SHIPPING
NEWSLETTER – JUNE 2008, ISSUE 24
IN THIS ISSUE:
• Loss of earnings after collision
• Four eyes are better than two
• Wrongful maintenance of arrest
• FOB contracts: shipment/delivery periods
• Nairobi wreck removal convention
• A life less frustrating?
• Bunker Wars: the burden of proof strikes
back!
• “Elli” and “Frixos”
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Shipping Newsletter – JUNE 2008
LOSS OF EARNINGS AFTER COLLISION
Ron Clark, an Admiralty Manager in our
Hong Kong office, considers the points of
interest arising from the recent judgment
of The Owners of the ship “FRONT ACE” v.
the owners of the “VICKY 1” [2008] EWCA
Civ 101.
In this case, the Defendants’ feeder tanker
“VICKY 1” came into collision with the
Ron Clark
[email protected]
Claimants’ VLCC “FRONT ACE”, whilst
manoeuvring alongside for a lightening
operation, causing significant damage
to the “FRONT ACE”. The Defendants admitted liability for the collision
and the issue before the Admiralty Registrar was the assessment of the
quantum of damages. The issues between the parties arose out of the
loss of a fixture which had been entered into before the collision and
which the Claimants said that they were unable to perform as a result of
the collision. Two questions were considered:1. Whether the loss of the fixture was caused by the collision and
2. If it was, how the loss should be calculated.
The charter the “FRONT ACE” missed was a Chevron voyage charter from
“1/3 ports Arabian Gulf” to “1/2 ports Singapore, Thailand, Philippines”
In explaining the effect of this deviation, and holding that the Claimants
and their various agents acted reasonably in taking the steps that
they did, and that there was no evidence of any failure on their part to
take reasonable steps to mitigate their loss as a result of losing the
Chevron fixture, the judgment demonstrates the Court’s reluctance in
such circumstances to entertain submissions based on the benefit of
hindsight. Accordingly, provided a party can be seen to have been acting
reasonably in its attempts to mitigate losses, the opposing party has an
onerous task in discharging the burden of proof that matters should have
been handled differently.
This approach has long been recognised and accepted by admiralty
practitioners and it is the exception where the Registrar will uphold an
opposing party’s arguments that have been developed with hindsight.
The lesson to be learned, therefore, is for a party seeking to recover
losses for detention to ensure that it records contemporaneously any
reasons or decisions taken in response to the deprivation of earning
capacity. As long as they are reasonable in the circumstances, they
should have a relatively comfortable ride in the recovery process.
Having determined that the loss of the fixture was caused by the
collision, the Registrar then proceeded to determine how that loss should
be calculated.
In his judgment, Sir Anthony Clarke MR outlined the methods concerned.
at a freight rate of WS125, whilst the substitute charter she took up was
The time equalisation method is “… based upon the earnings of which
a Vitol voyage charter from “1/2 ports West Africa” for discharge at “1/2
the vessel could expect to make in the 57 days between 20 January
ports Singapore, Japan” at a freight rate of WS90.
2003, which was the projected end of the Chevron fixture and 18 March
The critical issue before the Registrar was whether the loss of the
Chevron fixture was caused by the collision. The Claimants said that it
was, whereas the Defendants said that it was not, but that it was caused
by the Claimants’ failure to take reasonable steps to mitigate their loss
by proceeding to a repair port with reasonable expedition, so as to avoid
cancellation of the charterparty.
Following the collision, “FRONT ACE” discharged part of her cargo at
an Indonesian port, and then proceeded to another Indonesian port
to discharge the remaining part of her cargo before proceeding to
Karimun for permanent repairs, which were necessary to carry out the
Chevron fixture. A striking feature of this case, however, was that whilst
en route to Karimun the master, for reasons unbeknown at the time
to the Claimants, turned the ship on to a reciprocal course for some
hours, before again turning round and resuming his original course.
This involved a deviation of some 12 hours, which, it was alleged by the
Defendants, broke the chain of causation between the collision and the
loss of the Chevron fixture. It was only a day before the trial that this fact
became known, upon disclosure of the ship’s GPS log, which, effectively,
2003, which was the actual end of the Vitol fixture. Since the loss of
the Vitol fixture was caused by the collision, this seems to me to have
been a logical period to have taken. During that time it would have been
possible to complete either one voyage from the Arabian Gulf (“AG”) to
North West Europe or two voyages from the AG to Singapore and in both
cases leave the vessel approximately the same distance from her primary
loading area as she was following her discharge at Cilacap. In this way it
was possible to compare like with like”.
With regard to the ballast/laden method – “both the theoretical Chevron
voyage and the actual Vitol voyage are defined as starting on completion
of discharge at Cilacap and finishing on discharge of the Chevron cargo.
In this way each voyage has a ballast leg followed by a laden leg and (as
set out above) the time charter equivalent is calculated for the Chevron
voyage and then compared to the actual time charter equivalent achieved
on the Vitol fixture for the period over which the voyage dates coincide.”
