shipping e-brief summer 2014

SHIPPING E-BRIEFSUMMER 2014

CONTENTS

SHIPPINGAre Owners bound to give credit for benefit obtained following Charterers’ repudiation? 2

The correct test for anticipatory breach by renunciation 4

Court of Appeal gives broad meaning to “charterers’ agents” in off-hire clause 5

Court clarifies that enhanced statutory interest rate not applicable to charterparties with no significant connection to UK 7

A tough lesson on guarantee wordings: triple-check them! 8

Package limitation – can a cargo claimant “pick and mix”? 10

Charterer who expressed intention to perform in future nonetheless held to be in repudiatory breach 11

Towing the line – competing jurisdiction clauses 13

Underperformance disputes under time charterparties 14

Berth damage 16

Court upholds LMAA tribunal’s jurisdiction to rule on costs 18

SHIP FINANCELoan agreement relating to yacht construction contract construed as “on demand” 20

PRC Rules relating to the provision of cross-border security are relaxed: new SAFE regulations come into force 21

NEWS AND EVENTS

02 SHIPPINGE-BRIEF, SUMMER 2014

SHIPPING Are Owners bound to give credit for benefit obtained following Charterers’ repudiation?

Fulton Shipping Inc v. Globalia Business Travel S.A.U. (New Flamenco) [2014] EWHC 1547 (Comm)

In a significant case regarding measure of loss and mitigation of damages, the Commercial Court considered whether Owners, who were claiming damages for the Charterers’ early redelivery and repudiation of a time charterparty, had to give credit for the capital value of the vessel, sold by the Owners upon the Charterers’ repudiation for a greater sum than the value of the vessel at the contractual date of redelivery under the charterparty. Following a review of several leading authorities on this issue, the Commercial Court held that no such credit should be given since the benefit obtained by the Owners in realising the capital value of the vessel was not legally caused by the Charterers’ breach.

The background factsThe vessel was chartered under a charterparty on an NYPE form dated 13 February 2004. A dispute arose between the Owners and the Charterers as to whether they had agreed a binding extension to the term of the charterparty.

The Charterers maintained that they were entitled to redeliver the vessel by 28 October 2007, whilst the Owners contended that the Charterers could only lawfully redeliver the Vessel on 2 November 2009. The vessel was redelivered on 28 October 2007. Shortly before redelivery of the vessel, the Owners entered into an agreement to sell the vessel.

The Owners commenced arbitration against the Charterers. The arbitrator held that there had been an agreement to extend the charterparty and that redelivery by the Charterers on 28 October 2007 was a repudiatory breach. It is the question of the quantum of Owners’ claim, however, that is of particular interest.

The numbers:

Net loss of profit for remaining period of the charterparty: €7,558,375

Proceeds for sale of vessel in 2007: US$23,765,000

Anticipated sale proceeds of vessel had it been sold in November 2009: US$7,000,000

In the arbitration, the Owners claimed damages in the amount of €7,558,375 for net loss of profit, which the Owners claimed they would have earned had the vessel not been redelivered early. The Charterers argued that credit should be given for the US$16,765,000 difference in sale proceeds which the Owners gained as a result of selling the vessel in 2007 rather than 2009. Charterers’ position was that the sale had been a mitigating act and they were, therefore, entitled to the benefit of that act.

The arbitrator found that the sale of the vessel in October 2007

was caused by the Charterers’ breach and was made in reasonable mitigation of the Owners’ damages. There was therefore no reason why capital savings could not and should not be taken into account when assessing the net loss suffered by the Owners. On the numbers set out above, this would have extinguished Owners’ claim. The Owners appealed the arbitrator’s finding to the Commercial Court.

The Commercial Court decisionThe question of law before the Commercial Court was whether an owner claiming damages for a charterer’s repudiation of a time charterparty must give credit for the capital value of the vessel sold at the time of the repudiation for a greater sum than the value of the vessel at the contractual date of redelivery. The Commercial Court held that, on the facts found by the arbitrator, and applying the legal principles outlined in full in the judgment, the Owners were not required to give credit to the Charterers for any benefit in selling the vessel in October 2007 (relative to its value in November 2009), because this benefit was not legally caused by the Charterers’ breach.

In reviewing the relevant legal principles and authorities, the Court (Mr Justice Popplewell) took as the starting point the fundamental and uncontroversial principle that damages for breach of contract are intended to put the innocent party in the financial position it would have been in had the contract been performed; known as the “compensatory principle”. However, not all damages are recoverable and this principle is subject to considerations of causation, such that where a claimant’s losses are factually or legally too remote, they will not be recoverable.

The Commercial Court indicated that there is no general rule that determines when a party in breach may obtain credit for a benefit received following his breach of contract. The Court did, however, summarise a number of principles which emerged from its consideration of the numerous authorities, including The Elena D’Amico [1980]. In essence, the Court stated as follows:

1. In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking necessary that the benefit is caused by the breach. It is not sufficient if the breach has merely provided the occasion for the innocent party to obtain the benefit, or merely triggered his doing so.

2. Whether a benefit is caused by a breach is a question of fact and degree that must be answered by considering all the relevant circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence.

3. The fact that a mitigating step by way of action or inaction may be a reasonable and sensible business decision with a view to reducing the impact of the breach does not of itself render it one that is sufficiently caused by the breach. A step taken by the innocent party that is a reasonable response to the breach and designed to reduce losses caused thereby may be triggered by a breach but not legally caused by the breach. Benefits flowing from a step

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taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach.

4. Where, and to the extent that, the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit.

5. There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated, but such a difference in kind may be indicative that the benefit is not legally caused by the breach.

