UK: Clyde & Co Shipping Newsletter – July 2015

Ballast Water Management Convention: The tricky waters of compliance

Beth Bradley and Chris Moxon

One of the great difficulties with worldwide regulation is ensuring consistent implementation and compliance. The IMO's Ballast Water Management (BWM) Convention ratified by more than 40 states but not yet in force, is a case in point.

In assessing whether to approve BWM systems as meeting the IMO's Ballast Water Performance Standard (the IMO Standard), flag states that have signed up to the Convention must take into account the guidelines set out by the IMO (Resolution MEPC 174(58)). Those guidelines are also intended to inform shipowners and technology manufacturers about the evaluation procedure for the equipment.

The US Coast Guard (USCG) has, however, developed its own ballast water performance standard (the USCG Standard) and guidelines for approving systems. The IMO Standard and USCG Standard are identical, but the respective guidelines are not.

As a result, shipowners and technology manufacturers should take care to ensure that both the IMO guidelines and USCG guidelines are consulted when considering developing, fitting and using BWM systems. A BWM system approved as meeting the IMO Standard may be eligible for approval as an Alternate Management System (AMS) by the USCG, entitling the ship to which it is fitted to trade in US and Canadian waters without full type approval.

That said, AMS approval only lasts five years beyond the date when the ship would otherwise be required to comply with the USCG Standard. Although the AMS regime is a useful "stop gap" measure, the lack of clarity about whether or not BWM systems approved under the IMO guidelines will ultimately obtain USCG-type approval – and even whether or not the IMO guidelines will be applied consistently in the BWM Convention's signatory states – is unwelcome.

The IMO seems alive to these issues in obtaining approvals. It initiated a study on the implementation of the IMO Standard in late March, exploring the similarities and differences in testing and certification of BWM systems worldwide.

The survey was open to technology manufacturers and shipowners (among others) until 1 June 2015. If the study assists in getting nearer to a consistent worldwide approach to testing BWM systems and applying the guidelines for approval, it will have been a success.

Once the Convention has come into force, shipowners and operators should ensure that ballast water samples taken to monitor regulatory compliance are representative of the entire discharge, and that the operation of multi-use tanks does not give rise to mixing of different water types.

Failure to keep a close eye on these matters could lead to fines and delays in ports for breach of IMO or USCG guidelines, with the risk of charterparty disputes ensuing. A ship "unduly detained or delayed" by Port State Control under the BWM Convention may, however, be entitled to compensation.

First published in The Motorship, May 2015 issue

Jurisdiction of the Admiralty Court reviewed in Harms v Harms

Marcia Perucca

The Admiralty Court ruled in a recent decision1 that a German ship management company was entitled to issue proceedings in the English Court to obtain security for its claims against the German shipping companies in a dispute subject to German arbitration.

Background

The dispute between a German ship management company and the owners of six tugs registered in Germany arose from the owners' decision to sell the vessels to one of their competitors. The management company claimed this was a breach of the partnership agreements to which it was a party, and which gave it pre-emptive rights to purchase four of the vessels. The owners, on the other hand, said they had discovered that two of the management company directors had been taking secret commissions from the builders of three of the vessels which led them to lose trust in the company and, as a result, to terminate ship management agreements that were also in place between the parties.

The claims in the English court

The ship management company issued six in rem claims against the owners in the English court. There were two separate sets of claims. The first was a claim for damages for the unlawful termination of the ship management agreements by the owners, by way of selling the vessels without notice to the management company (the ship management claims). The second was a claim for breach of the articles of association of the corporate entity of the owners, which allegedly required notice of the sale of the vessels to be given to the management company, a shareholder in the corporate entity (the articles of association claims).

The purpose of the management company in issuing the claims in the English court was to obtain security for its claims in arbitration and German court proceedings. Although the in rem forms were not served and none of the vessels had been arrested, the owners filed an acknowledgement of service, and entered an appearance for the purposes of challenging jurisdiction. They later changed their approach, indicating they wished the English court to hear the ship management claims, but not the articles of association claims. The management company's position was that it was content for both substantive claims to be decided in the English court, but not just the ship management claims.

