Unseaworthiness and general average.  The Cape Bonny.

 

The Cape Bonny [2017] EWHC 3036 (Comm) gives us another general average judgment, following hot on the heels of the Supreme Court’s decision in The Longchamp. This time it was the effect of an actionable fault of the shipowner that was in issue.

An oil tanker suffered an engine breakdown on a voyage to China at a time when the vessel was endeavouring to avoid a tropical storm. The vessel required towage assistance and engaged a tow. She was not permitted to enter a port of refuge in Japan or to discharge at the Chinese discharge port and was taken to South Korea to transfer her cargo to another vessel by STS. At the time the vessel set sail, she had been unseaworthy in two respects. First, some of her filters were not seaworthy. Secondly, there was abnormal wear on one of the bearings. Cargo interests refused to pay their general average contribution on the basis that there had been actionable fault on the part of the shipowners, namely their failure  to exercise due diligence to make the vessel seaworthy as required by art III(1) of the Hague-Visby Rules which were incorporated into the contract of carriage.

Teare J found that owners had failed to exercise due diligence in respect of both of the instances of unseaworthiness, but that the first instance had not been causative of the breakdown.  A proper inspection of the filter candles prior to sailing would not necessarily have revealed that some had damaged mesh, as not all the candles were damaged. However, the deflection readings prior to sailing would have alerted a prudent engineer or superintendent to taking bearing clearance measurements. This failure to take due diligence was causative in that such measurements would have indicated abnormal wear requiring a repair before the voyage could safely be undertaken.

Accordingly, the general average expenditure incurred by the owners was due to their actionable fault and cargo interests were not liable to make a general average contribution. Teare J then went on to consider, obiter, whether the tow expenses would have been recoverable as being “reasonably made” as required by Rule A.  Although the vessel was immobilised at sea and not in danger of drifting aground, there was a tropical storm in the area and it was reasonable to engage a tug which could get to the vessel as soon as possible. Teare J approved the statement in Lowndes and Rudolf at para. A-42 to the effect that immobilisation caused by a main engine breakdown is a sufficient peril or danger in the law of general average “even if the accident occurs in fine weather. The cost of towage and/or salvage into a port of refuge will then unquestionably be treated as general average.” The actions of the owners in discharging the cargo by STS operations were also reasonable given that owners had failed in their attempts to get the vessel into a Japanese port of refuge and to get the receivers to accept delivery in the Chinese port of discharge.

 

“Subject to review” in conclusion of charterparty.

In Toptip Holding Pte Ltd v Mercuria Energy Trading Pte Ltd [2017] SGCA 64, the Court of Appeal of Singapore considered the effect of a ‘subject to review’ clause in an exchange of emails concerning the conclusion of a charterparty.  Mercuria had made an offer “otherwise subject to review of charterers pro forma charterparty with logical amendment” to which Toptip had replied “we confirm acceptance of your offer”. This showed that the parties intended to be immediately bound, even where there would be later discussion of standard terms.  A copy of a charter used by the parties several months earlier was then sent to the broker.

 

The Court of Appeal held that a contract had been concluded and that Mercuria were entitled to damages following a subsequent repudiation by Toptip. The “subject to review” clause was to be distinguished from “subject to contract” or “subject to details”. It was either a condition precedent or a condition subsequent (as in The Pacific Champ [2013] 2 Lloyd’s Rep 320.). Here it was the latter and the  words “with logical amendments” indicated only amendments consequential to what had already been agreed”.

Valuers’ negligence: no claim for more than lender loses

Not often do you find a Supreme Court decision in only 15 paragraphs that is clear, sensible and palpably right. Today we got just that in the valuers’ negligence decision of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77. Although a land case, this is of equal, and large, significance to ship and other finance.