6. Although causation between breach and benefit is generally a necessary requirement, it is not always sufficient. Considerations of justice, fairness and public policy have a role to play and may preclude a defendant from reducing his liability by reference to some types of benefit or in some circumstances even where the causation test is satisfied. In particular, benefits do not fall to be taken into account, even where caused by the breach, where it would be contrary to fairness and justice for the defendant wrongdoer to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has done or acquired for his own benefit.

In the present case, applying the principles above, the Court found that the fall in the value of the vessel between the relevant two dates was not caused by the Charterers’ breach but by the drop in the market as a result of the financial crisis. The effect of the drop in the market on the Owners was also not caused by the Charterers’ breach but by the decision of the Owners to sell the vessel. The decision to sell the vessel was legally independent of the Charterers’ breach. That breach only provided the context or occasion which enabled the Owners to sell the vessel and was therefore the trigger not the cause of the benefit obtained by the Owners.

The Court also held, on policy grounds, that it would be unfair and unjust to allow the Charterers to benefit from the Owners’ decision to sell the vessel at an opportune time when the market conditions favoured them, since this would allow the Charterers to appropriate the benefits of the Owners’ own investment in the vessel.

In addition, the Court found that the sale of the vessel was a type of transaction that the Owners were able to enter into irrespective of the Charterers’ breach of the charterparty. For example, if the Charterers had not repudiated the charterparty, the Owners may have chosen to sell the vessel on terms which enabled the new owner to perform the remainder of the charterparty.

On the basis of the above findings, the Court allowed the appeal, holding that the arbitrator had erred in law. In particular, the arbitrator’s finding that the sale of the vessel was caused by the Charterers’ breach and in reasonable mitigation of loss was not legally sufficient to establish the causal link between the Charterers’ breach and the benefit obtained by the Owners.

The Commercial Court has granted the Charterers leave to appeal to the Court of Appeal.

CommentLike many other cases that arose around the time of the global financial crisis, this case involves the Charterers’ repudiation of their charterparty with the Owners and the subsequent assessment of the Owners’ damages. This case is, however, unusual compared to many others since it involves an assessment of benefits obtained by the Owners from a sale of the vessel at the time of the Charterers’ repudiation, on which there was no directly applicable authority. Further analysis by the Court of Appeal of the issues under consideration would be welcomed, given the important implications the case may have on the law on measure of loss and mitigation of damages in the context of repudiatory breach and termination of contracts.

Rania TadrosPartner, [email protected]

Pavlo SamothrakisSolicitor, [email protected]


The correct test for anticipatory breach by renunciation

Geden Operations Ltd v. Drybulk Handy Holdings Inc (Bulk Uruguay) [2014] EWHC 855 (Comm)

The Commercial Court recently considered the principles applicable to anticipatory breach of contract in a charterparty dispute that came before the Court on appeal from a London arbitration award.

The background factsThe Disponent Owners of the vessel chartered it out on an amended NYPE form for about 35 to 37 months. The charterparty incorporated a Conwartime 2004 clause and a BIMCO piracy clause, amended (by deletion of paragraphs a and b) to reflect the market practice where it was intended that the vessel could transit the Gulf of Aden (“GOA”) without Owners’ prior consent (“GOA OK”). Disponent Owners knew from the negotiations with Charterers that the “GOA OK” status was important to the Charterers.

The head charterparty between the Disponent Owners and the Head Owners did not include such a provision but did include a Conwartime clause. Accordingly, the Disponent Owners needed the Head Owners’ consent for any transit of the GOA. When it was indicated to Charterers, just before the vessel’s delivery and her maiden voyage, that prior consent would have to be obtained to transit the GOA on any occasion, they treated this as an anticipatory and/or renunciatory breach and terminated the charterparty.

Disponent Owners accepted Charterers’ purported termination as itself a repudiation of the charterparty and sought to recover their damages in arbitration.

The arbitration awardThe Tribunal considered whether Charterers were obliged to seek and obtain permission from the Disponent Owners on every occasion when they wished the vessel to transit the GOA. The majority of the Tribunal decided that, on a true construction of the charterparty, the GOA transit was subject to the Disponent Owners’ consent and, therefore, the Disponent Owners’ rights and obligations were not back to back with those in the head charterparty in this respect. Nevertheless, the majority arbitrators decided that Charterers were not entitled to terminate the charterparty as Disponent Owners had not evinced an intention not to perform, nor declared that they would be unable to perform their obligations under the charterparty. The Disponent Owners’ behaviour simply conveyed to Charterers that permission to transit the GOA would be necessary and did not involve a refusal to comply with an order to transit the GOA.

The majority arbitrators further held that the consequence of the Disponent Owners’ refusal to allow the vessel to transit the GOA freely did not deprive the Charterers of substantially the whole benefit of the contract, since the possibility that the vessel might have been unable to transit the GOA at some stage in the foreseeable future could not be regarded as having any significant effect on her earning capacity at the date of delivery, particularly given market conditions and her wide trading limits. For example, contemporaneous evidence showed that Charterers would have traded the vessel initially in the Far East

and that they regarded the “GOA OK” status to be worth no more than US$1,250 per day.

Accordingly, the Charterers were found to have repudiated the charterparty and Disponent Owners were awarded damages assessed on the basis of the difference between charter rate and market rate. Charterers appealed on the grounds that the majority arbitrators had made an error of law. The Commercial Court dismissed the appeal.

The Commercial Court decisionThe Commercial Court was asked to consider the following:

1. In order to demonstrate that the Disponent Owners had evinced an intention not to be bound by the charterparty, was it necessary to show that a reasonable man would have concluded that Head Owners and hence Disponent Owners would have refused to comply, or comply promptly with an order to transit the GOA?

