Deductions from Charter Hire Made in Good Faith and on Reasonable Grounds?

London Arbitration 1/22

Disputes often arise in time charters on whether any deduction from charter hire can be made especially when there is an alleged underperformance of the chartered vessel.

It is well established principle of law that if a deduction is made from hire, such deduction must be made in good faith and be based on reasonable grounds (otherwise such deduction amounts to breach of contract on the part of the charterer). This effectively means that in case of a deduction for underperformance of the chartered vessel, the charterer might be called upon at short notice to demonstrate that its deductions were made bona fidei and its calculations were based in reasonable grounds (The Kostas Melas [1981] 1 Lloyd’s Rep 18).

This was the central issue in this dispute. The charterers withheld US$ 53,550.40 gross in respect of what they claimed was time loss due to underperformance to the extent of 6.6938 days (off-hire).

When the tribunal asked the charterers to demonstrate a prima facie case as to whether the deduction from hire was made bona fidei and on reasonable grounds, they responded with a report of weather routing company they appointed, some further comments from that company and the fact that the owners did not appoint their own weather routing company.

The tribunal found that charterers failed to address the question of good faith nor had they made any attempt to show that they had a claim for off hire. It was also noted by the tribunal that the charterers did not address the point made by the owners that there was no speed/consumption warranty in the charterparty as the fixture description of the ship was qualified by the words “all details about/in good faith”.

The tribunal here was simply deciding that the charterers had not shown that their deduction was made in good faith and on reasonable grounds so they were wrong to withheld the deduction from hire. It is theoretically open to charterers to claim that there was an underperformance of the chartered vessel but as hinted by the tribunal, based on the wording in the charterparty qualifying the performance of the vessel, it will be an uphill struggle to prove the existence of a speed/consumption warranty and the fact that it was breached!        

 

Misrepresentation and “Reservation of Rights” in Charterparties

SK Shipping Euorope Ltd v. Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights.

The following day, the owners purported to terminate the charterparty on the basis that the charterers’ message was itself a renunciation.

The trial judge (Foxton, J) found that there was no actionable misrepresentation. Furthermore, it was held that charterers’ conduct (especially fixing the vessel for a sub-charterer in July 2017 for a voyage to Tunjung Pelapas) was incompatible with an attempt to reserve rights to set aside the charterparty for misrepresentation) even though they expressly indicated that they “reserve their rights” after alleging that the owners misrepresented the capabilities of the chartered vessel (i.e. speed and consumption) during charter negotiations. The charterers appealed on both grounds.

Was there an actionable misrepresentation?

The key to the charterers’ appeal was a letter sent on behalf of the owner during pre-contract negotiations on 22 November 2016. The charterers argued that the representations made to them in that letter with regard to the chartered vessel’s last three voyages, its average speed and performance, included a representation as to future performance; and such representation was repeated in each of the parties’ subsequent communications by the restatement of the same data; and the trial judge was erred in law in concluding that there was no inducement

The Court of Appeal found that on an objective reading of the 22 November 2016 letter, a prospective charterer would have understood it be saying “this is how my vessel has performed on its most recent voyages and these are the warranties which I am prepared to give” and nothing more. It can, therefore, be safely concluded that there was no representation as to the future performance of the vessel with regard to speed and consumption. The tribunal also found that the explanation in the 22 November 2016 letter relating to the average of the vessel’s last three voyages was deliberately omitted once the parties began to negotiate. The natural conclusion that emerges from that is that they did not become part of the negotiations on which the charter in dispute was based or became “embedded” in the charterparty. (given that the Court already found that the representations in the letter did not include a representation as to the future, this finding had no impact on the judgment). Also, the Court was adamant that the trial judge made no error of law when concluding that there was no inducement.

Reservation of Rights

This part of the judgment has serious practical consequences for the shipping industry. A part of the industry until recently operated on the basis that the words “reserving my rights” would provide a silver bullet for an innocent party in a dispute or litigation that might follow! There is now authority to the effect that this is not necessarily the case.

The Court of Appeal agreed with the general statement that “a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract”. However, just like the first instance judge, the Court stressed that this was not an inevitable rule. On this point, the Court agreed with the Commercial Court’s statement that actions of the charterer, i.e. nature and consequences of any demand for future performance, may in some instances be incompatible with a reservation of rights. By considering all relevant circumstances existed at the time the order to proceed to Tanjung Pelapas was given, i.e. the fact that the voyage would last two months and that the general reservations made at the time concerned other complaints, not just the misdescription of the vessel, the Court of Appeal endorsed the decision of the Commercial Court that the order was intrinsically affirmatory conduct.

