Shipping newsletter - Legalseas

July 2011 Authors: Philip Roche, Peter Glover, Liana Miliotis, Ben Rose, Angela Savin, Leyla Cooper, Ian Teare

Introduction

Welcome to our July edition of Legalseas where we continue to consider a series of topical issues for the shipping industry.

In this July edition we have eight articles from across the Norton Rose international network covering maritime matters as diverse as marine pollution regulations in China, French hull insurance, legal privilege in the circumstances of taxation dawn raids and developments in salvage.

Our first article is from shipping dispute resolution legal manager Wenhao Han on the subject of marine pollution in China. With effect from 1 January 2012 operators of ships are required to conclude a pollution response agreement with a local qualified pollution clean-up company before their ships enter PRC ports, or before the commencement of lightering outside port areas. This article imparts important information for operators with respect to the new 2011 regulations which implement this requirement.

On the subject of the environment, our second article from shipping dispute resolution partner Philip Roche, associate Peter Glover, and assisted by shipping finance associate Liana Miliotis, considers the recently developed BIMCO Radioactive Clause for Time Charterparties which was developed following the Fukushima nuclear power plant incident in Japan in March 2011. This clause influences a number of contractual issues in standard charters, including safe port warranties, delays and deviation and this article considers each of these aspects.

Completing our Asian focus for this edition of Legalseas, our next article looks into the subject of the tax incentives offered to companies establishing maritime activities in Singapore. Singapore-based shipping finance partner Ben Rose provides a detailed overview of the consolidation of the various Singapore tax incentives into the Maritime Sector Incentive scheme which applies as from 1 June 2011. Ben considers whether this consolidation exercise will increase the attractiveness of Singapore as a tax domicile for shipping businesses or give some shipping companies pause for thought before taking expensive relocation steps.

Turning back towards Europe, our next article from tax partner Angela Savin and associate Leyla Kattan forms the second of our series of publications regarding tax investigations (for the first article in the series please see link An inspector calls - a practical guide to tax investigations). In a considerable number of business transactions, which involve an analysis of a party's tax position, tax opinions are granted by accountancy firms or other tax advisers rather than law firms. However in a landmark case, which is scheduled to reach the Supreme Court in the latter half of next year, the English courts have so far not allowed legal privilege to be extended to the advice provided by such tax advisers. Angela provides an essential update into this developing area of law and considers what Parliament's response to a call for legislation might be should the Supreme Court uphold the lower courts' decision not to extend the scope of legal privilege to tax advisers.

Our next article is from shipping dispute resolution partner Ian Teare and associate Peter Glover on the subject of the new Lloyd's Open Form Salvage Agreement known as LOF 2011. This article details a number of interesting departures from the existing LOF, including a default position that salvage awards and the reasons therefor should be published, the addition of new provisions allowing arbitrators/appeal arbitrators to order security for their expenses (and not just appointment fees) and special rules applying to laden containers in salvage situations.

Moving to France, shipping dispute resolution senior associate Jefferson Larue, provides a brief rundown on the key changes brought about by the new French Hull clauses which came into effect in July 2010. These hull Clauses, which have been published in English although subject to French jurisdiction, vary the existing terms by, amongst other things, increasing the maximum cover by reference to agreed value, removing deductibles from contributions to GA, salvage and sue and labour costs etc. and clearly establishing piracy as an insured peril within war risks clauses.

Staying with insurance, marine insurance partner David McKie, looks at the intriguing High Court case involving “SILVA”, a vessel which was improperly detained in Egypt for two years in respect of a health and welfare benefits claim relating to a vessel which, as a result of forgery, appeared to be in common ownership with “SAFIR”. The High Court provided very helpful guidance on the question of what encompasses “ordinary judicial process” within standard hull policies.

In our last article, shipping dispute resolution partner Philip Roche and associate Peter Glover consider the recent decision of the Court of Appeal in AET Inc. Limited v Arcadian Petroleum Limited in which the English courts were asked to decide if a demurrage claim could be upheld if owners failed to submit all supporting claim documentation within the relevant time period. In finding for charterers, the court followed a long line of cases making it clear that owners must satisfy the strict time bar provisions contained in charters or risk having their claims struck out.

Finally, the Bribery Act 2010 (the Act) came into force on 1 July and applies to all companies which operate their business (or part of their business) in the UK. With the wide-ranging changes the Act brings, together with its significant extra-territorial reach, it is little wonder that shipping has been identified as one of the most ‘high risk’ industries likely to be affected by the Act. As a result, international shipping companies need to address how best to minimise the risk of falling foul of the Act and how to prevent corrupt practices in their businesses. To the extent that companies have not already put in place procedures to ensure that they comply with the Act, they must now do so as soon as possible. For more information on the Act please read the following Norton Rose publication The Bribery Act 2010 - what you need to know.

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.

Editor
Richard Howley, Partner
Norton Rose LLP, London

Regulations and Detailed Rules on Ship-Induced Marine Pollution Emergency Preparation and Response Management in China

Author Wenhao Han

Introduction

On 1 June 2011, the Regulations on Ship-Induced Marine Pollution Emergency Preparation and Response Management (the Emergency Response Regulations 2011) promulgated by the Ministry of Transport of the People’s Republic of China (PRC) became effective together with the Detailed Rules on the Implementation of the Ship-Induced Pollution Response Agreement Regime (the Detailed Rules) issued by the Maritime Safety Administration (MSA) of the PRC. These Regulations and Rules have been awaited since the Regulations on the Prevention and Control of Marine Pollution from Ships (the 2010 Regulations) came into effect last year.

The 2010 Regulations

The PRC is a signatory to the International Convention on Civil Liability for Oil Pollution Damage 1992 and the International Convention on Civil Liability for Bunker Oil Pollution Damage 2001. However, for oil pollution caused by non-Convention ships, there is uncertainty in PRC law as to what rules apply to these ships and how compensation for damage caused by them should be determined. The State Council of the PRC promulgated the 2010 Regulations in order to fill this gap in the PRC pollution regime.

The 2010 Regulations came into force on 1 March 2010. The MSA is the enforcement agency and has primary responsibility for implementing the new regulations.

