SHIPPING E-BRIEF SPRING 2014
Court construes in-transit loss clause in voyage charterparty
Trafigura Beheer BV v. Navigazione Montanari Spa (Valle di Cordoba)  EWHC 129 (Comm)
The Commercial Court has recently considered the meaning of the expression “in-transit loss” in a voyage charterparty.
The Valle di Cordoba was attacked during the voyage by pirates, who forced the crew to transfer some of the motor oil cargo onto a lightering vessel and stole it. The Court held that the transferred cargo was not “in-transit loss” or “lost cargo” within the meaning of the in-transit loss (“ITL”) clause in the charterparty. So the Owners were not liable for the loss. The Court further held that, if it was wrong on this, the Owners could nonetheless rely on the protection of the charterparty exceptions clause, which incorporated the Hague-Visby Rules exceptions.
Ince & Co acted for the successful Owners. The decision is important because of the nature of the alleged in-transit loss that was claimed. In addition, if the Owners had been held liable, they would have lost their P&I cover because of the standard provisions in Club rules, which provide that Club cover is lost if owners agree to a regime that is more onerous for them than the Hague-Visby Rules regime.
The background facts
The Valle di Cordoba was chartered for the carriage of a consignment of premium motor oil from Abidjan, Cote d’Ivoire to Lagos, Nigeria. Having tendered NOR on arrival offshore Lagos, the vessel sailed to a position about 55nm south-west of Lagos and awaited the Charterers’ orders. The vessel was then attacked by pirates, who arranged for an STS transfer of some 5,300 mts of the cargo to an unknown lightering vessel that then departed with the cargo. The Valle di Cordoba was later released by the pirates and the remaining cargo was discharged. The Charterers claimed against the Owners for the value of the transferred cargo.
The charter was on a Beepeevoy 3 (“BP3”) form plus Trafigura Chartering terms of 1 August 2005. The Charterers brought their claim under clause 4 of the Trafigura terms, the ITL clause, which provided as follows:
“In addition to any other rights which Charterers may have, Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds
0.3% 0.5% and Charterers shall have the right to deduct from freight claim an amount equal to the FOB port of loading value of such lost cargo plus freight and insurance due with respect thereto. In-transit loss is defined as the difference between net vessel volumes after loading at the loading port and before unloading at the discharge port."
The charter terms provided for payment of freight to be made, less any sum derived from the operation of certain of the Trafigura clauses, including the ITL clause, a Clause Paramount, and an exceptions clause which, among other things, gave the Owners the benefit of the Hague-Visby Rules exceptions.
The Judge had to decide whether the transferred cargo was an “in-transit loss” or “lost cargo” for the purposes of the ITL clause and, if it was, whether the ITL clause imposed strict liability on the Owners in respect of the transferred cargo or whether the exceptions clause applied to exclude that liability (it being accepted by the Charterers that if the Hague-Visby Rules applied, the Owners would have no liability).
The Commercial Court decision
The Judge found in favour of the Owners. In his view, the ITL clause defined how the amount of in-transit loss is determined, rather than specifying the kinds of loss that qualify as in-transit loss. Ascertaining any short delivery in the bulk carriage of oil was difficult because there is no absolutely correct measurement. The practice in the oil trade is to make allowances of about 0.5% to account for discrepancies that invariably take place when measurements are made. In-transit loss clauses were designed to reflect this by stipulating a cut-off point above which differences in volumetric measures could not simply be explained as reflecting the normal incidents of carriage for which owners would not be liable.
Against this commercial background, the Judge ruled that the expression “in-transit loss” means loss that is incidental to the carriage of oil products and does not extend to losses such as those caused by the action of pirates. The Judge recognised that the limits of in-transit loss were not precisely defined. Uncertainties could arise in some cases about whether particular losses would fall within the expression as a matter of general trade usage. He did not, however, have to examine those uncertainties in this case as he considered that loss from the pirates’ activities was clearly not covered.
Even if he was wrong on that, the Judge held that the Owners were nonetheless entitled to the protections afforded to them by the exceptions clause and the Hague-Visby Rules incorporated into the charterparty. He rejected the Charterers’ argument that the ITL clause made the Owners strictly liable for loss of cargo. It was highly unusual for owners to accept absolute liability for cargo loss in a charterparty. Furthermore, given that the Owners would have the benefit of the Hague-Visby Rules exceptions if sued under the bills of lading, it did not make sense that they should be under an absolute liability if sued instead by the Charterers under the charterparty. The Charterers’ interpretation of the ITL clause would have surprising results: the Owners would be strictly liable only in respect of differences between vessel measurements after loading and before discharge. This would mean, among other things, that the Owners would be strictly liable for loss of cargo, but not for damage to it. The Judge concluded that the parties could not have intended to agree to a term under which strict liability would give rise to “inconsistencies and absurdities”.
The Owners’ responsibility was, therefore, subject to the exceptions clause, which provided that the Owners were entitled to the protection of the relevant articles in the Hague-Visby Rules “in respect of any claim made” under the charterparty. There was no good reason to limit the natural meaning of “any claim” by excluding claims under the ITL clause.
Whilst this decision does not determine the kinds of loss that will qualify as in-transit loss, it is helpful in indicating that such loss is likely to be confined to loss that occurs as a direct result of the transit during the course of a routine or ordinary voyage.
The Charterers are seeking leave to appeal.
How do you calculate loss of earnings following a collision?
The Owners of the ship Astipalaia v. The Owners and/or Demise Charterers of the ship Hanjin Shenzhen  EWHC 120 (Admlty)
This recent case has revisited the existing case law on assessment of damages following a collision and provided further clarification as to the appropriate test to be applied.
The background facts
On 26 March 2008, there was a collision between the fully laden VLCC tanker ASTIPALAIA and the container ship HANJIN SHENZHEN in the approaches to Singapore where ASTIPALAIA was due to discharge. As a result of the collision, ASTIPALAIA suffered damage to her hull, guard rails and mooring chock. ASTIPALAIA was able to proceed into Singapore to discharge her cargo.
At the time of the collision, ASTIPALAIA was trading in the VLCC spot market which, in early-mid 2008, was particularly buoyant and the vessel was acceptable throughout the industry to oil majors and other first class charterers. However, ASTIPALAIA was unfixed for her next employment at the time of the collision.
As a result of the incident, the vessel’s oil major approvals were temporarily placed on “technical hold” by the majors pending the usual investigation into the collision. ASTIPALAIA was also required by class to undertake permanent repairs before any further employment.
ASTIPALAIA sailed from Singapore to Dubai in ballast and entered dry dock for permanent repairs which lasted around 10 days. On exiting dry dock, ASTIPALAIA was still unable to resume trading on the VLCC spot market as the “technical hold” had not then been lifted. In the absence of oil major approvals, ASTIPALAIA was fixed to NITC to be employed as floating storage off Kharg Island, Iran on a 60 day period charter, during which time the “technical holds” were dealt with and lifted. She completed the NITC fixture and was redelivered at Fujairah on 29 June 2008, after which she resumed her normal pattern of spot trading.
Accordingly, despite the time in dry dock only lasting some 10 days, ASTIPALAIA was effectively unavailable for her primary trading market for the entire period from 26 March 2008 to 29 June 2008. ASTIPALAIA brought a claim for loss of profits based on what the vessel would have earned had she traded on the normal VLCC spot market during that period, giving credit for the mitigation earnings obtained while on charter as floating storage to NITC. The total amount claimed by ASTIPALAIA was approx. US$ 5,640,000 lost income during that period.
The reference to the Registrar
Following agreement on liability, the quantum of ASTIPALAIA’s claim was disputed and referred for determination by the Admiralty Registrar. The Court had to consider how to calculate loss of earnings of ASTIPALAIA in circumstances where: (1) the vessel did not have a specific next fixture concluded at the time of the collision such that there was no certainty as to what the vessel would have earned next, but for the collision; and (2) the vessel’s oil major approvals had been placed on “technical hold” and were not reinstated until the end of a less lucrative storage fixture.
ASTIPALAIA’s Owners contended that damages should be assessed on the basis that the best evidence of ASTIPALAIA’s potential earnings, but for the collision, were that ASTIPALAIA would either: (i) have been fixed to Indian Oil Corporation (IOC) with whom they had been negotiating for a West Africa-East Coast India fixture at the time of the collision, after which ASTIPALAIA would have resumed a “typical” spot trading pattern of a round voyage from the Arabian Gulf (AG) to the Far East; or (ii) had Owners not secured the IOC fixture, the vessel would have undertaken two AG-Far East round voyages. Under either alternative, these two hypothetical voyages would have been completed within roughly the same period of time as the detention period, i.e. by 29 June 2008, such that a reasonable comparison could be drawn between what the vessel could have earned during that period, with what she did in fact earn.
ASTIPALAIA’s Owners relied on the “time equalisation method” set out in The Vicky 1  2 Lloyd’s Rep 45, which they argued supported their approach of comparing what the vessel would probably have earned but for the collision with what she did in fact earn in the same period. The hypothetical voyage schedule advocated by the ASTIPALAIA’s Owners and prepared by their expert sought to provide comparable fixtures she could (but not necessarily would) have performed in the detention period in order to place a value on the vessel’s lost earnings. On that basis, ASTIPALAIA claimed damages of approximately US$ 5,640,000.
HANJIN SHENZHEN’s position
In the Vicky 1, the claimant tanker owners had lost an actual fixture. HANJIN SHENZHEN’s Owners argued that the principles from Vicky 1 only applied if the claimant shipowner had lost a secured fixture, not where there was no definite next business secured.
Their primary case was that the loss period should be split into two distinct periods: (i) the period during which the vessel was completely out of service, when repairs were being completed; and (ii) the period during which she performed the floating storage charter. On that basis, HANJIN SHENZHEN argued that whilst they were liable in damages for lost income for approximately US$ 800,000 for period (i) during the dry docking, by the time of the floating storage charter being entered into after dry docking the spot market had in fact fallen such that no damages were recoverable for period (ii) as the rates achieved under the floating storage business successfully mitigated ASTIPALAIA’S loss.
