The facts of the Wolff case

The facts of the Wolff case are relatively complicated but the essence of the case is as follows. Mr Wolff was a director of The Fielding Group Ltd ("TFG"). TFG purchased and imported clothes from Bangladesh. The consignments of clothes concerned were carried under "house" bills of lading or airway bills issued by Trinity Logistics USA Inc ("TUSA"). TUSA had agents in Bangladesh, Trinity Logistics (Bangladesh) Ltd ("Trinity Bangledesh") and agents in the UK, Trinity Europe Logistics Limited ("Trinity Europe"). Trinity Bangladesh dealt with shipment of the goods in Bangladesh and Trinity Europe dealt with release of the goods in the UK. On the facts of the case it was a breach of the respective contracts of carriage for the goods to be released other than against the presentation of an indorsed bill of lading or a "Bank Release" order; neither of which TFG could procure without first paying the supplier for the goods.  Any other release exposed TUSA to claims from the Bangladeshi suppliers for wrongful delivery. Equally any other release by Trinity Europe was a breach of the agency agreement between itself and TUSA.

In 2013 TFG were in financial difficulties and in order to get possession of the goods without first paying for them they induced Trinity Europe, by promising swift payment of their charges, to release goods to them without presentation of an indorsed bill of lading or a "Bank Release" order. Goods were so released between July 2013 and June 2014. This exposed TUSA to claims for wrongful delivery and put Trinity Europe in breach of their agency agreement with TUSA.

TFG went into administration in June 2014. On discovering what had been going on TUSA brought proceeding against various individuals on various grounds. So far as is relevant for present purposes, they brought a claim against Mr Wolff in tort of procuring a breach of contract; that is of the agency agreement between Trinity Europe and TUSA. They claimed an indemnity from Mr Wolff in relation to their, TUSA's, liability to the suppliers of the goods arising out of the wrongful delivery of the goods which resulted from Trinity Europe's breach of the agency agreement.

Parallels between the facts of the Wolff case and the commodity world

The parallels between the facts of the Wolff case and the delivery of commodity cargoes without presentation of the relevant bills of lading are readily apparent. When a trader asks a carrier (usually as the charterer of the ship) to deliver cargo represented by a bill of lading without production of that bill, it is invariably asking the carrier to act in breach of the bill of lading contract. As Longmore L.J. recognised in the opening sentence of his leading judgment in the Wolff case: "It has long been the cardinal principle of the English law of carriage by sea that the carrier should only deliver the goods to a person who presents an original bill of lading." Furthermore, if the request itself does not amount to an inducement to act in such a way the provision of an LOI which specifically indemnifies the carrier against the consequences of so acting is very likely to do so.

The requirements for making good a claim in tort of procuring a contract breach

As confirmed by the Wolff case the requirements for making good a claim in tort of procuring a contract breach are as follows:

(i) the conduct of the defendant must induce or procure the actions of the contract breaker;

(ii) the defendant must know that there is a relevant contract capable of breach and the nature of the contractual rights of the third party which will be breached by the contact breaker's conduct and

(iii)  the defendant must know and intend that the conduct of the contract breaker he is seeking to induce to act will result in the relevant contractual rights being infringed.

Requirements (ii) and (iii) require consideration of the knowledge of the individual defendant concerned; or of the knowledge of the relevant officers/employees if the defendant is a corporate entity. Technically, it is not necessary to prove that the relevant individual actually had the knowledge. It is enough, on the basis of the Wolff case at least, to establish that "it is almost certain" that they did.

The Wolff decision

At first instance the Commercial Court found Mr Wolff liable to TUSA for procuring Trinity Europe's breach of their contract with TUSA. The Deputy Judge found that Mr Wolff (a) had the requisite knowledge of the agency contract between TUSA and Trinity Europe; (b) as an experienced freight forwarder, must have known that what he was asking Trinity Europe to do would put them in breach of their contract with TUSA and (c) that he knew and intended them to breach that contract.

Having represented himself in the Commercial Court Mr Wolff was able to instruct solicitors and counsel on the appeal but they fared no better; his appeal against the Commercial Court judgment was dismissed.

Application of the Wolff case outcome to the commodity world

As mentioned above the parallels between the Wolff case and the use of LOIs are close. A party requesting a carrier to deliver a cargo without production of the bill of lading will be aware of the bill of lading contract concerned (the bills will usually be referred to in the LOI). Further, having under the LOI agreed to indemnify the carrier against claims under the bills, it would be difficult for the requesting party and LOI issuer to say they did not have the necessary knowledge that the action they had induced the carrier to take would amount to a breach of the bill of lading contract.

It must therefore follow that there is a real risk that any trading company issuing an LOI to get a cargo delivered without production of the bill of lading will be potentially liable, not only to the carrier under the LOI itself, but directly to the party whose contractual rights have been infringed by virtue of the carrier's conduct. Furthermore, any individual working for the trader who is engaged in procuring the discharge of the cargo without presentation of the bills may face an identical, personal liability.

There may be circumstances in which a buyer may ask a seller to instruct the carrier to deliver cargo other than against the bill of lading; for example when the seller is also the charterer of the ship and the bill has not yet reached the buyer through the banking chain. If the seller acts on such a request and issues an LOI to the carrier, the buyer may, by virtue of the request, be estopped or otherwise prevented from making any claim against the seller on the basis of procurement of breach of the bill of lading contract. However, such estoppel arguments are inherently quite difficult.

What to do?  

In our experience both buyers and sellers can, shall we say, be a little relaxed about the timing of the provision of a required LC. Indeed buyers, not wishing to tie up valuable credit lines, might deliberately delay putting up the LC if they have doubts as to whether the seller is going to perform. This can lead to what the buyer might regard as an opportunistic, though technically valid, termination of the contract by the seller if the LC is not in place by the contractual deadline. On the other hand, from a seller's perspective, a relaxed attitude, if amounting to an indication that it intends to perform despite the buyer's failure to put up the LC in time, may waive the right to terminate the contract on that basis.

This blog attempts to shine a light on some of the key considerations which should not be overlooked in operating a commodity contract requiring the provision of an LC.

(a) The buyer's perspective

In terms of the date by which the buyer needs to put up the LC if the contract specifies the date that should be treated as the deadline. If the contract does not have an express deadline the deadline to be inferred will depend on the terms of the contract; in particular the shipment/delivery terms and possibly any terms relating to nominations and the narrowing of the shipment and delivery ranges.

The legal cases decided by the English Courts in this area provide some guidance but a number of statements of the judges dealing with these cases have been what lawyers call "obiter; meaning they are not essential to the decision they made and are therefore more open to challenge in future cases. However, as a general rule (which, as always, is subject to the express terms of the contract) the LC must be in place by, at least, the beginning of the contractual shipment or, as the case may be, delivery period. We say "at least" as there are certain obiter judicial comments that support the argument that the LC must be in place a reasonable time before the beginning of the shipment or delivery period. The justification for an earlier date is that the seller will usually need some time to make the necessary arrangements to ready the goods for shipment or delivery and it is unreasonable to require such steps to be taken before it has received the payment security of the LC. The downside, however, in requiring the LC to be in place a reasonable period before the commencement of the shipment or delivery period is the resultant uncertainty this creates.  This is because it is difficult to predict what a tribunal may, in due course, find to be such a reasonable period in the circumstances of any individual case. This uncertainty is all the more unsatisfactory when the obligation to put up the LC on time is a condition of the contract giving the seller the option to terminate the contract for breach if the buyer fails to meet the relevant deadline.

It is vital that a buyer does not lose focus on the deadline for provision of the LC or get lulled by "noise" coming from the seller or elsewhere into thinking they can delay provision of the LC. For example the fact that the seller indicates it maybe in difficulty performing or might be delayed in giving delivery doesn't alter a buyer's obligation in respect of the provision of the LC. The case of Kronos Worldwide Limited v Sempra Oil Trading SARL [2004] EWCA Civ 03 provides a good example of a buyer taking their eye off the ball in respect of the provision of an LC and paying a price for doing so.

In that case Kronos sold a cargo of gasoil to Sempra on FOB terms with a narrowed loading range of 25-30 June 2001. Kronos then asked Sempra to agree to postpone the loading range to 1-5 July 2001 because there had been slippage in the refinery delivery schedule. Sempra refused and their nominated ship arrived at the loading port on 28 June 2001. She then had to wait to commence loading until 9 July 2001. It was common ground that the LC should have been in place before 28 June 2001 (although the Court did not need to decide how long before). But because of the issues in respect of the availability of the product, Sempra delayed putting up the LC and only provided it when Kronos advised Sempra that the product was ready for loading which only occurred on 6 July 2001. Sempra claimed demurrage in respect of the delay to the ship whilst awaiting the availability of the gasoil. Kronos response was that they were not liable for such demurrage since in the absence of the LC they were under no obligation to load the goods and so were not liable for the delay or the demurrage. On an appeal from a rather surprising first instance decision, the Court of Appeal agreed with Kronos and rejected Sempra's claim. Mance LJ said; "I have no doubt that the provision of a letter of credit should be regarded as a condition precedent to any obligation on the part of the seller to perform any aspect of the loading operation which is the seller's responsibility".

(b) The seller's perspective

The reader would be quite right to wonder whether Kronos might have said anything in the context of advising Sempra of their difficulties in meeting the contractual loading range which might amount to a waiver of their right to insist on timely provision of the LC. The answer to that question would be that it was common ground in that case that there was no such waiver although it is doubtful if any such waiver of itself would have assisted Sempra as the fundamental principle, as enunciated by Mance LJ, is that there is no obligation on the seller to load until the LC is in place.

Waiver, however, is a real "danger" for a seller facing a failure by the buyer to put up the LC in time. This is because it is relatively easy (particularly if there is imperfect communication between operations and finance teams) to inadvertently waive the right to insist on strict performance of the buyer's obligations in this respect. Any communication from a seller to a buyer which conveys an intention to perform the contract despite a failure by the buyer to put up the LC in time can amount to a waiver of the right to insist on strict compliance by the buyer and loss of the right to terminate the contract on the basis of that breach. If that happens it is not entirely straight forward to re-establish a deadline for the LC. This will need to be done by a carefully drafted message giving the buyer a reasonable period of additional time to provide the LC and formally making the time for provision of it of the "essence of the contract" (that is re-establishing a deadline which if not met will entitle the seller to terminate the contract for breach).

It is therefore also important for the seller to keep a close eye on the deadline for the buyer's provision of the LC so that they can be careful to not inadvertently waive their rights. To an extent once the deadline for provision of the LC has passed that can be achieved by expressly stating that communications are without prejudice to the right to treat the buyer's breach as repudiatory although delay in exercising that right can itself amount to waiver.

In considering waiver it is also important to identify what right it is that has or may be waived. Waiving the right to terminate the contract for breach in failing to put up the LC in time is one thing; waiving the requirement to put up an LC at all is quite another. As to the latter, it would take a very clear indication indeed from a seller that it was willing to ship or deliver the goods without first receiving the LC for such indication to amount to a waiver of the right to withhold shipment or delivery pending receipt of the LC.

Conclusion

In our experience the timing of the provision of an LC required under a commodity contract is often treated as a relatively unimportant administrative matter by both buyer and seller; at least until the actual shipment or delivery is imminent, if not very imminent. This can be potentially disastrous for the buyer as the delay in provision of the LC can give a savvy seller justification (indeed a get out of jail card) to side step performance of what has become an unprofitable contract.

First instance decision

In summary, Buyers (RBRG) argued that Sellers (Sinocore) should not be allowed to enforce an award for damages for breach of the sale contract because Sellers had (unsuccessfully) attempted to obtain payment by presenting forged documents under a letter of credit.

The Commercial Court dismissed Buyers' challenge to enforcement of the award because:

• It was not appropriate or permissible to go behind the CIETAC tribunal's finding that the cause of Sellers' loss was Buyers' wrongful instruction to their bank to change the shipment date in the letter of credit; and

   

• The principle that "fraud unravels all" only applied to Sellers' claim against the bank, not to Sellers' separate claim against Buyers under the sale contract.

 Appeal

Buyers appealed on 2 main grounds:

• The Judge applied the wrong test in assessing the consequences of Sellers' fraud.  If he had applied the correct test, the Judge would have refused enforcement; and

   

• Even applying the test he did, the Judge should have refused enforcement on the ground that Sellers' claim was based on its own fraud.

 The correct test

Buyers argued that the Judge should have applied the test laid down by the Supreme Court in Patel v Mirza [2016] UKSC 42.  Buyers said this was a more flexible test than that applied by the Judge, and would have led him to refuse enforcement of the award.

The Court of Appeal reviewed the authorities and concluded that the Judge applied the correct test.  The test in Patel v Mirza only applies to consideration of illegality as a defence to a substantive claim.  It does not apply to illegality as a "public policy" defence to the enforcement of an arbitration award. 

As the Court noted, there are good reasons for taking a different approach to substantive claims and enforcement claims.  Not least, there is always a strong public policy in support of enforcement of awards.

Even if Patel v Mirza was the correct test, the Court of Appeal would still not have refused enforcement.

Application

Whichever test was applied, Buyers' main argument was that Sellers' fraud was so closely connected with its claim under the sale contract, and hence with the award, that the award should not be enforced as a matter of public policy.

The Court of Appeal, however, found that there was in fact no fraud.  This was at most a case of attempted fraud, but neither Buyers nor their bank were actually deceived.  The bank did not pay out against the forged bills of lading and Sellers obtained no benefit from their wrongful conduct. 

The Court accepted Sellers' submission that the attempted fraud was not the basis of its claim under the sale contract but was "essentially collateral" – an interesting choice of word reflecting perhaps the Supreme Court's lenient approach to "collateral lies" in the presentation of insurance claims.

The simple answer to the Buyers' complaint can be found in the Court of Appeal's statement that "there is no public policy to refuse to enforce an award based on a contract during the course of the performance of which there has been a failed attempt at fraud".

Comment

Of course, Courts do not condone fraud, nor will they enforce claims based on fraud.  However, where the fraud or attempted fraud is merely collateral, the balance of public policy considerations lies in upholding the finality of arbitration awards.

In this case, the issue of fraud had already been fully considered by the CIETAC tribunal to which the parties had agreed to submit their disputes.  The English Courts' decisions are a welcome example of their pro-arbitration and pro-enforcement approach.

The LADY M was damaged by fire in May 2015 during a voyage from Russia to the USA. Defendant shipowners engaged salvors, and later declared General Average.

Cargo claimants denied a liability to contribute to GA, and claimed for breach of owners’ obligation under Article III of the Hague-Visby Rules to “carefully load, handle, stow, carry, keep, care for, and discharge the goods carried”.

The Court assumed, for the purposes of determining various preliminary issues, that the fire had been started by the Chief Engineer acting alone.

Preliminary Issues

• Did the conduct of the Chief Engineer constitute barratry?
• Is Article IV Rule 2(b) capable of exempting the owners from liability if the fire was deliberately or barratrously caused?
• Are the owners exempt from liability under the "any other cause" exception in Article IV Rule 2(q)?

Barratry definition

Barratry was helpfully defined by the Court (at paragraph 22 of the Judgment) as:

• A deliberate act or omission by the master, crew or other servant of the owners
• Which is a wrongful act or omission
• To the prejudice of the interests of the owner of the ship or goods
• Without the knowledge or privity of the owners

Because barratry is an international admiralty law concept, the definition of a “wrongful” act is necessarily broad, and not restricted by reference to English law.

In recognition of this, the Court noted that the wrongful act or omission must be either:

• Generally recognised as a crime, including the mental element necessary to make the conduct criminal; or
• A serious breach of duty owed by the person in question to the owners, committed by him knowing it to be a breach of duty or reckless whether that be so. 

Judgment

Article IV Rule 2(b)

The first preliminary issue (whether the conduct of the Chief Engineer was barratry) was necessarily fact-specific, and in any event did not need to be finally determined by the Court.

This is because the Court held that that Article IV Rule 2(b) applied even if there was barratry. That rule excludes “Fire, unless caused by the actual fault or privity of the carrier.”

As a matter of construction, the interpretation of treaties (as with statues and contractual clauses) starts with the ordinary meaning of the words used. Although the Court did examine the various authorities, as well as the travaux préparatoires to the Hague-Visby Rules, it was arguably unnecessary to do so, as the Court held that the ordinary meaning of Rule 2(b) was clear.

In that regard, the Court noted that:

• The reference to ”fire” in Rule 2(b) is unqualified, without any consideration of how the fire started;
• The inclusion of the phrase "unless caused by the actual fault or privity of the carrier" in the Rule implies that that fire is otherwise unqualified;
• By contrast, the general exception under Rule 2(q) expressly excludes losses contributed to by the neglect or default of servants or agents of the carrier.

The Court further stated that there was no policy reason for reading "fire" in a restrictive way, given that the “essence of barratry” was the crew acting against the shipowner's interests (paragraph 44).

Article IV Rule 2(q)

In the alternative, owners relied on Article IV Rule 2(q), which excludes liability for loss caused by “any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier…”.

Although strictly obiter, the Court held that Rule 2(q) did not apply to barratry.

The Court drew on the principles of English law governing vicarious liability in tort, in deciding that the Chief Engineer was a “servant” of the shipowners at the relevant time, regardless of whether he was on duty or performing his duties properly.

Comment

The Judgment in The LADY M is a helpful fresh look at the concept of barratry.  There is a high threshold to demonstrate that it would apply, but this will be dictated by the evidence.

It seems to the writer that the Court’s obiter comments on the general exceptions Rule 2(q) may prove to be just as helpful as Court’s decision on Rule 2(b).

In that regard, there will no doubt be some sympathy with cargo claimants, whose losses were incurred as a result of the actions of an individual employed by shipowners. It seems somewhat unfair that, as between ship and cargo owners, the latter should bear any responsibility for a crew member's actions.

However, as the Court held, it is clear that this is the effect of the Hague Rules (as Rule 2 survives intact from the original text, unamended by the Visby protocol).

That said, the original Hague Rules may perhaps be starting to show their age, at over 90 years old. In that regard, there may have been good historical reasons for fire onboard a vessel to be treated so differently, but it is perhaps questionable that this special treatment should continue today.

By way of comparison, shipowners in this case would not have been able to avoid liability under the Hamburg or Rotterdam Rules.  Both retain a fire exception, but it does not apply where the fire is caused by a crew member.

In determining whether a buyer can reject goods which do not meet the contract specification the starting point will always be the terms of the contract. In particular the contract terms may:

(i) provide guidance as to whether the failure to comply with the specification will result not only in the goods not being of contractual quality but also result in them not meeting the contract description;

(ii) expressly provide a remedy for breach of specification; for example by providing for an adjustment in the price to be paid for the goods in the event they are off-specification and

(iii) indicate whether the specification is intended to be a condition, warranty or innominate term of the contract.

Quality or description?

The first step in any analysis of a breach of specification claim is to determine whether the aspects of the specification with which the goods do not comply can be said to be not only an aspect of quality but also description. This is important because if the specific breach of the specification also means the goods do not meet the contract description then, absent any contrary provision in the contract, the buyer will, in  principle,  be entitled to reject the goods on that basis.

Words in a contract which identify the goods are words of description; requirements as to quality which do not serve that purpose are not. In some cases terms as to quality can also be part of the description of the goods. For example in Tradax Export  SA v European Grain & Shipping Co [1983] 2 Lloyd's Rep.100, which concerned a contract for solvent extracted toasted soyabean meal, it was held that the words "maximum 7.5 per cent fibre" not only went to the quality of the goods but also formed part of the contractual description of them.

Express terms providing a remedy for breach of specification?

Some commodity contracts, in particular soft commodity contracts, specifically provide for the buyer's remedy in the event the goods supplied do not meet the specification. In particular there are clauses which provide for an adjustment (generally downwards) in the price dependent on the degree by which the goods fail to meet the specification. Such clauses often also provide that the goods can be rejected if they fail to meet the specification by a specified margin.  What is a little surprising is that such clauses are not more prevalent in other types of commodity contracts as they usually bring certainty to the issue of rejection.

Condition, warranty or innominate term?

Assuming that (a) the element of the specification which is not met does not also form part of the description of the goods and (b) there are no express allowances in the contract, the right to reject will be determined by the characterisation of the contract terms containing the specification. If the relevant term is a warranty the buyer will not be entitled to reject; if it is a condition then, in principle, it will. If an innominate term, the right to reject will depend on the seriousness of the breach; a minor breach will not permit rejection but a serious breach going to the root of the contract will.

The starting point, in categorising the specification, will be the terms of the contract although the use of the words "condition" and "warranty" are not necessarily determinative in this respect. It is necessary to consider all the relevant provisions in the contract and, deploying all other accepted aids to construction, seek to determine into which category of legal term the parties intended the specific terms as to quality to fall. In most cases there will be little guidance to be found in the contract and the default position, in the absence of guidance, will be that the specification is an innominate term and it will all turn on how bad the breach is.

Section 14 of the Sale of Goods Act 1979

One must also bear in mind, however, that if the contract is governed by English law, then unless excluded (which is often the case), the buyer may be able to rely upon the implied condition in S.14 of the Sale of Goods Act 1979 that the goods supplied will be of satisfactory quality. Of course, a breach of the contractual specification will not necessarily render the goods “unsatisfactory”. It will be a question of whether the failure of the goods to meet the specification renders the goods “unsatisfactory” applying all the factors which are to be taken into account, in accordance with S.14, in determining that question. But if it does the buyer will, in principle, be entitled to reject.

RG Grain Trade LLP (UK) v. Feed Factors International Limited

The judgment in RG Grain Trade LLP (UK) v. Feed Factors International Limited [2011] EWHC 1889 (Com) provides a useful illustration of the interaction of many of the above considerations.

(i) The background facts

This case concerns the FOB sale by RG Grain Trade (Sellers) to Feed Factors (Buyers) of a cargo of sunflower expeller. A dispute arose in relation to whether the goods supplied under the contract were in accordance with the contractual specification and whether the Buyers were entitled to reject them and claim damages. The GAFTA First Tier Tribunal found for the Sellers but the GAFTA Board of Appeal allowed the Buyer's claim.

The Board of Appeal and the Court concluded that, by virtue of the various contractual provisions, the goods had been determined not to comply with the contractual specification.

So far as is relevant for present purposes, the contract provided as follows:

“Commodity: UKRAINIAN ORIGIN SUNFLOWER EXPELLER

In bulk, sound, loyal and merchantable quality.

Specifications: protein min 32% moisture max 7% - fiber (sic) max 23% - fat min 11%

Special Conditions: Other terms and conditions not in contradiction with above as per GAFTA 119…“

Clause 5 of GAFTA 119 provides as follows:

“5. Quality

Official … certificate of inspection, at time of loading into the ocean carrying vessel, shall be final as to quality.

Warranted to contain not less than ….% of oil and protein combined and not more than 1.5% of sand and/or silica. Should the whole, or any portion, not turn out equal to warranty the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below”.

The Board of Appeal found that a certificate issued by Salamon & Seaber was final and binding and Mr Justice Hamblen agreed. That certificate stated that the protein content of the cargo (referred to in Clause 5 of GAFTA 119) was 26.8%  (less than the minimum of 32% specified in the contract) and the fibre content (not referred to in Clause 5 of GAFTA 119) was 26.57% (more than the maximum of 23% specified in the contract).

In light of this finding, the Board of Appeal said in its Award:

“If a contract does not contain a scale of allowances for deficiency in certain specifications (viz fibre) and the goods subsequently fall outside this then it must follow that the goods can be rejected unless the parties agree to any other course of action”.

The Sellers contended before Mr Justice Hamblen that this conclusion was wrong on two grounds;

(1) The Board had failed to give effect to clause 5 of GAFTA 119 which is a non-rejection clause.