The main flaws identified in the ballast/laden method were that:
1. It is unsuitable for VLCC’s which have one major loading area
supported the Registrar’s previously held conclusion that, on balance,
(i.e. the Arabian Gulf) because it does not reflect the commercial
the deviation was most probably for purposes of tank cleaning and gas
importance to an owner of discharging cargo as closely as possible
freeing prior to the ship’s arrival at Karimun.
to the Arabian Gulf; and
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Shipping Newsletter – JUNE 2008
2. It does not take account of different voyage lengths so in the instant
case it was not possible to compare satisfactorily the Chevron voyage
with the Vitol voyage that ended 57 days later than the Chevron one
would have.
Accordingly, the losses calculated by reference to the time equalisation method
were held to be payable by the owner of “VICKY 1” to the owners of “FRONT ACE”.
It is clear that there is a lack of binding authority on such matters. This
is almost certainly due to the fact that admiralty practitioners have
The time equalisation method could be contrasted with that, in that it
been settling these cases over many years and accepted practices in
took into account the overall position until the end of the substitute
the calculation of detention losses have been developed between them,
fixture, which was entered into as a direct consequence of the
meaning that, only where the specific or unusual facts of a case dictate
collision.
(as here), will the Courts be called upon to decide these issues.
Four Eyes are Better than Two
owner to limit its liability for property or personal injury claims if it can
Oliver Beiersdorf and Joe Teig, Associates
in our New York office, comment on the
recent decision in re City of New York v.
Agni, No. 07-12521, decided March 27,
2008 in which the Second Circuit rejected
New York City’s attempt to limit liability in
Oliver Beiersdorf
[email protected]
knowledge. The Act also provides that a single forum may determine:
(a) whether the vessel owner is liable; (b) whether the owner may limit
its liability; (c) the total amount of claims; and (d) how the funds should
be distributed. Over 175 claimants asserted wrongful death or personal
injury claims against the City in the limitation action.
a ferry crash.
The district court denied the City’s petition, and the City appealed to
A U.S. federal appeals court recently
On appeal, beginning from the agreed premise that a ship in navigable
denied the City of New York a limitation
waters owes a duty to its passengers to exercise reasonable care
of liability under the Limitation of Liability
under the circumstances, the City argued that reasonable care did not
Act in a lawsuit arising from the crash of
require the presence of two pilots in the pilothouse at all times, and
a Staten Island Ferry into a pier when the
that, therefore, Ryan’s failure to enforce the City’s two-pilot policy was
captain lost consciousness. Eleven people
insufficient to establish negligence within the City’s privity or knowledge.
were killed, dozens were injured and the
The Claimants countered that the City was indeed negligent because it
impact tore a 210 foot long gash into the
took no other steps to mitigate the risk of sudden pilot incapacitation.
hull of the 310 foot long ferry.
Joe Teig
[email protected]
establish that the fault that caused the loss was not within its privity or
the United States Court of Appeals for the Second Circuit (“the Court”).
Neither precedent nor industry custom provided the Court with a ready
The ferry, the M/V “Barberi”, was a large
answer with respect to the applicable standard of reasonable care. U.S.
passenger vessel owned and operated
courts, however, often look to governmental safety regulations to help
by the City of New York, which shuttled
determine an appropriate standard of care. The Court, therefore, looked
passengers between Manhattan and Staten
to the agency charged with establishing maritime safety regulations –
Island. 1,500 passengers were on board on
the U.S. Coast Guard. The Coast Guard issued a regulation, 46 C.F.R.
October 15, 2003, when Assistant Captain
§78.30-5, which although not technically applicable, required that for
Richard Smith, the single pilot in the
passenger vessels of the size and passenger capacity of the
pilothouse at the time of the accident, “lost consciousness or situational
M/V “Barberi”, in addition to the pilot, there should be at least one other
awareness.” The calamity that ensued made national headlines.
member of the crew on watch in or near the pilothouse at all times when
Smith, who had concealed that he was taking prescription medication for
the vessel is being navigated.
chronic health conditions, pleaded guilty to multiple counts of seaman’s
The Court held that this regulation accurately reflected the minimum
manslaughter. Patrick Ryan, the City’s director of ferry operations,
standard of care under these circumstances. Because Ryan not only
pleaded guilty to criminal negligence due to his failure to enforce the
failed to enforce the two-pilot rule, but any policy that would meet this
City’s internal “two-pilot” rule, which generally requires that the Captain
standard of care, the City was guilty of negligence within its privity or
and an Assistant Captain both be present in the pilothouse when the
knowledge, and the district court’s denial of the City’s petition for a
vessel is underway.
limitation of liability was affirmed.
The City filed a petition in the United States District Court for the Eastern
Unless successfully appealed to the United States Supreme Court, this
District of New York, seeking to limit its liability to U.S. $14.4 million,
decision essentially opens the door to unlimited liability for the fifty-nine
the value of the vessel less the cost of repairs, under the Limitation
claims that have not yet settled. The City has paid approximately U.S. $
of Liability Act, 46 U.S.C. §183 (“the Act”). The Act permits a vessel
35.5 million in settlements to date.
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Shipping Newsletter – JUNE 2008
Wrongful maintenance of arrest
Alan Curran, an Associate in our Dry
Shipping Group, considers the position of
a shipowner who finds that the release of
his vessel from arrest is delayed for some
reason.