HANJIN SHENZHEN interests also opposed the “time equalisation method” of seeking to model hypothetical voyages on the basis that it was too speculative to seek to calculate when the vessel might have been back in the AG after the first hypothetical voyage, and what the spot rate might have been at that time for the second hypothetical voyage.
During proceedings, it was accepted by both experts that VLCCs operate in a well-defined and straightforward trading pattern. The largest loading area (around 72% of all VLCC cargoes) is the AG followed by West Africa, with a limited number of cargoes loading in the Caribbean or North Sea/Mediterranean. The Registrar accepted this evidence, and further evidence that, of the 72% of cargoes lifted from the AG, around 70% of those cargoes are for Far East discharge. Accordingly, it could be established on the balance of probabilities what sort of business the vessel most likely would/could have achieved during the total detention period.
The Admiralty Court decision
The Registrar considered and analysed various leading cases, including The Argentino (1888) 13 PD 191 (C/A), 14 App Cas 519 (H/L), The Soya  1 WLR 714 (C/A) and The Vicky 1  2 Lloyd's Rep. 45 (C/A).
Having done so, the Registrar accepted ASTIPALAIA’s approach to assessing damages. The Court upheld ASTIPALAIA’s argument that the detention period should include not only the repair period but also the additional period the vessel needed to obtain reinstatement of oil major approvals before returning to her normal employment, and that this detention period should be taken as a single period finishing on 29 June 2008, not broken into two parts. The arguments on behalf of HANJIN SHENZHEN that there were principles of law curtailing or precluding such an assessment were rejected.
On the basis of the expert evidence before him, the Registrar assessed damages in the total sum of approx. US$ 4,960,000 (a loss of earnings of US$ 9,860,000 less US$ 4,900,000 earned during the floating storage contract).
This judgment confirms that an owner can claim damages not just for the immediate loss of use of the vessel during the period of repairs but also for further knock-on effects to the vessel’s ability to return to normal trading, provided of course that such knock-on effects are not too remote or unforeseeable and that the loss can be proven by evidence.
The judgment also confirms that there is no set rule as to the recoverability of damages for loss of use, and that such recovery is not dependent on proof of a specific lost fixture, nor (if such a fixture is established) that damages are limited to that one fixture but no more.
While there is no set methodology for calculating loss of profits, the methodologies used in earlier cases may be adapted to suit the facts of each case. The principles applied in this case were ultimately the same as those applied in The Vicky 1 and can be said to represent a recognised and well principled approach to modelling a vessel’s likely earnings over a given period which properly takes into account the relevant market position as at the time the hypothetical voyages would have been fixed.
It should be noted, however, that proving one’s loss may be more difficult in other trades. The VLCC trade is sufficiently well established and “predictable”, with enough data published to allow a meaningful expert analysis of what the vessel could have earned. It would be more difficult to undertake the same exercise for ships with a more varied and unpredictable trading pattern.
Ince & Co acted for the owners of the ship Astipalaia. In case of any query relating to this article, please contact Michael Volikas, Jeremy Biggs or Beth Bostock.
Court of Appeal confirms limitation fund may be constituted with guarantee in England
Kairos Shipping Ltd v. Enka & Co LLC and Others (Atlantik Confidence)  EWCA Civ 217
The English Court of Appeal has recently clarified that it is, in principle, possible to constitute a tonnage limitation fund in England with a guarantee, including a P & I Club letter of undertaking (“LOU”). The appeal decision reverses the first instance decision of Mr Justice Simon (reported on in our Autumn 2013 Shipping E-Brief).
In coming to this conclusion, the Court of Appeal considered the scope of the applicable provisions in the Convention on Limitation of Liability for Maritime Claims 1976 (as amended by the 1996 Protocol) (“the 1976 Convention”). The 1976 Convention has the force of law in England by virtue of S. 185(1) of the Merchant Shipping Act 1995 (“MSA 1995”).
The 1976 Convention was intended to simplify the process by which shipowners could limit their liability for maritime incidents and thereby encourage international trade by sea-carriage. The Court of Appeal’s confirmation that, under English law, owners have the option of constituting a limitation fund by way of an adequate and acceptable guarantee reflects the purpose of the 1976 Convention.
This is an important issue for the shipping industry, particularly for P & I Clubs, and the decision has some considerable practical significance.
Following a maritime incident (such as the fire that broke out on board the Atlantik Confidence in this case), a shipowner can usually limit its liability for claims arising out of the incident by constituting a limitation fund. The amount of the fund is calculated on the basis of the tonnage of the vessel. The value of claimants’ claims is subsequently paid out of the fund on a pro rata basis.
The Owners in this case issued a limitation claim in the English Admiralty court and the issue arose as to whether they could constitute the limitation fund by means of a Club LOU, as opposed to a cash deposit into court.
Prior to the incorporation into English law of the 1976 Convention, a limitation fund could only be constituted in England by means of a cash payment into court and that has traditionally been the practice for owners setting up limitation funds in England. The English Civil Procedure Rules reflect this practice by providing that when a limitation decree is granted by the Court, “the claimant may constitute a limitation fund by making a payment into court” (CPR 61.11(18)).
Article 11(2) of the 1976 Convention, however, provides that:
“A fund may be constituted either by depositing the sum or by producing a guarantee acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the court or other competent authority.” (our emphasis)
In a 2012 case, Daina Shipping Co. v. MSC Mediterranean Co SA (The Rena) (an Ince case), on an uncontested application by a P & I Club, Mr Justice Teare allowed the Club to constitute a limitation fund by means of an LOU. Concerns as to whether this decision was inconsistent with the law meant that, when a similar issue arose in the Atlantik Confidence, the matter went to an oral hearing before Mr Justice Simon.
The Commercial Court decision
At first instance, Mr Justice Simon considered that the key issue was whether a P & I Club guarantee was “acceptable under the legislation of” England. He noted that Article 11(2) of the 1976 Convention was incorporated into English law by virtue of the MSA 1995. However, in his view, it was still necessary for there to be domestic legislation providing expressly that a guarantee was acceptable under English law. There was no such domestic legislation in England and, in fact, the provisions of the CPR contemplated a payment into court, rather than the provision of a guarantee. He concluded that without a specific statutory provision that a guarantee is acceptable, the rule remained that a fund may only be constituted by making a payment into court.
The Court of Appeal decision
The Court of Appeal was unanimous in allowing the appeal. Lady Justice Gloster gave the leading judgment. She considered that Mr Justice Simon was wrong to focus on the fact that there was no express provision in English legislation allowing the provision of a guarantee to constitute a limitation fund. It was sufficient that the 1976 Convention, as incorporated into English law, expressly provides the party constituting the fund with a choice of which method to employ, either a cash deposit or provision of a guarantee.
Furthermore, it was not necessary for the CPR expressly to reverse “the previous well-established” practice of constituting a limitation fund by a payment into court. The words of Article 11(2) of the 1976 Convention were sufficient to “change” this practice and confer the right to constitute a limitation fund by way of a guarantee. There was in any event nothing in the CPR that precluded the constitution of a limitation fund by way of a guarantee, even though the Rules only expressly contemplated the provision of a limitation fund by means of a payment into court.
There are, however, conditions for allowing a party to constitute a limitation fund by way of a guarantee pursuant to Article 11(2) of the 1976 Convention. As stated by her Ladyship, these are that: (i) the guarantee must be “acceptable under the legislation of the State Party”; and (ii) the guarantee must be considered to be adequate by the domestic Court or other competent authority.
As to (i), the guarantee would be acceptable if it did not contravene any relevant English statutory provision. A guarantee that satisfied the requirements of the Statute of Frauds (in writing and signed by the guarantor or his authorised agent) was likely to be “acceptable” for the purposes of the MSA 1995 although, in certain cases, such as where the guarantee was provided by an insurance business, other English legislation might also be relevant. It was not, however, necessary to have an express statutory provision permitting the provision of a guarantee to constitute a limitation fund.
As to (ii), adequacy of a guarantee simply meant it had to provide adequate security for the fund. This meant that the Court would need to be satisfied as to the financial standing of the guarantor, the practicality of enforcement and the terms of the guarantee instrument itself. These were almost daily considerations, however, for Admiralty and Commercial Court judges dealing with the provision of security by parties to litigation.
The appeal was, therefore, allowed and the Owners were entitled to constitute a limitation fund under the 1976 Convention by provision of a guarantee, subject to the guarantee providing adequate security in the Court’s opinion.
The Court of Appeal’s judgment reflects the fact that guarantees are commonly used as acceptable security for other maritime claims and that P & I Club LOUs are usually accepted as sufficient security in those cases, for example when releasing a vessel from arrest. The decision has been welcomed by many for the practical advantages it will bring for P & I Clubs and parties wishing to constitute limitation funds in England.
Shipping issues arising out of the Ukraine crisis
The background facts
The situation in Ukraine remains fluid and, with events moving quickly, very little is certain. Attention is focused on the Crimea with rumours in early March of Russian naval vessels at times blockading the Kerch Straits which, if true, would quickly isolate the main port of Mariupol. At present, the US and EU appear committed to achieving a non-military solution to the ongoing crisis. Limited sanctions have been introduced by both, aimed at freezing and/or seizing the assets of persons designated under the sanctions for their involvement in undermining the democratic process in Ukraine or misappropriating assets of the State. Russia has introduced its own limited sanctions in response. No-one wants to see any kind of armed escalation, but we can expect a period of uncertainty as Russia decides how it will react.
Ukraine’s importance in terms of wheat and corn supplies is significant. It is also a key exporter of metals and minerals to Europe, Russia and beyond. Ukraine ranks as the world’s fourth and fifth largest exporter of corn and wheat respectively and it is the world’s fifth largest steel exporter. It is also a vital gateway for Russian natural gas to Western Europe, with approximately a fifth of the gas used in Europe flowing across the country. Together with Russia, Ukraine forms the northern coast of the Black Sea, an important shipping route for agricultural products, metals and energy.