(2) The Board had proceeded on the erroneous basis that any failure of the goods to meet the specification would justify rejection.

(ii) The Commercial Court decision

With regard to ground (1), the Court agreed with the Board of Appeal that the provision in clause 5 of GAFTA 119 referring to the goods being taken at an allowance applied only to the warranties in respect of oil and protein combined and sand and/or silica as expressly referred to in that clause. The clause did not, therefore, apply to the specification in relation to fibre. Accordingly, the clause did not assist in determining whether the Buyers were entitled to reject on account of a failure of the goods to meet the contractual specification in relation to fibre.

With regard to ground (2), the underlying issue was whether the contractual requirement that the goods have a maximum fibre content of 23% was (i) a condition or (ii) a warranty or (iii) an innominate term.

The Buyers contended that the Board had in fact determined that the breach was one of a condition, alternatively that the Board's conclusion could be upheld on that basis. In particular, the Buyers argued that the breach in respect of fibre content was a breach of condition giving them a right to reject. Mr Justice Hamblen noted that there was no suggestion in the Board's reasons that they regarded the fibre content provision as a matter of description. Indeed, it was clear that the Judge was of the view that it was a matter of quality, referring as he did to the fact that the fibre content provision appeared under the heading “Specifications” and next to a specification characteristic which was clearly a matter of quality rather than description, namely protein.

As to the contractual nature of the provision with regard to fibre content, Mr Justice Hamblen referred extensively to the judgment of Mr Justice Slynn in Tradex v. Goldschmidt SA [1977] 2 LLR 604, where the Judge found that a contractual provision providing for “4% foreign matters” was an innominate term. Mr Justice Hamblen commented that there is “no hint in the Board's reasons that they have addressed their minds to the issue of whether the fibre content provision should properly be regarded as a condition, as opposed to a warranty or an innominate term. They have assumed that the term is a condition unless there is an indication to the contrary. That is not the law”.

As a result the Judge referred the matter back to the GAFTA Board for further consideration; in particular as to the contractual nature of the provision in respect of fibre content.

Comment

In Standard Chartered Bank v Dorchester LNG (2) Ltd ("Erin Schulte") [2014] Civ 1382 Moore-Bick said:

"Whatever view may have been taken at the time when letters of credit were in their infancy, in my view the modern cases support the proposition that if the opening or confirming bank fails to pay against presentation of conforming documents under a letter of credit payable at sight, the beneficiary may sue in debt to recover the value of the credit, provided he is willing and able to transfer the documents to the bank against payment….. If the beneficiary is willing and able to transfer the documents to the bank, therefore, he is entitled to recover the face value of the credit as a debt. If he is not willing or able to hand over the documents, the position is different, as Sir Christopher Staughton pointed out in Seaconsar Far East v Bank Markazi. Since the contract provides for payment against documents, the beneficiary is not entitled to recover the full value of the credit otherwise than on surrender of the documents."

When Moore-Bick LJ says that if the beneficiary is not willing "to hand over the documents, the position is different" he means that in those circumstances the beneficiary will need to claim in damages not debt (assuming it suffers a loss by virtue of the dishonour of the credit).

In the "Erin Schulte" the L/C concerned was confirmed by Standard Chartered Bank ("Standard Chartered") and supported a sale of oil by Gunvor; Gunvor being the beneficiary under the L/C. Gunvor made a compliant presentation under the L/C which included the bills of lading in respect of the oil. Standard Chartered wrongly rejected that presentation. Gunvor therefore sued Standard Chartered who thereafter settled the litigation by paying the sum due under the L/C in full. 

In the meantime Gunvor, in order to avoid delay at the discharge port, had arranged for discharge of the oil there by issuing a letter of indemnity ("the LOI") to the carrier in respect of liabilities they might face by giving delivery without presentation of the bills of lading.

Standard Chartered were unable to obtain reimbursement from the issuing bank and therefore sought to exercise the "security" they claimed to have as a result of being, they said, the lawful holders of the bills of lading. They sought to do that by suing the carrier in the "Erin Schulte" case for the full value of the cargo for mis-delivery; that is for giving delivery without presentation of the bills of lading. As a result of the LOI, Gunvor were obliged to indemnify the carrier against such a claim.

In the "Erin Schulte" the Court of Appeal concluded that Teare J. (the judge at first instance) was wrong to have concluded that Standard Chartered became the lawful holder of the bills of lading on presentation under the L/C but was right that it did so upon their eventual, post litigation, payment of the amount claimed under the L/C despite having rejected the presentation and indicated they were holding the documents to Gunvor's order. The Court of Appeal said that it was to be inferred that as Gunvor (a) had not taken the documents back (by virtue of the delivery of the cargo against the LOI the bills of lading had no value to Gunvor) and (b) had claimed against Standard Chartered in debt (as well as damages in the alternative), Gunvor were agreeing to Standard Chartered unwinding their rejection and taking up the documents including the bills of lading in return for payment. This was to be inferred, the Court of Appeal concluded, because a claim in debt carried with it an obligation to surrender the documents. Judgment was therefore given against the carrier which Gunvor were liable under the LOI to cover.

To claim in debt or damages – that is the question

The dilemma a beneficiary therefore faces in the circumstances of a dishonour of an L/C is whether to simply leave the documents with the bank and claim the sum due under the L/C as a debt or take the documents back and seek to realise their value elsewhere; claiming the shortfall from the bank as damages if they realise less than the sum which the bank should have paid under the L/C. That decision will, at least in part, depend on the beneficiaries' assessment of the merits of the bank's rejection of the presentation. If a beneficiary is supremely confident that they have made a good presentation they may wish to leave the documents with the bank and sue in debt. But that is a risky course as if the bank succeeds in establishing that the presentation was discrepant there is a danger (especially when the L/C is the mechanism for payment for perishable goods) that by the time the dispute about discrepancy is resolved the documents will be worthless.

The beneficiary may also be exposed to liability to third parties if leaving the documents with the bank. For example if the beneficiary is the charterer of the carrying vessel or exposed to demurrage liabilities under its own purchase contract, the beneficiary may incur significant liability for demurrage pending the resolution of the claim in debt. This is so because there is nothing it can safely do to facilitate delivery of the cargo as, having decided to claim in debt, the bills of lading have to be left available for the bank to take up as and when they decide to pay, or are required to pay pursuant to a judgment. The beneficiary is therefore unable to surrender the bills to the carrier to facilitate discharge of the goods. The vessel will just have to sit and await the resolution of the claim under the L/C. In a contested case, it is not difficult to anticipate delays of two or three years before liability under the L/C is finally determined and the recalcitrant bank pays. True, the beneficiary may be able to recover such costs under a separate claim for damages against the bank but apart from the uncertainty of such a claim, including potential arguments about failing to mitigate loss, racking up huge demurrage bills would certainly escalate the sums in dispute well beyond the sum due under the L/C.

As articulated above, the alternative to maintaining a claim in debt is, in essence, to take back the documents and claim the sum due under the L/C subject, as the Court of Appeal in The Erin Schulte observed, to giving credit for the value of the documents. But this course is not without potential pitfalls. Since one is in the territory of a claim for damages, there is again the obligation on the beneficiary to mitigate its losses. In the usual scenario involving an L/C supporting a commodity sale, where the goods concerned are on the water on their way to, or have already arrived at, the delivery destination identified in the bills of lading, the options open to the beneficiary with regard to the disposal of the goods are bound to be limited; indeed, the goods may be regarded in the market as ‘distressed’. Naturally, if a beneficiary in those circumstances does its best and disposes of the bills of lading, and the goods represented by them, on the best terms reasonably available, then it should have no worries. However, one needs little experience of litigation to anticipate the sort of arguments that might be run by the bank about the reasonableness of the conduct of a beneficiary in disposing of the bills of lading or goods in such circumstances. In addition to potential criticism in relation to the price achieved under such a substitute sale, the beneficiary might find themselves in a position where they are required to sell to a party, including possibly the original buyer, without the provision of payment security. What might be the position in those circumstances if the bills having been presented to the buyer, the buyer fails to pay for the goods. Would this be a novus actus, meaning that the beneficiary is limited to claiming the sum that would have been due under the L/C less the notional substitute sale price, despite the default in payment by the buyer?

Comment

As recognised by the editors of Cooke on Voyage Charters the date by which a chartered vessel will arrive at the load port is of vital importance to a charterer. This is particularly so in the case of commodity traders who usually have obligations under their sale contracts to ship the goods within a limited date range when a failure to ship in time may cause loss or result in them incurring liabilities under their sale contracts. In that context the right to cancel the charter provides the charterer with no right of recourse in respect of such loss or liability  and  it is often too late by the time the right to cancel arrives to find a substitute vessel to load within the applicable time frame. When a vessel is late or simply does not turn up at all what the charter wants is a remedy as against the owner in terms of a claim for damages for breach of the charter.

In the context of late arrival or a failure to arrive there are two obligations the breach of which may give rise to a right of recovery as against the owner. First, there is the obligation on the owner, whatever its precise terms, as to the timing of the commencement the approach voyage and second, the obligation to proceed to the load port once the approach voyage had been commenced. The first obligation arises before the vessel enters service under the charter and the second only once the vessel is in service under the charter; that service commencing on commencement of the approach voyage. As a matter of analysis of the allocation of risk between the parties, the approach of the courts has been to impose on the owner an absolute obligation to commence the approach voyage in time. This contrasts with the lesser obligation to exercise due diligence which will usually apply, by virtue of typical voyage charter terms, to the obligation to proceed to the load port once the vessel has commenced her approach voyage. 

The facts of the case 

The charter in the above case was for a voyage from Rotterdam to the Far East. At the time the fixture was concluded the vessel was laden with a cargo under a previous charter to be discharged in Egypt, south of the Suez Canal. The vessel was scheduled then to go to Alexandria to load a part cargo and thence to Antifer, Le Havre for final discharge before sailing to Rotterdam. The charter contained various ETAs in respect of this schedule culminating in an ETA Antifer of 25 January 2015. The cancellation provision in the charter permitted the Charterer to cancel the charter if the vessel was not ready to load  at Rotterdam by 2359 on 4 February 2015 (the cancelling date). There was no estimated readiness to load date or ETA Rotterdam in the charter.

Whilst transiting the Suez Canal the vessel suffered a rapid ingress of water which was attributed to contact with a submerged object. There was no suggestion that the Owner was in any way at fault for what happened. As a result the vessel had to be dry-docked for repairs which were estimated to take a number of months. The Charterer cancelled the charter on 6 February and claimed damages from the Owner (which were agreed as to quantum at US$1,202,812.50) on the basis that the Owner was in breach of an absolute obligation to commence the approach voyage to Rotterdam by a date when it is reasonably certain the vessel would arrive there by the cancelling date. The Charterer argued that the cancelling date was to be treated as equivalent to an expected readiness to load date. Given the planned itinerary of the vessel the approach voyage was not to commence until after discharge at Antifer and so the vessel plainly failed to commence the approach voyage in time; indeed never commenced it.

In the alternative the Charterer said (adopting, it would appear, an unpleaded case which was "suggested in argument" at trial) that on a proper construction of this charter, and in particular the express arrival ETA at Antifer of 25 January, the vessel had to commence her approach voyage to Rotterdam within a reasonable time to allow for discharge at Anifer after 25 January. There is no finding as to what that date would have been because on any basis the vessel didn’t commence that approach voyage in time.

The Owner argued that the neither the laycan nor the cancelling date was equivalent to an expected readiness to load date and there was no estimate as to the estimated arrival date to be otherwise derived from the charter terms. What the Owner said was that their obligation was limited to exercising due diligence to commence the approach voyage by a date which could reasonably be expected to get the vessel to the load port by the cancelling date.

The Court's findings

The Court had some sympathy with the Owner's case that the cancelling date was not the same as an ETA and Popplewell J. said that "I do not regard the cancelling date as the critical term which informs the question of what is a reasonable time at which" the obligation to proceed to the load port attaches. In the Judge's view the key provisions in determining the date by which the vessel had reasonably to commence the approach voyage were the ETAs for the intermediate ports on the previous voyage; in particular the ETA for the arrival at Antifer. In this respect the Judge concluded:

"The Owners gave intermediate port estimates which involved the Vessel arriving at Antifer on 25 January 2015 for final discharge of her previous cargo. Such estimate carries with it an estimate that she would take a reasonable period after arrival at Antifer to complete discharge. She was bound thereafter to embark on the chartered service. It is therefore the end of that additional period of reasonable discharging time that the Owners gave as an estimate of the expected commencement of the approach voyage and of the chartered service. In my judgment that is the time at which the Owners were under an absolute obligation to commence the relatively short approach voyage to Rotterdam, namely at the end of a reasonable discharging period for the Vessel if she were to arrive for final discharge at Antifer on 25 January 2015."

Fortunately, the Judge did not leave it there but went on to record his views on the question of much greater general importance of what the position is when there is a cancelling date but the charter contains no load port ETA or any other ETAs from which it is possible to derive a date by which the vessel should commence her approach voyage. As to that Popplewell J. said:

"In those circumstances I would have accepted [Charterers' counsels'] argument that there was an absolute obligation to commence the approach voyage by a date when it was reasonably certain that the Vessel would arrive at the loading port by the cancelling date. Although there are differences between a cancelling date and an estimated arrival date, they are not sufficient to treat them differently [for the purpose of determining the Owners' obligation in respect of commencement of the approach voyage]"

As a result the Court held the  Owner in breach and awarded the Charterer the agreed damages of approximately $1.2m.

Comment

It is a little surprising that the issue of whether one can equate the usual charterparty cancelling date with a load port ETA for the purposes of determining an owner's obligation to proceed to the load port has not been judicially considered before. It may well be that those involved in previous such disputes have accepted the tentative views expressed by the editors of Voyage Charters which correspond with Popplewell J.'s conclusions in this case.

• the cargo was not "the subject of the [arbitration] proceedings",
• there was no "good reason … to sell quickly", and
• the Court should not exercise its discretion to order a sale.

Somewhat surprisingly, while similar orders have been made in many other cases, the parties had not found any English authority on the first point.  In a 2015 Singapore judgment on the equivalent provision of their International Arbitration Act 2002, it was held that the Court did have power to order the sale of cargo in similar circumstances.

Charterers argued the requirement meant that there had to be a dispute "about" the goods, and that the power to sell should only be exercised where it will not be known until the dispute is resolved who is entitled to sell the goods.

The Judge rejected this argument.  He concluded that there was a sufficient connection between the cargo and the arbitration proceedings where owners were exercising a lien over the cargo as security for their claims for hire which were being pursued in the arbitration.  As the Judge said, "even if the arbitration is not 'about' the cargo, it will certainly determine what will happen to the cargo".

The second point arose because the Court's power to order sale of goods in support of an arbitration can only be exercised on the same basis as in Court proceedings.  In that regard, CPR 25.1 gives the Court power to order sale of property "which is of a perishable nature or which for any other good reason it is desirable to sell quickly".

The oil cargo was not perishable, so it had to be decided whether there was another good reason to sell it quickly.  This point overlapped with the more general discretionary considerations.

Owners' primary argument was that the cargo had already been on board the vessel for over 9 months and (if not sold) would remain there for many more months.  In that time, owners were incurring the costs of operating the vessel (without being paid hire) and losing the opportunity to trade the vessel elsewhere.  Owners also argued, and charterers accepted, that there was no viable alternative such as discharge into storage.

Charterers argued that owners had brought this situation on themselves because they allowed the cargo to be loaded in circumstances where charterers already owed substantial amounts of hire.  While this argument may have some commercial force, the Judge did not accept it was relevant to the legal analysis.

Charterers also criticised owners' delay in making the application between the tribunal giving permission in December 2016 and the Court proceedings being commenced in May 2017.  Owners' explanation, accepted by the Court, was that there was a lot of activity during this period in relation to the other disputes between Sovcomflot group companies and PDVSA, including an application for sale (and subsequently the discharge into storage) of the cargo on board another vessel, "NS COLUMBUS".

Finally, the day before the hearing, charterers made what the Judge described as a 'last-minute' offer to sell the cargo themselves and pay the proceeds into escrow.  Charterers argued that they were best placed to maximise the sale proceeds.  As a tactic, however, this failed because the Judge interpreted it as an acceptance by charterers that the cargo had to be sold.  Any offers charterers obtained for the cargo could notified to owners and if necessary the Court.

Comment

This is an encouraging decision for owners faced with defaulting charterers.  Often, the exercise of a lien by itself will lead to payment.  However, if it does not, and if (as in some jurisdictions) the lien cannot be maintained after discharge, or if storage facilities are not available, then an order for sale gives owners the ability both to recover the use of the vessel and to obtain a fund against which to enforce their claims.

One word of warning is that such an application might not be as straightforward where the cargo is owned by a third party which is not a party to the arbitration proceedings.  In this case, that issue did not arise because the cargo was owned by charterers.

• the cargo was not "the subject of the [arbitration] proceedings",
• there was no "good reason … to sell quickly", and
• the Court should not exercise its discretion to order a sale.

Somewhat surprisingly, while similar orders have been made in many other cases, the parties had not found any English authority on the first point.  In a 2015 Singapore judgment on the equivalent provision of their International Arbitration Act 2002, it was held that the Court did have power to order the sale of cargo in similar circumstances.

Charterers argued the requirement meant that there had to be a dispute "about" the goods, and that the power to sell should only be exercised where it will not be known until the dispute is resolved who is entitled to sell the goods.

The Judge rejected this argument.  He concluded that there was a sufficient connection between the cargo and the arbitration proceedings where owners were exercising a lien over the cargo as security for their claims for hire which were being pursued in the arbitration.  As the Judge said, "even if the arbitration is not 'about' the cargo, it will certainly determine what will happen to the cargo".

The second point arose because the Court's power to order sale of goods in support of an arbitration can only be exercised on the same basis as in Court proceedings.  In that regard, CPR 25.1 gives the Court power to order sale of property "which is of a perishable nature or which for any other good reason it is desirable to sell quickly".

The oil cargo was not perishable, so it had to be decided whether there was another good reason to sell it quickly.  This point overlapped with the more general discretionary considerations.

Owners' primary argument was that the cargo had already been on board the vessel for over 9 months and (if not sold) would remain there for many more months.  In that time, owners were incurring the costs of operating the vessel (without being paid hire) and losing the opportunity to trade the vessel elsewhere.  Owners also argued, and charterers accepted, that there was no viable alternative such as discharge into storage.

Charterers argued that owners had brought this situation on themselves because they allowed the cargo to be loaded in circumstances where charterers already owed substantial amounts of hire.  While this argument may have some commercial force, the Judge did not accept it was relevant to the legal analysis.

Charterers also criticised owners' delay in making the application between the tribunal giving permission in December 2016 and the Court proceedings being commenced in May 2017.  Owners' explanation, accepted by the Court, was that there was a lot of activity during this period in relation to the other disputes between Sovcomflot group companies and PDVSA, including an application for sale (and subsequently the discharge into storage) of the cargo on board another vessel, "NS COLUMBUS".

Finally, the day before the hearing, charterers made what the Judge described as a 'last-minute' offer to sell the cargo themselves and pay the proceeds into escrow.  Charterers argued that they were best placed to maximise the sale proceeds.  As a tactic, however, this failed because the Judge interpreted it as an acceptance by charterers that the cargo had to be sold.  Any offers charterers obtained for the cargo could notified to owners and if necessary the Court.

Comment

This is an encouraging decision for owners faced with defaulting charterers.  Often, the exercise of a lien by itself will lead to payment.  However, if it does not, and if (as in some jurisdictions) the lien cannot be maintained after discharge, or if storage facilities are not available, then an order for sale gives owners the ability both to recover the use of the vessel and to obtain a fund against which to enforce their claims.

One word of warning is that such an application might not be as straightforward where the cargo is owned by a third party which is not a party to the arbitration proceedings.  In this case, that issue did not arise because the cargo was owned by charterers.

RPC acted for the successful Charterer.

The facts of the case

Owner (Gard Shipping AS) and Charterer (Clearlake Shipping Pte Ltd) entered into a voyage charterparty in respect of the "Zaliv Baikal" ("the Vessel"). The charter was based on the BPVOY4 form and  incorporated the "Gard/Clearlake" rider terms.

The key clause was Additional Clause 11 of the Gard/Clearlake terms (AC11).

AC11 was in 3 sub-paragraphs and stated:

[Sub-paragraph (1)]

“Notwithstanding any term of this charter to the contrary, Charterers shall have the liberty, at any stage of the voyage, of instructing the vessel to stop and wait for orders FOR MAX 3 DAYS at a safe place WITHIN THE RANGES AGREED.  In particular and without prejudice to the generality of the foregoing, Charterers shall be entitled to instruct the vessel not to tender NOR on arrival at or off any port or place or to delay arriving at any port o[r] place until Charterers give the order to do so.  Time to count as used laytime or time on demurrage, if vessel is on demurrage.  AND ALL THE BUNKERS CONSUMED TO BE FOR CHRTS ACCOUNT

[Sub-paragraph (2)]

“AFTER FIRST 5 DAYS WAITING FOR ORDERS/DISCH INSTRUCTIONS AT SEA VESSEL TO BE CONSIDERED AS BEING USED FOR STORAGE, AND, UNLESS OTHEREWISE AGREED, FOLLOWING INCREASE OF DEMMURAGE RATE TO APPLY

DAYS 6 – 15 DEMM RATE PLUS $5,000

DAYS 16 – 25 DEMM RATE PLUS $10,000

DAYS 26 – 35 DEMM RATE PLUS $15,000

PRIOR TO EXPIRATION OF 35 DAYS PERIOD CHRTS TO INFORM OWNERS IF THEY REQUIRE MORE TIME TO USE VSL AS A STORAGE, AND NEW RATES TO BE MUTUALLY AGREED LATEST ON 35^TH DAY OF SUCH A WAITING.

SUCH A WAITING TIME TO BE COMPENSATED AT RATES AGREED ABOVE AND PAYABLE TOGETHER WITH FREIGHT AGAINST OWNERS SEPARATE INVOICE.”

[Sub-paragraph (3)]

Chrs option to order the ship to wait at an offshore position provided they give final destination and expected cargo delivery window, In WHICH case the above increase in rates not to apply”

in case when final destination a/or cargo delivery window changes, then increase Of rates to apply as per this clause.”

The facts were agreed. The Vessel was ordered to wait on several occasions and to discharge some cargo at an interim port during her voyage to the final discharge port, Rotterdam. The Vessel arrived and tendered Notice of Readiness (NOR) at Rotterdam on 26 January 2016 but the Charterer did not give any discharge instructions until 31 March. It was agreed that the Vessel was waiting at Rotterdam for 64.7 days.

The Charterer paid demurrage for the 64.7 days at the standard demurrage rate of US$32,550 pd. However, the Owner contended that the 'escalated demurrage' regime at sub-paragraph 2 of AC11 applied and that it was owed an additional US$976,731.

The issues

Owner's case was, in essence, that there was no commercial logic in differentiating between the Vessel being told to wait outside a port and/or not to tender NOR and tendering NOR but not being given  orders to berth. In all cases the Vessel should be considered as being used for (floating) storage, per sub-paragraph 2 of AC11, and so the 'escalated demurrage' regime applied. If not, then the Charterer could avoid being liable for the 'escalated demurrage' at the discharge port by waiting for the vessel to tender NOR and then giving no discharge instruction (as happened in this case).

The Charterer's case was simple; AC11 on its express terms only applied when the Charterer gave orders to stop and wait at sea prior to tender of an NOR and, as was common  ground, no such orders were given. Further, once NOR had been tendered, AC11 could not apply as the position was then that demurrage was payable under the specific laytime/demurrage clauses in the charterparty relating to post NOR delay in discharging at the discharge port.

