Author: Professor Simon Baughen

Professor Simon Baughen was appointed as Professor of Shipping Law in September 2013 (previously Reader at the University of Bristol Law School). Simon Baughen studied law at Oxford and practised in maritime law for several years before joining academia. His research interests lie mainly in the field of shipping law, but also include the law of trusts and the environmental law implications of the activities of multinational corporations in the developing world. Simon's book on Shipping Law, has run to seven editions (soon to be eight) and is already well-known to academics and students alike as by far the most learned and approachable work on the subject. Furthermore, he is now the author of the very well-established practitioner's work Summerskill on Laytime. He has an extensive list of publications to his name, including International Trade and the Protection of the Environment, and Human Rights and Corporate Wrongs - Closing the Governance Gap. He has also written and taught extensively on commercial law, trusts and environmental law. Simon is a member of the Institute of International Shipping and Trade Law, a University Research Centre within the School of Law, and he currently teaches at Swansea on the LLM in:Carriage of Goods by Sea, Land and Air; Charterparties Law and Practice; International Corporate Governance.

Unsafe ports and negligent pilots.

London Arbitration 2/23 involved a claim for breach of the safe port warranty in an amended NYPE 1981 form, time charter trip to China. The vessel grounded while under pilotage in the port of Chaozhou, proceeding to her discharge berth, and suffered damage to her port side hull structure, resulting in water ingress. The owners claimed that, in breach of the charterparty, the port was unsafe and claimed the cost of repairs and associated damages in an amount of US$1,158,559.59 plus interest and costs.

The parties accepted that the vessel grounded outside the channel in charted shoal water and that the pilot would have known of the location of the charted shoal water. At the time of leaving the load port, the vessel did not have adequate charts onboard to create a proper passage plan for the discharge port. The tribunal found that the plan must have been defective as it could not have been based on the appropriate channel data at the time the vessel departed the loading port.

The master should have made efforts to obtain the appropriate harbour chart, Chinese MSA Chart 81102. It was ordinary good practice to navigate on the largest scale chart available. The pilot could have taken a copy onboard or a photograph of the chart could have been emailed to the vessel. The tribunal found that the master was negligent in failing to obtain a copy of the chart. The master was therefore not aware that the vessel was standing into danger during her final approach to, and manoeuvres within, Chaozhou harbour and, consequently, failed to query the pilot’s actions or attempt any direct action to prevent the vessel grounding. In failing to effectively monitor the pilot’s conduct of the vessel the master was negligent.

The tribunal concluded that the pilot was negligent in failing to manoeuvre the vessel such that she remained in the deep-water channel at all times. The tribunal found that the cause of the grounding was the negligent navigation of the vessel during her inbound passage to her discharge berth. However, the deep-water channel was safe for the vessel at the material time. The limits of the channel were marked on appropriate navigational charts and were known to the pilot.

The test for competence was whether the pilot was affected by a disabling lack of skill or knowledge, deriving from inherent lack of ability, lack of adequate training, lack of particular knowledge, or a disinclination to perform the job properly: The Eurasian Dream [2002] 1 Lloyd’s Rep 719 per Creswell J. The tribunal found the pilot to have been negligent in misjudging the turn into the port and failing to take appropriate action to correct his error. It was not persuaded that there was any evidence that he was affected by any of the deficiencies in the test above. It found him to be competent. A one-off mistake such as this by a competent pilot was not a defect in the set-up of the port: The grounding did not result from the vessel being exposed to dangers that could not be avoided by good navigation and seamanship. The vessel could and should have been manoeuvred within the deep-water channel but was not. Nor was the grounding the result of an abnormal occurrence,

The tribunal also found that the vessel was unseaworthy at the beginning of her voyage because she lacked the appropriate chart to prepare a berth-to-berth passage plan that was compliant with IMO Resolution A893(21). The defect was capable of being rectified by the master obtaining the required harbour chart before the vessel commenced her inbound passage to Chaozhou. However, the master made no effort to obtain the required chart and commenced the inbound passage without any knowledge of the limits of the deep-water channel.

There was no evidence that the owners exercised due diligence to ensure that the vessel had a compliant passage plan before she departed for Chaozhou. However, the grounding was caused by the vessel’s negligent navigation, specifically the pilot’s failure to ensure that the vessel turned at the required rate to remain in the deep-water channel.

The owners’ claim for loss and damage suffered as a result of the grounding failed.

EU Parliament and Council reach agreement on FuelEU Maritime Regulation

Early on the morning of 23 March the European Parliament and the Council agreed on FuelEU Maritime – a new EU regulation ensuring that the greenhouse gas intensity of fuels used by the shipping sector will gradually decrease over time, by 2% in 2025 to as much as 80% by 2050. This measure increases the maritime transport sector’s contribution to reaching the EU-wide target of reducing net greenhouse gas emissions by at least 55% by 2030.

FuelEU Maritime will set maximum limits on the yearly greenhouse gas intensity of the energy used by a ship, with targets will becoming increasingly ambitious over time to stimulate and reflect the expected developments in technology and the increased production of renewable and low-carbon fuels. The targets cover not only CO2, but also methane and nitrous oxide emissions over the full lifecycle of the fuels.

Additionally there is an additional zero-emission requirement at berth, mandating the use of on-shore power supply (OPS) or alternative zero-emission technologies in ports by passenger ships and containerships, with a view to mitigating air pollution emissions in ports.