Alan Curran
[email protected]
cases coming before the courts. As far back as 1864, in the case of the
“Cheshire Witch” 167 E.R. 402, (1867) Br. & L. 362, it was recognised
by the courts that damages for such detention could be recovered. In
that case the arrest suit had been dismissed; this should ordinarily
have allowed the vessel to sail. However the arrestors were allowed to
detain the vessel for a further 12 days whilst they considered whether
to appeal. That further detention was for the claimant’s convenience
It is well settled law that an action for
alone and he was obliged to pay damages to the ship owner accordingly.
wrongful arrest will only be successful
The argument, which clearly failed, against the recovery of damages in
if the ship owners can prove mala fides
that case was on the basis that the detention was not improper since
(bad faith) or crassa neglegntia (gross
there was a lack of malice. When it comes to wrongful maintenance of
negligence). In order to show bad faith,
an arrest, the test would therefore not appear to be set as high as when
the ship owner would need to demonstrate
considering the wrongfulness of the arrest itself, which, as mentioned
that the arresting claimant had no honest belief in a right to arrest.
Alternatively, to show gross negligence, the shipowner would need to
above, would require malice or gross negligence.
show that there was so little basis for the claim that the arresting party is
The report of the “Cheshire Witch” case is very brief and does not
taken to have had no belief in its entitlement to arrest. In addition, gross
disclose the full strength of the two sides’ cases. That decision should
negligence could be shown by a lack of serious regard to the adequacy
therefore be treated with caution since it will not follow that in every case
of the grounds for arrest – The “Evangelismos” (1858) 12 Moore, 352;
The “Kommunar” (No.3) [1997] 1 Lloyd’s Rep. 22. These are very high
thresholds and, unless these are met, an innocent ship owner is left
without any way to recover damages for an unjustified arrest. This is quite
a harsh rule for ship owners, and it may leave them with no recourse
despite incurring potentially very large losses in such a situation.
Thankfully, the practice of the shipping industry is such that an arrested
vessel is often released after a short period of time once security is
provided by her owners, or their Club. This practice operates to minimise
the losses that may be incurred by an owner whose vessel is under arrest
and therefore goes some way to mitigate the effect of the difficulties in
recovering damages following an arrest that turns out to be unjustified.
What, then, of the ship owner who finds that the release of his vessel is
delayed for some reason?
of delay after the time when an arrest should have been released, even
in similar circumstances pending appeal, the ship owner will be able to
recover damages ( The “Kommunar” (No.3), above, p.30, per Colman J.)
Indeed in the case of The “Kommunar” (No.3), the judge found that a
delay of six days following judgment whilst an appeal was considered
was not so unreasonable as to render the arrestor liable in damages.
The test thus appears to contain a requirement of reasonableness. From
comments made by the Judge in the case of The “Kommunar” (applying
“Cheshire Witch”) it is submitted that there may be scope for a ship
owner to recover damages for the wrongful maintenance of an arrest
where an arrestor is deprived of all reasonable grounds for continuing
the arrest. Although both those cases related to the continuance of an
arrest pending a decision to appeal, it is highly arguable that they are
applicable by analogy to any situation where an arrest is maintained past
It would appear odd that an arresting party, having offered security,
its sell-by date. It is apparent that each case will need to be assessed
or who has had their arrest set aside, would wish to continue the
individually and the reasonableness of the arresting party’s actions
detention of the vessel. However, this does, on occasion, happen. The
considered. There is, nonetheless, clearly scope for a ship owner to
rarity of such a situation is demonstrated by the infrequency of such
pursue an arresting party who acts unreasonably.
Reed Smith
With effect from 1 May 2008, Reed Smith Richards Butler (the trading name of Reed Smith in Europe and the Middle East) will trade simply as
Reed Smith.
The change in Europe and the Middle East complements the firm’s position in the rest of the US and in Germany. In accordance with Hong Kong
regulatory issues, the firm’s Hong Kong practice will continue to trade as Richards Butler in Association with Reed Smith for the foreseeable future.
Nick Shaw, head of the firm’s shipping practice, commented:
“Since the Reed Smith Richards Butler merger, which took place on 1 January 2007, most of our clients and
market contacts already accept and are aware of our merger. This is a logical step which reflects the growth
and global reach of our shipping practice for which we have ambitious expansion plans.”
years in the shipping business
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Shipping Newsletter – JUNE 2008
Q&As with ALAN CURRAN
Alan Curran is an associate in the Shipping Group. He has a broad experience and handles a wide range
of shipping matters acting for P&I Clubs, Owners and Charterers. He is primarily focussed on dry
shipping and works in particular on P&I and FD&D matters and bill of lading and charter disputes. Alan
also has experience of admiralty and wet shipping matters. Alan is qualified as a Solicitor-Advocate.
What is your full name:
How do you get into work?
Alan Curran
Slowly, by train and tube.
Mother/father’s nationality?
What podcast did you last download?
Irish
Radio 1 Introducing...
Where were you born?
Most played song on your i-pod?
Hammersmith
It is usually on shuffle but Bon Jovi: “Its my life” is currently the most
played.
Any lawyers in family before?
One of my cousins is a lawyer in California.
What jobs, other than the law, did you consider?
As a child I always wanted to be a chef. When I went to university I also
looked into studying psychology.
Last concert you went to?
The Prodigy.
Last item of clothing you bought?
A t-shirt for a friend.
What other jobs did you do in your summer hols etc?
Last five things on credit card?