The potential disruption for the corn, wheat, gas and steel industries, together with the resulting rise in prices, is causing considerable concern. An escalation of tensions and any military action may have repercussions for shipowners, charterers, crews and insurers alike.
We outline below some of the legal issues that the shipping industry may face if the situation in Ukraine escalates.
War Risk clauses
Charterparties often include specific provisions relating to the outbreak of war or warlike situations. Such clauses generally provide that the contract should be cancelled/terminated in the event of war/hostilities/warlike operations breaking out, either between “two or more” of a list of specified nations (often including Russia and “any country in the EC”), or involving the flag state of the vessel.
What constitutes “war” in this context was the subject of an arbitration in 2002 (Northern Pioneer) where limited German participation in the NATO bombing operations in Kosovo led to charterers purporting to terminate charterparties involving German flagged ships. The Tribunal found that the action was not “war” and that, in any event, Germany was not “involved” (in what was a war between Kosovo and Yugoslavia) for the purposes of the clause. The matter found its way to the Court of Appeal ( EWCA Civ 1878) primarily on points of procedure but the Court confirmed that any right to terminate must be exercised within a reasonable time of war breaking out and doing so a month later was too late.
In the context of a war involving only Russia and Ukraine, then any reliance on a similar termination clause will probably be restricted to charterparties involving vessels flagged in those countries. Whether military intervention by the EU (or individual countries) or the US would be enough to widen the effect of the clause to allow a more general right of termination is likely to turn on the degree of their involvement.
In order for War Risk clauses to be relied upon, it is generally not necessary for war to be formally declared. Whether a state of war (including “hostilities/warlike operations”) exists for the purposes of these clauses will be a question of fact. The meaning of “hostilities/warlike operations” is, of course, wider in scope than “war”.
One other key question for owners will be whether they have to go there. As we saw during the height of the piracy problem, issues may arise over the right to refuse orders to Ukraine. In the wake of the Triton Lark ( EWHC 70), BIMCO reissued the War Risks Clause (Conwartime and Conwarvoy 2013) and whilst that case was focused on the piracy threat off Africa, deterioration of the situation in Ukraine may see an early test of the principles set out by the Court in the consideration of whether a vessel is exposed to War Risks and whether those War Risks “…may be dangerous or may become dangerous to the vessel, cargo or crew”.
In this context, War Risks include:
“…act of war, civil war or hostilities; ….warlike operations;…blockades (whether imposed against all vessels or imposed selectively against vessels of certain flags or ownership…) by any person….or the government of any state…”
What is “dangerous” will depend on the facts and will depend on both quantitative factors (the degree of likelihood that a particular peril may occur) and qualitative factors (the seriousness or otherwise of the consequences of that peril to the vessel). Issues may arise therefore as to whether an owner or master can refuse to go to an area where a War Risk exists and, because of that peril, will be dangerous at the time the vessel arrives there. The Conwartime clause expressly provides that a vessel does not have to pass through a blockade.
It should also be noted that whilst some War Risk clauses will operate to exclude the charterers’ safe port warranty, others will not. Furthermore, unless the off-hire clause in the charterparty expressly provides otherwise, hire will generally continue to run during any periods of delay associated with war risks.
When a War Risk clause is invoked and discharge occurs at an alternative port to the one originally nominated, whether the owners will be entitled to additional freight will depend on whether or not the substitute port is within the range specified in the charter. If it is, then freight may be paid as per the charterparty but, if it is not, then the charterers will be obliged to pay all of the additional costs associated with proceeding to and discharging at the alternative port.
Charterparties may contain either express or implied safe port warranties. It is well established in law that a port will be safe where, at the relevant time, the vessel can reach it, use it and leave it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship. The time for assessing the safety of the port is the time at which the charterer nominates the port (i.e. it must be “prospectively” safe). Safety means both physical safety and political safety. A port may, therefore, be unsafe if there is a risk of seizure or attack, or if the vessel may be detained, impounded, blacklisted or confiscated.
The question of whether a blockade to Ukrainian ports by the Russian naval forces would amount to an “abnormal occurrence” for the purposes of a safe port warranty is complicated. Following the House of Lords decision in The Evia (No.2) 1 AC 736, the test for an “abnormal occurrence” in these circumstances would be one of foreseeability. An event can be abnormal but foreseeable. The deemed foreseeability or otherwise of any blockade would be key to the question of whether or not damages might be available to shipowners for breaches of charterers’ safe port warranties.
Where charterers nominate an unsafe port, owners are entitled to reject that nomination on the basis that it is invalid. In the event that a valid nomination is made but, prior to the arrival of the vessel the port becomes unsafe, a time charterer will be obliged to nominate a new port. Under a voyage charter, the position is less clear and, unless the charterparty specifically provides for it, the charterer may not be able to change its nomination without the express consent of the owner. That is why voyage charters will often provide for a vessel to proceed to the nominated port “…or so near thereto as she may safely get...”. Considerations as to whether a charterparty is frustrated may arise if a vessel cannot get close to the nominated port at all.
If the situation escalates, or if the Russian naval forces do blockade Ukrainian ports and prevent commercial vessels from entering or leaving, shipowners and/or charterers might seek to argue that their charterparty is frustrated on the basis that the vessel is unable to navigate to Ukrainian ports. It must be noted, though, that frustration is difficult to argue successfully under English law. It would require the party claiming frustration to show that the event relied on had fundamentally changed the performance obligations originally contemplated by the parties and had made further performance under the charterparty impossible, illegal or radically different from that which was originally contemplated by the parties.
Whether there is frustration will depend on the nature of the charterparty and the length of the delay caused. Those entering into charterparties that might be affected by blockades of Ukrainian ports should consider incorporating terms that allocate the risks associated with such occurrence e.g. for delays, extra expenses etc.
The fact that contractual obligations become more onerous or expensive to perform is unlikely in itself to frustrate the contract. So if, for example, access to Crimean ports were blocked for a period of time otherwise sufficient to frustrate the charterparty, the charterparty may not be frustrated if another route would be available, i.e. delivery to another Ukrainian port which is not blocked and onward transportation by road/rail to the original destination port.
Charterparties should be reviewed to see whether they allow deviation to a different port although, absent an express provision, the shipowner/master has an implied right to deviate to avoid danger to the vessel, cargo and those on board. Parties may wish to vary their charterparties to allow for discharge at other Ukrainian ports, or even ports outside Ukraine. Conwartime for example, expressly provides for this.
Bills of lading
If it has been agreed that cargo is to be delivered at an alternative port, owners and carriers should be aware of the potential problems posed by an issued bill of lading which names a specific discharge port. It may be that a bill of lading incorporates the terms of the charterparty, or permits discharge at a port other than the one named on the bill. If no such provision exists, however, delivery to an alternative port may constitute a breach of the bill of lading contract. The parties should also bear in mind that even where a bill of lading appears to incorporate the charterparty provisions, proceedings might be commenced in a jurisdiction in which different principles may apply.
Obligation to pay for and arrange insurance
In the absence of express provisions to the contrary, responsibility for, and the costs associated with, insuring the vessel will fall upon owners rather than charterers. Should charterers wish to order the vessel to, or through, an area of heightened war risk, the vessel’s insurers may require the payment of additional premiums to compensate for the additional risk. In these circumstances, the issue will arise as to who is responsible for any additional premium and it will depend on the charterparty provisions whether the charterers are to reimburse the owners for any additional premium paid.
The situation in Ukraine remains in a “watch and see” phase. There is a lot of tension but seemingly a willingness on all sides to resolve things diplomatically. It is to be hoped that that resolve holds good. However, the introduction of sanctions by both the US and EU could give rise to a tit for tat escalation that may yet impact on commercial shipping even if both sides avoid any kind of military action. It remains to be seen whether sanctions will be increased and, in particular, whether any will be imposed against companies or indeed ports operating in the Crimea region. If military action does happen, then that is likely to be considered as a war or warlike situation with repercussions for the various stakeholders involved in any charterparty or contract of carriage. Those transacting business in the region should keep up-to-date with matters in order to minimise any risks to their commercial operations and ensure that any contracts are drafted to take account of the risks that may develop in the future.
This article is intended to provide only a general overview of the types of legal issues which may arise in the event of an escalation of the situation in Ukraine. For further information, please contact Stephen Askins, Michelle Linderman or your usual contact at Ince & Co.
Owners’ liens on cargo for unpaid freight in China
A shipowner client comes to us with a problem. The charterer has defaulted on freight payments and/or will not pay freight due and payable under the charterparty. The charterer has also gone incommunicado. The following diagram sets out the basic framework:
BILL OF LADING
SUPPLIER FOB SALE CHARTERER/SELLER CIF/CFR SALE BUYER/CARGO RECEIVER
The vessel is en route to discharge its cargo in China. The bill of lading is held by the buyer/cargo receiver to whom the charterer has sold the cargo. The shipowner wants to know whether he can exercise a lien on the cargo against the lawful holder of the bill of lading until he has been paid the freight due to him from the charterer.
This article sets out some basic guidance and tips for the shipowner who finds himself in a similar scenario.
The charterparty must contain a lien clause
The first question the shipowner should ask himself is whether the charterparty contains a lien clause. Many charters give the shipowner an express contractual lien on cargo in respect of unpaid freight. A typical lien clause wording might look something like this:
"Owners shall have a lien on the cargo for freight incurred at the port of loading to the extent of amount due to Owners."
The shipowner should be careful to consider the scope of the lien clause. If a lien clause refers only to a lien for unpaid demurrage, for example, it would not entitle the shipowner to exercise a lien in respect of unpaid freight.
The lien clause must be validly incorporated into the bill of lading
The receiver will come into a contractual relationship with the shipowner via the bill of lading. For the lien to be effective against the receiver, the shipowner will additionally have to prove that the bill of lading contract is also subject to the lien clause, and gives the shipowner the same rights as he has under the lien clause in the charterparty.
