Commercial contracts, wasted expenditure and lost profits

Anyone drafting a commercial contract these days will invariably add, somewhere, some kind of exemption clause. Unfortunately the drafter is frequently in a hurry, aware that there are a limited number of billable hours he can plausibly attribute to a mere drafting exercise; and as often as not the clause will be lifted from some precedent in the firm’s files, without too much thought about what it might actually mean in real life.

One suspects that this is essentially what had happened in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440. But whatever the history, the result was an expensive trip to the Court of Appeal because something like £80 million turned on the issue of the understanding of relatively few words.

To simplify, IBM agreed in 2014 to install a computer system for an insurance company, CISGIL, for a price of about £50 million. The contract contained a term which, while allowing a list of specific types of claim characterised as “direct loss” in the event of breach, contained a general disclaimer (Clause 23.3) as follows:

“[N]either party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data …, goodwill, reputation (in all cases whether direct or indirect) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party”

There was also a damages cap of roughly £80 million.

Delays occurred; things went wrong; CIGSIL declined to pay a stage invoice tendered by IBM; and the contract came to an end. Each side blamed the other for the debacle. The judge (see [2021] EWHC 347 (TCC)) and the Court of Appeal both held that it had been IBM who had wrongfully repudiated the contract; with the tedious details of this we are not concerned.

At this point, however, the issue of damages arose. Seeing difficulties in claiming for its consequential loss of profits because of Clause 23.3, CIGSIL chose to quantify its claim instead by reference to its wasted expenditure, a figure eventually quantified by O’Farrell J at about £122 million. IBM at this point said that this was an exercise in pettifogging: whatever label CIGSIL chose to put on its claim, it was at bottom trying to claim for its loss of profits, which was precisely what Clause 23.3 prevented it doing.

O’Farrell J (see [2021] EWHC 347 (TCC) at [680]-[686] sided with IBM. CIGSIL was, she said, claiming for its loss of bargain; the measure of that loss of bargain was “the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented.” And while CIGSIL was entitled to frame its claim as one for wasted expenditure if it so wished, that simply represented a different method of quantifying the loss of its bargain; it did not “change the characteristics of the losses for which compensation is sought”. It followed that the claim was inadmissible.

This certainly looked like a robust approach. It also chimed in neatly with modern academic analysis of expectation and reliance damages. At bottom both seek, in different ways, to put a claimant in the position he would be in had the contract been kept; either by showing the gains he would have made but now won’t, or by showing that an investment is now wasted that otherwise wouldn’t have been.

Nevertheless the Court of Appeal was having none of it. On a proper reading of Clause 23.3, the intention was indeed to exclude claims based on profits foregone, but to leave intact claims based on wasted expense. Even if both were similar animals on deep analysis, wasted expenditure did not fall within the meaning of loss of profit or revenue; from which it followed that in the absence of a specific reference to wasted expense, this remained recoverable.

Despite the seductive, apparently no-nonsense approach of O’Farrell J, we think the Court of Appeal got it right. When dealing with the interpretation of exception clauses, the fundamental issue is not any question of academic argument or analysis, but simply what reasonable businesspeople would have made of the words used. And a non-lawyer would undoubtedly say that money wasted was not the same thing as future gain foregone. Furthermore, as the Court pointed out, they would also have seen that there could be good reason to allow the former on the basis that it was likely to be relatively quantifiable and predictable, but to exclude the latter as likely to be open-ended and unquantifiable.

This case is thus good news for business certainty. Nevertheless, those drafting commercial contracts would do well not only to read it but to draft their contracts even more carefully. If those in the position of IBM do not like a result under which they remain liable for seven-figure sums in wasted expenditure, they can always exclude such claims expressly. They should also perhaps take the trouble to add that any such limit applies also to cases of repudiation, since even despite Soteriou, as a result of the decision in Kudos Catering (UK) v Manchester Central Convention Complex [2013] EWCA Civ 38, there remains a possibility that some clauses may be construed as being limited to mere defective performance and not applying to actual repudiation.

If a client complains about the number of billable hours devoted to such issues of drafting, a solicitor can always murmur in his ear that the investment is probably a good one. The Court of Appeal is an expensive place to end up in, however interesting its judgments may be to other practitioners and law professors, and no sensible businessman should want to go there if he can possibly help it.

Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law


Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.


The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipts and/or Messenger Receipt(s) and/or Warehouse Receipts and/or other shipping document(s).

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:


i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.

The Prestige, 20 years on. CJEU reference may be withdrawn at last gasp.

The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain M/T “PRESTIGE” (No. 5) [2022] EWCA Civ 238 (01 March 2022),  concerns a reference to the CJEU by Butcher J, arising out of the longstanding litigation between Spain and the owners’ P&I Club in connection with the Prestige oil spill in 2002. The Club had appealed against an order registering the judgment of the Spanish Supreme Court on 28 May 2019. The appeal was fixed for a two-week trial from 2 December 2020 to determine (i) as a matter of law, whether the judgment entered by Hamblen J constituted a judgment within the meaning of Article 34(3) and, if not, whether that judgment and the arbitration award (and the res judicata to which they give rise as a matter of English law) could be relied upon and (ii) as a matter of fact and law, whether the Spanish Proceedings had breached the human rights of the defendants, including the Club.