The decision

The Court considered the meaning of the first and second sub-paragraphs and AC11 within the context of the entire charterparty and decided that:

• Overall the charterparty provided a comprehensive demurrage framework for the different events which may cause delay during a voyage and different regimes applied in different circumstances with each having their own defined "trigger" event.
• Fundamentally, AC11 only operates where there has been an instruction to stop and wait for orders which is the trigger for AC11 to apply. A passive failure to give orders did not trigger AC11.
• In this case the delay at Rotterdam clearly fell within the laytime/demurrage regime dealing with post NOR delay at the discharge port. The tendering of NOR was the "trigger" for that regime in the same way the "trigger" for AC11 to operate was the giving of an order to stop and wait.
• Even if AC11 had applied (which it didn't) as there had been no agreement reached between the parties after 35 days waiting at Rotterdam, the escalated demurrage rates would not apply after that: only the basic demurrage rate plus bunkers consumed in accordance with the first sub-paragraph of AC11.

 Owners also argued that if AC11 did not apply to the current situation then the Court should imply a term of "like effect" i.e. that operated as Owners contended AC 11 operated. Perhaps unsurprisingly, the Court determined that it was not necessary to imply such a term; not least as such a term would be inconsistent with the express terms as construed by the Court.

The Court thus concluded:

"As set out above, given the agreed facts that there was no order to stop and wait prior to the service of the NOR at Rotterdam, I cannot see how the provisions of either AC 11 ….. can apply. Given the structure of the Charterparty, it is the ordinary laytime regime which applies and not the orders regime prescribed by AC 11.  Demurrage at the ordinary contractual rate is payable, not at enhanced rates (with payment for bunkers), because AC 11 is of no application to the waiting time at Rotterdam, since no order was given to stop, wait or delay prior to giving NOR and, once given, the ordinary laytime/demurrage regime kicks in."

Comment

Mr Justice Baker (co-author of "Time Charters") held that:

• Where the shipper is entitled to a bill of lading under the contract of carriage (and that bill of lading would be subject to the Hague Visby Rules ("HVR")), the HVR apply even when a sea waybill is issued instead of a bill of lading. 

• Under the Hague Rules and the HVR, a "unit" is an identifiably separate item and there is no requirement that it must be suitable for shipping without further packaging had it not been stuffed inside a container. 

• For there to be sufficient "enumeration" of the package / unit for the purposes of the HVR, it is only required that the bill of lading state accurately the number of units or packages inside the container.  It is not necessary to further describe the cargo "as packed", or packed in separate packages.

• The package / unit limitation applies to each individual package or unit separately, and not in aggregate.

Background

A cargo of frozen tuna loins and bagged frozen tuna parts was shipped in reefer containers from Spain to Japan.  A draft bill of lading was prepared but eventually (at the consignee's request) only sea waybills were issued. 

Among the 12 reefer containers shipped, cargo in three containers was damaged as a result of malfunctioning containers and (in one case) rough handling during re-stuffing in a replacement container.  

The Claimant consignee brought a claim against the Defendant carrier, who argued that, as sea waybills had been issued, the claim was limited to £100 sterling per package or unit under the Hague Rules, as incorporated by their standard terms and conditions.

The following four preliminary issues were before the Court:

 (i)  Is liability limited pursuant to Article IV rule 5 of the Hague Rules or Article IV rule 5 of the HVR?

 (ii)  Should limitation be calculated by reference to the cargo in all three containers collectively, or by separate treatment of the cargo in each container individually?

 (iii)  If liability is limited pursuant to Article IV rule 5 of the Hague Rules, are the relevant packages or units the containers or the individual pieces of tuna?

 (iv)  If liability is limited pursuant to Article IV rule 5 of the HVR, are the containers deemed to be the relevant package or unit, for the purposes of Article IV rule 5(a), or are the individual pieces of tuna the relevant packages or units?  In particular, were all or any of the individual pieces of tuna, packages or units enumerated in the relevant document as packed in each container for the purposes of Article IV rule 5(c)?

Judgment

Issue (i) – Hague or HVR?

Section 1(2) of the English Carriage of Goods by Sea Act 1971 ("COGSA") gives the HVR the force of law.  They are thus compulsorily applicable where they apply on their own terms.  Article I(b) provides that the HVR apply to “contracts of carriage covered by a bill of lading or any similar document of title” where the carriage is from a port in a contracting state. 

The Court held that, although no bill of lading was in fact issued, the contract of carriage was nevertheless "covered by" a bill of lading since the shipper was entitled to demand one be issued.  This was sufficient to trigger the mandatory application of the HVR under COGSA as the cargo was carried from Spain (a contracting state to the HVR).

Issue (ii) – Limitation per unit, or in aggregate?

The Judge held that the limitation per package or unit was a separate limit for each package or unit, and not an aggregate limit calculated by reference to the total number of packages or units of damaged cargo.

Issue (iii) – Is the container the "unit" under the Hague Rules?

Since it had already been held that the HVR applied, the Judge's comments on this issue were strictly obiter. 

The Judge rejected the carrier's argument that each container was a "unit" and held that it suffices that the “units” are "identifiably separate items of unpackaged cargo, as shipped".  It was irrelevant that they could be shipped without further packaging only by being placed in a container.  On the other hand, bundling or consolidating goods would make them "packages" within the meaning of the rules. 

On the facts of this case, each frozen tuna loin was therefore a “unit" and each bag of frozen tuna parts was a “package”.

Issue (iv) – Is the container the "unit" under the HVR?

The Judge held that the meaning of "package or unit" is the same under Article IV rule 5(c) of both the Hague and HVR, and therefore repeated his findings set out under issue (iii) above.

Article IV rule 5(c) of the HVR provides:

"… the number of packages or units enumerated in the bill of lading as packed in [the container] shall be deemed the number of packages or units…"

The Judge held that stating the number of units or packages accurately would constitute sufficient "enumeration", and it is not necessary under Article IV rule 5(c) of the HVR to enumerate the goods "as packed" (i.e. the items being packaged together).  In so deciding, the Judge declined to follow the persuasive precedent set by the Federal Court of Australia in El Greco v Mediterranean Shipping, which held that merely stating the number of "pieces" of goods in the container was not sufficient enumeration, as the bill of lading failed to indicate the number of goods "as packed". 

On the facts, stating "[number] pieces of frozen blue fin tuna loin" was held to be sufficient enumeration for each frozen tuna loin to count as a separate unit. 

It is worth noting that the Judge commented that, in absence of sufficient enumeration on the bill of lading, the container would be the relevant “package or unit”.

Comments

The Court's examination of the package / unit limitation as applied to containerised cargo (both under the Hague Rules and the HVR) is a welcome clarification of the law. 

By setting out clear guidelines as to what is required to bring an item of cargo within the definition of a "package or unit" under the applicable Rules, the Court has not only provided much-needed certainty, but also reflected the commercial reality that cargo packed into containers is in practice almost invariably made up of many smaller items. 

Similarly, the Judgment makes it clear that the package limitation applies to each individual package separately.  It is therefore not permissible to carry over any unused package limitation from less damaged packages to offset damage to other, more damaged, packages.

This Judgment is also a useful reminder of that a contract of carriage will remain "covered by a bill of lading" for the purposes of the HVR, even if one is not issued.


With contribution from Ingrid Chen (Trainee Solicitor)

The facts of the case 

Under 4 separate contracts Vitol bought 4,500 mt of biofuel from Beta, FOB Bilbao with a shipment period of 16 - 30 June 2016. The contract required Vitol to nominate the performing vessel(s) 3 working days prior to arrival of the vessel at the loadport.

Furthermore, the contracts provided that "the buyer's obligations with regard to the timing of lifting will be fulfilled provided that the nominated vessel arrives at the loadport and gives notice of readiness by 24:00 on the last day of the lifting period."

It was common ground that this meant that the deadline for Vitol's nomination was 24.00 on 27 June 2016.

On 1 June 2016 Beta advised that their plant had stopped production and as a result they would not be able to perform the contracts and proposed a "washout" of those contracts. Further correspondence followed without a solution being reached and at trial Beta accepted it had made it clear (in communications dated 1, 15 and 17 June 2016) that it was unable to perform the contract and thus were in anticipatory breach by renunciation.

But Vitol did not expressly accept Beta's repudiatory breach and terminate the contract at any time before the deadline for nomination of a vessel or indeed the deadline for the arrival of that vessel at the loadport. Indeed whilst the point is not discussed in the judgment, the correspondence from Vitol throughout June 2016, in which it insisted on performance by Beta, appears to positively affirm the contracts. Vitol did eventually give written notice of termination of the contracts on 7 July 2016; and when doing so relied on Beta's alleged failure to deliver within the "delivery window".  

Despite not terminating the contacts for breach (and indeed arguably affirming the contracts) Vitol did not nominate a vessel or put in a vessel to load within the above deadlines or at all. 

Vitol then made a claim against Beta for damages. Beta's defence on liability was that whilst they were in renunciatory breach Vitol had not accepted such breach as bringing the contract to an end before the deadline for their vessel nomination and thus Vitol remained obliged to fulfil its obligation under the contracts with regard to nominating a vessel(s). Further, since it was a condition precedent to their obligation to supply the biofuel that Vitol nominate a vessel(s) on which to load it and that never happened they were not in breach in failing to deliver biofuel under the contracts.

Vitol's principal response to this argument was that their failure to nominate amounted to an acceptance of Beta's repudiation.

 The Court's findings

The Court found that Vitol's failure to nominate a vessel(s) did not amount to an acceptance of Beta's renunciatory breach.

Mrs Justice Carr then went on expressly to consider the question "Did Vitol's failure to nominate by midnight on 26 June 2017 (sic) relieve Beta of its obligation to deliver the biofuel?" (its is assumed that the Judge intended to refer to 27 June 2016).

The Judge was referred to and cited the relevant authorities and reference texts which made clear that at common law:

• It is the duty of an FOB buyer to nominate a vessel and that is a condition precedent to the seller's duty to ship the goods;
• If shipping instructions/nominations are not given within the time allowed by the contract, the seller is not liable for damages for non-delivery; and
• Where a renunciation is not accepted the rights and obligations under the contract continue to subsist for the benefit of both parties.

However, the Judge appears not to have followed the above principles and concluded that:

"It is relevant to examine the purpose of the condition precedent contended for by Beta. It is to enable performance by the seller under the Contracts. When the parties know that such contractual performance is impossible, as was the case here, the obligation to nominate is simply stripped of its purpose and otiose. Without an assumed ability to perform, there is no rationale for the existence of a condition precedent. On the facts of this case, where to both parties’ knowledge, the Contracts could not and would not be performed by Beta, the condition precedent contended for does not thus arise on a proper construction of the Contracts."

The Judge's reasoning is difficult to follow. The post contract conduct of the parties can't be relevant to the question of whether the contract was subject to such a condition precedent and it is suggested that it plainly was. It may be that by word or conduct compliance with such condition precedent could be waived but it appears from the judgment that Vitol did not maintain such an argument; indeed their case on acceptance of renunciatory breach assumed a continuing obligation to nominate.

On the back of her finding that contrary to what was implicitly Vitol's primary case, Vitol were under no obligation to nominate a vessel by 27 June 2016, the Judge found that Beta were liable to Vitol and awarded Vitol damages of US$351,830.25.

However, the basis for the finding of breach by Beta is not clear. In particular it is not clear whether the breach which the Judge concluded gave a right to damages was Beta's anticipatory breach (evidenced by their June correspondence) or their actual breach in failing to ship the goods. This is not clear because a large section of the judgment concerns itself with the question of whether Beta was "discharged of its further obligations under the contract by reason of Vitol's failure to make the required nominations under the Contracts….." which would be irrelevant if the relevant breach was Beta's earlier anticipatory breach. Indeed the Judge concludes that "I am unable to accept on the facts of this case that there was no breach of contract by Beta in failing to deliver the biofuel because Vitol did not nominate under the Contracts". But it is difficult to see how Beta can have "failed" to deliver since without Vitol presenting a vessel to take delivery it was impossible for Beta to deliver.

Comment

It is a well-established principle that unless and until a renunciatory breach is accepted the rights and obligations under the contract continue to subsist for the benefit of both parties; in other words it is vital for the innocent party to continue to perform its obligations whilst the contract remains extant. There can be little doubt that in this case the shipment of the biofuel by Beta required Vitol to nominate and procure a vessel to load it and as a matter of contract it would be a breach by Vitol themselves to fail to do so.

Such letters of indemnity generally contain undertakings from the seller that (i) it has good title to the goods in question and the right to transfer title and give delivery of the goods to the buyer; (ii) it will locate and surrender the shipping documents to the buyer and (iii) it will indemnify the buyer in respect of the consequences of the shipping documents being outstanding or any breach of the above warranties (we will refer to this type of LOI as a "payment without shipping documents LOI").

The relevant clauses in sale contracts often state that the option to provide a payment without shipping documents LOI in lieu of shipping documents is there to cover the eventuality that the seller does not have the required shipping documents at the time it wishes to make a documentary presentation to secure payment for the goods. However, the seller is not required to prove that it does not have the shipping documents before presenting such an LOI in lieu of shipping documents. Undoubtedly, sellers often present such an LOI to trigger payment when they would be quite capable of presenting shipping documents if they wished.

The most important shipping documents are often the relevant bills of lading. They are important because bills of lading give the holder the right to delivery from the carrier of the goods represented by them. As such the buyer is usually "safe" making payment against presentation of the bills of lading as, in exchange for the cash it pays to the seller, it receives the right to delivery of the goods from the carrier at the bill of lading destination. But making payment against an LOI does not give the buyer any right to delivery of the goods against the carrier because the carrier is not party to the LOI. Further, such an LOI, unless counter signed by a bank or other reliable third party, provides no security to the buyer that in parting with the purchase price it will receive the goods.

There are further limitations to the effectiveness of such LOIs. For example, the undertakings in relation to title and the ability to effect delivery are given at the time the LOI is executed and are not generally worded as continuing undertakings. As such, there would be no breach of those undertakings if the day after they are given the seller sells and transfers title to the goods to a third party. Of course if the seller were to sell the cargo to a third party it may not be able to surrender the shipping documents to the original buyers as required by the LOI. But equally it might, if it is able to arrange delivery to the new buyer by giving a letter of indemnity to the carrier for delivery otherwise than against presentation of the bills of lading (we will refer to this type of LOI as a "discharge without B/L LOI"). This issue is discussed further below.

Euro-Asian v Abilo

The potential problems associated with the use of payment without shipping documents LOIs are well illustrated by the case of Euro-Asian Oil SA v Abilo (UK) Ltd and Credit Suisse AG [2016] EWHC 3340.

A Mr Igniska controlled a number of companies involved in the import and distribution of gasoil in Romania, including Abilo, Real Oil and DG Petrol. Mr Igniska needed assistance in financing the purchase of such product from third parties and Euro-Asian agreed to help. Euro-Asian therefore agreed to buy product CIF Constanza from Abilo and then re-sell to one of Mr Igniska's other companies on extended credit terms. Payment to Euro-Asian under their contract with Abilo was to be by LC. In the case of the fourth intended delivery, and consistent with the terms of the contract, the LC provided for payment against:

“presentation of the commercial invoice and seller's letter of indemnity . . . in a format acceptable to buyer and countersigned by a first-class international bank acceptable to buyer.”

Abilo (through their bank, Credit Suisse) subsequently presented a payment without shipping documents LOI ("the Abilo LOI") to Crédit Agricole (the LC issuing bank) under the LC referring to a cargo shipped on the "Ariadne" and warranting that:

“In consideration of Crédit Agricole . . . paying us, full purchase price of US dollars 15,844,840.00, we hereby expressly warrant that we have marketable title free and clear of any lien or encumbrance to such material and that we have the full right and authority to transfer such title to you and effect delivery of the said cargo to you.”

And that they would:

“locate and surrender to you the full set of 3/3 original bills of lading issued or endorsed to the order of Crédit Agricole . . . and other shipping documents and to protect, indemnify and hold you harmless from and against any and all damages, costs and expenses (including reasonable attorney fees) which you may suffer by reason of the shipping documents including the original clean and negotiable bills of lading remaining outstanding or by reason of a breach of the warranties given above . . .”

Credit Suisse countersigned the Abilo LOI becoming jointly and severally liable with Abilo under it. Crédit Agricole then paid under the LC.

However, the "Ariadne" cargo had in fact been used to satisfy the previous delivery under the contract between Euro-Asian and Abilo and had been discharged some 3 months earlier. Accordingly, Euro-Asian received no fourth delivery; although the relevant bills of lading were subsequently provided by Credit Suisse to Crédit Agricole.

Euro-Asian brought a claim against both Abilo and Credit Suisse for breach of the warranties and undertakings in the Abilo LOI. Euro-Asian asserted that Abilo/Credit Suisse were in breach of the warranties in the Abio LOI as the documents presented under the Albilo LOI referred to the "Ariadne" and that cargo had already been sold (and delivered) under an earlier transaction. As such Abilo did not have title to the product concerned and did not have the right or authority to effect delivery of the product at the time the Abilo LOI was issued. Further, Euro-Asian argued that Abilo had failed to surrender the original bills of lading as required by the Abilo LOI as the bills when eventually indorsed to and surrendered to Crédit Agricole were no longer negotiable but "spent" bills due the fact that the cargo had been discharged and delivered to others.

Credit Suisse argued that the arrangements made outside the sale contract and Abilo LOI meant that the obligations ostensibly arising under the Abilo LOI were not effective. However, the Court rejected those arguments. The Court also found that the undertakings in the Abilo LOI were breached in that Abilo did not, at the time the Abilo LOI was given, have title to or the right to deliver the "Ariadne" cargo. It also held that there was a breach of the undertaking in the Abilo LOI in relation to the surrender of the bills of lading ("the bills of lading undertaking"), as the bills were already spent when they were eventually surrendered. Judgment was given against both Abilio and Credit Suisse under the Abilo LOI.

The judgment records that Abilo was a company without any significant assets so it was fortunate that Euro-Asian contracted on terms that required the Abilo LOI to be countersigned by a "first-class international bank acceptable to buyer". But for that they would, according the Court, have been left holding worthless shipping documents and have had no effective right of recourse against anyone.  Or would they?

Are my bills of lading spent?

The Judge's reasoning on the bills of lading undertaking issue is very brief but proceeds on the basis that (i) the bills of lading which Abilo were bound to surrender under the Abilo LOI had to be negotiable and (ii) when the "Ariadne bills were surrendered they were not negotiable since they no longer gave the holder a right to delivery because the goods had already been discharged. With respect to the learned Judge the later part of that reasoning is questionable.

A carrier's obligation is to give delivery against presentation of the original bills of lading and it will be exposed to liability for damages for conversion and/or wrongful delivery if it does otherwise; e.g. by delivering against a discharge without B/L LOI. For example, in The Erin Schulte [2014] EWCA Civ 1382 it had been conceded by the Claimants that the bills of lading in that case were spent after discharge against a discharge without presentation of B/L's LOI but the Court of Appeal observed that "the right to obtain delivery.. from the carrier did not cease when the goods were discharged against the letter of indemnity…" and as such the bills still provided a right to delivery of the goods against the carrier (alternatively damages for conversion/wrongful delivery).

In this case it does not appear that the cargo was delivered by the carrier against the bills of lading as it is recorded that the bills of lading, indorsed in favour of Crédit Agricole, were eventually surrendered to Crédit Agricole. In the above circumstances, it seems that the bills were not spent at the time of surrender to Crédit Agricole and Abilo arguably complied with the bills of lading undertaking. If that is right, one can easily see the potentially limited value of payment without shipping documents LOIs.

Comment

As mentioned above, unless worded as continuing warranties, assurances given by the issuer of the payment without shipping documents LOI about title and ability to give delivery would not be  breached by a subsequent transfer of title others.

Furthermore, it is highly arguable that the issuer could comply with the usual undertaking in relation to the surrender of the bills of lading by surrendering the bills of lading to the beneficiary of the LOI even if the cargo had already been discharged. That is not to say that in such circumstances the buyer will not have a claim against the seller for non-performance of the sale contract (or even possibly fraud) but as banks do not generally underwrite the performance of the underlying sale contract such a claim, unlike a claim under a payment without shipping documents LOI countersigned by a bank, may be worth very little.

The judgment in the Euro-Asian case is currently subject to appeal, and it may be these issues receive further consideration by the appeal court.

The facts of this matter are set out in our article on the first instance decision.

Permission to appeal was given essentially on the question of whether, in the context of calculating damages for their repudiatory breach of charterparty, charterers were entitled to take advantage of the capital gains owners earned in selling the vessel following her early redelivery.

This question arose because the market (capital) value of the vessel dropped in the period following the repudiation, and it was undisputed that the vessel would have had a lower capital value if it had been sold following redelivery in accordance with the charterparty terms.

As we reported at the time, the Court of Appeal answered this question in the affirmative, agreeing with the arbitrator that the sale of the vessel arose from the consequences of the breach, and the capital gains were to be taken into account when assessing damages, in the usual way.

The Supreme Court has now overturned this decision, and affirmed Judgment at first instance.

In doing so, the Supreme Court crucially approved Mr Justice Popplewell's reasoning that the benefit caused by the early sale of the vessel (whilst the market was still high) was not caused by the charterers' breach, but rather by the subsequent fall in the vessel's market value. In addition, the effect of the fall of the market was not caused by the charterers' breach, but by the owners' independent decision to sell the vessel.

The Supreme Court that this absence of a "relevant causal link" was fatal to charterers' case that the benefit caused by the sale of the vessel should be taken into account.
The Supreme Court also reaffirmed the rule set out in The "WREN" and The "KILDARE" that, in the absence of an available market to charter the vessel, the measure of the loss is "the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market"

Comment

As Mr Justice Popplewell, the Judge at first instance, noted: "the search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive."

The real difficulty in weighing these points in applying the 'compensatory principle' in English law is underscored by the fact that this matter was overturned by a unanimous decision of the Supreme Court, appealing a unanimous decision of the Court of Appeal, which itself overturned an appeal from a High Court overturning an arbitration Award.
However, the Supreme Court Judgment in this matter still provides helpful guidance, highlighting that the sale of the vessel was not an act in mitigation of owners' losses because it was "incapable of mitigating the loss of the income stream".

Trite though it may seem, in doing so the Supreme Court gave a timely reminder that like should only be compared with like.

Not all benefits will be taken into account when calculating damages for breach of contract, and in the absence of a relevant causal link an accidental or incidental benefit will not affect the calculation.

The "Arundel Castle" was chartered on the terms of a fixture recap (Recap) based on the Gencon 94 form. The vessel proceeded to the load port of Krishnapatnam. The port was congested and the vessel was unable to proceed straight to the berth. She anchored at a location directed by the port authority which was 1.25km outside the port limits marked on the Admiralty chart. The shipowners gave Notice of Readiness (NOR) at that location and, later, a demurrage claim was made.

Liability for the demurrage was disputed and the dispute referred to arbitration. The Tribunal found that there was a requirement in the Recap (clause 15) that the NOR be tendered within "port limits", which they concluded was defined by the limits marked on the Admiralty chart; this notwithstanding clause 6(c) of Gencon 94 which permitted tender of the NOR "off the port" if a berth was not available. Consequently, the Tribunal found that the NOR was invalid and the demurrage claim failed.

The shipowners appealed to the Commercial Court on the basis that the Tribunal had made a mistake in law in finding the vessel was outside port limits when it tendered NOR.

Shipowners made two main points on the appeal:

• That "port limits" included any area within which vessels were customarily asked to wait by the port authorities and over which the port authorities exercised authority or control over the movement of shipping.

