Shipping newsletter - Legalseas

February 2012 Authors: Peter Glover, Dimity Maybury, Melissa Tang, Philip Roche, Emma Humphries, Roger Heward, Jon Cripps, Claire Berwick

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Contacts

Introduction

Welcome to our February edition of Legalseas. It continues to be a challenging time for many involved in the shipping industry and this is apparent from the mood of shipping respondents in our third transport survey published at the beginning of February, which looks (as in our previous two surveys) at the impact of the continuing global financial crisis on the aviation, rail and shipping sectors and the strategy of each sector for managing the impact of the crisis. When we published our first survey in 2009, concern was running high in shipping as for other sectors of the transport industry. In 2010 the mood was more upbeat and even one of “cautious optimism” for the year ahead. In our most recent survey though a more mixed picture emerges and views across the transport industry appear to be “increasingly polarised”. The overall mood amongst shipping respondents is more subdued this year but there is still optimisim that opportunities exist in uncertain times, with strategic alliances, joint ventures and pooling arrangements identified as one of the potential "ways" ahead.

On a more positive note, I am delighted to announce that on 1 January 2012 the formal merger of Canadian law firm Macleod Dixon with Norton Rose Canada took place. As a result of the merger, Norton Rose Canada will have close to 700 lawyers in their offices across the country and it will add 60 lawyers in Latin America, based in Caracas (Venezuela) and Bogotá (Colombia), a 13 lawyer office in Almaty (Kazakhstan) and a team of lawyers in Moscow to Norton Rose Group.

Returning to this edition of Legalseas, we have chosen once again, what we hope readers will agree, are a series of topical and interesting issues relating to the shipping industry. In our lead article, Peter Glover, an associate in our shipping dispute resolution team in London looks at the history and legislative framework of the International Convention on Arrest of Ships 1999. The article sets the scene for a series of articles on ship arrest to follow over forthcoming Legalseas editions.

In our second article, Dimity Maybury and Melissa Tang, associates with our shipping dispute resolution team in Sydney, examine the draft legislation of two of the six bills released for public consultation and to be introduced to Parliament in 2012 as part of the Australian government’s package of shipping reforms aimed at revitalising the Australian shipping industry. The article is a follow up to an article published in the October 2011 edition of Legalseas.

In our third article, we return to the topic of cabotage with the focus on Nigeria, as Peter Henley, a banking associate in London, provides an overview of the extensive restrictions on engaging in carriage of cargo and/or passengers within the coastal, territorial or inland waters of Nigeria and Nigeria’s Exclusive Economic Zone. In 2011, Grant Schulz, a banking associate with our shipping team in Singapore gave a brief overview of cabotage in the Asia Pacific region.

We then have the third in a series of articles looking at the sensitive subject of bulk cargo liquefaction incidents, which in recent times has resulted in the tragic loss of life of a number of seafarers. David Mckie, a shipping dispute resolution and insurance partner in London, considers some of the legal consequences surrounding the carriage of shipping cargoes which liquefy with specific focus on contracts of carriage. The first and second articles in the series can be found in the October 2011 edition of Legalseas.

Six months on from when the Bribery Act 2010 (the Act) came into force, Philip Roche and Emma Humphries, partner and associate in our shipping dispute resolution team in London look at what companies need to do to comply in the immediate and long term with the Act and the approach that the SFO is likely to take in enforcing the Act. Both have written previous articles in Legalseas and separate briefings for shipping clients on the topic of the Act.

In our final article, shipping dispute resolution partner Roger Heward, shipping finance associate Jonathan Cripps and shipping finance know-how lawyer Claire Berwick provide an overview of two refund guarantee cases which have recently passed through the English Courts and attracted a fair degree of publicity and interest from those in the shipping finance community because of the frequent use of refund guarantees as part of the pre-delivery finance security package in a new ship financing. The facts of Rainy Sky vs Kookmin Bank merits particular commentary and analysis and the summary in this edition therefore links the reader through to our more detailed briefings published on this case.

As always, I hope that you will find our articles to be of interest and we would be delighted if our readers could provide any comments on the content (including editorial), or suggestions for future articles of Legalseas, by using the feedback email. Likewise feel free to pass on the details of colleagues who may wish to receive Legalseas.

Finally I would like to take this opportunity to wish all our readers a happy (and prosperous) new year, in spite of challenging times, whether you celebrated on 1st January or on 23rd January for Chinese (lunar) new year.

Editor
Richard Howley, Partner
Norton Rose LLP, London

International convention on Arrest of Ships, 1999

Author: Peter Glover

Executive Summary

The International Convention on Arrest of Ships, 1999 ("1999 Arrest Convention") entered into force on 14 March 2011 when Albania joined Algeria, Benin, Bulgaria, Ecuador, Estonia, Latvia, Liberia, Spain and the Syrian Arab Republic in acceding to the Convention. Despite attracting the aforementioned signatory States, the Convention's otherwise lukewarm reception belies the great importance which the international shipping, trading and ship finance community attaches to the subject of the arrest of ships.