Waiter, night club door supervisor, barman, cashier, shelf-stacker, mini
bus driver, photo processor…
Kit for my Jeep
Cookery books
Indian meal
Case of wine
Interest
How does working at Reed Smith compare to them?
Very different.
What has been your favourite holiday destination to date?
Swat Valley, Northern Pakistan.
Have you been anywhere of particular interest on business?
Unfortunately not.
If you could go to one place in the world where would it be?
At the moment, probably Japan.
Why?
It is one of the few places that I have always wanted to visit but haven’t
managed to get to yet.
Are you married?
No.
Last film you went to see?
The Other Boleyn Girl.
Favourite actor / actress?
Julia Roberts.
Favourite sport?
Rugby.
How do you relax?
Bottle of wine and a video, or out with friends.
Do you have a personal role model – either at work or for life
generally? If so, who?
No.
Car?
We are meant to learn from our mistakes – what will you never
forget?
Jeep Wrangler (TJ).
Avoid “Reply to All” in emails…
Where do you live in London?
I don’t.
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Shipping Newsletter – JUNE 2008
FOB Contracts: Shipment/Delivery
Periods
Diane Galloway, a partner, and Iulia Ispas,
a paralegal, both in our Energy, Trade and
Commodities Group, look at the difficulties
which can arise when charterparty terms
are used in sale contracts.
Commercial trends have changed over the
Diane Galloway
[email protected]
A Seller is not in breach of condition for failing to load promptly on
arrival of the vessel. A vessel arriving very early in the shipment
period can often therefore be kept waiting by Sellers on payment of
demurrage and the Buyer cannot withdraw the vessel.
Delivery Period/“Laycan”: Summary
Laycan traditionally is a charterparty term; giving a spread of dates.
The short date is the earliest laytime will commence (even if the vessel
arrives earlier); and the charterer is entitled to cancel the charter if
years, creating more sophisticated FOB
the vessel does not tender NOR by the end date (but without any right
contract clauses which are meant to satisfy
to claim damages for the non-arrival without some other breach by
the traders’ needs and requirements.
shipowners).
Although these changes have some
The translation into an FOB contract would initially seem
benefits and merits, they can also create
straightforward: the “lay” earliest date is the earliest date at which
confusion among the contractual parties in
laytime commences against the Seller at the loadport and so the start of
case of dispute. The confusion arises when
the Seller’s loading obligation; the “can” is the last date the Buyer can
there are no clear provisions in respect
present a vessel otherwise the Seller can refuse to load and cancel the
of all of the relevant time limits. This can
shipment.
arise, for example, where time provisions
apply to one party only or where
charterparty terminology (particularly
“laycan”) is lifted into sale contracts.
Iulia Ispas
[email protected]
•
What then are the obligations if the FOB contract does not provide for a
shipment period?
The “Delivery Period” in an FOB sale can be a period for presentation by
Traditional v Modern Approach
the Buyer of the vessel – see for example, GAFTA FOB contracts:
The traditional approach was to use
“Provided the vessel is presented at the loading port in readiness to load
“shipment period” in an FOB contract to create obligations on the Seller
within the delivery period, Seller shall, if necessary, complete loading
to ship the goods during a specific period, i.e. by the end of the period.
after the delivery period ….”
The Buyer had to nominate and present for loading a vessel in good time
before the end of the shipment period to enable the Seller to ship in time.
Alternatively, many traders use “shipment” and “delivery” periods
interchangeably to mean the same thing. As a result, the various other
The more modern approach is to use “delivery period” and “laycan” or
terms of the contract must be scrutinized to see what the intention of the
“laydays” to create tight obligations on the Buyer to make the vessel
parties was.
available for loading at the loading installation within a particular (usually
short) time.
Shipment period: Summary
•
It is the duty of an FOB Seller to put the goods on board a ship
nominated or designated by the Buyer.
•
The Buyer must nominate and present a suitable vessel which is
capable of loading within the shipment period.
•
The shipment period is usually a condition of the contract. Failure
to load within the contractual shipment period gives the Buyer the
opportunity to reject the goods and documents.
One way in which traders have made clear that the period is for
presentation of vessel, not completion of loading, is the adoption of
charterparty wording “laycan” or “laydays” in the sale contract e.g.
“Delivery within period February 2008, buyer will narrow such period
to a two day laycan…”. See also, for example, BP GTCs 2007, Section 5
“The Buyer shall ensure that by no later than 2400 hrs on the last day of
the Laydays the vessel has arrived and tendered NOR”.
The problem
The danger of the FOB contract specifying a period for arrival of the
vessel is that there is then the unanswered question of when exactly
does the Seller have to load?
•
The timing obligations of the Buyer to give “effective” shipping
instructions to the Seller – usually to nominate and present a vessel
The quick answer is at the agreed loading rate, otherwise the Seller will
- are usually conditions. Instructions which are too late are not
pay demurrage for late loading. The more difficult issue is when is the
“effective”: the Buyer is in breach of condition and the Seller may
LATEST the Seller must load? When can the Buyer withdraw his ship for
refuse to load and claim damages for the Buyer’s breach.
failure to load?
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Shipping Newsletter – JUNE 2008
It is this issue that demonstrates a potential problem with this method of
•
defining FOB obligations.