2. Did the stance adopted by Disponent Owners go to the root of the contract?

The first questionCharterers argued that the majority of the Tribunal made an error of law in deciding that, in order to demonstrate that the Disponent Owners had evinced an intention not to be bound by the charterparty, it was necessary to show that a reasonable man would have concluded that the Disponent Owners would have refused to comply or comply promptly with an order to transit the GOA if and when made. Rather, the very act of making plain that consent was dependent upon the choice of Head Owners was itself sufficient to evince the necessary intention. Whether or not Head Owners would in fact grant permission was a speculative exercise which was irrelevant. By contracting with Head Owners on terms that were not back to back in respect of GOA consent, the Charterers alleged that the Disponent Owners had put it out of their power and control to perform their obligations under the charterparty.

Mr Justice Popplewell disagreed and stated that “this was an attempt to appeal a finding of fact by dressing it up as an issue of law”. Citing Universal Carriers v. Citati [1957], the Judge stated that the conduct that would be sufficient to entitle the other contracting party to treat himself as discharged from further performance would either be:

> renunciation, i.e. words or conduct evincing an intention by the contracting party no longer to be bound by his contractual obligations; or

> self-induced impossibility, i.e. conduct that puts it out of the party’s power to perform his contractual obligations.

In both cases, the inevitability of non-performance entitled the innocent party to treat the contract as at an end prior to the time for performance. However, unlikelihood or uncertainty in future performance do not suffice. More particularly, the uncertainty resulting from a party who has made his performance dependent on a discretion to be exercised by a third party does not put that party in anticipatory breach. This was a question of fact, and the Charterers would have to wait to see whether there would be a breach when the time for performance would have arisen.

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Furthermore, in cases both of renunciation and self-induced impossibility, the breach of contractual obligations must be of such character that in the event that it occurred after the time of performance had arisen, the other party would be able to treat himself as discharged from further performance. In essence, the breach must be one of condition or of an innominate term going to the root of the contract.

The second question The Court held that the alleged anticipatory breach i.e. the failure to comply promptly with a legitimate voyage instruction if and when made by the Charterers, given that prior consent would have to be sought by the Head Owners, was not a breach that would go to the root of the time charter, even though the “GOA OK” status had been expressed to be a “deal breaker” and Disponent Owners knew it was important to Charterers.

Relying on the Court of Appeal decision in Telford Homes (Creekside) Ltd v. Ampurius Nu Homes Holdings Ltd [2013], the Judge stated that, when one examines whether an allegedly anticipatory breach would have deprived one party of substantially the whole benefit of the charterparty for the remainder of the contractual period, it was necessary to look at the question prospectively at the date of the anticipatory breach, and then ask whether the party’s conduct deprived the other party of the whole of that benefit.

The Judge accepted Disponent Owners’ arguments that the benefit that the Charterers lost was the opportunity to market the vessel at “GOA OK” in the longer term. He considered that the findings of the majority arbitrators as to the vessel’s intended use in the foreseeable future by the Charterers, the competitive disadvantage of being unable to market the vessel as “GOA OK”, the value the Charterers put upon the competitive disadvantage and the ability to trade the vessel elsewhere, were all supportive of the factual conclusion that the Charterers were not deprived of substantially the whole benefit of the charterparty.

CommentThis is an interesting judgment which deals with a legally subtle yet practical point. The decision is important as it clarifies that there are no special rules for time charters within the general law on breach. In the context of a charterparty chain, the fact that a sub-charterparty is not back to back with the head charterparty in certain respects would not necessarily put disponent owners in repudiatory breach. The judgment also confirms that, in the context of renunciation, anticipatory breach and termination of a contract for repudiation, a lot will turn on factual points and a tribunal’s or court’s decision may vary, depending on the facts of each case.

Ince & Co acted for the successful Disponent Owners. In case of any query, please contact Jamila Khan.

Jamila KhanPartner, [email protected]

Stavroula MylonaSolicitor, [email protected]

Court of Appeal gives broad meaning to “charterers’ agents” in off-hire clause

NYK Bulkship (Atlantic) N.V. v. Cargill International S.A. (Global Santosh) [2014] EWCA Civ 403

The Court of Appeal recently considered the meaning of “charterers’ agents” for the purposes of a proviso to an off-hire clause in a case involving the arrest of a vessel that was time chartered on the NYPE form.

The background factsBy a charterparty dated 11 September 2008 on an amended NYPE form, NYK time chartered the Global Santosh to Cargill. Cargill sub-chartered the vessel to Sigma, by way of a voyage charter, for a shipment of cement sold by Transclear, also a sub-charterer of the vessel under a voyage charter, to IBG. Under the contract of sale, IBG was responsible for the unloading of the cargo and was liable to pay Transclear demurrage if unloading of the cargo was delayed.

Upon arrival at the discharge port, the vessel was held at anchor due to the breakdown of IBG’s unloader. Over two months later, she was eventually called in to berth. However, Transclear had obtained an Arrest Order on the cargo the day before to secure a claim for demurrage against IBG for $1,560,000. The Order prohibited any attempt to remove the cargo from the vessel, but also mistakenly named the vessel as the object of the arrest. Discharge only began nearly a month later.

Cargill withheld hire for the period during which the vessel was under arrest. NYK sought the payment of hire and the dispute was submitted to arbitration.

Arbitration and Commercial Court decisionsClause 49 of the charterparty provided as follows:

“Should the vessel be captured or seizured or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the Charterers or their agents.”

The question in issue was therefore whether the arrest was “occasioned by any personal act or omission or default of the Charterers or their agents”, i.e. whether it had been caused by the personal act or omission or default of Transclear or IBG, as Cargill’s agents. If the answer was ‘yes’, then Cargill was not entitled to put the vessel off-hire under Clause 49. If the answer was ‘no’, the proviso did not apply and Cargill was right to put the vessel off-hire for the period in question.