Whilst owners will always wish to preserve their interest in ensuring that legitimate trade is not interrupted by the unjustified arrest of a ship, claimants will similarly seek to preserve their interest in being able to obtain security, by way of arrest, for their claims. According to the United Nations Conference on Trade and Development, the 1999 Arrest Convention aims to strike a balance between these competing interests, bearing in mind the different approaches adopted by various legal systems.

In the light of the balancing of interests the 1999 Arrest Convention seeks to achieve, this article will briefly explore the application of the Convention; the expanded list of maritime claims available under the Convention compared with those available under the 1952 Arrest Convention; and the subject of security and the right of re-arrest and multiple arrest which the 1999 Convention provides, together with the difficulties this presents in the light of the present wording of standard form letters of undertaking.

Application of the 1999 Arrest Convention

Under Article 8, the 1999 Arrest Convention shall only apply to any ship within the jurisdiction of any State Party, whether or not that ship is flying the flag of a State Party. It follows that the Convention will only, for the time being, take effect within the jurisdictions of the 10 states which have expressed their consent to be bound by it. Ships entering the waters of a contracting State, irrespective of whether their flag of registry has ratified the Convention or not, will therefore be subject to the Convention.

Article 14 of the Convention nonetheless permits States to make defined reservations to the 1999 Arrest Convention. To date only two States have made reservations: Spain and the Syrian Arab Republic. Spain reserved the right to exclude the application of the Convention in respect of ships not flying the flag of a State Party. However, by Royal Decree-Law No. 12/2011 of 26 August 2011, a provision was added to the Ley de Enjuiciamiento Civil (to which the rules of the 1999 Arrest Convention shall apply) to extend the application to ships flying the flag of non-Contracting States. The reservation made by the Syrian Arab Republic is limited to its recognition of Israel and is not otherwise material to the operation of the Convention.

1952 Arrest Convention - List of Maritime Claims

Under the International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships, 1952 ("1952 Arrest Convention") the Convention adopted, by way of Article 1, a closed list of 17 named maritime claims. Article 3 widens the scope for arrest from the particular ship in respect of which the maritime claim arose to any other ship which is, with restrictions, owned by the same person, the so called "sister ship" arrest provision. The 1952 Arrest Convention also recognises a claimant's liability for damages for wrongful arrest, although in the United Kingdom it is very difficult for the shipowner to claim a remedy for wrongful arrest in the absence of proof of bad faith or gross negligence.

Despite some material criticism of the Convention, including the absence of being able to arrest a ship for unpaid insurance premiums and the differences applied to the meaning of 'charterer by demise' by civil and common law courts, the 1952 Arrest Convention has proved an international success with over 70 States signatory to the Convention.

1999 Arrest Convention - List of Maritime Claims

Unlike the closed list of 17 maritime claims in the 1952 Arrest Convention, the 1999 Arrest Convention contains 22 maritime claims, with bottomry being removed and 6 new claims being added. Importantly, unlike the closed list of claims in the 1952 Convention, the 1999 Convention is arguably open ended by way of Article 1(d) which permits arrest of a ship for damage, or the threat of damage, caused by the ship to the environment, and in addition damage, costs, or loss of a similar nature to those identified in Article 1(d).

In addition to the above, the 1999 Arrest Convention also provides a right to arrest a ship for a claim arising out of one or more of the following:

  • wreck removal - Article 1(e);
  • port, canal and pilotage dues - Article 1(k) and 1(n);
  • unpaid insurance premiums - Article 1(q);
  • unpaid commissions, brokerage or agency fees - Article 1(r);
  • disputes arising out of a contract for the sale of the ship - Article 1(v).

The 1999 Arrest Convention, unlike the 1952 Convention, also affords claimants the right of re-arrest and multiple arrest to secure their claim. Under Article 5, a claimant can re-arrest a ship after it has been released, or arrest multiple ships, in order to obtain sufficient security for his claim. The right to re-arrest or multiple arrest only arises, however, where:

  • the nature or amount of the security in respect of that ship already provided in respect of the same claim is inadequate, on condition that the aggregate amount of security may not exceed the value of the ship; or
  • the person who has already provided the security is not, or is unlikely to be, able to fulfil some or all of that person’s obligations; or
  • the ship arrested or the security previously provided was released either:

(i) upon the application or with the consent of the claimant acting on reasonable grounds, or

(ii) because the claimant could not by taking reasonable steps prevent the release.

Article 5 is a powerful instrument and the rights it affords a claimant are unlikely to be voluntarily surrendered against an owner on presentation of a letter of undertaking given the traditional wording of such letters require the claimant to release the ship from arrest or detention and promise not to re-arrest the ship or take any action against other assets to obtain security for the same claim. It is equally difficult to see how an owner, when faced with arrest in a Convention State, would avoid having to provide top up security on demand for a claimant. Somewhat paradoxically, such demands for top up security are also likely to prove in practice hollow as the operation of Article 5 is likely to accelerate the exodus from corporate group fleet ownership to fleets of single ship owning companies, which commenced under the 1952 Arrest Convention.

