Cockerill J’s decision last month in UCP Plc v Nectrus Ltd  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  4 WLR 163 and the IISTL’s own Peter Macdonald-Eggers QC in Citicorp Trustee Company Ltd v Al-Sanea  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.
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  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  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.
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.
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  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.
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  1 WLR 3292 and Cooley v Ramsey  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  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  2 QB 327, pretty arbitrary and could do with a look from the Rules Committee. They were right. Let’s hope something gets done.
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  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.
On 4 December 2017 Hong Kong will apply the latest limits of liability under the 1996 Protocol to the 1976 LLMC, pursuant to amendments to Schedule 2 of the Merchant Shipping (Limitation of Shipowners Liability) Ordinance (Cap. 434).
In Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64 Shell bought two parcels of Iraqi oil in 2013 from the state Iraqi oil company SOMO. Its bank, Credit Agricole in London, issued letters of credit governed by English law naming SOMO as beneficiary, but containing a clause as follows (essentially to comply with the Iraqi sanctions regime):
It can be disconcerting to find, towards the beginning of the report of a decision in the Supreme Court, something like this:
Don’t despair. The point at issue in the August 3 case of MT Hojgaard AS v EON Climate and Renewables UK Robin Rigg East Ltd  UKSC 59 was actually quite straightforward.
Problems appeared in a wind-farm off the Cumbrian coast, which were traceable to weaknesses in the foundations. The owners, E-ON, sued the constructor, Hojgaard, for breach of contract. In particular they relied on a warranty that the structure had been built to last for 20 years. There was some doubt over the meaning of the warranty (did it mean the thing would last 20 years, as the parties thought, or that its design was such that it ought to do so, as Lord Neuberger opined?); but the point didn’t matter, since here the collapse took place only a very short time after the whole caboodle had been built in the first place.
The claim thus looked straightforward, but here a difficulty arose. Like all major construction projects, the constructor had to observe detailed specifications. In this case the specification was named J101 (a technical specification prepared by acknowledged experts DNV — don’t ask further), which not only embodied the fearsome formula above, but which turned out to have a major defect in it. And the problems were due to this defect. Hojgaard argued that E-ON could hardly complain where Hojgaard had merely followed instructions: E-ON riposted that that was all very well, but a warranty was a warranty, and this one had been broken.
The Supreme Court confirmed what construction lawyers had always assumed was the case (see decisions such as Cammell Laird v Manganese Bronze  AC 402 and Steel Co of Canada v Willand Management  SCR 746): namely, that the warranty continued to apply even though in a sense inconsistent with the specification and thus impossible to satisfy. And, in the view of us at Maricom, rightly so. If a sophisticated business chooses to promise that something will happen come hell or high water, the fact that it turns out to have promised the impossible should not let it off the hook: that’s what warranties are all about.
The case is not of earth-shattering significance. DNV smartly changed its specifications in late 2009, so the particular issue here won’t affect wind-farm contracts signed after that date. As for the future, lawyers for constructors would do well to advise them to change their wording, making it clear that in so far as customers order structures to a particular specification, any warranties are qualified so as to prevent those customers both eating their cake and having it. If lawyers don’t do this, their PI insurers can expect some embarrassed phone calls; if construction companies don’t follow any such advice then that’s their look-out. But the decision in the Hojgaard case could still have some ramifications in respect of some older structures; to that extent at least it’s worth filing away a note.
SIMON RAINEY QC
Gard Shipping v Clearlake Shipping  EWHC 1091 (Comm) Sir Jeremy Cooke 12 May 2017
Persimmon v Ove Arup  EWCA Civ 373 Court of Appeal (Jackson, Beatson, Moylan LJJ) 25 May 2017
In this update, attention is drawn to two recent cases addressing the correct approach to the construction of contracts.