This requirement is satisfied if the bill of lading expressly incorporates the terms and conditions of the charterparty. Under English law, the shipowner must prove that the wording of the incorporation provision in the bill of lading is sufficiently clear to incorporate the charter lien clause into the bill of lading. Although general words may suffice, to best protect himself the shipowner should try to ensure that the bill of lading makes express reference to the lien clause in the charterparty. Typical wording might look something like this:
“This shipment is carried under and pursuant to the terms of the Charterparty dated XXX, and all the terms whatsoever of the said charter, including the lien under clause XX on freight, are hereby incorporated and shall apply to and govern the rights of the parties concerned in this shipment.”
There are additional requirements in China, where the bill of lading must state "freight payable as per charterparty" and must identify the charterparty in question expressly by having the date of the charterparty annotated on the bill of lading.
The requirements may also depend on the particular local maritime court. Some maritime courts in China even require that the relevant lien clause in the charterparty must also be expressly identified.
The lien must be recognised by the local courts in China
To protect himself, a shipowner should make sure that the bill of lading states the date of the relevant charterparty whose clauses are sought to be incorporated into the bill of lading.
Note, however, that even if the charterparty and the bill of lading provide the shipowner with a specific contractual lien over the cargo which would be enforceable under English law, and even though the charterparty may be subject to English law and arbitration, the lien may not be exercisable in China.
The shipowner must look to the law of the jurisdiction in which the lien is sought to be exercised (for present purposes, China) to see whether Chinese law also recognises a right to a lien, and whether the shipowner can fulfil the requirements in order to exercise the lien under Chinese law.
Article 87 of the Chinese Maritime Code provides that the shipowner is entitled to a lien over the cargo of the debtor for freight and other amounts outstanding, but this right is subject to a number of limitations. We briefly highlight below what we understand to be the prevailing Chinese maritime courts’ practice.
First, the shipowner must ask the charterer to provide security before exercising the lien. The shipowner can only exercise a lien if no security has been voluntarily provided by the charterer.
Secondly, the shipowner can only lawfully exercise a lien over the freight if the cargo is owned by the party who is liable to pay the overdue freight, i.e. the charterer. In other words, at the time the shipowner seeks to exercise the lien, the charterer (defaulting party) must also be the owner of the cargo upon which the lien is to be exercised.
This will give rise to a difficulty for the shipowner where the charterer is no longer the owner of the relevant cargo and is no longer the holder of the bill of lading. In that case, the shipowner is not able to lawfully exercise a lien over the freight under Chinese law.
In such event, upon the application of the holder of the bill of lading, the local court would issue an order to release the cargo. In our experience, these court orders can be obtained and enforced quite quickly.
What can the shipowner do?
Even if the shipowner believes he is in a position to lawfully exercise a lien on the cargo, he cannot rule out the possibility that the cargo receiver (or any other party who claims to be the owner of the cargo) will apply to the court for an order to release the cargo. The shipowner finds himself stuck between a rock and a hard place. He is unable to obtain payment for the freight from the charterer. Neither is he able to avail of the protection he would like to rely on, since he cannot validly exercise the lien in China.
Some shipowners choose to try to force the charterer’s hand by refusing to proceed to the discharge port or by doing so but refusing to discharge the cargo, in the hope that this will force the charterer to pay freight.
By doing so, the shipowner may be in breach of his obligation to proceed to the discharge port with due despatch and be exposed to liability to the holder of the bill of lading for interference with the bill of lading holder’s right to the cargo.
Further, this is a commercially unrealistic solution (how long will a shipowner be prepared to wait?), and in circumstances where the charterer is in genuine financial difficulty, it is unlikely to have the desired impact.
Shipowners would do well to bear in mind the wise old saying that “prevention is better than cure”. A shipowner’s best hope is to avoid this unfortunate situation by paying careful consideration to choosing commercial partners. Shipowners must be careful to conduct the appropriate financial due diligence on counterparties, especially when embarking on new commercial relationships with charterers who do not have an established reputation in the market.
This article is not intended to be legal advice on Chinese law. The authors are not qualified to advise on Chinese law. The views expressed are simply their understanding of Chinese law based on their experience.
Wai Yue Loh
Ship managers find port of refuge before the Hong Kong courts
Like London buses, you wait an age for one and none come; but when they do, three come along at once. This is what happened in Hong Kong with the Hong Kong court recently handing down three important decisions affecting a ship manager’s right of arrest under Hong Kong law.
Ship managers’ fees – a development in Hong Kong?
The Oriental Dragon  1 HKLRD 649
In The Oriental Dragon  1 HKLRD 649, the Admiralty Judge decided that a manager was entitled to arrest for a Lump Sum fee which included a fee payable for “ship management”. Whilst the reasoning behind the decision is not entirely clear, he appears to have relied upon the case of The Westport No. 2  1 Lloyd’s Rep 342, which held that a ship’s agent is entitled to include a reasonable figure for his own services in his claim for disbursements made on account of a ship. If the claim that arose related to services provided in respect of a named ship, for her operation or maintenance, it could fall within either section 12A(2)(l) (i.e. a claim in respect of goods or materials supplied to a ship for her operation or maintenance) or (12A(2)(o) (i.e. any claim by a master, shipper, charterer or agent in respect of disbursements made on account of a ship) of the High Court Ordinance. Although the Lump Sum fee in The Oriental Dragon was payable under a Consultancy Agreement, some of the services being rendered by the “consultant” were ship management services.
In Hong Kong, it has until now been generally accepted that managers have no right of arrest in respect of unpaid management fees since management fees are essentially remuneration payable to the ship managers for services rendered to the shipowners and not related to a ship. The decision in The Oriental Dragon represents a departure from this generally accepted position and gives managers grounds (in some cases) to argue at least that they are entitled to arrest for unpaid management fees in Hong Kong.
Running accounts – a potential trap?
The Ruby Star  HKCU 205
A running account is essentially an active account running from day to day which is predicated upon a continuing relationship of creditor and debtor between the parties to the running account. Payments in are reflected as a credit in the account and set-off against an earlier debit regardless of that debit’s characterisation.
There is a long line of English cases flowing from The West Friesland (1859) Sw 454 and The Comtesse de Frègebille (1861) Lush 329, which have held that an in rem claim cannot be brought for the general balance of a mercantile account. The judicial reasoning for these decisions has been that, in maintaining a running account, parties have indiscriminately set off sums received against in rem claims and in personam claims and it was not the Court’s place to settle accounts between parties. However, in 1997, Mr Justice Clarke decided in The Kommunar  1 Lloyd’s Rep 1 that, since these old cases were decided under older versions of the currently applicable statutes, the correct position under s 20(2) of the Supreme Court Act (the equivalent of s 12A(2) of the Hong Kong High Court Ordinance) was not that a claim on a general account must always fall outside the admiralty jurisdiction of the court; what was important was the underlying nature of the claims being advanced.
Until the recent case of The Ruby Star  HKCU 205, there was no Hong Kong case directly on this point. The new Hong Kong Admiralty Judge has now decided that the old line of English cases was overly mechanistic and preferred the approach of Mr Justice Clarke adopted in The Kommunar. He has held that a manager can arrest in respect of a running account provided that the “underlying nature of the costs or invoices comprising the unpaid balance of a running account” falls within one of the recognised maritime claims under section 12A(2) of the High Court Ordinance.
The shipowners, who intervened in the proceedings, have applied for leave to appeal this decision. If they are granted leave, we will report the Court of Appeal’s eventual decision on this case in a future e-brief article. Unless or until it is overturned, however, the decision can be relied upon in applications for arrest in Hong Kong.
Notwithstanding this potential development, a prudent manager should structure his accounts and demands for payment so as to avoid if possible creating a running account or the impression of a running account in the first place.
Assignees of claims to crew wages - beware
The King Coal  2 HKLRD 620
The provision of “services of crew and officers to a ship” comes within the ambit of section 12A(2)(l) of the High Court Ordinance as it is accepted that a claim for services falls within the meaning of the words “goods or materials supplied to a ship” (The Edinburgh Castle  2 Lloyd’s Rep 362; The Nore Challenger  2 Lloyd’s Rep 103). Hong Kong law recognises that no distinction is to be drawn between a claim by the person who actually supplied the goods, materials or services to the ship and a claim by the person who pays for or “renders himself liable to pay for” the supply.
The question that came before the Hong Kong Court recently was this. What then is the position of an assignee of a crew’s rights to wages given in exchange for payment of them by the assignee? In The King Coal  2 HKLRD 620, the Claimant based its application to arrest on section 12A(2)(n) as a claim “by a master or member of a crew for wages”. The Judge held that an assignee of a crew’s claim for wages cannot claim an in rem right under section 12A(2)(n). His reasoning was as follows:
“… In my view, the legislature in enacting Section 12A had decided to expressly introduce these particular words: “Any claim by a Master or member of the crew” in section 12A(2)(n). That is what the legislature had done by clear words. There may or may not be good reasons for that, but it is not for this court to speculate those reasons.
In light of the express words and the way Section 12A(2)(n) is drafted, the clear words of it mean that it is only limited to a claim for wages brought by the Master or a member of the crew. I therefore do not think it is reasonably capable of construing it to mean (as what Mr Wright has suggested) a claim in respect of wages of Master and officers or crew members brought by anyone. …”
Whilst The King Coal reflects the current state of the law in Hong Kong on this point, we make two comments. First, it is arguable that this judgment blurs the distinction between a maritime lien and a statutory lien. That a maritime lien is not assignable under Hong Kong law is not disputed. However, it was held in The “Wasp” (1867) L.R. 1 A. & E. 367, that the assignment of a chose in action had the effect of transferring with the claim a statutory right in rem (a procedural right). On this basis, it ought to be possible to assign the statutory right in rem in respect of a claim for crew wages without also transferring the maritime lien which would have afforded the claim a priority status.
Second, the better basis for the application would have been under section 12A(2)(l), although this has not been itself tested by the Hong Kong Courts in recent years.
In our view, these recent decisions do not have the effect of introducing sweeping revisions to Hong Kong law. They do, however, open up new avenues for arguing that the admiralty jurisdiction of the Court can be invoked for certain claims which ship managers may have. Whilst they present an opportunity for obtaining security from the Hong Kong Court through an arrest, any applicant must ensure that it complies with the full and frank disclosure obligations in the arrest affidavit. Citing the arguments both for and against the Court exercising its jurisdiction is crucial, particularly as the initial arrest application may not come before the admiralty judge. Failure to do so would risk a successful application being subsequently set aside on the grounds of material non-disclosure.
