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trade advantage

october 2013

a commodities update

Gard Marine & Energy Ltd -v- China National Chartering Co Ltd (2013)

An attempt to challenge the classic definition of a time charterer’s duty to nominate a safe port

In October 2006, the Capesize vessel “OCEAN VICTORY” (the Vessel) attempted to leave the port of Kashima, Japan during a severe gale. In the course of doing so, and as a result of the severe weather conditions, the Vessel was forced onto the end of a breakwater, went aground and - despite the efforts of salvors – later broke apart.

Claimant underwriters Gard Marine & Energy Ltd (Underwriters), as assignee of the Vessel’s registered owner and her demise charterer, sought damages from the defendant time-charterer China National Chartering (Charterers), alleging breach of the safe port warranty in the relevant charterparty.

Underwriters’ claim comprised the loss of the Vessel itself, loss of hire, SCOPIC costs in respect of the unsuccessful salvage attempt and wreck removal costs.

The relevant charterparty was on an amended NYPE form: the key issue in the case was whether Charterers were in breach of their duty to under the charterparty to nominate a safe port.

Underwriters submitted that Kashima had been prospectively unsafe for a Capesize bulk carrier - there was a risk that such vessels might be advised to leave port in bad weather, and yet there was no system in place to ensure that they could do so safely. Charterers, in response, submitted that a port could not be said to be unsafe merely because it did not have a system in place to guard against every conceivable hazard. Rather, Charterers argued, the emphasis should be on ‘reasonable safety’ and the taking of reasonable precautions. Moreover -

Charterers said - the risk of a vessel being trapped in the port by bad weather was so remote that it was unreasonable to expect a specific procedure to deal with it.

The London Commercial Court rejected Charterers’ assertion that the port had only to be ‘reasonably safe’. The legal authorities, properly applied, contained no such qualification, and adding one would represent an ‘unwelcome and inappropriate measure of uncertainty in the meaning of the safe port warranty’. The safe port warranty is not intended to be absolute – but nor is it intended to be qualified by what is ‘reasonable’. The question is ‘whether any dangers in a port can be avoided by good navigation and seamanship’.

The court found that the port of Kashima was regularly exposed both to long waves and to gale force winds in the channel approach. On the facts, there was a real - as opposed to fanciful - risk that both might occur at the same time.

THE OCEAN VICTORY

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New additions

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WelcomeWelcome to the october edition of Hill Dickinson’s trade advantage newsletter, which we hope you will find of interest.

If you wish to discuss the content of the articles or any other matter connected with the trade, please click here to contact any of our team.

We are pleased to welcome a new partner, Mark Evans, to our team. Mark is a transactional energy lawyer, specialising in structured commodity trading (both physical and financial), finance and related regulation in a range of commodities including energy related commodities (oil, power, renewable incentive mechanisms, biomass, gas, LNG, coal, uranium and carbon), softs and agricultural products. Mark has also worked in the UK power sector on project development, financing and M&A in a range of technologies including gas, coal, biomass and wind.

We also welcome Avnish Shah, a solicitor who joins us after a year working for an international law firm in Shanghai.

Congratulations to Jenny Duong who has qualified as a solicitor and has transferred to our Singapore office.

In those circumstances ‘… ordinary seamanship and navigation could not ensure a safe exit from Kashima… good luck [would also be] also required’.

There was a real risk that the Vessel might be advised to leave the port due to a convergence of bad weather events and, in those circumstances, there was no ‘system for ensuring that such advice was given only when it was safe to leave port’. At the time the Charterers ordered her to Kashima, the port was accordingly prospectively unsafe for the Vessel.

The court went on to consider whether the unsafety of the port had, in fact, caused the loss. The Vessel had attempted to leave port following advice from the Charterers’ agent, an experienced mariner familiar with the port. Charterers argued, however, that the chain of causation between that advice and the eventual loss of the Vessel had been broken by, amongst other things, the master’s misapprehension that the advice constituted an order from the port authority to depart, either by the rapidly deteriorating weather, or by the master’s decision to depart at all.

Stop pressOur team has retained its first tier ranking in Legal 500’s top UK firms in the physicals commodities sector:

‘Hill Dickinson LLP ‘demonstrates an excellent quality of service’; its lawyers are ‘timely, clear and commercially sensitive’. Names include the ‘intelligent and thoughtful’ Paul Taylor; the ‘extremely sharp’ Andrew Meads; the ‘practical and enthusiastic’ Fred Konynenburg; the ‘hugely experienced’ David Lucas; and Jeff Isaacs, who has ‘exceptional understanding and expertise in sugar trading’…’

Legal 500 UK 2013

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Again, the court found in Underwriters’ favour: there had been no break in the chain of causation and the effective cause remained Charterers’ agent’s advice that the Vessel should leave the port. It was reasonable, in the circumstances, for the master to have followed that advice – and the fact that it had been given without considering whether it was safe for the Vessel to leave merely reflected the unsafety of the port. Nor could the master’s navigation of the Vessel be said to have been negligent – but even if the steps the master took had been considered negligent, the unsafety of the port would still have remained the real and effective cause of the loss.

