Of damages and counterfactuals — again

It’s not often that we can say “You read it first on the IISTL blog.” But it seems we may be able to, following the decision of the Court of Appeal (Males, Rose and Haddon-Cave L.JJ.) in Classic Maritime Inc v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102.

The facts briefly recap thus. A charterer signed a CoA promising to come up with vast cargoes of Brazilian iron ore that would have netted the shipowner profits of something like $20 million. It didn’t, and in hindsight it was abundantly clear that it it never could have. The contract was subject to a force majeure clause including floods preventing performance. Floods duly materialised; but (as was held both at first instance and on appeal) the charterer couldn’t invoke the clause, since if it had never had any cargoes in the first place the floods hadn’t prevented it doing anything. Nevertheless Teare J held at first instance that even though there was breach the damages were not $20 million, but zilch (or rather nominal). His argument was that, hindsight having shown that the shipowner wouldn’t have had a right to performance even if the cargoes had been there, the value of the lost rights was zero.

We raised an eyebrow here at the idea that a defendant who hadn’t, and never could have, performed should be able to cut damages from $20 million to zero by pointing to a force majeure clause that might have protected him but in fact didn’t. The Court of Appeal has now made it clear that it thinks the same way, and substituted an award of $20 million. If (it was said) a claimant showed that a defendant had failed to perform and the defendant could not invoke any exculpatory provision, there was no reason why damages should not be substantial. The reasons behind the non-performance were irrelevant, as was the fact that had the defendant been able to perform in the first place he would have had an excuse.

In our view, despite the beguiling advocacy of the Institute’s own Simon Rainey QC, this is sensible and logical. Males LJ hit the nail on the head at [89] when he pithily pointed out that the breach was not inability or unwillingness to supply cargoes, but the simple fact that the cargoes, for whatever reason, were not there. Put that way, everything neatly falls into place. If you don’t perform your contract and can’t point to any excuse, you are liable for substantial damages. End of story.

Carriage contracts mean what they say, OK?

Open any contract textbook at the chapter on exception clauses, and you will come across a long list of cases on the restrictive interpretation of such clauses, saying that (for example) they will not lightly exonerate a party from the consequences of his own fault in the absence of clear words; that if a clause could cover both negligence and strict liability it will presumptively only cover the latter; that ambiguities will be construed contra proferentem; and so on.

As usual, however, things are not as they seem. No doubt such matters have formed the stuff of contract lectures and provided law professors with enjoyment for as long as most of us can remember. Outside academia, however, commercial lawyers today can pretty safely treat them as a mere empty ritual incantation and then go on quietly to ignore them.

The latest demonstration of this point comes in a case decided six weeks ago but only just reported, Aprile SpA v Elin Maritime Ltd [2019] EWHC 1001 (Comm). On the facts as assumed, steel fabrications were carried on deck from Thailand to Algeria under a straight bill stating that they were so carried and continuing: “ The Carrier shall in no case be responsible for loss of or damage to the cargo, howsoever arising prior to loading into or after discharge from the Vessel or while the cargo is in the charge of another Carrier, nor in respect of deck cargo or live animals.” The cargo did not arrive in one piece, and cargo — or its insurers — wanted to bring a claim. Faced with the unpromising terms of the bill of lading (which was unaffected by the Hague Rules because of the statement of deck carriage), they argued, with a touching hope, that for all its wideness the exemption did not cover any damage caused by negligence or unseaworthiness.

The deputy judge, Stephen Hofmeyr QC, was having none of it. In line with a series of recent authorities such as Persimmon Homes Ltd v Ove Arup & Partners [2017] EWCA Civ 373, he held that the exception clause had to be read, like any other contract term, with a view to seeing what it would mean to a reasonable businessperson, taking into account the circumstances surrounding the contract. He saw no reason to interpret the words “howsoever arising” as meaning anything other than what they said, or to regard claims alleging negligence or unseaworthiness as raising any special issue in this connection. He expressed the view that Langley J had been right to suggest as much in The Imvros [1999] 1 Lloyd’s Rep 848, and saw no justification in criticisms later made of that case. Equally he joined in the general tendency to sideline Canada SS v R [1952] AC 192 and its suggestions for cutting down the presumptive meaning of clauses that did not mention negligence in so many words. The argument that there might be strict liability as a common carrier and that the exception clause might have been intended to be limited to that he treated with the disbelief it richly deserved.