Lessons!

The judgment is a good reminder that construction of the representations from an objective point of view will be vital in determining whether there is an actionable misrepresentation or not. But this is hardly new. More significant message to the industry (and lawyers) is that it should not be assumed that “reservation of rights” language will always have the effect of reserving the rights of an innocent party. This kind of language will be construed in the light of surrounding circumstances and whether it will have the desired impact will largely depend on the future actions of the innocent party.  

It is worth noting that in deliberating the consumption and speed warranty issue, the Court of Appeal in its judgment made reference to the work of late Dr Nikaki and Professor Soyer “Enhancing Standardisation and Legal Certainty through Standard Charterparty Contracts” published as Chapter 5 in Charterparties Law, Practice and Emerging Legal Issues (Informa Law, 2018)).  

          

A classic problem returns – bills of lading, charterparties and the terms of the contract of carriage

As any shipping lawyer will tell you, the law is not at its tidiest when a bill of lading ends up in the hands of a voyage charterer. Yesterday’s decision in Unicredit AG v Euronav NV [2022] EWHC 957 (Comm) adds a further chapter to the saga, which may be more tendentious than it looks.

The case arose out of the insolvency and suspected fraud of Indian oil trader GP (Gulf Petrochem FZC, now a restructured GP Global, not to be confused with oil major Gulf Oil). BP chartered the 150,000-ton Suezmax Sienna from her owners Euronav and agreed to sell her cargo to GP. GP financed the deal through Unicredit, under an arrangement whereby Gulf agreed to pledge and assign to Unicredit all rights in cargoes and rights arising under bills of lading, and agreed that it would resell the cargo to buyers who would pay Unicredit direct.

A bill of lading was issued by Euronav to BP. On the sale, Unicredit paid BP on GP’s behalf; but instead of the bill of lading being endorsed to GP, the charter itself was novated, BP dropping out and being supplanted by GP. BP retained the bill of lading, still made out in its favour.

In April 2020, GP sweet-talked Unicredit into condoning a series of STS transfers of the cargo to what seem to have been connected entities, despite the fact that the bill of lading was still in the hands of BP. The sub-buyers never paid Unicredit; at the same time GP showed worrying signs of financial strain. Unicredit now realised that something had gone badly wrong with the deal, with their security and with GP as a whole. It swiftly got BP to endorse the bill of lading to it and tried to salvage the situation by suing Euronav for delivering the cargo without its production.

The claim was unsuccessful. And rightly so. On the evidence it was clear that Unicredit had actually condoned the STS transfers in the knowledge that the bill of lading would not available, and therefore had only itself to blame. With this we have no argument.

But the claim also failed for another reason, which we are less sure about: namely, that the bill of lading in fact never governed the liabilities of Euronav in any case. The reason was this. When the bill was issued to BP, it was uncontroversial that it did not form the contract between the parties, since there was also a charter in force between BP and Euronav, and as between the two the charter prevailed (see Rodocanachi v Milburn (1887) 18 Q.B.D. 67). True, at the time of the STS transfers there was no longer a charter between BP and Euronav because GP had been substituted for BP. But this (it was said) made no difference. Although the bill of lading would have been the governing document had BP endorsed it to GP (Leduc v Ward (1888) 20 Q.B.D. 475), this did not apply where there had been no such transfer. In the present case there was no reason to infer that at that time the document’s status in BP’s hands had been intended to change from that of mere receipt to full contractual document; it therefore remained in the former category.

With respect, it is not entirely clear why this should be the case. For one thing, if a carrier issues a bill of lading to a charterer, arguably the reason why the bill of lading does not form the contract between the parties is simply that one has to choose between two inconsistent contracts, and that the obvious choice is the charter. If so, once the charter drops away as between those parties, there is no reason not to go back to the bill of lading. This seems, if one may say so, rather more convincing than the idea that the carrier is implicitly agreeing that the bill of lading gains contractual force if, and only if, endorsed by the charterer to someone else so as to cause a new contract to spring up. (In this connection it is worth remembering that it is equally possible for a bill of lading that once did have contractual force to cease to have it as a result of transfer to a charterer – see for instance The Dunelmia [1970] 1 Q.B. 289 – despite the fact that in such a case there can be no question of any new contract springing up.)