Spain made an application seeking the reference of six questions to the CJEU (later adding a seventh) and invited  Butcher J to determine that application at the hearing of the appeal in order to be in a position to lodge any request with the CJEU before “the Brexit cut off”  with the end of the Implementation Period on 31 December 2020. On 21 December 2020 Butcher J then referred three issues to the CJEU.

“(1) Given the nature of the issues which the national court is required to determine in deciding whether to enter judgment in the terms of an award under Section 66 of the Arbitration Act 1996, is a judgment granted pursuant to that provision capable of constituting a relevant “judgment” of the Member State in which recognition is sought for the purposes of Article 34(3) of EC Regulation No 44/2001?

(2)  Given that a judgment entered in the terms of an award, such as a judgment under Section 66 of the Arbitration Act 1996, is a judgment falling outside the material scope of Regulation No 44/2001 by reason of the Article 1(2)(d) arbitration exception, is such a judgment capable of constituting a relevant “judgment” of the Member State in which recognition is sought for the purposes of Article 34(3) of the Regulation?

(3)  On the hypothesis that Article 34(3) of Regulation No 44/2001 does not apply, if recognition and enforcement of a judgment of another Member State would be contrary to domestic public policy on the grounds that it would violate the principle of res judicata by reason of a prior domestic arbitration award or a prior judgment entered in the terms of the award granted by the court of the Member State in which recognition is sought, is it permissible to rely on 34(1) of Regulation No 44/2001 as a ground of refusing recognition or enforcement or do Articles 34(3) and (4) of the Regulation provide the exhaustive grounds by which res judicata and/or irreconcilability can prevent recognition and enforcement of a Regulation judgment?”

At the time of making the reference Butcher J had not decided the Club’s human rights argument. That was decided against the Club in May 2021, after the end of the Implementation Period, and could not be referred to the CJEU. The reference, C-700/20, was heard by the CJEU on 31 January 2022 and the opinion of the Advocate General is expected on 5 May 2022, with the judgment of the CJEU to be delivered at any time thereafter.

The Club appealed the decision of Butcher J, and on 1 March 2022 the Court of Appeal held that Butcher J did not have the authority to refer the questions to the CJEU. The necessity test mandated in Art 267 of 267 of the Treaty on the Functioning of the European Union would only be satisfied if the European law question is conclusive of the issue which the national court has to decide on a particular occasion in accordance with its national procedure. The judge’s discretion as to whether to make a reference only arises once the test of necessity has been satisfied.  That was not the case here as Butcher J had not decided the human rights policy issue raised by the Club. Unless and until that issue had been determined against the Club, the questions referred could not be said to be conclusive or even substantially determinative of the appeal. The questions could have been resolved entirely in Spain’s favour, yet the Club could have won on the human rights issue. Looking at previous CJEU authority in Cartesio Oktato es Szolgaltato bt (Case 210/06) [2009] Ch 354 it was clear that as a matter of national law a reference can be set aside on appeal.

The Court of Appeal allowed the appeal and set aside the Judge’s order referring the questions to the CJEU. However, only the referring judge has jurisdiction to withdraw the reference. The Court of Appeal referred to Butcher J, pursuant to CPR 52.20(2)(b), the question of whether, in the light its judgment, he should withdraw the reference he made to the CJEU on 21 December 2020. The Court of Appeal indicated that the hearing should take place as soon as possible, and in any event in time for any decision to withdraw the reference to be effective.

Cyber warfare: Are you protected?

Beware of the war exclusions!

Following the Lloyds Performance Management Supplemental Requirements & Guidance, published July 2020, all insurance and reinsurance policies written at Lloyd’s must exclude all losses caused by war and nuclear, chemical, biological or radioactive risks (NCBR), except in limited circumstances.[1] This reinforces the exclusion of war and NCBR in hull and cargo and most cyber policies. Both cyber  security data and privacy breach (CY) and cyber security property damage (CZ)[2] polices are among the exempted class of business which would be allowed to write war risks. However, when writing these cyber policies, the terms and scope of the cover must be unambiguously stated. If there is an extension of the policy to include war, that extension must not override any NCBR exclusions contained within the cyber policy. It is customary to follow local law or regulation on how coverage should be provided for in policy documentation and for the exempted classes of business, it is recommended to follow local market practice. In light of these guidelines several war exclusions in varying degree of liability were developed to be endorsed on or attached to commercial cyber policies. It is not yet clear if the same clauses are or will become applicable to non cyber policies but the discussion is relevant considering current geopolitical conflicts and imminent threats to businesses and states.

The exclusions (LMA5564, LMA5565, LMA5566, LMA5567)[3] are very similar in terms of the language used and excludes loss of any kind directly or indirectly occasioned by, happening through or in consequence of war or a cyber operation.  The burden is on the insurer to prove that the exclusion applies. An obvious difference is the causal language used in each clause. ‘Happening through’ is not language commonly used in the marine sector, as such its meaning and what needs to be established to fulfil this causal effect requires clarification. Clauses 3-5 of each exclusion refer to the attribution of a cyber operation to a state and the definition of war and cyber operation are both related to the acts of a state against another state. War is defined as the ‘use of physical force by a state against another state’ thus excluding cyber incidents / attacks which may have the same effect but without physical use of force and not by a state against another state. Cyber operations means ‘the use of computer system by or on behalf of a state to disrupt, deny, degrade, manipulate or destroy information in a computer systems of another state’.[4] The emphasis on ‘states’ means that the exclusion would not be applicable to private acts of civilians who are not acting on behalf of their government or another state. Furthermore it is doubtful whether cyber operation would extend to the damage loss of cargo, vessel or financial losses since the subject of a cyber operation is the ‘information in a computer system’.