In 2011 Tiuta lent £2.475 million for a bijou Home Counties development against a valuation by De Villiers of £2.3 million undeveloped / £4.5 million complete, of which no complaint was made. After some months the developers ran into difficulties. In 2012 Tiuta made a new loan of £3.088 million against the same development, of which £2.799 million went to discharge the old loan plus accrued interest, and the balance of £289,000 was new money. This latter advance was made against a new valuation by De Villiers in the sum of £3.5 million undeveloped / £4.9 million complete. Shortly after all this, the developers went bust and Tiuta lost big money.

Tiuta sued De Villiers for their loss, alleging negligence in the second valuation. De Villiers riposted that they could not possibly be answerable for more than £289,000, since even if they had not been negligent Tiuta would still have been exposed to the original, largely irrecoverable, balance of £2.799 million. To everyone’s surprise, a majority in the Court of Appeal disagreed. The 2011 loan had been paid off and was now out of the reckoning: the 2012 loan in the figure of £3.088 million counted as an entirely new advance made against the suspect valuation, and on principle any loss on it was recoverable. McCombe LJ, the dissentient, was left gasping and stretching his eyes (remember Hilaire Belloc’s Matilda?) at the idea that new money injection of a mere £289,000 could give Tiuta, free gratis and for nothing, a claim of up to £3 million that had not been there before.

The Supreme Court swiftly restored orthodoxy. Whether the lenders provided new money of £289,000 and left the existing loan of £2.799 million untouched, or provided a new loan of £3 million-plus which was partly used to pay off the original loan, the result was the same: the only net increase in exposure was £289,000 and that was all that was recoverable. Nor could Tiuta get home by saying that the repayment of the original loan was somehow a collateral benefit to Tiuta: as Lord Sumption observed with merciless logic, it was in fact neither collateral nor a benefit.

Advantage PI insurers, to be sure. On the other hand, this still leaves some questions unanswered. If the first lender had been someone other than Tiuta, the result would presumably have been different. Does this mean that if a lender wants to avoid the result in Tiuta, all it has to do is to make sure that when it lends several times to the same project, each loan is made by a separate subsidiary special purpose vehicle (quite easy to arrange)? One suspects lawyers are already busy dealing with questions like this and advising accordingly.

Varying the order of priorities between in rem claimants in Singapore.

In The Posidon [2017] SGHC 138 Singapore High Court has recently held that the order of priorities set out in the High Court (Admiralty Jurisdiction) Act (Cap 123, 2001 Rev Ed) (“HCAJA”) could be varied in exceptional circumstances where: (i) there was knowledge that the mortgagor was insolvent; (ii), the mortgagee had been been fully aware, in advance, of the nature and extent of the expenditure incurred by the competing claimant; (iii) any such expenditure had brought about some benefit to the mortgagee.

 
The dispute arose as to the order of priorities against proceeds paid into court following the judicial sale of two vessels. The bank claimed as second mortgagee and the bunker supplies claimed as necessariesmen. The bunker suppliers argued that the court should depart from the usual order of priorities in Singapore and give them priority over the bank. Belinda Ang Saw Ean J held that the facts of the case did not justify varying the order of priorities set out in the HCAJA, stating [87] “Injustice warranting an alteration to the order of priorities is only present when the mortgagee stands by and allows such bunker arrangements to take place despite knowing that the mortgagors were insolvent and that the mortgagee would somehow be benefitting from the supplies at the expense of the bunker supplier.”

 
The borrowers here had been operating at a loss and accumulating trade debts for some time prior to the bank’s decision to terminate the loan facility agreement and enforce the mortgages. That did not mean that the borrower was insolvent and at the time of the termination of the loan facility arrangement the bank had not considered the borrower to be at risk of becoming insolvent. There was also no evidence that the bank was fully aware in advance of the owners’ bunkering arrangements. Nor did the supply of bunkers to the vessels bring about any benefit to the bank. The bank’s security interest was not protected because the bunkers gave the vessels motive power.

In the air with “The Aries”. Freight no set-off rule also applies to air carriage.