Put another way, it seems odd that entirely different results should follow according to whether a charterer transfers the bill of lading and retains the charter, or transfers the charter and retains the bill of lading.

There is also a practical point. Suppose that in the Unicredit case the unpaid party had not been Unicredit, but BP. BP might have thought that they were safe in allowing the charter to be novated in favour of GP provided they kept hold of the bill of lading and with it the assurance that the cargo could not reach GP’s hands without their consent. One suspects they would have been somewhat surprised to be told in such a case that the bill of lading was, and remained, of no effect despite the fact that they were no longer charterers of the vessel.

There clearly won’t be an appeal in this case, given the consent of Unicredit to what would otherwise have been a misdelivery. But the bill of lading point will no doubt give academics and others plenty to speculate about in the next editions of Scrutton, Aikens and other works. We await the results with interest.

The Proposed New GENCON 2022

The BIMCO GENCON charter is the most widely used charter for dry cargo and has been described as BIMCO’s “flagship” charter. It is exactly 100 years since the first GENCON charter, which then had the much longer official title of The Uniform General Charter of the Documentary Council of the Baltic and White Sea Conference, saw the light of day in 1922. Since then, there have been revised forms in 1976 and 1994 but the basic risk allocation between owners and charterers has remained essentially the same.

The charter has traditionally been categorised as being more owner- friendly as evidenced by the well-known (some might say, notorious) clause 2 which provides in essence that the owner is liable only if there is negligence on the part of the higher management of the owning company. However, although shipping people tend to stick to tradition, that balance of risk has progressively been diluted as time has marched on as evidenced by the commonly agreed addition of a Paramount Clause the effect of which is to emasculate clause 2 to a very large degree. It is also true to say that shipowners now operate in an environment which is much more tightly controlled and various international conventions have resulted in the implementation of regulatory codes such as the ISM and IMSBC, all of which have created stresses for the traditional GENCON format. Therefore, it was thought that the time had come when approaching the centenary of the first GENCON to have a thorough re-evaluation rather than just make some further piecemeal amendments such as simply adding a Paramount Clause – a solution described by a judge in one case as a “very slapdash way of doing things[1] and by another as follows: “The courts have not found it easy to make sense of the Hague Rules in the context of a charter-party since clearly these rules were not designed to be incorporated in such a contract.”[2]

Consequently, some 4 years ago, BIMCO established a sub-committee consisting of much-experienced representatives of all sides of the industry – shipowners, charterers, P&I clubs, brokers, agents and lawyers – to produce a new GENCON for a new age. It was initially thought that the process would not take too long. However, as work progressed, the committee came to realise how much the shipping world has changed since even the last revision was made in 1994. As a result, it became necessary to establish some fundamental principles which would underpin the drafting process. The challenge was, therefore. to produce a modern and balanced contract that would reflect today’s commercial reality but would at the same time retain its familiarity to make the users’ transition from GENCON 94 to the new version as smooth as possible.

With this this goal in mind, and following industry consultation, the subcommittee proceeded on the following premises:

  1. The charter should like other BIMCO dry cargo charters be based on FIOST principles which place the responsibility for the cost and risk of cargo operations on the charterers unless such operations affect the safety of the ship.
  2. Laytime and demurrage should be based on the principle that the owners bear the risk of delay caused by navigation risks whilst the charterers bear the risk of delay caused by commercial risks. Consequently, the charter should be based on the concept of a berth charter but with clauses designed to enable the owners to commence the laytime clock if, on arrival at the port, it is not possible for the vessel to berth for reasons other than navigation risks.
  3. The owners should be protected against liability for cargo loss or damage unless this has been caused by the failure of the owners to satisfy the fundamental duties that they can reasonably be expected to undertake: namely, to exercise due diligence to provide a vessel that is cargoworthy at the commencement of loading and seaworthy at the commencement of the cargo-carrying voyage, and (subject to FIOST) to properly and carefully care for the cargo after loading and before discharging.
  4. The owners should be protected against liability for delay not only on the laden voyage but also in arriving at the loadport if this has been caused by events which are beyond their control even if such events occur before they commence the approach voyage to the loadport.
  5. Owners should be able to rely on remedies such as the exercise of a lien, the suspension of their services under the charter or, failing all else, a termination of the charter, if charterers fail without justification to pay sums that are clearly due and owing to owners. It was thought that his is realistically the only way in which owners can ensure that they are paid moneys that are clearly owing to them.

