Shipping

Written by legal experts, Clyde & Co’s Shipping Newsletter is a regular publication in which recent developments are reviewed: new case law, changing legislation and new areas of potential liability. We begin this issue by examining whether charterers are required to give notice before suspending performance for breach of certain terms, under an amended BIMCO Supplytime 1989 charterparty. We then turn to a case where an arbitration tribunal was asked to consider interlinked charterparty disputes, in this instance deadfreight and despatch cross claims. The tribunal provided helpful guidance on both subjects.

Two further articles focus on the issue of laytime and off hire. The first article reviews the interplay between laytime and the “always accessible’/’reachable on arrival’ provisions in a voyage charterparty. It examines whether owners can claim damages if charterers breach said provisions, and how such a breach impacts upon the laytime and demurrage clauses. In the second article, we discuss the terms of an amended NYPE 46 charterparty to assess whether the charterers’ claim for off hire was valid, and whether there had been an actual loss of time. Here, the charterers’ claim failed.

The following paper examines the topic of speed and performance, and in particular the discrepancies which can arise between the ship’s own data and that which is reported by independent weather bureaus.

Recovery of arbitration costs forms the next subject. In an appeal against an arbitration award, the High Court had to determine whether it was possible to recover the costs of defending an arbitration in a dispute involving a long chain of charterparties, where two of the parties were companies belonging to the same group.

We continue with a review of a recent landmark High Court decision, which challenged the perception of some practitioners regarding the application of the Sale of Goods Act 1979 implied terms to the Norwegian Saleform 1993. Clyde & Co acted for the successful buyers.

The latest shipbuilding decisions regarding payment guarantees and refund guarantees are examined thereafter.

We conclude with a reminder of the recent EU sanctions imposed against Iran, contained in Council Regulation (EU) No. 1263/2012, which came into force on 23 December 2012. A link to our recent update explaining how these new sanctions will affect the shipping industry is included.

We hope that you find our newsletter informative.

If you would like to discuss any of the issues raised, please feel free to contact us on info@clydeco.com or alternatively, please liaise with your usual contact.

Clyde & Co - A leading international law firm with over 1,400 lawyers operating over 6 continents.

NewsletterFebruary 2013

ContentsIntroduction Page 1

Outstanding hire: do owners have to give charterers notice before suspending performance?Page 2

Deadfreight v DespatchPage 4

Is the meaning of laytime “always accessible”?Page 6

NYPE46 off hire clause requires actual delay to the progress of the adventurePage 7

Speed & Performance - Discrepancies between ships’ data and independent weather bureausPage 8

Recovering the costs of defending an arbitration in a charterparty chainPage 9

The meaning of “as is”Page 10

Shipbuilding guarantees: latest decisionsPage 11

Shipping industry feels force of EU Sanctions against IranPage 13

Meet the authorsPage 14

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Shipping Newsletter February 2013

Outstanding hire: do owners have to give charterers notice before suspending performance?Trudy Grey

The answer is: no - if you have a BIMCO Supplytime 1989 form of charterparty, according to Gloster J, in Greatship (India) Ltd v Oceanografia SA de CV [2012].

The factsUnder a charterparty on an amended BIMCO Supplytime 1989 form, the owners of the “GREATSHIP DHRITI”, Greatship (India) Limited, chartered her to Oceanografia S.A. de C.V. for a period of two years. Clause 10(e) of the BIMCO Supplytime 1989 charterparty provided, inter alia “[2] if payment is not received by the Owners within 5 banking days following the due date the Owners are entitled to charge interest … on the amount outstanding from and including the due date until payment is received… [3] in default of payment … the Owners may require the Charterers to make payment of the amount due within 5 banking days of receipt of notification from Owners; failing which the Owners shall have the right to withdraw the Vessel … [4] while payment remains due the Owners shall be entitled to suspend the performance of any and all of their obligations hereunder…”.

In this case, the owners purported to suspend the provision of the services of the vessel under clause 10(e) for non-payment of certain of the hire charges. The dispute was referred to London arbitration where owners claimed that clause 10(e) of the charterparty did not contain any requirement for owners to give notice to charterers before suspending performance.

