A Further Clarification on Cyber Risk Cover by the Lloyd’s Market Association

cyber-risk

Although cyber risks insurance in the London market is fast growing, more clarity is needed as various types of clauses drafted by different insurers are in use creating an enormous degree of confusion for assureds as to the scope of the cover on offer. With the objective of providing added clarity, from 1 January 2020, Lloyd’s underwriters will be required to clarify whether first-party property damage policies affirm or exclude cyber cover.

This is certainly a positive development and with the aim to assisting in this process, the Lloyd’s Market Association (LMA) has recently published a number of new clauses for the property and marine markets that can be used with traditional lines of business, e.g. hull & machinery policies, war risks insurance policies for vessels and other offshore structure. It should be noted that clauses published by LMA are designed to act as “models” and are distributed for the guidance of its members, who are free to agree to different conditions or amend as they see fit.

The new clauses published by the LMA comprise a cyber endorsement (LMA5400) and exclusion clause for Property D&F (LMA5401) and a cyber endorsement (LMA5403) and exclusion clause for Marine (LMA5402). All clauses explicitly supersede or replace conflicting policy wording related to cyber loss and data.

Both the property endorsement and exclusion clauses exclude coverage for any cyber loss, as well as any costs related to the use or replacement of data. The endorsement does, however, affirm coverage for physical loss or damage to property caused by fire or explosion that results directly from a cyber incident, as well as coverage for physical damage related to data processing media owned by a policyholder.

The marine clauses, meanwhile, rule out coverage for any loss or expense related to the “failure, error or malfunction of any computer, computer system, computer software programme, code, or process or any other electronic system.” Similarly, they exclude coverage for “the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system.” However, marine cyber endorsement clause makes it clear that if the clause is used with policies covering risks of war, civil war, revolution, rebellion, insurrection, or civil strife arising  therefrom, or any hostile act by or against a belligerent power, or terrorism or any person acting from a political motive, the cover will be available for losses arising from the use of any computer, computer system or computer software programme or any other electronic system in the launch and/or guidance system and/or firing mechanism of any weapon or missile.

It should be noted that liability and treaty reinsurance policies will also be required to clarify whether they affirm or exclude cyber cover and these requirements will come into effect in two phases during 2020 and 2021.

The Future of Commercial Law (Cryptoassets and Smart Contracts) under Consideration

 

The UK Jurisdiction Taskforce (UKJT), one of the six taskforces of the LawTech Delivery Panel, published its findings on 18 November 2019 on the issues of legal uncertainty regarding the status of cryptoassests and smart contracts under English law in a document entitled “Legal Statement on Cryptoassets and Smart Contracts”.

On the status of cryptoassets, the UKJT concluded that such assets, as a matter of English legal principle, to be treated as a “property”. In reaching this conclusion, the UKJT stressed that crypto assets meet the following characteristics of “property”:

  • They are definable and certain;
  • They are exclusive and capable of being controlled;
  • They are capable of being owned and transferred (through the use of the private key);
  • They have some degree of permanence and stability.

Considering the current legal rules and principles and scope of various statutes, the UKJT expressed the following views on cryptoassets:

i) They are not documents of title (so that they do not enable the person holding them to deal with the property described as if they were the owner);

ii) They are not negotiable (so a good faith purchaser cannot acquire good title);

iii) They are limited in terms of what security can be granted over them (as such they cannot be the object of “pledge” or “lien”);

iv) They are not “goods” for the purposes of the Sale of Goods Act 1979; and

v) However, they are “property” for the purposes of the Insolvency Act 1986.

The UKJT indicated that the intervention from legislators would be necessary to solve two aspects of cryptoassets. It has been stressed that problems are likely to arise if no governing law has been chosen. In that scenario, new law, ideally at international level, is required to answer this question. It is also clear that without new law, a distributed ledger cannot be an official register of title like the Land Register.