The 2010 Regulations require ships in excess of 1,000 gross tons carrying oil cargoes to have compulsory liability insurance or other financial security for claims arising from oil pollution damage in the PRC; a domestic Oil Pollution Fund is established by the Marine Pollution Regulations 2010 and receives contributions from owners and their agents who receive persistent oil cargoes at PRC ports.1

A key feature of the 2010 Regulations is that operators of ships carrying polluting and hazardous cargoes in bulk or any other ship above 10,000 gross tons, must conclude a pollution response agreement with a pollution clean-up company approved by the MSA and have this in place before their ships enter PRC ports. This requirement has caused concern to the international shipping community as it will inevitably affect a significant number of ships visiting the PRC.

Emergency Response Regulations 2011

Two pieces of supplemental legislation - the Emergency Response Regulations 2011 and the Detailed Rules - contain provisions for the implementation of the 2010 Regulations. The Emergency Response Regulations 2011 classifies the pollution clean-up companies as follows:

  • Level I: companies which are able to provide an emergency service to deal with oil spills from ships and spills of hazardous liquid cargoes in bulk within Chinese territorial waters.
  • Level II: companies which are able to provide an emergency service to deal with oil spills from ships and spills of hazardous liquid cargoes in bulk within 20 nautical miles from the Chinese coast-line.
  • Level III: companies which are able to provide an emergency service for ships to deal with oil spills within port areas.
  • Level IV: companies which are able to provide an emergency service for ships to deal with oil spills within a designated area of a port or the surrounding area of an independent wharf.

Pollution clean-up companies are required to obtain appropriate qualification certificates from the MSA, and these are valid for a period of three years. Qualification certificates will state the name of the company, the legal representative of the company, its level of capability, service area and validation period. Pollution clean-up companies can only provide services for which they are approved providers. Local MSA offices will publish a list of approved pollution clean-up companies, stating their names, levels of capability and service areas.

Operators of ships are required to conclude a pollution response agreement with a qualified pollution clean-up company before their ships enter PRC ports, or before the commencement of lightering for operations outside port areas. Ships should keep a copy of the pollution response agreement on board for inspection and should also present the pollution response agreement to the MSA when completing the formalities for entering or leaving port or for extending the period of operation in port. Ships should report to the MSA any breach of the pollution response agreement or of the Regulations and Detailed Rules by the pollution clean-up company.

Upon notification by a ship of a pollution accident, the appointed pollution clean-up company will be expected promptly to control and clean-up the pollution, and keep the MSA closely informed of its progress. The MSA can arrange necessary measures to be taken to facilitate the clean-up operation; the cost and expenses will fall to be paid, or secured with a financial guarantee provided by, the owners or agent of the ship causing the pollution before it proceeds on its next voyage. Only financial guarantees issued by banks or insurance companies incorporated in the PRC will be acceptable.

Ship Pollution Response Model Agreement

The MSA has published a Ship Pollution Response Model Agreement (the Model Agreement) on its website. The Notes to the Model Agreement explain that the rights and obligations prescribed in the Agreement are mandatory; parties are therefore not free to amend clauses in the Agreement. Parties may however make supplementary agreements on matters which have not been dealt with in the Agreement provided that they do not contradict applicable laws or regulations.

The Applicable law and Jurisdiction Clause in the Agreement provides that the Agreement is governed by the laws of the People’s Republic of China, and any disputes are to be resolved through amicable negotiation between the parties. Where no resolution is achieved, parties may submit their dispute to the MSA for mediation or to the China Maritime Arbitration Commission for arbitration, or bring an action before a PRC court having jurisdiction over the dispute.

Where are we now?

The International Group of P&I Clubs have issued circulars recommending that their members do not enter into contractual arrangements with clean-up contractors for the purposes of ensuring compliance with the 2010 Regulations until the list of approved clean-up contractors is published by the MSA. The International Group is reviewing the Model Agreement to determine whether it conforms with the International Group guidelines concerning spill response contracts.

The MSA in different localities throughout China is preparing for the full implementation of the Emergency Response Regulations 2011 and the Detailed Rules. A list of approved clean-up companies will be published both on the China MSA website (www.msa.gov.cn) and the China Oil Spill Prevention website (www.osp.cn) in the next few months, and clean-up companies will be permitted to publish their rates on the China Oil Spill Prevention website (www.osp.cn).

Operators of non-PRC flag ships (including owners, managers or ship operators) who have no domicile in the PRC are expected to appoint their local PRC branch, office or representative or agent to sign the Ship Pollution Response Agreement with clean-up companies after consulting with their P&I Clubs and before their ships enter PRC territorial waters.

There is a grace period until 1 January 2012. From that date onwards the MSA will require Ship Pollution Response Agreements to be in place. Watch this space!


Footnote
  1. The PRC is not a signatory to the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage 1992.
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BIMCO Radioactivity Clause

Authors Philip Roche, Peter Glover, Liana Miliotis

On 28 April 2011 BIMCO published a Radioactivity Risk Clause for Time Charter Parties. The Radioactivity Risk Clause was produced in response to the radiation leaks from the Fukushima nuclear power plant following the catastrophic earthquake and tsunami that struck the north-east coast on 11 March.

In response to the events in Japan, a number of owners and charterers have developed and employed their own respective radiation clauses for use in their charterparties. Many of these radiation clauses are framed very much in favour of the party that drafted them. In developing the BIMCO Radioactivity Risk Clause for Time Charter Parties, BIMCO aims to achieve a balanced contractual solution that addresses the potential risk of exposure to high levels of radioactivity based on thresholds established by competent authorities. BIMCO’s stated objective in producing the Radioactivity Risk Clause is to provide a measured response to the situation and to clarify where the parties to a time charter stand contractually in respect of trading to areas which may potentially place the vessel, crew and cargo at risk of exposure to high levels of radiation.

We set out below a number of the key issues within the BIMCO Radioactivity Risk Clause which concern both owners and charterers.

View the BIMCO Radioactivity Risk Clause

Safe Port Warranty

The Radioactivity Risk Clause makes it clear that an owner is not obliged to proceed to a port, place, area or zone which may expose the vessel to danger from radiation, as determined by the competent local, national or international authorities, which is harmful to human health.

