Are there further risks for seafarers on the back of the amendments proposed by the UK government to the new Nationality and Borders Bill?

It is argued that, despite the recent amendments, the new Nationality and Borders Bill still raises concerns for seafarers who comply with their legal duty to save life at sea.

Introduction

Since its introduction to the House of Commons on 6 July 2021, the new Nationality and Borders Bill has attracted a lot of attention and has received fierce criticism for the changes it brings to the UK’s immigration and asylum system. What has not been widely known, however, is that the new bill will also change the provisions of the Immigration Act 1971 in relation to people smuggling offences in a way that can potentially criminalise seafarers who save the life of someone in distress at sea. With an amendment which aims to protect seafarers from any unfair prosecution being tabled by the UK government, not least thanks to the efforts of, and lobbying from, industry stakeholders, this blogpost attempts to explain why the new Nationality and Borders Bill matters for seafarers, what changes are proposed to the existing legislation, and what risks remain for seafarers.

Why does the new Nationality & Borders Bill matter for seafarers?

In the past few years, the world has witnessed an unprecedented humanitarian crisis. Millions of people are forced to leave their home countries in order to escape war, famine and poverty and many of them have no other option but to risk their lives, and cross some of the world’s busiest shipping lanes in small dinghies in their search for safety. It is within this context that, on various occasions, seafarers had to assist with rescues at sea. What is important to note, however, is that seafarers do not conduct these rescue operations only out of a moral obligation. There is a legal obligation to do so. Under Article 98 of the United Nations Convention of the Law of the Sea, 1982, the master and crew of a commercial ship have a duty to rescue people in distress at sea, and to bring them in a place of safety. Similar provisions are found in Chapter V of the International Convention for the Safety of Life at Sea, 1974, as well as in the International Convention for Salvage, 1989, Article 10 of which provides that ‘every master is bound, so far as he can do so without serious danger to his vessel and persons thereon, to render assistance to any person in danger of being lost at sea’ and that ‘State parties shall adopt the measures to enforce the duty set out in paragraph 1’. In fact, the UK has adopted relevant provisions, establishing that a master shall be liable of a criminal offence if he/she fails to comply with his/her duty to render assistance to persons in danger at sea and that the maximum available sentence would be two-year imprisonment or a fine, or both.[1] In effect, this means that any new provision that could make seafarers criminally liable for saving people in danger at sea would criminalise seafarers for doing what they are required to do by law!

Given that the English Channel is tuning into a popular crossing point for those who search for a better future,[2] and since its inherent dangers, the issues raised by the upcoming changes of the current legislation are not just of theoretical interest.

What did the Immigration Act 1971 provide?

Section 25A, paragraph 1 of the Immigration Act 1971, which represents the current law, provides that a person, who knowingly and for gain facilitates the arrival or attempted arrival in, or the entry or attempted entry into, the UK of an individual, and he/she knows or has reasonable cause to believe that the individual is an asylum-seeker,[3] commits a criminal offence. This could lead to a maximum sentence of 14-year imprisonment, to a fine or to both.[4] However, with the greater focus on the requirement for gain, seafarers assisting with rescues at sea according to their international maritime law obligations are well protected from the risk of being unfairly prosecuted. Unfortunately, it is argued, the latter will not be guaranteed if/when the proposed Bill is passed.

What is the Nationality & Borders Bill’s new provision for the offence of assisting asylum-seekers to enter the UK?

The Nationality & Borders Bill,[5] as introduced on 6 July 2021, proposed, pursuant to clause 38, two significant amendments in relation to the offence of facilitating the arrival in, or entry into, the UK of asylum-seekers under section 25A of the Immigration Act 1971. The first relates to the maximum potential sentence, an increase of which has been proposed from a 14-year prison sentence to life imprisonment. The second, and arguably the most important one, relates to the removal of the current requirement ‘for gain’ in order to commit such offence. This implied that a blanket criminal offence would be created, with no defences available, which could expose those seafarers who comply with their international maritime law obligation to save life at sea into criminal liability.

As a result, it was not surprising that the proposed amendments were not received well by social partners and organisations representing seafarers and the shipping industry, in general. In fact, Nautilus International and the UK Chamber of Shipping issued a joint letter to the UK government over the new Nationality and Borders Bill, in which they raised their concerns about the potential implications of the proposed bill in the long lasting problem of criminalisation of seafarers and requested the maritime minister and the shadow secretaries of transport and maritime to raise those concerns with the Home Secretary to ensure that sufficient assurances will be given that seafarers would not be liable for prosecution for complying with international maritime law.[6] In response to this letter, the Home Office Minister at the time Chris Phillip clarified that the new Nationality and Borders Bill would not target seafarers.[7] Although this response was reassuring, it was not found to be satisfactory, as it left the matter to be dealt with through policy guidance.[8] Thus, Nautilus International and the UK Chamber of Shipping issued a second letter, urging for those reassurances, namely that seafarers of commercial ships would not be  criminalised for rescuing distressed persons at sea and bringing them ashore in the United Kingdom, to be codified in legislation.[9]

After strong lobbying from Nautilus International and the UK Chamber of Shipping, in January 2022, the UK government finally confirmed that it has tabled an amendment to the new Nationality and Borders Bill which ensures that seafarers who are required by law to rescue people at sea will be adequately protected from criminal prosecution.[10] Indeed, the latest reprint of the new bill,[11] in clause 40, paragraph 4, introduces a defence for the offence of assisting asylum seekers to arrive in, or to enter into, the UK under section 25A of the Immigration Act 1971 that could be used by seafarers in those circumstances.[12] This defence is to be included as section 25BA in the Immigration Act 1971. Briefly, it provides that a person charged with this offence would not be liable if it is established that:

‘(a) the assisted individual had been in danger or distress at sea, and

 (b) the act of facilitation was an act of providing assistance to the individual at any time between –

  • the time when the assisted individual was first in danger or distress at sea, and
  • the time when the assisted individual was delivered to a place of safety on land.’[13]

From an evidentiary perspective, the defence will succeed, if the person charged with the offence adduces sufficient evidence of the relevant facts, and the contrary is not proved beyond reasonable doubt.[14] Finally, it should be mentioned that the defence will not be available in two circumstances, where the UK was not the nearest place of safety on land, and there was no good reason to deliver the assisted individual in the UK instead of to a nearer place of safety on land, and where the person charged with the offence was on the same ship as the assisted individual at the time when the individual was first in danger or distress at sea.[15] Thus, against this backdrop, a question remains as to whether the amendments proposed to the new Nationality and Borders Bill by the UK government award seafarers who rescue those in distress at sea with adequate protection.

What is the risk for seafarers?

Most certainly, the fact that the new Nationality and Borders Bill has been amended to include a defence for the offence of facilitating the arrival in, or entry into, the UK of asylum-seekers is a big success for seafarers and the shipping industry. However, some risks remain. For example, there is a question as to what would be considered as ‘sufficient’ evidence for the purposes of this defence. Furthermore, one should not overlook or underestimate the difficulties faced by seafarers when they are required to provide evidence in the context of criminal investigations in a foreign port.[16] Finally, it is unclear what the position of those seafarers involved in criminal investigations for rescuing people at sea would be. [17]

Under the shadow of these risks, seafarers may still find themselves in front of a dilemma as to whether to rescue those who are in danger at sea, and risk finding themselves caught in the middle of a criminal investigation process, or whether to disregard their responsibilities under international maritime law to save life at sea, with whatever repercussions this might have in the existing humanitarian crisis, and ‘save’ themselves from the risk of being unfairly treated. In order to avoid this, it is argued, further clarity and certainty is required. This can be achieved through policy guidance. Alternatively, the possibility of developing a code of practice to be followed by seafarers when attempting rescues at sea can be considered.