In short, in carriage as elsewhere commercial contracts mean what they say; complex rules of interpretation, and outdated presumptions about exoneration for fault, have little part to play. And rightly so. Carriers and cargo interests alike are keen on English law and jurisdiction precisely because they know their contracts will be read in a common sense and businesslike way. The deputy judge here needs, if one may say so, to be commended for approaching this case with a realistic and hard-headed attitude, and not disappointing them.

Shipping casualties and clearing-up

After a casualty the clear priority for shipowning, P&I and insurance interests alike is to clear up the mess as soon as possible and start trading again. The last thing they want is a run-in with well-meaning administrators saying that nothing can be done until form after form has been filled in, checked, rubber-stamped and filed, and permission to act obtained from Old Uncle Tom Cobleigh and all. Yet this was exactly what happened in 2012 to the owners of the 86,000 dwt container vessel MSC Flaminia. A fire broke out on a voyage from Charleston to Antwerp, forcing the crew to abandon ship and resulting in the vessel being towed dead to Wilhelmshaven in Germany. The owners wanted to send her directly to an entirely reputable ship-repairer in Romania for cleanup and repair, but the German environmental authorities were having none of it. The vessel was full of filth, sludge, metal debris and the dirty water used to extinguish the fire. This was, they said, waste and subject to the Waste Directive 2008 and Regulation 1013/2006, requiring extensive documentation, planning and administrative oversight before any transfer could take place. Owners argued in vain that Art.1.3(b) specifically excepted waste produced on board ships, trains, etc and later discharged for treatment: debris from a casualty, said the bureaucrats, was not within the exception. The result was that the ship remained marooned in Wilhelmshaven for seven months before it was finally allowed to go to Romania. The German courts, in proceedings to recover the resulting losses from the state, initially supported the Teutonic bureaucracy, but the Munich Landgericht then sent the question off to the ECJ: was waste resulting from a marine casualty within the exception?

The ECJ, much to everyone’s relief, today said that it was. The Directive had to be interpreted purposively and there was no reason to give special treatment to waste resulting from a casualty, especially as the terms of Art.1.3(b) were unqualified. Within the EU this now means that vessels can get out of ports of refuge quickly and be sent with due expedition to wherever they can be cleaned up and repaired most efficiently. And a good thing too.

The decision, under the name of Conti II v Land Niedersachsen (Case C‑689/17) [2019] EUECJ C-689/17, is here (unfortunately only in French).

Money in the bank is not a trust fund — OK?

It is hornbook banking law, and has been ever since 1848 (see Foley v Hill (1848) 2 HLC 28), that those lucky enough to have a credit balance with their bank have the benefit of a debt owed by the latter: nothing more, nothing less, and certainly no trust or other equitable interest in any funds in the institution. Any lingering doubts on the matter were dispelled by Space Investments v CIBC (Bahamas) Ltd [1986] 3 All E.R. 75.

Or so we thought, until Barling J put the cat among the pigeons in late 2017. The Court of Appeal has now, much to everyone’s relief, reversed his decision and restored orthodoxy in First City Monument Bank plc v Zumax Nigeria Ltd [2019] EWCA Civ 294.

Cut away the intricacies of murky Nigerian financial transactions, and the background was this. Zumax, a Nigerian company servicing the oil industry in the shape of Shell and Chevron, banked in Nigeria with IMB. Like many Nigerian organisations, when it received dollar payments it ensured they were made offshore: here, into an account with Chase in the name of an Isle of Man nominee, Redsear. If and when monies were needed in Nigeria, Redsear would then transfer them into IMB’s account with Commerzbank; IMB in turn would credit Zumax in naira.

Between 2000 and 2002 several million dollars were transferred from the Redsear account to IMB, but allegedly never reached Zumax. Allegations of fraud were made against the person who organised these transfers, who had connections with both Redsear and IMB. Zumax alleged that in so far as these sums had reached IMB (whose obligations First City Monument had taken over), they had been held on trust for Zumax. We are not told in terms why Zumax did not simply sue to have its account credited, but this may have been due to the fact that Zumax was alleged to owe large sums of money to IMB under a previous facility, or some other reason connected with dubious dealings by IMB.