In Japan the competent authorities include the Japanese Nuclear Safety Agency (NISA), which is responsible for the administration of nuclear safety issues, and the Japanese Ministry of Education, Culture, Sports, Science and Technology (MEXT), which implements measures against nuclear accidents and surveys environmental radiation. Outside of Japan, the recognised international authorities include the World Health Organisation (WHO) and the International Atomic Energy Authority (IAEA). The Radioactivity Risk Clause does not specify what level of radiation is “harmful to human health”, instead relying on determinations by the competent local and international authorities as to what would constitute an acceptable risk, which is in turn dependent on a number of factors such as the amount and type of radiation released; weather conditions, such as wind and rain; a person’s proximity to the nuclear plant; and the amount of time spent in irradiated areas.

Similarly, the Clause does not address issues of timing, such that a vessel (and its crew) may find itself within an area in which radiation may be harmful to human health before any warning is published by the relevant competent authorities. Should such a situation occur, an owner would be at liberty to depart the area in furtherance of the master’s overriding responsibility for the safety of his vessel. Should such avoiding action be taken an owner will need, however, to be prepared to substantiate such action so as to avoid a claim for unlawful deviation.

Notwithstanding the above, the WHO and IAEA are working with the Japanese authorities to monitor radiation levels and to ensure compliance with international standards. It is therefore considered unlikely that an owner or charterer will be presented with conflicting opinions as to what constitutes levels which would be “harmful to human health”.

The Japanese Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has published a specialist web page entitled “Radiological information on ports and maritime transportation”. This website provides updates on radiation measurements taken in the regions of both Tokyo Bay and the Fukushima area and MEXT continues to publish various readings of environmental radioactivity levels by prefecture. In addition the WHO publishes regular situation reports regarding radiation exposure through air, sea water, drinking water and locally grown foodstuffs.

In the event that an owner refuses to proceed in the absence of valid grounds for refusing to do so, they may be in breach of the charterparty. Similarly, charterers cannot order a vessel to proceed to a port, place, area or zone which may become unsafe due to levels of radiation which would be “harmful to human health” as determined by the competent authorities. In the event owners determine that a port or similar place is unsafe to proceed to they must immediately inform charterers, who are in turn under an obligation to issue alternative voyage orders. The Clause provides that any time lost as a result of waiting for or complying with such orders shall not be considered off-hire.

Delays

The Clause provides that any delays arising out of measures taken by port authorities to screen the vessel for radiation either in the country affected or at subsequent ports of call shall be for charterers’ account. The Clause also provides that any time lost as a result of complying with such screening shall not be considered off-hire.

This has significance as Japan has started radiation checks on vessels and containers leaving the ports of Tokyo, Yokohama and Kawasaki (collectively known as “the Ports of Keihin”). On 22 April, the Japanese Ministry of Land, Infrastructure, Transport and Tourism (MLIT) issued guidelines for radiation measurements in ports in Japan and have introduced a system of issuing certificates showing radiation readings on vessels departing from Japanese ports. If the measured ‘dose rate’ on a vessel exceeds the criteria for decontamination (which is defined in the guidelines and is based on the standard value developed by international bodies such as the IAEA and IMO), then decontamination action must be taken.

In mid-April, the European Union asked that all European ports check radiation levels on all vessels coming from Japan to establish whether they exceed a proposed new radiation limit of 0.2 microsieverts per hour above normal levels. A number of European ports, namely Rotterdam and Antwerp, have commenced screening vessels and cargoes which have recently visited Japan, with any abnormal readings triggering further inspection by State governmental authorities.

To date, no vessels have been refused entry to Europe on the basis of elevated radioactive levels. A container vessel was, however, turned away from Xiamen, China, in March when the local port authorities detected an “abnormal” radiation reading of 3.5 microsieverts per hour on the deck of the vessel’s surface containers. The vessel returned to Kobe port and subsequently received permission to call at Hong Kong after passing the radiation level checks conducted by the Hong Kong local port authorities. In a special circular dated 28 April 2011 circulated to its members, BIMCO described this as a ‘one-off event - a “knee-jerk” reaction…where there was no substantive evidence of radiation contamination to support such rejection’ and has therefore not included any provisions in the Radioactivity Risk Clause in response to this event.

Deviation

The Clause provides that compliance with the Radioactivity Risk Clause shall not amount to a deviation. To the extent that there is any conflict with the Radioactivity Risk Clause and any other implied or express provision in the charterparty, the Radioactivity Risk Clause will prevail to the extent of the conflict.

Cargoes

The Clause provides a warranty by charterers that they shall not load cargoes and/or empty containers and/or supply bunkers that have levels of radioactivity in excess of normal background radiation levels for the area in which the vessel is located. The loading of cargo or the stemming of bunkers in the presence of radiation levels in excess of background radiation levels may operate to compromise an owner’s hull and machinery and P&I cover in the event such policies contain a nuclear risk exclusion clause. For this reason BIMCO recommend, if an owner is in any doubt, that a radiation survey be performed by a suitably qualified independent surveyor prior to the loading of cargo or the stemming of bunkers. Any radiation surveys performed at the owner’s request shall be at the charterer’s expense.

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Introduction of the Maritime Sector Incentives Scheme

This article was first published by Marine Money Asia on 1 July 2011.

Author Ben Rose

Introduction

For a number of years Singapore has worked to establish itself as a major international shipping centre and has introduced a number of tax incentive schemes to achieve this goal. In an effort to consolidate and simplify the regime of maritime tax incentives available to maritime industry participants in Singapore (Tax Incentives), the Singapore Government has recently introduced the Maritime Sector Incentive (MSI) Scheme.

Effective from 1 June 2011, the MSI scheme (operating under the auspices of the Singapore Maritime Port Authority (MPA)), offers both local and international entities a more concise and clearer picture of the Tax Incentives. The MSI Scheme is intended to simplify and enhance the existing regime and further promote Singapore as an international maritime centre, but it remains to be seen whether the amendments made by the MSI Scheme will in fact promote or hinder the expansion of the maritime industry in Singapore.