Charterers argued that the charterparty contained an express or implied requirement to give five banking days’ notice of owners’ intention to suspend.

The tribunal’s decisionThe London arbitrators held in favour of the charterers, deciding that the express notice provisions in parts [2] and [3] of Clause 10(e) applied to part [4]. Owners were given permission to appeal the Tribunal’s award as the question was determined to be of general public importance, since it arose out of a standard form charterparty which remains in regular use.

The court’s decisionOwners submitted that the arbitrators should have given effect to the clear, unambiguous and “unfettered” language used in the charterparty (Rainy Sky SA v Kookmin Bank [2011]) as a result of which, according to those principles of construction, owners were able to suspend performance “while payment remains due”.

Gloster J held that the owners were not required to give charterers five banking days’ notice of the suspension. Her ladyship commented that “if the contract has used clear and unambiguous language, the court must apply it, however surprising or unreasonable the result might appear to be. But where there are two possible constructions, the court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business common sense.”

In Gloster J’s view, the words “while payment remains due” in clause 10(e) clearly and unambiguously suggested that an owner was entitled to suspend performance of his obligations at any time after payment became due, and whilst hire remained unpaid. Her ladyship decided that, had the parties intended to make the right to suspend dependent on a period of notice, they could have made express provision for that in the charterparty, as they had in numerous other contexts. In this case, the wording of clause 10(e) was clear and unambiguous, and there was no scope for any alternate construction; there was no justification for what would, in effect, be a rewrite of the charterparty. Gloster J also saw no justification for the implication of a term in the charterparty, as charterers had suggested.

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Shipping Newsletter February 2013

(continued from page 2)

CommentaryThis case demonstrates, once again, how important it is to use clear and unambiguous wording in contracts. Charterers who are tempted to pay hire late for cash flow reasons may, unexpectedly, find themselves at risk of suspension of services by owners without notice if their charterparty contains similar wording to clause 10(e) of the charterparty in this case. If charterers want to make

sure they are given notice of suspension, they must state this expressly in the charterparty. They cannot rely on other notice provisions in the charterparty, even when contained in other parts of the same clause. This decision must provide some comfort for owners regarding prompt payment of hire, particularly in these difficult economic times.

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Shipping Newsletter February 2013

Deadfreight v DespatchLucinda Roberts

On some occasions, charterparty disputes give rise to interlinked claims, such as deadfreight and despatch claims, for example, where a charterer loads less than the agreed amount of cargo; this may result in a reduction in the number of laydays used. A recent Tribunal decision, London Arbitration 2/12, dealt with both those issues.

FactsThe vessel was chartered for the carriage of 46,000 MT (10% more or less in owners’ option) of bulk iron ore for a voyage from Caldera, Chile, to North China.

Deadfreight claimThe owners’ claim for deadfreight arose when the loadport advised the maximum allowable draft was 11.18 metres, not 11.40 metres as warranted by charterers in the charterparty. The vessel loaded 46,107.787 MT, but the owners claimed for freight on 47,265 MT which they said could have been loaded, had the draft been 11.40 metres.

Charterers denied liability on the grounds that:

i) the port authority reduced the draft following an earthquake. The 11.40 metre reference was made in good faith following the exercise of due diligence, but the reason the actual draft was lower, was beyond their control; and

ii) the owners had breached the agency provisions by replacing the charterers’ load port agent. The charterers were unaware of the loading operations until the vessel had sailed, and were consequently prevented from negotiating the loading of more cargo.

The Tribunal held:

i) the evidence showed the charterers were aware of the maximum draft before and during loading, and had the opportunity to negotiate;

ii) even if the owners were in technical breach of the agency provisions, the charterers had not objected to the change of agents, nor suffered any loss;

iii) no force majeure or other exception existed in the charterparty to exclude losses caused by an earthquake’s aftermath; and

iv) the charterers were bound by their warranty of 11.40 metres, and having assumed the risk of any reduction of available draft, were liable for the deadfreight claimed.