Conclusion

With only two major ship owning States, Denmark and Norway, having signed but not ratified the Convention, together with the absence some 12 years after the Convention opened for signature of wider international support, the 1999 Arrest Convention is unlikely to come into general acceptance and will be limited in effect to ships which enter the jurisdictions of signatory countries. However, in the light of the Convention's entry into force and the wider list of maritime claims for which a ship may be arrested, together with right of re-arrest and multiple ship arrest for top up security available to a claimant, owners are likely to view the 1999 Arrest Convention with measured concern; claimants on the other hand are likely to take the view that the Convention is a much overdue step in the right direction as regards enforcement and security for their claims.

For more information contact:

Peter Glover

Philip Roche

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Australian shipping industry reform - Coastal Trading Bill

Authors: Dimity Maybury and Melissa Tang

Introduction

In our October edition of Legalseas we reported on the Australian Government's new package of shipping reforms aimed at revitalising the Australian shipping industry.

The key elements of the reforms will be the tax exemptions and the AISR. Our discussions with key players in the industry indicate that tax exemptions alone will not necessarily make Australia a persuasive business proposition when it comes to the registration of ships. In addition, it will be cost savings that may be produced by these reforms which will attract ships to the AISR.

Since the announcement in September last year, the Department of Infrastructure and Transport (Department) has consulted with shipping industry stakeholders through individual consultations and industry forums.

On 19 December 2011, the exposure draft Coastal Trading Bill (Coastal Trading Bill) and Coastal Trading (Consequential Amendments and Transitional Provisions) Bill (Coastal Trading Consequential Amendments Bill) were released for public consultation. The bills are the first two of six bills to be introduced to Parliament in 2012 as part of the package of reforms.

Key details of the new coastal trading regime

The draft Coastal Trading Bill will replace the existing regulatory framework (Part VI of the Navigation Act 1912 (Cth), the Navigation (Coasting Trade) Regulations 2007 (Cth) and Ministerial Guidelines) and establish a new licensing regime for vessels engaged in Australian coastal trading.

In brief, the implementation of the draft Coastal Trading Bill will:

  • introduce a three tier licensing regime with general, temporary and emergency licences for the interstate coastal trade (see new coastal trade licensing regime below)
  • allow licensed ships to receive foreign Government subsidies
  • abolish the Single Voyage and Continuing Voyage Permit system
  • introduce a mandatory reporting and publishing scheme (see mandatory reporting requirements below)
  • introduce a civil penalty and infringement notice regime (see civil penalties below).

The intrastate shipping trade will continue to be regulated by the States and the Northern Territory although, consistent with the existing position, vessels engaged in intrastate voyages are able to opt-in and be covered by the proposed new regime.

The new coastal trade licensing regime

The Coastal Trading Bill provides that a ship must be licensed with a general, temporary or emergency coastal trading licence in order to engage in Australian coastal trading.

General licences

General licences are only available to Australian flagged ships registered under the Shipping Registration Act 1981 (Cth). Ships registered on the proposed AISR will not be eligible for a general licence.

Ships holding a general licence will:

  • have unrestricted access to coastal trades for a period of up to 5 years at a time
  • be subject to the Fair Work Act 2009 (Cth)
  • be able to hire seafarers that are Australian residents or temporary visa holders
  • be subject to annual mandatory reporting requirements, which are discussed in further detail below.

General licences will also give ships access to proposed Australian taxation incentives. Detailed information on this aspect is to be released in future bills but a summary of the proposals was discussed in the October edition of Legalseas

Temporary licences

Foreign flagged and AISR registered ships will be entitled to operate a specified coastal trade under a temporary licence.

Ships holding a temporary licence will be:

  • restricted to a nominated coastal trade (passengers or cargo) for a specific number of authorised voyages during a specified time period of up to 12 months
  • able to hire foreign crew members
  • subject to the Fair Work Act 2009 (Cth) for its crew members
  • (in respect of ships registered on the AISR) eligible for proposed taxation incentives
  • subject to making a specified number of voyages as authorised in the licence for a period of up to 12 months and mandatory reporting requirements at the end of each voyage.

Emergency licences

The grant of emergency licences will be limited to cargo or passenger movements in emergency situations only with details of the type of emergencies to be prescribed by the Regulations. The Regulations have not yet been drafted but according to the Stakeholder Discussion Paper, such emergencies include natural disasters or other similar critical emergencies.

Australian flagged ships registered under the Shipping Registration Act 1981 (Cth), foreign flagged and AISR registered ships are entitled to apply for emergency licences.

Ships holding an emergency licence will be:

  • eligible to operate the licence for a maximum period of 30 days
  • able to hire foreign crew members
  • subject to the Fair Work Act 2009 (Cth) for its crew members
  • subject to mandatory reporting requirements at the end of a voyage.

Mandatory reporting requirements

All licence holders will be subject to mandatory reporting requirements, including information about the type of cargo carried, ports at which cargo was taken on board and unloaded (for carriage of cargo) and the number of passengers carried and ports at which passengers were taken on board and disembarked (for carriage of passengers).