The sub-committee has now produced a draft which will be submitted for adoption by the BIMCO Documentary Committee in May.

Prof Richard Williams – member of the BIMCO Gencon sub-committee.


[1] Anglo-Saxon Petroleum v Adamastos Shipping [1957] 1 Lloyd’s Rep. 79

[2] “Standard Ardor” [1988] 2 Lloyd’s Rep. 159

Sanctions, force majeure. No obligation to accept payment in alternative currency.

MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) raises the question of whether the effect of financial sanctions obliges a contractual party to accept payment in a currency other than that specified in the contract. Mur Shipping BV (“the Owners” or “MUR”) concluded a Contract of Affreightment (“COA”) with RTI Ltd (“the Charterers” or “RTI”) in June 2016. Under the COA, the Charterers contracted to ship, and the Owners contracted to carry, approximately 280,000 metric tons per month of bauxite, in consignments of 30,000 – 40,000 metric tons, from Conakry in Guinea to Dneprobugsky in Ukraine. On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) applied sanctions (“the sanctions”) to RTI’s parent company, adding them to the Specially Designated Nationals and Blocked Persons List. This led to the Owners invoking a force majeure clause in the COA by sending a force majeure notice (“FM Notice”) on 10 April 2018 in which the Owners said that it would be a breach of sanctions for the Owners to continue with the performance of the COA and noted that the “sanctions will prevent dollar payments, which are required under the COA”.

The force majeure clause provided for the suspension of the obligation of each party to perform the Charter Party while such Force Majeure Event is in operation.  The clause provided that

“36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:

a) It is outside the immediate control of the Party giving the Force Majeure Notice;

b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;

c) It is caused by one or more of acts of God, extreme weather conditions, war, lockout, strikes or other labour disturbances, explosions, fire, invasion, insurrection, blockade, embargo, riot, flood, earthquake, including all accidents to piers, shiploaders, and/or mills, factories, barges, or machinery, railway and canal stoppage by ice or frost, any rules or regulations of governments or any interference or acts or directions of governments, the restraint of princes, restrictions on monetary transfers and exchanges;

d) It cannot be overcome by reasonable endeavors from the Party affected.”

The claim arose from the fact that RTI had chartered in 7 vessels when MUR, alleging force majeure, suspended performance of the COA in April 2018, and was based on the difference between the COA and chartered in rates for these 7 vessels.

The tribunal accepted that the effect of both “primary” and “secondary” sanctions was drastic. Thus, normal commercial counterparties would be frightened of trading with the party that has been sanctioned, bank finance was likely to be frozen, and underwriters would be reluctant to insure normal trading activities. The tribunal also held that sanctions had an impact on the ability of the Charterers to make US dollar payments to the Owners. The tribunal held that, but for one point, the Owners’ case on force majeure succeeded. The point on which it failed was that, applying the terms of the force majeure clause, it could have been “overcome by reasonable endeavours from the Party affected.” This was because the tribunal considered that the exercise of reasonable endeavours required the Owners to accept a proposal made by the Charterers to make payment in €. The tribunal described this as a “completely realistic alternative” to the payment obligation in the COA, which was to pay in US dollars.

Jacobs J held that the Tribunal had erred in their finding that “reasonable endeavours” required the Owners to accept the Charterers’ proposal to make payment in a non-contractual currency. A party does not have to perform the contract otherwise than in accordance with the contract in order to avoid a force majeure event. There was no reason to construe the force majeure clause as being concerned only with contractual obligations directly concerned with loading and discharging: the force majeure event may have an impact on other contractual obligations which then have the causative impact required by clause 36.3 (b). Jacobs J noted “Clause 36.3 (b) is an important part of the force majeure clause: it identifies the necessary consequence, as a matter of causation, of the “event or state of affairs” described in other parts of the clause. However, it is clear from clause 36.3 (c) that there may be a wide range of different matters which bring about the consequence that loading or discharge is delayed or prevented. Those matters include “restrictions on monetary transfers and exchanges”.

Financial Security in Cases of Abandonment: A Four-Month Limit for Unpaid Seafarers’ Wages?