 

 

In Schenker Ltd v Negocios Europa Ltd [2017] EWHC B20 (QB), High Court, Mercantile Court, Mrs Justice Moulder held that the sea carriage rule in The Aries [1977] 1 Lloyds Rep 334 prohibiting set-off of against freight also applied to claims to freight in carriage by air. The rule had previously been applied to international carriage by road in R H & D International Ltd v IAS Animal Air Services Ltd [1984] 1 WLR 573 and to domestic carriage by road in United Carriers Ltd v Heritage Food Group [1996] 1 WLR 371.

 

There were also two authorities in Hong Kong Emery Airfreight Corporation v Equus Tricots Limited and RAF Forwarding (HK) Ltd v Wong Angela. Emery Airfreight Corporation which had applied it to carriage by air.

 

Mrs Justice Moulder concluded:

  1. It is not the part of the function of judges to alter a well established rule or to say that a different rule is part of our law for the sake of harmonisation. It is the position here that although English authorities have not expressly determined the point in relation to air freight, the approach in the road haulage cases extending the rule from shipping are, in my view, instructive and persuasive. I note the rationale which is advanced in relation to cash flow. However, I do not accept that this alone would justify the extension of the rule into a new area. The rule may well be said to be anomalous when contrasted with other contracts for the supply of goods and services.

 

  1. However, given the clear and uncontradicted expert evidence that this is the basis on which the freight market contracts and the fact that it extends to carriage by sea, international and domestic road haulage, it would, in my view, be anomalous to hold that the common law freight rule did not extend to carriage by air. I, therefore, concur with the conclusion reached in the Hong Kong authorities which, though not binding on me, found that there is no logical or sensible distinction between the three means of transport for the purpose of the common law rule.

Getting a freezing order can damage your wallet — official

The decision in Fiona Trust v Privalov [2016] EWHC 2163 (Comm) (noted in this blog here) has been upheld in the Court of Appeal: see SCF Tankers Ltd & Ors v Privalov [2017] EWCA Civ 1877. Readers will remember that Russian shipping conglomerate SCF (aka Sovcomflot, previously Fiona) sued another Russian businessman for serious money, alleging that he had bribed its officers to enter into all sorts of disadvantageous agreements, and in support of the action got a freezing order for something over half-a-billion dollars. Having recovered a measly $16 million, it was then hit by Males J with an order on its undertaking in damages amounting to something close to $50 million — a costly victory indeed. Little of substance to report about the CA decision: it essentially approved the findings below on causation and mitigation. Males J’s judgment, and our blog post, remain the go-to place for detailed discussion of the principles to be applied.

Singapore arrest is for Singapore litigation.

 

In The Eurohope  [2017] SGHC 218 the Singapore High Court has held that it is an abuse of process to arrest a vessel in Singapore for the purpose of obtaining security for legal proceedings in another jurisdiction, in this case the High Court in England. This reflects the position in English law prior to s.26 of the Civil Jurisdiction and Judgments Act 1982 which empowered the court to order that property arrested be retained for the satisfaction of a judgment given in foreign court proceedings. Singapore has not enacted any equivalent legislation, and only provides for the arrest of ships to be used as security for pending international arbitrations (s. 7(1) the International Arbitration Act 1995).

Accordingly, the court ordered the in rem writ to be struck out, the warrant of arrest to be set aside, and the letter of undertaking issued by the owners’ P&I Club to be returned to the owners or their solicitors for immediate cancellation. The Court declined to award damages for wrongful arrest or wrongful continuance of arrest of the vessel. Taken as a whole the plaintiff’s behaviour was reasonable and did not amount to bad faith or malice.

Service of arbitration proceedings in cyberspace — don’t make idle assumptions.