The frequency of reporting obligations to the Department differs depending on the type of licence held:

  • general licence holders are to provide the required information no later than 10 business days after the end of a financial year
  • temporary licence holders are to provide the required information no later than 10 business days after the end of a voyage
  • emergency licence holders are to provide the required information no later than 10 business days after the end of a voyage.

The Department is required under the draft legislation to publish the information obtained under the mandatory reporting requirements. This is aimed at providing a more open and transparent system of cabotage.

Civil penalties

The draft Coastal Trading Bill introduces a civil penalty and infringement enforcement scheme. Under the proposed framework, failure to comply with the mandatory reporting requirements will result in either an infringement notice being issued by the Department or civil penalties of up to a maximum of A$275,000 in the case of a body corporate and A$5,500 in the case of an individual.

Unlicensed ships trading on the coastal trade will be subject to a maximum civil penalty of A$165,000 in the case of a body corporate and A$33,000 in the case of an individual. These penalties are significantly increased compared to the current regime where successful criminal prosecution results in the maximum penalty of A$25,000 in the case of a body corporate and A$5,000 in the case of an individual.

Transitional arrangements and consequential amendments

Under the transitional arrangements proposed under the Coastal Trading Consequential Amendments Bill, a permit or licence issued under the old regime will remain in force and will end on the earlier of 31 October 2012, the day the permit expires or when the Minister cancels the permit.

Existing licensed foreign registered vessels will be eligible to apply for a transitional general licence, and will be given a period of five years upon the grant of the transitional general licence to transition to Australian registration. Foreign registered ships holding a transitional general licence will not have access to the proposed taxation incentives.

Amendments will be made to the Navigation Act 1912 (Cth) so that ships operating on a temporary licence will be allowed to employ foreign seafarers. This is consistent with the current position with respect to ships trading on Single Voyage and Continuing Voyage Permits.

Comment

At a practical level, as currently drafted, the new proposed coastal trading regime appears to be very similar to the current regime. The only new aspects being:

  • emergency licences are available to all vessels in emergency situations
  • licensed ships are subject to mandatory reporting requirements
  • the introduction of a civil penalty and infringement notice regime
  • it will no longer be an offence for a licensed ship to be in receipt of a foreign subsidy.

The stated desire of the Government is to improve Australia’s overall maritime capability. However, an opportunity has been missed to take a fresh look at Australia’s coastal trading regime. Because the new proposed regime continues to differentiate between coastal and international shipping by failing to allow those ships on the AISR to obtain general coastal trading licences, this will, in our view, reduce the chances of success of the proposed reforms as a whole.

The success of the reforms will be measured by the success or otherwise of the proposed AISR. Australia should be focussed on making registration on the AISR as attractive as possible to the international shipping community.

When considering the proposed shipping reforms, the Bureau of Infrastructure, Transport and Regional Economics (BITRE) considered the economic impact of a system which allowed AISR registered ships to engage in both the coastal and international trades. BITRE concluded that, under this scenario, AISR registered ships would reap significant cost savings by being able to reduce the proportion of sailing days in ballast (Regulation Impact Statement, August 2010, [4.3.5]).

As stated above, it will be the cost savings that may be produced by these reforms which are what will attract ships to the AISR. Our discussions with key players in the industry indicate that tax exemptions alone will not necessarily make Australia a persuasive business proposition when it comes to the registration of ships.

What’s next?

The Department has gone through a public consultation process on the draft bills and the proposed reforms are currently planned (together with the other four bills not yet announced) for implementation in July 2012 for a planned commencement in mid 2013.

There have been new developments on this Bill since this article has been published. Norton Rose Australia will provide an update shortly.

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The Nigerian Cabotage Act

Author: Peter Henley

There are extensive restrictions on engaging in Nigerian cabotage (ie, domestic coastal carriage of cargo and / or passengers within the coastal, territorial or inland waters of Nigeria or Nigeria’s Exclusive Economic Zone) under the Coastal and Inland Shipping (Cabotage) Act 2003 (Act), and the available structures through which partnerships with Nigerian citizens or companies can be conducted are extremely limited.

The Act prohibits any vessel other than a vessel:

  • built and registered in Nigeria;
  • manned by a Nigerian crew; and
  • wholly-owned by Nigerian citizens or companies with 100% Nigerian shareholding,

from engaging in cabotage. Limited exceptions apply for vessels providing assistance to persons, vessels or aircraft in danger or distress and vessels engaged in salvage, scientific research or pollution management activities.

However, the Nigerian Minister of Transport (Minister) may issue waivers in relation to eligible vessels if some or all of the following “local content” circumstances apply:

  • no suitable Nigerian-owned vessel is available to perform a specific function required; or
  • no Nigerian shipbuilder has the capacity to construct a vessel of the size or type required; or
  • no qualified Nigerian officer or crew is available for the specific positions needed.

To obtain a waiver, a vessel owner or charterer must:

  • apply for registration under the Act; and
  • receive a licence from the Minister to engage in cabotage.