Introduction

The International Labour Conference (ILC) at its 103rd session approved the first group of amendments to the Maritime Labour Convention (MLC), 2006. The amendments were agreed by the Special Tripartite Committee at its first meeting at the International Labour Organisation (ILO) in Geneva in April 2014 and entered into force in January 2017. The amendments concerned Regulations 2.5 and 4.2 which deal with the right to repatriation and the shipowners’ liability for sickness, injury or death of seafarers occurring in connection with their employment. In brief, the amendments inter alia set out requirements for shipowners to provide financial security to provide support for abandoned seafarers and to assure compensation in the event of death or long-term disability of seafarers due to occupational injury, illness or hazard. While an exhaustive overview of such amendments is beyond the scope of this blogpost, this blogpost aims to shed light into the operation of Standard A 2.5.2. of the MLC, 2006, as amended, paragraph 9 of which stipulates that the coverage provided by the financial security system when seafarers are abandoned by shipowners shall be limited to four months outstanding wages and four months of outstanding entitlements.

Issues

Let’s take a hypothetical case of seafarers being abandoned for 10 months. Seafarers contact the P&I Club for assistance, providing all the necessary documentation to substantiate their claim. The P&I Club’s claims handlers acknowledge receipt of the claim, check the validity of the financial security system, and investigate whether the shipowners have in fact failed to pay wages to seafarers. If the P&I is satisfied that the financial security system is valid and that the seafarers’ wages are outstanding, the P&I Club will pay four months of outstanding wages and take immediate action to repatriate the affected seafarers. Now, assuming that all the outstanding wages are of the same rate, no further questions arise. But what if the outstanding wages are not all of the same rate? If, for example, after the first four months, there has been a pay rise under the seafarers’ employment agreement.

In such cases, a further question can potentially arise as to how the limit of four months outstanding wages will be calculated. Should it be calculated based on the first four outstanding wages? Or is there a right to pick and choose which of such outstanding wages to form the basis for the calculation of such limit? If the latter is true, seafarers will be keen on calculating such limit based on the higher rate of such outstanding wages. On the other hand, the P&I Club will attempt to calculate such limit based on the lower rate of such outstanding wages. In the next section, this blogpost will explain what the relevant provisions of the MLC, 2006, as amended, provide.

The law

The relevant provision is Standard A 2.5.2 of the MLC, 2006, as amended. Paragraph 9 of this Standard states that:

‘Having regard to Regulations 2.2 and 2.5, assistance provided by the financial security system shall be sufficient to cover the following: (a) outstanding wages and other entitlements due from the shipowner to the seafarer under their employment agreement, the relevant collective bargaining agreement or the national law of the flag State, limited to four months of any such outstanding wages and four months of any such outstanding entitlements; […].’

If one looks at the wording of this provision, it can easily be ascertained that the actual text of the Convention does not give an answer to this question. Certainly, the use of the words ‘limited to four months of any such outstanding wages and four months of any such outstanding entitlements’ gives ample of space for arguments suggesting that the four months limit can be calculated by reference to any such outstanding wages, and not necessarily the first four outstanding wages.

However, it is not clear whether the specific wording was used with such flexibility in mind. The draft text of the amendments of Standard A 2.5.2. of the MLC, 2006, was based on the principles agreed at the Ninth Session (2-6 May 2009) of the Joint IMO/ILO Working Group on Liability and Compensation regarding Claims for Death, Personal Injury and Abandonment of Seafarers. During the negotiations, it was considered whether links should be drawn between paragraphs 2 and 9 of this Standard. Although this discussion took place in respect of the duration of the limitation period (it may be worth noting here that, initially, a limit of three months wages was suggested), it can still be instructive. In this respect, it was explained that the purpose of paragraph 2 is to identify when abandonment takes place, whereas paragraph 9 defines the scope of financial security to be provided in case of abandonment. Thus, it was concluded, it is necessary to allow for a time lapse between the recognition of the abandonment situation and the limitation of financial security.

Against this backdrop, it can be argued that the purpose of the said limit is to ensure that seafarers’ wages are fully paid up for the first four months since their abandonment. Bearing in mind that it is the seafarers who have to initiate the process with the P&I Clubs, it may also be worth noting here that such interpretation can assist with avoiding cases, although rare, where seafarers intentionally allow wages to continue to accrue.

