difficulties. As the bank had accepted the BE, they were bound to, and did, pay Maybank.

The bank had no recourse to the cargo, which had long been discharged and released to the end-buyers before the issuance of the LC in June 2008. The court found, however, that the bank was not aware that the cargo had already been discharged in April 2008 without the production of BL4.

The court decisionPreliminary issue: proper law of the bills of ladingA preliminary issue dealt with by the court was the proper law of BL4. There was no express choice of law clause in BL4, but it expressly incorporated the terms of the charterparty, which was governed by English law. The court held that a three-stage test would be applied to determine the governing law of BL4. The court will first determine whether there is an express choice of law, failing which the court will determine whether there is an implied choice of law. If there is no implied choice of law, the court will proceed to determine the system of law which has the closest and most real connection with the contract.

The court held that general words of incorporation, in this case “all conditions, liberties and exceptions whatsoever of the said Charter apply to and govern the rights of parties concerned in this shipment” were sufficient to incorporate the choice of law clause in the charterparty into BL4 and that the charterparty choice of law clause was a “condition” within the meaning of the words of incorporation in BL4, because it provided a system of law which applied to interpret the contract’s meaning, scope and effect.

Delivery of cargo without presentation of the original BLThe court held that delivering cargo without the production of a BL would amount to a breach of the contract of carriage even if the charterparty contained a term which allowed the delivery of cargo against a LOI. Such a clause in the charterparty merely permitted, but did not oblige, the owners to deliver the goods without presentation of BL4.

Bank’s title to sueThe bank asserted that it was the lawful holder of BL4 because it was “a person with possession of the bill as a result of... any indorsement of the bill.…” under section 5(2)(b) of COGSA 1992. The court held, however that the phrase “any indorsement” in section 5(2)(b) must mean “any valid indorsement”. Therefore, where the indorsement of the BL is tainted by fraud, the indorsement would itself be invalid and incapable of constituting any subsequent transferee of the BL a “holder”. On the facts, the court held that KOSB’s indorsement of the BL was invalid as it had been made fraudulently. Under KOSB’s LOI, KOSB was to return BL4 to the owners once KOSB received BL4 upon making payment for the cargo. At that point in time, BL4 should have been deemed accomplished or spent and should have been withdrawn from circulation.

17SHIPPINGE-BRIEF

The court concluded that the unlawful means conspiracy had been made out and found the owners liable for the amount paid by the bank to Maybank under the BE. The owners’ appeal against the trial judge’s decision was subsequently dismissed by the Singapore Court of Appeal without any written grounds of decision.

CommentThe Dolphina is an important decision, albeit on somewhat unusual facts. The court’s analysis of when an endorsement of a BL is valid is illuminating. This is also the first time the court in Singapore has had to consider whether an omission to act could constitute conduct sufficient to amount to an unlawful means conspiracy.

Arbitration tribunal decides deadfreight and despatch claims

London Arbitration 2/12, LMLN 3 August 2012

The disputes in this arbitration related to claims for deadfreight and despatch under a voyage charterparty for the carriage of iron ore.

The background facts and the tribunal’s decisionOwners’ claim for deadfreightThe cargo was defined in the charterparty as “46,000MT MOLOO [More or Less at Owners’ Option] 10% IRON ORE IN BULK”. It was further provided that “Chartrs confirm min draught of 11.4m SWAD plus tide in the loading port”.

An owner is entitled to deadfreight if the charterer fails to load the full amount of cargo which he has agreed to supply under the terms of the charterparty. Here, the deadfreight claim arose from the fact that when the vessel arrived, the maximum allowable draught at the berth was 11.19 metres: less than the minimum draught warranted by the charterers. Therefore, the vessel could only load 46,000.787mt of iron ore. As the charterers had agreed under the charterparty to load up to 50,600mt, the owners claimed freight on the full cargo which could have been loaded at the warranted minimum draught, which they said was 47,265mt.