Previous regime

Prior to 1 June 2011, Singapore had a suite of tax incentives targeted at various different sectors of the maritime industry, including:

  • the income tax exemptions under section 13A of the Income Tax Act (ITA), for qualifying income derived from operating Singapore-flagged and foreign-flagged ships;
  • the Approved International Shipping Enterprise (AIS) scheme under section 13F of the ITA, providing for tax exemption on qualifying income derived from operating foreign-flagged ships in international trade;
  • the Maritime Finance Incentive (MFI) offering a tax exemption (or a concessionary tax rate of between 5 per cent and 10 per cent depending on the activity) under section 13S of the ITA, on qualifying income derived from leasing ships or containers and managing a shipping or container investment related enterprise;
  • the Approved Shipping and Logistics (ASL) scheme offering a 10 per cent concessionary tax rate on incremental qualifying income derived from certain shipping support services (by ship agencies, ship management companies, freight forwarders and logistics operators); and
  • the Ship Broking and Forward Freight Agreement (FFA) trading incentive providing a 10 per cent concessionary tax rate for certain income derived by approved ship brokers and approved FFA traders.

In addition, withholding tax exemption was granted on a case-by-case basis on qualifying payments made in respect of qualifying foreign loans taken to finance the construction or purchase of ships (subject to certain conditions).

Generally, under the AIS and MFI schemes, the relevant company applying for the exemption needed to be tax resident in Singapore, meaning that the central control and management of its business needed to be conducted in Singapore.

The MSI scheme

In broad terms, the MSI scheme consolidates the Tax Incentives previously offered and creates three broad categories of tax incentives for entities involved in international shipping operations, maritime leasing arrangements and shipping support services.

International Shipping Operations

The International Shipping Operations category of tax benefits (including the MSI-AIS Award and the MSI-SRS Award) was adopted by the Singapore Government to encourage international ship owners and operators to establish and grow their operations in Singapore and, where possible, to register their vessels under the Singapore flag.

Accordingly, the MSI-AIS Award and the MSI-SRS Award, together, offer entities entering into the scheme after 1 June 2011 similar tax benefits to those previously offered under section 13A of the ITA and the AIS Scheme. Existing entities enjoying tax exemptions under section 13A (mainly for Singapore-flagged ships) and section 13F (AIS Enterprise Scheme - mainly for foreign-flagged ships) will transit into this category.

The benefits include tax exemptions on:

  • qualifying income derived from the operation of Singapore-flagged ships and foreign-flagged ships plying in international waters;
  • qualifying in-house ship management fees derived from related qualifying special purpose vehicles; and
  • income derived from foreign exchange and risk management activities which are carried out in connection with and are incidental to the operation of the ship.

In addition to the existing incentives, qualifying MSI-AIS Award and MSI-SRS Award participants will receive an automatic withholding tax (WHT) exemption in relation to qualifying payments made on foreign loans used to finance the purchase or construction of Singaporean-flagged and (in the case of approved ship operators) foreign-flagged vessels, and on certain charter payments to overseas shipping companies. Previously, entities had to apply for a WHT exemption on a loan-by-loan basis, which was often cumbersome and time consuming (and often difficult to obtain for ship construction loans).

Significantly however, the incentives offered by the MSI-AIS Award will no longer be enjoyed for a guaranteed maximum period of 30 years by all qualifying entities, as was the case under the previous regime. International shipping companies with established worldwide networks, strong track records, demonstrable business plans and a commitment to expanding their shipping operations in Singapore may apply for a 10-year renewable award for a maximum period of 30 years. However, smaller entities or new entrants who do not meet these criteria may, up until to 31 May 2016, apply for a 5-year non-renewable award (with the possibility of graduating to a 10-year renewable award for a maximum of 30 years at the end of the 5- year period on reassessment of the application by the MPA).

Maritime leasing arrangement

This category of the MSI scheme, known as the MSI-ML Award (MSI-ML Award), is aimed at promoting the growth and development of ship and container financing in Singapore and takes over from the MFI scheme under the previous regime. The scheme is designed to encourage entities to use Singapore as their capital and funding base to finance their vessels and shipping containers. Existing entities enjoying tax exemptions (or concessionary rates) under the MFI scheme will automatically be granted exemptions under this category.

Qualifying entities (including ship or container leasing companies, funds, business trusts and partnerships) which own a ship or a shipping container (Asset Owning Entities) will receive a tax exemption (or concessionary tax rate of between 5 per cent and 10 per cent) on leasing income derived from the relevant asset, depending on the entity’s operational track record, whether the entity has a demonstrable business plan and whether it displays a commitment to expanding its shipping and container financing in Singapore.

Both operating and qualifying finance leases are covered under the MSI-ML award, to allow asset-owning flexibility and residual risk management options.

Approved management companies of the Asset Owning Entities may also apply for a 10 per cent concessionary tax rate on their qualifying management income under the MSI-ML Award. Again, applications will be assessed on the ability of an entity to demonstrate to the MPA that it has a strong track record, business plan and a commitment to expanding shipping and container financing in Singapore.

Tax concessions offered on qualifying income under the MSI-ML award will be for a 5-year non-renewable period and may be applied for until the sunset date of 31 May 2016.

MSI-ML Award participants who qualify as approved lessors will also receive an automatic WHT exemption akin to that received by MSI-AIS participants, as outlined above, on qualifying payments made in respect of qualifying foreign loans taken to finance the purchase or construction of both Singapore and foreign-flagged ships, without the need to apply on a case-by-case basis.

Shipping support services

The incentives offered under the shipping support services category of the MSI scheme (MSI-SSS Award) are aimed at encouraging support service providers to the maritime industry to base their operations in Singapore and to encourage large multinational companies and shipping conglomerates to set up their corporate service functions and conduct their ancillary services in Singapore.

The tax benefits offered under the MSI-SSS Award will mirror those offered by the ASL and FFA schemes under the previous regime (and existing entities enjoying concessionary tax rates under the current ASL and FFA schemes will transit into this category). However, the 10 per cent concessionary tax rate on incremental qualifying income derived from the provision of certain shipping support services will now be extended to include qualifying corporate services and will therefore cover:

  • ship management, ship agency and shipping freight/logistic services (previously covered under the ASL Scheme);
  • ship broking and forward freight agreement (FFA) trading (previously covered under the FFA scheme); and
  • qualifying corporate services, which includes shipping related corporate services (for example human resources services or legal services) rendered by applicant entities to a related party in which the applicant entity has at least a 25 per cent shareholding.