In Glencore Agriculture BV v Conqueror Holdings Ltd [2017] EWHC 2893 (Comm), decided today, Conqueror had a smallish demurrage claim in respect of a 30,000 dwt bulker, the Amity, which charterers Glencore had ordered to wait idle for a time before taking on a cargo of corn at Ilychevsk in Ukraine. Glencore’s point of contact with Conqueror in arranging the nuts and bolts of loading and dealing with the delay had been one FO, a fairly junior Glencore man: not surprisingly all messages had been sent by email to and from FO’s Glencore email address.

There was an arbitration clause in the (Synacomex) charter. To get the arbitration ball rolling for its demurrage claim, Conqueror sent notice of its appointment of an arbitrator to FO’s email address (but nowhere else). Nothing happened, despite a number of reminders sent to the same address: in the event Conqueror’s arbitrator determined the claim in Conqueror’s favour as sole arbitrator.

Glencore applied for a declaration that the award did not bind it, under s 72 of the Arbitration Act 1996 (and also ss 67-68 of the same Act). Had there been proper service? Popplewell J said No. The issue in an arbitration case fell to be decided on ordinary principles of agency. FO, being a fairly junior dogsbody in the Glencore corporate machine, had neither express nor implied authority to receive formal service of claims: nor had there been any holding out of him as having it, merely because he had made the arrangements for the loading.

Entirely correct, in the view of this blog. And one doesn’t have to be very sympathetic to Conqueror. They could always have used old-fashioned snailmail sent to Glencore’s head office: see s 76(4(b) of the Act. It seems, with respect, that someone at Conqueror just indolently assumed that it would do to email a contact in the company he happened to have dealt with before. That won’t, and shouldn’t, do. One more simple point for solicitors acting for arbitration parties to add to their checklist.

Causation and Contingencies. The CV Stealth, again.

In The CV Stealth [2016] EWHC 880 (Comm) an attempt by the sub-charterer to load a cargo of oil from Venezuela without the necessary export permission led to the detention of the vessel. Popplewell J upheld the arbitrator’s finding that the bareboat charterers could recover the resulting expenses from time charterers by way of an indemnity under cl. 13 of Shelltime 4 form. The time charterer’s employment order to load the cargo was the effective cause, or at least an effective cause of the detention of the vessel up to and including 21 July 2015.

The judicial detention of the vessel in Venezuela continued and on 25 May 2017 the Arbitrator issued a Fourth Partial Final Award awarding owners detention expenses and hire paid to the owners for the period after 21 July 2015, but subject to a provisional deduction of $1.4 m for saved drydocking expenses. The deduction was made because “as matters stand there must be a substantial possibility that the vessel will never, in her lifetime, be redelivered to the head owners and thus that the drydocking costs will never have to be borne by the owners here.”

The charterers appealed against the award on the grounds that in considering the issue of causation the arbitrator had merely asked himself whether anything had changed since his initial Partial Award. Charterers argued he should have asked whether the employment order continued to be an effective cause of the detention of the Vessel, or whether the sole effective cause of that detention eventually became the intractable and perverse refusal of the Venezuelan courts to order the release of the vessel as required by Venezuelan law.

Popplewell J held that the arbitrator had not misapplied the test for causation. The arbitrator had already found that the employment order had causative potency up to 21 July 2015. The fact that the approach of the Venezuelan courts had not changed from then, could legitimately be taken as evidence that the chain of causation had not been broken; a finding confirmed by the arbitrator’s finding that the subsequent judicial behaviour was insufficient to “obliterate the original cause of the detention”, which reflected the language of the test in Borealis v Geogas [2011] 1 Lloyd’s Rep 482, [44], on when an effective cause will be replaced by another intervening cause.

The owners also appealed against the provisional deduction of saved drydocking expenses, arguing that deductions could only be made if there were a finding that there was a benefit and that the benefit was legally caused by the breach. Popplewell J dismissed the disponent owner’s appeal. The arbitrator had adopted a “wait and see” approach of considering loss by reference to events as they unfolded which was a permissible approach to the date of assessment of loss where its extent may depend upon future contingencies.