The charterers claimed that the port authority reduced the draught following a recent earthquake. They refuted liability on the grounds that:

1. the owners had removed the charterers’ agent at the loadport (in breach of the agency provisions of the charterparty), meaning that they were in the dark during the loading operations and denied the opportunity to negotiate with the port authority to procure the loading of more cargo; and

2. the warranty as to minimum draught was given in good faith after exercising due diligence to ascertain the position - the actual draught was only lower because of circumstances beyond their control.

The tribunal rejected the charterers’ arguments. With respect to (1) above, the evidence showed that the charterers were aware of maximum draught limitation before and during the loading operation. Even if the owners were technically in breach of the agency provisions of the charterparty, this had not caused the charterers any loss. In relation to (2), as there was no force majeure or other clause excluding losses caused by the aftermath of the earthquake, the charterers were bound by their warranty as to the minimum draught at the loadport. The charterers had assumed the risk of any reduction in available draught and were liable for the deadfreight claimed.

Charterers’ claim for despatchWhere it is expressly provided for in a voyage charterparty, despatch is payable to the charterer if loading or discharging is completed in less than the allowed laytime. Such was the case here, with despatch payable at half of the demurrage rate.

Bernard YeeDirector, Singapore Incisive Law LLCbernard.yee@incisivelaw.com

Alvin OngAssociate, Singapore Incisive Law LLCalvin.ong@incisivelaw.com

18 SHIPPINGE-BRIEF

The evolving seascape of Indian shipping

The global slowdown in the shipping industry has affected all markets including India. In a recent downgrade by Moody’s, the growth rate of India has been pegged at 5.5% for 2012 and 6% in 2013. The causes are usually said to be lack of domestic policy initiatives, weak demand, elevated interest rates, and high inflation. That said, Indian shipping firms, unlike some of their Korean and Chinese counterparts, have not yet faced bankruptcy protection or liquidation. What has kept the Indian shipping firms afloat during this turbulent period, and what lies next for one of the most promising new world economies? We review below some of the initiatives taken by the Indian government, Indian shipping firms and the Indian judiciary.

Taxation, migration, ship-construction The Union Budget 2012-2013 of India was disappointing for shipping because most of the industry’s demands were ignored. Proposals for the abolition of seafarer’s tax, the creation of a modernization fund for easy access to low-cost borrowings, and exemption from service tax on several different inputs were met with much disappointment. The total outlay for the Ministry of Shipping was reduced by about Rs 9 Billion from Rs 67 Billion (Budget 2011-2012) to Rs 58 Billion. The silver lining, however, was dispensation of the existing 5% countervailing duty, and a reduction in withholding tax on interest payments (from 15% to 5%) of foreign borrowings.

With several layers of taxation to contend with, Indian ship owners have continuously tried to migrate to tax-friendly jurisdictions such as Singapore. Whilst the operational costs, tax benefits and regulatory efficiency remain obvious benefits, the disadvantage is that, in the case of long-term charter business generated predominantly from large public sector companies in India, the terms of such business grant preference to domestic ships i.e. ships and offshore assets owned by Indian domiciled companies.

For shipbuilders, the shipbuilding subsidy scheme (the “Scheme”) expired in 2007. The Scheme, when in force, had enhanced India’s share of world orders from 0.03% in 2002 to 1.55% in 2007 but, after its expiry, India’s share has been relegated to 0.01%.

The Scheme offered shipbuilders 30% subsidy on building costs and it comes as no surprise that the Shipping Ministry has asked for reinstatement of the Scheme with a target to increase India’s share in global shipbuilding to 5%, and to grab a 10% share in world ship repair.

Until such time as the Scheme is revived, Indian shipbuilders are dealing with the effects of the slump in trade that has suppressed rates and diluted new orders. Certain shipbuilders have raised and restructured massive amounts of debt locally with public sector banks, others have acquired control of ship owners with a view to indirectly avoiding defaults.

Reserve Bank of India (RBI) – ECB PolicyThe RBI regulates the ECB Policy, which governs foreign lending to Indian shipping companies/borrowers. The RBI has progressively monitored and liberalised the ECB Policy.