Conclusion

In practice, it is highly unlikely that seafarers are owed only four months’ wages when they are abandoned by their shipowners. Thus, the possibility of different rates for wages or other entitlements cannot be precluded. Given the uncertainty of the wording of Standard A 2.5.2. paragraph 9 (a) of the MLC, 2006, amended, any conflicting arguments can easily be avoided if the purpose of this provision is clarified in future amendments.

Interruption of laytime and demurrage due to owners refusing to berth.

In London Arbitration 12/22 a dispute arose as to demurrage due under a charter on an amended Gencon 94 form for a voyage carrying coal from Indonesia to China.  The owners refused to berth the vessel when ordered to do so by the charterers, because of the probability of a delay in commencing discharge because the storage yard to which the charterers intended to discharge the cargo was full. Charterers did not confirm they would reimburse the owners for berthing charges levied on the vessel during the period of non-discharge, and the vessel therefore remained at the anchorage until space became available.

The tribunal found that berthing charges levied on the vessel fell to the account of owners under 13(a) of the Gencon 94 form which provides “Taxes and Dues Clause (a) On Vessel – The Owners shall pay all dues, charges and taxes customarily levied on the Vessel, howsoever the amount thereof may be assessed.” The cost of using the berth was not part of the cost of cargo operations, which were for charterer’s account under cl.5.

The tribunal found that following The Stolt Spur [2002] 1 Lloyd’s Rep 786, any non-availability, whether it affected cargo operations or not, or even if none were planned, was sufficient to prevent laytime and or demurrage running. The owners were in breach of their obligation to have their vessel available, whether called upon to perform cargo operations or not, and this applied to a ship at anchorage, especially were a berth was free.

EU Port Services Regulation heading for the UK dustbin. Consultation process now running.

The Port Services Regulation 2017/352 Regulation (the PSR), includes provisions in the following areas: market access for port service providers; transfer of undertakings; financial transparency; charges; training and consultation; complaints and appeals.

The PSR has not been popular in the UK. In October 2017 the then shipping minister John Hayes told members of the UK Major Ports Group that the Regulation would be “consigned to the dustbin” in the UK due to Brexit”. But the Port Services Regulation was not immediately repealed. It was supplemented in domestic legislation by practical and procedural provisions in the Port Services Regulations 2019 (SI 2019/575) and in The Pilotage and Port Services (Amendment) (EU Exit) Regulations 2020 (SI 2020/671 which covers the situation as from 1.1.21.

The government’s view is that all the areas covered by the Ports Services Regulation are sufficiently covered in the UK by commercial practice within the framework of domestic law. The government intends to repeal the PSR as EU retained law, to revoke The Port Services Regulations 2019, and to amend the Pilotage and Port Services (Amendment) (EU Exit) Regulations 2020, by revoking those parts of the regulations that relate to the PSR and were made to ensure that the EU PSR remained operable after the UK’s withdrawal from the European Union.

 The government has now opened a consultation period from 22 March – 22 April 2022, https://www.gov.uk/government/consultations/repealing-the-eu-port-services-legislation/repealing-the-eu-port-services-legislation#:~:text=The%20government%20has%20signalled%20its,worked%20properly%20for%20the%20UK.

UNCTAD training course: implications of the COVID-19 pandemic for commercial contracts – International Sale of Goods on Shipment Terms and Carriage of Goods by Sea



IISTL Member, Professor Simon Baughen will be part of a team delivering UNCTAD’s forthcoming four-day virtual training course https://unctad.org/meeting/unctad-training-course-implications-covid-19-pandemic-commercial-contracts-international

The course will focus on the implications of the pandemic for some of the key commercial contracts in international shipping and trade, in particular contracts for the international sale of goods on Shipment Terms CIF and FOB and carriage of goods by sea under charterparties and bills of lading.

Each course consists of four daily sessions (am or pm CEST), covering: international sale of goods on CIF and FOB terms and related payment mechanisms; time and voyage charterparties; specialist standard form ‘pandemics’ clauses and force majeure clauses; bills of lading and related cargo claims, including special considerations applicable in the context of charterparty bills.

The course  will be offered on four occasions, to enable broad participation and accommodate participants in different time-zones.