On the legal position of smart contracts, the findings of the UKJT are more straightforward. Accordingly, smart contracts are capable of satisfying the English law requirements on contract formation. A court would interpret a smart contract in the same way as any other contract. On the issue of whether one can have a contract with anonymous or pseudonymous parties (given that users within a smart contract chain tend to transact in relative anonymity), it has been stressed that there is no requirement to know a party’s true identity. Also, it is the view of the UKTJ that a statutory signature requirement is highly likely capable of being met by means of a private key. Lastly, it has been stressed that statutory “in writing” requirement is likely to be met in the case of source code and, to the extent it is in readable format, object code.

The legal position of crypto assets has already been judicially aired in a number of cases (Liam David Robertson v. Persons Unknown [2019] not yet reported and B2C2 v. Quoine Pty (2019) SGHC(I)03 (Singapore International Court)). There are also reports that over $1.5 billion worth of cryptocurrency was stolen last year by hackers. It is obvious that courts in near future will be occupied dealing with matters concerning cryptoassets. Although it is not binding authority, there is no doubt that the Legal Statement will very useful when such issues are brought before the English/Welsh courts. The author believes that common law’s ability to adapt to different situations will be a key asset in resolving most of the legal issues emerging. However, it is also clear from the Legal Statement that there is an urgent need to consider developing appropriate legislation and regulation to deal with some of the issues that will emerge in particular: choice of law issues and the legal status of a distributed ledger. So, the ball is now in court of the Law Commission!

The potential for smart contracts in global financial markets is huge. Once they take off, one can see an increased use of them in shipping, aviation and energy sectors as they have the capability to provide immutable data! This can, of course, enhance certainty by reducing the scope of potential disputes between various parties to such contracts.

In summary, the way we do business is changing as a result of technology and this will undoubtedly test the ability of English common law to deliver against the expectations of global businessmen. There is an urgent need to engage in a serious debate to determine how we can address the complex range of legal issues thrown up by the massive accumulation of big data, on-chain smart contracts and other aspects of artificial intelligence.

Weight of undamaged pallets and Montreal Convention package limitation.

 

On 11 October 2018 (I ZR 18/18) the German Federal Court of Justice (BGH) ruled on the calculation of the Montreal Convention package limitation of 19 SDRs per kilo under art. 22(3). Article 22(4)(1) stipulates that compensation may not exceed the amount payable in the event of loss of the devalued part of a consignment. The claim was in respect of a consignment consisted of 1,000kg of goods and 250kg of pallets. The BGH ruled that in considering the weight relevant to the package limitation no account should be taken of the weight of the pallets which were undamaged. Only the net weight of the damaged goods was to be taken into account and so the claimant’s maximum damages claim would be 19,000 SDRs (1,000kg by 19 SDRs) and not 23,750 SDRs as claimed.

BIMCO withdrawal clause. No withdrawal for underpayment of previous hire instalment.  

 

Quiana Navigation SA v Pacific Gulf Shipping (Singapore) PTE Ltd “Caravos Liberty” [2019] EWHC 3171 (Comm) involved  a time charter under which the charterers made an underpayment of the fourth instalment of hire but owners did not exercise their right to withdraw under the BIMCO withdrawal clause incorporated into the time charter. However, the shortfall remained and at the time of the sixth instalment, which was paid in full, the owners decided to withdraw the vessel on account of the remaining shortfall in hire under the fourth instalment. The key words in the BIMCO Clause are “If the hire is not received by the Owners by midnight on the due date, the Owners may immediately following such non-payment suspend the performance of any or all of their obligations under this Charter Party (and if they so suspend, inform the Charterers accordingly) until such time as the payment due is received by the Owners.” In the context of the right to withdraw, what constitutes ‘the hire’? The tribunal found that it referred to the hire for that particular instalment and did not encompass previous underpayments. Cockerill J upheld that decision. The question “What is the hire?” question could only sensibly be answered and one single date produced if the charterers’ approach were preferred.  Cockerill J stated [42]:

“[i]t is artificial to ignore the temporal dimension inherent in the reference to a “due date” in (a); and equally artificial to say that the sum outstanding from the fourth instalment was due “on” 10 August. Owners’ argument also, either (as Charterers would put it) impermissibly elides the very real distinction between the continuing entitlement to recover hire as a debt and on the other the independent contractual entitlement to withdraw or at least attempts to draw focus from the existence of other remedies.”