Daniel JonesPartner, Hamburgdaniel.jones@incelaw.com

Peter HazellSolicitor, Hamburgpeter.hazell@incelaw.com

The laydays were 1 to 10 April, and it was stipulated that “laytime at the Port of Loading shall not count before 1st April”. The vessel arrived at the loadport, tendered notice of readiness and completed loading by 29 March. It was common ground that, as no new laydays had been agreed, laytime had not commenced at the loadport. The charterers argued, however, that they should be entitled to despatch for the full time allowed for loading, whereas the owners argued that as laytime never began, no laytime was saved during loading and no despatch was due.

The tribunal dismissed the owners’ argument, which was not supported by any authority, as illogical. There was no reason why a charterer should be deprived of a right to despatch where the loading operations were completed before laytime began to count. The nature of the benefit to the owners in having such operations completed early – reflected by despatch paid to the charterers – was just the same whether or not laytime began to count. The charterers were, therefore, awarded despatch for the full time allowed for loading.

CommentThis decision adds some helpful context to two types of voyage charterparty claim. The arbitrators’ comments relating to the charterers’ minimum draught warranty serve as a reminder that parties will be held responsible for a breach of their contractual warranty as to a particular state of affairs, even if the cause of that breach is outside of their control, unless the circumstances are covered by a suitably drafted exclusion clause.

The decision that despatch should be payable even where laytime has not commenced also provides some useful guidance on a novel issue although, being an arbitration decision, it does not create any binding precedent in English law.

SHIPPINGE-BRIEF

19

For starters, RBI has enhanced the borrowing limit for each borrower to US$750 million per year. It further liberalised security options, enabling borrowers to provide security over their immovable assets and their promoters to offer security over shares and issue corporate/personal guarantees. Refinancing options, which were previously permitted only if they were cheaper than existing finance, were enabled at higher costs provided RBI approval was procured. A quarter of the proceeds from foreign loans can today be used to repay outstanding local debt, if certain conditions are met. This measure is no doubt a boon as it helps hedge against the high interest rates in India.

Whilst the above positives have been encouraging, the RBI continues to suffer from bureaucratic paralysis, and more importantly lack of in-house legal expertise. The ECB Policy is plagued with ambivalence on critical issues. For example, the Policy loosely caps fees, interest and expenses associated with foreign loans under “All in Costs Ceilings”. It fails to enunciate what would fall within the black hole of “All in Costs”. Questions such as whether fees of advisors/arrangers and default interest would be covered in these ceilings often attract debate and lack consensus.

Prepayments are subject to the average maturity rule (a weighted average formula that determines the minimum mandatory life of the loan), and Indian ship owners often do, or potentially could, use this as a shield to convolute straightforward mandatory prepayment obligations. Sharing of security between Indian parent companies and overseas subsidiaries/joint ventures remains unclear (with two different regulations touching on the issue but none clarifying which regulation would supersede) and lenders have something to consider when they include cross-border cross-collateralization provisions in term sheets.

Enforcement woes in untested watersWith shipping markets claiming more victims this year, lenders will be concerned about their exposure to weaker players in the Indian market. Whilst foreign mortgagees have arrested and sold foreign vessels in India successfully, cases of mortgage enforcement over Indian domiciled ships are few and far between. With little or no experience in this field, banks have opted to restructure defaults by Indian owners, or defer the inevitable enforcement, with fingers crossed.

Arresting ships is, however, an efficacious remedy in India and courts are as proactive as other arrest-friendly jurisdictions. Arrests can be effected within 24 hours from the time of filing the arrest application. Sister ships can be arrested in India, but associated ships cannot be arrested unless the corporate veil is pierced. In a recent judgment, the Bombay High Court pierced the corporate veil of a multinational ship-owning conglomerate to permit arrests of associated ships. This judgment is pending appeal in the Supreme Court and, if not overruled, has the potential of establishing India as one of the more arrest-friendly jurisdictions, together with South Africa.