The ship management claims

The ship management agreements provided for German law and arbitration. On the other hand, it was common ground that the claims fell within the jurisdiction of the Admiralty Jurisdiction of the High Court by reason of s.20(1)(a) and s.20(2)(h) of the Senior Court Act 1981, as amended, these being claims arising out of an agreement relating to the use of a ship. This allowed the management company to issue the in rem claims in order to obtain security.

In submitting that the claim should be heard by the English court, the owners argued that there had been an agreement between the parties, in the exchange of submissions, to confer jurisdiction on the English court. Upon an analysis of the submissions, this argument was rejected by the court.

The owners also argued that once an in rem claim had been issued, it was always open to a defendant to file an acknowledgement of service and submit to the jurisdiction and that they had decided to do so in relation to the ship management claims.

Simon J held that the starting point was Council Regulation (EC) No. 44/2001 (the Brussels I Regulation). He referred to Article 31, which provides that an application can be made to the courts of one member state for security which is available in that particular member state, even if, under the Regulation, the court of another member state has jurisdiction over the substance of the matter.

Simon J held that the management company's action in issuing in rem claim forms in order to obtain security was both unexceptional in domestic terms and consonant with the Brussels I Regulation. The Court, he said, "will normally recognise both the obligation to submit disputes to arbitration or courts in a foreign jurisdiction, and the claimant's right to obtain and retain security in respect of such disputes".

Simon J concluded that the proceedings had not been brought in breach of the arbitration clause, and the owners were not entitled to submit to the jurisdiction of the court for the substantive claims. These claims were, therefore, stayed pending the provision of security in the arbitration proceedings.

The articles of association claims

The article of association claims were linked to proceedings before the German courts, which had jurisdiction under Article 22.2 of the Brussels I Regulation since the proceedings had as their object the validity of decisions of companies whose seat was in Germany.

The issue in dispute in the English court was whether the in rem claims issued in England fell within the admiralty jurisdiction under section 20 of the Senior Courts Act 1981. The management company argued that they fell under section 20(2), being either (a) a claim to the possession or ownership of a ship or the ownership of any share therein; or (b) a question arising between the co-owners of a ship as to possession, employment or earnings of that ship.

The purpose of the German proceedings was to nullify the resolutions to sell the vessels. The management company argued that, if the resolutions were annulled, their rights of pre-emption would be vindicated, making it a claim to the ownership of the vessels. The claim forms in the English court characterised the sale of the vessels as constituting a breach of the articles of association and a claim in tort and/or breach of statutory duties. The court concluded that in both sets of proceedings, the claim was essentially for damages resulting from the sale of the vessels, and could not be properly characterised as a claim to the ownership of the vessel (within the meaning of s.20(2)(a)).

As for s.20(2)(b), Simon J held that the section was concerned with co-ownership of vessels or shares in the vessel, and not with claims relating to the ownership of shares in companies or other legal entities which may own vessels. It followed that the English court had no jurisdiction in relation to the articles of association claims.

Comment

Simon J's decision confirms that in circumstances where a claim falls within the admiralty jurisdiction, a party's right to issue a claim in order to obtain security will be upheld even where the dispute is subject to an arbitration agreement or to the jurisdiction of a foreign court.

Footnotes

1 Harms Bergung Transport und Heavylift GmbH & Co KG v Harms Offshore AHT "URANUS" GmbH & Co KG & 5 Ors sub noms THE "URANUS" : THE "MAGNUS" (2015)

High Court upholds refund guarantees despite findings in China of fraud, and injunctions against the guarantor

Tom Kelly and Sapna Jhangiani

The case of Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd (2015) concerned two refund guarantees for two hulls (38 and 39) built for Spliethoff's Bevrachtingskantoor BV (SBV), the Claimant. The refund guarantees were provided by the Bank of China (BOC). As the vessels were not delivered on time, SBV claimed the repayment of instalments from the shipyard. SBV claimed payment from BOC under the guarantees after obtaining arbitration awards to that effect.