The Gard Shipping case is of interest, as it is the first application in a first instance decision, of the recent Supreme Court decision in Wood v Capita Services, which rejected the suggestion that there was any tension between the Supreme Court’s earlier decisions in Rainy Sky v Kookmin Bank and Arnold v Britton. It also considers the application of the Supreme Court decision on the implication of terms in Marks & Spencer v BNP Paribas.
The decision in Persimmon is striking, not so much for what it decides, as to the doubt it casts on the continuing relevance in commercial contracts, of the principle of contra proferentem and the rule in relation to exemption clauses flowing from the Canada Steamship case.
Gard Shipping v Clearlake
The Supreme Court decision Rainy Sky in 2011 opened the floodgates: no case on construction could be argued without it being asserted or, indeed, “trumpeted” (per Eder J in Aston Hill Financial) by each side that its interpretation made more commercial sense.
This development was not embraced with enthusiasm by most first instance judges. How could advocates or judges discern what, objectively, made commercial sense in myriad different circumstances? And even if they could, construing a contract in accordance with objective commercial sense risked rewriting the bargain actually struck by the parties.
Such doubts seemed to be reflected in the subsequent Supreme Court judgment in Arnold v Britton in June 2015. This was widely seen as being a “rowing back” from the free-for-all of Rainy Sky. Although there was no criticism of Rainy Sky per se, the Supreme Court emphasized the importance of the language of the provision which was to be construed. Commercial common sense was not to be invoked to undervalue the importance of the language.
Then, in March of 2017, came the Supreme Court decision in Wood v Capita Services. Giving the only judgment, Lord Hope emphatically rejected the submission that Arnold was a rowing back from or recalibration of Rainy Sky. What the court has to do, in any case, is, in the unitary exercise of construction, balance the indications given by the language and the commercial implications of competing constructions. The balancing exercise is key to the approach.
As to how that balance is to be struck, Lord Hodge identified 3 factors (which must be viewed as non-exhaustive): (1) the quality of the drafting – the poorer the drafting the more the balance may tip away from a strict semantic reading; (2) the court should bear in mind that one party may simply have made a bad bargain; and (3) the court should bear in mind that the drafting may be a negotiated compromise, with the parties unable to agree more precise terms.
Gard shows the first application of Wood in a first instance decision.
A voyage charterparty based on BPVOY4 contained standard laytime/ demurrage provisions. It also contained specifically agreed terms that the charterers had the liberty to order the vessel to stop and wait for orders. If they exercised that liberty, waiting time was to count as laytime and demurrage was to be payable at enhanced and escalating rates. The charterers did not give a “stop and wait” order. Instead, after the vessel tendered a Notice of Readiness (NOR) at the discharge port, the charterers simply gave no discharge orders at all for over 2 months.
The owners argued that it was clear that the commercial purpose of the clause was to make the charterers pay at the enhanced rates, where they used the vessel as floating storage. They had used the vessel as floating storage at the discharge port. It could make no commercial sense if the charterers could avoid the enhanced rate by the tactic of giving no orders, after NOR, rather than giving a “stop and wait” order. Commercially the two amounted to the same thing, and should attract the same consequences.
Sir Jeremy Cooke had no hesitation in rejecting this argument. The wording of the specially agreed terms required a “stop and wait” order to trigger the enhanced rates. There was no such order. Therefore, the enhanced rates were not triggered. The ordinary demurrage rate applied. He also firmly rejected the owners’ alternative argument based on an implied term on the grounds of lack of commercial necessity.
This case, therefore, provides an early indication that in charterparties, which are indeed often a negotiated compromise, in carrying out Lord Hodge’s balancing exercise judges will give more weight to the words the parties have actually used, rather than arguments based on supposed commercial common sense. Notwithstanding Lord Hodge’s assertion that Arnold did not recalibrate Rainy Sky, the post-Arnold focus on the actual words of the contract is likely to be maintained.
