Rescinding A Charterparty or Not! That is the Question SK Shipping Europe plc v. Capital VLCC 3 Corp and another (C Challenger) [2020] EWHC 3448 (Comm)

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights. The following day, the owners purported to terminate on the basis that the charterers’ message was itself a renunciation.

Was there a misrepresentation on the part of the owners?

Under common law, for the charterers to be able to rescind the contract (i.e. set the charterparty aside) it is essential that they demonstrate that the owners made an inaccurate representation with regard to the capabilities of the chartered vessel in terms of speed and consumption. The main argument put forward by the charterers was that the details of the vessel’s consumption circulated to the market by the owners constituted a representation of fact (and this representation was substantially inaccurate). Foxton, J, rather appropriately, held that an owner by offering a continuing speed and consumption warranty in a charterparty could not be assumed to make an implicit representation as to the vessel’s current or recent performance. This certainly makes sense given that the warranty in question did not require the owners to act or refrain from acting in a certain way. The so-called “speed and consumption” warranty in the contract simply related to a particular state of affairs and was only concerned with the allocation of responsibility for certain costs in relation thereto.   

However, this was not the end of the matter! The charters also argued that in a letter sent by the owners, historical speed and consumption data provided which was not reasonably consistent with the average performance of the vessel over its last three voyages and therefore untrue. Foxton, J, found that the owners did not have reason to believe that the statement based on the three recent voyages was true and accordingly this amounted material misrepresentation. However, he also found that this would not have given the charterers the right to rescind the contract as there was no inducement. This was the case because if the same warranty had been offered, but no representation made as to the vessel’s performance, the charterparty would have been concluded on the same terms.

The effect of ‘reserving rights’

It is rather common for most parties in shipping practice to add a ‘reservation of rights’ statement to the end of messages in pre-action correspondence. Usually, such a statement has the effect of preventing subsequent conduct of an innocent party constituting an election. The trial judge found that the charterers were aware at the latest in July 2017 that the fuel consumption of the chartered vessel was misdescribed by the owners. Whilst the charterers sent messages to the owners that they wished to reserve their rights emerging from the misconduct of the owners, they went ahead to fix a voyage with a sub-charterer expecting the owners to execute this voyage. Foxton, J, on that basis, held that such actions of the charterers were incompatible with an attempt to reserve rights to set it aside the charterparty ab initio for misrepresentation of which they had complained. Put differently, the judgment illustrates that in a case where the innocent party demands substantial contractual performance from the other, this is unlikely to be prevented from being treated as an “affirmation” simply because the innocent party earlier attempted to reserve its rights.

Was the owner in repudiatory breach?

The judge accepted that the owner was in breach of the charterparty i) by refusing to accept the legitimacy of the Charterer’s refusal to pay hire or make deductions from hire and ii) by sending messages demanding payment of hire, wrongly asserting that the Charterer was in breach. The terms breached were deemed to be innominate terms. However, it was held that the breaches complained of, taken cumulatively, had not deprived the charterers of substantially the whole benefit which they were intended to obtain under the charterparty for the payment of hire, or “go to the root” of the charterparty. As a result, the charterers had not been entitled to terminate the charterparty and their communication to that effect was itself a renunciation, entitling the owners to damages representing the loss it suffered by reason.              

The facts of the case provided a great opportunity to the trial judge to construe and apply several key principles of contract law (note that in the judgment there is also an obiter discussion on the application of s. 2(2) of the Misrepresentation Act 1967). Perhaps the most significant contribution of the case to the development of the contract law is the trial judge’s observation on the effect of reserving rights in this context. As noted, the previous authorities have not provided any extensive consideration to this matter. It is now emphasised clearly that a reservation of rights will often have the effect of preventing subsequent conduct from constituting an election to keep the contract alive, but this is not an inevitable rule. One might say in this context “actions might speak louder than words”. So in any case whether a statement reserving the rights of an innocent party has the desired impact will depend on the actions of the innocent party!

All the UK wants for Christmas is….Lugano

As 2020 draws to its end, two bits of good news in December. The first roll out of COVID-19 vaccines in the UK, and yesterday’s announcement of a free trade deal between the UK and the EU. However, commercial lawyers will be scanning the news for any announcement that the EU will now consent to the UK’s application to join the Lugano Convention 2007. However, even if that were granted today there would still be a three month delay before the UK joined the Lugano Club.

Article 72 of the Convention provides

3.   Without prejudice to paragraph 4, the Depositary shall invite the State concerned to accede only if it has obtained the unanimous agreement of the Contracting Parties. The Contracting Parties shall endeavour to give their consent at the latest within one year after the invitation by the Depositary.

