We do need a marine insurance drugs clause

Another item for the agenda at the LMA (and elsewhere where they do insurance).  If someone tries to use your ship without your knowledge for drug-smuggling and the vessel gets seized, the Supreme Court has now confirmed in Navigators Insurance Co Ltd & Ors v Atlasnavios-Navegação Lda [2018] UKSC 26 that your insurance may well not respond, with your underwriters politely but regretfully telling you that you are on your own.

While an elderly  bulker, the B Atlantic, was loading a cargo of coal in Maracaibo, Venezuela, enterprising drug smugglers strapped nearly 300 lb of cocaine to her hull with a view to retrieving it later. The drugs were found, and the vessel seized and condemned by the Venezuelan authorities. Her owners’ H&M insurance included the Institute War & Strikes Clause, which gave cover for capture, seizure and arrest; against persons acting maliciously; and against confiscation and expropriation. But specifically excluded under Clause 4.1.5 was detainment, confiscation or expropriation by reason of infringement of customs or trading regulations. The underwriters declined to pay. Flaux J decided for the owners; the smugglers’ acts were those of “persons acting maliciously”, and Clause 4.1.5 did not apply because the substantial cause of their loss was the acts of the smugglers and not the resulting infringement of the Venezuelan customs code. The Court of Appeal disagreed: the exclusion of infringement of customs or trading regulations should not be limited in this way, and in the circumstances excluded liability.

The Supremes, led by Lord Mance, agreed with the Court of Appeal, but went further. Not only did the events fall fair and square within the exclusion of confiscation for breach of customs or trading regulations, but there had been no cover in the first place. “Persons acting maliciously” meant persons deliberately out to injure the interests of the owners. Unlike terrorists, bombers or garden-variety vandals, drug-smugglers did not fall in this category: they were criminals, true, and knew that what they did might have consequences for the owners, but this was not enough.

This is, if one may say so, a sensible and convincing decision on the facts and the wording. But it does leave owners high and dry when faced with a risk against which they can quite legitimately desire protection. A specific clause protecting against seizure for drug-smuggling committed without the knowledge or connivance of the owner or the crew now seems a high priority. As we said, it’s over to you at the LMA.

 

 

Of sales, bills of exchange and arbitration

Picken J today revisited an old chestnut in arbitration law. Suppose you sell goods or services and draw on the buyer for the price (yes, some people still do this), and have a standard arbitration clause referring to “all disputes arising out of or in connection with this Contract”. Does the arbitration clause cover a claim on the bill of exchange, as against one on the underlying contract of sale? Just this happened in Uttam Galva Steels Ltd v Gunvor Singapore Pte Ltd [2018] EWHC 1098 (Comm), where the buyer made a s.67 application challenging an LME arbitration tribunal that had said yes and had then given judgment against it on the bill. In fact the buyer had introduced the point out of time, so the point was a non-starter.  But even without that it would, said Picken J, have failed. On the basis of modern arbitration practice as evidenced in Fiona Trust v Privalov [2007] UKHL 40; [2007] 4 All E.R. 951 parties should not lightly be taken to have agreed to bifurcated dispute resolution according to whether the action was being brought on the bill or on the contract. Dicta in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, 731 and the Singapore decision in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53 failed to convince him otherwise.

On balance it is suggested that his Lordship was right. It is true (as he admitted) that the result is that those who sell under bills of exchange may inadvertently give up the right they would otherwise have to summary judgment on the bill with few if any questions asked under the ‘pay now, sue later’ principle. But summary judgment is equally available under the underlying contract, and the fact that this may be precluded by an arbitration clause never seems to have unduly worried anyone.

If the claim is brought on the bill by an indorsee who is a holder in due course, then presumably the result will be different: the holder here can hardly be bound by any arbitration clause — as indeed was held in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53, where the claimant was the indorsee of a promissory note. But this need not detain us.