Su Yin Anand
SHIPPING LEGISLATION AND REGULATION
The revised Athens Convention: strict liability and higher limits of liability for passenger claims
The 1974 Athens Convention and its successor, the 2002 Protocol, regulate the liability of carriers and their insurers for passenger and luggage claims. In the wake of major casualties such as the Costa Concordia, there has been an increasing need for an updated and coherent legal framework in the cruise ship industry.
The 2002 Protocol will take effect 12 months after 10 member states have ratified it. On 23 April 2013, Belgium became the 10th member state to ratify the Protocol and it will now come into force on 23 April this year. The 2002 Protocol to the Athens Convention revises and updates the 1974 Convention. It will also significantly alter the landscape of passenger claims by imposing a form of strict liability for any “shipping incident” and substantially increasing the liability limits for passenger injuries.
The basic features of the Athens Convention 1974
The Athens Convention established a fault-based liability regime for damage and injuries suffered by passengers at sea. In “non-ship related” cases, the passenger has the burden of proving the fault or neglect of the carrier and the extent of the loss or damage suffered. On the other hand, in “ship-related” incidents, such as shipwreck, collision, stranding, explosion, fire or defects in the ship, the burden of proof shifts from the passenger to the carrier. In such cases, the carrier is presumed to be at fault and, to avoid liability, must prove that he took all necessary precautions to avoid the accident.
The carrier can limit his liability except where he acted with intent to cause damage or recklessly and with knowledge that such damage would result. However, the limits under the 1974 Athens Convention are significantly low. For death and personal injury to a passenger, the limit of liability is 46,666 SDR (about US$ 72,000).
The Key Changes under the 2002 Protocol
(i)Compulsory Insurance (Art. 4bis)
Compulsory insurance is not a new concept. It was first introduced by the 1969 Civil Liability Convention. The rationale behind compulsory insurance is to protect the injured passengers and ensure that funds are available to compensate the victims. The 2002 Protocol requires vessels licensed to carry more than 12 passengers and registered in a state party to maintain insurance or other financial security (such as a bank guarantee) up to the strict liability limit. But compulsory insurance applies only in respect of claims for death or personal injury to passengers. It does not apply to claims for loss of or damage to luggage. On a practical level, to comply with the Protocol requirements, carriers will need: (a) blue cards issued by their P&I insurers and (b) a Certificate issued by a State Party confirming that insurance or other financial security is in place.
(ii)Right of Direct Action against Insurers (Art. 4bis (10))
The 2002 Protocol allows claims for compensation to be brought directly against the liability insurer for claims up to the strict liability limit. Facing such a claim, the insurer is allowed only a limited set of defences. He cannot avail himself of any of the defences to which he might have been entitled in proceedings brought by the carrier such as unseaworthiness or “pay to be paid”. Such defences are not available to insurers against passengers.
(iii)Limits of Liability (Art.3(1) and Art. 7(1))
The 2002 Protocol raises liability limits significantly. For death and personal injury claims, the limits have been raised to SDR 250,000 (about US$ 387,000) per passenger on each distinct occasion. If the loss exceeds the limit, the carrier is further liable up to an overall maximum limit of SDR 400,000 (about US$ 620,000) per passenger unless the carrier shows that the incident which caused the loss occurred without his (or his servants’) fault or neglect.
Liability limits have also been increased for loss or damage to luggage and vehicles as follows:
- Loss or damage to cabin luggage – 2,250 SDR
- Loss or damage to vehicles (including luggage carried in it) – 12,700 SDR
- Loss or damage to other luggage – 3,375 SDR
(iv)Strict Liability (Art.3)
In relation to “ship-related” incidents, the fault-based regime under the Athens Convention 1974 is now replaced with strict liability.
But there are two tiers to the liability. In the first tier, the carrier is strictly liable up to the set limit (SDR 250,000) unless the carrier can prove that the accident was caused by (a) a natural phenomenon, act of war, hostilities or insurrection; or (b) by a third party with intent to cause the incident (such as a terrorist act). The second tier is above the strict liability limit (up to SDR 400,000) and, in this case, the carrier is liable unless he can prove that the incident causing the loss occurred without his fault or neglect.
As regards “non–ship related” incidents, the fault-based regime of the Athens Convention 1974 has been retained.
(v)Opt-out Clause (Art.7(2))
The 2002 Protocol allows member States to adopt higher limits of liability or even unlimited liability for death and personal injury claims under their national law.
The European aspect: EU Passenger Liability Regulation 392/2009
As a matter of EU law, the 2002 Protocol has been implemented by the EU Regulation 392/2009 (“PLR”) and is directly applicable to 27 Member States since 31 December 2012. The PLR ensures a single set of rules governing the rights of carriers and passengers in the event of an accident across the EU.
The PLR creates a coherent legal framework within the EU as it ensures that all EU citizens have access to the same levels of compensation when travelling between EU Member States. It extends the scope of the 2002 Protocol to cover certain domestic services in addition to international trading vessels. It obliges the carrier to make an advance payment (of € 21,000) to cover immediate economic needs in the event of death or personal injury claims.
Impact of the 2002 Protocol on P&I Insurers
Despite the increased exposure which has arisen as a result of the 2002 Protocol, the International Group of P&I insurers has agreed to issue blue cards for non-war risk liabilities in respect of both international and domestic trading voyages covered by the PLR.
The changes introduced by the 2002 Protocol and by the PLR are very significant for the passenger vessel industry.
Although the PLR is already in force within the EU, EU Member States still need to ratify the 2002 Protocol individually to ensure uniformity. This is particularly important when it comes to disasters like the Costa Concordia. The incident happened in Italy on 13 January 2012. The PLR came into force a year after the incident. Italy is not a signatory to the Athens Convention 1974 or the 2002 Protocol. If the incident had happened a year later, the position would have been very different for the victims/passengers of the vessel in terms of the increased limits under the 2002 Protocol and the PLR. This illustrates the need for a coherent and uniform legal framework. It is to be hoped that this is what the new rules will provide.
EU v. IMO: Whose emissions legislation will prevail?
Manzi and another v. Capitaneria di Porto di Genova Case C-537/11
As the EU and IMO emissions regulation legislation looks set to diverge even further, one owner fights back in the European Court of Justice, arguing that EU member states who are party to the IMO’s MARPOL Annex VI could not impose inconsistent EU requirements upon vessels flagged in other MARPOL Annex VI states.
The 1997 Protocol to the International Convention for the Prevention of Pollution from Ships, signed in London on 2 November 1973, as supplemented by the Protocol of 17 February 1978 (MARPOL 73/78), included a new Annex VI Rule 14(1), providing that the sulphur content in marine fuels must not exceed 4.5% by mass. Annex VI entered into force on 19 May 2005. However, EU legislation enacted in the same year required Member States to ensure that passenger ships operating on “regular services” to or from any EU port used fuel with a maximum sulphur content of 1.5% (Article 4a(4) of Council Directive 1999/32/EC of 26 April 1999, as amended by Directive 2005/33/EC of 6 July 2005 (Directive 1999/32)).
The expression “regular services” was defined as meaning:
“A series of passenger ship crossings operated so as to serve traffic between the same two or more ports, or a series of voyages from and to the same port without intermediate cause, either:
i.According to a published timetable, or
ii.With crossings so regular or frequent that they constitute a recognisable schedule.”
In July 2008, a cruise ship flying the Panamanian flag was found to be using marine fuels with a sulphur content in excess of 1.5% by the Capitaneria di Porto di Genova while in the Port of Genoa. An administrative penalty was issued against the Captain of the vessel jointly and severally with Compagnia Naviera Orchestra, the Owner of the vessel, by the Capitaneria di Porto di Genova for infringement of the Italian legislation giving effect to EU Directive 1999/32.
The Captain and the Compagnia Naviera Orchestra (the applicants) brought an appeal against that Order in the Italian Courts, arguing that:
- Cruise ships did not operate “regular services” within the meaning of Articles 4a(4) and 2(3g) of Directive 1999/32, and accordingly did not fall within the scope of the Directive;
- There was a discrepancy between Article 4a(4) of the EU Directive and Annex VI to MARPOL 73/78 as regards the maximum amount of sulphur contained in marine fuels; and
- A ship flying the flag of a State party to MARPOL 73/78 was authorised to use a fuel with a sulphur content of less than 4.5% by mass where it was in the port of another State party to MARPOL 73/78.
The Italian Court referred various questions to the European Court of Justice (“ECJ”) for a preliminary ruling, the issues for decision being:
1. Whether the term “regular services” applied to cruise ships;
2. Whether the 1.5% sulphur limit in Article 4a(4) was invalid on the basis that it contravened the principle of cooperation in good faith as between the EU and its Member States, in that it required Member States which had agreed to and ratified Annex VI to MARPOL 73/78 to act in breach of the obligations entered into towards the other States which were party to MARPOL 73/78; and
3. Whether, in light of the general principle of international law requiring international agreements to be implemented and interpreted in good faith, Article 4a(4) of Directive 1999/32 was to be interpreted as meaning that the sulphur limit of 1.5% in marine fuels did not apply to ships flying the flag of a non-EU State which was party to MARPOL 73/78 where such ships were in the port of an EU State which was itself a party to MARPOL 73/78.
The ECJ decision
The ECJ held as follows:
- Directive 1999/32 applied to cruise ships. A series of crossings for the purpose of tourism was to be regarded as traffic within the meaning of Article 2(3g). The list of ports contained in the itinerary for a normal cruise would necessarily consist of at least two ports which could not be avoided, i.e. the port of departure and the port of arrival. The transport was thus made between “the same two or more ports” even where the transport ended at the port of departure.
- The validity of Article 4a(4) of Directive 1999/32 could not be determined in the light of Annex VI to MARPOL 73/78 since the EU was not a contracting party to MARPOL 73/78, and was not bound by it.