In parallel, the shipyard brought proceedings against SBV, in China, claiming SBV had been fraudulent in assisting engine manufacturers supply second hand engines to the vessel. The Chinese Court upheld fraud, and issued orders requiring SBV to provide a guarantee in the Chinese Court, and preventing any payment out under the BOC guarantees.

Consideration of the guarantees

The guarantees were found to be on terms consistent with "on demand" guarantees, as considered in a number of recent cases1. This was, notwithstanding the inclusion of a proviso to the effect that where arbitration was commenced, payment needed to be made only in accordance with the terns of any award obtained by SBV.

BOC's main arguments on the issue of the guarantees were that:

(a) The arbitration award in the hull 39 reference was not an award for the purposes of the guarantee which triggered an obligation on the part of BOC to pay under the hull 39 guarantee

(b) On the basis that the guarantees were true guarantees, or sureties, they were discharged by the findings of fraud against SBV in China

As to argument (a), the Court held that any demand by SBV was valid, regardless of any arbitration award. The demand was independent of any dispute between SBV and the shipyard, and the disputes served only to defer payment under the guarantee. They did not affect the validity of the demand itself. The Court, therefore, held that once the arbitration award ordered the instalments to be repaid, and the shipyard failed to repay those instalments, BOC was obliged to pay under the guarantee.

In light of the Court's decision that the guarantees were performance bonds, argument (b) fell away. However, the Judge did go on to consider the situation had the guarantees been sureties in light of the wording, which stated that "our obligations shall not be affected or prejudiced by any dispute between you as the Buyer and the Seller". The Court held that this would include any finding of fraud against SBV. In particular, the Judge held that the word "dispute" was sufficiently wide to cover a situation where a judgment had been handed down following a dispute. There was, therefore, no need for a matter still to be contentious in order to count as a dispute.

The Court also considered the orders against BOC in China.

Chinese orders

Issue 1

First, the Court had to consider, as a matter of Chinese law, whether the orders against BOC, preventing any payment out under the guarantees, were still current. Based on expert evidence, the Court considered that the orders were indeed still current and, therefore, remained live. Certainly, the fact was that the Court in China regarded those orders as live.

Issue 2

The Court then considered whether those judgments should be recognised by the English Courts, despite being obtained in breach of the law and jurisdiction clause of the relevant contracts. The Court considered the fact that SBV had opposed jurisdiction of the Chinese Court to the full extent possible, but that when the Chinese Court ruled against it, and assumed jurisdiction, SBV took full part in defending the claims in China.

The Judge held, therefore, that the numerous clear authorities stating that it would be "manifestly against public policy to give recognition to the foreign judgment at the behest of the defendants who have procured it in breach of an order emanating from this court"2 did not apply. Where a party takes full part in foreign proceedings, even where those proceedings were started in breach of a jurisdiction clause and, in fact, of an anti-suit injunction, that party is held to have submitted to that jurisdiction, and loses its shield against recognition of the foreign judgment.

Despite the enforcement of the Chinese Court Orders, the Court declined to order a stay of enforcement of the guarantees. The Judge held that when considering an English law contract, such as the refund guarantees, English law regards illegality by the place of the performing party's domicile or place of business as irrelevant. The Judge, therefore, ordered judgment for SBV in the full amount of the guarantees claimed.

Footnotes

1 Such as Wuhan Guoyo Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA civ 1629 and Meritz Fire and Marine Insurance Co Ltd v Jan Denul NV [2011] 2 Lloyd's Rep 379

2 WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] EWHC 104

"SFL HAWK" – Passing of title under a bill of lading

Giyan Tang and Charlotte Gale

A holder of a bill of lading was deemed the owner of the cargo under section 25 of the Sale of Goods Act, even where the particular terms of a back to back sale contract indicated property only passed on payment, rather than on transfer of the bill.

Background

PT Awindo International (PT Awindo) were the shippers of a cargo of frozen swordfish, which they agreed to sell to Fishco BVBA (Fishco) (the First Contract). On the same date, Fishco also contracted with the Claimants, Carlos Soto Sau (Carlos Soto) for the on-sale of the cargo at a profit (the Second Contract).