What happens next?

Having been passed by MPs in the House of Commons in December, the Bill is now being debated by the House of Lords and is due to go to committee stage on 27 January 2022, where a detailed line by line examination of the separate parts of the Bill will take place. During the committee stage, all suggested amendments will also have to be considered and votes on any amendments can take place before every clause of the Bill will be agreed to. At the end of the committee stage, the Bill will be reprinted with all the agreed amendments, and it will then move to report stage for further scrutiny.

Concluding remarks

It is beyond doubt that what Nautilus International and the UK Chamber of Shipping achieved was a big win for seafarers which highlighted how important is the role of industry stakeholders in forming public policy. However, there are still things that can be done to ensure that the ‘faith’ of seafarers, who comply with their legal obligations and save people at sea, will be more predictable if/when the new Nationality and Borders Bill is passed.


[1] Section 3, Part II, Schedule 11 of the Merchant Shipping Act 1995.

[2] It is estimated that, in 2021, more than 21,000 people crossed the English Channel, while the number of people crossing in 2020 was more than 40,000.

[3] Section 25A, paragraph 2 of the Immigration Act 1971 explains that, for the purposes of this section, ‘“asylum-seeker” means a person who intends to claim that to remove him from or require him to leave the United Kingdom would be contrary to the United Kingdom’s obligations under (a) the Refugee Convention (within the meaning given by section 167(1) of the Immigration and Asylum Act 1999 (c 33) (interpretation)), or (b) the Human Rights Convention (within the meaning given by that section).

[4] Section 25A, paragraph 4, read in conjunction with Section 25, paragraph 5 of the Immigration Act 1971.

[5] Bill 141 2021-22.

[6] ‘Nautilus and UKCS question migrant Bill that could criminalise seafarers’ (20 July 2021) available at < https://www.nautilusint.org/en/news-insight/news/nautilus-and-ukcs-question-migrant-bill-that-could-criminalise-seafarers2/> accessed 12 January 2022.

[7] ‘Union urges Nationality and Borders Bill legislative clarity’ (12 August 2021) available at <https://www.nautilusint.org/en/news-insight/news/nationality-and-borders-bill-clarity/ > accessed 12 January 2022.

[8] ibid.

[9] ibid.

[10] ‘UK Chamber of Shipping and Nautilus welcome government amendment on Nationality and Borders Bill’ (6 January 2022) available at < https://ukchamberofshipping.com/latest/uk-chamber-shipping-and-nautilus-welcome-government-amendment-nationality-borders-bill/ > accessed 12 January 2022.

[11] HL Bill 82.

[12] It may be worth noting that this defence will also be available for the offence of assisting unlawful immigration under section 25 of the Immigration Act 1971. 

[13] Clause 40, paragraph 4 of the Nationality and Borders Bill (HL Bill 82).

[14] ibid.

[15] ibid.

[16] Research has shown that the fear of criminalisation is one of the most important factors that drives seafarers away from working at sea. See, for example, Report for discussion at the Sectoral Meeting on the Recruitment and Retention of Seafarers and the Promotion of Opportunities for Women Seafarers (Geneva, 25 February–1 March 2019), International Labour Office, Sectoral Policies Department, Geneva, ILO, 2019.

[17] There is also a question as to what the position of the ship would be for as long as the investigations last.

Proposal Questions and Implied Waiver in Insurance Contracts

It is common for underwriters to utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. Reliance on such emerging technologies inevitable brings attention to the questions posed to potential assureds in the proposal forms used by such systems. Any ambiguity in the wording of questions put forward to the assureds is likely to have an adverse impact on the insurer’s ability to claim non-disclosure or misrepresentation. This was the central issue in Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc [2021] EWHC 2538 (Ch).

The facts can be briefly summarised as follows: The assured obtained an insurance policy that provided cover for inter alia business interruption, money, employer’s liability and legal expenses. The insured property was damaged by fire in 2018 and when the assured sought to claim under the policy, the underwriters rejected the claim and purported to avoid it for misrepresentation and non-disclosure of a material risk. At inception and each renewal the assured was asked to answer the following question as part of procuring insurance through the insurer’s electronic automated underwriting system:

“No owner, director, business partner or family member involved with the business … has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation”.

On each occasion, the assured selected “Agreed” in response to the question. At claims stage, when it transpired that three of the directors of the assured had been directors of other companies that had entered voluntary liquidation, and had subsequently been dissolved, insurers argued that there had been a material misrepresentation by the assured in responding to the question above and/or non-disclosure of material facts and sought to avoid the policy.

The assured disputed that insurers were entitled to avoid the policy and started this litigation requesting the court to order the insurers to indemnify the assure with respect to the loss.

Two issues required legal analysis in this case:

  1. Was there any misrepresentation on the part of the assured by responding wrongly to the question? and
  2. Was there a non-disclosure as the assured failed to disclose insolvency of other persons or companies?

On (i) the assured submitted that the “Insolvency Question” was clear and unambiguous in that it simply asked about insolvency events relating to individuals (i.e. any owner, director, business partner or family member involved with the insured business) and did not ask about insolvency events of any other person or company with which any of them have been connected or involved in some way. The judge agreed with the assured noting especially in the question lack of express reference to any corporate body with which any of the persons expressly identified has been or is involved or connected with in some way.

The insurer’s attempt to rely on the Court of Appeal’s reasoning in Doheny v. New India Assurance Co [2004] EWCA 1705  was not successful given that the question put to the assured in that case was fundamentally different:

“No director/partner in the business, or any Company in which any director/partner have had an interest has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors.”

The Court of Appeal in that case held that this question required disclosure of insolvency events in relation to other companies of which the policyholder’s director had previously served as a director. However, that question in the proposal form was worded rather differently than the present “Insolvency Question”, because it clearly referred to “any Company in which any director/partner have had an interest”. Conversely, the wording of the present “Insolvency Question” is different and on literal construction more restricted. The insurer’s attempt to draw support from another judgment (R & R Developments v. Axa Insurance UK plc [2009] EWHC 2429 (Ch)) that deliberated a differently worded “Insolvency” question was also not successful.

On (ii) the court held that the insurer by asking a well-defined question essentially waived its right to information on the same matters outside the question asked. Several legal authorities pre-dating the Insurance Act 2015, which still represent the legal position on this matter, dictate that the test here is an objective one and requires the judge to question whether a reasonable person reading the relevant question would be justified in thinking that the insurer had restricted its right to receive all material information, and had consented to the omission of specific information (here the other matters relating to insolvency). In holding that this was the case in the present case, Snowden, J, said at [91-92]:

[91] To my mind, having identified previous liquidations as a subject on which the [insurer] required disclosure, and having specified the persons in respect of whom a previous liquidation would be disclosable, the [insurer] thereby limited its right of disclosure in respect of other (unspecified) persons or companies which had been placed into liquidation. The Other Insolvency Events were all liquidations. They were therefore precisely the same type of insolvency matters which were the subject of the Insolvency Question: the difference is that they related to a different set of persons than those identified in the question.