Meanwhile, the sensible reaction for a commercial lawyer is a simple one: say what you want. Where payment is or may be made by a bill of exchange, it is hardly rocket science to draft the arbitration clause to as to embrace “all disputes arising out of or in connection with this Contract, including cases where the claim is brought under a bill of exchange or promissory note”, or (if you prefer) “all disputes arising out of or in connection with this Contract, save for cases where the claim is brought under a bill of exchange, promissory note or similar instrument”. You may do students of commercial law out of a bit of technical learning, but you sure will save your clients a good deal of heartache and very possibly money.

Settlement: not as easily inferred as you might think.

It’s a fact of life that most cases settle. But establishing a settlement isn’t as straightforward as it looks, as Males J’s judgment in Goodwood Investments Holdings Inc v Thyssenkrupp Industrial Solutions AG (The M/Y Palladium) [2018] EWHC 1056 (Comm) shows. Goodwood appeared as purchaser of the Palladium, a futuristic 300-foot superyacht built by ThyssenKrupp for Russian billionaire Mikhail Prokhorov. The paint proved troublesome, and arbitration commenced.

Following settlement attempts, ThyssenKrupp wrote:

Offer in Full and Final Settlement

In view of the foregoing, the Builder’s offer is as follows: 1. The Replacement Works; and 2. Costs – €… Accordingly, the total net payment to be made by the Builder, in addition to performing the Replacement Works at its own cost will be €…

Additional Settlement Terms

The conclusion of a final settlement will remain subject to the following terms: 1. A full release of any existing or future (known or unknown) claims arising out of or in connection with the SBC, whether against the Builder, B+V, or any other sub-contractor ….  3. Return and cancellation of all outstanding guarantees. 4. Conclusion of a formal settlement agreement to include, prior to signature, formal approval of the settlement by the competent corporate body of the Builder.

A couple of days later Goodwood replied:

… the Further Offer is accepted by the Purchaser, subject only to the following points of clarification that are needed for logistical reasons:
1. The Further Offer does not say at which yard the work will be carried out. Can you please state which yard the Builder proposes to use? For the avoidance of doubt, the Purchaser would be prepared for that to be Blohm + Voss, or its new owner, Lurssen, or another European yard of comparable standing and quality.
2. The Further Offer is unclear about a start date for the work. For your information, the Purchaser’s preferred start date is about October 2018, after the next summer cruising season. We suggest, therefore, that the parties liaise about an exact date convenient to both parties.
3. Whilst the Purchaser is content for the work to be overseen by Wrede, the Purchaser must have the right to send its own consultants to assist Wrede, and receive reports and updates from Wrede, as it is in the interests of both the Purchaser and the Builder that any further dispute be avoided.
4. We understand that the settlement requires approval from the Builder’s board. Whilst that is understood by the Purchaser, your and Mr Bracker’s recommendation ought, we assume, [sc. to] ensure it is forthcoming. Regarding the arbitration hearing, our view is that it should be adjourned sine die pending formal board approval.
5. The Further Offer, taking account of the foregoing points, should be set out in a formal short settlement agreement to be executed by both the Purchaser and the Builder (once board consent is obtained) and that settlement agreement must expressly provide it is in full and final settlement of all disputes and differences arising out of or in connection with the subject matter of the Arbitration, and all the further matters that you mention in your Further Offer. It must be common ground that neither party is ‘buying litigation’ in order to end this long running paint dispute.”

ThyssenKrupp sought to continue the arbitration: Goodwood argued that the claim had been compromised. Males J had no doubt that ThyssenKrupp were right. Paragraph 4 of their Additional Settlement Terms put two obstacles in the way of there being an immediately binding offer to settle: a need for a formal agreement, and for the approval of ThyssenKrupp’s management. Furthermore, although expressed to be for ‘clarification’ the extra points in Goodwood’s response prevented this from being an unequivocal acceptance.

One further point. Goodwood argued, one suspects in some desperation, that an offer to settle subject to management approval, once accepted, gave rise to a concluded contract with a duty to use best endeavours to get that approval. Males J without hesitation rejected this argument: such an obligation, even if intended (a point that he did not have to decide), was an unenforceable agreement to agree.