In attributing cyber operation to a state, the primary but not exclusive determinant is whether the government of the state in which the computer system affected is physically located has attributed the cyber operations to another state or those acting on its behalf. Pending a decision, the insurer may rely on an inference which is objectively reasonable as to attribution of the  cyber operation  but no loss shall be paid during this time. If the  government of the state in which the affected computer system is located takes too long to decide, or is unable to declare or does not determine attribution, the responsibility shifts to the insurer to determine attribution by using other evidence available to it. There are several problems with the terms of LMA5564, there is no explanation of the type and source of information the insurers should rely on to develop an inference and what will qualify as objectively reasonable and importantly who will sit as ‘objective person’. Furthermore,  the reference to the insurer using ‘such other evidence as is available’ suggest that the insurer is permitted to rely on any source, type / quality of evidence available that will support his position that the exclusion does apply. In other words, the acceptable standard of evidence to support the insurer’s ‘inference’ and to discharge his burden that the exclusion does apply is low and therefore prejudicial to the assured.

The second war, cyber war and cyber operation exclusion (LMA5565) differs from LMA5564  in that LMA5565 clause 1.1 to 1.3 list the conditions under which war and cyber operations are excluded. These are war or cyber operation carried out in the course of war and or retaliatory cyber operations between any specified state (China, France, Germany, Japan, UK or USA) and or a cyber operation that has a detrimental impact on the functioning of the state due to the direct or indirect effect of the cyber operation on  the availability, integrity or delivery of an essential service in that state and or the security or defence of a state. Clause 3 introduces the agreed limits recoverable in relation to loss arising out of one cyber operation and a second limit for the aggregate for the period of insurance. If the limits are not specified, there will be no coverage for any loss arising from a cyber operation. Noteworthy is the fact that similar limits have not been introduced for loss arising from a war or cyber war, so the limit would be based on the insured value of the subject matter insured. The definition of essential service creates uncertainty because what is categorised as ‘essential for the maintenance of vital functions of a state’ may vary across states. While examples are provided which includes financial, health or utility services, unless the parties stipulate and restrict this category to only the services named in the policy, there is potential contention between the parties over what will qualify as an essential service and what is a vital function to a state. It is expected that the marine sector will be among the list of essential services, however it is unlikely that an attack on a commercial private vessel or onshore facilities would qualify as harm to an essential service, vital for function of the state.

A third form of the war, cyber war and cyber operations exclusion LMA5566 is identical to LMA5565 except that there is no equivalent to the clause on limits of liability for each cyber operation or aggregate loss in LMA5566. The fourth form of exclusion LMA5567 expounds on the conditions mentioned in LMA5565 and LMA55666, particularly the exclusion or loss from retaliatory cyber operations between any of the specified states leading to two or more of those states becoming impacted states. The exclusion of cyber operation that has a major impact an essential service or the security of defence of a state shall not apply to the direct or indirect effect of a cyber operation on a bystanding cyber asset. LMA5567 introduces the concepts of impacted states and bystanding asset, thus expanding the effect of the exclusion clause. Impacted states means any state where the cyber operation has had a detrimental impact on the functioning of that state due to its effect on essential services  and or the security or defence of that state. The bystanding cyber assets are computer systems used by the insured or its third party provider that is not located in the impacted state but is affected by the cyber operation. As an exemption to the exclusion, the consequence is that the insurer will be exposed to liability for loss to assets that are not owned by the insured or its third party providers. The only requirement being that these bystanding cyber assets / computer systems are used by the insured or its third party providers which could be an extensive list of unidentified assets and liabilities. Another problem with the definition of bystanding cyber asset is it does not declare for what purpose the said asset should be used by the insured or by the third party provider. The presumption is the use should be related to the subject matter / business of the insured but without clarification, there are doubts about the scope and limits of the term.  Interestingly and of concern is the use of the words ‘cyber war’ in the title of each exclusion but is not repeated in any of the four clauses nor is there a description of the meaning of a cyber war and how it differs from a cyber operation and war as defined in the clauses.

A guidance on the correct interpretation of the exclusion clauses was not published and given their deficiencies, the effectiveness of each exclusion clause is reduced. In terms of their application to marine activities, the insurer will find that he is liable to indemnify the assured for his loss from cyber-attack unless there is evidence to attribute the cyber act to a state. The exclusions will be more effective in scenarios where terrorist or political groups are involved. War is limited to acts between states and significant emphasis is placed on damage to essential services of a state. Despite the deficiencies discussed above, the importance and take up of any variation of the exclusion clause will increase as the political security of nation states and businesses continue to be of concern to insurers. The constant threats and warning  in the news of cyber-attacks being used as weapons of war will affect market response and which will sometimes be reflected in strictness of language / variations of the war exclusions used in insurance policies. Other stakeholders must be proactive and ensure that they have adequate insurance protection against cyber war risks and war risks generally and mitigate their risks of loss by implementing and maintaining good cyber hygiene based on industry specific best practices.  