The arbitral Tribunal, by a majority, found that neither Transclear nor IBG were acting as Cargill’s agents and therefore the proviso did not apply. This decision was reversed by Mr Justice Field on appeal. The Judge found that IBG had become Cargill’s delegate of the obligation to unload under


the charterparty by reason of the sale contract. For the purposes of Clause 49, the failure to unload within the lay days was an act, omission or default that occurred in the course of performing the obligation to discharge as delegated to it by Cargill.

The Court of AppealThe Court of Appeal was unanimous – 3:0. The judgment was given by Lord Justice Gross, a judge with long experience of shipping law. He dismissed the appeal and upheld Mr Justice Field’s ruling in favour of NYK. The ship was on-hire for the period of the arrest. The proviso did apply. However, he reached his view on a different basis from Mr Justice Field.

He agreed that the proviso applied to agents in the broad sense. As he put it, you look at who the actors are. Delegates of cargo can be agents for the purpose of the proviso, irrespective of the precise contractual relationship between them. They can include sub-charterers, sub-sub-charterers and receivers.

But Lord Justice Gross took a different line from Mr Justice Field on the relevance of the acts covered by the proviso to Clause 49. In his view, there was nothing there to restrict the application of Clause 49 to acts occurring in the course of the performance by the delegate of the delegated task. It was enough that the act of the delegate occasioned the arrest or detention of the vessel.

The Court of Appeal was in no doubt that on the act/actor analogy, the vessel’s arrest had been occasioned by an act or default of an agent of Cargill. The relevant actors were Transclear as well as IBG. Lord Justice Gross approached things by looking at which side of the line the problem fell on. Was it on NYK’s side or Cargill’s? He concluded that it fell on Cargill’s side of the line. It involved Cargill’s delegate. NYK was not involved in the dispute between Transclear and IBG about the delay. True, Cargill was under no obligation either to discharge the vessel in a given time – their charter was a time charter. However, the proviso was not limited to Cargill’s contractual obligations; what mattered was that the dispute arose out of their trading arrangements for the vessel. The general scheme of Clause 49 provided for the vessel to be on-hire or off-hire depending on which side of the line things fell.

CommentThis decision gives a broad meaning to “charterers’ agents” under a clause like this. It can include the whole chain of parties, down to the sub-charterers and the receivers. It remains to be seen how and to what extent this broad reading will be adopted for other provisions of dry time charters.

The decision will be welcomed by shipowners. Each case will depend on its facts, but the balance now seems to have shifted towards a more equal approach. The risks of the arrest will be borne by the party who is the most closely related to it – depending on which side of the line the matter falls.

The Court of Appeal’s reasoning was based on the approach of the Supreme Court recently in the Rainy Sky case, in which Ince acted for the successful shipowners. The Supreme Court ruled that where a contract term is capable of two meanings, you should prefer the meaning which is more consistent with business commonsense – and that, in doing so, you should look at (a) the clause; (b) the contract as a whole; and (c) its commercial context. That is what Lord Justice Gross did in the Global Santosh.

Florence PreuxSolicitor, [email protected]

Jonathan ElveyPartner, [email protected]


Court clarifies that enhanced statutory interest rate not applicable to charterparties with no significant connection to UK

Martrade Shipping & Transport GmbH v. United Enterprises Corporation (MV Wisdom C) [2014] EWHC 1884 (Comm)

The principal point of interest in this charterparty dispute was whether the Owners, who succeeded in arbitration proceedings in respect of their claim for unpaid hire, were entitled to interest on the amount recovered from the Charterers at the statutory rate provided for by the Late Payment of Commercial Debts (Interest) Act 1998 (the “1998 Act”). In broad terms, the 1998 Act applies to qualifying debts arising under commercial contracts for the supply of goods and services and implies a term into such contracts that such debts are to carry statutory interest, which is currently set at 8% above base rate.

The Tribunal awarded the Owners an enhanced interest rate pursuant to the 1998 Act. The Charterers appealed to the Commercial Court and the Court was asked to consider the applicability of the 1998 Act where a charterparty contract incorporates an express choice of English law and London arbitration.

This issue has been raised numerous times in a number of London arbitrations. Allowing the Charterers’ appeal, the Commercial Court has now confirmed that a real connection with England must be shown to establish that English law would have applied to the parties’ contractual obligations irrespective of the parties’ express choice of law and jurisdiction. In particular, the Court found that an English law and London arbitration clause is not a relevant connecting factor for the purposes of the 1998 Act.

The background factsThe Wisdom C (the “vessel”) was owned by a Marshall Islands company. She was entered with the Panamanian Registry and was managed by a Liberian company registered and operating from Greece. The vessel was chartered to a German company, for a time charter trip via the Mediterranean/Black Sea. Clause 48 of the charterparty provided for English law and London arbitration. Hire was paid in US dollars to a bank account in Greece. The brokers involved were Greek and the charterparty recorded that it was made and concluded in Antwerp.

The arbitration awardA number of disputes between the parties were referred to LMAA arbitration in London. The disputes included a claim by Owners for unpaid hire. Charterers contended that they were entitled to make lawful deductions from hire for alleged off-hire.

The Tribunal found that the Charterers’ deductions from hire had not been made on reasonable grounds and in good faith and that the Owners were entitled to an award in respect of the principal amount of hire claimed. The Tribunal further found that the Owners were entitled to interest on that sum and awarded interest at the rate of 12.75% per annum, being 4.75%, the official rate in June 2005, plus the enhancement of 8%, under the 1998 Act.

In their award the Tribunal considered the provisions of s.12(1) of the 1998 Act which provides:

“This Act does not have effect in relation to a contract governed by a law of a part of the United Kingdom by choice of the parties if:

(a) There is no significant connection between the contract and that part of the United Kingdom; and

(b) But for that choice, the applicable law would be a foreign law.”