In short, copy and paste the wording from this offer by ThyssenKrupp and you can be fairly safe in suggesting settlement with virtually no danger of inadvertently giving up your client’s case. Useful to know.

 

Jurisdiction in EU multimodal transport cases

Goods are carried multimodally from Finland to England by an English carrier, and stolen in England. If the owner wants to sue the carrier, where is the contract performed within Art.7(1) of Brussels I Recast: England, Finland or both? The Advocate-General has just given an opinion in Zurich Insurance v ALS Ltd (area of freedom, security and justice) [2018] EUECJ C-88/17: it is the place of loading or discharge, at the claimant’s election. Hence the claimant there had the right, whatever the English defendant said, to sue in Finland.

This must be right. It has always been accepted that the place of discharge is competent. In Rehder v Air Baltic Corp (C‑204/08) [2009] E.C.R. I-6073; [2009] I.L.Pr. 44 and flightright GmbH v Air Nostrum (C-274/16) [2018] EUECJ 274/16 this was held to be the position as regards transport of passengers; and understandably the view was expressed that there was no reason to regard the transport of things any differently.

Good, but not surprising, news for cargo owners and insurers. Still, it’s nice to know.

Cargo claims and recovery for third party losses.

 

 

When can the lawful holder of a bill of lading claim damages for losses sustained by a third party?  That was the question before the court in Sevylor Shipping and Trading Corp v Altfadul  and SIAT[2018] EWHC 629 (Comm), 23 March 2018. Altfadul were the lawful holder of the bill of lading and SIAT were the assignees of their claim under the bills of lading against the carrier. That claim arose in respect of damage to a cargo of bananas,  totalling just over $4.5m. In respect of this claim, Altfadul had received partial compensation from their seller, who were the voyage charterers, of just over $.2.5m. The arbitrators found that Altfadul were able to claim the full amount of the damages sustained by the cargo, and that the $2.5 m for which they had been compensated by their sellers could be recovered under s2(4) of COGSA 1992. This provides:

Where, in the case of any documents to which this Act applies-

(a)        a person with any interest or right in or in relation to goods to which the document relates sustains loss or damage in consequence of a breach of the contract of carriage; but

(b)        subsection (1) above operates in relation to that document so that rights of suit in respect of that breach are vested in another person,

the other person shall be entitled to exercise those rights for the benefit of the person who sustained the loss or damage to the same extent as they could have been exercised if they had been vested in the person for whose benefit they are exercised.

The arbitrators found: (i) s2(4) was not limited to situations in which the third party whose loss was being claimed by the lawful holder had been a previous lawful holder and had lost its rights through s2(5): (ii) s2(4) did allow Altfadul to recover for their seller’s loss. Section 2(4) required one to hypothesise  that the Charterers had vested in themselves the rights of suit under the bill of lading and if so, whether they have been entitled to recover the loss suffered, to which the answer was ‘yes’.

 

The owners appealed from the tribunal’s decision.  Andrew Baker J agreed with the first finding of the arbitrators but not with the second finding. The seller had been an intermediate holder of the bill of lading but as it had a voyage charter with the shipowner, under the rule in The Dunelmia  [1970] 1 QB 289 the bill of lading in its hands was a mere receipt.  The statutory vesting of rights of suit in him under s2(1) did not entitle a charterer to whom the mere receipt rule applied to sue the carrier under the bill of lading for losses suffered by him. His entitlement to recover those losses from the carrier was governed by the charter alone. Section 2(4) required one to hypothesise whether the person who sustained loss would have been able to exercise rights of suit under the Act if they had been vested in them. The answer with a charterer to whom the ‘mere receipt’ rule applied, was clearly ‘no’. Accordingly, s. 2(4) did not entitle the lawful holder to exercise its rights for its seller as the person who had sustained loss or damage, through the partial compensation it had paid to Altfadul in respect of the cargo damage.