[1] Lloyd’s, ‘Performance Management – Supplemental Requirements & Guidance’ (July 2020) 41 <https://assets.lloyds.com/assets/performance-management-supplemental-requirements-and-guidance-july-2020highlighted/1/Performance%20Management%20Supplemental%20Requirements%20and%20Guidance%20July%202020Highlighted.pdf> accessed 22 March 2022. War and NCBR policies can only be provided where: the exclusion of war is prohibited by local legal or regulatory requirements but this is not inclusive of the writing non-compulsory war risks; where the type of business is within the exempted class and where the syndicates have the express agreement from Lloyds through business planning process.

[2] Lloyd’s, ‘Cyber Risks & Exposures : Market Bulletin Ref : Y4842’ (25 November 2014)

<https://assets.lloyds.com/assets/y4842/1/Y4842.pdf > accessed 22 March 2022.

[3] LMA, ‘Cyber War and Cyber Operation Exclusion Clauses’ (LMA21-042-PD, 25 November 2021)  

<https://www.lmalloyds.com/LMA/News/LMA_bulletins/LMA_Bulletins/LMA21-042-PD.aspx> accessed 22 March 2022.

[4] Michael N Schmitt,  ‘The Use of Force’ in Tallin Manual 2.0 on the International Law Applicable to Cyber Operations ( 2nd edition Cambridge University Press 2017)The Tallin Manual is nonbinding legal source which explains how international law applies to cyber operations. It is in the process of a five (5) year review for the launch of Tallinn Manual 3.0.

UK bans Russian ships from entry to UK ports

As part of the UK’s sanctions against Russia following its invasion of Ukraine, Regulations 57 a-i of The Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2022 (SI 2022/203) took effect on 1 March 2022. These ban the entry into UK ports of

(a)a ship owned, controlled, chartered or operated by a designated person,

(b)a ship owned, controlled, chartered or operated by persons connected with Russia,

(c)a ship registered in Russia,

(d)a ship flying the flag of Russia, or

(e)a specified ship.

A ship is ‘controlled’ by “a person who is able to take decisions about its operation, including (but not limited to) decisions about the route the ship may take and the appointment of master or crew.

The Secretary of State may direct the UK Ship Registrar to terminate the registration of such ships and to direct harbour authorities to detain Russian ships at ports or anchorages.

The Secretary of State may also specify a ship for the purposes of the entry prohibitions provided the Secretary of State—

(a) has reasonable grounds to suspect that the ship is, has been, or is likely to be, involved in a relevant activity, and

(b) considers that it is appropriate for that ship to be specified, having regard to the purposes stated in regulation 4.

A ship is “involved in a relevant activity” if the ship is used for any activity whose object or effect is to contravene or circumvent, or to enable or facilitate the contravention or circumvention of, any provision of these Regulations.

The prohibition on entry does not, as yet, apply to Russian cargo although there have been incidents where dockers in the UK have refused to unload such cargo.

Canada also closed its port to Russian ships on 1 March. The European Commission has also proposed banning Russian ships from docking at European ports but there is currently opposition to this.

The Wall Street Journal has reported that an estimated 60,000 Russian and Ukrainian sailors are stuck at ports, with Russia providing over 10% of the global workforce for shipping.

Russia’s prime minister, Mikhail Mishustin, has said that nations that ban Russian ships from their ports could face retaliation.

Article 13.2 LLMC. Effect on LOU of owners establishing limitation fund in a different jurisdiction.

A maritime claim is brought before the courts of a state which applies the 1996 Protocol to the 1976 LLMC, and the owners P&I Club provides security based on the limits of the 1996 Protocol. However, the owners commence proceedings in another jurisdiction to limit by reference to the lower level in the 1976 LLMC which is in force in that jurisdiction? Do those proceedings affect the security provided by the Club? This was the issue which came before HH Judge Pelling QC in the High Court in Enemalta Plc v The Standard Club Asia Ltd [2021] EWHC 1215 (Comm)

The claim was for damage to an underwater connector cable, which caused a nationwide power failure in Malta. This was allegedly caused by a vessel, whose registered owners were a company domiciled in Singapore , and which was entered with the defendant P&I Club. The claim was brought in Malta which applies the 1996 Protocol and security was provided by owner’s P&I Club up to the limitation figure in the 1996 Protocol, and the LOU was subject to English law and exclusive jurisdiction of English High Court.

Owners then commenced proceedings in Singapore and sought to limit by reference to the lower level in the 1976 LLMC which applied in Singapore. Owners invited the Singapore court to order that on establishment of this fund any existing security given by or on behalf of owners should be released immediately. The claimants then requested the English High Court to make various declarations as to the validity of the LOU, irrespective of what the Singapore Court might decide. The defendant to these proceedings was the P&I Club and not the owner and the sole basis for the challenge to the High Court’s jurisdiction to make the requested declaration was that the Singapore Court had sole and exclusive jurisdiction to make an order art 13.2 of 1976 Convention.