[92] I therefore conclude that it was a reasonable inference for the [assured] to draw that the [insurer] did not wish to know about any other liquidations (or, indeed, administrations, administrative receiverships, company voluntary arrangements, and so on), other than those specified in the Insolvency Question.

Lessons from the Judgment

Given the increased use of electronic platforms for provision of information to insurers at pre-contractual stage, the case is another timely reminder to insurers that they need to check the wording of questions they rely on in proposal forms which appear as part of such platforms. In commercial setting we often advocate the use of clear wording but when it comes to legal matters concerning fair presentation of the risk, a very well-defined and clear question might serve the purpose of limiting the scope of disclosure for the assured- as was the case here (careful readers would remember that a similar point was raised by the assured (unsuccessfully) in Young v. Royal and Sun plc [2020] CSIH 25 (discussed again on this blog)). Also, it is worth keeping in mind that drawing support from previous authorities especially when construing such questions might often be problematic as wordings of questions in proposal forms deliberated in those judgments will inevitably differ- a matter that the insurer found out to its detriment in this case!            

Limitation — not everyone who operates a vessel is an operator

At least one P&I Club will, one suspects, be feeling rather rueful after this morning’s Court of Appeal decision in Splitt Chartering APS v Saga Shipholding Norway [2021] EWCA Civ 1880.

The Norwegian Mibau group undertook an operation for Costain, involving the transport and deposit of vast amounts of rock in the sea under Shakespeare Cliff near Folkestone. Getting the rock to the correct place involved towing a loaded dumb barge from Norway and anchoring it where the rock was to be placed. The barge was owned by one Mibau company, Splitt; for internal accounting reasons it was chartered to another such company, Stema AS, which also owned the rock. On arrival the barge was anchored, with a crew put on board employed by a third Mibau company, Stema UK. That crew took orders from, and acted on the instructions of, Stema AS.

Despite ominous weather forecasts, Stema UK’s crew assumed the barge could be safely left unmanned at anchor. They were seriously wrong. She dragged her anchor in a storm and sliced an underwater cable which proved costly to repair. The question arose whether, in a suit by the cable owners, Stema UK could limit its liability. Although clearly not an owner or charterer of the barge under Art.1(2) of the LLMC 1976, it argued that because of its de facto control at the relevant time it had been either a manager or an operator. The cable owners argued that it was neither.

Teare J held Stema UK entitled to limit. (See [2020] EWHC 1294 (Admty), noted in this blog here.) True, because it had lacked executive authority, being under the orders of Stema AS, it could not have been a manager. But it, or rather its employees, had undoubtedly been in physical control of, and had operated the machinery aboard, the vessel; and this meant that it counted as her operator within Art.1(2).

This was a commercially sensible result. It meant that the ability to limit stood to be fairly generously granted to any entity in physical control of a vessel; it also had the extra advantage that corporate groups would not be unduly prejudiced merely because for organisational reasons they chose to parcel out the functions of ownership and physical manipulation to different group entities.

Unfortunately it did not find favour with the Court of Appeal. Phillips LJ, giving the only judgment, took the view that just as an employee would not be an operator in his own right since he acted only on someone else’s orders, an entity physically operating a vessel as the catspaw of another entity was in the same position. It followed that because of its lack of authority to act on its own initiative without contacting Stema AS, Stema UK was liable in full since it was outside the charmed circle of those entitled to limit.

For what it is worth, with the greatest of respect this blog is inclined to prefer the reasoning in the judgment below. We see it as not only commercially rational but also more certain, in that making the status of operator dependent on an estimation of the amount of discretion allowed to an entity seems to encourage some hair-splitting arguments.

But no matter. As Phillips LJ pointed out, the effect of the Court of Appeal’s decision can easily be avoided by making sure that the people physically in charge of a vessel are seconded to, or otherwise technically employed by, the company with the serious decision-making power. No doubt, indeed, as this is being written P&I club lawyers will be sharpening their pencils with a view to drafting the necessary advice to members, and possibly even changes to the rules so as to back up that advice. As ever, a little discreet bureaucratic tinkering can pay big dividends.

Incorporation of charter terms into bills of lading. Is shipowner’s right to a general average contribution from cargo interests excluded?

The Polar ( [2021] EWCA Civ 1828) involved a claim by owners to recover cargo’s proportion of general average in relation to a payment to pirates who had detained the vessel in the Gulf of Aden. The cargo owners defended the claim on the ground that the shipowner’s only remedy in the event of having to pay a ransom to pirates was to recover under the terms of insurance policies, the premium for which had been paid by the voyage charterer.

The charter was on BPVOY 4 standard form, cl.39 of which provided a war risks clause which covered “acts of piracy”. There was also a Gulf of Aden clause which provided:

“Any additional insurance premia (including, but not limited to, those in respect of H&M, crew, P&I kidnap risks and ransoms), crew bonuses (which to be in accordance with the international standard) shall be for chrtrs account. Max USD 40,000 for charterer’s account for any additional insurance premium except for crew bonus which to be max USD 20,000 for charterers account.”

Six bills of lading were issued all of which incorporated the terms of the charterparty and five provided for general average to be settled under the York-Antwerp Rules 1974, with one providing for general average to be settled under the 1994 Rules. The insurance premium was just short of the $40,000 figure in the Gulf of Aden clause and the premiums were paid by the shipowner who was then reimbursed by the charterer.

The arbitrators on a determination of two preliminary issues found that: (1) the terms of the voyage charter, including in particular the war risks and Gulf of Aden clauses, were incorporated into the bills of lading; (2) the shipowner, on the true construction of the bills of lading and/or by implication, agree to look solely to its insurance cover under the war risks and/or K&R insurance in the event of a loss covered by that insurance.

On appeal Teare J held that the incorporating words in the bills of lading were wide enough to incorporate the war risks and Gulf of Aden clauses. However, the bills of lading holders were not liable for additional premium as it was not appropriate to substitute the “bills of lading holders” for “charterers” so as to impose a liability on them to pay the premium. As between the shipowner and charterers the parties had agreed that the shipowner would look to the insurers for indemnification in respect of losses under the Gulf of Aden clause and not to the charterer so that they were precluded from seeking a contribution from the charterer in respect of general average. However, the incorporated provisions of the charterparty did not have this effect as regards the bill of lading holders, who had not agreed to pay the premium.

The Court of Appeal has now upheld the decision. Males LJ, giving the judgment of the Court, noted that this was a weaker case than either The Evia (no 2) or the Ocean Victory for concluding that the shipowner had agreed not to claim a contribution in general average from the charterer. However, the question did not need to be decided, and the case could  proceed on the basis that there was an implicit agreement to this effect as between owners and charterers. As regard the bills of ladings, it was doubtful that the very wide words of incorporation were wide enough to encompass what was merely implicit in the express terms considered as a whole. To find in the bills of lading an agreement by the shipowner not to seek a general average contribution from the cargo owners, that must be because the express terms of the charterparty which are incorporated into the bills demonstrate that the same (or an equivalent) agreement was intended to apply also under the bills of lading.