Addressing the issue of the applicable law under s.12(1) of the 1998 Act, the Tribunal considered various factors and found that the choice of London arbitration “would be a very powerful indication in favour of English law”. The Tribunal also considered other factors such as the use of the English language, the fact that the vessel’s logs to which the Charterers were entitled were in English, that GA was to be adjusted in London (and English law was to apply to it), that the vessel was entered with the London P&I Club and that the Inter-Club Agreement was incorporated, which would be subject to English law. The Tribunal found that these considerations “are wholly persuasive in favour of a conclusion that English law would have governed absent an express choice” and concluded that the 1998 Act applied.

The Commercial Court decisionOn appeal, the Charterers contended that the 1998 Act had no application in that, contrary to the Tribunal’s findings, there was no significant connection between the contract and the UK as required under s.12(1)(a) of the 1998 Act.

There were two issues for consideration:

1. The first issue was whether the factors relied upon by the Tribunal – and, in particular, the London arbitration clause – were capable of amounting to significant connecting factors such as to make the 1998 Act applicable.

2. The second issue was whether – absent the express choice of English law in the clause – the application of art. 4 of the Rome Convention (given the force of law in England by the Contracts (Applicable Law) Act 1990) led to the conclusion that the charterparty would be governed by foreign law such as to make the 1998 Act inapplicable.

The Commercial Court allowed the appeal.

On the first issue, Mr Justice Popplewell reversed the arbitrators’ finding and held that the London arbitration clause was not a relevant connecting factor for the purposes of s.12(1)(a) of the 1998 Act. In fact, the Court found that such clauses are irrelevant for the purposes of the requirements under s.12 (1)(a). Section 12 of the 1998 Act provides that, where parties to a contract with an international dimension have chosen English law as the governing law of the contract, the choice of English law is not sufficient to attract the application of the 1998 Act. The 1998 Act attracted the application of the penal interest rate provisions only if either or both of the two requirements under s.12(1) were fulfilled.

The Court stated that factors that provide a “significant connection” must connect the substantive transaction itself to England. Such factors might include the following: (a) the place of performance of obligations under the contract is England; (b)


the nationality of the parties or one of them is English; (c) where the parties are carrying out some relevant part of their business in England; or (d) where the economic consequences of a delay in payment of the debts may be felt in the UK.

On the second issue, art. 4(2) of the Rome Convention provides in clear terms that the governing law of the charterparty is to be determined by the principal place of the business of the owner. In this case, the Owner was a one-ship company incorporated in a jurisdiction of convenience and the ship was managed by another company which has its place of business elsewhere. In those circumstances, it would be the place of business of the management company that was determinative of the governing law. The management company was running its business from Greece, not England. In the Judge’s opinion, it followed that, pursuant to art. 4(2) of the Rome Convention, the charterparty would not have been governed by English law in the absence of an express choice of English law by the parties.

CommentThis judgment confirms that, where there is no contractually agreed interest rate, the 1998 Act will only apply if it can be shown that (a) there is a significant connection between the contract and the UK and/or (b) English law would be the applicable law pursuant to the provisions of art.4(2) of the Rome Convention. If the charterparty’s only connection with the UK is the parties’ choice of English law as the governing law of the contract, that is not enough to trigger the 1998 Act.

The Commercial Court’s decision means that, where the requirements of the 1998 Act are not satisfied, a successful charterparty claim brought in London arbitration or the English courts will only attract interest at such rate as the arbitrators or judge deem fit, pursuant to section 49 of the Arbitration Act 1996 or section 35A of the Senior Courts Act 1981 respectively. Those rates will be considerably lower than what might otherwise have been claimable under the 1998 Act.

A primary consideration for restricting the 1998 Act’s applicability in this way, as stated by Mr Justice Popplewell, would appear to be the concern that applying a penal rate of interest on debts might discourage the international trading community, including those involved in shipping, from choosing English law and jurisdiction to govern their contracts.

Despina PlomaritouSolicitor, [email protected]

David McInnesPartner, [email protected]

A tough lesson on guarantee wordings: triple-check them!

St Maximus Shipping Co Ltd v. AP Moller-Maersk AS (Maersk Neuchatel) [2014] EWHC 1643 (Comm)

The recent decision of Mr Justice Hamblen in the Commercial Court on the construction of a Letter of Undertaking (“LOU”), provided by way of general average security, will give those negotiating such securities pause for thought when considering the precise wording and liabilities agreed.

The background factsThe Owners were the demise charterers of the vessel Maersk Neuchatel. They time chartered the vessel to Maersk as Charterers under a charterparty dated 16 August 2004, pursuant to which the vessel operated in a liner trade, calling at ports in South East Asia, South Africa and West Africa.

With regard to General Average, the charterparty provided as follows:

“General average shall be adjusted at the place as indicated in Box 33 according to the York-Antwerp Rules 1994 or any amendment thereto by an adjuster appointed by Owners. In the event of general average or salvage, the Charterers shall provide an acceptable temporary security covering all goods and containers to avoid delay and secure their release so that transit/delivery may continue. The Owners agree that Charterers’ temporary guarantee may be exchanged in due course for a full set of securities from the appropriate interested parties covering all goods and containers. The Charterers agree to co-operate with the Owners and the Owners’ appointed average adjusters, to assist by supplying manifests and other information and, where required, to endeavour to secure the assistance of the Charterers’ local agents in the collection of security, at the Owners’ expense.”

On 20 July 2007, the vessel grounded off the port of Tema, Ghana. General Average was declared on 25 July 2007 and Owners appointed an average adjuster.

The adjuster provided a draft LOU on 27 July 2007. The initial draft was intended to be temporary security in respect of the cargo, however Charterers opted to provide permanent security. The terms of the LOU were negotiated and agreed and, on 25 September 2007, Charterers’ solicitors sent a copy of the signed LOU by email to the average adjuster and to Owners’ solicitors.