The types of vessels eligible for registration under the Act are very broad, and include most cargo, operations and services support and passenger vessels. The (proposed) vessel owner or charterer must also comply with certain eligibility requirements for registration of the vessel. The three main ownership / chartering structures are:

Nigerian ownership structure
  • The vessel is wholly and beneficially owned by Nigerian citizens, or by a company wholly and beneficially owned by Nigerian citizens (100 per cent Nigerian Company); and
  • all of the shares in the vessel or 100 per cent Nigerian Company must be held by Nigerian citizens free from any trust or obligation in favour of any non-Nigerian citizen (Encumbrance).
JV ownership structure
  • Nigerian citizens own not less than 60 per cent of the shares in a Nigerian vessel owning company, free from any Encumbrance.
Bareboat charter structure
  • The bareboat charterer is a Nigerian citizen or a 100 per cent Nigerian Company;
  • where the vessel is financed, the term of the bareboat charter is more than five (5) years (and specific licensing and certification rules apply to any mortgagee), and certain other provisions of the Coastal and Inland Shipping Cabotage (Bareboat Registration) Regulations 2006 have been satisfied; and
  • the vessel is under the full control and management of Nigerian citizens or a 100 per cent Nigerian Company.

Under the latter structure, the vessel can be registered in the Nigerian Ship Register and fly the Nigerian flag for the period of the bareboat charter. Foreign registration is suspended for the period of Nigerian registration, but ultimate proprietary interests in the vessel (such as on a subsequent sale or the grant of a mortgage) would be addressed on the basis of the vessel’s original or primary registry.

The Act states that in issuing waivers, the Minister will give priority to applications in the following order:

  • joint venture structure;
  • Nigerian ownership structure; and
  • any other ownership structure.

The more limited the waiver requested (ie, the more closely a vessel complies with the key local content requirements), the more likely it is for a waiver to be issued. For example, a vessel crewed with a full Nigerian crew (save for key senior officers, such as the master, first mate and chief engineer) is more likely to obtain a waiver than a vessel with a much higher proportion of non-Nigerian crew members. Although not included in the Act, other factors that may influence the Minister include:

  • the number of other (particularly Nigerian) vessels undertaking similar activities; and
  • the benefits to other Nigerian enterprises if the waiver was granted.

On receipt of a waiver, a vessel may undertake cabotage activities, subject to complying with the terms and conditions of the waiver issued. Eligibility for registration must be maintained for the duration of the waiver certificate or vessels risk being removed from the register under the Act, and hence being barred from undertaking cabotage activities.

Waiver certificates must be held on board the vessel at all times, and penalties for non-compliance include fines, arrests of natural persons and seizure of vessels.

Impact on other laws

A vessel undertaking cabotage activities must also comply with the applicable provisions of the Merchant Shipping Act 2007. If the Nigerian ownership structure is adopted, then the vessel must comply with both registration regimes, save where any inconsistencies arise, in which case the Act will prevail. If the bareboat charter structure is used, the general provisions of the Merchant Shipping Act will be displaced by the more specific (and stringent) registration requirements of the Act save insofar as the Merchant Shipping Act provisions relate to issues such as maritime safety, employment conditions of seamen, navigation, seaworthiness of vessels, liability in collisions etc.

Licensed foreign vessels

Because the Act’s restrictions are not considered to be absolute, foreign-owned and flagged vessels may also be registered on a special register and licensed to undertake cabotage activities. This practice sits alongside the formal waiver regime, but a waiver under the Act is still required in order to implement such an arrangement. A vessel so licensed could maintain its foreign registry, fly a non-Nigerian flag, and maintain full ownership and finance on the basis of its foreign registry.

Application process and concluding observations

Applications for waivers may be made by Nigerian vessel owners or charterers, or by a Nigerian agent where a foreign-owned vessel has been licensed for cabotage purposes. The processing time for applications can vary. While formal waivers have been issued on a number of occasions by previous Ministers, it appears that the current Minister has not yet issued any waivers during his tenure as Minister, which commenced in April 2010.

Once issued, waivers are generally only valid for one year, and fresh applications will need to be lodged each subsequent year. However, where the bareboat charter structure is used, it appears that the approval process for subsequent years should be far less onerous than for the initial year.

Because of frequent delays in issuing certificates following the grant of a waiver, some applicants assume that once the Cabotage Department has received their fully-paid application and has issued a receipt in respect of the application fees, the issuance of the waiver certificate becomes a mere formality. However, this is not the case, and applicants should not commence cabotage activities until the formal certificate has been received by them.

The Nigerian cabotage regime is complex and its application does not in all circumstances reflect the terms of the legislation. Accordingly, international shipowners or operators should take expert legal advice in the jurisdiction before seeking to commence operations in Nigeria. If any reader would be interested to discuss these issues in greater detail please feel free to contact the writers or your usual NR contact.