Despatch claimThe charterers’ claim for despatch arose as the loading operations completed on 20 March - prior to the agreed laydays (1-10 April). Charterers relied on the Recap terms:

i) “Charterer is not bound to commence loading the vessel and, unless otherwise agreed, laytime at the port of loading shall not count before 1st April”; and

ii) “…the acceptance of the vessel by the Charterers outside the said lay days is subject to further consultation…”

It was common ground that no agreement regarding lay days was reached, and laytime never commenced. The charterers argued they were entitled to despatch for the full time allowed for loading, whereas the owners argued that no laytime was saved during loading, meaning no despatch was due.

The Tribunal rejected the owners’ argument as illogical, holding that the charterers should not be deprived of a right to despatch where loading completed prior to the commencement of laytime. The owners’ benefit from the early completion of loading (reflected by despatch paid to the charterers) remained the same whether laytime had begun to count or not.

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Shipping Newsletter February 2013Back to page 1

(continued from page 4)

CommentThis case is a reminder that, unless covered by an exclusion clause, parties remain responsible for breach of warranty where the cause of the breach is beyond their control. While the port’s reduction of the draft was beyond the charterers’ control, it was within their control to re-check the details in advance.

The finding on despatch is also of interest although the Tribunal did not adopt the Court of Appeal’s construction of “agreement” in The “FRONT COMMANDER” [2006], where the charterers’ requests for the vessel to tender Notice of Readiness, and berth, constituted their agreement to the early commencement of laytime. However, it should be noted that as this is an arbitration decision, it does not create a binding English law precedent.

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Shipping Newsletter February 2013

Is the meaning of laytime “always accessible”?Simon Jackson

Voyage charterparties sometimes contain a promise on the part of charterers that, upon arrival at the loading or discharging port, the vessel will be able to proceed directly to berth. The promise usually takes the form of the stipulation “reachable on arrival” or “always accessible”. Can owners claim damages if charterers break their promise, and how does such a breach impact on the laytime and demurrage provisions in the charterparty?

As to damages, once the vessel has tendered notice of readiness (“NOR”), and so become an “arrived ship”, no question of damages can arise in relation to the broken promise.1 Simply, laytime will start running and, if it expires before loading/discharging is completed, owners will be entitled to demurrage.

Where laytime starts running, and the charterers are still in breach of an “always accessible”/”reachable on arrival” warranty, the charterers will, however, not be entitled to rely on any exceptions to laytime whilst the breach persists2, even where the exception is “traditionally” an owners’ risk 3.

In London Arbitration 5/124, owners sought to test the limits of these principles. The vessel was chartered on an amended Synacomex form, for the carriage of sunflower seed meal in bulk, from Nikolaev, Ukraine, to Tarragona, Spain. The charterparty contained the notation “AAAA” (“always afloat, always accessible”). The vessel arrived at Nikolaev on 6 March 2012, and tendered NOR. There was then a delay of 11 days before berthing. Owners sought damages for detention and demurrage.

The claim for damages for detention failed, because the vessel had arrived, and so the charterers were entitled to use the laytime that they had paid for with the freight (i.e. a straightforward application of The “DELIAN SPIRIT” [1972]).

However, the calculation of laytime gave rise to difficulty because laytime was not expressed as a period of days/hours, but in “weather working days” which did not run when the weather prevented working, Saturdays, Sundays and holidays. Owners argued that charterers were not entitled to discount these days because they were an exception to laytime, to which charterers were not entitled, because they were in breach of the “always accessible” warranty.

The Tribunal disagreed, and found that the difference between such laytime clauses and exception clauses was that exception clauses stopped time running during periods covered by the clause, whereas with the laytime clauses, time did not run because it was outside the definition of such laytime. In the present case, therefore, time when the weather prevented working, Saturdays, Sundays and Holidays, were all outside the definition of the laytime allowed, such disallowed time being referred to as interruptions to laytime, rather than exceptions to laytime. So, where a charterer failed to meet his obligations to procure a berth that was always accessible/reachable on arrival, time which was outside the agreed definition of laytime, nevertheless, did not count against the charterers.