4.   The Convention shall enter into force only in relations between the acceding State and the Contracting Parties which have not made any objections to the accession before the first day of the third month following the deposit of the instrument of accession.

So in the interim, the UK on 1 Jan 2021 would revert to common law on civil jurisdiction and enforcement of judgments as between itself and the Lugano parties, subject to application of the Hague Convention 2005 which comes into force with the UK as an independent signatory, rather than by virtue of the EU’s accession, on 1 January 2021.

However in November the UK and Norway agreed to extend and update their 1961 Convention for the Reciprocal Recognition and Enforcement of Judgments in Civil Matters, so that it will apply to the extent that, and during any period that, the 2007 Lugano Convention does not apply to the UK.

The agreement between the two countries 

Hi Ho ‘Silver’. Salvage and Sovereign Immunity.

 

As 2020 draws to a close, we have the first case on the application of the 1978 Sovereign Immunity Act to a claim for salvage, in Argentum Exploration Ltd v The Silver [2020] EWHC 3434 (Admlty) (16 December 2020), heard by Sir Nigel Teare acting as a judge of the High Court.

A UK company formed in 2012 for the purpose of locating and salving valuable shipwrecks lying at depths which up until then had precluded salvage claimed to have salved in 2017 silver bars worth US$43m from the wreck of the SS Tilawa which Japanese torpedoes sunk in the Indian Ocean on 23 November 1942. The bars are the property of the South African government which was intending to use them in 1942 for minting South African coinage and some Egyptian coinage.

South Africa asserted sovereign immunity and claimed the Receiver of Wreck should deliver the cargo to it without any salvage being paid. Section 1 of the State Immunity Act 1978 (“the SIA”) provides that “a State is immune from the jurisdiction of the courts of the United Kingdom except as provided in the following provisions of this Part of this Act.” This is subject to various exceptions, in particular that in s.10(4) .

A State is not immune as respects—

(a) an action in rem against a cargo belonging to that State if both the cargo and the ship carrying it were, at the time when the cause of action arose, in use or intended for use for commercial purposes; “

The key question was whether the bars of silver and the vessel carrying them were, at the time the cause of action arose, in use or intended for use for commercial purposes.

South Africa argued that cargo was not in use during the voyage, but this did not determine the question of state immunity because it remained to consider whether the cargo was intended for use for commercial purposes. Sir Nigel Teare had difficulty in accepting that there is a principled reason for state immunity from the court’s adjudicative jurisdiction in an action in rem claiming salvage where the state has chosen to have its cargo carried by sea pursuant to a contract of carriage just like any private owner of cargo and has therefore exposed itself to claims for salvage like any private owner of cargo. The cargo of silver was intended to be used for commercial purposes, because it had been bought from the Bombay Mint and shipped commercially, and its intended us as part of a sovereign activity of producing South African cargo did not affect its status as commercial cargo.

The character or status of the cargo in 1942 was relevant to the character or status of the cargo in 2017, and there was no reason to conclude that the character or status of the cargo in 1942 as a cargo used for the commercial purposes of a contract of carriage had changed by then. For the character or status of the cargo in 1942 to have changed by 2017 there must have been some decision by the South Africa to change it. There was none on the facts of this case.

Accordingly, Sir Nigel Teare found that the matter fell within the ‘commercial purposes’ exception in the SIA. This conclusion was consistent with the obiter approach of Gross J., in the Altair that the cargo in that case was a commercial cargo (in use for commercial purposes) because it had been bought and shipped commercially, notwithstanding that it was to be used as part of the Public Distribution System.

It was therefore unnecessary to consider whether, if, contrary to this conclusion, the cargo was not in use for commercial purposes it was intended to be used for commercial purposes. On the facts it was intended to be used substantially for the government or sovereign purpose of producing South African Union coinage which was a sovereign or governmental activity.

Happy New Year!

It has been a challenging and in many ways difficult year for us all! But, the Institute of International Shipping and Trade Law has continued its activities doing what it does best: publishing academic work, organising events and contributing to the development of law and policy.

We would like to wish all of our friends, colleagues and followers a happy new year and we hope everyone safely enjoy the festive season! It is our expectation that 2021 will be a better year for us all!