The disadvantages of arresting in India, however, surface when the ship is sought to be sold in India and sale proceeds remitted to lenders. Although sale pendent lite (sale of a vessel pending litigation) is permitted, the Indian courts are reluctant to grant

Martin BrownPartner, Singaporemartin.brown@incelaw.com

Kunal KapoorSenior Associate, Singaporekunal.kapoor@incelaw.com

an Order of Sale before expiry of 12 weeks from service of the summons/issuing the Order of Arrest unless “very good cause” is made out.

The Indian courts have not defined what constitutes “very good cause” to sell a vessel pending litigation but, historically, rapid deterioration of vessel value and condition, likelihood of sinking or pollution and mounting port and insurance costs have been considered to be very good causes. Matters could get complicated where the defendant aggressively defends the application for sale and where multiple creditors are involved in disputes over priority.

Ships are sold by public auction and sale proceeds are deposited in court pending repatriation of sale proceeds, which requires RBI approval. RBI approvals are forthcoming (given the Court Order), but the backlog of cases before the RBI could be cause for delay. It is interesting to note that, pending repatriation of the proceeds to lenders, they will earn interest in the court fund, which could be higher than interest payments in the current market.

This is an edited version of an article which appeared in “Marine Money”.

20 SHIPPINGE-BRIEF

SHIPPING REGULATION

IMO Emissions Regulations: Are you ready for 1 January 2013?

Climate change has become increasingly influential in determining the standards of many industries, government policies and supranational regulations and shipping is no exception. As discussed in our previous article (see link below), through additions to MARPOL, the IMO has implemented its own regulations with the aim of cutting shipping carbon emissions by as much as 30% by 2030. This article considers the potential legal impact of the requirement, effective from 1 January 2013, that all ships of 400 gross tonnage and above must have a a Ship Energy Efficiency Management Plan (“SEEMP”) and, save for certain exempted states, new ships (or those undergoing a major conversion) must have an Energy Efficiency Design Index (“EEDI”).

SEEMP The SEEMP is a ship-specific plan aimed at enabling operators to improve fuel efficiency through four steps: (i) planning; (ii) implementation; (iii) monitoring, and (iv) self-evaluation and improvement. The objective is to provide a mechanism for the owners, masters and operators to monitor ship and fleet efficiency and performance over time and to use this to optimize performance. The IMO has also issued a set of guidelines for the development of a SEEMP, “The 2012 Guidelines for the Development of a Ship Energy Efficiency Management Plan”, and model SEEMPs have been produced by various organisations.

Part of the planning of the SEEMP involves goal-setting. Although this will not be public and there is no external scrutinisation, the expectation is that a target will be set to serve as an incentive for the proper implementation of the plan. An example suggested is the adoption of a specification of the Energy Efficiency Operational Indicator (“EEOI”). The EEOI is an indicator of efficiency, which approximately translates as the ratio of mass of CO2 emitted per unit of transport work. By using an EEOI target as a monitoring tool, it is possible to assess how certain variables, such as new energy-saving technologies or more frequent hull cleaning, affect the ship’s fuel efficiency. The objective is that a specific figure will be calculated for each voyage, but the collection of this data is on a voluntary basis only.

Section 5 of the 2012 SEEMP Development Guidelines deals specifically with “Guidance on Best Practices for Fuel-Efficient Operation of Ships”. Unsurprisingly, there is a focus on speed optimization, i.e. the speed at which the fuel used per tonne per mile is at minimum level for that voyage. The Guidelines also emphasise that the quest for efficiency is one for all stake-holders and not the owners/operators alone. It calls upon all involved parties (designers, ship yards, engine manufacturers, charterers, ports and vessel traffic management services) to consider efficiency measures within their operations. It specifically calls upon charterers and operators to agree charterparty terms that encourage the ship to operate at optimum speed to maximize energy efficiency.

As the global pressure to reduce CO2 emissions increases and fuel costs remain high, major charterers are already taking a pro-active approach. Rightship has developed its own fuel performance rating system and Cargill, amongst others, has indicated that it will no longer charter inefficient tonnage. Following industry demand, BIMCO has produced slow steaming clauses for time charters and, more recently, for voyage charters.