By seeking to apply a standard of ‘reasonable safety’, Charterers had, in effect, sought to apply a lesser (and less clear) standard to their duty to nominate a safe port. Had their argument been accepted, it would, we suggest, have led to less certainty between owners and charterers as to whether the safe port warranty had been complied with in any given case. The court’s rejection of the ‘reasonable safety’ argument therefore represents a welcome restatement of the classic (and clear) definition of safe port as being a port which, at the relevant time, the vessel can reach, use and return from without being exposed to dangers which cannot be avoided by good navigation and seamanship.

Gordon Campbell Associate

+44 (0)20 7283 9179 gordon.campbell@hilldickinson.com

Lucas Atkin Trainee solicitor

+44(0)20 7280 9148 lucas.atkin@hilldickinson.com

THE CRUDESKY Great Elephant Corp -v- Trafigura Beheer BV; Vitol SA and Vitol Asia Pte Ltd; China Offshore Oil (Singapore) International Pte Ltd (2013)

Force Majeure and ‘reasonable control’: The Court of Appeal has overturned the Commercial Court’s Judgment in this case concerning a charterer/FOB buyer’s entitlement to pass on demurrage claims to its sellers where delays had been caused by acts of the loading terminal.

The factsThe appellant Charterers, Beheer BV Trafigura (Trafigura), were the FOB buyers in a chain of contracts for the sale of crude oil (the Cargo) produced at the Akpo oilfield in the Niger Delta off the coast of Nigeria.

The chain of sale contracts included China Offshore Oil (Singapore) International Pte Ltd (COOSI), who sold to Vitol Asia Pte Ltd, and they to Vitol SA, who in turn sold the Cargo to Trafigura.

As the end FOB buyers, Trafigura chartered a vessel, “MV CRUDESKY”, from Shipowners Great Elephant

Corporation, to load the Cargo at the loading terminal, which was operated by Total.

As a measure against theft of crude oil, it was a government requirement that a representative of the Nigerian Department of Petroleum Resources (DPR) must be present at the Terminal during loading and that documentary authorisation should be provided by the DPR office in Lagos, which would arrive via DPR’s regional office in Port Harcourt.

Loading began on 31 August 2009 in the absence of a DPR representative in the belief by Total that such loading had been authorised by the DPR, there having been verbal authorisation by a regional DPR representative in Port Harcourt. As a result, the necessary documentation was not present when loading commenced or even upon completion the following day.

DPR in Lagos subsequently revoked the authorisation and the Vessel could not leave the Terminal as it did not have documentary evidence of loading the Cargo.

On 3 September the laytime allowed under the Charterparty expired and the Vessel was on demurrage. On 7 September, the DPR accused Total of committing an economic crime and the Vessel was detained. A US$12 million ‘fine’ was imposed on Total by the Nigerian Minister of Petroleum Resources (the Minister). Total paid the fine on 13 October and the Vessel was released and sailed on 16 October.

The issues at appealThe judgment essentially centred on two issues:

1. Was the event that caused the delay at the Terminal beyond the reasonable control of Total or the contracting parties in the chain of contracts so that the Force Majeure clauses would operate?

2. Was the chain of causation broken by the unlawful act of the Minister in seeking to impose the fine so that any liability of Vitol or COOSI was

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confined to the delay before 7 September?

Issue 1: Delays within the reasonable control of Total or other contracting parties?

The position under the Charterparty

The Charterparty was on the BPVoy3 form and contained the following relevant clause:

‘21. Laytime/Demurrage/Force Majeure

Any delay(s) arising from… arrest or restraint of princes, rulers or peoples shall, provided always that the cause of the delay(s) was not within the reasonable control of Charterers or Oowners or their respective servants or agents, count as one half laytime or, if the Vessel is on demurrage, at one half of the demurrage rate.’

At first instance, the Commercial Court judge had found that the delay from 7 September to 16 October was caused by the unlawful actions of the Minister in imposing the ‘fine’. Consequently he had considered that the delay arose from a ‘restraint of princes’ that was not within the reasonable control of either Total (terminal operators) or Trafigura (charterers). Trafigura could therefore rely on the Charterparty’s Force Majeure clause to reduce (by half) the demurrage rate payable to Shipowners for that remaining period.

However, the Court of Appeal disagreed with that decision. In their view the delay occurring to the Vessel was not beyond Total’s control.

They considered that the Commercial Court judge had not taken sufficient account of the fact that there was an official channel of communication between Total in Lagos and the DPR in Lagos. The real question therefore was whether the delay was caused by circumstances beyond the reasonable control of Total as a complete entity and this led to enquiry as to why Total Lagos had not sought official clearance until after the Vessel had begun to load.

The Court of Appeal concluded that Total had chosen not to follow the official channel of communication for obtaining loading clearance before the Vessel began to load. Rather, Total had allowed their representative to deal with the DPR representative in Port Harcourt and this was a choice which carried a risk:

‘Exercising a choice which carries a risk is doing something which is within one’s control. Using the usual channels which would carry no risk is also within one’s control. It was not beyond Total’s reasonable control to exercise one choice rather than another.’