• Alternatively, the wide definition of "port" in the well-known industry publications of Laytime Definitions for Charterparties 2013 and The Baltic Code 2014 should be used as an aid to construction in deciding what should be considered as the "port limits".

The Court held that:

• The test at common law for when a vessel had arrived under a port charterparty was whether she was at a position within the limits of the port where she was at the immediate and effective disposition of the charterer. If she was at a place where waiting ships usually lay she would be in such a position (unless exceptionally it could be shown otherwise by charterers). Where there was a national or local law that defined the limits of the port in question, those were the limits that would apply in the case of that port. Where there was no such law then a good indication of what the port limits were was given by the area of exercise by the port authority of its powers to regulate the movements and conduct of ships (applying the The Joanna Oldendorff).

• On the limited material available to the Tribunal (essentially just the Admiralty chart) the Tribunal were entitled to find as they did: that is that the vessel was outside the port limits when the NOR was tendered. Importantly, the Court said that this decision did not mean that in another case, if the evidence presented was different, a Court or Tribunal might reasonably come to a different conclusion as to the port limits of Krishnapatnam.

• As for the definition of "port" in the Laytime Definitions/Baltic Code those did not reflect the definition of "port" as explained in The Joanna Oldendorff or provide a definition of "port limits" save where the parties chose it as their definition. The parties had not chosen to do so in this case and so they did not apply.

It would be understandable if commercial parties considering the above would be surprised that shipowners did not recover demurrage where:

• The sea voyage had ended and the vessel had proceeded to a point directed by the port authorities to await their turn to berth in light of congestion; and

• The Recap, arguably, provided (per clause 6(c) of Gencon 94) that NOR could be tendered outside "port limits".

Commercial parties may also be surprised by the very narrow definition applied by the Tribunal to the meaning of "port limits" in circumstances where, as the Judge highlighted, "…a good indication of what the port limits were is given by the area of exercise by the port authority of its powers to regulate the movements and conduct of ships": which it did by directing the vessel to wait at the place it did.

Perhaps the moral of the story, particularly for shipowners, is to be very clear in any recap or charterparty about what is being agreed about the place of tender of NOR and to ensure, if reference is made to that being within "port limits", to define the port limits as widely as possible.

• Parties contracted for the sale and purchase of steel coils on C&F terms, to be shipped by Sellers from China to Mexico
• Buyers were required to open a letter of credit allowing shipment by 31 July 2010
• Buyers initially did so, but later instructed their bank to change the shipment period to 20-30 July 2010, and their bank notified Sellers of such amendment
• Cargo was loaded on 5-6 July 2010 and (genuine) bills of lading were issued bearing those dates
• Sellers gave Buyers that (correct) information
• However, on 22 July 2010, Sellers' bank presented to Buyers' bank bills of lading dated 20-21 July 2010
• Buyers obtained an injunction from the Dutch Courts preventing payment under the letter of credit
• Sellers held Buyers in repudiatory breach of contract and re-sold the cargo at a loss

Proceedings in China

Sellers sued Buyers' bank in the Chinese Courts.  That claim was dismissed, but Sellers' appeal was (at the time of the English judgment) still pending.

The sale contract provided for CIETAC arbitration in Beijing under Chinese law.

Buyers commenced arbitration, seeking damages for Sellers' alleged breach of a pre-shipment inspection clause.  Buyers alleged that Sellers shipped the cargo early to prevent inspection and then produced forged bills of lading to cover this up.

Sellers counter-claimed damages for Buyers' repudiatory breach, claiming the difference between the original sale price and the resale price.

The CIETAC tribunal held that:

• Buyers had not requested an inspection, so their claim failed
• Buyers were in breach in instructing their bank to change the shipment date in the letter of credit
• That breach resulted in Sellers not receiving payment
• Sellers' submission of forged bills of lading to Buyers' bank was a deception of the bank, but not a deception of Buyers who knew the true shipment dates
• Buyers were liable for damages of USD4,857,500 plus costs

Buyers failed in an attempt to have the Award overturned by the Chinese Courts.

Enforcement in England

Sellers applied for enforcement of the Award in England in the usual way – on paper and without notice to Buyers.  An enforcement Order was made but Buyers were given 14 days in which to object, which they did.

Buyers objected on 2 grounds:

• Sellers could have obtained payment by presenting the genuine bills of lading because the amendment to the letter of credit was legally ineffective, so Sellers' loss was caused by their presentation of the forged bills of lading, and/or
• Letters of credit are so important to international trade that the Court should not assist a seller who has presented forged documents

Relevant principles

The Judge reaffirmed that the Courts will not enforce an award which, on its face, gives effect to an illegal contract or corrupt practice (e.g. payment or recovery of a bribe).

However, the Courts will not refuse to enforce a lawful claim under a lawful transaction even if it is alleged that the transaction is somehow "tainted" by fraud or illegality.  For example, the English Courts have previously upheld contracts (lawful in themselves) which were procured by bribery.

Decision

The Judge rejected both of the arguments made by Buyers.

As to the first, it was not appropriate or permissible for the English Court to go behind the conclusion of the CIETAC tribunal, applying Chinese law, that the cause of Sellers' loss was Buyers' wrongful instruction to their bank to change the shipment date in the letter of credit.

As to the second, the principle that "fraud unravels all" (ex turpi causa non oritur actio) only arises in the context of the issuing bank's duty to pay under a letter of credit against apparently conforming documents.  There is no wider principle that a party presenting forged documents to the bank cannot bring any other claim in relation to the transaction generally.

Comment

This decision is a useful reminder that fraud, while not condoned by the Court, does not always unravel everything.  It is crucial to consider what the fraud is and whether it is an essential part of a party's claim.

The case has some interesting similarities with the recent Supreme Court decision in The DC Merwestone [2016] UKSC 45 which decided that a "collateral lie" told by an assured during the course of a claim presentation (previously called a "fraudulent device") will not necessarily invalidate the right to recover under insurance – see our previous blog post.

It is also worth noting that, even if he had been tempted to accept Buyers' arguments, the Judge would still have enforced the Award on the basis that there was a greater public interest in upholding the finality of arbitration awards.

The Rules of the High Court at Order 23 rule 1(1) provide that the Court may, "having regard to all the circumstances of the case", order the Plaintiff to give such security for the Defendant's costs as it thinks just.

There is a temptation, however, for enterprising Defendants to use this process as a means of exerting pressure on the Plaintiff, for example by demanding a large amount of security regardless of the claim value, and demanding that the security be provided by way of cash paid into Court.

In Dunham-Bush Industry Sdn Bhd (and others) v Kln Container Line Ltd HCAJ60/2015 the Admiralty Judge gave a rare written Judgment on a security for costs application.

In that case, the principal claim was for about HKD740,000 but the Plaintiff conceded that its maximum recovery was limited to HKD260,000. The Defendant demanded security of HKD344,000 up to the discovery stage, and demanded that this be paid into Court.

The Plaintiff offered security for a lower amount, in the form of a Letter of Undertaking (LOU) from the Plaintiff's Solicitors, but this was rejected by the Defendant.

The Court refused to grant the security demanded. Instead, the Court ordered the Plaintiff to provide security of only HKD130,000, by way of a LOU (as offered by the Plaintiff) and awarded the Plaintiffs their costs of the application.

In addition, the Court helpfully restated the position that:

• After the Civil Justice Reforms, the Court should actively manage cases to promote "a sense of reasonable proportion and procedural economy" in the conduct of proceedings

• This principle extends to demands for security for costs

• The quantum of security for costs demanded was "wholly excessive"

• There is no limitation on the form of security which the Court may order 

In conclusion, this concise Judgment is a useful reminder that security for costs demands must be proportionate, and that the Court will not permit the procedure to be used as a tool to dissuade Plaintiffs from bringing reasonable claims.

RPC represented the Plaintiffs in these proceedings.

However, certainty is not absolute, it is not an end in itself, and in recent years one could be forgiven for thinking that the importance of certainty was under attack.  Lord Bingham clearly thought so in his strong dissent in The Golden Victory : "the existing decision undermines the quality of certainty which is a traditional strength and major selling point of English commercial law".  However, the majority decision was recently endorsed by the Supreme Court in Bunge SA v Nidera BV.

The Court of Appeal had to grapple with the issue of certainty (amongst others) in deciding recently whether or not the payment of time charter hire is a condition, that is to say a term of a contract any breach of which (however trivial) gives the innocent party the right both to terminate the contract and to claim damages for loss of bargain.

In Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS, the Court of Appeal (with Gross LJ giving the leading judgment) upheld the decision of the Judge at first instance (Popplewell J) that payment of hire was not a condition.  In doing so, the Court overruled the decision of Flaux J in The Astra and restored what was the general understanding of the position, at least since the judgment in The Brimnes in 1973.  Normal service, it might be said, has been resumed, and indeed the importance of having appellate courts reaffirmed.

Much has already been written on the reasons for this decision, and even more on the previous conflicting judgments of Flaux J and Popplewell J.  For shipowners and charterers, however, and to a large extent for those advising them, the bottom line is all that matters.  Non-payment of hire in itself only gives rise to the contractual right to withdraw the vessel; it does not entitle owners to additional damages such as (if the market has gone down) the difference between the contract and market rates of hire for the balance of the charter period.

If owners do not like this result, they can negotiate for an express right to damages for loss of bargain, such as that given in the NYPE 2015 revision (and as is common in bareboat charters).  Charterers, conversely, would be advised to resist such a term, probably successfully in the current market.

But if no such term is agreed, one is left with uncertainty as to when an owner faced with a non-paying time charterer can terminate and claim damages.  The right to withdraw the vessel exists, which provides a degree of certainty.  However, as can be seen from the other half of the judgment in Spar Shipping, determining when damages can be claimed remains fraught with uncertainty.  This is because it requires owners to prove a renunciation of the contract by charterers.

A renunciation occurs where one party to a contract demonstrates an intention to commit a repudiatory breach; hence it is often called an anticipatory repudiatory breach.  A repudiatory breach is one going to the root of the contract or depriving the innocent party of substantially the whole benefit of the contract or turning the contract into something radically different from that which was agreed.

Renunciation may be inferred from both the nature of and reasons for past breaches of the contract (although not in themselves sufficient to justify termination) and evidence of unwillingness or inability to perform in the future.  This involves what the Master of the Rolls referred to as "a multifactorial assessment".  It may also be summarised as looking at the totality of the party's conduct – what they have done, what they have not done, and the reasons for each, as well as what they have said, and occasionally external factors.

There are obvious cases where it is clear that a party has no intention of performing, or is simply unable to perform, in one or more key respects.  Spar Shipping itself was such a case, the key consideration being the charterer's unwillingness and/or inability to pay hire punctually in advance.

However, in many cases, the position is far less clear and a difficult judgement call is required. 

• Has the charterer missed or delayed the last couple of payments because of temporary cash-flow difficulties or is this evidence of insolvency?
• Are excessive deductions being made opportunistically or because similar deductions have been made down the chain?
• What if there has been no default yet but the other party is seeking court protection (e.g. The Sanko Iris)?
• Are rumours of financial difficulties enough? 
• What if a related company has applied for court protection (e.g. The STX Mumbai)?
• How many unpaid instalments are sufficient if the charterer says nothing at all?

The problems are particularly acute when the vessel is on a laden voyage.  Withdrawing an empty ship at least means the owner can put her straight back onto the market.  However, cases such as The Kos and The Bulk Chile notwithstanding, withdrawing a laden vessel with no certainty of a claim for damages exposes the owner to potentially significant and unrecoverable losses.  Even if a charter has been renounced, the owner must be careful not to do anything to affirm it (as in the rather unsatisfactory case of The Fortune Plum).

While general guidance is given in Spar Shipping and other authorities, cases of renunciation are ultimately extremely fact-specific and the particular circumstances in which one case was decided are often too different for any useful comparison to be made.

As Gross LJ acknowledged, classifying the obligation to pay hire as a condition would have created greater certainty, although in his view that would have been at the cost of disproportionate consequences flowing from trivial breaches.  Because of the difficulties described above in proving renunciation, I am not convinced the Court's decision in Spar Shipping is an entirely satisfactory balance either, and prefer the view that the presence of an anti-technicality clause should make a difference.

A final word on certainty.  In his concluding paragraph, Hamblen LJ noted that the law had been settled for 40 years since The Brimnes and that the Court "should be very cautious before departing from such a decision so as to disturb the predictability of the law and detract from its certainty".  It seems, though, that a certain uncertainty is also a virtue.

The decision of the lower courts

Versloot Dredging BV and another v HDI Gerling Industrie Versicherung AG and others [2016] UKSC 45 involved the flooding of the vessel "DC MERWESTONE", resulting in the vessel's main engine being damaged beyond repair.  In the claim presentation, Mr Kornet (the relevant individual in the vessel's managers) claimed that he had been told by the crew that the bilge alarm had been activated during the flooding, but the crew had been unable to deal with the leak due to the rolling of the ship in heavy weather. 

Popplewell J at first instance found that Mr Kornet's statement regarding the activation of the bilge alarm was a reckless untruth; he had not been told this by the crew and had no reason to believe that the crew would support the statement.  Mr Kornet believed that the statement would fortify the claim and accelerate payment if the casualty could be blamed on the crew.  Ultimately, the lie was irrelevant to the merits of the insurance claim as it was held that the loss was proximately caused by perils of the sea, namely the fortuitous entry of seawater.

Popplewell J therefore concluded that there was a valid insurance claim for some EUR3.124million.  However, that insurance claim was lost as a result of the collateral lie.  The Court of Appeal reached the same decision with reference to the The Aegeon [2003].  In that earlier Court of Appeal case, Lord Justice Mance (as he then was) held that a fraudulent device used to promote a claim should result in forfeiture of the assured's cover, even though the claim was in all other respects valid.  The Court of Appeal considered there to be good public policy grounds for such an approach, namely the deterrence of fraudulent insurance claims generally.

The decision of the Supreme Court

By a four to one majority (Lord Mance dissenting), the Supreme Court held that the assured's use of a fraudulent device/collateral lie in the claims process will not result in forfeiture of cover.  A collateral lie is to be distinguished from a fraudulent claim which will result in forfeiture of the claim.  In terms of the distinction between a fraudulent claim and a collateral lie, Lord Sumption concluded:

"…the fraudulent claims rule applies to a wholly fabricated claim.  It applies to an exaggerated claim.  It applies even to the genuine part of an exaggerated claim if the whole is to be regarded as a single claim, as it must be.  But it does not apply to a lie which the true facts, once admitted or ascertained, show to have been immaterial to the insured's right to recover." 

Lord Sumption held that where the lie is immaterial to the assured's right to recover, the assured is trying to obtain no more than the law regards as his entitlement and the lie is irrelevant to the existence or amount of that entitlement.  It is a "collateral lie" which should have no bearing on the right of recovery.  Lord Sumption stated:

"In this case the lie is dishonest, but the claim is not.  The immateriality of the lie to the claim makes it not just possible but appropriate to distinguish between them.  I do not accept that a policy of deterrence justifies the application of the fraudulent claim rule in this situation.  The law deprecates fraud in all circumstances, but the fraudulent claim rule is peculiar to contract of insurance." 

Lord Sumption noted that where the assured's dishonesty amounts to a collateral lie, the assured gains nothing from the lie which he was not entitled to have anyway.  Furthermore, the underwriter loses nothing if he meets a liability that he had anyway.  Lord Sumption rejected insurers' arguments that the lie should be material to the potential merits of the claim as they would have appeared to a hypothetical insurer at the time that the lie was uttered, when the full facts were not necessarily known.  In this context Lord Sumption thought that hindsight was necessary.

Lord Mance (dissenting) disagreed with the rest of their Lordships in relation to the correctness of looking at the lie with hindsight.  Lord Mance took the view that the dishonesty taints the claim even if it turns out that the lie had no bearing on the claim at a later date.  The lie is told precisely because the assured does not believe that he has a good claim, even though at a later trial it may be shown that his fears were unfounded.  Lord Mance considered the decision to amount to a "charter for untruth" sanctioning a lack of integrity in the claims process, which was otherwise encouraged by the fraudulent devices rule.

Lord Hughes, however, observed that there were a number of other deterrents against dishonesty in the claims process.  He noted that the likelihood of criminal prosecution may well be remote.  However, in circumstances where an assured is proven to have acted fraudulently:

• he will forfeit all or most of his credibility in any debate, in court or out of it, as to his entitlement under the policy;
• he will likely be penalised with expensive inter-party cost orders if there is litigation involved;
• the policy is likely to be terminated by insurers, at least prospectively; and
• that history of dishonesty will be disclosable in any other insurance proposal which the claimant may make.

Comment

This is an important decision which could be considered to jar with the fundamental principle of utmost good faith which governs the operation of insurance contracts.  However, for commercially minded businesses that depend upon insurance and the hedging of risk in order to operate, the decision is unlikely to be used as a "charter for untruth" when one considers Lord Hughes' valid observations about the other consequences of a collateral lie in the claims process. 

Nevertheless, as Lord Mance observed at the end of his judgment, a prudent underwriter may well wish to make express in their policies the effect of a collateral lie when discovered to have been used by an assured during the claims process.

The Tribunal found in favour of Charterers, holding that Owners had assumed the risk of hull fouling.

Court

Permission was granted to Owners to appeal on the following question of law:

"Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?"

Owners contended that the decision of the Tribunal contradicted the statement in "Time Charters" (7th Ed., 2014) paragraph 3.75, that:

"Where the owners give a continuing undertaking as to performance of the ship, and the ship has in fact underperformed, it is a defence for the owners to prove that the underperformance resulted from their compliance with the charterers' orders..."

Owners argued that the Tribunal had been wrong to focus on the implied indemnity for compliance with Charterers' orders, which it was generally accepted did not apply (see The "KITSA" [FN2]).

Instead, Owners argued that the performance warranty only to applied to a clean (or 'unfouled') hull and propeller.

In support, Owners cited the extract from "Time Charters" quoted above, as well as The "PAMPHILOS" [FN3], in which the Court had refused to grant permission to appeal from an Award holding that:

●  marine growth was an ordinary incident of trading in accordance with the charterer's orders, and charterers had therefore complied with their redelivery obligations;

●  however, charterers' underperformance claim was unjustified. 

Conclusion

The Court rejected Owners' arguments, and noted that it would have been open to the parties to agree that the warranty would not apply after prolonged stays in warm water ports.

In the circumstances, the continuing performance warranty continued to apply where the Vessel's performance was affected by fair wear and tear in the course of contractual trading.

It is hard to put the ratio of the case any better than the Court itself (at paragraph 31 of the Judgment):

"Where a vessel has underperformed, it is not a defence to a claim on a continuing performance warranty for the owners to prove that the underperformance resulted from compliance with the time charterers' orders unless the underperformance was caused by a risk which the owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers."

Comment

This decision differs from The "PAMPHILOS", although the Judge was quick to highlight that the Court's decision in that case was made in the context of refusing permission to appeal on the grounds that the decision was not 'obviously wrong'.

It also marks a rare judicial correction to the text of "Time Charters", universally acknowledged as the leading authority on the law on period and trip time charters. 

Charterers will no doubt welcome the decision as clarification that they do not forfeit the benefit of the performance warranty if the vessel becomes fouled following their orders.

Owners may take some comfort from the fact that, where the charter contains a clause paramount, they may be able to rely on one of the Hague Rules defences.  Alternatively, there are many commonly used clauses which shift responsibility for hull fouling to charterers.

FN 1:  Imperator I Maritime Company v Bunge SA [2016] EWHC 1506 (Comm)
FN 2:  [2005] 1 Lloyd's Rep. 432
FN 3:  [2002] 2 Lloyd's Rep. 681 

Hong Kong first adopted the LLMC in 1993.  On 3 May 2015, the limitation levels were increased by the adoption of the 1996 Protocol.

With an increased level of limitation comes a heavier burden of proof on those who seek to break limitation.  In effect, a shipowner has an "almost indisputable right to limit" [FN2]. 

If a person seeks to break limitation, he must prove as per Article 4 of the LLMC that his loss resulted from a shipowners' "personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result".

Brief Facts

On 23 March 2014 at about 3.00am, the barge FLOATA 97 ("Barge") arrived at the North Lamma anchorage in Hong Kong and anchored next to the vessel HEUNG-A SINGAPORE ("Vessel") to assist with the unloading of containers from the Vessel.

During the course of operations, some of the containers fell onto the Vessel whilst others fell into the sea.  

It was found on investigation by the Hong Kong Marine Department that the cause of the incident was that:

• the containers on the Barge were not evenly distributed to prevent undue listing of the Barge,
• the containers on the Barge were not properly stowed and secured, and
• no risk assessment had been conducted prior to commencement of the cargo works.

The derrick operator on the Barge was prosecuted for failing to load, stow and secure cargo such as to prevent its loss overboard [FN3].  He pleaded guilty and was fined HK$2,500. 

Analysis

The Plaintiff was the registered owner of the Barge and applied to the Hong Kong Court to limit its liability in the face of claims by the Vessel and cargo owners.  The applicant, Mr Cheung Wai Yiu, was a defendant in the action, being a person claiming to have sustained loss or damage by reason of the incident.  Mr Cheung claimed to be the owner of a cargo of automobile accessories stored in one of the containers that fell into the sea, and he applied to break limitation.

The Court held that in order for Mr Cheung to succeed in breaking limitation, he had to establish by evidence sufficient prima facie grounds that:

• the loss of the container resulted from a personal act or omission of the Plaintiff Barge owner which was reckless, and
• actual knowledge of the Plaintiff that such loss (i.e. the loss of the container) would probably result.

Mr Cheung relied upon the actions of the crew on board the Barge, in particular the derrick operator, to show that there was a "personal act or omission" on the part of the Barge owners.

The issue before the Court was whether the crew members' acts or omissions could be regarded as the Barge owners' personal act or omission for the purposes of breaking limitation.  The Court held that they could not.

It is trite law that an incident caused by the acts of the Master or crew of a vessel would generally not be regarded as an act of the shipowner [FN4].  Only actions attributable to the shipowning company's management at board level, or the actions of someone such as the head of the traffic department with responsibility for running its ships, could be regarded as someone whose acts were the very acts of the company itself.

This approach to determining a shipowning company's acts or omissions (or "actual fault or privity" as the case may be) dates back over 100 years [FN5].  In these cases, it was held that the offending "fault or privity" element had to be that of not merely a servant or agent, but somebody for whom the company is liable because his action would be regarded as an action of the company itself.  As such, the wrongs of servants or agents in themselves would not constitute the "actual fault or privity" of the shipowner.

In the same vein, under the LLMC a shipowner's right to limit its liability would not be defeated by the wrongs of its servants or agents, including its Master and/or crew.  Therefore, the acts or omissions of the Barge's crew in this instance did not constitute a "personal act or omission" of the Barge owners.

On this basis, Mr Cheung failed to establish that his loss resulted from a personal act or omission of the Barge owners, and his attempt to break limitation failed.

Conclusion

In Hong Kong, the position remains that shipowners are prima facie entitled to limit their liability pursuant to the LLMC (with the 1996 Protocol limits).  The Admiralty Court is mindful that with a higher level of limitation comes a heavier burden of proof on those who seek to break limitation, and it is accordingly very difficult to do so.

Hong Kong therefore remains an attractive jurisdiction in which to commence limitation proceedings pursuant to the LLMC.