The distinction between “exceptions” and “interruptions” is not always obvious, and so, the Tribunal’s decision reinforces the need for practitioners to draft charterparties clearly to ensure that proper distinction is made between items that are intended to be interruptions to laytime, and items which are intended to be exceptions.

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1 The “DELIAN SPIRIT” [1972] 1 QB 103 2 The “LAURA PRIMA” [1982] 1 Lloyd’s Rep 1 3 The “FJORDAAS” [1988] 1 Lloyd’s Rep 336, The “SEA QUEEN” [1988] 1 Lloyd’s Rep 500 but cf The “KYZIKOS” [1987] 2 Lloyd’s Rep 122 4Reported in Lloyd’s Maritime Law Newsletter in October 2012

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Shipping Newsletter February 2013

NYPE46 off hire clause requires actual delay to the progress of the adventureMiranda Karali

In Minerva Navigation Inc v Oceana Shipping AG: Oceana Shipping AG v Transatlantica Commodities SA [2012], the court analysed the terms of an amended NYPE 1946 charterparty in order to assess whether the charterers’ claim for off hire was valid, and whether there had been an actual loss of time.

The ‘’ATHENA’’ carried wheat from Novorossiysk, Russia, to Tartous, Syria. On arrival the cargo was rejected as contaminated. The vessel then proceeded towards Libya, stopping and drifting for two weeks in international waters, 50 miles off Benghazi, while the issue of new bills of lading was being resolved. The charterers claimed that the vessel was off hire during the drifting period. They succeeded in arbitration and the owners appealed.

Mr Justice Walker allowed the owners’ appeal.

The off hire clause, clause 15, provided: ‘’...in the event of loss of time from...default of master...or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost..and all extra expenses directly incurred including bunkers consumed during period of suspended hire shall be for Owners’ account...’’

Analysing this clause involved two questions:

(a) whether clause 15 was engaged, and, if it was;

(b) what the consequences were.

(a) In this case, clause 15 was held to have been engaged, as the arbitrators had found that the service immediately required of the vessel was delayed due to default on the part of the Master preventing the vessel from proceeding to port.

(b) The arbitrators had, however, found as a fact that even if the vessel had proceeded directly to Benghazi, she would not have berthed earlier than she in fact did. The same bill of lading issues would have been present, and there was no reason to believe that those problems would have been resolved any ealier than they actually were. So time was not, in fact, ‘’thereby lost’’. As the charterers could not show that there had been a net loss of time in performing the chartered service overall, they could not place the vessel off hire.

The court’s decision makes good commercial sense. If there has been no actual delay, then the vessel will not go off hire under a NYPE 46 off hire clause. In other words, despite loss of a period of service, if the adventure is, in fact, not delayed, then hire will be due.

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Shipping Newsletter February 2013

Speed & Performance - Discrepancies between ships’ data and independent weather bureausLeon Alexander

In the current climate, we are seeing increasing attempts by charterers to withhold hire on the basis that the vessel did not meet its contractual performance warranty.

The law on the issue is well settled; since The “DIDYMI” [1988] it has been accepted that, if a vessel fails to meet its performance warranty in good weather, then it is also deemed to have underperformed during periods of bad weather. Therefore, charterers need only show the vessel underperformed (or over-consumed) during periods of good weather to claim underperformance for the duration of the voyage/charter.

How one measures the number of good weather days becomes complicated when there is a discrepancy between the weather and sea state conditions recorded in the vessel’s logbooks, and information from independent weather bureaus, as standard charterparty wordings are silent on which should take precedence.

Historically, the Master’s evidence has been preferred, unless he was obviously wrong. This is understandable given that he is on the bridge, and witnesses the weather and sea state continuously, whereas the independent weather information is often only measured daily, or twice daily, using satellite imagery.