- It was not for the Court to rule on the impact of Annex VI to MARPOL 73/78 on the scope of Article 4a(4) of Directive 1999/32. Article 4a(4) did not make any reference to Annex VI. The ECJ had accepted in a previous case that even where the EU was not itself bound by an international agreement, the fact that all its member states are contracting parties to it is liable to have consequences for the interpretation of EU law, in particular those provisions which fell within the field of application of the original agreement (R (International Association of Independent Tanker Owners (Intertanko) and Others v. Secretary of State for Transport C - 308/06). However, the Intertanko case was concerned in part with a conflict between EU legislation and MARPOL 73/78 by which all EU member states were bound. There were three EU member states (all landlocked) who were not contracting parties bound by the 1997 Protocol giving effect to Annex VI. The ECJ held that to interpret the provisions of EU law in the light of an obligation imposed by an international agreement which did not bind all the EU member states would amount to extending the scope of that obligation to those member states which were not contracting parties to such an agreement. Therefore, the Court was not required to interpret Article 4a(4) of Directive 1999/32 in the light of Annex VI.
In the light of this ECJ ruling, the owners of vessels flying flags of countries outside of the EU must ensure compliance with the requirements set out in Article 4a(4) of Directive 1999/32. Compliance with the lesser requirements of Annex VI of MARPOL 73/78 will not provide a defence in the event that EU port authorities choose to prosecute in relation to excessive sulphur in marine fuels.
Given this decision, owners also need to be aware that outside ECAs, where more stringent restrictions apply, from January 2020 EU Regulations will limit the sulphur content of fuel used in all EU waters to a maximum of 0.5%. Whilst Annex VI of MARPOL imposes a similar requirement, the latter is subject to the outcome of a fuel availability review in 2018. The EU has given a clear indication that the restriction will apply in EU waters regardless of the outcome of that fuel availability review.
The Jackson Reforms: a sea change in the conduct of civil litigation in the UK
In 2009, Sir Rupert Jackson, a senior judge within the Court of Appeal, was asked to carry out a review into the costs of civil litigation. The resulting changes to English civil litigation procedure became known as “the Jackson Reforms” and were brought into the Court’s Civil Procedure Rules (“CPR”) in April 2013.
This article looks at the current status of commercial civil litigation one year on from the implementation of the Jackson Reforms.
Outline of the Jackson Reforms
Sir Rupert’s reforms involved a number of key legal changes. The most relevant of these to commercial disputes are the expansion of permitted contingency fee arrangements for English litigation; increases to damages where a defendant fails to beat a claimant’s settlement offer; and the possible introduction in the Commercial Court of “costs budgeting” under which a judge will approve at an early stage in the case a budget in respect of the future costs of the case.
The second part of the Jackson Reforms concerns changes to the CPR designed to promote a new culture of avoiding delay and thus a saving of legal costs.
Initial High Court decisions – May 2013 to November 2013
At first, the courts cited the Jackson Reforms to support a tougher approach to dealing with situations where the parties had failed to take steps in litigation in time, but nonetheless judges were prepared to be lenient in appropriate cases.
- In Fons v. Corporal Ltd (9th May 2013), the Court refused an application for an extension of time to serve witness evidence.
- In Re Atrium Training Services Ltd (7th June 2013), the applicants applied for an extension of time to give disclosure on the basis that new solicitors had been appointed and the whole disclosure process had to be restarted. The Court granted a fixed extension of time but on terms that the claim would be struck out if the applicants failed to apply.
- In Thevarajah v. Riordan (10th October 2013), the Chancery Division gave a party relief from sanctions on the basis that, subsequent to the breach, the Defendants had complied with their disclosure obligations which amounted to a material change in circumstances justifying relief from sanctions. The Judge acknowledged the desire to counter a culture of deliberate delay but said that regard should be had to be doing justice between the parties.
- In Raayan v. Trans Victory Marine Inc (23 August 2013), the Commercial Court gave relief from sanctions where a party had served Particulars of Claim two days late.
The balance between taking a tough stance on non-compliance and doing justice between the parties shifted towards the former when the first case in this area reached the Court of Appeal in Mitchell v. News Group Newspapers (27th November 2013).
The Mitchell case concerned the claim brought by the former Cabinet Minister, Andrew Mitchell MP, against The Sun newspaper for its coverage of the so-called “Plebgate” affair. The Claimant failed to comply with the Court’s requirements to file and exchange a costs budget no later than seven days prior to the first Case Management Conference. In the event, the budget was lodged five days late.
Master McCloud had to decide on the consequences of the Claimant’s non-compliance. She recognised that she had a range of options for dealing with the non-compliance, ranging from striking out the Claimant’s case to adjourning the CMC and ordering the Claimant to pay any costs thrown away. She acknowledged that, but for the Jackson Reforms, she would have decided on the latter approach. However, Master McCloud felt the Jackson Reforms demanded a tougher approach and held that, as a result of his non-compliance, even if successful on the claim the Claimant could only recover court fees and nothing further in terms of costs. Permission to appeal was immediately granted to take the case straight to the Court of Appeal (leap frogging the High Court).
The Court of Appeal upheld the decision not to grant any relief from sanctions and advocated a two stage approach.
- Can the non-compliance properly be regarded as trivial? If so, relief from sanctions would be appropriate.
- If the non-compliance is not trivial then the burden is on the defaulting party to persuade the Court to grant relief. Good reasons would be fairly extreme (“debilitating illness” or being “involved in an accident”) whereas mistakes and oversight are unlikely to amount to a good reason.
The Court of Appeal also expressly criticised those recent decisions of first instance courts which took a more lenient stance, such as Raayan. Lord Dyson concluded that the new, more robust approach would mean that, in the future, relief from sanctions would be granted “more sparingly than previously”.
As we shall see, this decision heralded a true sea change in the way the courts going forward would deal with non-compliance.
Mitchell was quickly followed by a decision of the Court of Appeal in Thevarajah (16th January 2014) to overturn the decision of the High Court granting the Defendants relief from sanctions for failure to comply with their disclosure obligation.
- In MA Lloyd v. PPC International (20th January 2014), the Claimant failed to serve a witness statement in time and the Court issued an order debarring the Claimant from relying on any factual evidence. The Judge described the Defendant’s failure to seek such a sanction as “unduly timid”.
- In Web Resolutions Ltd v. E-Surv (20th January 2014), the Court set aside the grant of permission to appeal where the appeal application had not been served within the mandatory period.
- In Lakatamia Shipping v. Nobu Su (13th February 2014), the Court issued an “unless order” requiring the Defendant to provide standard disclosure by a particular date. The Court’s order did not specify the exact time by which standard disclosure was to be provided, in which circumstances the CPR states the latest time for compliance is 4.30 pm on the day in question. The Defendant’s solicitors were working on the basis that the deadline was 5 pm and offered to exchange at 4.45 pm. The Claimant took the position that the Defendant was out of time. The Defendant’s solicitors then proceeded to serve their list at 5.16 pm. The Defendant applied for relief from sanctions and the Judge held that, because the Defendant narrowly missed the deadline by minutes rather than hours, this was a case deserving of relief from sanctions.
Two further cases are illustrative of the Commercial Court’s approach to the principles laid down in Mitchell where the non-compliance was not trivial and are worth considering in some detail.
In Newland Shipping & Forwarding v. Toba Trading FZC (6th February 2014), the parties were required to exchange witness statements by 25 October 2013. On 24 October 2013, the Defendants’ solicitors wrote to the Claimants’ solicitors stating they were no longer acting for the Defendants and saying their former clients wanted an extension of time for serving witness statements by one month. The Claimants’ solicitors responded that they did not agree to the extensions and, on 29 October 2013, sought judgment against the Defendants for non-compliance with the Court’s orders. Following a hearing before Mr Justice Field, judgment was entered against the Defendants in excess of US$ 7 million. After the Defendants re-instructed their solicitors, an application was made to set aside the judgment against them. The Defendants argued that Mr Justice Field should have considered alternative and more appropriate sanctions when giving judgment (for example, debarring the Defendants from relying on the witness evidence they had failed to serve). The Defendants also noted inter alia that there had been no prior default on their part, they had asked for more time to serve witness evidence and the Claimants’ prior conduct had equally delayed proceedings. Citing the Mitchell principles, however, these arguments did not engage the Court’s sympathies. Mr Justice Hamblen refused to give relief from sanctions: the nature of the non-performance was serious, not trivial and there was no good reason why the default had occurred.
In Associated Electrical Industries v. Alstom (7th February 2014), Mr Justice Smith was dealing with the consequences of a failure by the Claimant to serve its Particulars of Claim in time. The Claimant sought to excuse its non-compliance on the basis of the exception in Mitchell that the delay should be regarded as trivial because the pleadings were only 20 days late; the delay did not prejudice the Defendant; the delay did not have any impact on other court users or on the Court’s resources; there was no breach of a court order or rule which attracted an automatic sanction; and, the non-compliance was not intentional in that no decision was made to deliberately serve the Particulars late.
When weighing up the proper balance to be struck in this case, the Judge’s clear instincts were against ordering a strikeout:
“If my decision depended only on what would be just and fair between [the Claimants and Defendants], I would not strike out the Claim Form and I would grant a retrospective extension of time for service of the Particulars…
I would consider an order striking out the Claim Form to be a disproportionate response to [the Claimant’s] non-compliance”.
Nonetheless, in reaching his conclusion, the Judge turned back to his earlier decision in Raayan where he noted that the defaulting party in that case was in a stronger position than the Claimant in the present case. In that case, the defaulting party made an unfortunate oversight, which was not due to any indifference towards compliance with CPR provisions, and was only two days late in serving Particulars of Claim. In Raayan, Mr Justice Smith had decided to give relief from sanctions and his decision was expressly criticised by the Court of Appeal. On that basis, therefore, Mr Justice Smith reached the conclusion that “despite my conclusions about the fairness between the parties and what would be a proportionate response to the non-compliance I allow [the Defendant’s] application” and he struck out the claim.