Heathrow Third Runway. 2018 Airports National Policy Statement not unlawful

Heathrow Third Runway. 2018 Airports National Policy Statement not unlawful

In February the Court of Appeal held that the Secretary of State had acted unlawfully in failing to take the Paris Agreement into account when designating the Airports National Policy Statement (the “ANPS”) and its accompanying environmental report in relation to the proposed  third runway at Heathrow airport. Accordingly, the ANPS was of no legal effect. Last week the Supreme Court overruled that decision on an appeal by the company which owns Heathrow Airport, Heathrow Airport Ltd (“HAL”).

The Secretary of State designated the Secretary of State designated the ANPS as national policy on 26 June 2018 under section 5(1) of the Planning Act 2008 (the “PA 2008”). Section 5(8) states that these reasons must include an explanation of how that policy takes account of existing “Government policy” relating to the mitigation of and adaptation to climate change. The March 2016 statements of Andrea Leadsom MP and Amber Rudd MP and the formal ratification of the Paris Agreement did not mean that the Government’s commitment to the Paris Agreement constituted “Government policy” in the sense in which that term is used in the statute. At the point the ANPS was designated in June 2018, there was no established “Government policy” on climate change beyond that already reflected in the Climate Change Act 2008 which sets a national carbon target. International treaties are binding only as a matter of international law and do not have an effect in domestic and do not constitute a statement of “Government policy” for the purposes of domestic law

The evidence shows that the Secretary of State took the Paris Agreement into account and, to the extent that its obligations were already covered by the measures in the CCA 2008, ensured that these were incorporated into the ANPS framework Insofar as the Paris Agreement might in future require steps going beyond the current measures in the CCA 2008, the Secretary of State took it into account but decided that it was not necessary to give it further weight in the ANPS.

Further, the Secretary of State had not separately breached his section 10 duty by failing to have regard to, firstly, the effect of greenhouse gas emissions created by the NWR scheme after 2050 and, secondly, the effect of non-CO2 emissions. The UK’s policy in respect of the Paris Agreement’s global goals, including the post-2050 goal for greenhouse gas emissions to reach net zero, was in the course of development in June 2018. The Secretary of State did not act irrationally in deciding not to assess post-2050 emissions by reference to future policies which had yet to be formulated and The Secretary of State’s department was also still considering how to address the effect of non-CO2 emissions in June 2018.

Future applications for development consent for the third runway will be assessed against the emissions targets and environmental policies in force at that later date rather than those set out in the ANPS in June 2018.

In June 2018 the CCA target was for a reduction in carbon emissions by 80% by 2050 which was Parliament’s response to the international commitment to keep the global temperature rise to 2ºC above pre-industrial levels in 2050. The figure of 100% was substituted for 80% in section 1 of the CCA 2008 by the Climate Change Act 2008 (2050 Target Amendment) Order 2019/1056. In its letter of 24 September 2019 to the Secretary of State recommending that international aviation and shipping emissions be included in a net-zero CO₂ emissions target, the CCC stated:

“Aviation is likely to be the largest emitting sector in the UK by 2050, even with strong progress on technology and limiting demand. Aviation also has climate warming effects beyond CO₂, which it will be important to monitor and consider within future policies.”

The Government in its response to consultations on the ANPS stated that it will address how policy might make provision for the effects of non-CO₂ aviation emissions in its Aviation Strategy. That strategy is due to be published shortly.

Non signatory third parties, the New York Convention and enforcement of arbitration agreements in the US. SCOTUS says ‘Yes, they can’.

In 2007, ThyssenKrupp Stainless USA, LLC, entered into three contracts with F. L. Industries, Inc., for the construction of cold rolling mills at ThyssenKrupp’s steel manufacturing plant in Alabama. Each of the contracts contained an identical arbitration clause.  F. L. Industries, Inc., then entered into a subcontractor agreement with GE Energy Power Conversion France SAS, Corp. (GE Energy), under which  GE Energy agreed to design, manufacture, and supply motors for the cold rolling mills. Between 2011 and 2012, GE Energy delivered nine motors to the Alabama plant for installation. Soon thereafter, respondent Outokumpu Stainless USA, LLC, acquired ownership of the plant from ThyssenKrupp.

According to Outokumpu, GE Energy’s motors failed by the summer of 2015, resulting in substantial damages. Outokumpu and its insurers filed suit against GE Energy in Alabama state court in 2016 and GE Energy removed the case to federal court under 9 U. S. C. §205, which authorizes the removal of an action from state to federal court if the action “relates to an arbitration agreement . . . falling under the Convention [on the Recognition and Enforcement of Foreign Arbitral Awards].” GE Energy then moved to dismiss and compel arbitration, relying on the arbitration clauses in the contracts between F. L. Industries, Inc., and ThyssenKrupp which defined the terms “Seller” and “Parties” to include subcontractors. 