Part of the additional war risks and Gulf of Aden clauses were prima facie incorporated into the bills of lading contracts, but the next issue was whether the requirement on the charterer to pay the premium should be “manipulated” so as to impose that obligation on the bill of lading holders. Males LJ found that is was not appropriated to engage in such manipulation. There was nothing in either the bills or the charter to say how liability for the premium would be apportioned between different bill of lading holders. The fact that neither the bills nor the charterparty addressed this question suggested that the bill of lading holders were not intended to be liable for the premium. However, the incorporation of these terms did serve a useful purpose as the basis on which the shipowner has agreed in the bill of lading contract that the voyage will be via Suez and the Gulf of Aden, without which there would be uncertainty as to the vessel’s route.

Cargo argued that the premium paid by the charterer could be regarded as paid for the benefit of the bill of lading holders on the basis that its counterparty would not seek contribution from them as the party for whose benefit the premium is paid in the event of an insured loss. Males LJ rejected the argument as the risks of piracy and the potential need to pay a ransom were foreseen by the parties to the bill of lading contract and dealt with expressly by them. There were no clear express words to rebut the presumption that the shipowner did not intend to abandon its right to a contribution from the cargo owners in general average. Any “implicit understanding” was not so clear as to show that this was what the parties intended, particularly as the charterer was not necessarily paying the whole of the additional premium which would be necessary to obtain the cover required.

 In this case both parties were insured against the risk of piracy and allowing the shipowner to claim would mean that each set of insurers would bear its proper share of the risk which it has agreed to cover. In contrast, if the bills of lading were construed so as to exclude a claim by the shipowner, the loss would be borne entirely by the shipowner’s insurers and  the cargo owners’ insurers would escape liability for a risk which they agreed to cover.

Keeping Confidential Information confidential during IP litigation

In a second instalment to Anan Kasei Co Ltd and another v Neo Chemicals & Oxides (Europe) Ltd and others [2021] EWHC 3295 (Pat) Mr Justice Mellor addressed the list of ‘important points’ identified by Lord Justice Floyd when looking to the protection of confidential information during IP litigation:-

i)   In managing the disclosure of highly confidential information in intellectual property litigation, the court must balance the interests of the receiving party in having the fullest possible access to relevant documents against the interests of the disclosing party, or third parties, in the preservation of their confidential commercial and technical information. 

ii)   An arrangement under which an officer or employee of the receiving party gains no access at all to documents of importance at trial will be exceptionally rare, if indeed it can happen at all.

iii)   There is no universal form of order suitable for use in every case, or even at every stage of the same case.

iv)   The court must be alert to the fact that restricting disclosure to external eyes only [EEO club] at any stage is exceptional.

v)   If an external eyes only tier is created for initial disclosure, the court should remember that the onus remains on the disclosing party throughout to justify that designation for the documents so designated.

vi)   Different types of information may require different degrees of protection, according to their value and potential for misuse. The protection to be afforded to a secret process may be greater than the protection to be afforded to commercial licences where the potential for misuse is less obvious.

vii)   Difficulties of policing misuse are also relevant.

viii)   The extent to which a party may be expected to contribute to the case based on a document is relevant.

ix)   The role which the documents will play in the action is also a material consideration.

x)   The structure and organisation of the receiving party is a factor which feeds into the way the confidential information has to be handled. [Oneplus v Mitsubishi [2020] EWCA Civ 1562 at 39-40]

In so doing Mr Justice Mellor reached the conclusion that this summary primarily, “points to the need for the Court to strike an appropriate balance” [at 25]. In his judgement of 6th December 2021 Mr Justice Mellor also addressed Regulation 10 of The Trade Secrets (Enforcement, etc.) Regulations 2018, in particular subsections 4, 5, 6 and 7, concluding “[I]n my view, these regulations reflect the existing position on the authorities and do not support a hardline view” [at 29]. Given the particulars of the present case Mr Justice Mellor nevertheless reached the decision that the, “EEO materials required more protection than Mr Morris (Neo) was prepared to offer… [and] that the circumstances in this case require an exceptional solution” [at 76] be reached.

Avoidance of Insurance Policy under the New Law 

The new proportionate approach to remedies for breach of “the duty of fair presentation” introduced by the Insurance Act (IA) 2015 has recently been to put test in Berkshire Assets (West London) Ltd v. AXA Insurance UK Plc [2021] EWHC 2789 (Comm).   

The facts are relatively straightforward. The assured, a joint venture vehicle used to purchase and develop an existing office block into residential apartments, bought from the insurer a Construction All Risks and Business Interruption Policy. On 1 January 2020, the insured development suffered damage as a result of flooding and the assured sought to claim for the property damage under the policy. During the investigation stage of the claim it transpired that when the policy was procured in November 2019, the assured failed to disclose the fact that criminal charges were filed against one of its directors in Malaysia in August 2019 by the Malaysian public prosecutor in relation to an alleged scheme to defraud the Malaysian government and other purchasers of bonds. The insurer avoided the policy on the premise that the relevant non-disclosure was material and if it had been adequately disclosed, the insurer would not have agreed to insure the assured at all. The judgment was given in favour of the insurer on both grounds. 

The finding on materiality is not surprising at all. The IA 2015, introduces no change in the materiality test, which originates from s. 18(2) of the Marine Insurance Act (MIA) 1906 and, accordingly, stipulates that a circumstance’s materiality will need to be judged with reference to the influence it would have on “the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.”  The fact that the test remains unaltered means that the case law as it stood prior to the introduction of the IA 2015 is still relevant. And on numerous occasions, the courts repeatedly acknowledged that the charge of a criminal offence would often constitute a material circumstance (see, for example, March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep 169). And it did not matter that the Malaysian criminal charges had been subsequently dismissed. There is authority indicating that materiality must be judged at the date of placement and not with the benefit of hindsight. This was put very cogently by Phillips J (as he then was) in The Dora [1989] 1 Lloyd’s Rep 69, at 93: “when accepting a risk underwriters were properly influenced not merely by the facts which, with hindsight, can be shown to have actually affected the risk but with the facts that raised doubts about the risk.” (a point endorsed by Mance, LJ (as he then was) in Brotherton & Ors v. Aseguradora Colseguros (No 2) [2003] EWCA Civ 705). Further, Colman, J, held (which was approved by the Court of Appeal) in North Star Shipping Ltd v. Sphere Drake Insurance Plc [2005] EWHC 665; [2005] 2 Lloyd’s Rep 76 that a failure to disclose pending criminal charges were material facts, even though the assured was acquitted and the charges set aside.            

Proving materiality and inducement would have been adequate to avoid the policy under the old regime but the changes introduced by the IA 2015 on the remedies available now requires the insurer to prove either that the assured acted fraudulently or recklessly in failing to present the risk fairly or the insurer would not have taken the risk at all had (s)he been aware of the criminal charges brought against one of its directors in Malaysia (s. 8 of the IA 2015). In this case, the insurer was able to prove the latter by relying on an internal practice note on “disclosure of previous insurance, financial or criminal matters” which provided that if an assured client disclosed maters that fell within a particular “negative criteria”, the risk was not acceptable to the insurer and should be declined. The Court was satisfied that the insurer had no authority to write the risk under the practice note and if the criminal charges had been appropriately disclosed the insurer would have declined the risk.  