Article 13.2 provides: “After a limitation fund has been constituted in accordance with Article 11, any ship or other property, belonging to a person on behalf of whom the fund has been constituted, which has been arrested or attached within the jurisdiction of a State Party for a claim which may be raised against the fund, or any security given, may be released by order of the Court or other competent authority of such State…”

HH Judge Pelling QC saw the instant case as the mirror image of the ICL Vikraman [2003] EWHC 2320 Comm, where an English domiciled Club provided a LOU, with a non- exclusive English jurisdiction agreement, to Cargo in Singapore to secure release of vessel arrested there. The UK was then party to 1976 LLMC, and Singapore not. Owners established their Fund in England and applied to the High Court to order the release of the  LOU under art 13.2 of LLMC. Colman J  held that although the owner was entitled to establish the limitation fund in England, the effect of Article 13.2 was that security located in Singapore did not fall within that article because Singapore was not a state party to the 1976 Convention and so that security would not be, or could not be, released

In the instant case, it was at least strongly arguable that an English court applying English law would conclude that the letter of undertaking should be treated as located in England. Therefore, the Singapore Court would have no jurisdiction to order its release, if that is what ultimately happened. The LOU would not be a security within the jurisdiction of a state party to the 1976 Convention. If the claimant succeeded in recovering a judgment in the Maltese proceedings for a sum in excess of the security that would be provided under the 1976 Convention in Singapore, the claimant would then seek to enforce its claim in England against the defendant under the letter of undertaking. By the terms of the LOU those proceedings would have to be brought in England and would be subject to English law. There was no principled reason why the court would not have jurisdiction to determine by declaration what would be the effect on the LOU of any order made by the Singapore Court under Article 13.2.

Although the Singapore Court had exclusive jurisdiction to make an order under Article 13.2 of the 1976 Convention, the present proceedings were concerned with the dispute between the claimant and the defendant as to the effect of any order made in the Singapore proceedings, commenced by or in the name of the vessel’s owner, on the liability of the defendant under its autonomous contract with the claimant. That was an issue that the parties had agreed should be determined exclusively by the English Court. Accordingly, HH Judge Pelling QC rejected the Club’s challenge to the jurisdiction of the High Court to hear the claim seeking declarations as to the continuing validity of the security provided under the LOU.

IISTL Professor’s UNCTAD Report on “Legal and Practical Implications of Covid-19” Is Out

“CONTRACTS FOR  THE CARRIAGE OF GOODS BY SEA AND MULTIMODAL  TRANSPORT KEY ISSUES ARISING FROM THE IMPACTS  OF THE COVID-19 PANDEMICA” is now available at https://www.google.com/url?q=https%3A%2F%2Functad.org%2Fsystem%2Ffiles%2Fofficial-document%2Fdtltlbinf2022d1_en.pdf&sa=D&sntz=1&usg=AFQjCNGYpOUVQNY4G-u7Vkox_kWvDs8Nkw

This is a report for the United Nations Conference on Trade and Development and was  prepared by  Professor  Simon  Baughen,  with contributions  by  Regina Asariotis  and  Anila  Premti,  Policy  and Legislation  Section,  Trade  Logistics  Branch,  Division  on  Technology  and  Logistics  of  UNCTAD. The report forms  part  of  the  ‘International commercial transport  and  trade  law’  component of the  UN Development Account project (UNDA  2023X)  project on “Transport and trade  connectivity  in the  age  of pandemics”.  

This report examines some  of  the  key legal issues  arising from  the  pandemic  as  they  affect  contracts  for the  carriage  of  goods  by  sea, multimodal  contracts  of  carriage  that  (may)  involve  carriage  by  sea,  as well as voyage  and time  charters. 

COPYRIGHT IN THE POST BREXIT WORLD – WAVING GOODBYE TO THE AQUIS?

The UK exited the EU on 31 January 2020, with the transition period ending on 31 December 2020. Given the teething problems of the early years of Brexit, one can only imagine how troubled the adolescence will prove to be and IP is no exception. Prior to Brexit, the UK adhered to the Civil Enforcement Directive 2004/48/EC which was implemented to address the disparities between EC Member States for the enforcement of IP rights. Subsequent attempts to harmonise criminal sanctions across the Member States by way of the proposed Criminal Enforcement Directive (IPRED2) failed, due in part, to the lack of EU aquis communautaire and the fact that the use of criminal sanctions and remedies for IP infringement remains very controversial. The UK was the only European State to have called the aquis into question and it is now about to embark on a creating a pyre of otiose law. However, the Trade and Cooperation Agreement, which came into effect in 2021 (TCA) appears to transpose at least the spirit of the Civil Enforcement Directive and some of the provisions appear to be more prescriptive. The September 2021 Blog considered the effect of Brexit on civil IP damages. This Blog considers the aquis in that context.