[FN1]  Floata Consolidation Limited v Man Lee Hing (Hong Kong) Vehicles Limited & Ors (HCAJ 178/2014)

[FN2]  The Bowbelle [1990] 1 WLR 1330, cited with approval in The MSC Rosa M [2000] 2 Lloyd's Rep. 399 and The Leerort [2001] 2 Lloyd's Rep. 291

[FN3]  Contrary to sections 34(4) and 34(5) of the Merchant Shipping (Local Vessels) (General) Regulations (Cap. 548F)

[FN4]  The Lady Gwendolen [1965] P 264

[FN5]  Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705, more recently applied in Meridian Global Fund Management Asia Ltd v Securities Commission [1995] 2 AC 500

In The "WEHR TRAVE" [FN2], the English Commercial Court examined the limits to the TCT charterers' powers, and in particular whether TCT charterers could load a fresh cargo once the initial cargo loaded on board the vessel had been fully discharged.

Background

SBT Star Bulk & Tankers as Owners chartered their Vessel, the "WEHR TRAVE" to Cosmotrade as Charterers for a time charter trip. The charterparty was on an amended NYPE 1946 form and provided (inter alia):

"… That the said Owners agree to let, and the said Charterers agree to hire the said vessel, from the time of delivery, for one Time Charter trip via good and safe ports and/or berths via East Mediterranean/Black Sea to Red Sea/Persian Gulf/India/Far East always via Gulf of Aden, with steels and/or other lawful/harmless general cargo, suitable for carriage in a cellular container vessel as described. No bulk cargo is allowed. Duration minimum 40 days without guarantee within below mentioned trading limits."

The Vessel loaded cargoes at three ports and discharged at five ports, the last of which was Dammam.

Disputes arose when Charterers gave an order for the (empty) vessel to load another cargo at Sohar in Oman for discharge in India. 

Owners refused to comply, on the basis they had contracted for a "one Time Charter trip" only.  Owners argued that Charterers' order was illegitimate, and that after discharge at Dammam the Vessel could only legitimately proceed to the redelivery range under the Charterparty.

The parties proceeded to arbitration, where the Tribunal held (as a preliminary issue) that Charterers' order to load a further cargo was permitted under the Charterparty.  Consequently, Owners were in breach of Charterparty for failure to comply with the order.

Owners appealed under s.69 of the Arbitration Act 1996 to the High Court.

High Court Judgment

The Court restated the position that the basic "underlying notion" of a TCT is that the vessel will generally be under the orders and directions of the charterer, in accordance with clause 8 of the NYPE form.

The parties were free to deviate from this basic principle, but to do so would require agreement and clear wording [FN3].The Court held that, on the facts:

• The port calls were within the trading limits and contractual route agreed under the Charterparty; and 
• None of the wording (such as "always via Gulf of Aden" or "one Time Charter trip") was sufficiently clear to change the position.

 Owners' appeal was dismissed and the findings of the arbitration Tribunal were upheld.

 Comments

This Judgment is a helpful reminder that the scope of a charter depends upon the specific charterparty terms agreed by the parties, rather than the label given to it.

If Owners had wished to restrict the TCT to one voyage, or one cargo only (making it more akin to a voyage charter), the Charterparty should have made this clear. 

The bottom line is that although a TCT may be a hybrid form of charter, the fundamental nature of the rights and obligations underlying the contractual relationship are still those of a time charter. 

[FN1]: See for instance The "ARAGON" [1975] 1 Lloyd's Rep 628, in which the Court held that a TCT charterer was not bound to proceed to the initially nominated loadport

[FN2]: [2016] EWHC 583 (Comm) 

[FN3]: See paragraph 13 of the Judgment

It seems logical then that the more judgments being delivered in a particular area of law (say, shipping or commodities) the faster that area of law will develop, and the converse will also be true.  Development of the law is important for many reasons, but particularly so in relation to commerce where new ways of doing business (indeed, entire new industries) may fall outside what was contemplated by statutes or cases just 20 or 30 years old. 

Enacting new legislation can be a long process, subject to the shifting interests of politicians, for whom the updating of commercial laws is unlikely to be a vote-winner.  Compare the 109-year gap between the Marine Insurance Act 1906 and the Insurance Act 2015 with the constant stream of new legislation relating to crime, human rights, constitutional issues, taxation, and so on.  While some matters require legislative action, the gap is for the most part filled by Judges developing the law one case at a time.

The argument made by the Lord Chief Justice and others is that changes introduced by the Arbitration Acts 1979 and 1996 swung the pendulum too far in favour of finality of awards and away from Court supervision of the legal outcome.  This was done primarily by restricting the number of appeals to be heard by the Courts.

As the debate continues, statistics will no doubt be produced showing the number of applications for leave to appeal, how they were decided, and how far they went through the Courts.  Indeed, I recall a speech given by Sir Bernard Eder last year in which such data were presented in relation to shipping cases, and it was surprising to see how few substantive appeals are heard each year.  This reflects the high threshold to be met before permission to appeal will be granted under section 69 of the 1996 Act, namely that:

• the decision of the tribunal on the question is obviously wrong, or
• the question is one of general public importance and the decision of the tribunal is at least open to serious doubt. 

It will be a rare case where the tribunal's decision is obviously wrong.  This means that in most cases an aggrieved party will need to identify a question of general public importance.  In the shipping sector, this will often rule out appeals on points of construction because most charterparties are an amalgam of some or all of the following:

• a fixture recap setting out the key negotiated terms of the fixture,
• an often outdated printed form with more or less common amendments,
• a set of rider clauses amending and supplementing the printed terms,
• the standard terms of one of the parties (perhaps a major trader), which may themselves be amended for the particular fixture, and
• a swathe of BIMCO clauses dealing with current or past topical issues such as piracy, low-sulphur fuel, ISM/ISPS and the like.  

Whilst many sets of rider clauses and standard terms cover the same issues, they are rarely if ever identical.  Accordingly, persuading a Judge that the construction of a particular clause in a particular charterparty raises a question of general importance can be an uphill task.

More important, though, than mere numbers is the effect of such judgments on the development of the law, which is the Lord Chief Justice's concern.  Looked at in that light, I would suggest that (in the areas of law with which this blog is concerned) the quality and breadth of judgments produced on appeal from arbitration awards have in recent years had an effect that goes far beyond the limited number of cases which reach the Courts.

There are the headline cases which have an effect across the law of contract, not confined to their origins as shipping or commodities cases.  One only has to look at the long line of recent cases on various aspects of contractual damages: The GOLDEN VICTORY and Bunge v Nidera on post-termination events, The ACHILLEAS (as explained in The SYLVIA) on remoteness, The NEW FLAMENCO on mitigation, and The MTM HONG KONG and two appeals from arbitrations between Glorywealth and Flame addressing the compensatory principle.

And of course the market waits with bated breath for the Supreme Court's decision in The RES COGITANS.

In addition to this, the Courts have produced a steady stream of judgments on the more everyday aspects of (in particular) charterparty law, including:

• The LIVANITA, The ARCHIMIDIS and The REBORN on unsafe ports,
• The PEARL C and The OCEAN VIRGO on speed and consumption,
• The GLOBAL SANTOSH, The SALDANHA and The ATHENA on off-hire,
• The SILVER CONSTELLATION on RightShip approval,
• The ZENOVIA and The GREAT CREATION on redelivery notices, and
• The ASTRA on whether payment of hire is a condition. 

On the other hand, Mr John Schofield laments in the preface to the seventh edition of his book, Laytime and Demurrage, that:

            "In the preface to the fifth edition in 2005, I identified three areas of the law where I thought further judicial scrutiny would be of assistance.  Unfortunately more than 10 years on, there has been no significant judicial intervention in any of the areas I identified."

The current system, therefore, does leave gaps in certain areas.  Whether this is because such cases are by their nature less likely to meet the requirements of section 69, or because they tend to be of a lower value (particularly in an era of low freight rates), or for some other reason, is not clear.

The gaps are very often plugged (as the table of cases in Mr Schofield's book shows) by the anonymised summaries of London arbitration awards published in the Lloyd's Maritime Law Newsletter.  This is an invaluable resource for practitioners and their clients.  However, it has its limitations.  The summaries can be very brief, often (and perhaps inevitably) leading to a loss of detail as to the factual / contractual matrix, as well as in the submissions made and the tribunal's reasoning.  This can make it difficult to identify the similarities and differences between the reported case and the problem at hand.

The published awards also represent only a fraction of the awards issued each year.  According to the LMAA website, its members have issued on average around 550 awards annually over the past decade.  However, over the same period the number of awards reported in the LMLN has not exceeded 27 per year and is often far lower (just one in 2009).  Obviously not all awards are interesting enough to merit publication, but this statistic must also reflect the frequent exercise of the right of either party to veto a proposal that the award be published (even in an anonymised form).  I suggest that consideration should be given to amending the LMAA Terms to remove such veto and leave it to the arbitrator(s) to decide if an award should be published, or at least to require both parties to reject publication.

Where there is a lack of English authority, it is always possible to look to the rest of the common law world.  However, US law is by and large too 'different' to be of great assistance, and in many other jurisdictions a strict 'Model Law' approach is taken.  This is the case in Hong Kong and Singapore, where there is no equivalent of section 69 of the 1996 Act [FN1] and consequently no possibility of appeal on a point of law.  This leaves little if any local jurisprudence in relation to charterparties in particular.

In those jurisdictions, the pendulum has clearly swung almost as far as it can against Court intervention, save in very restricted circumstances such as a lack of jurisdiction or inability of one party to present its case.  The remedies available in England under section 69 (and section 68) of the 1996 Act seem generous by comparison.

Making it easier to appeal against awards might well aid the development of the common law, but at what price?  Arbitration can already be as expensive as litigation, sometimes even more so given the need to pay the arbitrators' fees.  The prospect of more frequent trips to Court (and additional time and expense) in cases which do not satisfy the current section 69 criteria might well encourage parties to consider Model Law jurisdictions.  While London remains pre-eminent in shipping and commodity arbitrations, other centres (in particular Hong Kong and Singapore) are increasingly busy and are actively promoting themselves as alternatives.

While I understand the concerns which have been raised, and agree that this is a point which should be kept under review, I would suggest that the balance struck in England remains for the time being about right.

[FN1]  Save for an 'opt-in' provision in the Hong Kong Arbitration Ordinance (Cap. 609)

 Glory Wealth v Flame¹ is but the most recent in a series of interesting judgments considering the 'compensatory principle' in contractual damages.  It is also the second arbitration appeal arising out of the same Contract of Affreightment (COA) which Flame failed to perform following the market crash of late 2008.

In the first appeal, relating to unperformed shipments in 2009 and 2010, Flame persuaded the Court that an innocent party which accepts a repudiatory breach must still demonstrate that it would have been able to perform when the time came².  However, that was a Pyrrhic victory as the Tribunal had found as a matter of fact that Glory Wealth would have been able to perform. 

The Award

The latest appeal arose out of the Tribunal's refusal to award substantial damages to Glory Wealth in respect of Flame's failure to perform 6 shipments in 2011, even though the Tribunal found that performance of those shipments would have produced a profit of just over US$3 million. 

The reason for the Tribunal's decision was that, if the shipments had been performed, Glory Wealth would have directed freight to be paid to two other companies, who would in turn have paid freight or hire on the chartered-in vessels and held onto the profit themselves.  These companies were owned by directors of Glory Wealth, but the Tribunal found as a fact that they were not agents of Glory Wealth, nor would they have accounted to Glory Wealth for the profit made on the shipments³.  Accordingly, the Tribunal held that Glory Wealth had suffered no loss. 

The Tribunal based its decision on the standard compensatory principle, namely that the purpose of an award of damages is, "so far as money can do so, to place the innocent party in the position he would have occupied if the contract had been performed according to its terms".  Since Glory Wealth would never have received the freight, a nil award of damages would (in the Tribunal's view) place Glory Wealth in the position it would have been in had Flame performed its obligations under the COA.

The Appeal

Unsurprisingly, Glory Wealth appealed.  The Court thus had to consider whether a company could be said to have lost money which it would never in fact have received.  The Court started by noting that it was common ground that Glory Wealth had an entitlement to freight under the COA, and that Flame’s breach deprived them of that right.  The Tribunal had valued the right to freight at just over US$3 million (net), but awarded Glory Wealth nothing because it would have directed freight to be paid to the other companies.

The Court disagreed.  Where the Tribunal went wrong was to focus on only one aspect of Glory Wealth's ownership of the right to freight, namely the right to receive it directly.  However, as the Judge said, "The tribunal did not take into account that whilst one limb of the right to receive freight is the right to receive it into one's bank account another limb of that right is the right to give it away.  Flame's breach had deprived Glory Wealth of the benefits of ownership of the right to freight under the COA."  The right to dispose of the freight was just as valuable as the right to receive it.

The Court was critical of Glory Wealth's conduct both as regards the use of other companies to receive freight when Glory Wealth itself was insolvent and in relation to the arbitration.  However, the Judge also held that there was "no obvious merit" in a result which would enable Flame to escape having to pay damages for their admitted breach of contract which caused a loss of over US$3 million.

Comment

It would be wrong to read this case as putting a limit on the compensatory principle (which has been reaffirmed at the highest level).  It is rather about the application of that principle to the facts and the need to be clear about exactly what has been lost by the defendant’s breach. 

It is also, more broadly, a useful reminder that the right of ownership of something includes the right to give it away. 

1  Glory Wealth Shipping Pte Ltd v Flame SA [2016] EWHC 293 (Comm)

2  Flame SA v Glory Wealth Shipping Pte Ltd [2013] 2 Lloyd’s Rep. 653

3  It appears this arrangement was put in place to avoid attachments of Glory Wealth's assets, as the company was by 2011 "deeply insolvent"

The High Court of Hong Kong has recently shown that it is ready and willing to enforce the obligations under such LOIs by way of mandatory injunction¹.

Background

Loyal Base Development Ltd ("LB"), as buyers of the cargo, issued an LOI to Cargill (their sellers) for delivery of the cargo at Rizhao, China without original bills of lading. 

In turn, Cargill issued a back-to-back LOI to their sellers, who had chartered the vessel, and who issued an LOI to the shipowners. The Vessel arrived at the discharge port in September 2014 and the cargo was delivered without production of the original bills.

Almost a year later, in August 2015, Bank of China (the "Bank") arrested the vessel in China.  The Bank alleged that it was the lawful holder of the bills of lading and that the cargo had been misdelivered. 

Demands were made along the chain of LOIs and Cargill called on LB to provide security for the release of the vessel.  LB failed to respond.

Ex Parte Application

Cargill made an application to the Hong Kong Court for a mandatory injunction and/or an order for specific performance against LB (a Hong Kong company), to compel them to comply with their undertakings in the LOI. 

The LOI was on terms familiar to the reader, and provided inter alia, as follows:

"If, in connection with the delivery of the cargo as requested, the ship, or any other ship or property in the same or associated ownership, management or control, should be arrested or detained… to provide on demand such bail or other security as may be required… to secure the release of such ship or property… whether or not such arrest or detention or threatened arrest or detention or such interference may be justified." 

On 26 August 2015, the Court granted the mandatory injunction requiring LB to honour the terms of the LOI. 

LB applied to discharge the Order on several grounds, including that:

• Cargill had misled the Court regarding the merits of the Bank's claim;
• Cargill had failed to inform to the Court that it had already arranged for security to be provided for the release of the Vessel; and
• Cargill failed to inform the Court when the Vessel was released on 31 August 2015. 

Decision

As a starting-point, drawing on similar authorities in England² , the Judge highlighted that:

• The purpose of an LOI for discharge without original bills of lading is to avoid the detention of the vessel in the event of a claim;
• Damages are therefore not an adequate remedy for the shipowners; and
• It would be "inequitable" not to order specific performance of the obligations under the LOI.  

As to LB's complaints, the Judge held that the merits of the Bank's claim were irrelevant to LB's undertaking to provide security.  To go into the merits of the Bank's claim would defeat the purpose of the LOI.  Indeed, the LOI itself required LB to provide security "whether or not such arrest… may be justified".  

It was sufficient that the arrest of the vessel was "in connection with" the delivery of the cargo to trigger LB's obligations under the LOI. 

With regard to disclosure, the Court affirmed that there is a duty on the applicant to make full and frank disclosure in its application.  This is an ongoing duty for as long as the proceedings continue without the defendant being heard. 

By the time the inter partes summons to continue the injunction was heard (and adjourned) on 28 August 2015, Cargill knew that security was being arranged to secure release of the vessel.  Cargill should therefore have disclosed this information at that time, as it was relevant to the Court's decision whether to continue, extend, or amend the injunction order.  

However, such non-disclosure was not sufficiently material to justify the discharge of the injunction. 

Comment

This decision is a welcome reconfirmation that the Hong Kong Court will enforce by injunction LOIs for delivery of cargo without original bills of lading, and will not permit obligations to be avoided on technicalities. 

In doing so, the Court recognised the commercial importance and purpose of such LOIs.  In particular, it is clear that obligations will be triggered regardless of the underlying merits of a claim which results in the arrest, or threatened arrest, of the vessel. 

The Court's decision is also a helpful reminder that full and frank disclosure is necessary in applications for ex parte relief, and the duty does not come to an end when the injunction is granted.  Failure to comply risks the Court discharging the injunction. 

Written by Steven Wise and Camelia Tang

Background

The dispute arose out of alleged misdelivery of cargo in China.  Bank of China (the "Bank") as holder of the bill of lading, arrested the vessel "ZAGORA" to obtain security for its claim.  As commonly happens in Mainland China, despite the incorporation of a Hong Kong arbitration clause, the Bank also commenced substantive proceedings in respect of its claim in the Qingdao Maritime Court.  

After eventually accepting service of the Qingdao proceedings, the shipowners filed a challenge to the Court's jurisdiction on the basis of the arbitration clause.  That was rejected, and the shipowners filed an appeal.  Before the appeal was decided, the shipowners made an application to the Hong Kong Court for an anti-suit injunction on the grounds that the Qingdao proceedings had been brought in breach of the arbitration clause.  By the time the injunction application was heard in Hong Kong, the Shandong Higher People's Court had rejected the shipowners' appeal and affirmed that the Qingdao Maritime Court had jurisdiction to determine the claim.  

The Decision

As in England and many other jurisdictions, the Hong Kong Courts are strongly supportive of arbitration.  Accordingly, as a general rule, anti-suit injunctions are readily granted to restrain a party from pursuing foreign court proceedings in breach of a valid arbitration agreement.  A recent example of this in Hong Kong is Ever Judger Holding Co Ltd v Kroman Celik Sanayii Anonim Sirketi², a bill of lading case about which I published an arbitration update available here.

However, the Hong Kong Court's approach is qualified by two considerations:

• the injunction must be sought without delay, and
• the foreign proceedings must not be too far advanced.

On the facts of this case, the Judge took into account three main factors in relation to delay:

• a period of 8 months between September 2014 and May 2015 when the Judge found that the shipowners were evading service of the Qingdao Maritime Court proceedings,
• a further delay of 4 months between the shipowners accepting service of the Qingdao proceedings and issuing the application in Hong Kong for an anti-suit injunction, and
• the fact that the time bar for commencing arbitration expired in December 2014, about 3.5 months after the Qingdao proceedings were commenced.

However, the Judge rejected the Bank's argument that they suffered prejudice as a result of the expiry of the time bar.  Although the Bank did not have a copy of the charterparty, it would have seen from the terms on the reverse of the bill of lading that the law and arbitration clause of the charterparty was incorporated.  However, the Bank took no steps to check the position by obtaining a copy of the charterparty.  The Judge held this to be unreasonable.   

Having disposed of the issue of prejudice, the shipowners argued that delay by itself is irrelevant to the granting of an anti-suit injunction.  Such an argument ran counter to recent English authorities, in particular Essar Shipping Ltd v Bank of China Ltd³  (a strikingly similar case which we have already blogged here), and a Court of Appeal judgment on the related subject of anti-enforcement injunctions⁴.

After reviewing the English authorities, the Judge confirmed that Hong Kong took the same approach, and that "the need to act promptly is well-established on the authorities".

While this may give rise to some uncertainty, the Judge commented that, "in practice, it is not very difficult to recognize delay where it exists".  In assessing whether there has been a lack of promptness, time begins to count against the innocent party once he is aware of the foreign proceedings brought in breach of an arbitration agreement.  In this case, the delay of 12 months from the commencement of the Qingdao proceedings was in the Judge's view "both inordinate and culpable", and he declined to grant the injunction on the ground of delay alone.

The Judge also took into account the expiry of the time bar for commencing arbitration.  There had been ample time for the shipowners to have applied for an injunction in the 3.5 month period between the commencement of the Qingdao proceedings and the expiry of the time bar.

While Hong Kong (and English) judges are not overly sensitive to the feelings of foreign courts⁵, judicial comity remains a factor.  Delay is relevant in this context also, in particular if one of the reasons for the delay is the fact that the innocent party is challenging the foreign court's jurisdiction in that court.  As the English Court of Appeal stated in the Ecobank case:

"an applicant should act promptly and claim injunctive relief at an early stage; and should not adopt an attitude of waiting to see what the foreign court decides.  In The Angelic Grace, Leggatt LJ said that it would be patronising and the reverse of comity for the English court to decline to grant injunctive relief until it was apparent whether the foreign court was going to uphold the objection to its exercising jurisdiction and only to do so if and when it failed to do so."   

Comment

It is clear from recent decisions that in both Hong Kong and England a party facing a claim brought in breach of an arbitration clause must apply for an anti-suit injunction as quickly as possible.

If necessary, this should be done at the same time as raising a challenge to jurisdiction in the foreign court itself.  It is certainly no excuse for delay to say that one was waiting for the foreign court to rule on its own jurisdiction.

In particular, shipowners should be careful not to allow the usual one year time bar under bills of lading to expire before applying for an injunction. 

¹Sea Powerful II Special Maritime Enterprises (ENE) v Bank of China Ltd (HCMP 399/2015) – Judgment dated 12.01.2016
²[2015] 2 HKLRD 866
³[2015] EWHC 3266
⁴Ecobank Transnational Inc v Tanoh [2015] EWCA Civ 1309
⁵The Mainland Courts being, for these purposes, in a different jurisdiction under the "one country two systems" principle

The facts are set out in our previous article on the first instance decision in this matter. Permission to appeal was given on the following point: 

"When assessing shipowners' damages for loss of profits on earnings of hire under a time charter party which has been repudiated by the charterers and the repudiation accepted by the owners as terminating the contract, are the charterers entitled to have taken into account as diminishing the loss of earnings/hire sustained by the owner as a result of the accepted repudiation "a benefit" said to consist of avoidance of a drop in the capital value of the vessel because the vessel has been sold shortly after acceptance of the repudiation whereas if the vessel had been retained until after performance of the charter party, it would have had a lower capital value by reason of decline in the capital value of the vessel through market decline in ship sale values in that period?" 

The Court of Appeal answered this question in the affirmative, reversing the Judgment at first instance, and agreeing with the arbitration award. 

The arbitrator had found (as a matter of fact, rather than law) that the sale of the vessel arose from the consequences of the breach.  In these circumstances, the capital gains were a benefit to be taken into account when assessing damages, in the usual way. 

The compensatory principle is that a claimant who sustains loss is, so far as money can do it, to be placed in the same position as if the contract had been performed.  This is relatively straightforward where there is an available market. 

However, the matter is more complicated where there is no available market, as is clear from the leading authorities of The "WREN"[2] and The "KILDARE"[3].  In those cases, the loss had to be determined by reference to the actual trading of the vessel on the spot market. 

The Judge at first instance reasoned that owners' decision to sell the vessel was not caused by charterers' breach in redelivering the vessel early.  Instead, it was an independent speculation on the part of the owners, as was the charterers' decision not to fix a replacement vessel in The "ELENA D'AMICO"[4]. 