The Regulation takes a goal-based and technology-neutral approach, allowing for innovation and the development of new fuel technologies to meet future needs, and offering operators the freedom to decide which to use based on ship-specific or operation-specific profiles. The Regulation also provides for a voluntary pooling mechanism under which ships will be allowed to pool their compliance balance with one or more other ships, thereby making it the pool as a whole that has to meet the greenhouse gas intensity limits on average.

The political agreement must now be formally adopted, and once this is completed by the European Parliament and the Council, the new rules will be published in the Official Journal of the European Union and enter into force 20 days after publication.

Anti-assignment clauses and subrogation under foreign law

Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm) involved the effect of an anti-assignment clause in a contract on statutory rights of subrogation under an insurance policy subject to Japanese law taken out by one of the parties. Mitsui Bussan Aerospace Co Ltd (“MBA”) and Dassault entered into a sale contract governed by English law under which Dassault would manufacture and deliver to MBA two aircraft and certain related supplies and services for supply to the Japanese Coast Guard. Article 15 of the Sale Contract, titled “Assignment-Transfer”, provided:

“Except for the Warranties defined in Exhibit 4 that shall be transferable to Customer, this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.

Notwithstanding the above and subject to a Seller’s prior notice to Buyer, Seller shall have the right to enter into subcontracting arrangements with any third party, for the purpose of the performance of this Contract”

The Sale Contract contained an arbitration agreement providing for arbitration under the ICC rules and for the seat of arbitration to be London.

MBA entered into a contract of insurance with MSI, governed by Japanese law, without seeking Dassault’s consent. The Policy covered the risk of MBA being held liable to the Japanese Coast Guard for late delivery under the Sale Contract. In fact, delivery was delayed and the Japanese Coast Guard claimed liquidated damages for late delivery. MBA claimed that sum from MSI (less a deductible) under the Policy, and MSI accepted that claim and paid MBA in turn.

Article 25 of the Japanese Insurance Law provides:

“An insurer, when the insurer has made an insurance proceeds payment, shall, by operation of law, be subrogated with regard to any claim acquired by the insured due to the occurrence of any damages arising from an insured event (under a non-life insurance policy which covers claims arising due to default or any other reason, such claims shall be included; hereinafter referred to as the ‘insured’s claim’ in this Article), up to the smaller of the amounts listed below:

(i) the amount of the insurance proceeds payment made by the insurer; or

(ii) the amount of the insured’s claim (if the amount set forth in the preceding item falls short of the amount of damages to be compensated, the amount that remains after deducting the amount of the shortfall from the amount of the insured’s claim).”

Article 26 of the Japanese Insurance Law provides: “A contractual provision that is incompatible with the provisions of […] [Article 25] that is unfavourable to an insured shall be void.” However it permits of agreement that an insurer would not be subrogated, as not being “unfavourable to the insured”.

The mechanism of subrogation under Japanese Law is the transfer of rights: the insurer acquires the right to sue in its own name, including the right to initiate proceedings. This was reinforced by Article 35 (1) of the Policy which essentially reproduced Article 25 of the Japanese Insurance Law and provide:

“In the event that the Insured acquires a right to claim for damages or other claim […] as a result of the occurrence of Losses, such claims shall be transferred to [MSI] when [MSI] pays the insurance benefits for said Losses..”

30 April 2021, MSI submitted a request for arbitration under the arbitration agreement in the Sale Contract against Dassault. The Tribunal considered the jurisdictional issue as a preliminary issue. In its Partial Award on jurisdiction by a majority decision, the Tribunal dismissed Dassault’s jurisdictional objection. The Tribunal held that: (i) Article 15 of the Sale Contract did not apply to involuntary assignments and/or assignments by operation of law; (ii) as a matter of Japanese law, the transfer of rights from MBA to MSI occurred by operation to law pursuant to Article 25 of the Japanese Insurance Act. The majority found that, since the transfer occurred by operation of law, Article 15 did not apply to it

On appeal under s.67 of the Arbitration Act 1996 Cockerill J that the effect of Article 15 was that the subrogation to MSI was of no effect and the Tribunal had no jurisdiction to hear its claim against Dassault. So far as the authorities went, there was a presumption that the court should not be prevented from giving effect to such a clause when the transfer is one which is voluntary (in the sense of consented to). The authorities did not justify a conclusion that prohibitions on assignment should not be taken to carve out transfers which occur “by operation of law” in a broad sense. The relevant test was whether the transfer was voluntary in that it was in the power of MBA to prevent the transfer. The answer was that it was. MBA might have chosen not to insure or might have chosen a policy governed by another system of law. It might have excluded the operation of Article 25 instead positively reinforcing it with Article 35 of the Policy. It might have chosen not to make a claim. It was therefore in the power of MBA to comply with the provision. It acted voluntarily or consented to take a step which on a certain contingency would put it in breach of that provision.

MSI pointed out that it was difficult to say that subrogation under English law was acceptable, whereas the subrogation equivalent of another legal system was not. Dassault replied that an English law subrogation does not involve a transfer and there simply is a relevant difference for the purposes of a clause such as this. Secondly, the assumption that there is no problem with English law subrogation might not be a safe one.