Buyer for the failure of the Seller to load promptly. Demurrage is
usually the only remedy;
It was held in a recent Court of Appeal judgment ERG Raffinerie
Mediterranee Spa v Chevron USA Inc [2007] All ER 364 and in SHV
Other losses (e.g. market losses) would not be recoverable by the
•
The Buyer would only be entitled to terminate for non-loading and
Gass v Naftomar [2006] 2 All ER 515 that a laycan provision in an FOB
remove his vessel after a “frustrating time” based on charterparty
contract gave the FOB seller a right to bring the contract to an end in
cases. “Frustrating period” is ill defined and unhelpful to most
circumstances in which, without a cancelling provision, he might well
Buyers seeking a clear date when they may withdraw the vessel.
have no right to do so.
•
Sellers’ late loading may have substantial consequences for Buyers,
The concomitant of that right was that the buyer was entitled to present
particularly if pricing is bill of lading date dependent, but demurrage
the vessel at any time up to 2400 hours on the last day of the laycan
is usually the Buyer’s only recovery.
spread, which was 30 May in the instant case. If he was entitled to
present the vessel at any time up to and including 2359 on 30 May, the
contract could not be interpreted to mean that the seller had to have
completed loading by 2400 on that day, i.e. the time for presentation
of the vessel by the Buyer was a condition of the contract, meaning the
Seller could terminate for non-arrival of the vessel. There was no similar
absolute deadline for Sellers’ performance.
The result of these decisions is:
•
“Laycan” or “laydays” does not mean the same as shipment period;
•
This wording makes the contract a “non-traditional” FOB contract;
•
The Buyer runs the risk of the contract being terminated if the vessel
does not arrive in time;
•
•
We have had a number of cases recently where the Buyer was keen
to withdraw a vessel for non loading by the Seller but contract terms
did not permit this, so the Buyer then runs the risk of himself being
in default. The simple question “How long do I have to wait?” had no
simple answer.
We have also had cases where Traders assume that they have made back
to back FOB sales where, on analysis, one is a traditional FOB sale, and
one is a contract providing for delivery of the vessel not loading within
the contract period, giving a serious mismatch of obligation. Care must
therefore be taken to look at which type of FOB contract is made.
Ideally, a latest date for loading should be inserted, even on these
non-traditional FOB contracts. For example, the Exxon Mobil FOB terms
provide for time of delivery of the vessel not to be a condition but permit
The Buyer is entitled to present the vessel at any time up to 2400
the Buyer to withdraw and cancel if there is no completion of loading
hours on the last day of the laycan spread;
within 10 days of NOR or 10 days of the end of the “Accepted Date Range”.
The Seller would be in breach giving rise to damages (usually
Traders’ checklist for all FOB contracts should therefore include
demurrage) if he did not load within the laydays but would not be in
identifying what type of FOB contract they are making and consideration
breach of condition;
of insertion of a final date for loading.
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Shipping Newsletter – JUNE 2008
Nairobi Wreck Removal Convention
The UK Government has indicated that it proposes to ratify the Nairobi
International Convention on the Removal of Wrecks 2007 (ICRW)
as soon as practicable. Ratification will be effected by inserting new
Sections 255A-U in the Merchant Shipping Act 1995.
The UK’s ratification of the Convention will be of interest to all those who
own and operate sea-going ships, and will be important to owners of
ships exceeding 300 GT, insurers, and public bodies likely to incur wreck
for such costs. This will only apply to vessels in excess of 300 GT.
The Government will be required to certify insurance for all eligible UK
flagged ships (comparable to the position under the CLC, and Bunker
Convention, which will be coming into force on 21.11.08.). Further,
non-UK registered ships of 300 GT or more will not be allowed to
enter or leave UK ports or terminals without a State certificate.
4. State parties will be able to recover from shipowners the costs
associated with wreck removal.
Although at the moment the UK arrangements for maritime casualties
removal costs.
The Convention will come into force 12 months after it has been ratified
by ten countries. At the moment only Estonia has ratified it, and so its
implementation is some way off.
include wrecked ships in the UK territory and territorial waters, and in
the Pollution Control Zone, (as provided for in the Merchant Shipping
Act 1995, as amended by the Maritime Security Act 1997 and Marine
Safety Act 2003), the Convention fills the gap in the international
However, once it applies, it will have the following effect:
liability framework. It means that the UK will be able to act in respect
1. The registered owner of a vessel will be required to remove its wreck
as providing a system of insurance and the ability to claim costs. There
from the UK’s Pollution Control Zone (equivalent to an exclusive
economic zone under the United Nations Convention on the Law of
the Sea 1982).
2. Strict liability will be imposed on registered owners of all ships in UK
ports, harbours or terminals, or operating in UK waters in respect of
the cost of locating, marking and removing a wreck, unless the wreck
was caused by force majeure or the actual omission of a third party.
3. Registered owners of a ship registered in or entering a port or
terminal of a State party will be required to maintain insurance cover
A life Less Frustrating?
Mark O’Neil, a Partner, and Antonia
Panayides, an Associate (Legal Assistant),
both in our Dry Shipping Group, review the
impact of two recent decisions on the law
of frustration
of all wrecks, whatever the flag, in the Pollution Control Zone, as well
is also an option available to the UK to apply the Convention in both its
territory and territorial seas.