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Cargo liquefaction

Author: David McKie

Wet wolves and dry sheep - legal implications of cargo liquefaction

Introduction

Bulk cargoes which are prone to liquefy ought to be capable of being transported safely if proper notice of the risk of liquefaction is given to the carrier. Experience shows this often does not happen. This final article in our series considers some of the legal consequences of shipping cargoes which liquefy. The focus here is on the implication for contracts of carriage, although it should always be remembered that the shipment of dangerous cargoes can potentially prejudice insurance cover and result in criminal liability.

Common law

At English common law, a shipper has an implied obligation not to ship cargo without giving notice to the carrier of any special characteristics that might cause loss of or damage to the ship or other cargo, or cause detention of or delay to the ship. If insufficient notice of a bulk cargo’s liquefaction risk is given to the shipowner, and the cargo liquefies, the shipper and charterer are likely to be strictly liable to the shipowner/carrier for loss, damage or delay which results. Ignorance of the risk is no defence, nor is the exercise of due diligence.

International conventions

Article IV rule 6 of the Hague (and Hague-Visby) Rules, allows the carrier to land, destroy or render innocuous without compensation any inflammable, explosive or dangerous cargo, and this will include a cargo shipped with an unsafe moisture content. If the carrier (or the Master or the carrier’s agent) has not consented to the shipment of goods with actual or constructive knowledge of the characteristics that render that cargo dangerous, the carrier is entitled to an indemnity from the shipper. Where the carrier has given informed consent but the cargo nevertheless becomes a danger to ship or cargo, the carrier loses the right to an indemnity but can deal with the cargo without liability to cargo interests, save in general average. Again the shipper’s liability is strict and ignorance of the cargo’s dangerous characteristics is no defence.

The Hamburg Rules and the Rotterdam Rules also impose strict liability on the shipper for the shipment of dangerous cargo.

Charterparty clauses

Many charterparties contain express clauses prohibiting the carriage of explosive, flammable or IMDG Code cargoes, but these are not always worded to catch cargoes which are dangerous at common law. It is therefore increasingly common in the bulk cargo trade to see bespoke clauses dealing with liquefaction risk. In 2011 the International Group of P&I Clubs published their recommended Solid Bulk Cargo Clause which is too lengthy to quote here but in very broad terms seeks to make charterers liable for all time and costs associated with establishing that a solid bulk cargo is safe for shipment and for the consequences if the cargo is thought, or turns out, not to be safe. These clauses need to be read not in isolation but in the context of the whole contract of carriage, particularly provisions regarding seaworthiness and obligations to load, stow and trim the cargo.

Seaworthiness

Whilst the duties and liabilities in relation to shipment of dangerous cargoes are placed firmly on the shipper or charterer, the carrier will lose its rights under Article IV rule 6 if it has failed to exercise due diligence to make the vessel seaworthy. Unknowing acceptance of a cargo which may liquefy is unlikely to amount to a failure to exercise due diligence, even if the fact of the cargo’s liquefaction risk makes the vessel unseaworthy.

Nevertheless, neither the carrier nor the Master should assume that the Master need do nothing if presented with a cargo which poses a potential or obvious liquefaction risk. Consent to the loading might thereby be inferred depending on the circumstances. Although the Master is not expected to be an expert chemist, a failure to take the steps an ordinarily competent and prudent Master should take (which might include consulting the IMO Safe Bulk Cargo Code and publications like Thomas on Stowage, as well as visual inspections and “shake” tests) might amount to incompetence making the vessel potentially unseaworthy or it may be negligence causative of the resulting loss. Consideration also needs to be given to compliance with the ISM Code in this context.

Conclusions

Situations involving actual or potential cargo liquefaction are likely to be quite complicated in practice and specific advice should of course be sought on every occasion. International conventions on the carriage of goods and charterparty terms may seek to deal with the consequences of shipment of cargoes which liquefy. The carrier is likely to have rights against the shipper or charterer, but the extent of these rights may be curtailed or even lost by the steps taken by chartering personnel ashore or by the Master prior to loading. There is fertile ground for factual disputes particularly as to what information about the cargo was given or should have been apparent to the shipowner or ship’s Master.

Ultimately it is likely to be better and cheaper for all parties involved to take active steps to ensure that there is a proper information exchange prior to agreeing to carry or load a bulk cargo which may liquefy, so as to minimise the risks of that cargo turning out to be what one judge memorably once described as a wet wolf in a dry sheep’s clothing.

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The Bribery Act 2010 - update

Author: Philip Roche and Emma Humphries

Serious Fraud Office (SFO) guidance on ‘Facilitation Payments’

Six months have passed since the Bribery Act 2010 (the Act) came into force in July 2011 (see July Legal Flyer update). The Act has introduced wide-ranging changes which companies in the shipping industry should be aware of and we would expect all those companies that may be affected to have put compliance procedures in place already.

The ‘corporate offence’ in the Act of the failure by a commercial organisation to prevent bribery applies to all companies which operate their business (or part of their business) in the UK.

A ‘bribe’ can include a financial or other ‘advantage’, however small. This means that many facilitation or ‘grease’ type payments typical in the shipping industry are unlawful. The Act makes no exception for them and indeed such payments have always been unlawful in English law.