This required a consideration of the nature of subrogation in English law. Would the third rule of English law subrogation, that an insurer can pursue a claim in the name of the insured, but not pursuant to a transfer of right, be affected by Article 15 or a clause like it? Cockerill J was not prepared to decide that Dassault’s argument would probably gain traction based on a fairly slight and somewhat abstract argument and its case must therefore (for present purposes) stand or fall on the basis that English law subrogation would not fall foul of Article 15.

MSI argued that “a question of public policy arises… because the general view of English contractual law is that it’s sensible for parties to obtain insurance and they should not be penalised for doing so“. Cockerill J rejected this because one could not imply into the clause a blanket exception for insurance: it would be contrary to the express words of the contract and it would fail the business efficacy test.

The moral of this tale is that if your contract contains a ban on assignment, you need to take care with taking out insurance under a policy subject to a foreign law. If subrogation under that system of law operates by a direct transfer of rights to the insurer, it will be caught by the ban on assignment in your contract.

Implied term under time charter. Reinspection of holds following initial failure.

Pan Ocean Co Ltd v Daelim Corporation [2023] EWHC 391 (Comm) (24 February 2023) DL LILAC, involved an appeal under section 69 of the Arbitration Act 1996 heard by Sir Ross Cranston acting as a High Court Judge. The issue of law was:

“whether there was an implied term of the subject time charter having the effect that where the vessel was off hire under clause 69 after a failed holds inspection and the Master advised that hold cleaning had been completed and called for a reinspection, the charterer was obliged ‘to have the vessel re-inspected without delay’.”

The case involved a time charter trip in early 2017 on an amended NYPE 1993 form to carry a cargo of urea in bulk. Clause 69 was headed “BIMCO Hold Cleaning/Residue Disposal For Time Charter Parties” and provided:

“Vessel’s holds on delivery or on arrival 1^st load port to be clean swept/washed down by fresh water and dried so as to receive Charterers intention cargoes in all respects free of salt, rust scale and previous cargo residue to the satisfaction of the independent surveyor.

If vessel fails to pass any holds inspection the vessel to be placed off-hire until the vessel passes the same inspection and any expense/time incurred thereby for Owners account.”

The charterers deducted US$110,765 in hire and US$16,308 in bunkers arising out of the failure of a cargo holds inspection at Jubail (the loading port). The holds initially failed an inspection between 0700 and 1230 on 16 February 2017 due to the presence of rust, paint flakes and cargo residue. At 14.30 on 19 February 2017 the vessel was ordered off-berth. An hour later the master notified the agents that the vessel had been cleaned and requested a reinspection. At 22.18 the vessel shifted to the inner anchorage and rebirthed at 20.42 on 3 March 2017. At 0700 on 4 March 2017, the holds were reinspected at 11.00 the vessel passed the inspection

The owners contended that it was an implied term of the charter party that the charterers should carry out any reinspection with reasonable diligence and without any undue delay and the charterers were in breach of that implied term because the reinspection took so long to arrange. They argued further that the charterers were not entitled to treat the vessel as off-hire after 1530 on 19 February because any loss of time after then was caused by the charterers’ breach of their obligation to arrange a reinspection with diligence. The owners also referred in their closing submissions to an arbitration report in Lloyd’s Maritime Law Newsletter (“LMLN”) 17/10 “where the clause used was virtually identical to that adopted in the instant case.

Sir Ross Cranston concluded that the Award could be read in such a way that the Tribunal did in fact apply the correct legal test for implied terms notwithstanding the reference to “reasonable” in paragraph 25 of the Award. In the opening words of paragraph 25 the Tribunal indicated that it was adopting the owners implied term argument, in which their closing submissions had referred to the “need” for an implied term, and that commercially any other interpretation was not sensible – a reference to the necessity and obviousness benchmarks in Lord Neuberger’s judgment in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742.

Any implied term had to oblige both parties to take reasonable steps to cooperate to organise a reinspection without undue delay. That was all that would be required under the test of necessity for an implied term to protect both parties from delay of the other side and would be consistent with clause 69. The Tribunal was wrong in law to find that the vessel was immediately back on hire once the Master had notified the agents on 19 February 2017 that the holds were ready for reinspection. That was inconsistent with clause 69 of the charterparty, and did not accord with the implied term as found by the Tribunal.

What the Tribunal needed to do was to decide by when the reinspection should have been undertaken had there been compliance with the implied obligation to exercise reasonable diligence to have the vessel reinspected without undue delay. The case wasremitted to the arbitrators todecide what could and should have been done by the parties regarding reinspection, whether either party was in breach in this regard, the relevant timescales (e.g., the time within which the reinspection could have been arranged and completed had there been no breach of the implied obligation), and the financial consequences of any breach.

Late redelivery under time charter. Recovering more than allowed under The Achilleas.

In The Achilleas, [2008] UKHL 48, the House of Lords set out a bespoke rule as to what damages could be recovered by a shipowner in respect of the time charterer’s breach in redelivering the vessel late – market value at the time of breach less time charter hire rate for the period from when the vessel should have been redelivered, up to the time of actual redelivery. However, clauses may be inserted in time charters to allow for recovery of additional damages in the event of such a breach. London Arbitration 1/23 involves just such a clause.

The case involved a head time charter and a sub time charter on similar terms with redelivery to be on or before 1 July 2021 in both cases. Charterers were to give various etas as to the vessel’s redelivery date and port, and clause 119 provided that if an order for a voyage ending after the maximum period were given the owner should have the option

“(i) to refuse the order and require a substitute order allowing timely redelivery of the vessel,ꞏ or

(ii) to perform the order without prejudice to their right to claim damages, including consequential damages, for breach of charter in case of late redelivery of the vessel.