It is worth briefly considering the nature of the EU aquis, described as ‘seeming to live a dull and uninteresting life between periods of EU enlargement and it always seems to be one of those immensely important concepts that always finds its way into the headlines of newspapers, magazines, journals and news bulletins, when enlargement is on the agenda’. Joseph Weiller describes the aquis thus: ‘The holiest cow of all has been the preservation of the aquis communautaire and within the aquis, the Holy of Holiest is the Constitutional Framework of the Community.’ The aquis or Community Patrimony, is the body of common rights and obligations which bind all Member States together within the EU. It is a very concrete social structure which automatically confronts new Members of the EU and is something that they have to accept and adapt to. Brexit was the result of the UK having been confronted with the aquis, but never having accepted, or adapted to it. During David Cameron’s tenure as Prime Minister, he wrote an article for the Daily Telegraph, published on 15 March 2014, in which he postulated that ‘I completely understand and share people’s concern about the EU. Our businesses value the Single Market, but find the degree of European interference in our everyday life, excessive. People are worried that Britain is being sucked into a United States of Europe.’ 

In 2017, the academics Richard Arnold and Lionel Bentley et al considered the legal consequences of Brexit for IP law before the TCA was finalised. They rightly identified that the UK would have to comply with some of the EU aquis since every EU FTA with the rest of the world, comes with a detailed IP chapter, which obliges the other party to comply with some features of EU law even if it secures trade agreements only with third parties, such as Australia or New Zealand, beyond Europe, as third countries are often themselves, bound by bilateral agreements with the EU. Copyright law is harmonised in the EU by nine Directives, which were of direct effect in the UK, prior to Brexit and therefore implemented in the Copyright, Designs and Patents Act 1988 (CDPA 1988). These remained in force until modification, the most urgent, being the references to Member States and another EEA State. The Intellectual Property (Copyright and Related Rights) (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/605), passed under the powers of the European Union (Withdrawal) Act 2018, coming into force on 1 January 2021, removed all references to the EU, EEA or Member States in UK copyright legislation and preserved the effect of UK law where possible. Arnold and Bently were right to recommend that if the UK starts to unravel the copyright EU aquis, it would in any case, be wise to revamp the CDPA 1988, now a long and over complicated instrument, a fact noted in my previous September Blog.

The TCA has set out the general principles governing copyright, such as agreement by the parties to affirm their commitment to comply with international treaties such as the TRIPS Agreement, National Treatment, the rights of authors and performers and terms of protection, but given the emergency amendments set out in the 2018 Regulations and the incorporation into the TCA of the provisions of the Enforcement Directive 2004/48/EC, there is scope for confusion relating to the applicable principles of IP protection. 

In relation to the enforcement of IP rights, little will change in practice, as the UK and the EU are parties to international IP treaties, such as the TRIPS Agreement. The value and legacy of the case law of the CJEU, which has a defining role in shaping the EU copyright framework, will need to be considered. The legal value of the CJEU case law issued before and after Brexit, will have to be addressed, as it likely that the court will refer to decisions as a  guiding principle at least, even if they are not directly applicable to future legal decisions. The case law decided pre-Brexit, may carry greater weight than post Brexit case law, given that it was applicable in the UK, prior to 31 December 2020. Further, as EU Directives have been implemented in the UK via national legislation, the content of those Directives have been analysed through UK case law, embedding it within the common law system.

Whilst he was the Brexit Minister, Lord David Frost delivered a statement to the House of Lords on 16 September 2021, on the future of retained law. He stated that he was going to conduct a review of so called ‘Retained EU Law’, legislation that remained on the UK statute books through the 2018 Withdrawal Act. This was intended to remove the special status of retained EU law, so that it was not a distinct category domestic law, but normalised within the national law, with clear legislative status, so that EU law does not attract undue precedence and the UK courts will be able to fully depart from it. A new, Standing Commission is to be set up, in order to receive ideas from any British citizen on how to repeal or improve regulation. The challenge here, is to redraft the CDPA 1988, so that European IP law is replaced with legislation that remains compatible with the TCA. However, the very fact that such legislation has to demonstrate such compatibility, shows that the UK is yet again confronted by the aquis, must adapt to it and continue to accept it. We will not be waving it goodbye anytime soon.

Cryptocurrencies and Ransomwares – Are they Recoverable?

Cyber criminals have been exploiting the ‘privacy’ features of crypto-assets to target businesses and individual accounts to steal and unlawfully demand the transfer of crypto-currencies through ransomware attacks. In addition to the distinctive features of cryptocurrencies which gives cyber criminals a false sense of anonymity, the rapid rise in cryptocurrency fraud and ransomwares are also the product of very lax or non-existent international regulation. In 2020, 57.9% of the organizations in the UK and 78.5% in the USA were affected by a ransomware.[1] The targets of major ransomware attacks in 2021 included Colonial Pipeline and JBS meat processing in the US,  Health Services Executive in Ireland and Hackney Borough Council in England. The business types targeted is an indication of the threat to critical national infrastructure. Some ransom demands are made in fiat currency while others are in cryptocurrencies.  The average ransom paid by medium sized organizations was US$170,404 and the average costs to rectify and respond to a ransomware was US$1.85 million.[2]

International and Government Response

Prior to the creation of the Ransomware Task Force in December 2020[3], there was no coordinated effort among states and the private and public sector to tackle the serious and growing threat from ransomware attacks.

Equally problematic is the lack of clarity on the legality of paying ransom / ransomware demands.