The Convention does not set out the penalties for breach, but allows
each State to determine what the appropriate penalties should be. The
effectiveness of the Convention is likely, therefore, to be dependent on
the consistency and deterring effect of the penalties imposed. In the UK
this is likely to be criminal liability and fines for the master and operator,
and detention of any vessel that fails to comply with the insurance
provisions.
the contractual obligation. Force majeure clauses are often present in
contracts which reduce the significance of the doctrine of frustration.
That said, frustration is often nevertheless pleaded as a primary or
alternative defence by a party seeking to avoid its contractual obligations
and remains an argument which is extremely difficult to deal with, and of
uncertain results.
In a maritime context, frustration can arguably arise when an event
Antonia Panayides
[email protected]
A contract may be discharged on the ground
occurs without due fault of either party, whether it be the total loss or
of frustration when something occurs after
commercial destruction of the ship under the charter, or requisition
the formation of the contract which renders
or detention of the ship for an inordinate period of time, or whether it
it physically or commercially impossible
be that the performance of the charter becomes illegal or impossible
to fulfil or transforms the obligation to
because of the destruction or discontinuance of something essential to
perform into a radically different obligation
its performance. The contract will be terminated by operation of law if
from that undertaken at the moment of entry into the contract (Chitty).
Established as a legal concept in 1863 in Taylor v. Caldwell 122 ER 309,
the effect of the event is such that it destroys the identity of the charter
service or makes it as a matter of business a totally different thing,
which the terms of the contract are not wide enough to encompass. Time
frustration today operates within narrow confines. In general the courts
charters, for long periods of time, are less likely to be found frustrated by
do not like using the doctrine of frustration which (potentially) allows
the courts, as it is much more likely that the fundamental purpose of the
a party to escape from a bad bargain. Such an approach is perhaps
charter will and can be performed within the period agreed. Such a result
justified in circumstances in which commercial contracts increasingly
obviously depends upon the length of the time charter concerned and the
make provision for the various possible catastrophic events which
nature of the potentially frustrating event. Voyage charters, on the other
may occur during the life of the contract and which may impact on
hand, are much more susceptible to frustrating events in circumstances
9
Shipping Newsletter – JUNE 2008
that no cargo could be provided in Taiwan. The cement was subsequently
supplied by alternative sellers at a higher price and the cargo was shipped
to Mexico although never delivered owing to blocking by Cemex. Buyers
claimed that the original sellers were in breach of the contract and
claimed damages. The original sellers’ defence was that the contract had
become frustrated by virtue of the fact that they were unable to secure a
supplier. The High Court found in favour of buyers, reversing an earlier
Tribunal’s finding, in the alternative, that there was no frustrating event
in sellers not being able to supply cement from the Far East. The Court
found the sellers had assumed the risk of being unable to provide a
supplier under the contract and that the sellers could not be excused from
in which it is usually imperative that both cargo and vessel leave on time
without delay.
The purpose of this article is not to provide a comprehensive recital on
the law on frustration, but to consider two recent cases which impose
further restrictions on the application of the doctrine and require a
much more multi-factorial and, most importantly, equitable, approach in
considering whether the doctrine should apply at all.
The “Sea Angel” [2007] 2 Lloyd’s Rep. 517 involved the grounding of a
crude oil tanker on 7th July 2003 as the vessel approached the port of
Karachi. The “Sea Angel” was the vessel chartered in by the salvors,
Tsavliris, the initial time charter period being for only 20 days. After
completion of the vessel’s final voyage, charterers were unable to redeliver her for over 3 months owing to the Karachi Port Trust’s refusal
to issue the necessary clearance certification which is a pre-requisite
to obtain port clearance. The Court of Appeal upheld the High Court’s
finding that there was no frustrating event, insofar as the risk of being
detained by the Port Authority was part and parcel of the matrix of the
their obligation by frustration. There was always a risk of supplier failure
and, as between the seller and the buyer, it was the seller who was in a
position to guard against the risk by making a binding and enforceable
contract with the supplier. This case represents a major shift by the
Courts away from the doctrine of frustration, insofar as it prioritises the
consideration of the whole factual matrix and the equity of the parties’
respective positions over and above consideration of whether the
underlying and most immediate contracts are capable of performance.
By way of conclusion, courts are now much more likely to look at the
overall justice to be served than the simple question of the background
facts and/or trying to identify a frustrating event. Furthermore, the onus
is now much more on the contracting parties to consider and provide
for those events and circumstances which may or might allow them to
avoid their contractual obligations. As Lord Denning stated in Intertradex
SA v. Lesieur-Tourteaux Sarl [1978] 2 Lloyd’s Rep. 509 “such events
are commonplace in the world of affairs. If a party desires to avoid such
consequences, he must insert a stipulation to excuse him. He cannot
avoid them by a plea of frustration.”
charterparty, and should have been foreseeable by Tsavliris and the
salvage industry. Gross J., at first instance, held the risk of any delay
resulting from the lack of port clearance rested with charterers. In the
Court of Appeal, Lord Justice Rix said “the application of the doctrine
of frustration requires a multi-factorial approach. Among the factors
which have to be considered are the terms of the contract itself, its
matrix or context, the parties’ knowledge, expectations, assumptions,
contemplations, in particular as to risk, as at the time of the contract.”
Most importantly, the Court of Appeal felt that “greater injustice” would
have been caused to the ship-owner had he not received hire due to no
fault of his own than to Tsavliris in paying hire for the extended period.