In any event, for the number of days by which the maximum period stipulated in this charter party is exceeded, the Charterers shall pay the prevailing market rate if this is higher than the hire rate agreed in this charter party.”

At the time of fixing the time charterers were aware of the importance of the redelivery date to the owners who were planning to drydock the vessel shortly afterwards as the vessel as due for her special class survey on 6 July, although the parties would also have known that there was some flexibility on dates because the owners would have been able to obtain a short extension of the validity of the class certificates.. Owners intended to obtain a short fixture to get the vessel near to the drydocking port to come into effect after the end of the two time charters on 1 July 2021.

Delays occurred at the discharge port and the follow on fixture owners negotiated on 25 June 2021 was cancelled on 6 July. Discharge eventually completed on 14 July 2021 and the vessel then sailed to the drydocking shipyard arriving there on 22 July 2021. The owners claimed that the charterers were in breach of charter on the following grounds:

(a) the vessel was redelivered late;

(b) the charterers failed to comply with their undertakings in clause 119;

(c) the charterers breached an implied term that any notices of expected redelivery (i) would be given honestly and in good faith, and (ii) would be based on objectively reasonable grounds following proper inquiries made by the charterers.

Time admitted a breach in redelivering late, that their last orders were illegitimate, and their estimates in the voyage orders had not been reasonable estimates. The charterers admitted that the owners were entitled to damages for late redelivery calculated on the basis of the difference between the market and the charter rate of hire for the 12.508 day overrun period between when the vessel should have been delivered (midnight on 1 July) and when she was actually delivered (12.12 GMT on 14 July).

Owners, however, also claimed hire and bunkers that would have been earned under the cancelled repositioning fixture, for the period for the actual ballast voyage from the time charter discharge port to a place 10 hours from the drydock, being a mid-point between the two redelivery ports under the repositioning fixture.

The tribunal accepted owners’ additional claim. The clause was not limited to breach by way of illegitimate last orders but covered all three breaches claimed by owners. The additional claim fell within the term ‘consequential damages’ in cl.119 which was not limited to damages within the second limb of Hadley v Baxendale (1854) 9 Exch 341 and would include losses on a follow-on fixture. However, this’ construction would not allow recovery of actual losses in excess of market rates. The standard approach to damages for breach of charter applied.

If this construction of cl. 119 were wrong, and ‘consequential losses’ was, as charterers argued, limited to the second limb of Hadley v Baxendale, owners’ claim would still be recoverable on that basis.

Owners’ alternative claim based on the alleged breach of the obligation to give redelivery notices, which had to be given in good faith and also to be reasonable, was rejected as the tribunal accepted that even if the charterers had given accurate notices the vessel would not have been redelivered earlier.

Covid, off hire and construction of clause requiring owners’ consent to deductions from hire.

Fastfreight Pte Ltd v Bulk Trident Shipping Ltd (Re Arbitration Act 1996) [2023] EWHC 105 (Comm) (24 January 2023) is a case involving off- hire arising out of lengthy COVID related delays off a Chinese discharge port in 2021.

The “Anna Dorothea”, was chartered for a trip time charter for the carriage of a bulk cargo from East Coast, India to China in April 2021 on an amended NYPE 1993 form. The vessel loaded a cargo of iron ore pellets at Visakhapatnam, India for carriage to China, and was ordered by the Charterers to sail to Lanqiao for discharge. It arrived off that port on 4 May 2021 but was not able to obtain a berth. In the event, the cargo was not discharged, and the vessel was not redelivered by the Charterers to the Owners until 28 August 2021.

Except for a period of five days between 22 and 26 May 2021, the Charterers did not pay any hire for the vessel between 4 May and 28 August 2021. They contended that the vessel went off-hire on 4 May 2021 and remained off-hire thereafter on the basis that three crew members had positive rapid lateral flow tests for Covid on 1 May 2021. Owners case was that it was impossible to arrange for PCR testing of those crewmembers, but if they had Covid-19 (lateral low tests not being wholly reliable) they would have recovered by no later than 13 May, as their temperature records for that day and subsequent days showed. The Charterers relied on clause 67 to justify their putting the vessel off hire.

Owners claimed that charterers could not deduct for off hire by virtue of line 146 appended to cl.11 which was headed “Hire Payment” and provided:

“(a) Payment

Payment of Hire shall be made so as to be received by the Owners or their designated payee in cash in to Owners’ bank account in Germany…

(line 146) Notwithstanding of the terms and provisions hereof no deductions from hire may be made for any reason under Clause 17 or otherwise (whether/ or alleged off-hire underperformance, overconsumption or any other cause whatsoever) without the express written agreement of Owners at Owners’ discretion. Charterers are entitled to deduct value of estimated Bunker on redelivery. Deduction from the hire are never allowed except for estimated bunker on redelivery…

Clause 17, headed “Off Hire” stated:

“In the event of loss of time from deficiency and/or default … of officers or crew … or by any other similar cause preventing the full working of the Vessel, the payment of hire and overtime, if any, shall cease for the time thereby lost. Should the Vessel deviate .. during a voyage, contrary to the orders or directions of the Charterers, … the hire is to be suspended from the time of her deviating .. until she is again in the same or equidistant position from the destination and the voyage resumed therefrom. …