The case is a timely reminder that failing to disclose criminal charges or convictions could trigger moral hazard concerns in relation to the assured and in most instances would be held to be material even if they are not directly related to the assured’s involvement with the insured property. But more significantly, one should not disregard the role the insurer’s internal practice note played in achieving the desired result from the insurer’s perspective. Given that under the IA 2015, it is vital for the insurer to demonstrate what s(he) would have done had the risk been fairly presented to him/her, one perhaps would expect insurance companies to produce more detailed internal underwriting guidance going forward ready to be deployed in litigation.  

The changes introduced by the IA 2015 have been systematically analysed in a book edited by Professors Clarke and Soyer, The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law, published by Informa Law in 2016.

              

Several excellent contributors (Sir Bernard Rix, Professor Tettenborn, Associate Professor Leloudas, Simon Rainey QC and Peter Macdonald-Eggers QC, also commented on various parts of the law reform in this book.

Bank of New York Mellon (International) Ltd v Cine-UK and other cases [2021] EWHC 1013 (QB)

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Issue: Whether tenants of commercial premises remain responsible to pay their rents despite the enforced closure or inability to trade from their premises because of COVID-19 and COVID-19 Regulations?

The Claimant (Landlord) requested a summary judgment (CPR 14.2)  to be made against the Defendants (tenants) for the rent of three (3) commercial premises that became due during the COVID-19 pandemic. The tenants are Cine-UK Limited (Cine-UK), Mecca Bingo Ltd and Sports Direct.com Retail Ltd. The landlords are Bank of New York Mellon (BNY / Superior landlords) and AEW respectively. The annual rent to be paid in advance by quarterly instalments on the usual days. The tenants claimed that the COVID-19 Regulations meant that public access was restricted to their business premises which eventually led to their closure for substantial periods. As a result, the tenants claim that they did not have to pay all or parts of the rent. The tenants believe they have a real prospect of defending the Claims based on the following reasons: the rent cesser clauses should be construed or be implied so that at least whilst the businesses are closed because of COVID -19 and COVID-19 Regulations and on the assumption that the landlords have insurance, they do not need to pay rent. Alternatively, the landlord is to recover the rent by their insurance. Even if the rent cesser clause did not have such effect by construction or implication, a similar effect could be achieved from suspensory frustration or  an application of principles of supervening event in terms of illegality and or the doctrine of temporary failure of consideration. Finally, such effect could be achieved by an application of Government guidance requiring negotiations and ameliorative measures between landlords and tenants as it relates to the payment of rent during the pandemic.

The landlords’ position is this is a matter of allocation of risk in relation to events that were foreseeable and for which the tenants should have negotiated a cesser clause. They argue that the insurance may cover some liabilities to the landlord but does not extend to covering loss or rent where there are no relevant rent cessation provisions in the leases and the relevant tenants can pay. Therefore, the rent including the value added tax (VAT) and interest continue to fall due despite the COVID-19 Regulations and its effects.

Mecca Bingo and Sports Direct had additional claims concerning mistaken payments and miscalculations which they are seeking to recover, however the details of such claims will not be addressed herein.

Lease Agreements

The leases are written in a standard commercial form, for a defined number of years and after 18 months of closure, the Cine -UK lease would have 12.5 years to run or 2.5 years if the break clause were to be exercised, The Mecca and Sports Direct leases would have another 11 years to run.[1] There were provisions made in each lease for the insurance of specific events including against property loss or damage by insured risks. Equally relevant is the presence of a rent cesser clause in each lease where the property has been destroyed or damaged or access to it denied or the property is unfit for occupation and provided the insurance is not vitiated or payment of insurance monies is not refused as a result of the act or default of the tenant.[2] There is also an extension of cover clause for ‘Murder Suicide or Disease[3] where insurers agree to indemnify the insured for loss of rent resulting from interruption of the business during the indemnity period following any human infectious or contagious disease manifested by any person whilst in the premises or within a 25 mile radius of it.

Issues: Construction of Rent Cesser Clauses

The landlords submit that the rent cesser clause would operate to only suspend rent where the insured risks have caused physical damage or destruction which prevents the premises from being fit for occupation or use.  Conversely, the tenants maintain that the word “physical” was not used, thus they propose that what has happened is damage or destruction even though not of a physical nature. Even if destruction must be physical, damage which is used as an alternative to destruction, need not be.

Master Dagnall held that the usual meaning of the word damage relates to a physical state. The tenants referred to Halbury’s Law[4] definition of “damage” which had a wider meaning representing ‘any disadvantage suffered by a person as a result of the act or default of another…’, however “damage” as used in that context was based on the law of “damages” and not the lease of a property. Additionally, ‘damage or damaged’ was used as an alternative to destruction thus there must be a link to a physical item. Whereas the words ‘damage or damaged’ could apply to nonphysical events, it is imperative that the context in which the words are used is analysed. Throughout the agreement, ‘damage or damaged’ is used with or surrounded by words which connote a physical state for example ‘reinstatement work or physical remediation.’[5]. In any event, ‘it will be a stretch of the definition of the words “damage or damaged” if it should include nonphysical disadvantage as suggested by the tenants.’[6] Master Dagnall reasoned this would ‘introduce a modern colloquial meaning into standard form documents’[7].

The rent cesser clause is subject to the requirement that the inability to use the premises must be caused by physical damage or destruction and not a mere inability to use the premises without more. The real subject of the insurance is the property of the landlord, that is the ‘brick and mortar’, in other words the physical property rather than the ‘effects on the trade’.[8] Accordingly, the rent cesser clause will operate where the closure to the insured property is due to physical damage or destruction, it is not sufficient for it to be in consequence of closure without physical damage or destruction.[9] In concluding on this issue, the court agreed with the landlords’ that the rent cesser clause is only triggered by physical damage or destruction to the insured premises. This is also the natural meaning of the words ‘damage or damaged’ used on their own or in the context of the agreement.[10] Furthermore, this interpretation is consistent with a possible commercial purpose and in line with the ‘brick and mortar’ aspects of the provisions.

Implication of the Rent Cesser Clauses

Master Dagnall acknowledged that it would be fair and reasonable to imply the rent cesser clause as proposed by the tenants. Yet, it might be prejudicial to the insurers who may not have contemplated this liability when they agreed the premium even though it is their responsibility to consider both the expressed and implied terms of the relevant lease.[11]

There is no warranty in the leases that the premises can always be utilised for its permitted use but the obligation to pay the rent remains unless the parties agree otherwise. Moreover, if the parties intended for the rent cesser clause to operate where there is nonphysical damage, the parties should have expressly provided for this in the agreement. As such, the court agreed with the landlords’  that the lease sets out all the circumstances under which the rent cesser clause would apply including where an insured peril has occurred. Even though COVID-19 and COVID-19 Regulations may be unprecedented, in respect of SARS and the consequent fears, it is not convincing that COVID-19 and COVID-19 Regulations were unforeseeable.[12] The case is not fit for an ‘Aberdeeen implication’, because it is not clear what both parties would have intended if they were notified of the potential of and had considered COVID-19 and COVID-19 Regulations.[13]  Based on the foregoing, Master Dagnell concluded that the tests for implication of the rent cesser clause proposed by the tenants was not met, therefore they do not have any real prospect of success for summary judgement on this issue.