The question then arose whether, even if the delay was within Total’s control, it could be said that it was not within the reasonable control of Trafigura or their ‘servants or agents’ as required under Clause 21 of the Charterparty.

As Trafigura had delegated their loading responsibility to Vitol under the FOB sale contract, it was argued that Vitol were the agents of Trafigura.

However, in the Court of Appeal’s view, Total were the agents of Trafigura in relation to the loading of the Cargo for the purpose of Clause 21 of the Charterparty because it was the intention of that Charterparty that if anything went wrong with the loading operation, Trafigura would bear the liability and would look up the chain of contracts for an indemnity:

‘… It would not be consistent with the concept of the charterers being responsible for defaults in loading, that they should be able to excuse themselves on the basis that the event causing the damage was outside the control of themselves or their immediate contracting party. By contracting with Vitol S.A., Trafigura initiated (or participated in) a chain of contracts which led to the actual loading of the vessel being done by Total. If the events that occurred were within the (reasonable) control of Total, then Trafigura should be contractually liable to the Owners of

the vessel for the consequences of those events.’

The position under the Trafigura/Vitol sale contract

Applying similar reasoning to the sale contract between Trafigura and Vitol, the Court of Appeal overturned the Commercial Court’s decision and found that the event that had caused the delay was within Vitol’s reasonable control.

The sale contract between Vitol and Trafigura was on the NNPC (Nigerian National Petroleum Corporation) terms and included:

Article 18.1

“Each party hereby agrees to comply and to procure its personnel, directors, agents, contractors, representatives and permitted assigns to comply with all laws, rules, regulation, valid directives and policies and bye laws applicable and necessary for the performance by each party of its obligations under this Contract.”

Article 21 (the Force Majeure clause)

“Neither the Seller nor the Buyer shall be held liable for failure or delay in the performance of its obligations under this Contract, if such performance is delayed or hindered by the occurrence of an unforeseeable act or event which is beyond the reasonable control of either party (“Force Majeure”)…

This Force Majeure clause, at Article 21, not only required the relevant event to be outside the reasonable control of Vitol, but also that it should be ‘unforeseeable’.

In the Court of Appeal’s opinion, the word ‘unforeseeable’ did not add much to the concept of ‘within reasonable control’. It was very likely that if an event was within the reasonable control of a party, it was also foreseeable.

They considered that it was certainly foreseeable that if loading took place without obtaining clearance through the official channels: ‘… questions would

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be asked and the vessel would not be allowed to leave until they were answered’.

It was also argued that as the Force Majeure clause referred to the event being beyond the reasonable control of ‘either party’ without any mention of their ‘servants or agents’, it was Vitol’s own reasonable control rather than Total’s which was relevant.

This was dismissed by the Court of Appeal. They held that, since Vitol (as FOB sellers) were responsible for anything that went wrong during the loading operation, an act beyond Vitol’s control would include the act of any party to whom Vitol had delegated their contractual obligation, in this case Total.

They further held that Vitol were in breach of Article 18.1 which required it to ensure that their agents and contractors complied with all the rules necessary for the performance of their obligations under the contract. It would therefore be absurd if Vitol could exempt themselves from the consequences of that breach by reference to the Force Majeure clause when it was their own breach that caused the event in the first place.

Accordingly, Vitol could not rely on the Force Majeure clause in their contract with Trafigura, and Trafigura could pass their liability up the chain to their FOB seller, Vitol.

The position under the Vitol/COOSI contract

The Court of Appeal applied the same reasoning to decide that the cause of the delay was similarly within COOSI’s control.

The sale and purchase contract between COOSI and Vitol included Incoterms 2000 and Total’s crude FOB terms (2009). Those terms included the following Force Majeure clause:

‘XII. 1 Neither party shall be deemed in breach of the Agreement as a result of, or be liable to the others for, any failure, omission or delay in its performance in whole or in part of any of the terms or conditions of the

Agreement … if such failure, omission or delay arises or results from any cause reasonably beyond , or to be treated as reasonably beyond, the control of that party (any such event being hereinafter referred to as ‘Force Majeure’).’

Overturning the Commercial Court’s decision, the Court of Appeal held that since COOSI had assumed responsibility for loading the Cargo under their FOB contract with Vitol, they could not rely on the Force Majeure clause unless they could show that the relevant events had been beyond the control of Total, being the party which discharged that responsibility on their behalf.

As the Court of Appeal had confirmed that the cause of the detention was within Total’s reasonable control so it followed that COOSI were liable to Vitol who in turn were liable to Trafigura.

The Court of Appeal also held that COOSI, being the closest party to Total, had not proved that the acts of Total were beyond their own control.

Issue 2: did the Minster’s ‘fine’ break the chain of causation?

Given that the Force Majeure clauses noted above could not be relied on, the Court of Appeal considered whether the Minister’s abuse or arbitrary exercise of power was a new intervening cause which displaced the original breaches of contract by Vitol and/or COOSI.