The Associated Electrical decision suggests discomfort on the part of first instance judges with taking the draconian approach advocated by the Court of Appeal in Mitchell. Nonetheless, many judges feel bound to adopt that approach lest they be criticised when these matters reach the Court of Appeal. To confuse the picture, Mr Justice Smith’s tough approach in Associated Electrical was then criticised by a Deputy Judge sitting in the Chancery Division in Clarke v. Barclays Bank (27th February 2014), who doubted Mr Justice Smith had correctly followed the Mitchell principles in a case involving relief from sanctions for a failure to provide timely disclosure. Deputy Judge Hollington stated in Clarke that the Court of Appeal in Mitchell had not said Raayan had been wrongly decided, only that Mr Justice Smith had applied incorrect reasoning when reaching his conclusion. Deputy Judge Hollington stated that “My understanding of Mitchell is that the court should strive to be a tough but wise, not an officious or pointless strict, disciplinarian.”
Drawing all the threads together, it is in only cases of a plainly trivial breach that there is a good chance that the Court will give relief from sanctions for non-compliance with the Court’s rules and procedures. Whilst the different judges have taken conflicting approaches to the issue of non-compliance, the most recent decisions from the Commercial Court demonstrate an almost “zero tolerance” approach to non-compliance.
The new regime does not mean that the Court will be tough only where automatic sanctions apply in the event of a default and a party asks for relief from those sanctions. The Court is also taking more drastic action when it has to decide the consequences of a breach of an order or the CPR when no automatic sanction applies.
Whilst first instance judges appear to be uncomfortable with the new stricter regime, many feel bound to apply it. This is something which needs to be kept in mind by anyone involved in the litigation process. All parties involved in litigation should keep under review whether more time might be needed to complete a step in the litigation process. The earlier a request for an extension of time is made, or an application to the court for further time, the more likely it is to succeed.
The recast Brussels Regulation: enhancing the effectiveness of jurisdiction agreements
Reforms to the Brussels Regulation (on jurisdiction, recognition and enforcement of judgments in civil and commercial matters in the EU) apply from 10 January 2015. In an article in our Winter 2014 Shipping E-Brief (“The recast Brussels Regulation: reinforcing the arbitration exception” – see link below), we considered how certain of the changes might affect the interaction between proceedings in court and arbitration. In this follow-up article, we address a different topic: how the recast Regulation is intended to strengthen choice of court (i.e. exclusive jurisdiction) agreements.
Background - jurisdiction under the Regulation
The general rule in the Regulation is that a defendant must be sued in the courts of his country of domicile (Article 2). There are various exceptions – for example, in relation to contract matters (where the defendant may be sued “in the courts for the place of performance of the obligation in question”) and tort (where he may be sued “in the courts for the place where the harmful event occurred or may occur”) (Article 4). A further exception is where there is an exclusive jurisdiction agreement: an EU member state court will have jurisdiction over a dispute where the parties have agreed that it should do so, provided at least one of those parties is domiciled in the EU (Article 23).
The Regulation also provides for what is to happen if proceedings are started in different EU member states in relation to the same cause of action and between the same parties. In that event, the court first seised takes precedence. The court second seised is required to stay its proceedings - until the first court has determined whether or not it has jurisdiction (Article 27).
The lack of flexibility in the application of Article 27 has proved controversial and been widely criticised, not least since it allows for disruptive litigation tactics to flourish. These include the so-called “torpedo” or “Italian torpedo”, where a party prospectively facing a claim takes the pre-emptive step of seeking a declaration of non-liability, usually in his local court, while being fully aware that a court in a different member state is provided for in a jurisdiction agreement. The strategy is aimed at delay and obstruction, and at taking advantage of the strictly applied lis pendens rule in Article 27. In Research in Motion v. Visto Corporation  EWCA Civ153, the Court of Appeal noted that:
“much ingenuity is expended on all this elaborate game playing…A party who fires an Italian torpedo may stand to gain much commercially from it. It would be wrong to say that he is “abusing” the system, just because he fires the torpedo or tries to”.
Difficulties have been caused, not least since the automatic stay in Article 27 has operated regardless of whether the “torpedo” proceedings are started with any genuine belief that the court first seised will ultimately retain jurisdiction. Matters have then been compounded by the fact that some courts are unwilling to decide jurisdiction as a preliminary issue, but will only do so at the same time as hearing the substantive merits of the case.
Issues concerning Article 27 were considered by the Supreme Court in London at the end of last year in The Alexandros T  UKSC 70. In that case, proceedings were brought in Greece by assureds against their insurers, for claims in tort based on Greek law that were associated with the insurers’ conduct when handling a total loss claim. The insurers then commenced proceedings in England against the assureds, arguing that the Greek proceedings breached English exclusive jurisdiction agreements. One question was whether the Greek and English actions involved the “same cause of action” for the purposes of Article 27, such that they might give rise to irreconcilable judgments. The Supreme Court held that a claim for damages and/or an indemnity for breach of an English exclusive jurisdiction agreement does not involve the same cause of action as (and is not the mirror image of) foreign proceedings said to be started in breach of that agreement.
The relevant reforms
The strict application of the court first seised rule has been relaxed by the re-cast Regulation in situations where there is an exclusive jurisdiction agreement. Article 31(2) of the revised Regulation provides that if the parties have agreed to the exclusive jurisdiction of the courts of an EU member state and proceedings are commenced in those courts, the courts of any other member state in which proceedings have also been commenced shall stay their proceedings. For these purposes, it is irrelevant which set of proceedings was commenced first. It is then for the courts to which exclusive jurisdiction has been granted by the parties to decide whether the jurisdiction agreement is valid and effective.
So precedence to decide on the validity and scope of an exclusive jurisdiction agreement will no longer be given to the court first seised; provided an action is started in the EU court designated in the jurisdiction agreement, the decision on jurisdiction will rest with that designated court.
This revision is welcome and should go some way towards defusing the torpedo and enhancing the effectiveness of jurisdiction agreements.
In addition to this reform of the rules on lis pendens, Article 23 has been amended (becoming new Article 25) so as to extend the scope of jurisdiction agreements. There is no longer a requirement that at least one of the parties must be domiciled in the EU. However, the Regulation does not apply where the exclusive jurisdiction provided for is a non-EU member state court. And it should also be noted that neither new Article 31(2) nor new Article 25 will assist a party in the case of a non-exclusive jurisdiction agreement (although, by Article 25, an agreement as to jurisdiction will be considered to be exclusive, unless the parties have agreed otherwise).
There are also new provisions (new Articles 33 and 34) giving EU member state courts a discretion to stay their proceedings where earlier proceedings have been commenced in the court of a non-EU “third state”. The EU court is not obliged to order a stay, but has a discretion to do so having assessed “all the circumstances in the case before it” (Recital 24). Some of the factors that the EU court may consider in deciding how to exercise its discretion are stated to include: connections between the facts of the case, the parties and the non-EU state concerned, how far the proceedings in the non-EU court have progressed by the time proceedings are initiated in the EU member state court, and whether or not the non-EU state court can be expected to give judgment within a reasonable time. The EU court may also take into account any exclusive jurisdiction clause in favour of the non-EU court in deciding how to exercise its discretion. So whilst a jurisdiction agreement in favour of a non-EU member state does not oblige an EU court to stay its own proceedings, it can be a factor influencing that EU court’s discretion as to whether or not to grant a stay.
It is worth noting that the recast Regulation expressly provides that jurisdiction agreements are separable from the main contract (Article 25(7)), so that their validity cannot be contested solely on the basis that the main contract is alleged to be invalid. This reflects the English common law position, as confirmed by the House of Lords in an Ince case in 2007, Fiona Trust v. Privalov.
These reforms follow a long period of consultation. The UK Government’s position was that reform was “an important priority” and the UK has opted into the changes.
Our view is that there was a clear case for changes to be made to the Regulation in relation to exclusive jurisdiction agreements and the impact of the court first seised rule. The strengthening of the protection given to exclusive jurisdiction agreements – and in particular the precedence given to the courts chosen by the parties, to decide on the agreement’s validity and application - is an overdue change, but one that is most welcome.
Bribery Act update: DPAs come into force, Sentencing Guidelines published – corporate prosecutions on the way?
In our last Bribery Act (the “Act”) update (Shipping E-Brief July 2013), we outlined how Deferred Prosecution Agreements (“DPAs”) are expected to work in the UK, and summarised the draft sentencing guidelines for fraud, bribery and money laundering by corporate offenders (the “Guidelines”), which were first published by the Sentencing Council of England and Wales in June 2013. Following a period of consultation, the Guidelines have now been finalised and will apply to corporate entities convicted of an offence and sentenced on or after 1 October 2014. DPAs will be available in relation to offences committed by corporates from 24 February 2014.
These developments are part of the UK’s ongoing anti-corruption initiatives and should be seen in the context of the UK prosecuting authorities’ expressed intention of clamping down on economic crime. Fraud is said to cost the UK £73 billion each year. The Director of the Serious Fraud Office (“SFO”), David Green, has already called for an amendment to the Act to widen the scope of corporate liability. It has also been reported that the SFO has received funding from the Treasury to investigate allegations of bribery against Rolls Royce in the Far East, which suggests that a high-level prosecution might be on the way after a lack of corporate prosecutions under the Act since it came into force in July 2011. Below we summarise these various developments in further detail.
DPAs are agreements between prosecutors and corporates (they are not available to individuals) whereby the prosecution of a corporate that is allegedly guilty of an economic crime may be suspended, conditional upon the corporate agreeing to a number of imposed conditions. These may include the confiscation of the profits of wrongdoing; payment of a significant fine and cooperation with future prosecutions of individuals; agreeing to external monitoring; agreeing to establish anti-corruption policies and procedures and the provision of appropriate training. Significantly, and unlike DPAs in the USA, DPAs in the UK will be subject to judicial oversight. Approved DPAs will also be made public in open court, thereby avoiding the use of DPAs to conceal a corporate’s alleged wrongdoing.