Applications will again be assessed on an entity’s track record, whether it has a demonstrable business plan and whether the entity has a commitment to expanding their ancillary shipping operations in Singapore in the future. Singapore tax benefits received under the MSI-SSS Award will be subject to a 5-year non-renewable period and the operation of the category has a sunset date of 31 May 2016.

Future of the MSI scheme

It is clear from the Singapore Government’s adoption of the MSI scheme and the resulting restructuring/simplification of the maritime tax incentives that the Government remains dedicated to cementing Singapore’s status as a global leader in the shipping and maritime industry.

The introduction of the automatic withholding tax exemption on qualifying foreign loans (for both Singapore and foreign-flagged ships) is clearly an advantage of the new scheme and will hopefully encourage more international shipping companies to own/manage their ships from Singapore. Singapore also has other attributes which make it attractive as a location for shipping companies, such as its network of double tax agreements.

However, by reducing the guaranteed period for tax exemption/concession for many of the categories to a 5-year non-renewable period and by introducing sunset clauses applicable to all three categories of tax incentives under the MSI Scheme, there is an inherent risk that the scheme will appear less attractive to both local and foreign operators in the long term - particularly to those owners/operators who are required to operate foreign-flagged ships, for example to meet cabotage rules in a number of jurisdictions in the region, including India and Indonesia.

As such, whilst the new scheme streamlines the existing rules, and introduces certain tax enhancements to the existing arrangements, the changes also introduce a degree of uncertainty over the duration of the tax incentives (and the MSI scheme itself), which may be viewed negatively by international shipping companies thinking of using Singapore as a base for their shipping operations in the long-term. The full impact of the MSI scheme on the Singapore maritime industry may therefore only become fully apparent over time.

In all cases, shipping companies proposing to establish in Singapore are recommended to discuss their proposals with the MPA to establish the way in which the new incentives will operate in the context of their business proposal.

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Legal advice privilege

Authors Angela Savin, Leyla Kattan

It is settled law in the UK that legal advice given by lawyers is covered by legal advice privilege (LAP). This gives a party the right to prevent third parties and the courts from having sight of the relevant material. It has been described by the courts as a fundamental human right that is essential to the administration of justice - a person should be able to obtain skilled advice about the law knowing that his discussions and the advice he receives will not be disclosed without his consent. It is well established that the right to claim LAP is exercisable in response to a request or demand for information pursuant to investigatory powers and therefore that it is not confined to litigation. Materials produced in contemplation of or as part of litigation enjoy separate protection.

Recently, in the tax sphere, the scope of legal advice privilege has been challenged. In this second article on tax disputes, we look at an attempt to extend the scope of legal advice privilege.

Some non-lawyers such as other tax advisers argue that LAP should be extended to cover legal advice given by them. In particular, they argue that in giving tax advice, there is no difference between what they do and what lawyers do. Given the large number of non-lawyers who give tax advice, it is argued that their clients are entitled to the fundamental human right of LAP - which should not only be available if lawyers are instructed.

Some argue that LAP should only be applicable to communications with a lawyer. LAP exists to enable persons to obtain advice about the law knowing that what they say and the advice they receive will be held in confidence. A client is more likely to be open with his lawyer if he knows that what is said will be protected from disclosure. Lawyers (unlike other tax advisers) have a unique responsibility to the Supreme Court, therefore creating a close link between lawyers and the administration of justice.

The scope of LAP in the tax field has recently been in the spotlight due to a case brought by Prudential plc. The case concerned “section 20” information notices (now schedule 36 notices) which require taxpayers or third parties to deliver documents to HMRC which it reasonably requires to check a taxpayer’s liability. The section 20 notices required Prudential to produce documents pursuant to an investigation by HMRC into a commercially marketed tax avoidance scheme. The documents included materials produced by accountants.

Prudential challenged the request on two grounds, one of which was that the section 20 notices sought material which was covered by LAP. Prudential argued that in the present day where skilled professional advice on tax law is obtained from accountants as well as lawyers, the long established common law rules regarding LAP should apply to communications between client and accountant (as the professional tax adviser) for the purposes of obtaining legal advice on tax, and not just to communications between client and lawyer.

However, the Special Commissioners, High Court, and Court of Appeal each rejected the Prudential’s arguments and held that LAP should not be extended to legal advice given by those who are not members of the legal profession.

One of the main reasons for the Courts in reaching this decision has been the role of Parliament. The question of extension of privilege has been considered by various committees over the years, yet Parliament has not created a statutory extension. Furthermore, the Court of Appeal noted that there was the “serious hurdle” as to what kind of adviser an extended LAP would apply. It held that the proposals put forward by the Prudential for extending LAP to certain professional persons would introduce an undesirable and substantial degree of uncertainty. The Court of Appeal concluded that LAP is a right which must be clear and certain in its application, and that it is for Parliament to decide if and how this right should be extended.

In April 2011, Prudential was granted leave to appeal to the Supreme Court. The Law Society and Institute of Chartered Accountants in England and Wales (ICAEW) have been given permission to intervene in the appeal. A hearing date will be set this October, so the case is unlikely to be heard until the latter half of next year.

Although it is impossible to predict what the outcome of the case will be, it would be a surprising result if the Supreme Court disagrees with the Court of Appeal and finds that the court rather than Parliament is the proper forum for extending a right such as this which has been described as fundamental to the administration of justice.

Should Prudential lose in the Supreme Court, attention may then turn to Parliament. However, there is a danger that Parliament, rather than extending LAP, might restrict its application. The Australian Government recently issued a discussion paper on extending privilege to accountants, but it is thought by some that the proposals would remove some of the protections currently provided by privilege. It is therefore unclear whether the proposals will result in a step forwards or backwards for the Australian taxpayer.

However, as noted above, Parliament has been given the opportunity to change the scope of LAP in the past but has not chosen to do so. Whether it now believes that change is necessary has yet to be seen.

In the next edition of Legalseas, we consider the topic of information exchange.