However, increasingly, Tribunals are appreciating that the Master’s view is subjective, and the independent weather data is becoming more reliable.

In London Arbitrations 3/12 and 4/12, which both concerned the same charterparty dispute, charterers claimed underperformance, and overconsumption. The relevant clause stated (emphasis added):

“Evidence of weather conditions to be taken from the vessel’s deck logs and Independent Weather Bureau reports. In the event of a consistent discrepancy between the deck logs and Independent Bureau reports, then the matter to be referred to arbitration, if not settled amicably”.

The clause does not state which data is to be preferred, and the phrase “consistent discrepancy” is open to much interpretation.

The factual background was not unique; relying upon independent bureau information, charterers argued the vessel

underperformed during good weather on 7 of 20 voyages, and sought to apply that underperformance on all 20 voyages. Owners contested the underperformance by relying upon the passage reports that were taken from the log books.

The Tribunal found that there was a sufficiently consistent discrepancy (of, on average, over 0.5 on the Beaufort Scale) which entitled them to consider the independent information.

When analysing the data, the Tribunal found that the vessel’s documents were over six times more likely to record the wind force as greater than it was in the independent bureau information, and they decided that the independent bureau information was to be preferred.

In reaching this conclusion the Tribunal stated:

“Log entries are at times made with half an eye on the charter warranties.”

This is a surprisingly frank comment. The Tribunal is inferring that when completing log books, Masters may occasionally overstate the weather conditions in order to comply more agreeably with charter warranties; i.e. Masters may not necessarily be faithfully reporting the actual weather conditions - to the charterers’ detriment.

There was no reciprocal acknowledgment by the Tribunal that independent bureaus are instructed, and their information prepared on charterers’ behalf, often in order to support claims for underperformance.

It may be that the Tribunal was persuaded by the fact that the log books were so much more likely to record heavy weather, and that there was also some discrepancy between some of the ship’s documents themselves (on occasion the passage reports and deck logs recorded differing conditions). Nonetheless, this is still a surprisingly frank statement.

The completion of log books aside, this arbitration is a reminder of the importance of drafting clear speed/performance clauses that set guidance on when independent weather bureau information is to be preferred to log book entries.

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Shipping Newsletter February 2013

Recovering the costs of defending an arbitration in a charterparty chainJaime Albors

The case of Occidental Chartering Inc v Progress Bulk Carriers Ltd [2012] concerned an appeal against an arbitration award which arose out of an unsafe port claim involving a chain of charterparties.

BackgroundThe vessel “CHADA NAREE” had been time chartered to B by registered owners A. B had entered into an internal re-let with C, a company of the same group which then time chartered the vessel to D. Finally, D entered into a voyage charterparty with E. The charterparties were on materially identical terms. The subject of the arbitration was an unsafe port claim, commenced by the registered owners, which was then passed down the chain.

The arbitrations (heard concurrently) were between A and B; C and D; and, D and E. Crucially, no arbitration took place between B and C, the two being companies belonging to the same group.

The arbitrators found inter alia that there was a breach of the safe port warranty in each of the charterparties, and that the parties could recover down the chain (A–B–C–D–E) for damages and associated expenses. However, in respect of liability for costs for defending the claim in the C–D arbitration, C could not recover from D, as C had not incurred any liability for costs they could pass down the chain. The chain was “broken” since C had not been party to the arbitration with B.

Importantly, throughout the course of the arbitration, and until D had raised the issue of liability for costs, the arbitrators had been treating B and C as “Disponent Owners” (one and the same) for the purposes of passing liability down the chain.

C appealed.

The Commercial Court’s decisionThe Court found in favour of C.

It was clear that in reading the awards, for the purposes of the first award, C and B were treated as the same party. The arbitrators had themselves stated that it was clear that the charterparty was a document internal to the “Occidental organisation”. In addition, it was undisputed by the parties that the three charterparties were back-to-back in respect of the material provisions.