However, the Court of Appeal disagreed.  The sale of the vessel was not an independent speculation, but was in the ordinary course of business where there was no available market.  As such, the capital benefit of selling the vessel in 2007 rather than when the vessel should have been redelivered in 2009 (after the market had collapsed) had to be taken into account when assessing the losses caused by the defendant's breach of charterparty[5]. 

If there had been an available market, the measure of damages would have been the difference between the market rate and the charter rate over the balance of the charter period.  In that case, the sale of the vessel would have been an independent business decision, and would not be taken into account. 

However, where (as in this case) there was no available market, the additional profit on the sale of the vessel would be taken into account, as this was effectively a mitigation of owners' losses and not an independent business decision.  This distinguished the case from The "ELENA D'AMICO". 

Where the owners had mitigated their losses by selling the vessel, the benefit of doing so was to be calculated by reference to the difference between the value of the vessel at the time of sale and its value at the time when (in a falling market) the charterparty was due to expire. 

Comment

The Court of Appeal's Judgment is a helpful application of the principle that, in the absence of an available market:

• If a claimant mitigates their loss, and obtains a benefit by doing so,

• That benefitis normally to be brought into account in assessing the claimant's loss; unless
• The measure is wholly independent of the relationship between the clamant and the defendant.

[1] Fulton Shipping v Globalia Business Travel [2015] EWCA Civ 1299

[2] [2011] 2 Lloyd's Rep 370

[3] [2011] 2 Lloyd's Rep 360

[4] [1980] 1 Lloyd’s Rep 75

[5] See Paragraph 34 of the Judgment - "where the market rate is displaced because there is no market…one just has to decide whether the sale of the vessel arose "out of the consequences of the breach and in the ordinary course of business"."

The facts are largely matter-specific, but in brief recap Polaris Shipping (charterers) chartered the vessel "OCEAN VIRGO" from Sinoriches Enterprise (owners) for one TCT via the North Pacific to Singapore / Japan range. 

The charterparty was on the NYPE form, and speed and performance warranties were given on the basis of:

            "good weather/smooth sea up to max BF SC 4 / Douglas Sea State 3. No adverse currents, no negative influence of swell" 

Charterers brought a speed and consumption claim, alleging that the vessel could not meet its performance warranties in good weather. 

Arbitration Award

The sole arbitrator, an experienced Master Mariner, held that:

• For a good weather period to be admissible, it had to run for 24 hours from noon to noon; and

• Any speed and consumption analysis involved a sampling exercise, and the sample size must be sufficiently large to be representative of the voyage in its entirety. 

The arbitrator went on to dismiss the charterers' claim, on the basis that there had been insufficient good weather periods during the course of the charterparty. 

High Court Judgment

Charterers obtained permission to appeal against the Award on the basis that the arbitrator had erred in law:

• By excluding periods of good weather which did not last a full 24 hours; and

• By indicating that he would assess any performance claim by reference to the individual 'leg' of the voyage, rather than with regard to whole of the charter period (regardless of the weather conditions). 

The Court upheld charterers' appeal on both counts. 

Mr Justice Teare held (at paragraph 18 of the Judgment) that:

"The charterparty merely referred to "good weather". There are no words in the charterparty which justify construing good weather as referring to good weather days of 24 hours from noon to noon." 

However, the Court stressed that the arbitrator was free to decide whether a particular period of good weather represented a large enough sample to be included for consideration. 

For instance, on the second leg of the voyage, good weather was only observed for 5.51% of the time.  The arbitrator found that this was too small a sample to be representative.  The Court held that he was entitled to reach this conclusion, which was a finding of fact, not law. 

By reference to the oft-cited key authorities of The "DIDYMI"[2] and The "GAS ENTERPRISE"[3] the Court held that a breach of the performance warranty (if identified) must be applied to the whole of the charter period, not just the voyage or leg on which it occurred.  The only exception is for periods of slow steaming on charterers' orders. 

The Award was remitted to the arbitrator for him to determine whether the periods of good weather on the first leg amounted to a sufficient sample to establish a breach of the performance warranty. 

Comment

Although a short Judgment (at only 23 paragraphs), this decision has potential implications for all performance claims. 

First, it makes it clear that it is not acceptable to imply a reference to 'good weather days' into clauses which do not contain it.  Therefore, periods of less than 24 hours cannot be excluded on that basis alone. 

Secondly, the Judgment is a welcome restatement of the principle that where a breach of the performance warranty is identified, the shortfall in performance must be applied to the entire charter period (see also "Time Charters", 7th Edition at paragraph 3.67).

[1] Polaris Shipping Co Ltd v Sinoriches Enterprises Co Ltd [2015] EWHC 3405 (Comm)

[2] [1988] 2 Lloyd's Rep. 108, at 117

[3] [1993] 2 Lloyd's Rep. 352, at 366

The respondent, Bank of China (the "Bank"), as holder of original bills of lading, commenced proceedings in China against the applicant bareboat charterer, Essar Shipping Ltd ("ESL"), alleging a cargo misdelivery claim of over US$11million.

The vessel concerned, the "KISHORE" (the "Vessel"), was arrested in Tianjin to obtain security for the Bank's claim.  However, the Bank also commenced substantive proceedings in Qingdao despite the incorporation into the bill of lading an arbitration clause stipulating London arbitration.

ESL first applied to the Tianjin Court to set aside the arrest.  That application was rejected. Subsequently, 2 months after proceedings were commenced, ESL filed a formal challenge to the Qingdao Court's jurisdiction.  ESL then waited a further 7 months before applying to the English Court for a declaration that the dispute was subject to English law and London arbitration and an injunction restraining the Bank from pursuing its claim in China. 

The rival arguments

In opposing the injunction, the Bank argued that:

• There was a significant delay of more than 9 months between the Bank's commencement of proceedings in China and the issue of ESL's claim form and application for an anti-suit injunction in England.
• Even if the Bank had acted unreasonably in commencing proceedings in China, as opposed to London arbitration, the time bar had expired and it would not be in the interests of justice for the Court to grant an anti-suit injunction which would essentially deprive the Bank of its claim. 

ESL responded that:

• It was entitled to first challenge the Qingdao Court's jurisdiction before seeking an anti-suit injunction.
• The length of delay in itself is of less importance than the extent to which foreign proceedings have progressed.
• Justifiable delay should not be given serious weight against the grant of an injunction.
• Waiting for a foreign jurisdictional challenge to be determined, although significant, is less important than permitting foreign proceedings on the merits to unfold.
• There were no strong reasons why the arbitration agreement should not be enforced by injunction. 

Decision 

The Judge noted that the grant of an anti-suit injunction is discretionary.  The underlying principle is that the English courts can grant anti-suit injunctions in situations where the injunction is "sought promptly and before the foreign proceedings are too far advanced" (The Angelic Grace)[2].

The Court held that, whilst the dispute was indeed subject to English law and London arbitration, an injunction would be refused because the application was not made promptly.  The fact that the Qingdao Court proceedings were not "too far advanced" did not affect this conclusion. 

However, the Judge did not accept the Bank's alternative argument based on specific prejudice.  Since foreign shipowners often seek anti-suit injunctions against cargo owners who pursue claims in the Chinese Courts, it was unreasonable of the Bank not to commence protective arbitration proceedings before the time bar expired.  

Comment 

Two key points arise out of this case.

First, even where an arbitration agreement is valid and covers the disputes in question, an anti-suit injunction may be refused where there is delay in seeking the injunction. In such circumstances, however, there will still be a claim for any damages flowing from the breach of the arbitration agreement.

Secondly, what constitutes delay will depend on the circumstances of each case. Most bills of lading stipulate a time bar of 9 or 12 months. What is clear is that "delay" must be considered in context and, in this case, a delay of 9 months was considered far too long against the backdrop of a 12 month time bar. 

The lesson to be drawn is that anti-suit injunctions should be sought as soon as possible after proceedings are brought in breach of an arbitration agreement.

[1] [2015] EWHC 3266

[2] [1995] 1 Lloyd's Rep 87

The final remaining criterion is the ratification by states representing 35% of the world's merchant shipping tonnage.  Prior to the Biennial Assembly Meeting, the Convention had been ratified by 44 states representing approximately 32.9% of the world's tonnage. 

According to Lloyd's List Intelligence, the combined fleets of Indonesia and Ghana represent approximately 1.46% of the global fleet in terms of gross tonnage.  Argentina, the Philippines, Belgium and Finland have all confirmed that they are in the process of ratifying the Convention.  Should one of these countries with a larger proportion of the world's gross tonnage on its register complete the ratification process prior to the end of December 2015, it would seem likely that the criteria for enforcement of the Convention will have been met, leading to the Convention coming into force 12 months thereafter. 

It is understood that the IMO are currently reviewing the distribution of the world's tonnage, in order to establish exactly what percentage has so far ratified the Convention and what additional percentage may be gained by the ratification by the aforementioned nations.

Many commentators believe that ship owners are not yet ready for the Convention, despite the fact that over ten years have elapsed since its inception.  Of particular concern is the ongoing refusal by the United States to approve many of the ballast water treatment systems that have been type-approved by other nations. 

Once in force, the Convention will require ship owners to install the necessary equipment for the proper treatment of ballast water by each vessel's next scheduled dry-docking.  Regardless of when the Convention enters into force, the announcement will likely see many owners rescheduling dry-docks due in the immediate aftermath, in order to extend the deadline by which they will be required to install the necessary equipment.

Owners are likely to be waiting anxiously for the results of the IMO's current review of the distribution of world tonnage, and to see which nation next confirms ratification, and when.

By way of a very brief recap, the issue arose because the Shipowners' ("Owners") defence to the claim for payment by OW Bunker Malta ("OWBM") (pursued by ING Bank as assignee) rested on two provisions of the Sale of Goods Act 1979 (the "Act").  While other points remain in dispute, it was recognised that, if the Act applied, OWBM's claim would fail.  

The appeal

The issue on appeal was restricted to the question whether the contract between the Owners and OWBM was a contract for the sale of goods within the meaning of the Act^[2].  The Court of Appeal held that it was not, for essentially the same reasons as the arbitrators and the Judge at first instance.  

Like the Judge, the Court of Appeal accepted that the language of the OW Bunker terms suggested the parties were thinking in terms of a sale and purchase of the bunkers.  However, the labels which parties to a contract use only take the matter so far, and the Court of Appeal agreed that it was necessary to analyse the obligations which the parties in fact undertook.  

Looking at the terms of the contract, the Court of Appeal identified three critical provisions as showing that transfer of property in the bunkers was not the essential subject matter of the contract:

• The retention of title until payment was made,
• The period of credit before payment fell due, and
• The permission given to the Owners to consume the bunkers in the meantime. 

At first instance, the Judge gave equal weight to a fourth factor – that all parties were aware that some or all of the bunkers were likely to be consumed before expiry of the credit period.  The Court of Appeal did not consider this commercial context to be such an important factor.  In their view, it was not necessary to look far beyond the terms of the contract themselves, although the commercial context supported their conclusion. 

The Court of Appeal then turned to consider what the true nature of the contract was, if not a contract of sale.

• "It is a contract under which goods are to be delivered to the owners as bailees with a licence to consume them for the propulsion of the vessel, coupled with an agreement to sell any quantity remaining at the date of payment, in return for a money consideration which in commercial terms can properly be described as the price." 

• "…what the owners contracted for was not the transfer of property in the whole of the bunkers, but the delivery of a quantity of bunkers which they had an immediate right to use but for which they would not have to pay until the period of credit expired." 

In a passage which does not bode well for certainty, the Court of Appeal went on to say that the contract was a contract for the sale of goods to which the Act applied as regards the bunkers remaining at the time of payment.  A failure to pass title to such unconsumed bunkers would be a breach of contract by OWBM.  However, such a breach would not give Owners a complete defence unless "contrary to all expectations" such a large proportion of bunkers remained that there was a total failure of consideration. 

At first instance, the Judge went on to consider whether OWBM had obtained the necessary permission from Rosneft (who retained title) for Owners to consume the bunkers.  The Court of Appeal considered that the Judge should not have done so, but Owners did not challenge the Judge's finding.  Rosneft themselves filed submissions on the issue, but the Court of Appeal declined to address it. 

Comment

This is another disappointing decision for shipowners and charterers who contracted with OW Bunker. 

The Court of Appeal has also (with respect) muddied the waters by holding that the Act does apply to the sale of bunkers still on board the vessel at the time payment is made.  This, however, is a mere fortuity and it is surprising that the Court of Appeal considered it should affect the characterisation of the contract. 

It is to be hoped that these important issues will receive consideration by the Supreme Court, and that the Court will speak clearly with one voice.  If not, much more litigation will inevitably follow.   

As mentioned above, the Court of Appeal did not address the question whether OWBM had obtained permission from Rosneft for the Owners to consume the bunkers.  This means they did not have to consider what is really the key commercial issue, namely the risk of arrest in other jurisdictions.  

It therefore remains something of a jurisdictional lottery for shipowners and charterers as to where physical suppliers choose to take action.  

While interpleader relief has been granted in the USA and Canada, it has been refused in Singapore, and it seems unlikely that the English courts would assist.  Although unrelated to the OW Bunker saga, shipowners also now face the possibility of arrest in Australia on the basis of maritime liens arising under foreign law.

[1] PST Energy 7 Shipping LLC v. O.W. Bunker Malta Ltd (The "RES COGITANS") [2015] EWCA Civ 1058

[2] Section 2 of the Act defines a contract of sale of goods as "a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price".

The Court rejected the appeal, confirming the Tribunal's award of damages for loss of profit after the date the original charterparty would have ended, had it been performed. 

Background

The vessel "MTM HONG KONG" was chartered by MT Maritime Management BV as Owners to Louis Dreyfus Commodities Suisse SA as Charterers under a Charterparty dated 6 January 2011 on an amended VEGOIL form. The loading port range was South America, and the discharge port range was Gibraltar to Rotterdam in Europe. 

The Charterparty was terminated on 21 January 2011 whilst the Vessel was on her way towards the loading range in South America. 

The Vessel continued to South America, arriving in Uruguay on 2 February 2011. 

The Vessel was only fixed on 24 February 2011, for a voyage from San Lorenzo, Argentina to Rotterdam. This fixture was completed on 12 April 2011. 

Arbitration Award 

The Tribunal found that:

• Charterers had repudiated the Charterparty on 21 January 2011.
• The original voyage would have taken 43.6 days to complete, i.e. until 17 March 2011.
• If that voyage had been completed, the Vessel would have carried a cargo from the Baltic to the USA, followed by a cargo from the USA to Europe. 

Owners claimed the difference between:

• The profit the Vessel would have earned if the original voyage had been performed, as well as the next two voyages; and
• The profit actually earned by the Vessel under the replacement fixture from San Lorenzo to Rotterdam.

Charterers argued that Owners were only entitled to profit until the estimated end date of the original voyage. 

The Tribunal found in Owners' favour, and Charterers applied for leave to appeal. 

High Court Judgment 

Charterers were granted leave to appeal against the Award on the following question of law:

"If a voyage charter is repudiated by charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel's (actual and hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?" 

The Court rejected the appeal, and found that damages should be assessed up to the end of the substitute employment, in order to put Owners (as the innocent party) in the same position as if the Charterparty had been performed. 

Charterers relied heavily on the 19th century case of Smith v M'Guire[3], in which damages were limited to the difference between the freight which would have been earned, had the charter been performed, and that which was earned until the employment under the charter would have ended, less any expenses which would have been incurred. 

However, the Court held that this was simply the starting position – and that there were three main factors which justified a departure from that position in this case: 

• Owners had acted reasonably in sending the Vessel to South America, despite the long delay in fixing her;
• There was no suggestion that the losses claimed were too remote; and
• It was possible on the facts of the case to predict the Vessel's immediate future employment, had the original charter been performed. As a result "the damages could be assessed with a reasonable degree of confidence". 

Conclusion 

In coming to its decision, the Court completed a helpful and comprehensive review of the authorities on damages for repudiation of a voyage charter. 

However, somewhat disappointingly, the Court was unable to distil any hard set of rules from the authorities. Indeed, the Court was at pains to stress that an owner's claim for loss of employment after the date the original charter would have concluded will not always succeed[4]. 

Instead, the decision illustrates the difficulties in calculating how to put a party in the same position as if the contract had been performed, and highlights that such decisions will necessarily depend heavily on the facts of the matter, and the remoteness of the damages claimed. 

Finally, a note of caution. The Court rejected Charterers' claim that, if the damages calculation did not end at the date when the contractual voyage would have ended, there would have been no logical end to the calculations. However, that does seem to remain a genuine concern.  In this case, the Court may have been constrained by findings of fact in the arbitration Award, on which there had been no appeal (such as that it was possible to say with "some degree of certainty" what the Vessel would have done after the contractual voyage[5]). However, in a case where such factual issues remain up for debate, it is likely that the parties will continue to argue over the appropriate cut-off date for calculation of damages, and whether such damages are too remote to be claimed. 

Unfortunately, the Judgment may well have left the waters muddier than before, and it is foreseeable that this issue will be litigated again.

[1] [2015] EWHC 2505 (Comm)

[2] Robinson v Harman 1 Ex 850 at 855: "The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."

[3] (1858) 3 H&N 554

[4] See paragraph 78 of the Judgment

[5] See paragraph 71 of the Judgment

The Galatea

In the recent English Commercial Court decision of Involnert Management Inc v. Aprilgrange Ltd & Others (The "Galatea") [2015] EWHC 2225 (Comm), Leggatt J held that yacht insurers were entitled to avoid a property insurance on a yacht – and decline liability for a total loss claim - in view of an innocent material non-disclosure by the assured as to the market value of the yacht at the time of placing.  But Leggatt J lamented the fact that (as he saw it) until the new law comes into use, current English insurance law puts an insurer in a better position due to an innocent non-disclosure (i.e. no liability at all) than the insurer would have been had full disclosure been made (i.e. reduced level of cover).

In December 2011 the yacht Galatea caught fire alongside at her marina in Athens, Greece.  She became a constructive total loss.  At the time the yacht was insured by the same hull insurers for both Hull & Machinery risks (section A) and Increased Value Risks (section B).  The total agreed insured value for both sections was €13 million - €9.75 million of cover on "all risks" H&M terms and €3.25 million of cover on "total loss only" Increased Value terms.  (The 25% upper tier of TLO Increased Value has been in use for some time across a number of marine hull markets - including the yacht market - as a means of reducing the total hull premium).

The yacht was purchased by the assured in 2007 and, in prior policy years, had always been insured at her original purchase price of €13 million.  18 months before the April 2011 hull placing, the yacht managers obtained a professional valuation of the market value of the yacht at €7 million.  About a month before placing the policy, the owner received an email from the yacht managers recording the managers' view that the yacht's market value was €7 million.

Insurers rejected liability for the total loss claim under both sections of the hull cover on several grounds.  The bulk of Leggatt J's judgment focussed on (i) whether the non-disclosure of the earlier valuation at €7 million was material; and (ii) if it was material, whether insurers had waived materiality.  The judge held that the non-disclosure was material and that materiality was not waived by insurers.  Although the non-disclosure was innocent (i.e. it was an inadvertent and unintentional error by the assured/yacht managers) it was nevertheless a material non-disclosure.  Insurers had not waived materiality and so they were entitled to avoid the policy as a whole.

Comment

Avoidance for material over-valuation is not new.  Property that is insured for amounts way in excess of its true market value presents a clear moral hazard and is therefore material.  English law has long recognised that, for a marine hull insurance, a ship owner is entitled to insure his property for in excess of market value provided that the owner "genuinely and reasonably believes that a commercial vessel ought to be insured for a particular value which is in excess of the market value and the proposed value is consistent with reasonably prudent ship management" (see North Star Shipping v. Sphere Drake [2005]).  The difficulty for this yacht owner, however, is that the Court found that, in view of the clear valuation at only €7 million, the owner could not reasonably have believed that his vessel ought to be insured for €13 million.

It is easy to view this decision as perhaps the death throes of the (soon to be) old non-disclosure rules and yet another example of judicial frustration with those rules.  But even under the (soon to be) new non-disclosure rules, the failure to disclose the earlier yacht valuation would still be viewed by Leggatt J as a failure by the assured to make a "fair presentation of the risk" and would be considered a "qualifying breach" under the new Insurance Act 2015.  On the yacht underwriters' evidence, application of the new rules would therefore have reduced the level of cover (and the level of the total loss claim) by almost 40% to €8 million.  That is quite a drop in cover.

Over-valuation cases are not new.  But the Galatea judgment is of interest as it is the first time in recent years that English judges have addressed the issue of valuation against a split "tower" of marine hull cover.  For many years the agreed vessel value at the time of placing lay in the agreed value under the H&M policy.  The Increased Value cover was, originally, utilised as a way of insuring against both an increase in a vessel's market value during the policy period as well as the additional costs which an owner is likely to incur when his vessel becomes a total loss (and which are irrecoverable under the H&M policy).  Against that original use of Increased Value cover, one could argue that there was no material over-insurance because the agreed H&M value was €9.75 million against a market value of €7 million - perhaps not so much of a jump as to trigger moral hazard (although on his evidence it looks like the actual underwriter would still have thought that reduced gap to be material). 

However, as both the parties and the judge recognised in the Galatea, the global yacht/superyacht hull market has for some time adopted the 75/25 split of cover between H&M and TLO Increased Value sections as being representative of the combined insured value of the yacht and therefore a way to obtain the top 25% of that cover at a much lower premium, and the CTL trigger at only 75% of the combined insured value.  Whether a similar approach can be said for the global blue water hull market - where H&M and Increased Value covers can often be placed in different markets with different insurers - is unclear.

Finally, it is worth remembering that, despite the focus on non-disclosure and waiver of materiality, the yacht owners' claim also failed completely on the grounds that it had not complied with a pretty innocuous condition precedent – namely an obligation to provide insurers with a sworn proof of loss within 90 days of the loss (in circumstances where insurers knew – and no-one disputed – that the total loss had occurred).  But the condition precedent was clear and unambiguous and it was not complied with.  The law on conditions precedent will not be affected by the Insurance Act 2015 (unless you try to "dress" any of them up as warranties).  So be careful what conditions precedent you agree to!

The Court may still grant relief (under what is now Section 12 of the Arbitration Act 1996) but only if:

1. The circumstances are such as were outside the reasonable contemplation of the parties when they agree the provision in question, and that it would be just to extend the time, or
2. The conduct of one party makes it unjust to hold the other party to the strict terms of the provision in question.

The introduction of this test has had exactly the effect that was intended.  There are now significantly fewer applications for enlargement of time.  One could say that such applications are now few and far between.

However, a recent attempt to invoke the Court's power under this Section was made in the case of Expofrut SA and Others v. Melville Services Inc and Another.  The matter came on for hearing before Mr Justice Burton on 22 June who, by his judgment of 8 July 2015 (commendably quick) refused to grant the necessary extension.

In that case, cargo claimants had initiated proceedings in Belgium on 17 February 2010 against the carrier in respect of damage to a consignment of fresh fruit shipped from Argentina to Antwerp.

The claim was brought in Belgium well within time but the Belgian Court ultimately determined that the claim had to be pursued by arbitration by reason of the incorporation of the arbitration clause from the relevant charterparty into the bills of lading.  

Having reviewed the authorities on Section 12, the Judge then turned to consider the facts to see whether the conduct of the carrier made it unjust to hold the cargo interests to the strict terms of the provision in question, it being common ground that this was the only basis on which the application could succeed.

After reviewing the evidence of the two Belgian lawyers representing the parties, the Judge concluded that:

1. there was no admissible evidence of any reservations by the cargo interests of their right to refer the matter to arbitration if the Belgian Court were to decide that the arbitration clause had been properly incorporated; and

1. there was no conduct by the carrier or their representatives which made it unjust to hold the cargo interests to the strict terms of their contract. 