Accordingly, owners’ withdrawal was unjustified and amounted to a repudiation of the charter.

Demurrage due to delays in discharge due to damaged condition of cargo.

Alianca Navegacao E Logistica LTDA v Ameropa SA (The Santa Isabella) [2019] EWHC 3152 (Comm)

A vessel carried a cargo of white corn/maize from Mexico to South African Ports under a Synacomex form charter incorporating the Hague Rules.  On arrival the cargo was found to have suffered extensive damage and that led to a delay in discharge resulting in demurrage becoming due. Voyage charterers claimed that they were not liable for demurrage due to delays resulting from fault of the disponent owners. They alleged that the damage to the Cargo, and the delays at Durban and Richards Bay, were caused by (a) the Vessel taking the Cape Horn route rather than the Panama Canal route from Topolobampo to Durban, (b) failure by the Vessel to ventilate the Cargo in accordance with a sound system, (c) failure by the Vessel to disinfest areas of the Vessel outside of the cargo holds following loading at Topolobampo and/or (d) the Vessel proceeding to Durban at less than her warranted speed.

Andrew Henshaw QC (sitting as a Judge of the High Court) found that the owners’ obligation was to proceed on the usual and reasonable route to the discharge port and that where there were more than one such routes they were entitled to choose one rather than the other and that choice did not require owners to calculate the effect of taking that route on the cargo being carried. Both the Cape Horn route and the Panama Canal routes were usual routes to Durban and the owners committed no deviation, nor breach of art. III(2) of the Hague Rules, in taking the former. In determining which route to take the judge stated[91]:

“cargo considerations may be relevant in the elementary sense that a much longer voyage is likely to be detrimental to a perishable cargo. However, the case law does not in my view require shipowners to undertake the far more refined analysis urged by Ameropa, which would involve (in the present case) considering in detail how predictable climactic conditions on the Cape Horn and Panama Canal routes would impact on the need to ventilate the cargo and the vessel’s ability to do so.

However, the owners were found to have been in breach of art III(2) of the Hague Rules in failing properly to ventilate the cargo on the voyage and this had resulted in the delays experienced at Durban and Richards Bay. It was common ground that as owners were not bailees the legal burden of proof in showing breach of art III(2) fell on charterers. Charterers argued that the arrival of the cargo in a damaged condition  gave rise to an inference of breach. The judge rejected this, stating [52]:

“As a matter of common sense, the arrival in a seriously damaged condition of a cargo loaded in apparent good order and condition calls for an explanation, and a want of care on the part of the shipowner is a possible inference. In the present case, Alianca’s explanation is that the length and/or route of the Voyage made damage inevitable. On that basis, I am inclined to the view that it is for Ameropa to show, on the balance of probabilities, that the damage suffered in fact arose from a breach of contract by Alianca.”

Ameropa succeeded in showing that the damage did arise from a breach of contract by disponent owners.

The owners were also in breach of their obligation to proceed at the warranted speed but it was not possible to identify any particular element of damage or loss caused by that breach.

FAL Convention. Electronic documentation for ports replacing paper.

On 1 January 2017 the Facilitation Convention was amended to provide for exchange of FAL data electronically from 8 April 2019. The amendments provide for a transition period of 12 months during which paper and electronic documentation co-exist for FAL documents.

The amendments provide that consideration should also be given to such a Single Window serving as the mechanism through which the public authorities communicate decisions and other information covered by this Convention in connection with the arrival, stay and departure of ships, persons and cargo.