This concept of a multi-factorial approach and finding the equitable
solution constitutes a further development of the Court’s previous
reluctance to make a finding of frustration and thereby allow a party to
escape a bad bargain.
In the “Mary Nour” [2008] 1 Lloyd’s Rep. 250 CTI, as buyers of cement,
entered into a sale contract with Transclear SA as sellers, for the sale of
27,000 m.t. of cement for shipment and sale to Mexico. The objective of
the contract was to try to break the cartel operated by Cemex in Mexico.
The seller’s suppliers pulled out and the sellers gave notice to the buyers
In February 2008, Reed Smith LLP announced the
continuation of its growth in China with the addition of two
partners and a team of lawyers and legal professionals from
the former Dewey Ballantine’s Beijing office. The enlarged
Beijing practice will complement that of the firm’s Hong
Kong operation. Already one of the 15 largest law firms in the
world, Reed Smith officially began operations in Asia when
its merger with Richards Butler Hong Kong became effective
at the start of this year.
The partners joining Reed Smith in Beijing are Sharon Mann
and Hugh Scrogin. Sharon is a former senior director of
the Trade Facilitation Office at the U.S. Embassy in Beijing.
Her practice covers Chinese investment, capital markets
and trade issues. Hugh is a corporate partner focusing on
investment, M&A, other corporate transactions and dispute
resolution.
Michael Dardzinski is also joining Reed Smith as Counsel.
He handles M&A, other transactions and dispute resolution.
A number of other lawyers and professionals will also join
the team.
10
Shipping Newsletter – JUNE 2008
Bunker Wars: The Burden of Proof
Strikes Back!
Mark O’Neil, a partner in our Dry Shipping
Group, considers the burden of proof in
bunker quality disputes
Mark O’Neil
[email protected]
held that, on a balance of probabilities, the main engine damage must
have been caused by some aspect of the bunkers supplied and that, on
the balance of probabilities, that aspect was the poor ignition quality of
such bunkers.
Whilst the above mentioned arbitral decision was welcomed by
the author of this article and his clients, it did rather drive a coach
Bunker quality disputes have traditionally
and horses through the standard burden of proof tests and checks
focused on whether or not the bunkers
established under English law. Claimants had not been rigorously
supplied to a vessel accorded with the
required to prove that a specific quality of the bunkers (be it ignition
contractual charterparty specification.
quality or anything else) had caused the specific damage concerned, as
Claimants in such disputes would have
the Tribunal focused on ignition quality as the likely cause absent any
the dual burden of proof to show, not
other more likely explanation. This arbitral decision was followed by
only that the respondent suppliers of the
many others in owners’ favour focusing on ignition quality and unfitness
bunkers (normally the charterers) had
for purpose as the battleground and encouraged owners to attribute
supplied bunkers outside of the contractual
any and all engine damage to alleged poor quality of bunkers. Bunker
specification, but also (often a more difficult burden to overcome) that the
disputes are notoriously expensive and complicated to run which, in
off-spec quality of the bunkers supplied actually caused the damage to the
turn, encouraged charterers and/or bunker suppliers to settle these
vessel’s main engine. Whilst the first burden of proof was often easy to
claims rather than risk an adverse finding as a matter of fact (never
establish through ever more sophisticated sample collection at the vessel
appealable) in arbitration. An American style litigation culture was
or barge manifold and sampling procedures, the second burden of proof
therefore initiated.
would almost inevitably require extremely complicated expert evidence
of both an engineering and chemical nature. With a less than perfectly
maintained and regularly overhauled main engine and component parts,
it was often easy for the bunker supplier (be it charterers or the ultimate
physical supplier of the bunkers) to raise alternative possibilities as to
the cause of the damage (e.g. improperly maintained purifiers, improper
bunker management through co-mingling of bunkers, cylinder liners
exceeding their life expectancy/running hours). The burden of proof was a
“burden” in a very real sense and this dissuaded “have a go” litigants from
proceeding with less than cast iron cases.
Recent bunker quality disputes have become ever more complicated and
the focus has very much been on the dual obligation of bunker suppliers/
charterers not only to supply bunkers which are on spec, but also fit for
the purpose intended (and for the specific engine onboard the vessel
supplied). The “fitness for purpose test” was brought to the fore in an
arbitration successfully pursued by the author of this article, the basis
of the allegation of lack of fitness for purpose being the poor ignition
quality of the fuel supplied. In that particular arbitration, the Tribunal
In a recent arbitral decision involving the author of this article (but this
time on charterers’ behalf) the floodgates were firmly closed by a very
sensible Tribunal adopting an extremely rigorous approach on burden
of proof. In that particular arbitration, owners thought to claim huge
damages for physical damage to the main engine and consequential loss
of time on an extremely scant and dubious evidential basis. Hoping to
ride the fitness for purpose wave created by previous arbitral decisions,
they were abruptly stopped in their tracks, after a lengthy hearing, by an
Award which found that they had failed to discharge the burden of proof.
The above development is a welcome one and will cause owners and/
or disponent owners to think again before they embark on costly bunker
claims without the necessary evidence to succeed and discharge the
burdens of proof placed upon them. Furthermore, and importantly, it
will also encourage claimants’ insurers to take a much more cautious
approach to the question of cover of these disputes or face potentially
huge exposure on costs in the event that the claim should fail.