If upon the voyage the speed be reduced by defect in, or breakdown of, any part of her hull, machinery or equipment, the time so lost, and the cost of any extra bunkers consumed in consequence thereof, and all extra provide directly related and actually paid expenses (always limited to one shift maximum) expenses [sic] … may be deducted from the hire only after having reached an agreement with the Owners on the figures (costs, times, bunkers). (emphasis added)”

The charterparty also additional clause 67 BIMCO Terms:

“Notwithstanding anything within this charter party, the riders, the recap, and/or the “BIMCO infections or contagious disease clause for time charter parties” and/or its equivalent, in the event any member of the crew or persons (except those on charterers’ behalf) on board the vessel is found to be infected with a highly infectious or contagious disease and the vessel has to (i) deviate, (ii) be quarantined, or (iii) barred from entering any port, all time lost, delays and expenses whatsoever shall be on owners’ account and the vessel shall be off-hire.

…

Owners are fully aware that vessel is fixed for one trip via East Coast India to China.“

The arbitrators made a partial final award of hire in the sum of US$2,147,717.79, without prejudice to the Charterers’ right thereafter to counterclaim the whole or any part of that sum, and reserved jurisdiction accordingly as well as jurisdiction to decide all other undetermined matters that had been referred to them. Three days ago Henshaw J decided to uphold the decision of the arbitrators on an appeal on the following question of law.

“Where a charterparty clause provides that no deductions from hire (including for off-hire or alleged off-hire) may be made without the shipowner’s consent: Is non-payment of hire a ‘deduction’ if the Vessel is off hire at the instalment date?”

Henshaw J noted the importance of the opening words of line 146 “Notwithstanding of the terms and provisions hereof”. Line 146 singled out cl. 17, the off hire provision, as one which it qualifies. Clause 17 was not primarily directed at allowing the offsetting of overpaid hire but was mainly directed at the prior question of whether hire accrues or ceases to accrue at all. The final part of cl.17 was specifically directed at the making of deductions in the sense of subtractions from hire payments but that portion of the clause clearly included its own bespoke provision requiring the Owners’ written agreement. Read as a whole and in context, the restriction on “deductions” in line 146 applied to any exercise of rights that would otherwise arise under or by reason of cl 17 to reduce (wholly or partly) a hire payment based on the vessel being off hire.

The use of the words “whether/ or alleged off hire” showed that line 146 was designed to cater for situations where a dispute exists about whether the vessel is off hire or not, and to address the situation by requiring the hire to be paid, leaving the argument for later. The Owners did not have an unfettered discretion when deciding whether or not to agree to an alleged off-hire: their discretion had to be exercised for a contractually appropriate purpose (so there has to be a genuine dispute about the deduction) and rationally. Under clause 23 the Charterers had a cross-claim in debt for any overpaid hire which was secured by a lien on the vessel. The arbitrators were correct to reject Charterers’ submission, that line 146 applied only to set-offs and cross-claims.

The conclusion as to the construction of line 146 meant that it was not necessary to consider the effect of the Bingham J’s decision in The Lutetian [1982] 2 Lloyd’s Rep. 140 that where the vessel is off hire at the date on which a hire instalment would otherwise fall due, the effect of what is now cl. 17 of the charterparty is that the obligation to pay hire is suspended. The Lutetian clearly could not be dispositive of the present case, because it contained no equivalent to line 146.

Comment.

Essentially the additional clause in line 146 reverses the position with claims for off hire. The usual position with a time charter is that a charterer may make deductions on an interim basis only where it can establish that they were made both in good faith and on reasonable grounds at the time of deduction (those requirements applying whether the deduction is made pursuant to equitable set-off or an express term of the charterparty). This is reversed with line 146. Hire continues to be paid, unless owners consent to the deduction for the claimed off hire, with charterers then having to claim overpaid hire from owners. This discretion has to be made for a contractually appropriate purpose -there must be a genuine dispute about the deduction – and rationally. For charterers it is a case of “pay now, claim back later.”

COVID may have provided the occasion for this decision, but there is no decision as to whether charterers will be able to claim back hire for this period as off-hire. This will involve construing how cl.67 will operate in circumstances where the port authority refuse to allow the vessel into berth for a substantial period of time during which it is clear that the affected crew members must no longer be infected.

But that is a matter for another day.

Economic loss and limitation under Hague-Visby Rules. The Limnos not followed.

Trafigura Pte Ltd v TKK Shipping Pte Ltd (Rev1) [2023] EWHC 26 (Comm) (13 January 2023) involved a point of law relating to what is meant by Article IV(5)(a) of the Hague-Visby Rules which limits the carrier’s liability to a sum based upon the weight of the “goods lost or damaged”. The ‘Thorco Lineage’ carried cargo from the US to Australia under a bill of lading issued in Switzerland. Following an engine failure, the salvors re-floated the vessel, and obtained a lien on the cargo in respect of the cargo interests’ liability for salvage remuneration. A small part of the cargo was also physically damaged in the re-floating efforts. The claimants incurred four heads of loss which they claimed were the result of the carrier’s breach of contract.

i) Liability to pay the Salvors US$7,355,000.

ii) Physical loss and/or damage to the cargo US$278,658.31.

iii) On-shipment costs in respect of the cargo (some of which was physically damaged and some of which was not) US$723,831.85.

iv) Costs incurred in arranging for the salvage sale and/or disposal of some of the physically damaged cargo US$58,934.74.