Attention was drawn to Chitty on Contracts (31st ed) which considers how a chain of causation may be broken by the intervening act of a third party between the breach of contract and the loss suffered. But, in light of the particular facts of this case, the Court of Appeal concluded that the chain of causation had not been broken. Notably the Court of Appeal referred to the fact that the authorities were entitled to investigate the incident so that there may have been delays even without the fine.

‘If every arbitrary exercise of power in any country of the world where ships come and go were sufficient to

displace serious breaches of contract, that might be an encouragement to lawlessness. It was never suggested that the loss from delay between 7th September and 17th October was too remote because it was not within the reasonable contemplation of the parties that the Nigerian authorities would take a very serious view of what had happened. The loss initially incurred up to 7th September is a justified claim and the loss thereafter has the same quality. Different considerations might arise if the shipowners had been fined and then sought to recover the amount of the fine but that has not happened here. I would hold that loss incurred by the delay has been caused by the initial breaches of contract.’

ConclusionUnder the Charterparty, Trafigura were liable to pay demurrage in full to the Shipowners. However, as none of the parties in the sale chain could rely on their contracts’ Force Majeure clauses, the demurrage claim could be passed up the chain to the respective sellers.

Avnish Shah Solicitor

+44 (0)20 7280 9140 avnish.shah@hilldickinson.com

Claire Messer Associate

+44 (0)20 7280 9129 claire.messer@hilldickinson.com

REMIT Enforcement Regulations now in force

Mark Evans reviews the Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013.

IntroductionThe Electricity and Gas (Market Integrity and Transparency)

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(Enforcement etc.) Regulations 2013 (the Regulations) were laid before Parliament on 6 June 2013 and came into force on 29 June 2013. The Regulations set out powers for the Gas and Electricity Markets Authority (the Authority) and its administrative arm, the Office of Gas and Electricity Markets (Ofgem) to obtain information generally from relevant market participants to facilitate the Authority’s market surveillance duties and also the processes to be followed by the Authority and Ofgem in enforcing the provisions of REMIT - EU Regulation 1227/2011 on wholesale energy market integrity and transparency which came into force in December 2011.

Ofgem is now consulting on two documents required by the Regulations to be published by the Authority, namely procedural guidelines on the Authority’s use of its investigatory and enforcement powers under REMIT (the Guidelines) and the Authority’s policy statement regarding financial penalties under REMIT (the Policy Statement).

This note briefly considers the terms of the Regulations in the light of the Guidelines and the Policy Statement.

1. REMIT - a recap

REMIT, it will be recalled, prohibits insider trading and actual or attempted market manipulation (the REMIT prohibitions) in wholesale energy markets, ie. any wholesale market within the EU where, broadly, electricity or natural gas for delivery or transportation within the EU is traded physically or financially. Transactions related to contracts with retail customers are not part of wholesale energy markets unless the customer in question consumes more than 600 GWh per annum.

REMIT imposes obligations on those who trade in wholesale energy markets to register with (in the UK) the Authority, to provide the Authority with information to enable it to monitor trading in wholesale energy markets, to tell the Authority if they suspect that a transaction might breach the REMIT

prohibitions and to disclose publically and promptly all inside information relating to wholesale energy markets. The registration and trading disclosure obligations are not yet operative, as the details are still being formulated and thus the Regulations do not apply to those obligations.

2. The Regulations: an outline

The obligation to retain records and provide informationThe Regulations require market participants (ie. traders in wholesale energy markets, but not individuals employed by market participants) and professional arrangers of trades in wholesale energy markets to take reasonable steps to record and retain for at least six months all telephone conversations and electronic communications (including faxes, emails, and instant messaging exchanges) made in connection with any transaction in wholesale energy products. The Authority is also given the power to require these entities to provide information or documentation to the Authority which is reasonably required by the Authority in connection with monitoring the integrity and transparency of the wholesale energy market.

Investigations into breaches of the REMIT prohibitionsAdditionally, the Regulations provide a broad sweep of powers (and accompanying procedural requirements) to enable the Authority to investigate - and impose sanctions for - breaches of REMIT. In its Guidelines, Ofgem anticipates that information concerning a breach of the REMIT prohibitions could reach the Authority through a number of routes: from its own monitoring activities, from suspicious transaction reports from market participants or from whistle-blowers, to name but three. Based on this information, Ofgem will determine whether or not to open an investigation (see paragraph 4 below). If it does open an investigation, then the Regulations

provide a range of powers to facilitate the process, including to:

• require any party to produce information or documents relevant to the investigation;

• require any person who may have relevant information to attend a hearing with the Authority;

• require market participants (ie traders in wholesale energy markets) and professional arrangers of transactions in wholesale energy markets to produce reports or to commission consultants to do so;

• enter and inspect premises with a magistrate’s warrant and remove documents and other types of information;

• take out an injunction if the court is satisfied that a person may breach or continue to breach a REMIT prohibition, or may not comply with an information request under the Regulations, or may dispose of assets; and

• seek a court order imposing on a person a temporary prohibition of professional activity, where the Authority has serious concerns about the honesty, integrity or competence of an individual or group of individuals.

