FOB Sellers liable to Buyers for shortage and overshipment.

 

 

London Arbitration 23/16 is an interesting award on the obligation of fob sellers in delivering the correct quantity of goods to the vessel/s nominated by the buyers. The sellers concluded three fob sales for a total of 12,000 mt straight steel bars of different qualities and specifications, which were subject to two shipments. There was a shortage on the first shipment, and an excess discharged on the second shipment which included bundles of 10 mm bars with white painted ends that should not have formed part of the cargo for that vessel.

The buyers successfully claimed damages from the sellers for (a) the compensation paid to receivers for the shortage and (b) compensation paid to shipowners in respect of delays to the discharge of the vessel, detention of the vessel following discharge, shifting expenses and a fine, consequent upon the over-shipment. The type of loss – expenses on shifting at orders of port authority consequent on discharge of excess cargo – was reasonably foreseeable.

The tribunal held that sellers’ were in breach of their obligation to place the correct quantity and quality of cargo on board the vessels nominated by the buyers, and this obligation was not limited to delivering the steel to the forwarding agent. Clause 4 of the contract specifically stated that this was an fob contract and its meaning was not affected by the fact that there was no specific requirement for the buyers to nominate a vessel.

The tribunal rejected the sellers’ argument that the chain of causation had been broken by the failure of the masters of the two vessels to issue accurate bills of lading. The bills of lading did not identify the different bar sizes loaded but simply stated the total number of bundles and the total weight of the cargo under the heading “Shipper’s description of goods”, and stated “shipped in apparent good order and condition … weight, measure, quality, quantity, condition, contents and value unknown”. It was fanciful to suggest that the master of the first vessel should have been aware that there was a shortage of 70 bundles out of 2793 bundles, or that the master of the second vessel should have been aware that he was loading a quantity of 10 mm bars with white markings which should not have formed part of that shipment.

 

Hanjin Rehabilitation. Claims by Owners and the UK Recognition Order

 

 

As well as having its own vessels, Hanjin is also believed to have time chartered a substantial number of vessels. It is a good bet that many of those charters will be subject to London arbitration and English law. The Hanjin collapse will see those shipowners making claims against Hanjin, such as for damages for the unexpired residue of the charters following their termination, (an issue on which the Court of Appeal’s decision in Spar Shipping is eagerly awaited).

Shipowners will also seek to claim against third parties connected with Hanjin, by exercising liens on sub-freights against parties who have sub-chartered from Hanjin, or by claiming freight due under shipowners’ bills incorporating the terms of those sub-charters. The mechanism for making such claims is by giving notice to the sub charterer or to the bill of lading shipper that payment is to be made to owners and not to Hanjin, and hoping that the freight hasn’t already been paid. However, the basis of the two types of claim is quite different. The nature of the lien on sub freights has not been definitively ascertained under English law, but the better view is that the lien operates as an equitable assignment giving  rise to a floating charge over the charterer’s asset, its contractual right to sub-freights. The claim to freight under the bill of lading on the other hand is a claim under a separate contract between the shipowner and the shipper.

Following the rehabilitation proceedings in South Korea (which are similar to US Chapter Eleven proceedings), recognition orders have been obtained in various jurisdictions including the UK. Under article 20(1) of the UNCITRAL Model Law, which is given the force of law by the Cross-Border Insolvency Regulations 2006, there will be then be an automatic stay of certain actions, such as commencement or continuation of actions or proceedings against the debtor or its assets, or execution against a debtor’s assets. The stay will effect any arbitration proceedings against Hanjin, or its sub-charterers against whom the lien on sub-freights has been exercised. However, article 20 (6) provides that the court has power to modify or terminate the automatic stay and to do so upon such terms and conditions as it thinks fit. Article 20(2) requires the court to apply the same test and principles as it would apply to the stay of a winding up order under section 130(2) of the Insolvency Act 1986 which gives the court a free hand to do what is right and fair according to the circumstances of each case. The stay will usually be lifted when disputed claims need to be resolved by proceedings and it is right and fair in all the circumstances to accept and implement this need.

Last year in proceedings arising out of another set of rehabilitation proceedings involving a South Korean charterer, Re Pan Ocean Co. Ltd Pan Ocean); subnom another  v. Pan Ocean Co Ltd and another [2015] EWHC 1500 Ch, the discretion was exercised in favour of allowing arbitration proceedings to continue, although the owners’ application to the Company Court was made however on the basis that they would not seek to enforce any arbitration award or subsequent judgement against the assets of Pan Ocean. This follows a similar result in Cosco v Armada [2011] EWHC 216 (Ch), a case involving a recognition order of Swiss bankruptcy proceedings against a time charter. Briggs J allowed the stay to be lifted in respect of owners’ arbitration proceedings against sub-charterers, pursuant to the lien on sub-freights. This was subject to a condition that after an award in owners’ favour had become final, charterers should have the opportunity to restore the matter to the court, in the event that any aspect of the interests of its creditors or office-holder have not been addressed by the arbitrators, or upon appeal.

However, a claim to freight under the bill of lading, as a contractual claim against the shipper, should not be affected by the recognition order unless the freight exceeded the amount of owners’ claim in which case the surplus would be held on account of the time charterer.