Work continues on a BIMCO “virtual arrival clause”, under which the vessel proceeds at a reduced speed to enable her to arrive just in time for her load/discharge slot, with arrival (for laytime/demurrage purposes) being deemed to have occurred at the time she would have arrived if proceeding at full speed. The bunker savings from the reduction in speed can then be calculated and shared as agreed by the parties. Such clauses have already been adopted in the tanker sector. There, however, the charterers may also own and operate the terminals and loading and discharging slots can be pre-agreed with reasonable certainty. It is likely that significant change from current practices would be required before virtual arrival could feasibly become a feature in the dry bulk trade. This is recognized by the SEEMP Development Guidelines which stresses the need for co-ordination of arrival times with the availability of load/discharge berths and encourages port authorities to change procedures where necessary to maximize efficiency and minimize delay.

There are as yet no prescribed sanctions for breaches of the technical regulations. Individual member states are responsible for enforcement of IMO conventions and may structure various penalties for non-compliance among ships that carry their state’s flag. A proposal that port states could deny entry to non-compliant vessels was dropped during negotiations, so it remains to be seen what teeth the new regulations will have.

Whatever the long-term impact of the new regulations, it seems clear that the current trend is for a reduction in speed, which itself has potential legal implications. In particular, concern has been expressed that there will be an increase in engine damage if ships’ engines are regularly operated significantly below their design speed. Issues also arise owing to the longer voyage times resulting from slow steaming. Unless appropriate slow steaming provisions are effectively incorporated into the bill of lading, there is potential exposure to third parties for late delivery of cargo or, in the worst case scenario, for deviation arguments to arise. Owners and charterers would, therefore, be well advised to tackle these issues up front and ensure that appropriate clauses are included in the charterparty to address these risks.

EEDIThe EEDI is intended to encourage shipbuilders to create more fuel-efficient vessels and to stimulate the development of the necessary technological advances to enable this. It establishes a minimum energy efficiency for new ships by way of a formula with a specific benchmark level to be achieved for each vessel type. A simplistic version of the formula is: EEDI = CO2 emission/transport work, the latter being calculated by reference to the ship’s capacity and ship’s design speed at maximum design load and 75% rated installed shaft power. The lower the EEDI, the more efficient the ship.

SHIPPINGE-BRIEF

21

Between 1 January 2015 and 31 December 2019, the expectation is that energy consumption will be reduced by 10%, with further incremental reductions totaling 30% by 2024, and that the reductions will be achieved by technological developments in the intervening period.

It does not matter how the ship achieves the required energy efficiency, so long as the EEDI does not exceed the reference line value agreed by the IMO for the relevant ship type. The formula is not universally appropriate as it has been designed primarily for cargo ships and will not apply to all ship types or all propulsion systems. The IMO has stated that it will develop formulae for other ship types in due course.

The formula has already attracted criticism, in particular concern has been expressed that the obvious way of meeting the required EEDI is through reduction of installed engine power, with adverse consequences for the safety of ship manoeuvrability. The regulations expressly require that installed power must be not less than that needed to maintain the manoeuvrability of the ship under adverse conditions and the IMO is working on Interim Guidelines for determination of the minimum power propulsion, with a view to approval of a joint MSC-MEPC Circular prior to 1 January 2013. Absent the development, however, of the technological advances envisaged as justification for the drop in EEDI by 2024, there will obviously be significant pressure to achieve the EEDI targets by speed reduction.

Issues have arisen in relation to application of the EEDI formula to ro-ros (in respect of which it has been said to disregard the fundamental physical principles of powering ships) and ferries, for which alternative frameworks are being considered.

It remains to be seen whether difficulties will also arise with respect to other cargo vessels as the formula is put into practice and to what extent the EEDI will become an issue of contention in shipbuilding contracts. Given the criticisms of the formula, however, it is to be expected that shipbuilders will be cautious to undertake meaningful obligations as to the achievable EEDI, which must be independently verified by class.