Tenants’ reliance on the Insurance

Master Dagnall agreed with the landlords that the insurance policies do not compel the insurers to pay the landlords the outstanding rent where the rent cesser clause does not operate.[14] The court’s decision is influenced by the following points[15]:

  1. Without the operation of the rent cesser clause (no physical damage), the landlords who are the insured have not suffered any loss of rent.
  2. The landlords’ construction was in accordance with policy wording, particularly ‘the Murder, Suicide or Disease extension’. The policy provides that the insurer will indemnify for the loss of rent, which has not occurred. The loss to the landlords must have been due to the interruption of the landlords’ businesses which in the circumstances have also not occurred.  If the premises were vacant and could not be leased due to COVID-19, that could have been reasoned differently but those were not the facts before the court.
  3.  Even if damage could be extended to nonphysical loss, the other requirement mentioned in i. and ii. above must be satisfied.
  4. The commercial purpose of the insurance taken out by the landlords is to insure against the operation of the rent cesser clause which would have been a loss to them. If the tenants wanted to be protected in these circumstances, they would need to negotiate a wider rent cesser clause or alternatively purchase a separate business interruption insurance policy.
  5. The Mark Rowlands v Bermi[16] and Frasca-Judd v Golovina[17]. line of authority[18] relied on by the tenants was not accepted as directly on point. They are not concerned about what is covered by the insurance but with whether the insurance as it exists can be extended to protect the interests and loss of the tenants. Rather than being concerned about the liability for rent, it is concerned about the liability for remediation costs.
  6. Any suggestion that a clause be implied into the insurance policy that rent would be covered in the absence of a rent cesser clause cannot be accepted as either obvious or necessary for business efficacy. The insurance policy is well drafted and contains clauses specifically detailing the allocation of risks. Furthermore, the insurance is chiefly to protect the landlords against loss and to imply such a clause would be in contract with rules of implication.

Interpretation of the Insurance Provisions

Another point raised by the tenants is the breach of the insurance contract by the landlords who sought insurance coverage against COVID-19 and COVID-19 Regulations but not the sums equivalent to rent that would be loss from the closure or inability to use their premises. Additionally, the tenants insist that since they pay the premium for the insurance, they have the right to benefit from the insurance through cover for the rent.[19] The leases define COVID-19 and other diseases and Basic Rent as an ‘Insured Risk’ as such the tenants reasoned that since they pay for the insurance, it makes sense that when there are resultant closures, the insurer will pay for the rent or its equivalent. The landlords disagreed. They are of the view that this issue is governed by the rent cesser clause which describes when rent is payable following an insured risks which will eventually determine when the insurance covers the rent.[20]

Master Dagnall agreed with the Landlords ‘that the inclusion of something as an insured risk does not mean the landlord must include a clause in the insurance for the insurer to pay three (3) years of rent if the insured risk occurs and cause the closure of or prevented the permitted use of the premises.’[21] The fact that the tenants indirectly pay for the insurance does not mean the insurance must be tailored to benefit the tenants as suggested by implying such a term. The court also dismissed the notion that the implied term was required to give the lease business efficacy. The lease works well without the implied term. It provides for insurance against rent where a rent cesser clause applies in some instances and not in others. The tenants could have insured themselves against this risk by purchasing a separate and more appropriate insurance policy.

Frustration

Some of the tenants (Sports Direct, Mecca and Cine – UK) argued that there was a temporary frustration of their lease during the periods of lockdown hence rent not being payable during those periods. The landlords countered by stating there has been no frustration since ‘temporary frustration’ does not exist in law.  Master Dagnall considered and applied National Carriers v Panalpina[22] and The Sea Angel[23]and held that the principle of frustration does apply to leases. Closure of the premises due to events outside the control of the parties is a supervening event, thus being capable of causing frustration of the lease but only on rare occasions. The relevant question is whether ‘the situation has become so radically different that the present situation is outside what was the reasonable contemplation of the parties so as it to render it unjust for the contract to continue?’[24]  

COVID-19 and COVID-19 Regulations could qualify as a supervening event but in light of SARS, they were foreseeable but unprecedented.[25] While it was not reasonably expected by commercial people that the lockdowns would last for more than eighteen (18) months, there was significant amount of time remaining in each lease (Cine -UK another 12.5 years to run or 2.5 years if the break clause were to be exercised and Mecca Bingo and Sports Direct another 11 years each)  in relation to the period of closure due to COVID-19 and COVID-19 Regulations. For this reason, there was no ‘radical difference’ nor was it unjust for the leases to continue bearing in mind their terms and the allocation of risks. There was no frustration of the leases. As for the tenant’s contention that the Sports Direct lease was temporarily frustrated, Master Dagnall rejected the tenant’s claims and agreed with the landlords that there is no such doctrine as temporary frustration in law. Frustration by definition and effect means the discharging and ending of the contract without the possibility to revive it hence it cannot be suspended.

Illegality

The tenants claim as well that they are relieved from their obligations to pay rent under the lease as its performance has become impossible based on its illegality. The landlords responded by agreeing that this is possible, however of no benefit to the tenants since it is not illegal for them to pay rent. It was held that the suspension of an obligation that is illegal does not excuse another obligation which is not interdependent or conditional upon the former. A suspension of the rent will only be allowed if a rent cesser clause can be invoked, however the tenants have failed to do so. Illegality of an obligation would not excuse the tenants from their obligation to pay rent.

Failure of Consideration

The final point raised by the tenants is that they are relieved from their obligation to pay rent due to partial failure of consideration arising from their inability to operate from and use the premises as permitted. Master Dagnall accepted that the tenants may successfully establish that they cannot trade from the premises as permitted by their lease however he refused to accept that would relieve the tenants of their obligation to pay rent. Moreover, ‘partial failure of consideration’ is not a separate principle; It is related to or dependent on a relevant principle of contract law, which the tenants have failed to establish.[26] The inability of the tenants to use the premises as permitted is not necessarily a ‘partial failure of consideration, instead it is an unexpected occurrence which means the leases are not as beneficial to the tenants as initially expected.[27] The landlords did not breach the contract and there was no provision for the rent to be suspended except for the limited circumstances provided for the application of the rent cesser clause. Based on the foregoing, the tenants were unable to rely on to COVID-19 or COVID-19 Regulations to counter claims against them for rent incurred during the period of interruption. The tenants must continue to pay the rent even for the period in which they could not use the premises as permitted because of COVID-19 and COVID-19 Regulations.