After no more than nine months of investigation, Ofgem will either produce a statement of case if there is a case to answer and provide that to the alleged infringer, or close the investigation, or inform the alleged infringer of the new timetable within which one of these events will occur. If a statement of case is delivered to the alleged infringer, he has the right to respond to it in writing or through oral representations and to see the evidence on which the statement of case relies. A decision is then made by the Authority as to what sanctions if any to impose on the infringer.

Decision making and sanctionsThe Regulations give the Authority power to impose a financial penalty or

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alternatively to issue a public statement of censure. It may also impose a restitution order (see paragraph 6 below) and ask the court to impose a fine and/or a restitution order. At all key stages of the decision making process, the party in breach is notified of the Authority’s intentions and given the opportunity to make representations. If the Authority proposes to exercise its own powers to impose a penalty, issue a notice of censure or to issue a restitution order, it must send the infringer a warning notice. Having taken into account any representations made by the infringer at that stage, a decision notice will be issued. Finally, once the appeals window has expired or a final appeal has been heard, a final notice will be issued. If the decision at any stage is to discontinue the investigation, then a notice of discontinuance will be issued. Appeals against a decision notice lie to the Upper Tribunal in the Tax and Chancery Division.

3. When is the Authority likely to instigate an investigation?

In the Guidelines, Ofgem makes clear that it will have to prioritise cases so as to be able to allocate its limited resources. Thus it will take into account all relevant factors in order to set priorities, including:

• the seriousness of the alleged breach;

•whether the interests of market participants or consumers were damaged;

•whether competition in the markets or confidence in them were harmed; and

•whether the offence was a one-off or repeated

Ofgem will also consider whether it is the regulatory body best placed to take action in a particular case or whether, for example, a national regulatory authority in another EU jurisdiction might not be better placed.

4. How will the Authority approach decision making

after an investigation?

Regulation 42 requires there to be a separation of roles between those who are directly involved in establishing evidence on which a decision is based and those taking the decision. The Guidelines make clear that these requirements will be satisfied by Ofgem staff conducting investigations and decisions being taken by the Authority or an enforcement committee of the Authority.

5. When will the Authority impose a fine and how much is that likely to be?

The Regulations permit the Authority to impose unlimited financial penalties. Ofgem’s Policy Statement (current in draft form and subject to consultation) provides that in determining whether to impose a financial penalty, the Authority will take into account a list of factors including:

• the impact of the breach on consumers and markets;

•whether the infringer misled Ofgem;

• the existence or otherwise of a compliance programme at the infringer;

• the involvement or otherwise of senior management; and

• the degree to which the infringer has cooperated with the investigation.

There is no mention in the Regulations or the Policy Statement of any scale or hard numbers for the quantum of financial penalties. The quantum must be reasonable in the circumstances and one of the objectives of the Authority under REMIT is to deter future breaches. It can be assumed therefore that financial penalties will increase in proportion to the financial resources of the infringer. It is likely that there will be discounts applied in cases where an early settlement is reached. Until the Policy Statement is finalised, an interim policy set out in Schedule 2 of the Regulations applies.

6. What is the function of a restitution order?

A restitution order may be imposed by order by the Authority under Regulation 23 or by the court at the request of the Authority under Regulation 22 where profits have accrued to the infringer as a result of its breach of the REMIT obligations or where third parties have suffered loss or been otherwise adversely affected as a result of the breach. The infringer can be ordered to disgorge a just amount taking into account the profit and losses referred to above. Amounts disgorged will be distributed amongst those which have suffered loss as a result of the breach.

7. Will the Authority take action against individuals or companies or both?

The Regulations permit action to be taken against any person who fails to comply with REMIT when required to do so. Those bound will generally be bodies corporate but may also include sole traders and partnerships for example. The Policy Statement makes clear that the Authority will consider taking action against an individual within a firm when there is evidence of personal culpability on the part of that individual. Generally action will be taken against an infringing firm, but that may not be appropriate where a firm has taken all reasonable steps to ensure compliance with REMIT. All relevant factors will be taken into account to ensure that imposing a penalty on an individual would be a proportionate response.

8. How much of the process (investigation, decision making, sanctions) will be public?

Generally the existence of an investigation will be made public on the Ofgem website and any potential infringer subject to the investigation will be made aware of that fact by written notice, save, in each case, where the

Authority believes that that would prejudice the conduct of the investigation. Generally, neither warning notices nor matters relevant to them may be published by the Authority or a recipient of the notice. However, in the case of a warning notice regarding an intention to impose a financial penalty, the Authority may publish any relevant information it considers appropriate after consultation with the recipient of the notice. The Authority must publish such information as it considers appropriate about the matter to which a decision notice (issued after the recipient of a warning notice has made representations about it or after the period for responding has expired) or a final notice (issued after any appeals process has been exhausted or after the period for lodging an appeal has expired) relates.