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LOF 2011 Client Briefing

Authors Ian Teare, Peter Glover

On 9 May 2011 Lloyd’s launched the latest version of the long standing and internationally recognised Lloyd’s Open Form of Salvage Agreement. The new LOF will be known as LOF2011.

Whilst there have been a few minor amendments in the layout of the form itself, the material changes are the addition of two new “Important Notices” provisions, together with changes to the accompanying LSSA clauses.

Set out below are a number of the key changes to the LOF Form itself and the accompanying Lloyds Standard Salvage and Arbitration (LSSA) Clauses which concern both owners and underwriters.

LOF 2011 - Important Notices

3. Awards. The Council of Lloyd’s is entitled to make available the Award, Appeal Award and Reasons on www.lloydsagency.com (the website) subject to the conditions set out in Clause 12 of the LSSA Clauses.

Salvage awards made pursuant to LOF2011 will now be made available on the Lloyd’s website. Traditionally, LOF awards have been confidential and confined to the parties involved. Confidentiality, of course, being a feature common to most, if not all, arbitration regimes. For commercial reasons, usually associated with the sensitivity of the information the subject of the dispute, many parties prefer arbitration over court proceedings as a means of avoiding making such information public.

No doubt different parties to salvage agreements will have differing views as to the merit or otherwise in keeping salvage arbitration awards confidential. One can envisage scenarios such as Article 14 claims, which usually involve the analysis of commercially sensitive accounting information, which salvors may prefer to keep confidential. However, the present thought is that open disclosure of awards will assist the market as a whole in using the Form by giving the market insight into how LOF Arbitrators approach matters of principle and, of particular interest and benefit, disclosure of the quantum of awards together with the factual matrix which will enable third parties to reach a more informed view of their own cases when considering, for example, settlement proposals.

To accommodate concerns relating to public disclosure, there is a provision within the LSSA clauses for any party to apply to the LOF Arbitrator for an order to defer or withhold such information, but they will need to provide good reasons in support of any application. The default position, therefore, is that the awards will be disclosed (see below for further comment on the procedure).

4. Notification to Lloyd’s. The Contractors shall within 14 days of their engagement to render services under this agreement notify the Council of Lloyd’s of their engagement and forward the signed agreement or a true copy thereof to the Council as soon as possible. The Council will not charge for such notification.

As a matter of industry practice, salvors have traditionally not given notice to Lloyd’s in respect of the performance of salvage services under a LOF contract. This is largely due to the ability, in most cases, for salvors and salved interests to arrive quickly at an amicable settlement and therefore avoid the need of the Lloyd’s Salvage Arbitration Branch (SAB) and the LOF arbitration system. Consequently, it has become very difficult to gauge the actual level of use of the LOF, and salvors are now under a requirement to report to Lloyd’s all LOFs within 14 days of their engagement.

LSSA Clauses

Security for Arbitrator’s and appeal Arbitrator’s Fees

6.6 The Arbitrator shall be entitled to satisfactory security for his reasonable fees and expenses, whether such fees and expenses have been incurred already or are reasonably anticipated. The Arbitrator shall have the power to order one or more of the parties to provide security in a sum or sums and in a form to be determined by the Arbitrator. The said power may be exercised from time to time as the Arbitrator considers appropriate.

10.8 The Appeal Arbitrator shall be entitled to satisfactory security for his reasonable fees and expenses, whether such fees and expenses have been incurred already or are reasonably anticipated. The Appeal Arbitrator shall have the power to order one or more of the parties to provide such security in a sum or sums and in a form to be determined by the Appeal Arbitrator. The said power may be exercised from time to time as the Appeal Arbitrator considers appropriate.

Under clauses 6.6 and 10.8, Arbitrators are entitled to order security from time to time for their reasonable fees and expenses, whether such fees and expenses have been incurred already or are reasonably anticipated. This change has been brought about largely due to the increasing concern on the part of Arbitrators as to the potential for the non-payment of their fees. Prior to the introduction of rule 6.6, any party requesting the appointment of an Arbitrator would be required to give an undertaking as to the Arbitrator’s appointment fee only. Clause 6.6 is much wider than this and allows security to be ordered against all reasonable fees and expenses.

It is also important to note that any order for such security may be made by the arbitrator to one or more of the parties to the LOF contract at the Arbitrator’s discretion: salvors, shipowners, cargo or container interests.

Availability of Award, Appeal Award and Reasons

Clause 12 sets out the conditions whereby the award, appeal award and reasons for the same will be published on the Lloyd’s website (www.lloydsagency.com). Under LOF2011 both the award and the reasons for that award will be published on the website no later than 21 days after the date on which the award or appeal award is published by the Council unless any party makes a representation to the Arbitrator within 21 days of the award being published and made available to the parties that the award remain private and confidential. Thereafter the party must submit in writing to the Arbitrator within a further 21 days the reasons for requesting the withholding of the award and reasons from publication.

In the event of an appeal being entered against an award, the award and the reasons shall not be made available on the Lloyd’s website until the Appeal Arbitrator has issued his appeal award, the notice of appeal is withdrawn or an order as set out above is made.

Container Vessel Clauses

Clauses 13, 14 and 15 only apply to salved cargo insofar as it consists of laden containers. These changes originate out of concerns that the costs incurred in the collection of salvage security from low value cargo interests in cases involving container (i.e. multi-bill of lading) vessels were disproportionate to their proportion of any salvage award or settlement. A brief analysis of each of the clauses is set out below.

13. The parties agree that any correspondence or notices in respect of salved property which is not the subject of representation in accordance with Clause 7 of these Rules may be sent to the party or parties who have provided salvage security in respect of that property and that this shall be deemed to constitute proper notification to the owners of such property.

Clause 13 specifically refers to Important Notice No. 1 of the LOF2011 form, which required notices to be given to the owners of the salved property, which in many container ships may amount to several thousand notices. The new clause 13 permits the SAB, or the salvors, or their appointed representatives or agent to send any appropriate notices to the party (in most cases this will usually be the cargo insurers) that has provided the salvage security. Irrespective of which side ultimately ends up being liable for the costs of the arbitration, this costs saving measure must be regarded as a positive step forward in the LOF system.

Of course if a party has appointed a representative ordinarily resident in the United Kingdom under clause 7 (a Clause 7 notice), clause 13 will not apply to that party. Any appointment under clause 7 must be in writing.