Comments

Bank of New York Mellon (International) Ltd v Cine-UK and other cases is among the recently decided cases addressing business interruption claims arising from COVID-19 and COVID-19 Regulations. It reveals to contractual parties, businesses, and insurers that an interruption to businesses caused or arising from COVID-19 and COVID-19 Regulations on its own may not be sufficient to successfully claim for business interruption and to compel the insurers to indemnify an assured for their loss. As demonstrated in this case, the legal obligations between a tenant and landlord will not change because of interruption to the business caused by COVID-19 and COVID-19 Regulations as this is not the fault of either party. It is important for tenants and landlords to recognise that the terms of the lease and insurance policies will determine the allocation of risks and that rent will only be suspended in accordance these terms and the scope of a rent cesser clause where expressly provided.  The same is true for the interpretation of insurance clauses. Though an insurance policy may contain a business interruption clause or extension clause on ‘diseases’ that is wide enough to include COVID-19, the scope of its application will be limited based on the surrounding words of the clause. Therefore, if as in this case, the business interruption clause requires there to be ‘damage or destruction’ and there is no physical damage to property at the insured premises, the assured will not recover for loss merely because COVID-19 disrupted their business and caused financial or other nonphysical loss.

The context and surrounding words within which the clauses are written are very important to aid with their construction and it should not be assumed that ‘damage’ will take a wider meaning to cover nonphysical loss simply because COVID-19 is widespread and has affected many businesses. The identical concerns apply to the treatment of an extension clause on ‘diseases’ which for example covers COVID-19, its application to a scenario will depend on the other words or requirements of the clause and what makes commercial sense. COVID-19 Regulations have also not prohibited landlords from requesting the rents from tenants who can afford to pay, in fact the parties are encouraged to arrive at ameliorative settlements and where possible continue to meet their obligations under the lease.  It will be difficult for a court to allow a rent cesser clause to implied into a lease written on a standard form if the test of obviousness and necessity are not satisfied. It is also difficult because standard clauses are usually well drafted, without errors, and deemed to have considered all possible circumstance.

A successful claim for frustration of a lease due to COVID-19 and COVID-19 Regulation is possible. However, what is of value is comparing the period of interruption with the outstanding period of the lease and then determine whether there has been such radical difference in the subject of the agreement that it would be unfair to continue the lease. Merely relying on the occurrence of COVID-19 and the length and extent of the lockdown are not adequate to satisfy this claim. Interestedly, Master Dagnall analysis throughout the judgment in relation to the issues raised were resolved by applying settled principles of law, thus we must be reminded that COVID-19 has not changed the fundamental principles of contractual interpretation, the law of frustration, law of implication and the obligations under a lease agreement. Nonetheless, the specific words of a clause, contract or insurance policy and their interpretation will be the key towards the success or failure of a claim involving COVID-19. More importantly, tenants and other business owners must ensure their business interruption policies and rent cesser clauses are drafted to make provision for loss due to nonphysical damage and loss of turnover.


[1] para 36.

[2] para 43.

[3] para 59.

[4] Volume 29 para 303.

[5] para 120.

[6] Ibid.

[7] para 120.

[8] [2021] EWHC 1013 (QB), para 126.

[9]ibid.

[10] para 127.

[11] para 140.

[12] para 148.

[13] Ibid.

[14] para 167.

[15] para 168.

[16] [1986] QB 211.

[17] [2016] 4 WLR 107.

[18] Essentially, the principle is that in a contractual relationship of landlord and tenant, where a landlord is indemnified by an insurer, the landlord cannot seek to also recover from the tenant in either contract or tort, otherwise that would effectively be double indemnity. The insurance taken out is to benefit both the tenant and the landlords.

[19] [2021] EWHC 1013 (QB), para 173.

[20] para 177.

[21] para 179.

[22] [1981] AC 675.

[23]  [2007] EWCA Civ 547.

[24] [2021] EWHC 1013 (QB), para 209.

[25] ibid.

[26] [2021] EWHC 1013 (QB), para 221.

[27] Ibid.

Demurrage an exclusive remedy: the Court of Appeal gives judgment in The Eternal Bliss – Simon Rainey QC & Tom Bird

The Court of Appeal has today given judgment in The Eternal Bliss on the availability of general damages in addition to demurrage arising from delay. Allowing the appeal, the Court held that demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime.

The appeal raised a point on which there was no previous binding authority and which has, for almost 100 years, divided eminent judges and commentators. The leadig textbooks were split on the issue. 

Scrutton took the position that where the charterer’s breach causes the shipowner damage in addition to the detention of the vessel, losses can be recovered in addition to demurrage. But the authors of Voyage Charters said the better view was that the shipowner could only recover such losses if it could show a separate breach of contract (one other than the failure to load or discharge the cargo within the time allowed).

The dispute in this case arose from a voyage charter for the carriage of soybeans from Brazil to China. The charter was drawn up on an amended Norgrain form, which provided that demurrage, if incurred, was to be paid at a daily rate or pro rata.

After arriving at the discharge port, the vessel was kept at the anchorage for 31 days due to port congestion and lack of storage space ashore. Post discharge, it was said that the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds. The owners commenced arbitration against the charterers seeking to recover the cost of settling the cargo claim. The sole breach of contract relied on was the charterers’ failure to discharge within the laytime. The charterers contended that demurrage was the owners’ exclusive remedy for that breach.

The parties invited the Court to determine this point of law on assumed facts under s.45 of the Arbitration Act 1996. At first instance, Andrew Baker J found for the shipowner. He held that the cargo claim liabilities were a different type of loss to the detention of the vessel and that the shipowner could recover damages without proving a separate breach of contract. The 1991 decision in The Bonde (in which Potter J had reached the opposite conclusion) was, he said, wrongly decided.

Like the first instance judge, the Court of Appeal approached the point as one of principle, noting that distinguished judges have struggled, without success, to discern a ratio on this issue in Reidar v Arcos (the 1926 decision to which the long debate is often traced back). In delivering the Court’s judgment, Males LJ held that the case turned on the proper meaning of the term “demurrage” as it is used in the charterparty. The Court of Appeal concluded that, “in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime” (para 52).

This is a significant judgment on a major point of shipping law. In reversing the first instance decision, the Court of Appeal has given a much broader scope of the meaning of “demurrage” and treated it in much the same way as a standard liquidated damages clause, rather than limiting it to a particular type of loss. But this may not be the last word on the issue, which given the lively debate would benefit from clarification from the Supreme Court.

Simon Rainey QC and Tom Bird acted for the shipowner, instructed by Nick Austin and Mike Adamson of Reed Smith LLP.

One obligation, one remedy. Now it’s Eternal Bliss for charterers.


In K Line PTE Ltd v Priminds Shipping (HK) Co, Ltd (The Eternal Bliss) [2020] EWHC 2373 (Comm) the vessel was kept at the anchorage at Longkou in China for some 31 days due to port congestion and lack of storage space ashore for the cargo. In consequence when the cargo of soyabeans was discharged it exhibited substantial mould and caking. This led the receivers bringing a cargo claim against owners which they then, reasonably, settled and then sought to recover from voyage charterers by way of damages for breach of their obligation to discharge within the laydays. Charterers responded by saying that demurrage was the exclusive remedy for this breach.