DPAs are a discretionary tool and will only be used where the prosecuting authorities consider that it is in the public interest to enter into a DPA with a corporate rather than prosecute it. For example, the public interest might be served by avoiding collateral damage suffered by employees and shareholders of a corporate if it is put out of business or wound up as a result of a criminal conviction. However, as stated by David Green: “DPAs are not a panacea, nor are they a mechanism for a corporate offender to buy itself out of trouble”.
On 14 February 2014, the Director of the SFO and the Director of Public Prosecutions (“DPP”) published a joint Code of Practice on the use of DPAs. Referring to publication of this Code, the DPP, Alison Saunders, has stated that “Whilst the circumstances appropriate for the use of DPAs may be quite rare for the CPS, the guidelines… set out our approach to this new legislative functions in an open and transparent way.” Prosecutors must have regard to the Code throughout the DPA process, namely: when negotiating DPAs with a corporate that they are considering prosecuting; when applying to the Court for approval of a DPA; and when overseeing DPAs after their approval by the Court, particularly in relation to their variation, breach, termination and completion.
Although the Bribery Act has been in force since 1 July 2011, there have so far been no prosecutions of corporates under Article 7 for failing to prevent bribery (although there may be at least one in the pipeline, see below). Furthermore, while the Act introduced a new, strict liability offence for corporates, there were no pre-existing sentencing guidelines for judges to apply in the event that a corporate was prosecuted. These new Guidelines are designed to address this situation and will apply to corporate convictions for fraud and money laundering, in addition to bribery.
The Guidelines are relevant to DPAs as well as actual convictions because Schedule 17, paragraph 5(4) of the Crime and Courts Act 2013 (which contains the provisions governing DPAs) requires that: “The amount of any financial penalty agreed between the prosecutor and P [the defendant] must be broadly comparable to the fine that a court would have imposed on P on conviction for the alleged offence following a guilty plea.” As such, when negotiating the terms of a DPA with a corporate, prosecutors will be obliged to take the Guidelines into account.
It is not within the remit of this article to provide a detailed analysis of the Guidelines. In essence, however, in determining a sentence, or the terms of a DPA, judges and prosecutors must take the following steps into consideration:
- Determine whether compensation should be ordered. This should be given priority over the payment of any other financial penalty, such as a fine.
- Consider whether confiscation should be ordered. This can be done under the Proceeds of Crime Act 2002.
- Determine the level of the corporate’s culpability and amount of harm caused. A corporate’s culpability may be categorised as high, medium, or low, depending on the role it played in committing the offence and its motivation in doing so. In the case of bribery, the measure of harm will normally be the gross profit from the contract obtained, retained or sought as a result of the offence, or the cost avoided by failing to put in place appropriate measures to prevent bribery.
- Determine the appropriate penalty. The Court may take into account a number of factors set out in the Guidelines to determine the appropriate level for any fine imposed. The fines can be hefty; a corporate is at risk of being fined up to 400% of the value of the actual profit from its criminal conduct.
- Make any final adjustment to the fine. The Court should consider whether the fine imposed is proportionate, taking into account the size and financial standing of the corporate and the seriousness of the offence. The overriding objective, according to the Guidelines, is that the fine imposed “must be substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law. Whether the fine would have the effect of putting the offender out of business will be relevant; in some bad cases this may be an acceptable consequence.”
Finally, a corporate’s sentence may be reduced where it assists in prosecuting other parties involved or where it pleads guilty.
Proposed amendment to the Act
David Green is reportedly seeking an amendment to the Section 7 “failure to prevent bribery” offence under the Act, with a view to expanding its scope to cover failure to prevent all acts of financial crime. The intention would be to prosecute corporates that have benefited from the criminal conduct of their staff, thereby giving corporates an added incentive to discourage criminal conduct by their employees. In addition to any fine it would have to pay, a corporate could also incur a further financial fallout through being prevented from bidding for any public project within the EU (EU public procurement rules debar a corporate found guilty of bribery from receiving such a contract). As at the time of writing, it remains to be seen whether the Act will in fact be amended.
The SFO has publicly declared its intention to bring high-level corporate prosecutions sooner rather than later. While a number of prosecutions have been taking place in recent years in respect of bribery and corruption offences committed prior to the Act coming into force, the current major investigation into Rolls-Royce concerning possible bribery and corruption in China and Indonesia is reported to include alleged offences that took place after June 2011. If that is indeed the case, then those offences may be prosecuted under the Act. It has also recently been reported that French train manufacturer, Alstom SA, is to be charged with various bribery and money laundering offences, including for allegedly paying bribes to win contracts overseas. It seems that at least some of the offences they are charged with may come under the Act.
In October 2013, David Green mentioned that the SFO had two cases involving corporate defendants in the court system awaiting trial. Whether those two cases include the allegations against Rolls Royce or Alstom SA or are entirely different cases of bribery and corruption remains unclear. Nor is it clear whether those cases involve offences pre- or post-dating the Act. Be that as it may, it seems likely that at least one major corporate prosecution may be on the way.
Ben Morgan, joint head of bribery and corruption at the SFO, has defended the lack of prosecutions under the Act on the basis that the SFO has so far been dealing with offences committed under the old anti-corruption legislation in the UK and, according to Mr Morgan, “this made it harder to bring companies to book for their misdemeanours”. This may all be about to change if, as anticipated, a few high-level prosecutions under the Act finally come to court. It will also be interesting to see if the section 7 offence under the Act is expanded in scope as the SFO would like it to be. If it is, corporates will be at even greater risk of being held liable for their employees’ corrupt conduct.
Furthermore, with the introduction of DPAs that give the prosecuting authorities a statutory framework and additional tool for ensuring that financial crime by corporates is appropriately dealt with, together with the new Sentencing Guidelines and joint Code of Practice to regulate the agreement and management of these DPAs, it is to be hoped that there will be an increase in the number of enforcement actions for economic crime.
As ever, however, particularly in an environment of increasing international intolerance of bribery and corruption, corporates should continue to review their adequate procedures and compliance policies regularly to ensure they remain effective and appropriate.
Acceleration without due care may lead to a bumpy ride
Combined Developers v. Arun Holdings and Others (6105/2013)  ZAWCHC 132
A recent South African decision serves as a valuable reminder of the care that should be taken when exercising a right of acceleration.
Rights of acceleration
In debt finance transactions, it is common to expressly provide in the loan or facility agreement for the lender to have a right to accelerate the debt before the scheduled repayment date, usually as a result of an event of default occurring, thus making the full balance of the debt payable immediately. Such a mechanism is necessary in order for the lender to be able to enforce its security, for instance by exercising a right of sale under a mortgage over any assets, so as to recover the full balance of the debt upon the occurrence of an event of default.
Under English law, acceleration clauses are enforceable so long as they provide only for the acceleration of the unpaid principal amount. A provision requiring for the immediate payment of all future interest that would have been payable under the loan agreement will generally be void as a penalty. It will not be a penalty, however, for the borrower to agree to indemnify the lender against the loss incurred by the lender as a result of the early repayment following acceleration. So, where the borrower is aware that the lender is liable under a payment obligation of its own in respect of the funds borrowed by the borrower, a provision requiring the borrower to indemnify the lender for such liability in the event of an acceleration of the loan will generally be enforceable.
Under most loan agreements, before the lender can exercise a right of acceleration, the lender will be required first to give notice to the borrower of the event of default. The exact requirements, and any period during which the borrower is allowed to remedy the default, will depend on the specific terms of the agreement.
Combined Developers v. Arun Holdings
In the recent decision in Combined Developers v. Arun Holdings and Others, the High Court of the Western Cape Division demonstrated the risk under South African law of exercising a right of acceleration in a manner inconsistent with the specific requirements of the contract and public policy.
The case concerned a loan agreement which required repayments to be made on the last day of each calendar month. Shortly before the end of the month in question, the lender sent the borrower a statement of the amount due that month. When the payment was not made by the end of the month, the lender sent an informal reminder. The borrower then paid the amount specified in the lender’s statement. The borrower failed, however, to pay “mora” interest that had accrued on the amount, in the sum of R86.57 (roughly US$ 8.00), on account of the late payment. This sum had not been included in the lender’s statement and had not been demanded by the lender. Nevertheless, the lender issued a notice to the borrower contending that the failure to pay the interest was an event of default and that it was exercising its right of acceleration such that the full balance of R7.6 million (around US$ 700,000) plus interest was immediately due and payable.
The South African Court held that the reminder did not meet the requirements of a demand under the loan agreement, which was a prerequisite to exercising the right of acceleration. In particular, the reminder did not refer to the “mora” interest or specify the amount of such interest. Accordingly, the interest had not been demanded and, until it had been, the lender had no right of acceleration. The Court also found that to interpret the reminder as a demand, such that the right of acceleration could be exercised in circumstances where the borrower was not notified that the “mora” interest was due, or of its amount, would be so draconian and unfair that it must be a breach of public policy, and some communication to remind the borrower that it remained in arrears must have been required.
Risks associated with rights of acceleration
It is likely that a similar conclusion would have been reached had the case been considered under English law, although the analysis may have differed and, for instance, it is unlikely that public policy would have played such a significant role in the interpretation of the relevant contractual provisions. Leaving aside the differences between the rules of construction under English law and South African law, which are beyond the scope of this article, the clear message to be taken from the decision in Combined Developers is that any right of acceleration must be exercised carefully and strictly in accordance with the requirements of the particular contract.
The liability to which a lender could be exposed in the event of a wrongful acceleration of a loan could potentially be substantial if the lender proceeds to enforce any security it may have over the borrower’s assets on the basis that the full amount of the loan is immediately due. In the context of ship mortgages for instance, a wrongful arrest of the mortgaged vessel could entitle the borrower to damages in respect of its potentially considerable losses caused by the wrongful arrest.
The risk of getting it wrong will be greater where the default and acceleration provisions are unclear or ambiguous and this risk can be minimised by careful drafting at the time of the transaction. In the event of any subsequent default by the borrower, any doubt concerning the rights of acceleration and enforcement can potentially be alleviated by consulting a suitably qualified lawyer.