The dispute was whether the words “goods lost or damaged” refer and refer only to physically lost or damaged goods. In this case there were two such expenses, salvage payable pursuant to LOF and the cost of on-shipping goods from a place of safety to the port of discharge, resulting in a diminished value for the merchant at the port of discharge to the extent of the additional expense which he has incurred. The goods were clearly economically “damaged”. Teare J departed from the previous first instance decision of Burton J in The Limnos [2008] 2 Lloyd’s Rep 166 in finding that “goods lost or damaged” means “goods lost or which survived in damaged form”. Teare J held that “goods lost or damaged” includes goods which are economically damaged. The travaux préparatoires were of no assistance as there was no discussion of the meaning of the words “goods lost or damaged”. Under Article IV r.5 (a) the liability of the Defendant in respect of the Claimant’s liability to the Salvors was limited to 2 SDRs per kilogramme of the whole cargo. Likewise the liability of the Defendant in respect of the on-shipment costs incurred by the Claimant was limited to 2 SDRs per kilogramme of the whole cargo.

Teare J then considered the position based on the assumption that Burton J’s decision in The Limnos was correct. First, the cargo in this case was physically damaged in that it was subject to the salvor’s maritime lien and so the Claimant’s proprietary or possessory title to the cargo was damaged and therefore the liability of the defendant in respect of the claimant’s liability to the salvors would be limited to 2 SDRs per kilogramme of the whole cargo. However, the maritime lien did not extend to the on-shipment costs incurred by the Claimant. Teare J accepted the submission of Counsel for the Defendants that if there is economic loss or damage in connection with the goods which were the subject of the contract of carriage then, if there is also physical loss or damage to such goods, the carrier’s liability for the economic loss or damage is limited by reference to the weight of the physically lost or damaged goods and if there is no such physical loss or damage then the carrier’s liability for the economic loss lor damage is unlimited. The limit of the Defendant’s liability in respect of the on-shipment costs would be based upon 2 SDRs per kilogramme of the physically lost or damaged cargo.

What’s coming in 2023?

What’s coming in 2023?

Nearly two weeks into the New Year and the IISTL’s version of ‘Old Moore’s Almanack’ looks ahead to what 2023 is going to have in store us.

Brexit. EU Retained EU Law (Revocation and Reform) Bill will kick in at end of the year. It will be a major surprise if the two Conflicts Regulations, Rome I and Rome 2 aren’t retained, but not the Port Services Regulation.

Ebury Partners Belgium SA/NV v Technical Touch BV, Jan Berthels [2022] EWHC 2927 (Comm) is another recent decision in which an ASI has been granted to restrain proceedings in an EU Member State (Belgium) in respect of a contract subject to English jurisdiction.

Electronic bills of lading. Electronic Trade Documents Bill. Likely to become law in 2023 and to come into effect two months after getting Royal Assent. The Law Commission will publish a consultation paper “Digital assets: which law, which court?” dealing with conflicts of law issues in the second half of 2023.

Autonomous vessels. The Department for Transport consultation on MASS and possible amendments to the Merchant Shipping Act 1995 closed in November 2021. Maybe some results in 2023?

Supreme Court cases

Okpabi v Royal Dutch Shell. The case may well go to trial in 2023, although in May 2022 the High Court EWHC 989 (TCC), held it was premature to grant a Group Litigation Order and directed that each individual claimant should specify additional details to formulate a proper cause of action for the defendants to respond to.

In similar proceedings in the Netherlands in which the Court of Appeal in the Hague gave judgment in January 2021 relating to multiple oil pipeline leaks in the Niger Delta, it was announced just before Christmas 2022 that Shell will pay 15 million euros ($15.9 million) to the affected communities in Nigeria in full and final settlement on a basis of no admission of liability.

The Eternal Bliss appeal to the Supreme Court is likely to be heard in 2023, with possibility of judgment given in 2023.

But there must be a question mark over London Steam-ship Owners’ Mutual Insurance Association Ltd (Respondent) v Kingdom of Spain (Appellant), Case ID: Case ID 2022/0062 where it is stated “This appeal has been adjourned by request of the parties.”

Climate Change

IMO Two measures aimed at reducing shipping’s contribution to GHG emissions, EEXI and Cii, both came into force as from 1 January 2023 and will be in the forefront of the minds of those negotiating new time charters.

EU. Shipping is likely to come into the ETS system with the amendments to the 2003 ETS Directive with phasing in from 1 January 2024. Here and here.

BIMCO has produced time charter clauses to deal with all three of these measures.

Ewan McGaughey et al v. Universities Superannuation Scheme Limited is a case involving whether the investments in fossil fuels by a large pension fund in the UK breach the directors’ fiduciary duties and duties towards contributors of the pension fund. On 24 May 2022, the High Court refused permission to bring a derivative action against USSL, but the Court of Appeal gave permission to appeal in October 2022, so a hearing in 2023 is “on the cards”.

European Union

On 15 July 2022, the EU Taxonomy Complementary Climate Delegated Act covering certain nuclear and gas activities came into force on 4 August 2022 and has applied from 1 January 2023. A legal challenge against the Commission before the CJEU by various NGOs and two member states, Austria and/or Luxembourg has been threatened in connection for the inclusion of nuclear energy and natural gas in the Delegated Act. Climate mitigation and adaptation criteria for maritime shipping, were included in the EU Taxonomy Climate Delegated Act adopted in April 2021.