Furthermore, in the view of Cooke J, there was a “basic underlying fallacy” in the arbitrators’ award. The claim made by C against D was one in damages for breach of safe port warranty. If the arbitrators had found that E was liable to D, D was liable to C, and B liable to the registered owners, they had necessarily found that C was “sub-silentio” liable to B, because, if not, C could not have recovered damages and associated expenses from D. “The same breach which gave rise to damages in respect of the cost of repairs and associated expenses, gives rise also to damages in respect of the costs of resisting the registered owner’s claims which are passed on down the line of charterparties. There is no difference in character between these heads of damages.”

This decision should be welcome as it sets aside arguments of a technical nature in favour of a more pragmatic, commercial interpretation. It would now seem that where there is an internal re-letting between two companies of the same group, on back-to-back terms, as part of a chain of charterparties, liability can be passed up and down the entire chain regardless of whether or not an arbitration has been held between the same group companies.

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Shipping Newsletter February 2013

The meaning of “as is”Marko Kraljevic

Norwegian Saleform 1993 (“NSF 93”) currently remains the wording of choice for parties to most ship sale and purchase transactions. The recent landmark High Court decision in The “UNION POWER” [2012] has challenged the perceptions of some practitioners regarding the application of the Sale of Goods Act 1979 (“SOGA”) implied terms to NSF 93, and is therefore of great significance to the market.

The factsThe dispute arose following the sale of the 1994 built vessel “UNION POWER” for US$7 million in 2009. The vessel and her records had been inspected by the buyers in the usual way, on 18 August 2009, and the buyers’ surveyor found nothing of significance. The parties entered into a Memorandum of Agreement (“MOA “) based on NSF 93, on 4 September 2009, which by clause 11 stated that the vessel was sold “as she was at the time of inspection”. The vessel was delivered to the sellers on 1 October 2009, at Tuzla, Turkey. Following drydock repairs and special survey, the vessel sailed from Tuzla on a ballast voyage. Only some 30 hours after departure from Tuzla, the main engine broke down. Further investigation revealed that the no.1 crankpin bearing had failed, and that the crankpin was significantly undersize and oval.

The buyers argued that a term as to satisfactory quality was implied into the MOA by virtue of section 14(2) of SOGA, and that the sellers were in breach of that term. The sellers, on the other hand, maintained that the section 14(2) implied term was excluded because this was inconsistent with the stipulation in clause 11 that the vessel was sold “as she was at the time of inspection”.

The decisionAt arbitration, the tribunal rejected the sellers’ argument, holding that the implied term as to satisfactory quality was to be implied into the MOA, that the sellers were in breach of that term and that the buyers’ claim therefore succeeded.

The sellers appealed and, after hearing detailed argument on the point, the High Court upheld the approach of the tribunal. Flaux J concluded that the words “as she was”, in the first sentence of clause 11, were merely a necessary part of a sentence which recorded the obligation to deliver the vessel in the same condition as she was when

inspected but that this said nothing about what the sellers’ obligations were, either on inspection or delivery, as regards the quality of the vessel, and as such they could not exclude the implied term as to satisfactory quality under section 14(2) of SOGA.

CommentAlthough the Court’s finding is of considerable significance to users of NSF 93, as the judge recognised, it is already common practice for additional language to be incorporated into MOAs based on NSF 93, with a view to excluding SOGA implied terms. Flaux J noted that, in order to be effective, such amendments must either expressly exclude the SOGA implied terms, or amount to an unequivocal statement of an alternative regime as to quality “which was wholly inconsistent with the section 14(2) implied terms as to satisfactory quality, such as an entire agreement clause.”

The decision may also have a wider impact on any contract for the sale of goods on “as is, where is” or equivalent terms. This is because Flaux J considered the notion of “as is sales” generally, and expressed the provisional view that, in the absence of proven market practice, a mere stipulation that goods are sold on an “as is basis” may be insufficient to exclude SOGA implied terms. In particular, he indicated that such words may operate to exclude only a right to reject the goods but not the right to sue for damages if they are found to be of unsatisfactory quality.

Clyde & Co acted for the successful buyers in the “UNION POWER” case.