As a post-script it may well be that under South Korean insolvency law the rehabilitation proceedings will not affect the exercise of a lien on sub-freight. This was the position in The Bulk Chile [2012] EWHC 2107 (COMM). It was there argued at first instance that the lien on sub freight was subject to the Comprehensive Stay Order, designed to suspend creditors’ compulsory enforcement, which is defined in article 44 of the Debtor Rehabilitation and Bankruptcy Act as meaning, among other things, “the compulsory auction sale proceedings for the execution of security interests”. Andrew Smith J heard conflicting evidence from South Korean lawyers on this and concluded that the Stay Order did not affect the exercise of the lien. He stated [69]:

“Mr Kim’s suggestion of such a purposive construction of the statute is advanced in tentative terms. “Mr Choi firmly rejected it in a report in response dated 22 June 2012, and cited in support of his opinion the views of the Bankruptcy Division of the Seoul court published by them in “Practice in Rehabilitation Cases”. His opinion is in line with a decision of the Seoul court of 21 December 2011 in case no 2011 Hoehwak 382.” I cannot accept that Mr Kim’s suggestion represents the present state of Korean law, and I conclude that the orders of the Seoul court afford the defendants no answer to the lien claims. I uphold the lien claim against Metinvest.”

 

OWB Bunkers. Arrests by physical suppliers in US.

 

 

The OWB Bunker saga has placed owners on the horns of a dilemma. Pay ING as assignee of OWB or pay the physical supplier? Owners certainly do not want to have to pay twice. Three recent arrest cases in the US by the physical suppliers indicate that they will not obtain a maritime lien for necessaries. Valero Marketing & Supply Co v M/V ALMI SUN, 2016 US Dist 2016 AMC 632 (ED La Feb 8 2016); O’Rourke Marine Servs LP, LLP v M/V COSCO HAIFA, 2016 (SDNY April 8 2016);Bunker Holdings v M/V YM SUCCESS, 2016 (WD Wash June 6 2016).

There are three elements to the maritime lien for necessaries. 1. Necessaries must be furnished (2) to a vessel (3) on the order of the owner or person authorised by the owner. In these three decisions by district courts it has been held that a person with authority to bind the vessel must have some control over the subcontractor’s selection or performance in order for the subcontractor to have a maritime lien for necessaries. Accordingly, the third requirement for a maritime lien had not been satisfied as OW Bunker selected the physical supplier without the direction or involvement of the party with authority to bind the vessels. The Fifth Circuit is expected to give its decision in the Valero appeal by the end of the year.

Hanjin: further consequences of the lack of proper international arrest regime

Further confirmation of the problems caused by the chaotic state of international ship arrest and international marine insolvency law. Essentially ships belonging to insolvent owners are left circling the globe, not daring to put in anywhere. For the owners of the cargo (and, in this report, certain passengers too), that is, it seems, just tough.

Unexecuted illegal transactions. Can I get my money back?

In the third of a series of seminal judgments given on 20 July, the Supreme Court has revisited the effect of illegality in civil claims.In Patel v Mirza [2016] UKSC 42 Mr Patel paid £620,00 to Mr Mirza for the purpose of betting on the price of RBS shares, using advance insider information which Mr Mirza expected to obtain from his RBS contacts regarding an anticipated government announcement which would affect the price of the shares. The government announcement did not materialise and the intended betting never took place. Mr Patel asked for his money back but Mr Mirza failed to repay it. Mr Patel then sued for recovery of the money in restitution on the grounds of a total failure of consideration. However, there was a problem with his claim. To show grounds to recover the money he would have to rely on his illegal agreement, which amounted to a conspiracy to commit an offence of insider dealing under section 52 of the Criminal Justice Act 1993.

The first instance judge held that, in accordance with the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340,  Mr Patel would not be able to recover the money because of his need to rely on the illegal agreement. The Court of Appeal reversed the decision on the ground that the agreement had not been executed. However, Gloster LJ rejected the view that Tinsley v Milligan was to be taken as laying down a rule of universal application that the defence of ex turpi causa must apply in all circumstances where a claim involves reliance on the claimant’s own illegality. What had to be considered was whether the policy underlying the rule which made the contract illegal would be stultified by allowing the claim. In the present case the mischief at which the offence of insider trading was aimed as market abuse by the exploitation of unpublished price-sensitive information obtained from a privileged source. If no such activity occurred, was hard to see on what basis public policy should bar the return of money which had been advanced for that abortive purpose.

The Supreme Court unanimously dismissed the appeal and took the opportunity to indulge in a recategorisation of the effect of illegality on civil claims. Lord Toulson, with whose approach three other Lords, and Lady Hale, agreed, endorsed Gloster LJ’s approach. He concluded, at paragraph 120:

“The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.”

However, Lords Mance, Sumption, and Clarke disagreed with Lord Toulson’s reformulation of the approach to illegality, Lord Sumption stating [265]:

” In my opinion, this is far too vague and potentially far too wide to serve as the basis on which a person may be denied his legal rights. It converts a legal principle into an exercise of judicial discretion, in the process exhibiting all the vices of “complexity, uncertainty, arbitrariness and lack of transparency” which Lord Toulson attributes to the present law.”