Barling J held that because the monies had been transferred to IMB via its Commerzbank account specifically for the benefit of Zumax, IMB had not been free to deal with them as its own, and there was in the circumstances no reason why a trust should not be inferred. The Court of Appeal saw this off in short order. It was of course possible for a bank to receive money as a trustee for its customer: but it was unlikely. The fact that monies were transferred to a bank for the benefit of the account of X was entirely consistent with a duty to credit the account and not to hold the monies on trust, and this applied as much to a transfer through a correspondent bank (i.e. Commerzbank) as to a direct transfer. The normal inference, indeed, was that a bank in such a case held the monies at its free disposal. For good measure there had been no mention of any need to segregate the monies — normally an important feature of a trust. (The court might have added that in so far as a “Quistclose trust” was alleged, it would still not get Zumax home, since the normal inference in such trusts is that unless and until put to its intended use the money is held not for the payee but for the payer — here Redsear).

Relief all round, one suspects, for the banking community. Banking law is complex enough without being regularly made more difficult by the use of trusts; this decision will make it that much more difficult for lawyers further to muddy turbid waters by lengthy pleadings alleging fiduciary duties, trust relationships and the like. In the view of this blog, this is quite right too.

Bareboat charters — keep your paperwork up to date

Life can be demanding for bareboat charterers, whether they are simply chartering in, or using a bareboat charter from a bank as a financing device.

In Silverburn Shipping v Ark Shipping [2019] EWHC 376 (Comm) owners under a Barecon1989 charter had suspicions as to their Korean charterers’ ability and intention to look after the vessel properly, and terminated the charter. One reason they gave was that the charterer had allowed the BV classification to lapse a short time before the vessel went into dry dock, thus breaking its obligation under Clause 9 to “keep the Vessel with unexpired classification of the class … and with other required certificates in force at all times”. Arbitrators refused to order the immediate redelivery of the vessel, holding that the duty to maintain class was not absolute, but rather to renew any expired entry in a reasonable time, and in adition that the duty to maintain the vessel in class was an intermediate term and not a condition.

On a s.69 appeal, Carr J disagreed. She saw no reason to read the obligation to keep the vessel in class as anything other than an absolute duty. Further, while accepting that the oft-emphasised requirement of commercial certainty could be over-used and could not “be deployed as some trump card” (a bon mot at para.[53] that is likely to find its way quickly into textbooks and counsel’s argument), she decided that the duty to keep in class was a condition of the contract, Breach of it could be serious in respect of the tradeability of the ship, and affect insurance, ship mortgage and flag: entry in class was moreover a black-and-white criterion with no shades of grey which was redolent of the idea of a condition.

This is something that needs to be taken seriously by charterers. Although the wording of Clause 13 of Barecon2017 differs slightly from the 1989 version, any discrepancy is minor and Carr J’s reasoning would, we suggest, continue to apply. Moreover, the right to terminate a bareboat charter can have considerable effects, particularly in the case of a financing charter with a purchase option: once the charter goes, so does the option. True, if the grounds for termination were wholly technical, in theory the court would have a right to relieve a bareboat charterer from forfeiture (The Jotunheim [2005] 1 Lloyd’s Rep. 181); but this is a difficult jurisdiction to persuade it to exercise, particularly in the face of an agreement for termination entered into by commercially-savvy parties. Charterers and borrowers, you have been warned.

Clearing up after a marine casualty: comfortable words from the Advocate-General.

As a matter of EU law, moving waste across borders can be an expensive bureaucratic nightmare. Regulation 1013/2006 on waste shipments lays down all sorts of notification, insurance, and other requirements that must be satisfied before any such shipment can take place.

The German owners of the MSC Flaminia got a taste of this in 2012. En route from Charleston to Antwerp with a cargo of nearly 5000 containers, including 151 stated to contain dangerous cargo, the vessel suffered a fire and a number of explosions. These left her in an unholy mess, with quantities of scrap metal, possibly contaminated sludge and water used to put out the fire slopping about everywhere. She ran for Wilhelmshaven and made arrangements for cleaning-up operations in Romania. The German environmental authorities then said “Not so fast”, arguing that all the rigmarole of the waste shipments directive had to be gone through. The owners argued that the exception in Art.1(3)(b) applied, which excises from the Regulation “waste generated on board vehicles, trains, aeroplanes and ships, until such waste is offloaded in order to be recovered or disposed of.” The government argued that this did not cover waste created by a casualty outside normal ship operations; a Munich court duly sent the issue to the ECJ.