Concern has also been expressed as to whether it is appropriate for class societies, having approved a particular ship design, to then be involved in verifying the EEDI as, in these circumstances they may be viewed as having a vested interest in the outcome.

Sulphur emissionsForeshadowing the technical regulations is the regime of Emission Control Areas (“ECAs”), regions where fuel sulphur content is prescribed. On 12 September 2012, the European Parliament voted to amend the EU low-sulphur Directive to incorporate the IMO rules for sulphur emissions. News of this vote has not been received well by the shipping industry, as repeated concerns had already been expressed as to whether there will be a sufficient supply of fuel to allow compliance. Under the IMO regulations, fuel burnt in ECAs must currently contain 1% sulphur or less and, from 2015, this will fall to 0.1% or less. Regions outside the ECAs will have a fuel sulphur limit of 3.5% until 2020, when the limit will be reduced to 0.5%. The European Directive already mandates that vessels cannot burn fuel with a sulphur content above 0.1% in EU ports.

The final approval for adoption of the IMO sulphur limits into EU law must be provided at the European Council meeting later this year, but a reversal of the European Parliament vote is unlikely.

In August 2012, ECAs were also declared in North American territorial waters. Canada has not yet begun, however, to enforce its ECAs, and the application of the US ECAs to Alaska is currently the subject of court proceedings resulting from the increased cost of shipping to Alaska. The EU is also considering extending ECAs to new areas, such as the Mediterranean.

Together, these measures present the prospect of higher fuel costs and the fitting of expensive technology, for example gas scrubbers. Owners and charterers entering into long-term contracts should ensure that the costs of compliance and risk of non-compliance with the anticipated changes is clearly allocated in the charterparty terms.

CommentDespite comments made earlier this year by the chairman of the UK Parliamentary Select Committee on Energy and Climate Change, Tim Yeo, that the IMO’s progress on climate change initiatives has been “glacial”, the organisation has shown with successive amendments to MARPOL 73/78 that it is advancing the regime of shipping emissions regulations. The introduction of the EEDI and SEEMP represents only the latest change in an evolving regulatory landscape and there is no doubt more to come.

(http://incelaw.com/documents/pdf/strands/shipping/article/reducing-shipping-emissions–an-overview-of-recent-international-initiatives-april-2012),

Fionna GavinPartner, Londonfionna.gavin@incelaw.com

Joshua WilliamsTrainee Solicitor, Londonjoshua.williams@incelaw.com

22 SHIPPINGE-BRIEF

Merchant Shipping (Compulsory Insurance of Ship owners for Maritime Claims) Regulations 2012 come into force

These UK regulations came into force on 5 October 2012 and implement into domestic law EU Directive No. 2009/20/EC on the insurance of ship owners for maritime claims, which entered into force on 1 January 2012. The regulations apply to owners of all UK-registered ships of 300 gross tonnes and above and to owners of all non-UK registered seagoing ships of 300 gross tonnes and above that call at UK ports.

The purpose of the Directive was to make mandatory the current shipping industry standard of taking out insurance to cover the vast majority of third party maritime claims of the type described as subject to limitation in the Convention on Limitation of Liability for Maritime Claims 1976, as amended by the Protocol 1996. This is intended to protect against situations where a ship-owner is liable for third party claims but has insufficient funds to pay.

As a result of the regulations, the UK Maritime and Coastguard Agency (“MCA”) will be required to check that ships of 300 gross tonnes and above entering UK ports carry a certificate of insurance and comply with the requirements of the regulations. It is an offence for a ship to enter or leave a UK port without having the requisite insurance and the ship will be expected to carry and produce the relevant insurance certificate on demand by the MCA. A ship that contravenes the regulations may be detained. A ship-owner who is found guilty of an offence under the regulations may be fined.

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

COMMERCIAL

When is it unreasonable to withhold your consent?