Separately, he concluded that there has been delay in making the application which was a further factor militating against any extension of time. 

In summary, the Judge had little difficulty in concluding that on the facts of the case before him the application did not merit the grant of an extension.  It is equally clear from the authorities so far that it will probably be a fairly unusual or exceptional case in which the Court is likely to exercise its power to extend time under this section.

[2015] EWHC 1950 (Comm)

In short, the Court decided that a contract for the supply of bunkers to a vessel made on the OW Bunker Group 2013 Terms and Conditions of Sale for Marine Bunkers (the "OWB terms") was not a "contract of sale of goods" falling within the definition contained in the Sale of Goods Act 1979. 

The effect of this conclusion is that ING Bank (as assignee of the claim) is entitled to payment for the bunkers despite the fact that OW Bunker did not pay their own supplier and there is a risk that the shipowner may have to pay twice.  This seems at first a surprising result but, on analysis, is the (presumably unintended) consequence of the particular terms which the parties added to a "standard" contract of sale. 

The facts

As is often the case, the supply of bunkers to the vessel was subject to a string of contracts.

• The shipowners ("Owners") contracted with OW Bunker Malta Ltd ("OWBM")
• OWBM contracted with its Danish parent company, OW Bunker & Trading AS ("OWBAS")
• OWBAS in turn contracted with Rosneft Marine (UK) Ltd ("Rosneft"), and
• Rosneft placed an order with its Russian subsidiary, RN-Bunker Ltd, which was the physical supplier of the bunkers 

The contract between OWBM and the Owners was subject to the OWB terms and provided for payment within 60 days of delivery.  The contract between OWBAS and Rosneft was subject to Rosneft's 2012 Marine Fuel Sales General Terms and Conditions (the "Rosneft terms") and required payment within 30 days of delivery.  The contract between Rosneft and RN-Bunker was also on the Rosneft terms. 

The bunkers were delivered to the vessel on 4 November 2014.  Rosneft paid RN-Bunker on 18 November 2014, but neither OWBAS nor the Owners paid their counterparts. 

Since OWBAS are now under Court protection in Denmark, the prospects of them ever paying Rosneft are not good.  As in many other cases, Rosneft have demanded payment from the Owners, who do not deny that they must pay for the bunkers but equally do not want to risk paying twice. 

The contract terms

The key features of the OWB terms on which the case was decided are as follows:

• "Title in and to the Bunkers delivered and/or property rights in and to such Bunkers shall remain vested in the Seller until full payment has been received by the Seller of all amounts due in connection with the respective delivery" (Article H.1)
• "Until full payment of the full amount due to the Seller has been made… the Buyer agreed that it is in possession of the Bunkers solely as Bailee for the Seller, and shall not be entitled to use the Bunkers other than for the propulsion of the Vessel…."  (Article H.2)
• The effect of Article H.2 in the context of the agreed 60-day credit terms was that some or all of the bunkers would be likely to be consumed before the expiry of the credit period 

The Rosneft terms contained a similar retention of title clause but not the express permission for the bunkers to be consumed in the propulsion of the vessel.  

The dispute

ING Bank (as assignee of OWBM) brought a claim against the Owners in London arbitration for the price of the bunkers supplied. 

Owners' main defence was that the contract with OWBM was governed by the Sale of Goods Act 1979 (the "Act") and that ING's claim for the price of the bunkers did not satisfy the conditions in Section 49 of the Act[2].  Owners also argued that the failure of OWBAS to pay Rosneft meant that OWBM were in breach of the term implied by Section 12 of the Act[3]. 

ING's primary case was that the contract between the Owners and OWBM was not a contract to which the Act applied.  

The decision

The arbitration tribunal found in favour of ING that the Sale of Goods Act did not apply.  Hence, ING had a straightforward claim in debt.  The tribunal also held that, if the Act applied, ING's claim would fail. 

The Owners obtained permission to appeal against the arbitrators' award and strongly criticised it as "bizarre", "perverse" and "unworkable".  However, the appeal failed and the award was upheld in glowing terms by the Commercial Court. 

The Owners' main argument on the appeal was that their contract with OWBM was clearly a contract of sale:

• It was described as such
• It identified the parties as buyer and seller
• It used the language of a sale contract, and
• It contained the sort of terms which would be expected in such a contract 

The Judge accepted that was how the contract had been drafted.  However, that was only a starting-point and the question ultimately turned on an analysis of the obligations which the parties undertook.  

In that regard, it was important to keep in mind that consumption of the bunkers before payment would extinguish any property or title in them.  As a matter of law, you cannot own something that does not exist. 

This is of crucial importance to understanding the decision because the passing of property is key to the application of the Sale of Goods Act.  Section 2 of the Act defines a contract of sale of goods as "a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price".  

The question was therefore whether the contract between the Owners and OWBM was one by which OWBM transferred or agreed to transfer the property in the bunkers to the Owners.  The answer given by the arbitrators and the Judge was "no". 

The Judge relied on four factors:

• The retention of title until payment was made
• The period of credit before payment fell due
• The permission given to the Owners to consume the bunkers, and
• The fact that some or all of the bunkers were likely to be consumed before expiry of the credit period 

In those circumstances, the Judge held (at paragraph 42) that "the parties must be taken to have understood that it was likely that title would never be transferred to the Owners.  It was possible that it would be, but not likely.  It was certainly not an essential part of the transaction that it should be." 

Both parties knew that it was unlikely that property would ever be transferred because the bunkers would be consumed (and property in them extinguished) before payment was made.  The Judge therefore found it difficult to conclude that OWBM undertook any obligation to transfer property in the bunkers to the Owners. 

Accordingly, "what the Owners were paying for was not a title which they were not going to get but something else".  

So what exactly were Owners were paying for?  In the Judge's view (at paragraph 46):

• "… the true nature of the parties' bargain was that OWBM would deliver or arrange for delivery of the bunkers, which the Owners would be immediately entitled to use for the propulsion of the vessel"
• "… what the Owners were paying for was the right to consume the bunkers and not an unlawful possession which exposed them to the risk of an action at the suit of the true owner" 

The primary obligation on OWBM was therefore to obtain permission from the true owners of the bunkers for their consumption by the vessel.  The question arose whether OWBM had done so in this case.  That was not a question answered by the arbitrators.  However, the Judge considered that he needed to do so. 

The Judge also answered that question in ING's favour.  As a matter of English law, the Judge held that Rosneft gave permission for Owners to consume the bunkers before title passed because Rosneft knew and accepted that:

• OWBAS was not an end-user but a trader
• OWBAS would contract either directly or indirectly with Owners, and
• That contract would authorise Owners to consume the bunkers immediately 

Comment

The consequences of this decision for shipowners and charterers who contracted with OW Bunker are potentially far-reaching.  The Commercial Court declared in the clearest terms that OW Bunker (or ING Bank claiming as assignee) are entitled to be paid for bunkers supplied, irrespective of whether OW Bunker themselves have paid for them.  

The one caveat to this is the need in each case to show that OW Bunker did in fact obtain permission from the true owner of the bunkers for their consumption by the vessel.  Where OW Bunker contracted with the physical supplier on terms similar to the Rosneft terms and subject to English law, it is likely to be held that the physical supplier did give such permission.  However, where the physical supplier's terms are materially different and/or are subject to a different governing law the issue remains open. 

The Judge recognised that Rosneft might have a claim against the Owners in some other jurisdiction, with the potential that Owners might have to pay twice for the bunkers.  However, in a comment that will bring little comfort to shipowners, the Judge stated that "exposure to claims with the possibility of arrests is one of the risks which shipowners run". 

It is likely that the Owners will seek to appeal this decision so a final resolution of the issue may still be some time off.

[1] PST Energy 7 Shipping LLC v. O.W. Bunker Malta Ltd (The "RES COGITANS") [2015] EWHC 2022 (Comm) 

[2] S.49 provides "(1) Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.  (2) Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price, although the property in the goods has not passed and the goods have not been appropriated to the contract." 

[3] S.12(1) provides "… there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass."

Background

On 10 June 2010, Nidera BV (the "Buyers") entered into a contract with Bunge SA (the "Sellers") to buy 25,000 MT of Russian milling wheat.  The shipment period was August 2010.  The contract incorporated GAFTA Form 49. 

GAFTA 49 Clause 13 provides (inter alia):

"In case of prohibition of export…whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment… and to that extent this contract or any unfulfilled portion thereof shall be cancelled…" 

GAFTA 49 Clause 20 provides (inter alia):

"In default of fulfilment of contract by either party, the following provisions shall apply…

 (c)     The damages payable shall be based on, but not limited to the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods on the date of default established under (b) above." 

On 5 August 2010, Russia introduced an embargo on the export of wheat for the period of 15 August to 31 December 2010.  On 9 August 2010, the Sellers notified the Buyers of the embargo and declared the contract cancelled under Clause 13. 

The Buyers did not accept that the Sellers were entitled to cancel, and treated the purported cancellation as a repudiation of the contract, which they accepted on 11 August 2010.  

The Buyers brought a claim against the Sellers for damages.  The case made its way to the Supreme Court via GAFTA's first tier arbitration tribunal and Appeal Board as well as the High Court and Court of Appeal. 

Each of the arbitration tribunals and the High Court found that Sellers had repudiated the contract because their notice of cancellation was premature.  That was no longer in dispute by the time the case reached the Supreme Court. The question there was whether the Buyers were entitled to substantial damages. 

Earlier decisions

Overturning the GAFTA first tier tribunal, the GAFTA Appeal Board held (and the High Court and Court of Appeal agreed) that the Buyers were entitled under Clause 20(c) to damages for the difference between the contract and market price on 11 August 2010, the date that the repudiation was accepted.  In doing so, they held that this was the damages calculation required by Clause 20(c) of GAFTA 49.  Damages were consequently calculated at over US$3 million. 

This was widely seen as a victory for commercial certainty over fairness. 

Critics noted that, had they not cancelled prematurely, the Sellers would have been able to cancel the contract anyway, once the embargo made the contract impossible to perform.  This seemed to conflict with the House of Lords decision in The "GOLDEN VICTORY"[2], and to be a particularly harsh result for the Sellers (and a windfall for the Buyers). 

However, the High Court and Court of Appeal held that, by Clause 20(c), the parties had agreed between themselves the appropriate measure of damages for the breach of contract in question, and the Court had to respect the parties' choice and enforce it without regard to events occurring after the breach.  

The Sellers appealed to the Supreme Court.

The questions for the Supreme Court were essentially limited to the following.

1.       Does the GAFTA default clause exclude common law principles for the assessment of damages for anticipatory repudiatory breach, and in particular the compensatory principle identified in The "GOLDEN VICTORY"? 

2.       Is the "overriding compensatory principle" established by The "GOLDEN VICTORY" limited to instalment contracts? 

Supreme Court decision

The Supreme Court was critical of the lower Courts' emphasis on certainty in place of fairness.  Lord Sumption, who gave the leading judgment, commented (at paragraph 23):

"… commercial certainty is undoubtedly important, although its significance will inevitably vary from one contract to another.  But it can rarely be thought to justify an award of substantial damages to one who has not suffered any…" 

The Buyers argued that Clause 20 of GAFTA 49 replaced the common law compensatory system of damages in favour of a mechanical formula, an argument which the High Court and Court of Appeal accepted.  The Sellers, on the other hand, argued that there was a presumed intention on behalf of the parties that the clause would produce the same measure of damages as the compensatory principle would at common law. 

The Supreme Court were not convinced by the Sellers' argument.  However, Lord Sumption accepted that, in line with the ordinary rules of construction, the clause would be assumed "not to have been intended to operate arbitrarily".  In other words, where there are multiple possible interpretations of a clause, the Court will not construe the clause in an uncommercial way.  

In addition, the Court held that damages provisions in contracts (such as Clause 20 of GAFTA 49) were "not necessarily to be regarded as complete codes for the assessment of damages."  The Court implied that there would be a presumption against such an interpretation, however it would be a matter of construction in each case.  

In this case, the Supreme Court held that the GAFTA default clause did not exclude the common law principles of compensatory damages.  Lord Sumption stated (at paragraph 27):

"…it is a question of construction whether the mere fact that [the Clause] deals with damages means that it must have been intended to do so exhaustively, thereby impliedly excluding any considerations which it has not expressly addressed." 

The GAFTA default clause was not sufficiently explicit to operate as a complete code for the calculation of damages and to exclude events occurring after the breach.  The Sellers would have been entitled to cancel the contract as a result of events occurring post-breach, and the Buyers had therefore suffered no loss.  The damages awarded to the Buyers were reduced by the Court from over US$3 million to nominal damages of just US$5. 

The Supreme Court also expressly endorsed the decision in The "GOLDEN VICTORY" and restated the fundamental compensatory principle that any assessment of damages must reflect the "nature of the bargain which the injured party has lost as a result of the repudiation".  

Separately, the Court gave short shrift to the argument that this principle only applied to instalment contracts, with Lord Toulson commenting (at paragraph 87) that this made "no sense".  The Court held that the compensatory principle applied equally to a contract with multiple instalments as it did to a single sale. 

Comments

This decision is a welcome restatement by the Supreme Court of the basic rule that the purpose of damages for breach of contract is to put the innocent party back in the position they would have been, had the contract been performed. 

If follows that as a matter of fairness (and, dare we say, common sense), an innocent party should not be allowed to turn a profit on a contract which would have been cancelled in any event, simply by virtue of the other party jumping the gun and cancelling too early.  

The decision of the Supreme Court leaves open the possibility of parties contracting out of The "GOLDEN VICTORY".  However, very clear words will be needed to show that was what the parties intended, and the presumption will be that they did not intend to displace such a fundamental principle.

[1]    Bunge SA v Nidera BV [2015] UKSC 43 

[2]    [2007] UKHL 12.   In that case, a long-term time charterparty was prematurely cancelled.  It was accepted that this was an anticipatory repudiatory breach of contract.  However, the charterparty would have been terminated early in any event by operation of the war clause, as a result of the Iraq War.  The majority Judgment of the House of Lords was that the owners were only entitled to losses they had actually suffered, which did not include the period after the outbreak of the Iraq War.  Irrespective of the date at which the market price was established for the purposes of calculating damages, it was necessary to take account of contingencies known to have occurred.  Lord Carswell stated (at paragraph 63 of the Judgment): "principles of certainty and finality have in this case to yield to the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred."

On 8 June 2015, increased limits came into effect under the 1996 Protocol to the Convention on Limitation of Liability for Maritime Claims (LLMC) 1976.  The increases mean that, whether for personal injury/loss of life or property claims, the limits are now just over 50% higher. 

The amendments were adopted by the IMO’s Legal Committee in June 2012, following a proposal to increase the limits submitted by 20 State Parties to the LLMC Protocol.  They came into force in accordance with the "tacit acceptance" procedure for updating the 1996 limits. 

Full details of the new limits can be found by following the link below. 

Hong Kong adopts 1996 Protocol

Just a month before the limits increased, the 1996 Protocol was finally brought into effect under Hong Kong law.  

Hong Kong thus became the 50th and most recent state or territory to implement the increases to the 1976 Convention limits, joining Australia, Japan, Malaysia and New Zealand as major Asia-Pacific parties to the Protocol.  

Amendments to the Merchant Shipping (Limitation of Shipowners Liability) Ordinance (Cap. 434) were passed by the Hong Kong legislature as long ago as 2005.  However, the amendments could not come into effect until after the Central People's Government notified the IMO of Hong Kong's accession to the Protocol.  That has now taken place and by a notice published in the Gazette on 30 April 2015 the Government appointed 3 May 2015 as the date when the amendments would come into operation. 

For the time being, it is the original 1996 limits which apply.  It remains to be seen when the increased 1996 limits will be adopted.  No further legislation is required for that as section 28 of the Ordinance gives the Chief Executive power to amend the limits in accordance with any revision to the Protocol.

IMO Media Centre

Even if a charterparty is drawn up, it is sometimes left as a "working copy" and not signed.  More often, to work out what the terms of a charterparty are, it is necessary to consider the effect of several layers of terms:

• a printed form such as the NYPE 1946 or Asbatankvoy, usually heavily amended;
• a set of rider clauses from a previous fixture, either bespoke or one party's standard terms; and
• a recap email which summarises the particular commercial terms of this fixture and often also contains specific amendments to the rider clauses.

There is one particular type of provision which receives little if any consideration – the dispute resolution clause.  Of course, nobody enters into a contract expecting there to be a dispute.  However, as with insurance, it is good to know there is a clear and workable dispute resolution clause there if you need it.  Unfortunately, it is common to find a variety of such clauses spread across all three layers of terms – e.g. in clause 17 of the NYPE 1946 form, in a rider clause and in the recap email.

Fortunately, Courts and Tribunals take a purposive approach to interpreting such terms, trying to work out what the parties really intended and giving effect to that.  A good example of this is the recent decision of the English Commercial Court in Shagang South-Asia (Hong Kong) Trading Co Ltd v Daewoo Logistics [1].

The charterparty

Clause 23 of the fixture note provided for "ARBITRATION TO BE HELD IN HONGKONG.  ENGLISH LAW TO BE APPLIED."  Clause 24 incorporated the terms of the Gencon 1994 form of charter.  Clause 19 of that form is a detailed law and arbitration clause with three options:

• English law and London arbitration,
• US law and New York arbitration, or
• arbitration in and subject to the laws of the place indicated in box 25.

Clause 19 further provided that, if box 25 was not filled in, disputes would be subject to English law and London arbitration. 

The dispute

A dispute arose between Daewoo (as disponent owners) and Shagang (as charterers).  Daewoo purported to commence a London arbitration against Shagang.  When Shagang did not respond to notices, Daewoo purported to appoint their chosen arbitrator as sole arbitrator in accordance with clause 19(a) of the Gencon form.

Shagang then instructed lawyers who questioned the sole arbitrator's appointment, suggesting that the seat of the arbitration was Hong Kong, not London.  In line with principles of kompetenz-kompetenz, the parties first addressed submissions on the point to the arbitrator himself.  He determined that he had been properly constituted as sole arbitrator.  Shagang then challenged this decision (as of right) in the English Court.

The dispute depended on the resolution of two related questions:

• the meaning of clause 23 of the fixture note; and
• its relationship with clause 19 of the Gencon form.

Daewoo argued that the reference to Hong Kong in clause 23 merely required any hearing to take place in Hong Kong because that would be convenient for the parties.  They argued that it was not a choice of Hong Kong as the legal "seat" of the arbitration, which would require it to be conducted in accordance with the Hong Kong Arbitration Ordinance (Cap. 609).  Daewoo said that the reference to English law applied to both the substance of the dispute and the procedural law of the arbitration.

Shagang's case was that the two parts of clause 23 dealt with different matters – the seat of the arbitration was Hong Kong, but English law would determine the substantive dispute.

The decision

The Court found clearly in favour of Shagang that this was a "Hong Kong arbitration" clause. 

Agreeing that an arbitration was "to be held" in a particular place indicated that all aspects of the arbitration process would take place there, including any supervisory court proceedings.  It would be surprising (to say the least) for an arbitration to be held in one place but subject to the procedural law of another place.  Indeed, Daewoo could only point to one reported case in which the Court had ever found such "bifurcation" [2].  That case was distinguished and confined to its particular facts, as it had been in at least two other reported cases.

As to clause 19 of the Gencon form, the Court held that it was not possible to read it together with clause 23 of the fixture note.  Clause 19 contains a particular set of options, but all of them contemplate a unitary approach to the place of arbitration, the procedural law and the substantive law.  Clause 23 does not fit into that scheme, and accordingly it cannot have been intended to incorporate clause 19 of the Gencon form into this charterparty.

Comment

This judgment is of wider interest because the question often arises whether specially-agreed terms in a fixture recap are intended to be read with or simply replace the equivalent terms in a "proforma" document incorporated by the words "otherwise as per…".  Each case depends on its own facts but this is a good example of an inconsistent term in the proforma giving way entirely to a brief but sufficient provision in the fixture recap.

The time and expense of these proceedings could have been saved if the charterparty had been drawn up because (one assumes) the inconsistency between clause 23 and clause 19 would then have become apparent.  However, for as long as commercial parties prefer to get the deal done first and worry about the details later, it is comforting to know that the Courts will strive to identify and give effect to their intentions, however imperfectly expressed.

[1]  [2015] EWHC 194 (Comm)

[2]  Braes of Doune Wind Farm v Alfred McAlpine Business Services [2008] 1 Lloyd's Rep. 608

Perhaps surprisingly to the man in the street (or boardroom) this can be the case even where the contract appears to provide a clear and unambiguous answer.

Attempts have been made over the years to harmonise national laws in this area.  These have produced notable successes in relation to particular subjects such as arbitration (the New York Convention) and corporate insolvency (the UNCITRAL Model Law on Cross-Border Insolvency).  However, an international regime addressing choice of court in civil and commercial matters generally remains elusive, despite the continued efforts of the Hague Conference. 

The one supra-national organization that has effectively implemented such a regime is the European Union ("EU").  That regime has recently been updated and, as explained below, now has the potential to affect a much wider range of international contracts.

On 10 January 2015, the reign of Brussels I[1] came to an end, and the new age of the Brussels Recast[2] (also known as Brussels I bis) began. 

Exclusive Jurisdiction Clauses

The Brussels Recast, like Brussels I before it, deals with jurisdiction and the recognition and enforcement of judgments and applies to "all civil and commercial matters". 

One of the more important changes implemented by the Recast concerns the treatment of jurisdiction clauses.  The changes are set out below (emphasis added).

Brussels I Article 23(1): 

“If the parties, one or more of whom is domiciled in a Member State, have agreed that a court … of a Member State are to have jurisdiction … that court shall have jurisdiction. Such jurisdiction shall be exclusive unless … agreed otherwise” 

Brussels Recast Article 25(1): 

“If the parties, regardless of their domicile, have agreed that the court … of a Member State are to have jurisdiction … that court shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless … agreed otherwise”

Scope

Brussels I Article 23(1) only applied if:

• At least one party was domiciled in a Member State; and

• A particular Member State was specified in the jurisdiction clause.

This meant that Brussels I had no application where both parties were domiciled outside of the EU.

However, Brussels Recast Article 25(1) applies if only one condition is satisfied, namely:

• A particular Member State is specified in the jurisdiction clause.

This means that if, for example, a Chinese company and a Korean company agree that the courts of England & Wales have exclusive jurisdiction, Brussels Recast Article 25(1) will be engaged and the English courts will have mandatory jurisdiction.

In that case, it is widely understood that permission will not be needed to serve a Claim Form out of the jurisdiction – see CPR rule 6.33(2).

This is a welcome change.  In the maritime field in particular, it is not unusual for both parties to be domiciled outside of the EU, and yet to choose the exclusive jurisdiction of the courts of England & Wales.  The Brussels Recast will make it easier to give effect to the parties' choice.

The "Italian Torpedo"

Brussels I contained no provisions regarding the priority between Article 23 (jurisdiction agreements) and Article 27 (lis pendens).

As a result, some defendants would rush to start an action in particular EU Member States where Court proceedings are thought to be comparatively slow-paced, in order to take advantage of the ‘first in time’ rules. 

This tactic was more commonly known as the "Italian Torpedo", and took advantage of the fact that the Member State court "first seised" of the matter would take precedence – regardless of whether the parties had agreed in their contract that the courts of another Member State had exclusive jurisdiction.

This already unfortunate situation was compounded by the decision of the European Court of Justice in Turner v Grovit[3] that anti-suit injunctions could not be used to enforce jurisdiction clauses as against the courts of another Member State. This rendered parties powerless to stop the Italian Torpedo.