The Advocate-General’s opinion came down clearly for the shipowners: there was no specific exception for waste arising from an accident or casualty, and no need to imply one. One suspects the ECJ will follow suit. The relief for shipowners is likely to be considerable: it means that cleaning-up operations can now proceed smoothly wherever is easiest. And a good thing too.

See Schifffahrts GmbH MSC Flaminia v Land Niedersachsen (Case C698/17), as ever available on BAILII (unfortunately in French).

International insolvency — English law rights confirmed protected

Shortly after New Year 2018, Hildyard J decided that when an Azeri bank went bust and was put into reconstruction in Baku, the Azeri administrator could not use the Cross-Border Insolvency Regulation to freeze out a couple of creditors in England and Russia whose bond debts were governed by English law. They had refused to have anything to do with the reconstruction, smugly sat back and waited for the reconstruction to finish, knowing that the bank still had English assets that could potentially be seized. (See our blogpost here).

The Court of Appeal has now agreed, in Bakhshiyeva (Foreign Representative of the Ojsc International Bank of Azerbaijan) v Sberbank of Russia & Ors [2018] EWCA Civ 2802 (18 December 2018) . It might or might not be a good idea for England to adopt modified universalism in insolvency and accept, in essence, that the law of a corporation’s home jurisdiction should be controlling in all questions of the enforceability of obligations against it, wherever situated and whatever the law governing them. Indeed, it does just this in EU insolvencies, courtesy of the EUInsolvency Regulation 2015. But established common law authority said that an English court would ignore laws cancelling debts that did not emanate from the state whose law governed them. Further, the CBIR was best read as legislation with procedural, not substantive, aims. It would suspend enforcement of obligations while the reconstruction was going ahead, but would not actually destroy them. Any attempt to use a foreign reconstruction for anything more than that would not be countenanced.

Whether this is the last word we will see. There may be an appeal to the Supremes: the two creditors clearly have the money, and quite a lot rides on the result. However, the view of this blog, for what it is worth, is that this is a delicate matter best left to careful legislative reform, if indeed reform is needed at all. And that’s a bigger if than it looks. Money-men aren’t popular these days, but there is something to be said for the position of the two creditors. No-one has to issue English-law bonds, nor to leave assets in England that can be seized to support the obligations contained in them. And, one strongly suspects, the interest rate on the English-law debt was lower than on Azeri-law debt precisely because of the perceived lower solvency risk. The ability to take the benefit of this and then tell foreign creditors to go fish isn’t, perhaps, something we should be promoting.

Remedies for delivery without production of the bill of lading

A case in the CA of some interest today. Imagine carriers or forwarding agents have delivered goods to a buyer without getting payment for them. No point in suing the buyer in 99% of such cases: and often carriers and forwarding agents will be men of straw too (remember in addition that P&I clubs won’t sub up for this sort of thing). But had you thought of suing the rich man behind the buyer who sweet-talked the forwarding agent or carrier into letting the goods go without payment? You hadn’t? It’s actually a classic case, in most situations, of inducing breach of contract: a point confirmed by the Court of Appeal in Michael Fielding Wolff v Trinity Logistics [2018] EWCA Civ 2765, upholding Sara Cockerill QC at first instance. Happy hunting.

Ship arrest: no undertaking in damages exigible from arresting party

The Court of Appeal declined yesterday to upset the ship arrest apple-cart. In The Alkyon [2018] EWCA Civ 2760 it upheld the decision of the Admiralty Judge, Teare J, noted here on this blog, that a bank could hold an arrest over a mortgaged ship without having to give any undertaking to pay damages for loss of use should it turn out that its claim was ill-founded. The owners of the MV Alkyon, a 36,000 dwt bulker, had argued that there was no default justifying her arrest in Newcastle; that they could not afford to bail her; that her immobilisation by arrest would cause them big losses; and that it was only fair that if the bank was indeed wrong, it should carry the can for those losses.

Despite the fact that there is theoretically no restriction on the court’s discretion to release an arrested vessel (see CPR 61.8(4)(b)), Teare J disagreed; and the Court of Appeal agreed with him. Although there was much in common between ship arrest and freezing orders, where an undertaking in damages was emphatically the rule, for the court to demand such an undertaking in arrest cases would  cut across the idea that arrest was available as of right, and also the established principle that liability for wrongful arrest could not be imposed unless the claimant proved bad faith or possibly gross negligence. This was not something for the judiciary — barring possibly the Supreme Court — to do.