This article was first published in Fairplay, 7 February 2013 issue.

For a more detailed analysis of the case, please click here to read our full update.

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Shipping Newsletter February 2013

Shipbuilding guarantees: latest decisionsTom Kelly

The Court of Appeal recently considered the wording of a payment guarantee issued on behalf of the buyers, under a shipbuilding contract, in the case of Wuhan Guoyo Logistics Group Co Ltd & Others v Emporiki Bank of Greece SA [2012].

The dispute centred on whether the document was a standard guarantee, dependent on the buyers’ liability to pay, or whether it was an “on-demand” bond, and could be called on regardless of the underlying shipbuilding contract.

The document was called a “payment guarantee”, and contained the words: “In the event that the BUYER fails to punctually pay the second instalment guaranteed hereunder…we shall immediately pay to you or your assignee the unpaid 2nd instalment…” The document also stated in Clause 1 that the bank guaranteed “the due and punctual payment by the BUYER”. However, payment was to be made “upon receipt by us of your first written demand” and was also expressed to be immediate. Clause 7 further provided that the bank’s obligations were not affected by any dispute between buyer and seller.

The Court of Appeal, overruling the decision at first instance, found that the document was an on-demand bond, and that the bank was required to pay on the seller’s written demand, without reference to the obligation of the buyer under the shipbuilding contract. The Court referred to Paget’s Law of Banking, which stated:

“Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay ‘on demand’ (with or without the words ‘first’ and/or ‘written’) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.”

The decision of the Court of Appeal should be no great surprise in that it brings the construction of payment guarantees broadly into line with that of refund guarantees in shipbuilding contracts, as established by Meritz v Jan de Nul [2011]. Following Meritz, it is well established in the industry that wording of this sort, with reference to payment “on written demand” is likely to establish the document as an on-demand bond, under which a guarantor must, absent bad faith, pay the guaranteed sum without reference to the underlying contract. Buyers, as well as sellers, should therefore take care not to be caught out by a claim over disputed sums being presented under the guarantee, unless arbitration is commenced within any time limit set out in the guarantee.

Refund guarantees were themselves considered in Wuhan Ocean Economic & Technical Cooperation Co Ltd & Others v Schiffahrts-Gesellschaft “HANSA MURCIA” mbH & Co KG [2012]. Under an addendum agreeing an extension of the delivery date under the shipbuilding contract, the buyers undertook to extend the validity of the refund guarantee applicable to the contract from 30 June 2010 to 31 May 2012. The guarantee also provided that where arbitration was commenced prior to delivery of the vessel, the guarantee validity would be extended to 60 days following any award.

By 28 June 2010, the sellers had not yet secured the extension to the refund guarantee in accordance with the addendum, so the buyers purported to hold them in repudiatory breach of the contract, and terminated the shipbuilding agreement. The buyers alleged that the sellers were under an implied obligation to secure the extension within a reasonable time, and their failure was sufficiently serious a breach as to justify termination of the contract.

(continued on page 12)

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Shipping Newsletter February 2013

(continued from page 11)

On appeal from arbitrators, Cooke J considered that there was an implied term requiring the extension within a reasonable time, in order to provide the buyers with certainty as to the security of their advance instalments. If the sellers were allowed to delay obtaining an extension up to the date of expiry of the refund guarantee, that would be too late for the buyers to protect themselves (other than by commencing arbitration).

The Court then turned to the nature of the implied term, and whether its breach entitled buyers to terminate. After brief consideration, Cooke J held that it was an innominate term, a breach of which had the potential to deprive the buyers of substantially the whole benefit of the contract. The question, therefore, was: had that happened in this case?

Overall, Cooke J thought not. It was clear, under the terms of the guarantee, that its validity could be extended, even after it had otherwise expired, provided arbitration was commenced prior to delivery of the vessel. That being so, the buyers’ security was not seriously imperilled because they could commence arbitration, and would then have 60 days, following any award, to claim under the guarantee.