Critics of Brussels I argued that the consequence of allowing the Italian Torpedo to continue was increased costs for all parties, which in turn led to lower chances of settlement and an increased burden on the courts. 

It appears that the EU took these arguments on board.

Recital 22 of the Brussels Recast provides (emphasis added) :

"in order to enhance the effectiveness of exclusive choice-of-court agreements and to avoid abusive litigation tactics, it is necessary to provide for an exception to the general lis pendens rule … where a court not designated in an exclusive choice-of-court agreement has been seised of proceedings and the designated court is seised subsequently of [the same] proceedings...

In such a case, the court first seised should be required to stay its proceedings as soon as the designated court has been seised and until such time as the latter court declares that it has no jurisdiction under the exclusive choice-of-court agreement."

In short, the Brussels Recast now provides that where there is a jurisdiction agreement:

• Any court other than the chosen court must stay proceedings until the chosen court has decided whether it does have jurisdiction; and

• If the chosen court decides it does have jurisdiction, all other courts must decline jurisdiction.

Precedence is therefore given to the country specified in the jurisdiction clause, regardless of whether proceedings have first been commenced elsewhere.

This is a welcome change, which should limit the scope for "abusive litigation tactics" such as the Italian Torpedo.

Comment

The Brussels Recast represents a significant improvement on Brussels I, extending the benefit to parties regardless of domicile and upholding choice-of-court agreements. 

However, it must be remembered that these rules only apply where matters are before the courts of EU Member States.  A truly international solution still seems far off, with only Mexico having acceded to the Hague Convention on Choice of Court Agreements, although the EU, USA and (very recently) Singapore have signed.

[1]  Regulation EC 44/2001

[2]  Regulation EC 1215/2005

[3]  Case C-159/02 [2004] ECR I-3565

So How Does It Work?

The Convention gives a state party the power to take measures in relation to the removal of a wreck within its EEZ which poses a hazard to navigation or a threat to the marine environment (a state can also opt to extend the power to within its territorial waters).  The contracting state can then recover the cost of removal from the vessel owner and its insurers.  A wreck is defined broadly and includes any object that is or has been on board a vessel – covering cargo and any fittings or machinery – which is sunk, stranded or adrift as a result of a maritime casualty.  There is a limited exclusion of liability for wrecks caused by certain war-related risks.  But in general the right of recovery – including a right of direct recovery by the state against insurers – operates on a strict liability basis.  

Compulsory Insurance 

The Convention (article 12) requires any vessel over 300MT gross tonnage which is either:

1. flagged by a state party, or
2. wishes to trade/navigate within the territorial waters of a state party

to maintain insurance for wreck removal liability under the Convention.  The Convention gives the flag state a right of direct action against the insurer. 

The insurance must provide cover in an amount up to the limits of liability under the 1976 Limitation Convention (with 1996 Protocol) levels.  With increased 1996 Protocol limits coming into force in June 2015 this can be a high limit.

Each qualifying vessel must carry on board a flag state Certificate of Insurance evidencing that the compulsory insurance is in place.  The Certificate must contain particulars about the vessel and its ownership, the identity of the insurer and the period of validity of the relevant insurance. 

Insurer "Blue Cards"

To obtain a flag state Certificate of Insurance, the shipowner assured must first obtain a "Blue Card" from their marine liability insurer verifying that the compulsory insurance is in place.  (The format of the "wreck removal" Blue Card mirrors the content already accepted for "bunker" Blue Cards).  The assured then submits the Blue Card to the relevant institution (usually the flag state authority) responsible for issuing the Certificates in their state; in the case of the UK this is the UK Maritime and Coastguard Agency ("MCA"). 

Owners of a vessel registered in a state party must apply to the relevant institution in that state; for example, a UK registered vessel must apply to the MCA for the Certificate.  Some state authorities are happy to issue Certificates to vessels from other flags, but several state authorities have already said that, for the moment, they will only issue Certificates to vessels flying their flag.

Guidance provided by the MCA in respect of applications for a Certificate can be found at the following link: https://www.gov.uk/government/publications/application-for-bunker-and-tanker-certificates-msf-3233. 

The MCA has already identified a backlog of applications. The MCA can process on-line applications but only if the insurers issuing the "Blue Card" is already on their approved list.  If your application is not already in it is pretty unlikely that your Certificate will be ready by 14 April 2015.  The MCA has also suggested that applications in respect of non-state party vessels be made to relevant authorities in alternative jurisdictions including Cook Islands, Denmark, Germany, Liberia, Marshall Islands or Palau.

Right of Direct Action against Insurers and Period of Strict Liability

Any claim for wreck removal costs under the Convention by a state party can be brought directly against the insurer identified in the Certificate.  The liability of the insurer is strict (save for limited exclusions in relation to war-related causes).  The Blue Card (and Certificate) can only be cancelled on giving 3 months' notice to the issuing authority.  If the casualty occurs within that 3 month notice period then the insurers who issued that Blue Card is on the hook - irrespective of any underlying policy defences.

In practice, if a shipowner goes off-risk with one P&I insurer, it will place immediate replacement cover elsewhere and get a fresh Blue Card to replace the existing one.  But most coverage issues do not become apparent until weeks or months after a loss has occurred or a coverage problem has come to light.  With a strict 3 month notice provision in the Blue Card, this could lead to a situation where the insurer is directly liable to a state party for wreck removal but are technically off-risk under the policy terms.  The insurer may want to obtain an indemnity from its assured for that exposure or an assignment of the right to claim under any replacement cover in the event the old insurer gets stuck with the bill.

War Risk Exclusion

The Blue Card will, in practice, be issued by the P&I insurer (or other principal marine liability insurer) even though they may not cover liabilities arising from war risks and the "war" P&I is placed elsewhere.

The Convention (article 10) contains a limited exemption of wreck removal liability where the maritime casualty which leads to the wreck removal order is caused by war or hostilities, or wrongful government acts.  This "exclusion" may not be wide enough to match the standard war risks perils. So insurers should check the extent to which their own policy's war risk exclusions match the carve-out in the Convention.  If they don't match, insurers should be alive to situations where they may be strictly liable for wreck removal caused by war risks which they do not in fact insure.  They will, however, still be on the hook with strict liability under the Blue Card.  As with the existing bunker Blue Cards, the insurers may look for an indemnity from their assureds together with an assignment of the right to claim under the assured's war P&I cover.

Conclusions

The shipping world has gotten to grips with the bunker Blue Card regime and in many ways the wreck removal Blue Card regime operates in the same way.  In the majority of incidents the wreck removal costs will be picked up only by the P&I Club/marine liability insurer who had cover in place at the time the casualty occurred.  But there is scope for marine liability insurers to find themselves exposed to strict liability to pay significant wreck removal costs which, on the policy terms, they are not liable to pay.  Aside from the cash-flow challenges, that can also cause a headache with your reinsurance collections.  So it may be prudent for insurer, as a condition to issuing any Blue Card, to seek an indemnities and contingent assignments from their assureds in the event that they do get stiffed with the bill.

OGVs calling at Hong Kong will be required to switch to fuel which meets the prescribed standards within one hour of arriving at their berth and burn the fuel until not less than one hour prior to the vessel's departure.  Dates and times of fuel change-over operations must be logged and records of the same are to be kept for at least three years.

If approved by the Legislative Council, the regulation is expected to enter into force on 1 July 2015.

Since the lower limits for Emission Control Areas came into effect under MARPOL Annex VI on 1 January 2015, Ultra Low-Sulphur Fuel Oil with maximum 0.1% sulphur content has become more widely available.  The fuel required by the new regulation (maximum 0.5% sulphur) is not an industry standard grade, so it is likely that ships will either burn gas oil or Ultra Low-Sulphur Fuel Oil, if available, whilst berthed in Hong Kong.  This would also avoid vessels having to segregate three different grades of fuel.

Ocean Victory, a capesize bulk carrier owned by Ocean Victory Maritime Inc., was demise chartered to Ocean Line Holdings Ltd for a period of 10 years on an amended Barecon 89 form. As required by the charterparty, both the registered owners and demise charterers (who paid the premiums) were named on the vessel's hull policy, which was written by Gard Marine & Energy.

The vessel was time chartered to China National Chartering Co Ltd (Sinochart), who subsequently fixed the vessel to Daiichi Chuo Kisen Kaisha on a time charter trip from South Africa to Japan. The vessel berthed in Kashima, Japan on 20 October 2006, where discharge commenced that same day. On the morning of 23 October a north-easterly wind of force 8 was recorded and a local weather forecast indicated the weather conditions would worsen. The weather deteriorated rapidly during the morning of 24 October, with winds of force 9 and a significant wave height of up to 6.5 metres at the seaward end of the breakwater. In addition, "long waves" with periods of greater than 30 seconds were causing the vessel to surge alongside the berth.

The Master decided to leave the berth and arranged departure for 1300hrs, which was later postponed by local pilots, due to conditions in the fairway. The swell grew larger, causing further surging alongside the berth and the parting of mooring lines. Pilots agreed to unberth the vessel and at about 1400hrs a pilot boarded the vessel. At 1430hrs, the vessel departed the berth and proceeded to sea via the Kashima Fairway where she encountered gale-force winds and heavy seas. At a point when the vessel was north-west of the seaward end of the breakwater, she lost steerage and subsequently grounded. The crew were safely evacuated from the vessel before she broke apart.

The first instance judgement

Gard Marine & Energy, claiming as assignee of the claims of the owners and demise charterers, sued Sinochart for the loss of the ship, salvage and wreck removal expenses and loss of earnings totalling over US$130 million. The basis of Gard's claim was breach of the safe port warranty. Sinochart, in turn, claimed against the trip time charterer, Daiichi Chuo.

Sinochart and Daiichi ("the charterers") denied the port was unsafe, noting that no vessel had ever before been trapped by a combination of wind and swell at the berth and adverse conditions in the fairway. The charterers also argued that under the scheme of the demise charter the owners had no claim against the demise charterers even if they breached the safe port warranty. Thus Gard (as assignee) had no claim against Sinochart – i.e. there was no liability which could be passed down the charter chain.

At first instance, Mr Justice Teare found in favour of Gard, holding that Kashima was an unsafe port and that the owners did have a substantive claim against the demise charterers, which could be passed on to Sinochart and then to Daiichi.

The appeal

On appeal, that decision was overturned. The Court of Appeal held that Mr Justice Teare had erred in considering the frequency of long waves (affecting the berth) and gale-force northerly winds (affecting the fairway) as separate phenomena. The question that should have been asked was whether the combination of these phenomena was a characteristic of the port or an abnormal occurrence. While accepting that each phenomenon separately was a characteristic of the port (and not abnormal), the historical evidence showed that no vessel had ever been dangerously trapped at the berth at the same time as the Kashima Fairway was not navigable because of gale force winds. In the Court of Appeal's view, this led to only one conclusion: the events of 24 October 2006 were an abnormal occurrence and there was, therefore, no breach of the safe port warranty.

The Court of Appeal also found in charterers' favour on the issue of recoverability. The requirement in the demise charter for both the registered owners and demise charterers to be insured "in joint names as their interest may appear" meant that the parties intended there to be an insurance funded result in the event of loss or damage to the vessel by marine risks. Accordingly, even if the demise charterers had been in breach of the safe port obligation, they were under no liability to the owners. As a result, there was nothing which could be passed down the chain to Sinochart or Daiichi.

Comment

This case shows the importance, in an unsafe port claim, of correctly identifying the relevant characteristic of the port which is said to have caused the loss. It is often the case that more than one factor is in play, and the Court of Appeal has made it clear that it is the likelihood of the combined event occurring that must be considered. It is not enough, as the judge at first instance held, for the combination of factors to be a theoretical possibility.

The case is also a reminder that care must be taken in drafting demise charters (and other contracts such as pooling agreements) to ensure – if required – that a breach by the demise charterers does give rise to a claim. 

Given the sums involved, it would not be surprising if this case ends up in the Supreme Court.

Background

The "B ATLANTIC" loaded coal in Venezuela in August 2007.  As is usual for vessels loading on the north coast of South America, the owners conducted a dive inspection of the vessel's hull prior to loading to make sure that it was free of "unwanted cargo", i.e. drugs.  Unfortunately, the vessel had 132 kg of cocaine strapped to the stern of her hull 10 metres below the water line.  The vessel was immediately detained by customs and by local Court order.  After 6 months of vessel detention owners gave CTL notice of abandonment to war insurers which was declined on the standard terms.  The detention of the vessel was upheld by local Courts and two of the crew members were convicted.  All attempts to overturn the detention order failed before the Venezuelan Courts and the owners eventually abandoned the vessel and cargo to the Venezuelan Court 2 years after the detention.

The dispute

Owners and insurers agreed that the owners and crew had no involvement in the attempted trafficking.  It was also agreed that the actions of the drug traffickers could, in principle, fall within the scope of "persons acting maliciously" - an express insured peril under clause 1.5 of the Institute War & Strikes Clauses.  But insurers argued that this "malicious act" was not a proximate cause of the loss or, if it was a proximate cause, it was not the sole proximate cause of the loss.  Insurers alleged that, notwithstanding the malicious acts by the drug traffickers, the loss was proximately caused by detention of the vessel by reason of infringement of a customs regulation – an express excluded peril under clause 4.1.5 of the standard War Risks terms.  Under the standard insured peril/excluded peril doctrine, insurers said there was no cover.

The decision

At a preliminary issue hearing the Commercial Court decided that, in order to bring themselves within the "customs infringement" exclusion, the insurers did not have to show privity or complicity on the part of owners or crew.  After a full hearing of the claim in October this year, Mr Justice Flaux held that the exclusion for "infringement of customs regulation" did not apply, and that the sole proximate cause of the loss was the malicious act of a third party – an insured peril.  Owners' claim for a CTL therefore succeeded.

The Commercial Court held that to apply the "infringement of customs regulation" exclusion to every case where the vessel is held for breach of customs would offend the spirit of the war risks cover.  The Judge felt that there has to be an implicit agreed limitation on the exclusions so that they do not apply where the breach of customs was caused by a "put-up job" – a malicious act of a third party without any involvement whatsoever of the owners or crew.  The language of War Risks exclusion 4.1.5 is pretty clear and it is debatable whether it requires any further implied terms to make it work.

Comment

In reaching his view on construction, the Judge relied heavily on a concession made by insurers that deliberate acts of local authorities to plant drugs so as to facilitate vessel confiscation would not trigger the "infringement of customs regulations" exclusion.  The Judge saw no real distinction between that extreme circumstance, and the facts in the case before him.  In both instances the "infringement" was the manifestation of the malicious acts of third parties, for which the owners had cover. However, it is possible that insurers' concession was based upon settled law that perverse judgments by local authorities can break the chain of causation so that the "infringement of customs regulations" exclusion no longer applies.  It will be of interest to see if insurers seek and obtain permission to appeal.

The judgment is also of interest for its treatment of the owners' claim for sue & labour expenses.  After the CTL notice of abandonment was tendered by the owner and declined by insurers, the owner incurred almost US$2m in legal costs in Venezuela in its attempt to get the vessel and crew released.  Although undecided, there is strong judicial and academic support for the view that, in total loss claims, the assured's duty to sue & labour (and insurers' duty to reimburse sue & labour expenses) comes to an end when the CTL claim is crystallised – this usually being the moment when the notice of abandonment is tendered by the assured and declined by insurers but with agreement from insurers to treat the assured as if a claim form/writ had been issued against insurers that same day.  Flaux J. declined to follow the dicta of Rix J. in the Kuwait Airways litigation and held that, as the vessel remained in the grip of the insured peril beyond the notice of abandonment, the sue & labour expenses could be recovered.

For the full judgment, follow this link: The B ATLANTIC [2014] EWHC 4133 (Comm)

The extension was sought up to the date of arrest in December 2013. The defendants ultimately accepted that there was no opportunity to arrest the vessel in a relevant jurisdiction before June 2013. However, they argued that time should only be extended up to the earliest date at which the plaintiffs could have arrested the vessel, i.e. when it called at Singapore for approximately 16 hours on 9-10 September 2013. The vessel also made 2 further port calls prior to being arrested on the 6th December.

The Court granted the extension to the plaintiffs, finding that they did not have a reasonable opportunity to arrest the vessel during the call on 9-10 September 2013, as the vessel arrived at 1859 and sailed the following morning at 1100. The Court further found that while the plaintiffs had ample opportunity to arrest the vessel during her subsequent calls, the parties had agreed to an extension of the limitation period.

It is also worth noting that the Singapore Court disregarded the fact that the vessel had called extensively in Nigeria (where the collision occurred), reaffirming the "right of litigants to determine which jurisdiction they wish to pursue their claims in".

The full judgment can be found by following the link below:

ORINOCO STAR

In another development, the Hong Kong Companies Registry has received notice of the appointment of Receivers (two individuals from PricewaterhouseCoopers LLP, London) over certain security interests created by O.W. Bunker China Ltd and other group companies in favour of ING Bank N.V.  The charges themselves were registered in January 2014.

The property charged is said to include sums due under one-time or framework supply contracts entered into by various OW Bunker companies, including O.W. Bunker China Ltd.  It is to be expected that the Receivers will be contacting shipowners and charterers in relation to payment for bunker stems which have not yet been settled. 

However, these developments do not necessarily mean that other claimants will withdraw their claims, and advice should be taken in each case before making any payment.

At the time of writing, there is no record of a Winding-Up Petition having been presented to the Hong Kong Court in respect of O.W. Bunker China Ltd (a Hong Kong company), although at least one High Court Writ has been issued against the company.  Under Hong Kong law, once a winding-up order is made (or provisional liquidators appointed) no action can be commenced or pursued against the company without permission from the Court.

Most of the claims we have seen so far involve competing demands for payment in respect of the same bunker stem.  Demands may be made by (among others):

• The contracting OW Bunker company (or a Court-appointed representative of such company)
• An assignee of OW Bunker (there are reports that rights have been assigned to at least one bank)
• The physical supplier of the bunkers (claiming, for example, a maritime lien or under a retention of title clause)

There is no simple answer to the problems which shipowners and charterers face when competing claims are made for payment, save that advice should be taken on the specific circumstances of each case before making any payment.  The relevant factors to be considered include:

• The place of delivery of the bunkers
• The status of the contracting OW Bunker company
• Whether any notice of assignment has been given
• The identity of the physical supplier
• The terms of the bunker supply contract, in particular the law and jurisdiction provisions
• Where a ship might be arrested

Any payment to one party without consent of the other(s) gives rise to the risk of a double payment.  It may be possible to reach a negotiated settlement with the competing claimants.  If that is not possible then in certain jurisdictions the shipowner or charterer may be able to invoke the Court's assistance by way of, for example, interpleader action. 

Where a vessel is on time charter, a shipowner faced with a claim should also consider its rights of recourse against the time charterer.

The full report can be viewed by following the link below

IMB container weight fraud

The Court, overturning the Arbitrator's findings, held that a benefit to an innocent party would only be taken into account to reduce the damages payable where the benefit was caused by the breach.  In this case, the alleged "benefit" was the shipowners' ability to sell the vessel following early redelivery in 2007 at a much higher price than they would have obtained had they sold at the end of the contractual charter period in 2009.  The Court held that such benefit was not caused by the charterers' breach.  Accordingly, the shipowners did not have to give credit for the difference between the capital value of the vessel in 2007 and 2009. 

Background

The dispute arose out of a time charter on the NYPE form dated 13 February 2004 for the vessel "NEW FLAMENCO" (the Vessel), which was novated to Owners on 23 March 2005 (the Charterparty).  The Charterparty provided for London arbitration and English law. 

In June 2007, the Charterparty was extended by agreement until 2 November 2009.  Charterers disputed the agreement to extend the Charterparty, and told Owners they would redeliver on 28 October 2007.  Owners treated Charterers as being in anticipatory repudiatory breach and on 17 August 2007 accepted the repudiation, terminating the Charterparty.  Shortly thereafter, Owners ended into a Memorandum of Agreement for the sale of the Vessel for US$23,765,000. 

Owners brought a claim against Charterers in arbitration for damages calculated in the usual way based on the difference between the Charterparty and market rates of hire for the balance of the charter period. Charterers contended that the Arbitrator was obliged to take into account the decrease in capital value of the Vessel between the actual redelivery date and the earliest contractual redelivery date in 2009.  The Arbitrator found that the value of the Vessel in 2009 was US$7,000,000, and that Owners therefore had to give credit for the "benefit" of US$16,765,000 obtained by selling the Vessel in 2007.  This was more than the Owners' loss of profit claim.

Decision

After an extensive review of the authorities, the Court held that, for an innocent party to be deprived of part of the loss recoverable for breach of contract, the benefit in question must have been caused by the breach.  It was not enough that the breach may have provided the opportunity to gain the benefit.

In this case, the difference in the value of the Vessel was not caused by Charterers' breach of the Charterparty, but rather by the global financial crisis, which would have happened regardless of the breach.

The effect this change in value had (or rather did not have) on Owners was also not caused by Charterers' breach; it was caused by Owners' independent commercial decision to sell the Vessel.

Comment

This case serves as a useful reminder that, while an innocent party should always take steps to mitigate its losses, not every benefit gained following an early redelivery will be taken into account.

The Court also emphasized that, even if a benefit is legally caused by a breach, the Court retains a discretion not to reduce the damages payable if that would be contrary to considerations of justice, fairness or public policy.

[1] Fulton Shipping Inc v. Globalia Business Travel SAU [2014] EWHC 1547 (Comm).

The UK Marine Accident Investigation Board (MAIB) has recently published its report on the collision between the RICKMERS DUBAI and WALCON WIZARD, which was being towed by the KINGSTON in the Dover Straits in January 2014. The authors of the report heavily criticise the over-reliance by the navigating officer on RICKMERS DUBAI on the ship's Automatic Identification System (AIS) equipment.

AIS was phased into commercial shipping approximately 10 years ago, with security concerns being the main driver behind its implementation. Air traffic control has employed a similar system for decades and this system, together with radar, forms the basis of the control of aircraft.

Like all other equipment available to the navigating officer, AIS must be used with caution and, most importantly, in conjunction with other equipment. Crosschecking the information available from the AIS is especially important because of the high risk of errors that may be contained within. Unlike other sources of information, such as visual and radar, the correct functioning of the AIS relies on the equipment on other vessels performing correctly. This is not just confined to the AIS system itself, but also to all the navigational equipment that feeds the system. Of all the information available to the officer of the watch, that which is obtained from the AIS may often be the least reliable.

The MAIB report identifies several factors that contributed to the collision, however it was the reliance by the navigator on RICKMERS DUBAI solely on AIS information for collision avoidance, which contributed most. It is easy to see why, given that neither KINGSTON nor WALCON WIZARD were transmitting AIS data at the time.

The full report can be obtained by following the link below.

Rickmers Dubai Vs Walcon Wizard & Kingston

• Alcohol and drug abuse;

• Violence and harassment; and

• Infectious disease.

The document details responsibilities for governments, shipowners and seafarers related to accident and illness prevention practices, implementation, training and emergency and accident response.

The Press Release published on 22 October 2014 by the International Labour Organisation can be accessed in the link here.

It is possible that an insurer could lose this protection if it unequivocally waives the breach; for example, knowing of a breach of warranty, the insurer chooses not to avoid cover.  However, what comes across from the CFA's judgment is that in practice an insured will need to point to clear evidence that the insurer has waived its right to avoid cover.  In this case, the fact that the insurer could have found out about the breach of warranty from information available on the internet did not fix the insurer with actual or presumed knowledge.

Read the full article here.

[1] Section 33(3) of the Marine Insurance Ordinance (Cap. 329).