Previous requests from other NGOs asking the Commission to carry out an internal review of the inclusion of certain forestry and bioenergy activities in the EU green taxonomy had already been rejected by the Commission in 2022.

The Corporate sustainability reporting directive came into effect on 16 Dec, 2022

For EU companies already required to prepare a non-financial information statement, the CSRD is effective for periods commencing on or after 1 January 2024. Large UK and other non-EU companies listed on an EU regulated market (i.e. those meeting two of the three following criteria: more than €20 million total assets, more than €40 million net turnover and more than 250 employees) will be subject to the CSRD requirements for periods commencing on or after 1 January 2025.

UK and other non-EU companies that are not listed in the EU but which have substantial activity in the EU will be subject to the CSRD for periods commencing on or after 1 January 2028.

Finally, a very happy 2023 to all our readers.

Under pressure. Duress and non-contractual waiver.

In London Arbitration 33/22 a shipyard claimed in London arbitration for the balance under a final repair invoice and the shipowners claimed for breach of contract and delay in completion of the repairs. A principal issue was whether the shipowners were entitled to make such claims due to the fact that their agent had signed a final agreed invoice in the sum of US$1,712,222 which contained the following waiver:

“Owners are accepting this invoice unconditionally and in full and final settlement of the repairs of [the vessel] in [the yard]. It is expressly stated that repairs carried out and completed to fill (sic) satisfaction of Owners/Representatives/Their and no (sic) any claim/losses can be raised. The warranty as per article 12 from the contract remains in full.”

Article 12 of the ship repair agreement provided that the yard “guarantees the quality of the performed repair works and of the materials and equipment used for the repairs, for a period of 3 (three) months counting as from the date of the completion of the repairs and re-delivery of the vessel” and went on to provide “In any event, the SHIPYARD’S liability for all and any guarantee repairs shall not exceed 10 % of the price of the repairs under this Agreement.” Article 13.4 provided “The yard shall in no case be held responsible for any indirect damages, incl. due to loss of charter or loss of earnings of the vessel.”

Owners paid the first instalment of the invoice and the vessel left the yard the following day, but did not pay the second and third instalments which came due one month and two months later.

At the hearing one of owners’ witnesses, one of the owners’ witnesses, the technical manager at the vessel’s managers, gave evidence that in final negotiations the yard had agreed to a 10 per cent discount but he was then presented with a settlement agreement which included the waiver in dispute. He was told that if he did not sign the vessel would not be permitted to sail and could be delayed for months and was given one hour to decided. He concluded that there was no alternative but to sign. The tribunal accepted his evidence. He had been given authority to agree the final invoice without a waiver, but the yard’s insistence on including a non-contractual waiver in the final invoice was unlawful, and therefore amounted to illegitimate pressure, as was the threat to refuse to allow the ship to sail by exercising a non-contractual lien with no common law basis. It was not realistic for the owners to have been expected to make an urgent application to the Commercial Court for an order to release the vessel, or commence arbitration proceeding for an expedited order.

Owners were therefore entitled to bring their counterclaims which mostly succeeded albeit at lower amounts. However, their claim that because of the delay of 62 days in completion of the repair works, they lost the opportunity to trade the vessel in a rising market was rejected. The parties did not intend to include loss of hire or loss of earnings as a consequential loss. The owners had included a penalty of US$12,000 per day in Article 12 which covered their direct losses because of delay. If loss of earnings was covered under clause 13.4, there would be no need to include a penalty for delay.

The yard was awarded the sum of US$852,222.22 (the balance under the final invoice) less US$396,449.21 on account of owners’ counterclaim, giving a sum due of US$455,773.01.

The yard claimed interest under Article 10 of the repair contract which provided for interest at 0.1 per cent per day, effectively 36.5 per cent per annum and owners argued that it should be struck out as penal.

Although the tribunal accepted that the general commercial practice was for interest rates to be at least 10 per cent above the national base rate, the rate of 0.1 per cent per day was excessive and should not be applied to any sum due to the yard.

Exercising its discretion under s.49 of the Arbitration Act 1996, section 49, the tribunal awarded interest at the rate of 4.5 per cent per annum compounded at three-monthly intervals upon the sum of US$455,773.01 due under the final invoice after deduction of owners’ counterclaims, from 30 days after the date of the final invoice until final payment.

Shipping and the EU Emissions Trading Scheme. It’s going to cost you from 2024 onwards.

Over the last two years the proposed inclusion of shipping in the Emissions Trading Scheme has bounced around the organs of the EU in the trilogue procedure. The EU Parliament’s initial proposal of 16 September 2020 was to amend the MRV Regulation 2015/757 and to include ships of 5000 grt and over in the ETS for all voyages into and out of a port in the EU including from and to ports outside the EU, starting on 1 January 2022. The shipowner, demise charterer, and time charterer would all be responsible under the ETS for the costs of acquiring ETS allowances.

The Commission responded on 14 July 2021 https://iistl.blog/2021/07/14/bastille-day-eu-commissions-present-to-the-shipping-industry/with a proposal to amend the 2003/87/EC directive establishing the Emissions Trading Scheme (‘ETS Directive’) so as to include maritime transport within the ETS but with only 50% cost for CO2 emissions on a voyage from or port outside the EU to one in EU, and to a voyage from the EU to a port outside the EU. There would be a phase in period between 2023 and 2026 for surrender of allowances. Only the shipowner and demise charterer would be responsible for allowances.