At first instance, [2020] EWHC 2373 (Comm), Andrew Baker J heard a preliminary point of law on assumed facts as to whether demurrage was the sole remedy for this breach of the obligation to discharge within the laydays. He found that it was not. It was the remedy only where what owners were claiming was detention loss. Other consequences of the breach, in this case the sum owners paid to settle the receivers’ claim, were recoverable as unliquidated damages. In doing so he declined to follow the only clear decision on this issue, that of Potter J in The Bonde [1991] 1 Lloyd’s Rep 136 who had held that demurrage is liquidated damages for all the consequences of the charterer’s failure to load or unload within the laytime. Andrew Baker J also found that if demurrage was liquidated damages for all the consequences of the charterer’s delay at the discharge port, an indemnity would not be implied rendering the charterer liable for one of those consequences. Charterers appealed the finding on the extent of the demurrage remedy. Owners did not challenge the indemnity finding on appeal.

The Court of Appeal, EWCA/Civ/2021/1712, for whom Males LJ delivered the judgment of the Court, has today reversed that decision and concluded that in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them. Accordingly, if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation. The Court noted that The Bonde was the only clear decision on this point and that both the academic texts and judicial dicta were divided.

The Court of Appeal gave the following six reasons for its decision.

 “First, while it is possible for contracting parties to agree that a liquidated damages clause should liquidate only some of the damages arising from a particular breach, that strikes us as an unusual and surprising agreement for commercial people to make which, if intended, ought to be clearly stated. Such an agreement forfeits many of the benefits of a liquidated damages clause which, in general, provides valuable certainty and avoids dispute.” [53]

”Secondly, we accept that statements can be found in the case law to the effect that demurrage is intended to compensate a shipowner for the loss of prospective freight earnings suffered as a result of the charterer’s delay in completing cargo operations… No doubt this is the loss which is primarily contemplated and, in most cases, will be the only loss occurring. But that does not mean that this is all that demurrage is intended to do. The statements cited were made in cases where the present issue was not being considered.” [54]

Thirdly, if demurrage quantifies “the owner’s loss of use of the ship to earn freight by further employment in respect of delay to the ship after the expiry of laytime, nothing more”, as the judge held at [61] and again at [88], and does not apply to a different “type of loss” (as he put it at [45]), there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause.”[55]

“Fourthly, as Lord Justice Newey pointed out in argument, the cost of insurance is one of the normal running expenses which the shipowner has to bear. A standard expense for a shipowner is the cost of P&I cover which is intended to protect it against precisely the loss suffered in this case, that is to say liability to cargo claims, whether justified or not. Thus a shipowner will typically have insurance against cargo claims, while a charterer will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within the laytime. Rather, the charterer has protected itself from liability for failing to complete cargo operations within the laytime by stipulating for liquidated damages in the form of demurrage. Accordingly the consequence of the shipowner’s construction is to transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not. That seems to us to disturb the balance of risk inherent in the parties’ contract.”[56]

“Fifthly, The Bonde has now stood for some 30 years, apparently without causing any dissatisfaction in the market.” [57]

“Sixthly, that reason would have less force if we agreed with the judge (at [127]) that the reasoning in The Bonde “is clearly faulty” or that the judgment “is explicable only if a non sequitur lies at its heart”. With respect, however, we do not accept the judge’s criticisms of The Bonde.” [58]

The Court of Appeal then noted that allowing the appeal would produce clarity and certainty, while leaving it open to individual parties or to industry bodies to stipulate for a different result if they wished to do so.

It will be interesting to see if owners now try to draft clauses stating expressly that demurrage only covers certain stated categories of loss – and whether charterers accept that.

It will also be interesting to see whether the case eventually ends up before the Supreme Court.

Sale of goods and summary judgment for the price: common sense rules.

Sale of goods law can at times be a bit esoteric. When it is, the difficulty can lie in making sure it accords with common sense as practised by businesspeople. Martin Spencer J managed just that today in dismissing what is best described as a pettifogging defence which counsel (absolutely properly, given his duty to his client) had raised to what looked like a straightforward claim for payment for building materials.

In Readie Construction v Geo Quarries [2021] EWHC 3030 (QB) Geo agreed to supply something over £600,000-worth of aggregate to builders Readie for a warehouse project in Bedfordshire. After most of the deliveries had been made and paid for, it turned out that something seemed to have gone badly wrong. Following heavy rain, the aggregate that had been used to form the base of the warehouse had melted into some sort of unprepossessing slush. Readie told Geo to stop deliveries and refused to accept or pay for the final batch, saying that Geo must have supplied the wrong substance. Geo invoiced Readie for the balance of the price and sought summary judgment, invoking the following Clause 4.1 from the sale contract:

The Customer shall make payment in full without any deduction or withholding whatsoever on any account by the end of the calendar month following the month in which the relevant invoice is dated. If payment is not received in full when due the Customer shall pay interest on the unpaid amount at a rate per annum which is 8% and above Bank of England base lending rate from time to time and the Customer shall pay to, or reimburse the Company on demand, on a full indemnity basis, all costs and liabilities incurred by the Company in relation to the suing for, or recovering, any sums due including, without limitation the costs of any proceedings in relation to a contract between the Company and a Customer incurred in or suffered by any default or delay by the Customer in performing any of its obligations. Payment shall only be made to the bank account nominated in writing by the Company on the invoice. Time of payment is of the essence.” (Our emphasis)

Straightforward, you might have thought? Not necessarily. Readie’s first argument was that the clause didn’t protect a seller who delivered the wrong goods, rather than goods that were correct but bad: after all, if it did, they said, it would mean that a seller who delivered nothing at all, or something obviously irrelevant such as sand, would still have the right to be paid after submitting its invoice. This point Martin Spencer J adroitly — and we on the blog think rightly — got rid of by saying that the right to be paid would be implicitly conditional on a bona fide purported delivery.

The next argument was that Clause 4.1 ousted counterclaims and set-offs but not Readie’s would-be right to abatement of the price. There was authority that some clauses would indeed be interpreted that way. But his Lordship remained unconvinced that this one was of that type: it was comprehensive in its terms, and there was no reason not to interpret it in an accordingly wide way, as requiring the buyer to pay in full, no questions asked, and argue the toss later. This again seems, if we may say so, highly sensible. Hardly any businesspeople know the difference between a set-off and a right to abatement; indeed, one suspects the proportion of practising lawyers is also embarrassingly low. However attractive it might seem to a law professor with time on their hands, one should not lightly assume a clause is meant to invoke a technical legal distinction which lawyers and laypeople alike are largely unfamiliar with.

Lastly, it being accepted that because of a retention of title clause s.49(1) of the Sale of Goods Act 1979 did not give Geo a right to the price on the basis that property had passed, Readie argued that s.49(2), allowing a claim for payment on a day certain irrespective of delivery, did not apply either. The right to payment, they said, was dependent on delivery, or at least purported delivery: how could payment then be due “irrespective of delivery”? The answer, again we suggest correct, was that “irrespective of delivery” means simply “not fixed at the time of delivery”, thus ousting the presumption of cash on delivery reflected in s.28.

To this latter question there might have been an easier answer, save for a curious concession on Geo’s part that they could not succeed in a claim for the price unless they were within either s.49(1) or s.49(2). Since The Res Cogitans [2016] AC 1034 it has been clear that freedom of contract exists as to the time and circumstances when payment becomes due, whether or not either limb of s.49 is satisfied. It must have been at least arguable that Clause 4.1 simply provided its own solution and needed to be applied in its own terms without any reference to s.49 at all. Another note, perhaps, for your for the file on the minutiae of bringing claims for summary judgment for goods supplied.