This article first appeared in the 15th August 2007 edition of Lloyd’s List.
The Reed Smith Corporate Group has prepared a Guide to doing Business in the UK:
About UK Business summarises the main legal requirements for doing business in the UK, the different ways in
which those requirements can be met, and some of the more significant legal considerations which the business will have
to deal with. It is aimed to be of relevance particularly to companies based abroad. For more details, or to request a copy,
please contact Allison Mitchell, [email protected]
11
Shipping Newsletter – JUNE 2008
“elli” and “frixos”
New Joiners
In Newsletter 23 Alan Curran reviewed the decision in the case of the
Amy Dominguez has recently joined
ELLI” and the “FRIXOS”. That decision was appealed and Alan now
the Shipping team from Stephenson
reviews the appellate decision
Harwood, where she trained and qualified
as a solicitor in September 2006. Amy
The claims in this matter concerned two “double sided” sister-ships
has experience of handling dry shipping
chartered on the Shelltime 4 form. When the MARPOL regulations
litigation cases, including cargo claims
on double-hulls came into force both vessels were defined by their
and charterparty disputes. Amy will be
classification society as being only partially double sided. The
primarily working for David Semark,
consequence of this was that the vessels could no longer be used to
carry fuel oil.
At first instance the court held that the fitness of a vessel for service
Mark O’Neil and Charlie Weller.
Amy Dominguez
[email protected]
was an obligation that extended to physical and legal fitness. The
vessels could not obtain the appropriate MARPOL certification and
Nick Barber is an Associate in the Shipping
were therefore not fit for the service required of them. The Owners had
Group specialising in both Dry and Wet
a continuing obligation to maintain or restore that fitness if it was lost.
matters. He served in the Merchant
Owners were therefore obliged to do whatever was necessary to restore
Navy for six years on a range of vessels
the vessels’ fitness for the service required of them regardless of the
including offshore supply vessels and
costs of doing so.
anchor handlers, Capesize bulkers and
On appeal, the Owners argued that the nature of Owners’ obligations as
freight and passenger ro-ros. After serving
to seaworthiness, which includes cargoworthiness, are tied to the time
as a chief officer Nick studied Law at
of delivery into Charterers’ service. Owners also stressed that there was
Southampton University and qualified
no breach in the description of the vessels.
Nick Barber
[email protected]
The judgment turned on the precise wording of the charter, in particular:
i) Clause 1, which began with the words “At the date of delivery of the
vessel …”, and continued in sub-clause (g) to say that the vessel “shall
have on board all certificates, documents… required from time to
time by any applicable law to enable her to perform the charter service
without delay”. It was held that the particular should prevail over the
as a solicitor. Since qualifying, Nick has
assisted in various charterparty disputes
including unsafe port disputes and late
redelivery of a drillship after a long term
charter, as well as undertaking casualty investigations. Nick has also
assisted in MOA disputes and has advised on long term offshore charter
and service agreements. Nick is a member of the Firm’s Casualty
Response Team.
general, and so the specific words of the sub-clause (g) prevailed over
the general phrase at the beginning of clause 1.
Luca Salerno is an English and Italian
qualified lawyer and has worked as a
ii) Clause 52, which warranted that ‘the vessel is in all respects eligible
commodities derivatives lawyer in London
under applic[able] convention, laws, and regulations for trading to and
for the last seven years. His experience
from the ports and places specified in… the Charter Party’ and that ‘she
derives from in house positions in a
shall have on board… all certificates… and other documents required
trading company (Sempra Energy Europe
for such services…’. This covered the requirement to have a MARPOL
Limited now part of the RBS Group) and
exemption and the later words of the clause resolved all doubt as to
subsequently in an investment bank (J P
future applicability of the warranty since it was warranted that the vessel
“does, and will, fully comply with all applicable conventions…including
…. MARPOL 1973/1978 as amended and extended.”
The Court of Appeal held that the terms of the charter were clear and
there was therefore a continuing obligation on Owners to restore the
ability of the vessels to carry out the service required of them when the
MARPOL regulations came into force.
Morgan Chase Bank N.A.) where he was
Luca Salerno
[email protected]
Assistant General Counsel. He joined Reed
Smith’s Energy Trade & Commodities
Group in May 2008. Luca’s expertise
encompasses physically and financially settled transactions having
energy commodities, base metals, emission allowances as underlying
and complements both the Shipping and Financial Institutions Group
capabilities. Luca is also a regular speaker on, and has expertise in,
It is not yet known whether the Owners will pursue this point any further
regulatory capital and financial regulation. Luca contributed to the
and seek to appeal to the House of Lords.
drafting of the MIFID Guide for Commodity Traders.
The information contained in this Newsletter was compiled for its clients by
Reed Smith as a summary of the subject matter covered and is intended to be
a general guide only and not to be comprehensive, nor to provide legal advice.
Reed Smith Richards Butler LLP accepts no responsibility whatsoever for loss
which may arise on information contained in this Newsletter. This Newsletter
was compiled up to and including May 2008.
©Reed Smith 2008.
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The term ‘partner’ is used to refer to a member of Reed Smith Richards Butler
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For further information on any topic in this Newsletter, please contact
Jane Peaston, ([email protected]) or your usual contact at
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