14. Subject to the express approval of the Arbitrator, where an agreement is reached between the Contractors and the owners of salved cargo comprising at least 75 per cent by value of salved cargo represented in accordance with Clause 7 of these Rules, the same agreement shall be binding on the owners of all salved cargo who were not represented at the time of the said approval.

Clause 14 provides that where an agreement has been reached between the salvors and the owners of the salved property, which must comprise a minimum of 75 per cent (by value) of the salved cargo, and with the Arbitrator’s express approval, the agreement can be made binding on the owners of all of the salved cargo who were not represented at the time of giving of the Arbitrator’s approval.

One of the problems facing salvors in a multi bill of lading salvage case is how to deal with the legally unrepresented cargo interests when seeking to secure a settlement with the other respondent interests. In such a scenario, the unrepresented cargo interests could amount to a significant proportion of the salved fund and in order to make a recovery from them the salvors would have to proceed to an arbitration notwithstanding that they had settled with the ship owner and those cargo interests who had been legally represented. The logic of this amendment from a costs savings point of view is plain to see. That said, one can see potential for interesting cases to develop. For example, if there is damaged cargo within the represented and unrepresented cargo groups and it is borderline as to whether the 75 per cent threshold has been reached then the Arbitrator will have to look very closely at the evidence as to values in order to be satisfied that he can make the Order envisaged by the new clause.

15. Subject to the express approval of the Arbitrator, any salved cargo with a value below an agreed figure may be omitted from the salved fund and excused from liability for salvage where the cost of including such cargo in the process is likely to be disproportionate to its liability for salvage.

Clause 15 operates to permit salved cargo with a value below an agreed figure to be omitted from the salved fund and excused from liability for salvage where the cost of including such cargo is likely to be disproportionate to any award or settlement. One can see potential for argument on this amendment as there is presently no guidance as to what constitutes salved cargo with a low value. It remains to be seen, therefore, how this amendment will be deployed but it is anticipated that for cargo interests to be excused the emphasis will have to be very much on the combination of low value and difficulty in enforcing any award. Equally, it is anticipated that, to be excluded, cargo interests will have to be a very small proportion of the fund indeed.

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The new French Hull clauses

Author Jefferson Larue

The new French Hull clauses were released last July. They comprise a package of hull and machinery, war and loss of income covers with various additional covers such as the wreck removal clause and the contributory value clause. The parties can choose which sections apply and can amend the wording.

The French clauses remain “all risks” based and still exclude fishing vessels, yachts, river crafts and construction risks. The hull and machinery coverage includes three sub-covers: physical loss; collision liability; and salvage/general average, sue and labour and legal costs. Each is insured up to the amount of the agreed value. The global limit is now three times the agreed value as opposed to two times under the previous provisions. Unrepaired damage is now covered.

Formerly, the insured was exempted from any deductible in case of total loss and of abandonment of the vessel. This exemption now also applies to the insured’s contribution to general average, salvage charges, sue and labour expenses and to the legal costs reasonably incurred to prevent or mitigate the loss. In addition, the insurer is now due to settle the indemnity within 30 days after receiving all relevant documents.

Punitive damages are now expressly excluded. Piracy is now covered under the war risks cover. Although the wording is in English, it is governed by French law. Finally, jurisdiction has been given to the French Marine Arbitration Chamber unless the parties wish to choose another forum.

The package comes with commentaries on the functioning of the covers and on the construction of some particular clauses, with a translated abstract of the French marine insurance code and a global guide on French insurance law.

As French law has the reputation of being relatively more favourable to insureds, the French market hopes that ship owners will find these new clauses attractive.

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War risks - ‘‘ordinary judicial process’’ exclusion - The Silva [2011] EWHC 181 (Comm)

Author David McKie

War and strikes risks insurance usually excludes from cover any detainment resulting from “ordinary judicial process”, such as by court action to enforce civil debts or obtain security. The English High Court has recently provided helpful guidance on the scope of this exclusion.

On 24 December 2008, the insured ship SILVA was arrested in Port Suez to enforce a claim for around US$1.3 million which had been ordered to be paid to “the Judges’ Fund” (a fund for health and welfare benefits to judicial officials and their families) as part of a 1996 judgment for pollution damage caused by another ship, the SAFIR.

The arrest was maintained on the basis of evidence that the SILVA and the SAFIR were in common ownership. This evidence was fabricated by a convicted forger who was remunerated by the Egyptian Ministry of Justice for assistance in the collection of debts. Despite the efforts of the insured the Egyptian authorities refused to release the SILVA, which remained under arrest for over 2 years. The insured claimed that the vessel was a constructive total loss. War risks insurers disagreed, relying on the “ordinary judicial process” exclusion in the policy, which was subject to English law.

On the detailed facts, the High Court decided that this judicial process in Egypt could not be described as “ordinary”. On the contrary, it amounted effectively to extortion. The insured was therefore entitled to recover in full.

Exclusion clauses will be interpreted strictly. Where there is ambiguity, an exclusion clause will be interpreted against the party seeking to rely upon it. As a result, insurers may need to consider redrafting the standard “ordinary judicial process” exclusion if they wish to exclude similar claims in future.

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Time bars and demurrage claims - the need for strict compliance

Authors Philip Roche, Peter Glover

In the recent decision of AET Inc. Limited v Arcadia Petroleum Limited [2010] EWCA Civ 713 (the Eagle Valencia) the Court of Appeal took the opportunity to highlight the difficulties and procedural issues owners may be presented with when attempting to recover demurrage from charterers. With tanker freight rates at historic lows, and with both charterers and owners interested in maximising their economic return from any given transaction, the case serves as a timely reminder that where a charterparty makes clear provision for how demurrage claims are to be submitted to owners, it is essential that such provisions be strictly complied with.

The facts can be stated succinctly. The Eagle Valencia (Vessel) was chartered on a Shellvoy 5 form (Charterparty). For present purposes, demurrage was stated to be “60,000 US D PDPR” and the material sections of Charterparty are as follows:

[13.1.a1] Time at each loading or discharging port shall commence to run six hours after the vessel is in all respects ready to load or discharge and written notice thereof has been tendered by the master or Owners’ agents to Charterers or their agents or the vessel is securely moored at the specified loading or discharging berth whichever first occurs.