Porton Capital Technology Funds and others v. 3M UK Holdings Ltd and another [2011] EWHC 2825 (Comm)

Defining what is meant by “reasonable” in contracts governed by English law is rarely straightforward. A contractual term providing for one or both parties to act reasonably automatically qualifies the relevant contractual obligation, so that it is not absolute. The question of reasonableness is one of fact to be decided by the court objectively according to the circumstances in each case. Nonetheless, the number of cases in recent years involving disputes as to what is or is not reasonable demonstrates that this is a perennial grey area when determining a party’s obligations under a contract.

The phrase “not to be unreasonably withheld” is commonly found in commercial agreements, including in property leases. Such landlord and tenant agreements often provide for a landlord not to unreasonably withhold his consent to, for example, assignment of a lease or subletting a property. Much of the relevant case-law, therefore, relates to landlord and tenant disputes. One judge has commented that “there are few expressions more routinely used by British lawyers than ‘reasonable’, and the expression should be given a broad, commonsense meaning.…”. Another has said that “one should read ‘reasonableness’ in the general sense”. These are very general propositions and not always easy to apply in practice.

The recent decision in Porton Capital v. 3M UK Holdings provides useful clarification as to the practical operation of this obligation to act reasonably in a commercial context. In Porton Capital, the court confirmed that the party withholding consent does not have to show that its refusal to consent was right or justifiable, only that it was reasonable. In other words, did it come to the same conclusion as might be reached by “a reasonable man” in the same circumstances? What the court considers a reasonable man might do in similar circumstances will depend very much on the facts of the particular case.

In a shipping context, the decision is relevant because the phrase is often incorporated into contractual terms, for example those providing for inspection of a ship’s logs and other ship’s records (voyage reports, loading and discharging port sheets etc), with such inspection usually taking place at charterers’ request and owners’/master’s consent “not to be unreasonably withheld”. The owners might be reluctant to comply with such a request where, for example, the time and cost will be disproportionate to any relevance the documents might have for the charterers’ purposes. Alternatively, the owners might consider the request to be a “fishing expedition” designed to find grounds for some complaint against the owners. Porton Capital suggests that, so long as the owners’ decision is not arbitrary, they would not have to comply so as to prejudice their interest.

23SHIPPINGE-BRIEF

The background facts in Porton CapitalThe defendants (“3M”) purchased a company in exchange for an initial cash payment and a future earn-out based on the net sales of the business. 3M agreed that they would not terminate the business without the vendors’ consent, such consent not to be unreasonably withheld. For various reasons, the main one being 3M’s lack of confidence in the future profitability of the business, 3M sought the vendors’ consent to terminate the business. The vendors refused to give their consent. 3M terminated the business anyway and the vendors sued 3M for breach of contract.

The Commercial Court decisionThe court relied on principles previously established in landlord and tenant case-law and held that the vendors had not been unreasonable in withholding their consent. The key conclusions (points 4 and 5 perhaps being the most noteworthy) are as follows:

1. The burden is on the party requesting consent to show that the refusal to give it is unreasonable.

2. What is reasonable depends on the circumstances of each case.

3. The party refusing to give its consent does not need to show that the refusal is right or justified, simply that it is reasonable in the circumstances.

4. The party whose consent is required is entitled to take into account its own interest to determine what is reasonable (in this case, it was in the vendors’ interest to obtain as large an earn-out payment as possible).

5. The party whose consent is required does not have to balance its interest with those of the party requesting consent.

In the judge’s view, it was reasonable for the sellers to require more information from 3M as to why they were terminating the business and not to take their decision at face value. Furthermore, the probability that, had the sellers still been running the business, they would have closed it down in light of the losses it was making was irrelevant because they had sold the business on the basis of an agreement that included an earn-out.

CommentThere is no duty of good faith in English contract law. Unless a contract provides otherwise, parties entering into contracts may prioritise their own interest over those of their counterparty without finding themselves in breach. To avoid uncertainty as to what is considered reasonable in terms of the parties’ contractual obligations, it is recommended that the contract should where possible define the specific circumstances in which consent can and cannot be refused, as well as setting out expressly any conditions that must be met before consent is given.