The documents in question are:

General Declaration

Cargo Declaration

Ship’s Stores Declaration

Crew’s Effects Declaration

Crew List

Passenger List

Dangerous Goods Manifest

The document required under the Universal Postal Convention for mail

Maritime Declaration of Health

Security-related information as required under SOLAS regulation XI-2/9.2.2

Advance electronic cargo information for customs risk assessment purposes

Advanced Notification Form for Waste Delivery to Port Reception Facilities, when

communicated to the Organization.

 

The amendments only affect FAL documents and not the certificates of liability insurance under the CLC, the Nairobi Wreck Removal Convention, the Bunker Oil Pollution Convention. These must be carried on board vessels as paper certificates.

 

‘Properly due’ in General Average Guarantee. Guarantor’s reliance on Rule D of YAR 1974.

 

 

The BSLE Sunrise [2019] EWHC 2860 (Comm) involved a preliminary  issue as to whether the issuer of the GA guarantee can raise a defence under Rule D of YAR 1974 as to their liability under the GA guarantee.

Following a grounding off Valencia in 2012, owners incurred expenses in attempting to refloat vessel and in conducting temporary repairs. General Average Bonds and General Average Guarantees were issued. Each GA bond provided

“In consideration of the delivery to us or our order, on payment of the freight due, of the goods noted above we agree to pay the proper proportion of any … general average

… which may hereafter be ascertained to be properly and legally due from the goods or the shippers or owners thereof …”

Each of the GA guarantees, in the wording approved by the Association of Average Adjusters and the Institute of London Underwriters, provided:

“In consideration of the delivery in due course of the goods specified below to the consignees thereof without collection of a deposit, we the undersigned insurers, hereby undertake to pay to the ship owners … on behalf of the various parties to the adventure as their interest may appear any contributions to General Average … which may hereafter be ascertained to be properly due in respect of the said goods.

Cargo interests maintained that the grounding was due to owners’ breach of their obligation of seaworthiness under art III.1 of the Hague/Hague-Visby Rules which were incorporated into each of the bills of lading, and accordingly under Rule D of YAR 1974 which was incorporated into those contracts, no general average was due from them.

Judge Pelling QC held that this defence also applied in respect of the general average guarantees. The wording in the bonds and the guarantees should be construed in the same word and that the word “due” when applied to a monetary obligation meant that it is legally owing or payable. No sum becomes legally due or payable “ … on behalf of the various parties to the adventure as their interest may appear …” by way of contribution to general average unless and until it has been decided whether the Rule D defence  succeeds or fails. The inclusion of the word “properly” served to put the point beyond doubt.

The Maersk Neuchâtel, [2014] EWHC1643 (Comm); [2014] 2 Lloyds Rep 377 on which owners relied contained different wording whereby the undertaking was to pay “ … on behalf of the various parties to the adventure as their interest may appear …” the GA “… which may hereafter be ascertained to be properly due in respect of the said goods”. This was construed as requiring the charterer to pay the sum ascertained to be due in the adjustment, with the omission of the words in the standard bond such as ‘is payable’ and ‘properly due’, making the contract akin to an on-demand guarantee, payment being due upon here certification.

Accordingly the Preliminary Issue was resolved in favour of the guarantors. Nothing was payable under the GA guarantees issued by them if the loss was caused by the owner’s actionable default or until that issue has been resolved.

Brexit. Here’s the new deal – same as the old deal?

 

Mr Johnson yesterday concluded a new withdrawal agreement with the EU which will be put before Parliament on Saturday, after the rugby.

 

The main changes from Mrs May’s withdrawal agreement are that under the new backstop, that would come into effect on 1.1.2021 if a new agreement with the EU has not been concluded by then, there would be customs border between Eire and Northern Ireland but in practice customs checks on goods going into the island of Ireland, would take place on the UK mainland – not, as has been suggested, in the Irish Sea. Northern Ireland would also be subject to the rules of the internal market as regards goods and agriculture. Stormont will be able to vote on the continuance of this backstop four years after the end of the transition period and should it vote against them these provisions would lose force two years later during which time the “joint committee” would make recommendations to the UK and EU on “necessary measures”. In the absence of a sitting Northern Ireland Assembly at that time the UK would make alternative arrangements to provide for the necessary vote.