[15.3] Owners shall notify Charterers within 60 days after completion of discharge if demurrage has been incurred and any demurrage claim shall be fully and correctly documented, and received by Charterers, within 90 days after completion of discharge. If Owners fail to give notice of or to submit any such claim with documentation, as required herein, within the limits aforesaid, Charterers’ liability for such demurrage shall be extinguished.

[22.1] If Owners fail

  • to obtain Customs clearance; and/or
  • free pratique; and/or
  • to have onboard all papers/certificates required to perform this Charter, either within the six hours after Notice of Readiness originally tendered or when time would otherwise normally commence under this Charter, then the Original Notice of Readiness shall not be valid.

[22.2] A Notice of Readiness may only be tendered when Customs clearance and/or free pratique has been granted and/or all papers/certificates required are in order in accordance with relevant authorities requirements.

[22.5] The presentation of the notice of readiness and the commencement of laytime shall not be invalid where the authorities do not grant free pratique or customs clearance at the anchorage or other place but clear the vessel when she berths.

The Vessel arrived at Escravos, the second load port, and tendered Notice of Readiness (NOR) at 11.48 on 15 January 2007. Free pratique was granted by the port health authority at 08.30 the following morning. That afternoon the master sent charterers and others two e-mails stating that, without prejudice to the NOR tendered on 15 January, the Eagle Valencia had arrived, is ready in all respects to load and that free pratique had been granted. Three days later, on 19 January, the Vessel departed the anchorage and proceeded to the berth where she duly commenced loading. Loading was completed on 21 January and the Vessel departed Escravos on the same day.

Owners contended that laytime began six hours after the original notice of readiness was tendered, relying on clause 22.5 of the Charterparty. Shortly before the hearing owners also claimed in the alternative that the e-mails sent after free pratique had been granted amounted to giving fresh notice of readiness. Whilst the primary case had been properly notified to charterers, together with all supporting documentation within the 60 day time limit, the alternative, and lesser value demurrage claim, had not been properly notified or documented.

Charterers disagreed and contended that laytime did not begin until the Vessel had berthed since the original NOR was invalidated by clause 22 as free pratique was not obtained within six hours. Further, charterers contended that in any event owners could not place reliance on the alternative claim because no such claim based on the e-mails of 16 January had been submitted within 90 days as required by clause 15.3.

In allowing the appeal, the Court found that the whole scheme of clause 22 in relation to free pratique is to implement a different arrangement from the position as it was under clause 13. To find otherwise would render there being no point in having a special additional clause, in the form of clause 22, at all. In essence, there was nothing in clause 13 which prevented a NOR being tendered in the absence of free pratique – effectively a practice mirroring the position at common law. Nonetheless, clause 22 provided that clause 13 would continue to be applicable if free pratique was granted within six hours of the tender of NOR; if however it was not granted within six hours of the NOR being tendered then the original NOR would not be valid. This would not prevent an owner from tendering a fresh NOR once free pratique has been granted (see clause 22.2) and time will then run after six hours from the tender of this fresh notice. It necessarily follows that up to this point time, costs and expense will be for owners’ account.

The Court also held that there was no legal requirement for a NOR to be in any prescribed form. Save for contractual requirements to the contrary, the NOR merely has to be a statement that a vessel is ready, in the premises, to load or discharge and that it must be accurate in stating that the vessel is so ready.

In the e-mail correspondence of 16 January the master was stating that the vessel was ready to load and as such that correspondence constituted a fresh NOR. Reliance by owners on that notice was, however, barred as clause 15.3 of the Charterparty required any demurrage claim to be fully and correctly documented, and received by charterers, within 90 days after completion of discharge. The Court held that the NOR was an essential document in support of every demurrage claim and that in the absence of submission of the NOR, a claim cannot be said to be fully and accurately documented within the wording of clause 15(3). It followed that owners’ alternative claim for demurrage had been extinguished.

A clause (in the form of clause 15.3) which provides that claims must be brought within a defined time limit, failing which charterers would be released from all liability to owners, is an exclusion clause. Exclusion clauses must be clear and have been subject to special scrutiny by the courts. The usual practice by the courts to the interpretation of exclusion clauses is to apply the contra proferentem approach to their interpretation: that is the wrongdoer bears the burden of proof with any doubt or ambiguity being resolved in favour of the innocent party. In shipping cases, however, the courts have permitted a firm stance in favour of charterers seeking to rely on the exclusions available to them.

In the matter of Babanaft International Co SA v Abant Petroleum Inc (the Oltenia) [1982] 1 Lloyds Rep 448 the Court held:

The commercial intention was to ensure that claims were made by the owners within a short period of final discharge so that claims could be investigated and if possible resolved while the facts were still fresh. This could only be achieved if the charterers were put in possession of all the factual material which they required in order to satisfy themselves whether the claim was well founded or not. The expression “all supporting documents” did not debar owners from making factual corrections to claims presented in time nor from putting a different legal label on a claim previously presented.

Similarly, in Waterfront Shipping Company Limited v Trafigura AG (The Sabrewing) [2008] 1 Lloyd’s Rep. 286, which concerned a time bar clause, the court stressed that strict compliance with a time bar clause was necessary.

In light of the court’s approach, the question then becomes: what should a prudent owner do to ensure that an alternative case is not struck out by a time bar? One answer to this question is found in the judgment of the Eagle Valencia itself, where the Court stated:

That is not necessarily to say that alternative laytime statements and invoices would always have to be submitted to avoid the extinction of an alternative claim but merely to say that the documents to be submitted pursuant to the clause must include a valid notice of readiness. It is not unreasonable for charterers to require such a notice nor is it unreasonable to expect owners to supply it.

It necessarily follows that owners, in addition to following the good practice of always tendering NOR’s without prejudice to the validity of earlier tendered NOR’s, should submit to charterers all NOR’s tendered together with all alternative case supporting documents to ensure that their claim is fully and accurately presented. It is suggested that the same considerations apply equally to claims for deviation and detention. To submit anything less in the circumstances may leave an owner exposed at their own peril.

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