In the view of this blog, the Court of Appeal was quite right not to draw the analogy with freezing orders. For one thing not all arresters are plutocratic banks: think crewmen seeking wages or damages for injury on board, or for that matter suppliers of canned food and water for those crewmen to eat and drink. For another, the right to arrest is there for a purpose, namely to assure people that they will be paid by the owners of peripatetic pieces of maritime machinery: to allow a threat to arrest to be met with a threat to claim damages would not further this end. For a third, damages for arrest may well bear no proportion to the amount of the claim: the losses caused by the arrest of a large bulker or reefer would be likely to dwarf a straightforward $100,000 bunkers debt. And lastly, it’s all very well saying a single arrester ought to carry the can for immobilisation losses: but what if cautions against release then pile on? Which of the undeserving claimants should have to pay how much? Nice work for lawyers, maybe: less good news for shipping claimants who want to get on with their commercial lives.

Where is General Average?

Jurisdiction decisions in the shipping context follow each other in close succession. Yesterday we had another, from Males J, of some interest to insurers: namely, Griffin Underwriting Ltd v Varouxakis (The Free Goddess) [2018] EWHC 3259 (Comm).

The Free Goddess, a 22,000 dwt bulker owned by Freeseas, was seized by Somali pirates while en route to Thailand with steel coils. K & R insurers Griffin, based in Guernsey but doing business in London, paid out something over $6 million to free her, whereupon she sailed to Oman. Griffin clearly had a right to take over from Freeseas a pretty cast-iron GA claim against cargo interests: on arrival it duly entered into a settlement agreement with Freeseas under which Freeseas agreed to furnish all assistance, including preservation of security, in claiming GA and also to account to Griffin for all sums received on that basis. GA, as might be expected, was settlable and payable in London.

According to Griffin’s (as yet unestablished) allegations, Freeseas did no such thing. Instead of the obvious course of oncarrying the cargo to Thailand and claiming GA in due course, it sold the ship in Oman, destroying any security for GA and providing cargo with a counterclaim for damages which was likely to dwarf the GA liability in any case. In addition it had allegedly trousered a large sum in interim GA contributions without accounting for it. 

Freeseas not being worth powder and shot, Griffin sued one Ion Varouxakis, the Greek-domiciled owner of the company, for inducing it to break the settlement agreement. They alleged that the damage had been suffered in London and therefore they could invoke Art.7, the tort article of Brussels I Recast. Mr Varouxakis insisted that he could only be sued in Greece, arguing for good measure that this was a suit by an underwriter in a matter relating to insurance under Art.14, so the other exceptions did not apply.

In fact Mr Varouxakis was held to have waived any jurisdiction point, so the claim is going ahead in London anyway. But Males J did go on to give a view on the other points. On the issue of the loss of the right to GA, he regarded the issue of where the loss had been suffered as finely balanced, but expressed the view that the direct damage had been suffered in Oman, where he opined that the right to enforce GA had been effectively lost: the fact that GA had not been paid in London he regarded as a remoter consequence and not in account because of decisions such as Kronhofer v Mayer [2004] All ER (EC) 939. So there would have been no jurisdiction. On the other hand, he thought the loss had been suffered in London as regarded the failure to account, and so would have allowed the claim under that head to go ahead on that head in any event. As for the suggestion that this was a matter relating to insurance, he smartly rebuffed the point: insurance might be the background, but this arose out of an independent settlement agreement.

The second point was fairly obvious: if someone infringes my right to an accounting in London, it is difficult to think of anywhere apart from London where the damage occurs. The third is also welcome: the insurance rules under under Art.14 are ill-thought-out even by Euro-standards, and anything that prevents their becoming any more bloated than they already are can only be a good thing.  

This blog is less sure about the first. Saying the damage occurred in Oman gets pretty close to conflating damage with the act giving rise to it; it also means that the place of the damage in cases of this sort becomes wildly arbitrary, depending on which port a vessel happens to be in at the time. On the other hand, if GA is settled and negotiated in London, it seems fairly convincing to argue that preventing it being settled and paid there causes a direct loss within the Square Mile. Unfortunately, because the claimants won in any case, we are unlikely to see an appeal here. But this shouldn’t be regarded as necessarily the last word.