The difficulties associated with implementing the Act have raised a number of concerns to those in the shipping industry as to what is expected of them both in the immediate and long-term and the approach the SFO is likely to take in enforcing the Act.

The SFO’s decision on whether to prosecute a company for making facilitation payments is based on a number of ‘steps’. The SFO will be looking to see (i) whether the company has a clear issued policy requiring such payments to be resisted; (ii) whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments; (iii) whether those procedures are being followed by employees; (iv) if there is evidence that all such payments, if made, are being recorded by the company as such; (v) if there is evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries/ports concerned that such payments are being demanded; and (vi) whether the company is taking what practical steps it can to curtail the making of such payments.

Essentially, the SFO will be looking to see that a company has adequate procedures in place designed to prevent bribery. In addition, it will be looking to see a reduction in facilitation payments made over time. The SFO understands that it cannot expect to see an overnight ‘sea change’ in the approach to facilitation payments in the many ports of the world, and appreciates that, in many jurisdictions they are effectively unavoidable at this time. If, however, companies cannot demonstrate that they are at least trying to resist or reduce the amount of payments, and in particular are trying to hide the fact that such payments are made, this will make companies more susceptible to the possibility of investigation and possibly prosecution.

Many masters and/or crew members face intimidation and duress in some jurisdictions, making facilitation payments hard to avoid. The SFO has made it clear that it expects all companies to take a zero tolerance approach to bribery and corruption but would be sympathetic to events where facilitation payments have been made where there was duress, i.e. a risk to life and limb or risk to the health and safety of an individual. The SFO does not include economic duress in such a category - so the risk of a delay would not be regarded as sufficient excuse for making the payment. Yet in most cases, it is the threat of delay that is most persuasive when faced with demands for facilitation payments.

Notwithstanding this, companies have a duty to report such activities to the appropriate authorities as well as to keep a record of the payments. The SFO has sought to reassure those concerned that their reason for asking companies to record the payments made is not to incriminate themselves and invite investigation, but to assist the SFO with identifying where the key problem locations/ports are located so that this may be addressed at a collective level. Ship owners should complain to trade bodies and associations such as the Chamber of Shipping or INTERTANKO, for instance, who may be willing to collate and make representation to appropriate authorities. The UK Foreign Office has agreed to assist in this regard. There is an expectation that industry bodies, such as INTERTANKO or the British Chamber of Shipping will assist smaller companies by providing guidance, as well as continued and general involvement with the SFO on behalf of these companies. However, the SFO does encourage businesses to utilise information which is already available in the public domain, regarding port activity for example, which a company can and should make use of in ensuring it complies with the Act.

Some companies have entered into agreements with certain port authorities to set up what is effectively a fund, used to pay the port officials’ salaries and move towards introducing automated processes, thereby removing the human element and giving the Master an excuse to refuse the payment.

The SFO has produced a letter for Masters, intended to be shown to those demanding a faciliation payment explaining why they are refusing. It is not expected that such document will be of much use in the face of demands for the ‘usual payment’.

Smaller companies however will struggle to make such far-reaching changes to how they do business, particularly if they use certain ports only infrequently. The SFO has confirmed it is aware of the disparity that exists in the industry, that smaller companies have fewer resources and would be less resilient to the possible consequences such as delay of resisting bribery and corruption. That said, the SFO has made it clear that it takes a particularly dim view of cash payments which will rarely be excused if discovered. However, if they can be avoided and the other steps put in place, the SFO believes that it is unlikely that they would seek to prosecute a company which is making genuine attempts to tackle corruption. Provided the companies can demonstrate they are actively adopting a zero tolerance approach, the SFO has indicated they will leave those companies free to resolve issues regarding facilitation payments over time. No indication has been given, however, as to when that time may run out.

Aside from having to comply with the letter of the law, many companies (for example, energy majors) are demanding that their contractual counterparts also agree to comply with the Act. This is because of the requirement that British businesses have adequate procedures to prevent bribery on their behalf and therefore, to fulfil the test, the company must ensure that its business partners also not involve themselves in unlawful behaviour. As a result, we are increasingly seeing quite onerous provisions in their standard form agreements, such as charter-parties. Such clauses are far reaching and often give the counterparty considerable rights of investigation and audit.

The SFO’s apparent tolerance of the making of facilitation payments by companies that have adequate anti-bribery and anti-corruption procedures in place is likely to be a short-term position as a result of the Act still being in its infancy. Companies are likely to face a stricter approach in the future in relation to facilitation payments, particularly if the SFO cannot perceive any attempt to reduce payments or a reduction in the number of payments made. In the medium- to long-term, therefore, it simply will not be enough, and it certainly will not be a defence to prosecution, to protest that such payments are a reality of operating in the global shipping industry.

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Refund guarantee cases

Authors: Roger Heward, Jonathan Cripps and Claire Berwick

Refund Guarantors have their day in Court

You wait for ages for a good refund guarantee case to pass through the Courts…and then two come along at once.