ConclusionThe Regulations, combined with Ofgem’s Guidelines and Policy Statement, provide a detailed framework of checks and balances to ensure a fair and proportionate response to REMIT infringements. This has borrowed from prior regulatory experience not only in the energy sector but in financial services enforcement too. Possibly the greatest immediate impact of the Regulations however will be the significant logistical burden which many market participants and arrangers will be likely to have to face in order to comply with the record retention and information/document production provisions of the Regulations. Please contact the writer for further details.

Mark Evans Partner

+44 (0)20 7280 9213 mark.evans@hilldickinson.com

THE ATLANTIC CONFIDENCE Cosmotrade SA -v- Kairos

Shipping Ltd & Ors (2013)

The Commercial Court has reviewed whether a London Limitation Fund may be constituted by way of a Club Letter of Guarantee. Given the wording of the statutory legislation, the Court has answered in the negative.

Following the sinking of their vessel, the “MV ATLANTIC CONFIDENCE”, Shipowners wished to limit their liability to cargo and other interests by reference to the vessel’s tonnage and the limits set out in the 1976 Limitation Convention. In order to do so, they looked to establish a Limitation Fund. A key issue was whether that Fund could be set up by way of a Club Letter of Guarantee (or Letter of Undertaking), rather than a cash payment into Court.

Whilst the judge noted that Club LoUs were generally acceptable security, he found himself constrained by statutory legislation to the effect that monies must be paid into court.

The 1976 Limitation Convention (ie. the Convention on Limitation of Liability for Maritime Claims 1976) is given the force of law in the UK by the Merchant Shipping Act 1995. The 1976 Limitation Convention stipulates that a Limitation Fund may be constituted. It provides too, that rules as to the constitution and distribution of the fund and all procedural matters are subject to the law of the State Party where the Fund is constituted.

The UK’s Civil Procedure Rules (CPR) provides that ‘The Claimant [in this case Shipowners] may constitute a Limitation Fund by making a payment in to the court’.

The judge was persuaded both by the wording of the CPR and by the absence of specific statutory provision referring to guarantees that he had to conclude that a Fund, if constituted, is to be made by way of a payment into Court.

However, he showed some sympathy for Shipowners/their Club when

commenting to the effect that legislation on this subject would benefit from review and he gave permission to appeal against his finding as ‘… there is likely to be more than one view of the matter’.

Claire Messer Associate

+44 (0)20 7280 9129 claire.messer@hilldickinson.com

THE DC MERWESTONE

Versloot Dredging BV & Anr -v- HDI Gerling Industrie Versicherung AG & Ors (2013)

H&M policy: issues arising in relation to perils of the seas, crew negligence and fraudulent aspect of an insurance claim

This was a claim between the owners of the vessel “DC MERWESTONE”, against their hull and machinery underwriters, in relation to a 12-month policy commencing on 1 April 2009.

The vessel’s crew used the emergency fire hose to blast away chipped ice after they had to crack open the hatches in severely cold temperatures at the loadport (Klaipeda). However, they failed to empty it properly, meaning that seawater remained within the hose and its filter, before expanding, cracking the hose’s casing and distorting the lid so that it no longer worked as a seal. Once temperatures were back to normal, the seawater melted and leaked from the crack and the lid, flooding the engine room, damaging the main engine beyond repair and incapacitating the vessel while it was off the coast of Poland on 28 January 2010.

The vessel’s engine room should have coped with the ingress but for construction faults. The ingress of seawater from the fire hose seeped into the bowthruster room, which was separated from the main engine room

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by the vessel’s duct keel tunnel. There were unpacked cable glands at each end of the duct keel that enabled ingress into the main engine room. The vessel’s engine room pumping system was also defective due to bilge pipe blockages.

The vessel’s Owners claimed under their H&M Policy for resultant loss. The policy included Institute Time Clauses – Hulls 1/10/83 (ITC) - which covered damage to the vessel caused by ‘perils of the seas’ (clause 6.1.1) and “negligence of Masters Officers Crew or Pilots” (clause 6.2.3).

The policy also included the Institute Additional Perils Clause (IAPC), which extended cover to ‘loss or damage to the Vessel caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever’. Clause 2 makes Clause 1 subject to the proviso that the loss or damage ‘has not resulted from want of due diligence by the Assured, Owner or Manager’.

The basis of Owners’ claim was therefore:

(1) Loss caused by ingress of seawater into the bowthruster room, a peril of the seas pursuant to 6.1.1 ITC; alternatively

(2) Cover under ITC 6.2.3 or IAPC 1.2 due to:

(a) crew negligence in relation to the issues with the fire hose, which did not result from want of due diligence by Owners/Managers; and/or

(b) contractors’ negligence in failing to seal cable ducts at each end of the duct keel tunnel, which did not result from want of due diligence by Owners/Managers.

Underwriters resisted the claim, contending that:

(1) the loss was not caused by a peril of the seas, and the negligence clauses are negated by want of due diligence;

(2) the loss was caused by the vessel’s unseaworthiness to which Owners

were privy; and

(3) the claim was forfeit as it was supported by a fraudulent device.