03 – 06 May:      9:30 – 13:00 CEST – for participants in Asia, Africa, Europe

10 – 13 May:    15:00 – 18:30 CEST – for participants in Americas, Africa, Europe

16 – 19 May:    15:00 – 18:30 CEST – for participants in Americas, Africa, Europe

07 – 10 June:     9:30 – 13:00 CEST – for participants in Asia, Africa, Europe
 

Commercial contracts, wasted expenditure and lost profits

Anyone drafting a commercial contract these days will invariably add, somewhere, some kind of exemption clause. Unfortunately the drafter is frequently in a hurry, aware that there are a limited number of billable hours he can plausibly attribute to a mere drafting exercise; and as often as not the clause will be lifted from some precedent in the firm’s files, without too much thought about what it might actually mean in real life.

One suspects that this is essentially what had happened in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440. But whatever the history, the result was an expensive trip to the Court of Appeal because something like £80 million turned on the issue of the understanding of relatively few words.

To simplify, IBM agreed in 2014 to install a computer system for an insurance company, CISGIL, for a price of about £50 million. The contract contained a term which, while allowing a list of specific types of claim characterised as “direct loss” in the event of breach, contained a general disclaimer (Clause 23.3) as follows:

“[N]either party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data …, goodwill, reputation (in all cases whether direct or indirect) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party”

There was also a damages cap of roughly £80 million.

Delays occurred; things went wrong; CIGSIL declined to pay a stage invoice tendered by IBM; and the contract came to an end. Each side blamed the other for the debacle. The judge (see [2021] EWHC 347 (TCC)) and the Court of Appeal both held that it had been IBM who had wrongfully repudiated the contract; with the tedious details of this we are not concerned.

At this point, however, the issue of damages arose. Seeing difficulties in claiming for its consequential loss of profits because of Clause 23.3, CIGSIL chose to quantify its claim instead by reference to its wasted expenditure, a figure eventually quantified by O’Farrell J at about £122 million. IBM at this point said that this was an exercise in pettifogging: whatever label CIGSIL chose to put on its claim, it was at bottom trying to claim for its loss of profits, which was precisely what Clause 23.3 prevented it doing.

O’Farrell J (see [2021] EWHC 347 (TCC) at [680]-[686] sided with IBM. CIGSIL was, she said, claiming for its loss of bargain; the measure of that loss of bargain was “the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented.” And while CIGSIL was entitled to frame its claim as one for wasted expenditure if it so wished, that simply represented a different method of quantifying the loss of its bargain; it did not “change the characteristics of the losses for which compensation is sought”. It followed that the claim was inadmissible.

This certainly looked like a robust approach. It also chimed in neatly with modern academic analysis of expectation and reliance damages. At bottom both seek, in different ways, to put a claimant in the position he would be in had the contract been kept; either by showing the gains he would have made but now won’t, or by showing that an investment is now wasted that otherwise wouldn’t have been.

Nevertheless the Court of Appeal was having none of it. On a proper reading of Clause 23.3, the intention was indeed to exclude claims based on profits foregone, but to leave intact claims based on wasted expense. Even if both were similar animals on deep analysis, wasted expenditure did not fall within the meaning of loss of profit or revenue; from which it followed that in the absence of a specific reference to wasted expense, this remained recoverable.

Despite the seductive, apparently no-nonsense approach of O’Farrell J, we think the Court of Appeal got it right. When dealing with the interpretation of exception clauses, the fundamental issue is not any question of academic argument or analysis, but simply what reasonable businesspeople would have made of the words used. And a non-lawyer would undoubtedly say that money wasted was not the same thing as future gain foregone. Furthermore, as the Court pointed out, they would also have seen that there could be good reason to allow the former on the basis that it was likely to be relatively quantifiable and predictable, but to exclude the latter as likely to be open-ended and unquantifiable.

This case is thus good news for business certainty. Nevertheless, those drafting commercial contracts would do well not only to read it but to draft their contracts even more carefully. If those in the position of IBM do not like a result under which they remain liable for seven-figure sums in wasted expenditure, they can always exclude such claims expressly. They should also perhaps take the trouble to add that any such limit applies also to cases of repudiation, since even despite Soteriou, as a result of the decision in Kudos Catering (UK) v Manchester Central Convention Complex [2013] EWCA Civ 38, there remains a possibility that some clauses may be construed as being limited to mere defective performance and not applying to actual repudiation.

If a client complains about the number of billable hours devoted to such issues of drafting, a solicitor can always murmur in his ear that the investment is probably a good one. The Court of Appeal is an expensive place to end up in, however interesting its judgments may be to other practitioners and law professors, and no sensible businessman should want to go there if he can possibly help it.