The District Court granted GE Energy’s motion to dismiss and compel arbitration with Outokumpu and Sompo Japan Insurance Company of America. 

The Eleventh Circuit reversed the District as including a “requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.” This requirement was not satisfied because “GE Energy is undeniably not a signatory to the Contracts.” It further held  that GE Energy could not rely on state-law equitable estoppel doctrines to enforce the arbitration agreement as a non signatory because, in the court’s view, equitable estoppel conflicts with the Convention’s signatory requirement. The equitable estoppel doctrine permits a non-signatory to a contract which contains an arbitration clause to rely on that arbitration clause when the signatory asserts claims that implicate the contract.

The Supreme Court first found that in cases which fall under Chapter 1 of the U.S. Federal Arbitration Act (FAA), which governs domestic and other arbitrations seated in the U.S., non-signatories may enforce arbitration clauses against signatories.

The Supreme Court then held that the only provision of the New York Convention that addresses the enforcement of arbitration agreements was Article II(3) and the nonexclusive language of that provision did not set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements. This states that “[t]he court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. Nothing in the text of the Convention “conflict[s] with” the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA. 9 U. S. C. §208.

The Court subsequently remanded the case to the Eleventh Circuit to decide whether applicable domestic-law equitable estoppel doctrines would permit GE Energy to compel arbitration.

War Risks and Kidnap & Ransom in charter do not exclude GA claim for piracy under bills of lading.

The Polar [2020] EWHC 3318 (Comm) – HERCULITO MARITIME LIMITED v. GUNVOR INTERNATIONAL BV – involved an appeal pursuant to section 69 of the Arbitration Act 1996, in respect of a claim by shipowners against cargo owners under six bills of lading for general average  in respect of ransom payments made by owners to pirates. under the relevant bills of lading. The general average expenditure was the payment of a ransom to pirates to enable the release of the vessel so that she could complete her voyage.  Cargo owners contended that the GA claim was barred because the bills of lading incorporated the terms of the relevant charterparty under which the shipowners’ only remedy in the event of having to pay a ransom to pirates was to recover the same under the terms of a Kidnap and Ransom insurance policy and a War Risks policy taken out by the shipowners, the premium for which was, pursuant to the charterparty, payable by the charterers. Previous cases on incorporation had involved demurrage clauses and jurisdiction and arbitration clause. Incorporation of insurance terms and their possible constitution of a complete code excluding other remedies, such as claiming in GA, was a novelty.

The clauses were incorporated as directly germane to the loading, carriage and discharge of the cargo, but they provided  for payment of the premiums

by charterers and this language would not be manipulated so as to include bills of lading holders. Sir Nigel Teare, acting as a Judge of the High Court, held that “to substitute “bill of lading holders” for “Charterers” when reading clause 39 into the bills would be inconsistent with the obligation of the bill of lading holders to pay freight as per the charterparty as the price for the performance by the Owners of the contract of carriage. It would mean that the holders of the bills of lading, in the event that certain liberties were exercised by the Owners, had to pay may more than the agreed freight for the performance of the contract of carriage. Moreover, such additional sums would be unknown and unlimited.”  Similar provisions applied as regards kidnap and ransom insurance premiums payable under the Gulf of Aden clause.

As regards, the argument that the charter provisions on payment of the premiums constituted a ‘complete code’ excluding owners’ remedies in the event of piracy, this was certainly the position as regards the charterers. On the true construction of the charter the parties had agreed to look to the additional policies for the recovery of relevant losses and so the Owners were precluded by that agreement from seeking to recover that loss by way of a contribution in general average. However, as regards the position under the bill of lading, the only parts of the clauses in question which have been incorporated into the bills so as to bind the holders of the bills were the liberties conferred on the Owners not to complete the voyage or to depart from the usual or expected route. There was an important difference between the position under the Charter and the position under the bills of lading –  it could not be said of the bill of lading holders, as Lord Roskill said of the charterers in the Evia No.2, that theyhad paid the premiums not only for no benefit for themselves but without shedding any of their liability to contribute in general average in respect of losses caused by the additional insured perils. The point was not that the Owners had agreed to transit the Gulf of Aden at no cost to themselves, but that the charterers had agreed to pay for the insurance.

For these reasons the contract of carriage contained in or evidenced by the bills of lading did not contain an agreement by the Owners not to seek a contribution in general average from the holders of the bills from liability in respect of losses covered by the additional insurance taken out by the Owners.