In November 2011, judgment was handed down by the Supreme Court in the case of Rainy Sky v Kookmin Bank1, a case that had attracted considerable interest from the shipping finance community a year previously when the case was heard in the Court of Appeal.

Rainy Sky v Kookmin Bank involved a dispute as to the enforceability of refund guarantees issued by Kookmin Bank, in Korea, in connection with a shipbuilding contract entered into by Rainy Sky SA as buyers and Jinse Shipbuilding of Korea as builders. The builders became insolvent and entered into a formal debt work-out procedure under Korean law. The buyers demanded immediate repayment of the instalments and when the builders failed to pay, the buyers made demand under the refund guarantee.

The drafting of the refund guarantee was ambiguous and the question was whether Kookmin Bank was liable under the refund guarantee for all instalments which became repayable by the builders under the Building Contract or whether liability under the refund guarantee was contingent on the buyers also having a right under the Building Contract to reject the vessel and terminate, cancel or rescind the Building contract. Insolvency of the builders did not give rise to a right on the part of the buyers to rescind the Building Contract.

The Court of Appeal held that, on its true interpretation, the refund guarantee applied only in circumstances where the buyers had exercised a right either to reject the vessel, or to terminate, cancel or rescind the Building Contract, and that consequently as (insolvency of the builders did not give rise to a right by the buyers to rescind), Kookmin Bank as guarantor had no liability under its guarantee.

Please click here to link through to a full briefing and commentary on the Court of Appeal decision: June 2010 briefing.

On 2 November 2011 however, the Supreme Court unanimously reversed the decision of the Court of Appeal and restored the order of the Judge at first instance. The Supreme Court judgment did not create new law but the Supreme Court took a more purposive approach in interpreting the ambiguous drafting in dispute. The Supreme Court decided that the “commercially sensible” interpretation (and views on this may vary) was that Kookmin Bank did have a broader liability to refund instalments whenever such instalments were repayable by the builders under the Building Contract.

The case is a reminder that there is no substitute for careful and accurate drafting of legal documents and if the drafting is ambiguous (as was the case with the drafting in the refund guarantee) then the parties must submit to the outcome of legal proceedings.

Please click here to link through to a full briefing and commentary on the Supreme Court judgment: December 2011 briefing.

The second refund guarantee case of interest to pass through the Courts in November was the case of WS Tankship II B.V., WS Tankship III B.V., WS Tankship IV B.V. v The Kwangju Bank Ltd, Seoul Guarantee Insurance Company2).

In this case each of the claimants agreed to buy a bitumen tanker from GEO Marine Engineering & Shipbuilding Co. Ltd., Kwangju Bank Ltd and Seoul Guarantee Insurance Company issued refund guarantees in relation to each of the tankers under the mistaken belief that they were issuing refund guarantees on an instalment by instalment basis. The wording of the refund guarantees however, which was taken directly from the form agreed between the buyers and the yard, covered all instalments by automatically increasing the value of the guarantee with each instalment.

The banks resisted calls on the guarantees following the insolvency of the yard, arguing that the guarantees should be construed as single instalment guarantees and that, in any event, the guarantees were secondary obligation guarantees not primary “on demand guarantees”. If the banks succeeded on the latter argument, a number of defences flowed from this, including a question as to the “signing” requirements for the refund guarantees issued by SWIFT. The banks’ arguments were largely specific to the intricate facts of the case but two points can be taken from the case.

The first point to note is how confusion between parties can cause unnecessary litigation. The confusion as to whether the refund guarantees were on an instalment basis or for all payments came about due to language problems between the parties and was perpetuated by none of the parties challenging that the conduct of the guarantors, in issuing further refund guarantees when instalments were paid, was inconsistent with what had been agreed under the Building Contract. The point to note therefore, in order to try to avoid litigation, is the need to be clear about what you are expecting, to check that the drafting of the guarantee correlates with what you understand has been agreed and to question anything unexpected at the time you identify any issues.

A secondary point of interest was the consideration given to the “signing” requirements for guarantees issued by SWIFT form in the context of the dispute as to the nature of the guarantee being given. A “true” guarantee where the guarantor acts as secondary obligor must be in writing and signed by the guarantor to satisfy statutory formalities for guarantees under section 4 of the Statute of Frauds Act 1677. Documents issued in SWIFT form will have a SWIFT identification number but current practice is that this number alone will not suffice to comply with statutory formalities and there should be the inclusion of the name of the issuing bank in some form. The Court concluded that the inclusion of the name, whether intentionally written or by automatic means, whether in a header or otherwise and whether abbreviated or not, was sufficient to come within the spirit of the law even if not the letter. Although the judge’s comments on this point were purely anecdotal, they will have some persuasive weight and give some degree of comfort on guarantees issued in SWIFT form.

Footnotes
  1. Rainy Sky SA v Kookmin Bank [2011] 1 W.L.R. 2900
  2. WS Tankship II B.V., WS Tankship III B.V., WS Tankship IV B.V. v The Kwangju Bank Ltd, Seoul Guarantee Insurance Company [2011] EWHC 3103 (Comm)
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