 

However, Andrew Baker J went on to find that the tribunal’s decision to award the full amount of loss to Altfadul was correct under common law principles as regards damages entitlements under contracts for the carriage of goods by sea. In R&W Paul Ltd v National Steamship Co Ltd (1937) 59 Ll L Rep 28 Goddard J had found that a recovery from an intermediate seller was res inter alios acta  as regards the bill of lading holder’s contractual entitlement to damages. The bill of lading holder would have to account to its seller in respect of the damages received in relation to that recovery, but that did not affect its contractual entitlement to recover damages in full from the shipowner. The later decision in The Sanix Ace [1987] 1 Lloyd’s Rep 465 had not qualified that principle and restricted it to situations where the claimant could establish that it had owned, or had the immediate right to possession of, the cargo at the time at which it had been damaged. Andrew Baker J summarised the principles of recovery, thus.

  1. Assuming title to sue in contract, the carrier is liable to full damages if sued by the receiver who, by reason of the carrier’s breach, receives damaged rather than sound goods (R&W Paul) or if sued by a claimant who did not receive the damaged goods but who owned the goods when they were damaged by the carrier’s breach (The Sanix Ace), in each case irrespective of how financial loss reflecting or resulting from the cargo damage is or comes to be distributed across the sale of goods chain (ibid). The former sues as the owner of the damaged goods since but for the breach he would have been the owner of undamaged goods; the latter sues as the owner whose sound goods were damaged.

Non-exclusive jurisdiction under Brussels I Recast: a logical but odd result.

Cockerill J’s decision last month in UCP Plc v Nectrus Ltd [2018] EWHC 380 (Comm) may well encourage some lawyers to groan further about the effects of EU law on questions of jurisdiction. The background was a corporate dispute of spectacular dreariness: suffice it to say Nectrus alleged UCP owed it several million, while UCP had a claim for damages against Nectrus arising out of the same events. The relevant contract contained a non-exclusive English jurisdiction clause. Nectrus sued in the Isle of Man: a month or so later UCP sued in England. Nectrus sought to argue forum non conveniens to remove the hearing to Douglas. UCP argued that the English court not only should not but could not decline jurisdiction. It observed that the court had jurisdiction under Art.25 of Brussels I Recast, and that the limited lis alibi pendens provisions in Arts.33 and 34 were not applicable (since they only affected jurisdiction under Arts.4, 7, 8 and 9 and not jurisdiction by virtue of agreement). Cockerill J agreed, following dicta from Popplewell J in IMS SA v Capital Oil & Gas Industries [2016] 4 WLR 163  and the IISTL’s own Peter Macdonald-Eggers QC in Citicorp Trustee Company Ltd v Al-Sanea [2017] EWHC 2845 (Comm). Logical, certainly, in the light of the acepted interpretation of Brussels I. But it does have the effect that a non-exclusive jurisdiction clause now means not so much “You can, but don’t have to, sue in England” as “You can sue me outside England, but if you do I can still insist on proceedings taking place here.” Not quite the same thing, most lawyers will (one suspects) conclude.

Ultra vires or ineffective: a no-nonsense approach to contractual effectiveness

A short technical point of interest especially to those dealing with foreign state or semi-state entities arises out of a decision of Andrew Baker J a week ago in Exportadora De Sal SA De CV v Corretaje Maritimo Sud-Americano Inc [2018] EWHC 224 (Comm).

The power of a Ruritanian state corporate entity  to conclude a contract is governed by the law of the place of incorporation, i.e. Ruritania. The validity of the contract, and whether anything has happened which has the effect of preventing the parties being liable, or discharging an existing duty, is controlled by the governing law of the contract: if there’s an English law and jurisdiction clause, this means English law, to the exclusion of Ruritanian. But where is the boundary between the two?

A Mexican 51/49 state/private entity contracted for the building of a self-unloading salt barge (don’t say you don’t learn about interesting gadgets on Maricom) for about $27 million. The contract specified English law and London arbitration. The Mexican entity broke its contract, and following arbitration went down for about $7 million.  However the builders, when they tried to enforce the award, encountered a plea that the Mexican entity concerned had had no power under Mexican law to contract for the barge except through a specified tender process; that this hadn’t happened, that there had indeed been a Mexican administrative decision to cancel the contract on that basis, and that this nullified not only the contract but any submission to the arbitral process contained within it.