The LOU provided as follows:

“In consideration of the delivery to Cargo Interests or to their order on payment of freight due of the cargo carried on board the MV MAERSK NEUCHATEL at the time of the above mentioned casualty, we hereby undertake and agree as follows:

1. To pay the proper proportion of any General Average and/or Special Charges which may hereafter be ascertained to be due from the Cargo or Shippers or Owners thereof under an Adjustment prepared by the appointed Average Adjuster in accordance with the Charterparty, dated 16 August 2001, and/or the Bills of Lading issued by us or SCL.

...”


The final adjustment was published on 10 January 2012. Taking into account sums already paid, the adjustment provided that a further US$4,254,985.53 was due from cargo interests.

Charterers contested the adjustment and argued that their liability was limited to amounts that were properly and legally due – not necessarily the amount contained in the average adjustment. A draft of the adjustment had been provided to Charterers that had indicated that 79.55% of the bottom damage and 100% of the propeller damage was sacrificial damage and the amount due from cargo interests was US$6,304,663.92. The final adjustment, however, indicated that 82.17% of the bottom damage and 100% of propeller damage was sacrificial damage and, taking into account a payment on account, the amount due from cargo interests was US$4,254,985.53. Charterers contested the correctness of these conclusions and it was their case that only a further US$3.5 million was properly and legally due.

Charterers further argued that they were not bound to accept the correctness of the average adjustment and had not given up their right to dispute the adjuster’s determination.

Alternatively, they argued that Owners were estopped from challenging Charterers’ construction of the LOU by accepting the LOU under cover of an email dated 25 September 2007, which stated as follows:

“This guarantee is provided on the basis that any liability on the part of cargo to contribute in GA arising out of this incident is agreed between Owners and Charterers or determined by the English High Court of Justice in the event GA liability is disputed.”

Alternatively, they said that the LOU should be rectified on the basis of common mistake so as to reflect the Charterers’ construction.

Owners contended that, on the proper construction of the LOU, Charterers were obliged to pay the full amount stated in the adjustment, provided only that the adjustment was prepared in accordance with the York-Antwerp Rules 1994 by Owners’ appointed adjuster. They argued that Charterers were bound by the findings of fact in the adjustment and the adjuster’s assessment of their costs.

The Court was asked to consider as a preliminary issue the construction of the LOU and Charterers’ arguments regarding estoppel and rectification.

The Commercial Court decisionThe Court preferred the Owners’ construction of the LOU and held that there was a clear undertaking to pay. The language of Clause 1 amounted to an unconditional and absolute obligation to pay the amount ascertained to be due in the adjustment.

Mr Justice Hamblen considered the decision of Mr Justice Sheen in The Jute Express [1991] 2 Lloyd’s Reports 55. In that case, additional wording had been used to qualify the obligation to pay an amount “which is payable in respect of the goods by the owners thereof.” Mr Justice Sheen found this to mean sums that were legally due and therefore the cargo interests had preserved the right to challenge the amount said to be due in

the adjustment. Mr Justice Hamblen considered this to support Owners’ case and that, in the absence of such wording in this case, Charterers were obliged to pay the adjusted amount. He pointed out that Charterers could have used such wording in the present case if they had wished to preserve the right to challenge the adjuster’s findings.

On the proper construction of the LOU, Charterers were obliged to make payment of the amount ascertained to be due in the adjustment. The Court held that the obligation was akin to an on-demand guarantee. In doing so, it placed weight on the commercial bargain made by the parties. If this resulted in overpayment, then Charterers may have a means of recourse against Owners. If there was an underpayment, then Charterers would be free of any further liability and Owners would be left with unsecured claims against various cargo interests for the balance.

Additionally, the Court rejected Charterers’ argument that Owners were estopped by representation from asserting that Charterers’ construction of the LOU was incorrect as they had not responded to the covering email that had purported to add terms to the LOU. Neither had Charterers established that the LOU should be rectified on the basis of common mistake.

CommentThis is an important case for all parties involved in the negotiation of General Average security and will be of interest to all parties involved in negotiating other types of security. In light of this decision, a guarantor’s liability to pay an amount ascertained to be due under a General Average adjustment is likely to be construed as an on-demand guarantee to pay the amount ascertained to be due in the adjustment, unless express wording is included preserving the right to contest the adjustment and limiting the obligation to pay amounts that are legally due.

When negotiating the wording of General Average security, it is important that one considers carefully the precise wording of the LOU and the effect it may have on a party’s obligation to make payment of general average contributions. It may be appropriate to insert additional wording to protect a party’s ability to contest the determination in the average adjustment and limit the guarantor’s payment obligation to making payment of amounts legally due. For other forms of security, this decision reinforces the point that all terms of the security should be included in the guarantee itself, rather than in related correspondence: the safest course of action will always be to treat the guarantee document as “stand alone” and likely to be strictly construed.

Anna Devereaux Solicitor, [email protected]

Kevin Cooper Partner, [email protected]


Package limitation – can a cargo claimant “pick and mix”?

Yemgas Fzco & Ors v. Superior Pescadores S.A. Panama (Superior Pescadores) [2014] EWHC 971 (Comm)

The Commercial Court (Mr Justice Males) recently had to deal with some interesting issues relating to a clause paramount and package limitation. In short, the Judge held that (1) the phrase “The Hague Rules as enacted in the country of shipment...” did not mean the Hague-Visby Rules; (2) in relation to several identical bills of lading, the cargo claimants could not choose the Hague Rules limits instead of the Hague-Visby Rules limits as and when it suited them; and (3) the relevant date under the Hague Rules for converting gold value into money is the date of delivery of the goods.