If the Northern Irish Assembly votes against the provisions, they would lose force two years later during which time the “joint committee” would make recommendations to the UK and EU on “necessary measures”.

 

There are changes to the political declaration, too. The parties are committed to concluding a free trade agreement which provides for regulatory autonomy in para 18 as follows.

“The Parties will retain their autonomy and the ability to regulate economic activity according to the levels of protection each deems appropriate in order to achieve legitimate public policy objectives such as public health, animal health and welfare, social services, public education, safety, the environment including climate change, public morals, social or consumer protection, privacy and data protection, and promotion and protection of cultural diversity. The economic partnership will recognise that sustainable development is an overarching objective of the Parties. The economic partnership will also provide for appropriate general exceptions, including in relation to security.”

Para 21 contemplates “free trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition, as set out in Section XIV of this Part.”

Shortly afterwards there follows one of those exceptions.

 

  1. While preserving regulatory autonomy, the Parties will put in place provisions to promote regulatory approaches that are transparent, efficient, promote avoidance of unnecessary barriers to trade in goods and are compatible to the extent possible. Disciplines on technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) should build on and go beyond the respective WTO agreements. Specifically, the TBT disciplines should set out common principles in the fields of standardisation, technical regulations, conformity assessment, accreditation, market surveillance, metrology and labelling. The Parties should treat one another as single entities as regards SPS measures, including for certification purposes, and recognise regionalisation on the basis of appropriate epidemiological information provided by the exporting party.

And another is to be found in section XIV

“To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid, competition, social and employment standards, environment, climate change, and relevant tax matters….”

The parties commit to “maintain environmental, social and employment standards at the current high levels provided by the existing common standards…. [and] should rely on appropriate and relevant Union and international standards, and include appropriate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement. The future relationship should also promote adherence to and effective implementation of relevant internationally agreed principles and rules in these domains, including the Paris Agreement.”

 

But it is not all about goods. Paragraph 25 provides “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sectors, respecting each Party’s right to regulate. The Parties should aim to deliver a level of liberalisation in trade in services well beyond the Parties’ World Trade Organization (WTO) commitments and building on recent Union Free Trade Agreements (FTAs).” This will aim for substantial sectoral coverage in line with GATT article 5.

Maritime transport is mentioned at para which provides “The future relationship should facilitate cooperation on maritime safety and security, including exchange of information between the European Maritime Safety Agency (EMSA) and the United Kingdom Maritime and Coastguard Agency (MCA), consistent with the United Kingdom’s status as a third country.” There is no mention of the Rotterdam Rules.

There would be an independent arbitration process to deal with disputes under the new agreement but: “[131] The Parties indicate that should a dispute raise a question of interpretation of provisions or concepts of Union law, which may also be indicated by either Party, the arbitration panel should refer the question to the Court of Justice of the European Union (CJEU) as the sole arbiter of Union law, for a binding ruling as regards the interpretation of Union law. Conversely, there should be no reference to the CJEU where a dispute does not raise such a question.”

The new WA will have to obtain the approval of Parliament on Saturday, otherwise Mr Johnson will be required by law to seek an extension to 31 January under art.50.  If the necessary letter is not sent, the Scottish Court of Session will reconvene on October 21 to decide whether it will sign a letter to the EU on Mr Johnson’s behalf.

In the meantime, expect a lot of phone calls by Mr Johnson to ‘our friends in the North’. Labour votes, or abstentions, are likely to be critical to getting the new deal through.

 

Different treatment of NOR for cancellation and for laytime purposes. Fine, if that’s what the parties agree.