As with many other situations, it is clear that buyers need to take great care before “jumping” and terminating a shipbuilding contract for repudiatory breach. Unless there is specific wording making the renewal of a refund guarantee a condition, or providing for sanctions where the extension is not procured, then, where buyers have some form of protection on expiry (as in this case), the Court may well find that any termination by buyers was wrongful.

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Shipping Newsletter February 2013

Shipping industry feels force of EU Sanctions against IranPatrick Murphy

On 23 December 2012 the restrictive measures against Iran contained in Council Regulation (EU) No 1263/2012 came into force. Whilst extending the restrictive measures in areas already legislated for, such as over the transfer of funds and financial services, it introduces new prohibitions which affect the shipping industry in a number of important ways. In particular, ship builders and repairers, classification societies and surveyors and charterer/operators will be affected by prohibitions against dealing with Iranian persons.

Ship builders/repairersThe amended regulation now prohibits the direct or indirect sale, supply, transfer or export to any Iranian person, entity or body or for use in Iran of “key naval equipment or technology” for use in ship building, maintenance or refit or used in the construction of oil tankers. The equipment/technology is listed in detail in a new annex to the regulation by reference to the harmonised system code, but includes: marine propulsion engines; outboard motors; steam turbines and parts of steam turbines for marine propulsion; ship’s or boat’s propellers; and direction finding compasses and other navigational instruments for use in the maritime industry.

As with previous iterations of the EU sanctions against Iran, the direct or indirect provision of technical assistance, brokering services, financing or financial assistance in relation to those goods or related to the provision, manufacture or maintenance of those goods to an Iranian person, entity or body, or for use in Iran, is also prohibited.

There are limited exceptions in respect of providing such goods to someone who is not an Iranian person, entity or body where a vessel has been forced into an Iranian port or territorial waters by reason of force majeure. There are also exceptions in respect of the provision of these goods and services until 15 February 2013 in respect of contracts concluded before 22 December 2012.

However, the effect upon the shipbuilding/repair industry could be significant. Suppliers of such goods and services who are subject to the regulation will now have to conduct extensive due diligence on their customers to ensure that they are not being provided to an Iranian person, entity or body.

The definition of an Iranian person, entity or body is sufficiently broad that this could be a real concern. It includes not just the state of Iran or a corporate entity registered in Iran, but also any legal person inside or outside Iran which is controlled directly or indirectly by another Iranian person. That could mean that an entity in a jurisdiction without any apparent connection to Iran, but which is controlled indirectly (perhaps through a series of offshore holding companies) by an individual or company in Iran is itself an Iranian person. The provision of any of the prohibited naval equipment/technology to that company by a person subject to the regulation would be a breach of the regulation.

To continue reading the full update, please click here

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14

Shipping Newsletter February 2013

Lucinda Roberts LondonE: lucinda.roberts@clydeco.com

Trudy Grey LondonE: trudy.grey@clydeco.com

Leon Alexander LondonE: leon.alexander@clydeco.com

Jamie Albors LondonE: jamie.albors@clydeco.com

Simon Jackson LondonE: simon.jackson@clydeco.com

Miranda Karali LondonE: miranda.karali@clydeco.com

Marko Kraljevic LondonE: marko.kraljevic@clydeco.com

Tom Kelly LondonE: thomas.kelly@clydeco.com

Our team of 170 marine lawyers provides legal expertise across jurisdictions across all key maritime regions. Our team covers:

– Marine finance – Owners, operators and P&I Clubs – Shipbuilding and offshore construction – Marine insurance & cargo – Charterparties, International trade and commodities

– Global governance (risk management, regulation, sanctions)

– Dispute resolution and international arbitration – Ports and terminals

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Meet the authors

Patrick Murphy DubaiE: patrick.murphy@clydeco.com

www.clydeco.comClyde & Co LLP

Further advice should be taken before relying on the contents of this Newsletter.

Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary.

No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP.

Clyde & Co LLP is a limited liability partnership registered in England and Wales. Authorised and regulated by the Solicitors Regulation Authority.

© Clyde & Co LLP 2013

CC002733- February 2013

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