The background factsA cargo of machinery was loaded on the MV Superior Pescadores at the port of Antwerp, Belgium in January 2008 and the Owners issued six bills of lading for carriage to Balhaf in Yemen. Each of the bills was for a number of packages and contained on its reverse side a Paramount Clause in the following familiar terms:

“2. Paramount Clause

The Hague Rules contained in the International Convention for the Unification of certain rules relating to Bills of Lading, dated Brussels the 25th August 1924 as enacted in the country of shipment shall apply to this contract. When no such enactment is in force in the country of shipment, the corresponding legislation of the country of destination shall apply, but in respect of shipments to which no such enactments are compulsorily applicable, the terms of the said Convention shall apply.”

Although the bills of lading were not issued on the standard Congenbill form, this wording was (with one immaterial change) identical.

While the vessel was crossing the Bay of Biscay, the cargo shifted and was damaged, giving rise to a claim (ignoring package limitation) said to be in excess of US $3.6 million.

An agreement was subsequently reached that the claim would be subject to English law and jurisdiction. That law includes the Carriage of Goods by Sea Act (“COGSA”) 1971 which renders the Hague-Visby Rules applicable as a matter of statute law when the carriage is from a port in a contracting state. Belgium is such a state.

In some of the bills of lading, the Hague Rules limit was always higher than the Hague-Visby limit, and the Claimants claimed this higher limit. In the case of bill of lading no. 4, application of the Hague Rules yielded a higher limitation figure for four of the six packages, while for the remaining two packages the Hague-Visby limit was higher. In the case of each package, the Claimants claimed whichever limitation figure was the higher. The effect of the different limitation formulae for which the two regimes provide was that (at current values) the Hague Rules limit was higher for packages weighing up to about 10 tonnes, while for packages weighing more than this, the Hague-Visby limit was higher.

The Owners paid the amount of the Hague-Visby package limit, equivalent to just over US $400,000, and contended that it was not open to the Claimants to claim a further US$200,000 by picking and choosing between the Hague-Visby package limit and the Hague package limit, depending on which gave them more.

The Commercial Court decision 1. Which Rules apply?

The basis for the Claimants’ argument was that the Hague Rules were contractually incorporated into the bill of lading by virtue of the Clause Paramount. Whilst the Hague-Visby Rules applied compulsorily, they allow the parties to agree contractually on a higher package limitation figure.

The first question was, therefore, whether the Hague Rules applied contractually. That depended on what was meant by the phrase “the Hague Rules contained in the International Convention for the Unification of certain rules relating to Bills of Lading, dated Brussels the 25th August 1924 as enacted in the country of shipment...”. It was common ground that if this did not refer (or was not capable of referring) to the Hague-Visby Rules which have been enacted in Belgium, then the Hague Rules would be incorporated by virtue of the second sentence of the clause.

On this point, the Judge had a lot of sympathy for the Owners’ argument that this expression was capable of referring to the Hague-Visby Rules given that these are just an amendment of the Hague Rules. However, he decided to follow the approach in the Happy Ranger [2002] EWCA Civ 694 and he held that the clause paramount constituted a contractual agreement to incorporate the Hague Rules.

2. Can the Claimants pick and mix?

Article IV, Rule 5 (g) of the Hague-Visby Rules says:

“By agreement between the carrier, master or agent of the carrier and the shipper other maximum amounts than those mentioned in sub-paragraph (a) of this paragraph may be fixed, provided that no maximum amount so fixed shall be less than the appropriate maximum mentioned in that sub-paragraph.”

The Owners argued that you could not have an agreement which might only sometimes give rise to a higher figure, depending on the weight of the package lost and the respective values of gold and SDRs. The Judge had sympathy with that argument, but decided that there was no reason in principle why you could not agree a regime that involved a “wait and see” approach. However, readers will know that where you normally expect to find this sort of agreement, if ever, is on the front page of the bill in a box marked “Declared Value” or similar. There is no mention of this point in the judgment, but the Judge was deeply uneasy about the “oddness” of the cargo claimants’ “pick and mix” approach, where identical bills were governed by different regimes and where, in the case of one bill of lading, different regimes were applied to different packages covered by the bill. He therefore found in favour of the Owners on this point and held that the Hague-Visby Rules limit applied.


3. Converting gold value

The final point, albeit just a comment given the result above, was when the gold value should be assessed under the Hague Rules and whether this should be at the date of judgment (as is the case with SDRs) or the date of delivery of the goods. The Judge held it was the latter, relying on the assumption made by Mr Justice Hobhouse in The Rosa S [1989] QB 419.

CommentTo a newcomer to the world of maritime claims, the risk apportionment in the Hague and Hague-Visby regimes is not particularly fair. However, the rationale for the Rules, that have served world trade well for coming on 100 years, is that they promote certainty and the parties to the venture can and should insure their respective risks. Given the hundreds of cargo claims that occur worldwide every day, this is an area of the law that really does benefit from certainty and, in this regard, we consider that the Court’s decision in this case will be a welcome addition to those of us who deal with such claims on a daily basis.

This decision is being appealed. We will report on the Court of Appeal judgment in due course.

Ted GrahamPartner, [email protected]

James Hickland Senior Associate, [email protected]

Charterer who expressed intention to perform in future nonetheless held to be in repudiatory breach

London Arbitration 7/14, LMLN 20 March 2014

In a recent arbitration award reported in the Lloyd’s Maritime Law Newsletter, London arbitrators have taken a robust approach to a case involving an alleged repudiatory breach of charter by defaulting Charterers, in circumstances where the Charterers were insisting that, despite their non-performance to date, they remained willing to perform their contractual obligations in the future. This is likely to be a welcome decision for owners facing similar situations.

The background factsThe vessel was chartered on the NYPE form for a period of about 5 years. In January 2012, Charterers failed to pay an instalment of hire and proposed paying only 30% of all outstanding hire due to their financial difficulties. On 30 January 2012, Charterers wrote to Owners to say:

“we once again express our apologies for the inconvenience so far caused, but as we have repeatedly informed Owners, this is really something beyond our control and Owners should therefore take such steps as may be necessary to minimise losses/damages.”