Persimmon v Ove Arup
The correction of approach to the relevance and utility of the so-called “commercial” approach to construction of commercial contracts post Arnold v Britton and the current emphasis on the primacy of the language used by the parties as usually the best and surest guide to what they intended to achieve has found an echo in the rather different field of exemption clauses. The traditional approach that an exclusion or exemption clause is to be construed contra proferentem (once one has decided who the proferens is) in the event of any ambiguity has ruled the field for many years, although there have been many statements to the effect that it is not to be deployed where the words are themselves sufficiently clear. But the trend has increasingly been to give effect to exclusion clauses in commercial contracts without resort to maxims of hostile construction where the wording is subjected to some special linguistic threshold or a more demanding need for clarity.
An early indication of the new approach was given by Lord Neuberger MR in K/S Victoria Street v House of Fraser  EWCA Civ 904, although was perhaps lost sight of. The position was reviewed more clearly and emphatically in the context of the mutual indemnities and exclusions in Transocean Drilling v Providence Resources (The Arctic III)  EWCA Civ 372 where the Court of Appeal ruled that the principle had no role to play in the case of a mutual clause “especially where the parties are of equal bargaining power”, and stressed the parallels with Arnold v Britton. The Court distinguished the sort of mutual exclusion clause before it from what it described as “a typical exclusion clause, by which a commercially stronger party seeks to exclude or limit liability for its own breaches of contract.” The decision raised a number of questions in particular as to equality of bargaining power and the consistency of the Court’s approach in the light of a case decided by the Court of Appeal just shortly before (: Nobahar-Cookson v The Hut Group Ltd  EWCA Civ 128) in which the contra proferentem approach appeared to receive restatement and approval. However the Court was clear that it was not intending to cast any doubt on the allied principle of construction that clear words were required to exclude liability for negligence and the ‘Rule’ in Canada Steamship.
The recent decision in Persimmon Homes v Ove Arup appears to continue the trend towards minimising the scope for a contra proferentem approach generally, and not just in the context of mutual exclusion or exemption clauses. The case raised issues of construction under a contract for consultancy and surveying services rendered by Ove Arup to Persimmon and other parties relating to a redevelopment project for the Barry Docks. Asbestos was found in more than expected quantities for which it was alleged that Ove Arup was responsible by negligently failing to detect and manage that risk. A number of issues arose as to the application of exclusion and limitation clauses. In particular a clause which read “Liability for any claim in relation to asbestos is excluded”.
The Court of Appeal re-endorsed in terms the approach in K/S Victoria Street to the effect that the language used should be and usually is enough to resolve the meaning without resort to “rules” of construction and the approach taken in The Arctic III. But more importantly it went a step further and doubted the relevance and applicability of the Canada Steamship principles (by which a clause must either expressly refer to negligence or some synonym of it or, if it does not, must indicate that it covers negligence with general words being read as covering non-negligent liability if possible to do so and unless such liability is fanciful).
The Court stressed that it was necessary to distinguish between a simple exclusion of liability and an indemnity clause requiring a party to hold the other harmless from the consequences of that party’s negligence and that, at least in the former case, the Court’s “impression” was that Canada Steamship guidelines “in so far as they survive” are “now more relevant to indemnity clauses than to exemption clauses” and that in commercial contracts between sophisticated parties, such as a large construction contract, it should all turn on the language. The Court made it clear that the wording in question (referred to above) was clear enough to cover liability for negligence and that Canada Steamship was simply not of assistance. As belt and braces the Court then applied Canada Steamship and held that any liability other than liability for negligence was indeed fanciful.
The case represents a further cutting back of the application of technical canons of construction to exclusion clauses in the commercial context in favour of simply giving ordinary language its effect. It also states, perhaps more clearly than before, that the same approach applies generally and that Canada Steamship is not exempt from the process.
Although the Court was at pains to stress that the issues before it were not such as to merit a general review of Canada Steamship, its words will be likely to be cited generally as building on an Arnold v Britton approach, even to exclusion clauses: “Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down.”