Andrew Baker J gave the buyers short shrift for a number of reasons we need not go into here. As regards the no-power argument, however, he made the important point that it was a non-starter. Although possibly dressed up as an ultra vires point, it was really nothing of the sort: viewed as a matter of substance it was a question of substantive validity. Substantive validity being governed by English law, the fact that under Mexican law the contract had been declared entirely ineffective was simply beside the point. As his Lordship observed, this decision was merely a mirror-image of the earlier Haugesund Kommune et al. v Depfa ACS Bank [2012] QB 549, where an ostensibly validity-orirnted rule had been held on a proper construction actually to go to the vires of a contracting party. But  the Exportadora de Sal case is none the less a useful weapon in the armoury of an English international commercial lawyer faced with an impressive-sounding plea that an apparently English contract was ultra vires under the laws of Backofbeyondia.

 

 

Maritime or non-maritime? The status of oilfield contracts in Louisiana

 

 

On 8 January 2018 the Fifth Circuit  en banc (In re Larry Doiron, Inc., http://caselaw.findlaw.com/us-5th-circuit/1885307.html (5th Cir. Jan. 8, 2018 No. 16-30217)) reworked the test for determining whether oilfield contracts are maritime or non-maritime in nature. Under maritime law knock for knock indemnity clauses in oil field service contracts are valid, but under anti-indemnity statutes in some states, such as Louisiana and Texas, they are invalid.

 

The case involved flowback operations performed in state waters on a fixed platform. The master service contract for the flowback work did not call for any vessel involvement. However, during the job the flowback contractor, STS, found a crane was needed to manipulate some of the flowback equipment. A tug and barge were needed to get the crane to the platform and the platform owner had to charter in vessels to allow the flowback contractor to do its work. required the platform owner (Apache) to subcontract with Larry Doiron Inc to charter in the necessary vessels to allow STS to do its work under the MSC.   During the ensuing operations, an STS technician was injured, and LDI sought indemnity from STS under the terms of the Apache-STS MSC (which provided for indemnity from STS to Apache and any of Apache’s subcontractors).

 

The Fifth Circuit set out a new two part test to determine whether or not the contract is maritime in nature. First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? Second, if the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract? If so, the contract is maritime in nature.

 

Applying this new test to this case, the oral work order called for STS to perform downhole work on a gas well that had access only from a platform. After the STS crew began work down hole, the crew encountered an unexpected problem that required a vessel and a crane to lift equipment needed to resolve this problem. The use of the vessel to lift the equipment was an insubstantial part of the job and not work the parties expected to be performed. Therefore, the contract was non maritime and controlled by Louisiana law which barred the indemnity under Louisiana Oilfield Indemnity Act.

International insolvency outside the EU: contract under English law and we’ll see you right.

Before the twenty-first century there was a clear and undoubted rule in international insolvency known as the Gibbs rule (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399). Whatever recognition or other co-operation we might be prepared to grant foreign insolvency proceedings, if an obligation was governed by English law and otherwise valid, its validity could not be affected by any act of foreign courts or authorities proceeding under their own insolvency law.

There is no doubt that this is no longer the case for EU insolvencies: the EU Insolvency Regulations of 2000 and more recently 2015 have clearly put paid to any such exceptionalism. But what of non-EU insolvencies? Since 2006 there has been some question whether the simple Gibbs rule might have been affected by the UNCITRAL-based CBIR (Cross-Border Insolvency Rules), which now give the English courts considerable scope to replicate in England the effects of a foreign insolvency proceeding in a debtor’s own COMI (centre of main interests, essentially where its business was run from). Progressive and academic opinion (the latter as usual generally aping the former) consistently suggested that the answer ought to be Yes, on the basis that modified universalism in insolvency needed to become more global and less narrowly jurisdictional.