Peril of the seas / negligence

Underwriters submitted that the loss was not caused by a peril of the seas, but by crew negligence in relation to the emergency fire pump. The fallback negligence clauses could not be relied on by owners because loss resulted from want of due diligence by owners/managers in (a) failing to promulgate cold weather procedures (the decision to use the fire hoses to blast away chipped ice resulted from lack of information from the Vessel’s Safety Management System (SMS)); (b) failing to inspect and maintain the duct keel and (c) failing to have a proper and effective system for the maintenance of the bilge pumps.

A peril of the seas has two elements:

(1) a ‘peril’ meaning a fortuity which gives rise to the event which is not bound to happen; and

(2) that fortuity has to be ‘of the seas’.

The judge concluded that the seawater ingress itself was a fortuity, coming as it did from an unexpected accident. The fortuity in question must only be a proximate cause of the loss. If the ingress was not the cause of the loss, it was at least a cause. It was that fortuity – the ingress itself – that made the peril and not the event (crew negligence) which caused the fortuity.

Underwriters submitted that even if this were a ‘peril’, it could not be ‘of the seas’, as the event leading to the problems with the fire hose could have happened on land. The judge concluded that the fortuitous ingress of seawater was a relevant proximate cause of the loss and there could be little doubt that this was an accident which was particular to the maritime nature of the adventure.

In relation to negligence provisions being negated by want of due diligence, the judge held:

(1) while the SMS did not have a cold weather procedure, little over a month before the casualty Managers had sent an email to the vessel with an instruction to ensure that all waterlines were drained to prevent frozen lines. This was sufficient to bring the matter to the crew’s attention, and indeed a short and specific email may well have been more likely to get the crew’s attention than a lengthy protocol; and

2. Owners/Managers could not reasonably have been expected to discover the deficiencies in question prior to the casualty.

Unseaworthiness to which Owners were privy

Section 39(5) of the Marine Insurance Act 1906 provides that where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, a relevant insurer is not liable to any loss attributable to that unseaworthiness.

The blockages in the bilge pipes meant that suction from the engine room was ineffective once ingress was discovered. Underwriters submitted that Owners were aware of the blockages because they requested that the ballast line be cut rather than connecting the ballast pump to the bilge system when trying to get rid of the engine room ingress. The judge rejected this argument, concluding that cutting ballast lines was an attempt to create a new source of suction given the fact that pumps were not working at full capacity and on the evidence he was not persuaded that Owners/Managers knew of the blockages. In any event, he considered that the blockages were not causative of the loss, still less a proximate cause.

Fraudulent supporting document

Underwriters submitted that a crewmember deliberately or recklessly gave a false narrative of the casualty in a letter to their lawyers. The false account stated that the crew ignored

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the bilge alarm that went off after the ingress because they attributed it to the vessel rolling in heavy weather. Underwriters alleged that this crew member knew about the negligence provisions in the policy and sought to distance Owners from fault.

Of particular importance was that the explanation of ignoring the bilge alarm came under the heading ‘Facts’ in his letter, and the crew member reported that his conclusion came ‘after further internal investigation’. The judge concluded that this was false and misleading and the crew member had no reason to believe it was true - and was reckless as to whether it was true or not. The false statement directly related to the claim and intended to promote it.

A claim could still be fraudulent where the assured believed he had suffered the loss claimed but sought to improve or embellish the surrounding facts by some lie. In this situation, there is no requirement that the insurer be deceived by the lie, or that the lie play any part in considering a payout. The primary consideration is the assured’s attempt to deceive.

The judge therefore held that Underwriters’ defence of fraudulent device succeeded and owners’ claim was forfeit despite being otherwise valid. He added that the decision was regrettable despite its inevitability. the fraudulent conduct in question was not serious. It was a reckless untruth, as opposed to a planned deceit, it was told on only one occasion and not persisted with at trial. To be punished with forfeiture of a valid claim was disproportionately harsh, but the only conclusion on the law as it stands.

Lucas Atkin Trainee solicitor

+44 (0)20 7280 9148 lucas.atkin@hilldickinson.com

Claire Messer Associate

+44 (0)20 7280 9129 claire.messer@hilldickinson.com

THE YONG JIN

Kingsway Shipping Co Ltd -v- STX Gulf Shipping DMCCO “MV YONG JIN” (2013)

The court rejected Head Owners’ attempt to rely on a Sub-charterer’s Guarantee given to the vessel’s master. Said guarantee was held to have been given to the master in his capacity as representative of the intermediate charterer.

Kingsway Shipping Co Ltd (the Head Owner) time chartered the “MV YONG JIN” on an amended NYPE form to Victory Shipping Sbn Ltd (the Charterer, or Victory). In November 2011, Victory time chartered the vessel to STX Gulf Shipping DMCCO (the Sub-charterer). The Sub-charterer then voyage chartered the vessel to an unknown party for a voyage from one safe port one safe berth Sohar, to one safe port one safe berth Jubail, to carry a cargo of 70,000mt (10 +/- at owners’ option) of iron ore pellets.