The Hague Rules time bar. Can suit be commenced in a Hamburg Rules jurisdiction?

 

 

The Golden Endurance [2016] EWHC 2110 (Comm) involved cargo claims arising out of a shipment from  three West African ports, Lome, Takoradi and Owendo to Morocco in June and July 2013 and has already been the subject of an anti-suit injunction application that came before Burton J in November 2014,  [2014] 1 Lloyds’ Rep 266. After the decision to grant the injunction in relation to one of the cargo claims, but not in relation to the other two, three proceedings remained afoot: London arbitration in relation to the Lome claims; a declaration of non-liability in the High Court in relation to the other two claims; proceedings by cargo insurers in Morocco in relation to the other two claims which resulted in a judgment against the carrier in February 2015.  The carrier then sought summary judgment in the second of these proceedings, on the grounds that the cargo claims were time-barrred as suit had not been commenced within one year of delivery, as per art III r6 of the Hague Rules which applied to the bills of lading.

Phillips J first rejected cargo insurers’ argument that the Moroccan judgment estopped the carrier, per rem judicatam, from proceeding with its claim for a declaration. The carrier by requesting the dismissal of the claim in Morocco in favour of arbitration proceedings, had not voluntarily submitted to the jurisdiction of the Moroccan court. He then held that for the purposes of the one year Hague Rule time bar under art. III r6, suit can be commenced in any competent court, and that includes a court in a State which applies the Hamburg Rules, such as Morocco where proceedings had been commenced within one year of delivery. Phillips J was also of the view suit that would not be commenced by the carrier’s initiation of proceedings  for a declaration of non-liability.

Brexit and the 2001 Bunker Oil Pollution Convention.

 

Another legislative casualty of the EU referendum will be the UK’s implementation of the 2001 International Convention on Civil Liability for Bunker Oil Pollution Damage (Bunkers Convention). This was done by inserting s.153A into the Merchant Shipping Act 1995, pursuant to The Merchant Shipping (Oil Pollution) (Bunkers Convention) Regulations SI 2006/1244. As this secondary legislation was made pursuant to the Secretary of State’s powers under s.2(2) of the European Communities Act 1972, it will fall away when the Act is repealed at the culmination of the withdrawal process. Section.153A will then cease to have effect.

 

Demurrage cannot last forever – but can go on for a bit longer.

 

MSC v Cottonex Anstalt was the case we reported last autumn about the containers of cotton that nobody came to collect from their discharge port in Bangladesh. Leggatt J held that the carrier was entitled to claim demurrage from the shipper under the bill of lading up to the point at which the contract came to an end due to its repudiation by the shipper. The Court of Appeal has upheld the first instance finding but has overturned the finding that the repudiation took place on 27 September 2011 when the shipper advised the carrier that it would not be able to collect the containers. At this time the delay was between two and a half to four months from discharge and the carrier argued that this was not a long enough period of delay to go to the root of the contract.

 

The Court of Appeal agreed ([2016] EWCA Civ 789). No reason had been given as to why the contract should be taken to have been repudiated on 27 September 2011. Instead, the Court of Appeal fixed on 2 February 2012 as the date of repudiation. That was when the carrier offered to sell the containers to the shipper in an attempt to break the impasse. That was the clearest indication that the commercial purpose of the adventure had by then become frustrated. The sale would have discharged the shipper’s obligation to redeliver the containers and with it the final obligations under the contracts of carriage which still remained to be performed. Accordingly, the shipper was liable for demurrage up to that date and for the value of the containers by way of damages.

 

A trap for the unwary. Service of proceedings in other Member States.

 

 

CPR 6.40(3) lists service in accordance with EU Regulation 1393/2007 (the “Service Regulation”) as one of several permissible methods of service of proceedings out of the jurisdiction. However, service under the Service Regulation is actually the only permissible method of service where proceedings are served on the territory of a Member State in respect of a civil or commercial matter (see C-325/11 Alder v Orlowska [24-25]).

 

In Asefa Yusuf v A.P. Moller [2016] EWHC 1437 (Admlty) cargo claimants’ English solicitor purported to serve proceedings on shipowners in Denmark in which the Service Regulation applies by virtue of a declaration made by Denmark ([2008] OJ L331/21).  However, art. 15 of the Service Regulation provides that service may be made “through the judicial officers, officials or other competent persons of the member state addressed, where such direct service is permitted under the law of that member state.” In the case of Denmark this meant service through a bailiff. Accordingly service was not within art.15 and Simon Bryan Q.C. , acting as a Deputy Judge of the English High Court, held that there could be no exercise of discretion under any English CPR Rule (such as CPR 6.15, 6.16 or 3.10). This could only be done if there was service within Article 15 with minor errors of procedure, but this was not the case here where service was effected through an English solicitor, rather than through a Danish bailiff.

 

Accordingly the High Court had no jurisdiction to try cargo’s claim against owners and the Admiralty Claim Form and service of the Admiralty Claim Form were set aside.