The terms of the two contracts were materially similar with one main exception – the First Contract contained a rejection clause which was not replicated in the Second Contract.

In both cases, the cargo was to be paid for by an irrevocable letter of credit providing for payment within 45 days of shipment under the First Contract and within 60 days under the Second Contract.

The cargo was shipped on board the "SFL HAWK" and a "to order" bill of lading was issued by Maersk, naming PT Awindo as the shipper and Carlos Soto as the notify party. This bill of lading was endorsed in blank and passed to Fishco, who delivered the bill of lading and associated documents to Banco Santander, with whom Carlos Soto had opened the letter of credit. Although Banco Santander alerted Carlos Soto to discrepancies in the documentation, Carlos Soto waived these and collected the documents, amongst which was a packing list stating "LC 45 days after shipment with rejection clause".

At discharge, the temperature of the cargo was found to be overly high. Consequently, the Vigo Port Authority rejected the cargo, which meant that it could not be sold in the European Union. No payments had yet been made for the cargo by either party.

Fishco presented the rejection certificate to their bank, who cancelled the letter of credit in favour of PT Awindo. Carlos Soto paid Fishco in full for the cargo, before reselling the damaged cargo back to Fishco for 10% of the invoice value, by way of mitigation.

PT Awindo brought a claim against Maersk in respect of their losses. The parties settled on terms where PT Awindo warranted that they were the lawful holder of the bill of lading, that no other party had title to sue and that they were authorised to act on behalf of all other cargo interests.

Irrespective of that settlement, Carlos Soto brought their own claim against Maersk for damages.

Maersk agreed that Carlos Soto had paid for the cargo, were the lawful holder of the bill of lading and were entitled to possession of the cargo at all relevant times. Maersk did not agree that Carlos Soto were the owners of the cargo at the relevant time or that they had suffered any loss.

The Court was therefore asked to consider the following points by way of preliminary issue:

Did property in the cargo pass such that Carlos Soto were at all relevant times the owners of the cargo?

Whilst endorsing and transferring a bill of lading is prima facie evidence that there is an intention to pass property, this does not necessarily always follow. The question of passing of property is one of "actual intention".

The First Contract and letter of credit provided for delayed payment, the right to reject the cargo and the right to cancel the letter of credit. These particular features led the Court to conclude that the parties did not intend for property in the cargo to pass until PT Awindo had received payment from Fishco. As Fishco had cancelled the letter of credit, property remained with PT Awindo.

Carlos Soto raised an alternative argument that they received the bill of lading in good faith, with the consent of the seller and without notice of any rights of the original seller to retain title. It was submitted that Carlos Soto should be considered the owners of the cargo pursuant to s.25 of the Sale of Goods Act 1979 (SGA 1979).

Maersk argued that Carlos Soto should have been put on notice by the packing list, which referred to a rejection clause. The Court accepted that even if Carlos Soto had seen the words on the packing list (which, on the evidence, they had not), they would not have realised property in the cargo may have been retained by PT Awindo.

The Court was satisfied that Carlos Soto were the owners of the cargo at all relevant times pursuant to s.25 of the SGA 1979.

Was the claimants' loss caused by Maersk's breach of duty?

Maersk argued that the true cause of Carlos Soto's loss was not their negligence as carrier, but Fishco wrongfully retaining payment from Carlos Soto despite not having paid PT Awindo. Fishco's retaining payment was an "intervening act" breaking the chain of causation, meaning that Maersk could not be liable.

The Court disagreed with this analysis. The cargo had been damaged prior to, or upon discharge at Vigo, so that the loss crystallised before any intervening act.

The Court recognised that the chain of causation could only be broken if the impact of an intervening act was severe enough to "obliterate" the previous wrongful act of the carrier. It was held that Fishco's actions did not obliterate Maersk's breach.

Comment

A carrier should exercise caution when settling a claim with a shipper because the holder of the bill of lading can also be deemed the owner of the cargo in their capacity as a "bona fide" purchaser under s.25 of the SGA 1979.

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