England and Wales

The payment of a ransom is not illegal in England and Wales provided they are not paid to or have any association with terrorist groups (s. 15 (3) Terrorism Act 2000), persons subject to economic sanctions or used to finance a criminal act[4] and there is nothing illegal about the contracts between the parties.[5] The National Cyber Security Centre in their guidance on mitigating malware and  ransomware attacks emphasised that law enforcement does not encourage, endorse or condone the payment of ransom demands.[6]

United States of America

The US has not outlawed the payment of ransoms but have issued an advisory on potential sanctions risks for facilitating ransomware payments.[7] The advisory warned that companies including insurance firms, financial institutions and  those specialising in digital forensics and incident response that facilitates the payment of ransom may risk breaching OFAC[8] Regulations. These companies are encouraged to contact the relevant government agencies if they reasonably believe that the person making the ransom demand may be sanctioned or in connection with sanctioned individual or entity.

France has unofficially declared their refusal to pay ransomware demands. Consequently, AXA insurers in France announced they would temporarily halt writing cyber insurance with a clause to indemnify customers for ransom paid.[9]

Efforts to recover cryptocurrency?

  1. Seizure / Recovery of cryptocurrency

Bitfinex: The authorities in the US have been able to successfully trace and recover crypto-assets stolen or paid for ransom. The most recent is US$5bn worth of stolen bitcoin seized by the US Department of Justice reported on Tuesday (08/02/2022).[10] The bitcoin was stolen in 2016 after hackers breached the Bitfinex cryptocurrency exchange. The money was then transferred to digital wallets said to  be operated by a couple in New York. At the time, the bitcoin valued about US$71 million but its current value is upwards US$5 billion. Various methods were employed by the couple to launder about US$25, 000 of the bitcoins. The couple will be charged for federal crimes of conspiracy to defraud the US and conspiracy to commit money laundering.

The length of the probe (5yrs) and the coordinated efforts of investigators from across the U.S and Germany highlights the resources governments and private investigators are willing to invest to ensure cyber criminals are not allowed to steal and launder cryptocurrencies gained unlawfully.

Colonial Pipeline: The authorities were also able to recover some of the cryptocurrencies paid as ransom by Colonial Pipeline Company following a ransomware attack in 2021. Colonial paid the cyber-criminals US$4.4 million in cryptocurrency to release the system, which they made a claim to recover from their cyber insurers. The U.S authorities recover US$2.3 million of the ransom.[11]

  1. Injunctions

AA v Unknown and others[12] :The claimants were UK insurers whose customer, a Canadian insurance company computer system was hacked and encrypted. A ransom demands of US$950,000 in bitcoins to a specific address was made by the hackers. The Claimants agreed to pay the ransom. Some of the money was transferred into fiat currency while 96 bitcoin was sent to  an address linked to an exchange operated by the 3rd and 4th defendants. The first Defendant was the persons unknown who made the demand. The second Defendant was the owner / controller of the 96 Bitcoins. The insurers retained the services of an incident response company that specialises in the negotiation of crypto currency ransom payments to negotiate with the hackers to regain access to the customer’s data and systems. The ransom was paid but further investigations were carried out by the insurers with the assistance of Chainalysis Inc, a blockchain investigations company who also provides software to track the payment of cryptocurrency.[13] The investigations successfully revealed the location of the Bitcoins, 96 of which was found at an address operated by the 3rd and 4th Defendants while some was transferred to a fiat currency account. The insurers successfully made an application to the High Court for a proprietary injunction over the cryptocurrency. It was held by the court that cryptocurrencies  are ‘property’ and could be the subject of a proprietary injunction as they met the four criteria of property; ‘being definable, being  identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence’.[14] The decision was an adoption of points presented in the Legal statement on cryptoassets  and smart contracts by the UK Jurisdiction Taskforce.[15]

ION Science Ltd v Persons Unknown and others[16]: The case concerned the fraudulent inducement of the claimants to make an investment  equivalent to 64.35 bitcoin and pay for commission to receive profits from the said investment. The company referred by the Respondent was operating without Swiss authorisation. The bitcoins were transferred to two cryptocurrency exchanges each located in the US and Cayman Islands. The court granted orders against the first Respondent (Persons Unknown) in the form of a proprietary injunction, a worldwide freezing order and an ancillary disclosure against persons unknown. There was also a Bankers Trust order which could be served on two cryptocurrency exchanges outside of the Jurisdiction.

Remarks: These  cases are examples of the instances where cyber-criminal are held responsible for the theft of or laundering of cryptocurrencies. Cyber criminals are subject to the application of money laundering and Terrorism. Crypto-assets illegally acquired can be the subject of an injunction, a worldwide freezing order and seized even if the investigation takes years to complete. Cyber insurance and incident response companies do have an obligation to ensure they are not facilitating the payment of ransoms to terrorists, sanctioned person or governments and their affiliates. The abovementioned orders are methods victims of a cryptocurrency fraud or ransomware attack can use in their effort to recover their crypto-assets. However while these methods have been successful for traceable currencies (Bitcoins and Ethereum), the same may not be very effective to recover non-traceable cryptocurrencies (Monero).


[1] CyberEdge, ‘2021 Cyberthreat Defense Report’ (2021), 23 < (1) New Messages! (imperva.com)> accessed 09 February 2022.

[2] SOPHOS, ‘ The State of Ransomware 2021’ (April 2021) < sophos-state-of-ransomware-2021-wp.pdf> accessed 09 February 2022.