Today, however, Hildyard J, in a careful judgment in Bakhshiyeva v Sberbank of Russia & Ors [2018] EWHC 59 (Ch), a case on the dry subject of paper issued by a Baku bank, gave the answer No. The bank, OJSC, with connections to the Azeri state, was highly insolvent. It went into Chapter 11-style reconstruction in Azerbaijan, successfully applying to have the proceeding recognised in the UK under the CBIR. A vote of an overwhelming number of creditors, valid under Azeri law, agreed a complex debt-for-government-bonds-and-new-lower-debt arrangement under which OJSC would then continue trading. Two financial institutions, one English (Templeton) and one Russian (Sberbank), holding English-law-governed debt issued by OJSC, held out. They took no part in the vote, though as a matter of Azeri law they were bound by it.

The question was, could the English court prevent these two minority creditors bloody-mindedly enforcing their rights in full against the bank once the moratorium created by the Azeri proceedings was over? As stated above, the answer was No. Whatever one might think of the Gibbs rule, it was too solidly anchored to have been removed by the side-wind of the CBIR. Nor should it be bypassed by, for example, admitting that the debt still existed but then reducing it to something like the grin on the Cheshire cat by preventing its enforcement against the assets of the debtor.

There is much to be said for Hildyard J’s solution, both on grounds of legal certainty and also because Parliament has occasionally stepped in in other areas, but not this one, to prevent abuse of international creditors’ rights (notably, in enforcing statutory debt relief for poor countries against vulture funds and the like).

It may, moreover, be important not only for bondholders — who will obviously be opening discreet magnums of champagne this evening — but for other creditors, including maritime ones. Charter claimants and bunker suppliers whose rights are governed by English law will now, it seems, be able to watch smugly from the sidelines while shipping companies go into reconstruction, waiting for the proceedings to end before pouncing, catlike, on the very same companies, seizing their London accounts and arresting their vessels for the full amount of their claim as soon as they venture far from home. Commerce red in tooth and claw, you might say: but then that’s how it’s always been in shipping.

 

Carry on suing in England – at least if you’re suing a non-European

In matters of tort foreign defendants domiciled in the EEA are reasonably well-protected from the exorbitant jurisdiction of the English courts. Both Brussels I Recast and Lugano II limit jurisdction to cases where where the act leading to liability, or the harm done by it, happened in England: furthermore, Euro-law makes it clear that the reference to harm here is fairly restrictive, referring only to direct harm and not to the financial effects of it, such as the straitening of an English widow’s circumstances following a wrongful death abroad.

By contrast, there is no such luck for defendants domiciled outside the EEA. For some time conflicts lawyers have remarked that English claimants, especially personal injury claimants, find it remarkably easy to establish jurisdiction against them. This is because CPR, PD6B 3.1(9), allows service out not only where damage results from an act “committed … within the jurisdiction” but also in all cases of damage “sustained …within the jurisdiction.”, and in a series of cases such as Booth v Phillips [2004] 1 WLR 3292 and Cooley v Ramsey [2008] ILPr 27 this has been held to cover almost any loss, even consequential, suffered in the jurisdiction. And in Four Seasons Holdings Inc v Brownlie [2017] UKSC 80 the Supreme Court by a majority (Lords Wilson and Clarke and Lady Hale vs Lords Sumption and Hughes) has now weakly upheld this distinction.

International law enthusiasts will know that this case arose out of a car accident in Egypt in which the late Prof Ian Brownlie was tragically killed and his widow was injured. The actual decision was in the event a foregone conclusion: by the time the case reached the Supreme Court it was clear that the defendants, the franchising company behind the Brownlies’ Egyptian tourist hotel which had organised the fatal car ride, had never contracted with the Brownlies and was not liable in tort for the acts of the hotel itself. Nevertheless, the majority in the Supreme Court, doubting the decision of the Court of Appeal on this point, made it clear that, while not finally deciding the issue, they were not prepared to condemn the older authorities. It seems likely that future cases will follow their lead.

One further point. Lord Sumption and Lady Hale made the point that the decision whether a contract was made in England, another of the “gateways” in non-EEA cases (see CPR, PD6B 3.1(6)), was in the light of cases like Entores v Miles Far East Corpn [1955] 2 QB 327, pretty arbitrary and could do with a look from the Rules Committee. They were right. Let’s hope something gets done.