The Parliament made various counter amendments in June 2022 as did the Council, noted in here https://iistl.blog/2022/07/06/eu-inclusion-of-shipping-in-the-ets-latest-developments/.

On 18 December 2022, hopefully before the World Cup Final took place, the Parliament and Council made a provisional agreement as outlined in the press release quoted below. The text of the agreement has yet to be released but the press release quoted below indicates agreed amendments to the Commission’s proposed amending of the ETS Directive.

“EU ETS maritime

The Council and Parliament agreed to include maritime shipping emissions within the scope of the EU ETS. They agreed on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026.

Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of 5000 gross tonnage and above will be included in the ‘MRV’ on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and off-shore vessels between 400-5 000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026.

In addition, the agreement takes into account geographical specificities and proposes transitional measures for small islands, ice class ships and journeys relating to outermost regions and public service obligations and strengthens measures to combat the risk of evasion in the maritime sector.

Certain member states with a relatively high number of shipping companies will in addition receive 3.5% of the ceiling of the auctioned allowances to be distributed among them.

The co-legislators agreed to include non-CO2 emissions (methane and N2O) in the MRV regulation from 2024 and in the EU ETS from 2026.”

www.consilium.europa.eu/en/press/press-releases/2022/12/18/fit-for-55-council-and-parliament-reach-provisional-deal-on-eu-emissions-trading-system-and-the-social-climate-fund/

It now looks clear that shipping is going to be brought into the EU’s ETS in just over a year’s time. This will entail added costs to voyages into and out of the EU which will fall on owners and bareboat charterers. It should be noted that, although the UK has established its own ETS, this does not currently include shipping.

An example of these coming ETS costs was given by Safety4Sea in late September 2022, https://safety4sea.com/prepare-for-higher-shipping-costs-but-the-eu-ets-should-be-a-manageable-change/, who posited the example of a voyage from Brazil to Rotterdam, using a carbon credit price of $85 per metric tonne of carbon emitted, a similar figure to the current price of $85.20 per m/t. The example has been updated in line with the recently agreed phase-in period.

The example takes a Capesize dry bulk voyage carrying iron ore from Ponta da Madeira in Brazil to Rotterdam (4,100 nm). Assuming a Capesize speed of 14 knots this would take around 12 days: at 62 tonnes per day this corresponds to 744 tonnes of fuel consumed, emitting 2,300 tonnes of CO2. As the voyage starts outside Europe, only half of the emissions qualify for allowances – 1,150 tonnes.

40% of this will need to be covered for 2024– 460 tonnes. Therefore, at a carbon credit price on 13 December 2022 of just over EUR 85/mt of carbon emitted, the total cost for the carbon allowance would be EUR 39,100, plus a small addition for consumption in port. This compares with a fuel cost for the voyage of around EUR 520,000 (equivalent to 8%).

But two years later, in 2026, the cost for the carbon allowance would rise to 100% almost EUR 100,000 – equivalent to 20% of the total fuel bill for the voyage

For voyage charters to and from the EU, these costs will likely be reflected in increased freight rates for voyages in and out and within the EU. For time charters, although charterers bear the cost of bunkering the vessel during the currency of the charter, that does not mean that owners will be able to recover the costs of ETS allowances from them. Assuming that the EU is a permitted trading area, there is no mechanism for owners under the standard form time charters by which to recover these additional costs. The express or implied indemnity will not work, as these costs will be regarded as the natural costs of trading, as was the case in The Dimitris L [2012] EWHC 2339; [2012] 2 Lloyd’s Rep. 354, where the time charterers’ orders to proceed to the United States did not entitle the owners to be indemnified against the cost of U.S. Gross Transportation Tax.

However, specific clauses may be developed to deal with the apportionment of ETS costs. One such clause was is BIMCO’s Emissions Trading Scheme Agreement for Time Charterparties released on 31 May 2022.

The clause, which is not limited to the EU ETS, provides a mechanism for making the time charterer responsible for providing and paying for emission allowances with both parties cooperating and exchanging data necessary to facilitate compliance with any applicable ETS scheme and to calculate the amount of allowances that need to be surrendered for the period of the charterparty.

While the vessel is off-hire the charterers have the right to offset any allowances due or to require owners to return a quantity of emission allowances equivalent to that for which the charterers would have been responsible for this period had the vessel been on hire.

If charterers fail to transfer any emission allowances in accordance with the provisions in the clause, owners may suspend performance of all or any of their obligations, on giving charterers five days notice, until the time owners receive the emissions allowances in full. During this period of suspension the vessel is to remain on hire and owners are to have no responsibility whatsoever for any consequences arising out of the valid exercise of this right. The right of suspension is without prejudice to any other rights or claims owners may have against charterers under the charterparty.

Unlike many BIMCO clauses, there is no provision for the incorporation into any bills of lading or waybills issued under the charter. This makes sense as ensuring the time charterers bear the financial consequences of acquiring ETS allowances required during the currency of the charter will not directly impact on third party holders of bills of transport documents. This may happen, though, with delay due to owners operating their rights to suspend services under the clause in which case owners would be able to pass on to charterers any resulting liabilities incurred to such third parties.