[3] Institute for Security and Technology, ‘Combating Ransomware A comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force’ (Ransomware Task Force, 2021) < Combating Ransomware – A Comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force (securityandtechnology.org)> accessed 09 February 2022.

[4] Serious Crime Act 2007, ss 45- 46.

[5] Masefield AG v Amlin Corporate Member Ltd [2010] 1 Lloyd’s Rep. 509; [2011] 1 Lloyd’s Rep. 630 CA

[6] NCSC, ‘Guidance: Mitigating malware and ransomware attacks’ ( Version 3.0, 09 September 2021) < Mitigating malware and ransomware attacks – NCSC.GOV.UK> accessed 07 February 2022.

[7] The U.S. Department of the Treasury’s Office, ‘ Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments’ (OFAC, 01 October 2020) < *ofac_ransomware_advisory_10012020_1.pdf (treasury.gov)> accessed 09 February 2022.

[8] The U.S Department of the Treasury’s Office of Foreign Assets Control.

[9] Frank Bajak, ‘ Insurer AXA halts ransomware crime reimbursement in France’ (AP News, 06 May 2021) < Insurer AXA halts ransomware crime reimbursement in France | AP News> accessed 07 February 2022.

[10] BBC News, ‘ Record-high seizure of $5bn in stolen Bitcoin’ (08 February 2022) < Record-high seizure of $5bn in stolen Bitcoin – BBC News> accessed 08 February 2022.

[11] Josephine Wolff, ‘ As Ransomware Demands Boom, Insurance Companies Keep Paying Out’ (Wired, 12 June 2021) < As Ransomware Demands Boom, Insurance Companies Keep Paying Out | WIRED> accessed 09 February 2021.

[12] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704.

[13] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704, paras [12-13] per Bryan J.

[14] [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704, paras [55-61] per Bryan J; National Provincial Bank Ltd v Ainsworth [1965] 2 All ER 472, 494 per Lord Wilberforce.

[15] UK Jurisdiction Taskforce, ‘  Legal statement on cryptoassets and smart contracts’ (November 2019) <The LawtechUK Panel (technation.io)> accessed 05 February 2022, paras 15 and 71- 85.

[16] (unreported, 21 December 2020).

Covid-19 and delays under time charters.

Another London Arbitration award concerning the effects on charterparties of the outbreak of Covid-19 in 2020.

London Arbitration 4/22, involved events in the early stages of the outbreak of Covid-19, before the declaration of a pandemic. The vessel arrived at the discharge port in China on 4 March 2020. Due to anxiety about the outbreak of Covid-19 the third officer checked the temperature of each pilot when they came aboard with a contactless hand-held infrared thermometer and it was alleged that each pilot had temperatures in excess of 37.5C which the master said exceeded the maximum allowed by the owners’ company policy. The master then insisted that the pilots take their temperatures with mercury thermometer before embarking on vessel.  The pilots refused to do so and the vessel missed its berthing slot. After owners had sent an apology for the benefit of the piloting company on an entirely without prejudice basis, replacement pilots boarded the vessel on 13 March to bring it into berth.

The vessel had been chartered for a time charter trip on amended NYPE form and charterers argued that it had gone off-hire for three reasons. First there had been a default of officers or crew under cl. 15. The tribunal held that there was no such default which would involve a refusal by the crew to perform their duties to the shipowner, as defined in The Saldanha [2011] 1 Lloyd’s Rep 187. In contrast, here the master and third officer were clearly seeking to implement company policy. rather than refusing to discharge their duties owed to the shipowners.

Secondly, by reference to cl.58 which provided: “58. Deviation/Put Back: Should the vessel put back whilst on voyage by reason of … the refusal of the Captain, Officers or crew to do their duties without any specific or valid ground for rejection, or any Owners’ matters unless caused by default of Charterers and/or their staff and/or their agents, the payment of hire shall be suspended from the time of inefficiency in port or at sea until the vessel is again efficient in the same position or regains a point of progress equivalent to that the hire ceased hereunder …” The tribunal rejected charterers’ argument as there was no refusal of the master, officers or crew to do their duties within the meaning of clause 58.

Thirdly, by reason of deviation/put back provisions under cl.15 whereby hire would be suspended:  “Should the vessel deviate or put back during a voyage, contrary to the orders or directions of the Charterers, for any reason for other than accident to the cargo..” The tribunal found that there was little logical or practical difference between the vessel being physically diverted away from its course rather than simply failing to proceed forward on that course, and if necessary would have found that the vessel went off-hire under this provision.

In the event, the tribunal was not required to express a firm view on the point and determine the matter on the basis of off-hire. Instead it found that charterers were entitled to damages for owners’ breach of cl.8 as the refusal of the master to allow the pilots to remain on board and, to proceed to berth on 4 March was a failure on the part of the owners to follow the charterers’ legitimate orders and directions. There was no risk to the ship, crew or cargo in those orders to justify the action of those on board the vessel and the delay that resulted from those actions. A general fear of Covid-19 did not provide the owners with carte blanche to refuse to perform under the charterparty, and unilaterally to impose their own conditions for the attendance of the pilots. The charterers were entitled to recover in damages the value of hire and bunkers for time lost.