Upstream gas sales: of capacities and counterfactuals

Lack of unambiguous drafting in a gas sales contract landed three hydrocarbon giants in the Court of Appeal today; it also raised a nice point about damages and counterfactuals.

In British Gas v Shell UK [2020] EWCA Civ 2349, Shell and Esso agreed to supply, and BG to buy on a take-or-pay basis, a minimum daily quantity of gas (appearing in the forest of acronyms typical of hydrocarbon contracts as a TRDQ, or Total Reservoir Daily Quantity). The sellers controlled a couple of reservoirs which, together with others, were connected to the well-known Bacton terminal in Norfolk. As might be expected, gas from all the connected reservoirs was commingled before it came on shore, and the owners of the various reservoirs, including the sellers, had a practice of “borrowing” gas from one another to meet variations in demand. In order to protect BG’s interests, the sellers in addition undertook under Clause 6.4 of the contract to “provide and maintain a capacity (herein referred to as the ‘Delivery Capacity’) to deliver Natural Gas from the Reservoirs” amounting to 130% of the relevant daily quantity. If the capacity was reduced, then the sellers had a right to reduce the TRDQ proportionately.

As capacity in the North Sea ran down, the sellers’ capacity to supply from their own reservoirs dipped below the magic figure of 130%, though if you took into account their capacity to borrow gas the capacity remained adequate. BG saw an opportunity to sue the sellers. It argued that (1) “capacity” meant capacity from the sellers’ own reservoirs, excluding borrowed gas; and (2) had the sellers reduced the TRDQ to 100/130 of the reduced capacity, it would have bought in all excess requirements more cheaply elsewhere.

The Court of Appeal held for BG on (1): capacity on an ordinary interpretation meant capacity from the sellers’ own resources, not third parties’, so that the sellers were in breach. On damages, however, it held that BG had suffered no loss. The sellers had had a right, but no duty, to reduce the TRDQ in line with the total capacity; they had not done so; and the fact that they might have avoided being in breach of the 130% stipulation had they done so was beside the point.

The decision in (1) seems right as a matter of interpretation, and also sensible: apart from anything else, capacity clauses exist to assure certainty of supply, and would be somewhat devalued if they took into account possible arrangements that the seller might enter into with third parties.

The damages point is an awkward one, as is always the case with the fiendish counterfactual question “what would have happened if the defendant hadn’t been in breach?” It turns, it is suggested, on a proper interpretation of the sellers’ contractual obligation. Was it (i) to maintain a capacity to supply amounting to at least 130/100 of the TRDQ, or (ii) to set a TRDQ amounting at most to 100/130 of its capacity to supply (not quite the same thing)? Given the provision that there was a right but no duty to reduce the TRDQ in line with capacity, the latter answer seems correct. If so it follows, at least in the view of this blog, that BG’s claim against the sellers for substantial damages was rightly rejected as a claim for failing to do what they had not been bound to do in the first place.

Just one more thing. Before you file this case away as a useful piece of ammunition on the damages point, remember that in every case of this sort, the answer – and often many millions of dollars – is likely to turn on a careful reading of the underlying contract. A decision on one particular piece of wording may well not be a reliable guide to another.

The Third Group of Amendments to the Maritime Labour Convention 2006 Enters into force Later this Month

Later this month, the third group of amendments to the Maritime Labour Convention 2006 will be entering into force (26 December 2020). While these amendments have been discussed in a previous post on this blog https://iistl.blog/2020/06/10/singapore-passes-legislation-to-give-effect-to-the-third-group-of-amendments-to-the-maritime-labour-convention-2006/ , it may be worth reminding that they relate to Standard A 2.1, Standard A 2.2 and Regulation 2.5 of the Convention. The amendments ensure that a seafarer’s employment agreement (SEA) shall continue to have effect, wages and other contractual benefits under the SEA, relevant collective bargaining agreements or applicable national laws shall continue to be paid and the seafarers’ right to be repatriated shall not lapse for as long as a seafarer is held hostage on board a ship or ashore by pirates and armed robbers.

IISTL Celebrating Its 20th Anniversary with Sir Peter Gross!

This year we are celebrating our 20th anniversary! Yes it has been 2 decades since the foundation of the IISTL in 2000 by Professor DR Thomas! The current Director Professor Soyer on behalf of every IISTL member and the School of Law wishes to invite you to join us to celebrate this great occasion that also coincides with our University’s Centenary!

7 December 2020 at 6.00 pm (online)

Book your place online: https://lnkd.in/daRxurN