Kevin CooperPartner, Londonkevin.cooper@incelaw.com

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

Lauras RambinasTrainee, Londonlauras.rambinas@incelaw.com

24 SHIPPINGE-BRIEF

OTHER NEWS

Ince & Co opens office in BeijingInce & Co expanded its Greater China capability by opening a new office in Beijing in July 2012. It is one of the first English maritime law firms to open a third Greater China office, and now has offices in Beijing, Shanghai and Hong Kong.

Lawyers in Ince & Co’s Beijing office provide clients with both contentious and non-contentious shipping and international trade expertise. The office is led by partner Wai Yue Loh, who moved to Beijing from the firm’s Shanghai office.

“With many of our lawyers visiting Beijing regularly to work with our clients, I am delighted that we have now opened a permanent office in this major city. This new office boosts our ability to service our international clients’ needs in China and further develops our strong regional capability,” the firm’s senior partner, James Wilson, said.

“We are extremely pleased to expand our practice with our third office in Greater China. We look forward to building our presence in Beijing as we continue with our strategy of growth in the region,” James added.

Wai Yue commented: “A base in the business and political heart of the PRC not only provides proximity to our clients’ operations in Beijing and in northern ports such as Tianjin, Dalian and Qingdao, but also assists us in maintaining close relationships with government authorities.”

Head of Ince & Co’s yacht group hosts reception to launch Large Yacht Code (LY3) at Monaco Yacht ShowAlbert Levy, current Chairman of Superyacht UK, hosted a reception at the Show, at which the Large Yacht Code (LY3) was launched. Lawyers from six of the firm’s offices also attended the Monaco Yacht Show this year, which took place on 19-22 September.

Partners who attended include: Albert Levy and Stephen Askins (London), Andrew Charlier and Jérôme Cohen (Paris), Tim Schommer (Hamburg) and Ian Cranston (Monaco), together with lawyers Freddy Desplanques (Le Havre) and Aymeric de Tapol (Hong Kong).

Monaco-based partner Ian Cranston, said:

“Our Monaco office opened just over a year ago and I am delighted that so many of my colleagues with expertise in this market attended the yacht show. It provides a great platform for discussing a number of current issues with our clients, such as the Maritime Labour Convention which comes into force next year, and the opportunities available in China for the superyacht market.”

Ince & Co wins China Shipping & Maritime Law Firm of the Year AwardInce & Co was named International Winner for Shipping & Maritime 2012 at the China Law & Practice awards in Beijing. This is the second consecutive year that the firm has been recognised in the China Law & Practice awards, having previously won International Team of the Year 2011 for Shipping & Maritime.

The firm was chosen because of the breadth and depth of our maritime work, as well as innovation and the quality of service we provide to clients. Partner and head of our Shanghai office, Paul Ho said: “It’s an honour to receive this award which recognises both our commitment and dedication to our clients, and to the Chinese market.”

Ince & Co lawyers participate in India Shipping Summit 2012Lawyers from Ince & Co’s Singapore and Dubai offices recently attended the eighth annual India Shipping Summit, which took place in Mumbai on 8-10 October 2012.

Senior associate Kunal Kapoor moderated a panel discussion titled, ‘Foreign investments in India’s infrastructure: not all as it seems’. The session considered issues surrounding the newly announced budget and proposed tax changes, and their impact on infrastructure sectors including shipping/offshore, and also looked at new opportunities for maritime players in this dynamic economy.

Peter Measures, partner in the firm’s Dubai office says: “We were delighted to be involved in this conference. It provides an excellent networking opportunity and a platform for discussion of the issues that are of most interest to India’s maritime community and those who serve it.”

Ince & Co is a network of affiliated commercial law firms with offices in Beijing, Dubai, Hamburg, Hong Kong, Le Havre, London, Monaco, Paris, Piraeus, Shanghai and Singapore.

E: firstname.lastname@incelaw.com incelaw.com

24 Hour International Emergency Response Tel: + 44 (0)20 7283 6999

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.

© 2012 Ince & Co International LLP, a limited liability partnership registered in England and Wales with number OC361890. Registered office and principal place of business: International House, 1 St Katharine’s Way, London, E1W 1AY.