The vessel grounded in Jubail, Saudi Arabia on 2 December 2012. The Head Owner applied for summary judgment in its action taken directly against the Sub-charterer for alleged losses arising out of the grounding, pursuant to a guarantee which the Head Owner claimed had been provided by the Sub-charterer in their email to the vessel’s master.

At the loadport, the Sub-charterer had wanted to load a larger quantity of cargo and conveyed this to the master. It was common ground that the master was communicating with the Sub-charterer in his capacity as representative of the intermediate Charterer, Victory. There was multiple email correspondence between the master and Sub-charterer about the quantity of cargo to be loaded, which resulted in the master sending the following email to the Sub-charterer, copied to the Charterer and Head Owner, on 20 November 2011:

‘As I previously informed you that my vsl will be loaded cargo at Sohar based on max. draft at Jubail as 12.60m at all times only for the ship’s safety purpose.

If you request us to load cargo basis of max. draft at disport as 13.3m on high water, kindly issue a your “Guarantee letter” for the safety of vessel for loading with 13.3 m on high water at disport, and for your taking all the responsibilities if any problems occurred at disport port caused by loading draft 13.3m. If you issued your “Guarantee letter” mentioned above to us, we can accept yr request for loading cargo at Sohar based on disport max. draft as 13.3m on high water as per attached pre-stowage plan. awaiting for yr prompt confirmation/reply on this matter.’

Following further emails and telephone communications over the need for a guarantee and the specific wording of it, the Sub-charterer sent the following email addressed to the master:

‘… Chtrs guarantee the vsl is safety at disport with loading cargo bss max draft 13.3m at high water for disch cargo, and also chrtrs STX Gulf Shipping will take all responsibilities for the problems occurred caused by loading cargo with max draft 13.3m high water at the disport, if any.’

The Head Owner argued that this email constituted a guarantee whereby the Sub-charterer agreed to indemnify the Head Owner against any damage caused by the vessel loading a cargo quantity commensurate with arrival drafts of 13.3m.

The Sub-charterer’s case was that the guarantee was provided to the master in his capacity as representative and agent of the Charterer (and not Head Owner) and it merely confirmed to the Charterer that the Sub-charterer would comply with their charterparty’s safe port warranty.

At the hearing, the court noted that while there were some telephone conversations involving the Sub-charterer, it had not been argued that

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these were significant and it was understood that all important communications were dealt with in writing (by email). On the basis of that email evidence, the court considered it was well placed to reach a conclusion on a summary judgment basis, as to whether the guarantee was given to and accepted by the master purporting to act as a representative or agent of the Head Owner.

Accordingly the parties’ email exchanges were analysed. The focus was on those exchanges which were known or were available to the parties in the litigation, ie. Head Owner and the Sub-charterer.

The court concluded that the Sub-charterer’s instructions to load a larger quantity of cargo were given to the master as a representative of the Charterer. In return, the master sought a guarantee and the natural interpretation was that he did so in the same capacity, ie. as representative of the Charterer.

The court rejected the Head Owner’s argument that owners are not entitled to ask for such an indemnity from their charterers, noting the frequent scenario of an indemnity for the release of cargo without original bills of lading.

The Head Owner further argued that the master would be seeking protection for his employers, the Head Owner. While the court agreed that it could be interpreted in this way, it would not change the charterparty chain of rights and obligations.

The court further found that the other email exchanges were consistent with the guarantee being provided to the Charterer, notably:

(i) In one email, the Sub-charterer threaten a claim against ‘owners’ if the vessel refused to load larger quantity of cargo and this can only be a threat against its contractual partner, ie the Charterer and not Head Owner.

(ii) There was a formal communication from the Sub-charterer to brokers Merit Maritime to forward the guarantee to the Charterer.

(iii) All communications were copied to the Charterer, thereby recognising the legal relationships in the charterparty chain. This would not have been necessary had Head Owner been correct that the guarantee was given to them directly.

The Sub-charterer was only concerned with its own rights to have a larger quantity of cargo loaded and that was a right which lay solely against the Charterer and not the Head Owner. By giving the guarantee, the Sub-charterer was seeking to resolve a dispute with the Charterer and not the Head Owner. The Head Owner’s application for summary judgment was therefore dismissed.

Jenny Duong Solicitor

+65 6576 4747 jenny.duong@hilldickinson.com

Claire Messer Associate

+44 (0)20 7280 9129 claire.messer@hilldickinson.com

For further details please contact:

Mark EvansPartner+44 (0)20 7280 9213mark.evans@hilldickinson.com

Claire MesserAssociate+44 (0)20 7280 9129claire.messer@hilldickinson.com

The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. Whilst every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the commodities team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter.

hilldickinson.com/marine

a commodities update october 2013

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About Hill DickinsonThe Hill Dickinson Group offers a comprehensive range of legal services from offices in London, Piraeus, Singapore, Monaco, Hong Kong, Liverpool, Manchester and Sheffield. Collectively the firms have more than 1350 people including 175 partners.

Events calendar Two of our partners, Fred Konynenburg and Andrew Meads, are speaking at GAFTA’s ‘Shipping the Goods’ course in Sao Paulo in November.