 

The “strange result” condemned by Roskill J. in The Madeleine [1967] 2 Lloyd’s Rep. 224, namely, that a notice of readiness may be valid for one purpose (avoiding the option to cancel) but invalid for another purpose (the commencement of laytime), can arise if the parties choose to agree upon different regimes. This is what happened in Bilgent Shipping PTE Ltd.and ADM International SARL v. Oldendorff Carriers (The Alpha Harmony) [2019] EWHC 2522 (Comm) – a tale of a chain of two voyage charters, with the same provisions for tender of NOR to commence laytime but with different cancellation clauses. The laycan period under both initially ended on 31 May 2015 but was narrowed to end on 10 May 2015. The vessel tendered notice of readiness by email at 0704 on 10 May 2015 which was a Sunday. The email stated that the vessel had arrived at 0250 – outside normal working hours. Both charters provided for notice of readiness to be delivered between 0800 and 1700 on a weekday and between 0800 and 1100 on a Saturday, with laytime to commence at 0800 on the next working day after a valid notice of readiness had been tendered.  No express provision was made for delivery of a notice of readiness on a Sunday. However, the head charter contained an additional clause dealing with service of NOR that made no reference to service within working hours.

The vessel tendered notice of readiness by email at 0704 on  Sunday10 May 2015. The email stated that the vessel had arrived at 0250. Sub charterers cancelled at 2047 on Sunday 10 May 2015 and head charters followed suit at 0555 on Monday 11 May 2015. The question was whether the cancellations were lawful in circumstances where, although notice of readiness had been tendered before the relevant time on the cancelling date, it had not been tendered during the permitted hours. The arbitration panel in both arbitrations held that the cancellations were not valid.

Teare J allowed the appeal under the sub charter, but dismissed that under the head charter.

Under the sub charter cl16, the cancellation clause  provided: “Should the Notice of Readiness at loading port not be delivered as per Clause 14 by twelve o’clock noon on the 31st day of May 2015, the Charterers or their Agents shall at said hour and at any time thereafter, but not later than the presentation of Notice of Readiness together with the required certificates at said office, have the option of cancelling this Charter Party…” Teare J held that  the words “as per clause 14” meant that the Notice of Readiness must be in accordance with the requirements of clause 14 which required NOR to be served within stated office hours.

By contrast the cancellation clause in the head charter cl.4 provided as follows:

“… Should the vessel’s notice of readiness not be tendered and accepted as per Clause 17 before 2359 on the 30th/31st day of April/May of 2015, the Charterers or their Agents shall at any time thereafter, but not later than one hour after the notice of readiness is tendered, have the option of cancelling this Charterparty. … ”

There were two charter provisions relating to NOR. Clause 17 provided:

“(a) Notice of readiness and Commencement of Laytime See also Clause 70

Notice of vessel’s readiness to load and/or discharge at the first or sole loading and/or discharging port, shall be delivered in writing or by cable/telex/email to Charterers/Receivers (or their Agents). See also Clause 70. Such notice of readiness shall be delivered when vessel is in the loading or discharging port and is in all respects ready to load/discharge in case loading/discharging berth is occupied vessel to be allowed to tender Notice of readiness whether in port or not, whether in berth or not, whether customs cleared to not, whether in free pratique or not.”

Cl.70 contained provisions regarding the start of laytime and the requirement as to service of NOR within stated.

For cancellation purposes, it was cl.17 that was the relevant clause dealing with NOR and under that clause there was no time restriction on the service of NOR. The words in cl.17 “See also Clause 70”, were not sufficient to incorporate in clause 17, and hence in clause 4, the office hours requirement for the delivery of a notice of readiness. The combined effect of clauses 4 and 17 as amended showed, for the purposes of the cancelling clause, that there was no requirement that the notice of readiness be delivered within office hours. Accordingly, for cancellation purposes NOR had been served before the cancelling deadline of 2359 on 10 May 2015 and the head charterers had no option to cancel the charter.