Owners responded by asking Charterers to make their position clear in respect of the payment of the outstanding hire and their intentions to pay further hire instalments. In response, Charterers wrote to say:

“We refer to Owners’ last message and their request for clarifications. As we have previously informed Owners, whilst Charterers intend to perform the charter, they are however currently unable to say when hire can be paid, hence our invitation to Owners to propose how best to mitigate/resolve this situation.”

In reply, Owners pressed Charterers again to say how they intended to perform the charter in circumstances where they could not clarify when they would pay hire. Charterers did not respond to this message and so again, on 3 February, Owners called upon Charterers to pay the outstanding hire and to clarify their position as a matter of urgency.

On 6 February, Charterers wrote to Owners to complain about steps the Owners had taken against a company with a similar name to that of Charterers, but they did not respond to the points Owners had been making in relation to the subject charter. On 7 February, Owners pressed Charterers again to confirm when the outstanding hire would be paid. There was again no response from Charterers to this message.

On 13 February, Owners pointed out to Charterers that the ship had been re-delivered under the sub-charter and again called upon Charterers to state their intentions. Despite reminders sent on 14 and 15 February, Charterers failed to respond. On 16 February, Owners informed Charterers that they considered their conduct to be repudiatory and that, if the outstanding hire was not received by 20 February, Owners would withdraw the vessel.

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On 17 February, Charterers responded to say:

“As we had previously informed Owners, our intention has always been and still is, to perform our contractual obligations. Unfortunately, current financial conditions are preventing us from dealing with this matter as we would have liked... if Owners believe the best way to mitigate is to fix the vessel for their own account, then we will not stop them.”

On the same day, Owners responded to say there was nothing in Charterers’ message which gave a proper indication that Charterers intended to or were able to perform the charter. Owners gave an extended deadline of 21 February for payment of outstanding hire.

When Charterers failed to respond to this message, on 22 February Owners brought the charter to an end on the basis of Charterers’ repudiatory breach.

The Tribunal’s decisionThe Tribunal stated that they had no hesitation in concluding that Charterers were in repudiatory breach of charter despite their various messages to the effect that they wanted to continue to perform the contract. The Tribunal relied on the following factors to reach a conclusion that any reasonable observer would find Charterers’ behaviour was repudiatory:

> The failure to pay the instalments of hire and to find a sub-fixture for the vessel.

> Charterers’ frequent failures to respond to Owners’ messages in which Owners raised unequivocal questions that required adequate answers.

> The Tribunal concluded Charterers’ message of 17 February was “as close as one might get to a clear admission that the Charterers were unable to perform” the charter. This was so even though Charterers’ responses, when they did send them, were carefully worded in an attempt to make it difficult for Owners to say that Charterers’ conduct was repudiatory.

Accordingly the Tribunal awarded Owners’ damages of US$15,910,650.

CommentIn the current market, many owners are facing difficult decisions as to whether the conduct of a defaulting charterer is sufficient to amount to a repudiatory breach of charter entitling the owner to terminate and receive damages for their losses post withdrawal. Under English law, in order to demonstrate that a party has renounced its obligations under a contract, it is necessary for the innocent party to show that the conduct of the defaulting party unequivocally demonstrates an intention not to perform the contract, or an inability to perform, either in its entirety or in a manner which goes to the root of the contract. The innocent party faces a dilemma where a defaulting party insists that, despite its non-performance to date, it intends to perform its obligations in the future.

The Tribunal in this case appeared to have little difficulty in seeing through Charterers’ assertions that they intended to perform in the future. The Tribunal concluded that objectively the Charterers’ messages, taken together with their conduct in not paying three instalments of hire, demonstrated they would not or could not perform the charter.

This will be a welcome decision for Owners who face similar situations though, of course, every case has to be assessed on its own facts.

David RichardsSolicitor, [email protected]

Nick BurgessPartner, [email protected]


Towing the line – competing jurisdiction clauses

Med Marine v. Castillo Schiffahrts – GMBH & Co & Anr (Conti Cartagena) [2014] EWHC 1064 (Comm)

In a recent judgment, the Commercial Court has dismissed a challenge to the jurisdiction of the English Court by two defendants, who alleged that the proper jurisdiction for a dispute under an agreement which incorporated the UK Standard Conditions for Towage and other Services (Revised 1986) (the “UK Towage Conditions”) was the Istanbul Court. Mr Stephen Hofmeyr QC, sitting as a Deputy Judge, concluded that the reference to the Istanbul Court was simply a carve out to the otherwise exclusive jurisdiction of the English Court, allowing the Claimant the option to sue in Turkey for unpaid fees only.

The background factsThe Claimant is a Turkish company which provides tug, pilotage and mooring services to vessels entering ports in Turkey. The first Defendant is the registered owner and the second Defendant the demise charterer of the vessel Conti Cartagena (the “Vessel”).

In August 2012, the Vessel was at the Besiktas Shipyard in Turkey having works carried out and was scheduled to be shifted to a floating dry dock. The Defendants engaged the Claimant to provide the necessary tug and pilotage assistance but, during the course of the shifting operation, the Vessel collided with a floating dry dock and with another vessel.

The Vessel Owner and Demise Charterer commenced proceedings in Turkey. However, the Turkish company alleged that the English courts had jurisdiction over the dispute and issued English proceedings, seeking a declaration of non-liability. The Commercial Court had to decide whether it had jurisdiction over the parties’ dispute. For the purposes of the English proceedings, therefore, the Turkish company was the Claimant and the Vessel Owner and Demise Charterers were the Defendants. In the meantime, the Turkish proceedings were stayed, pending the outcome of the Claimant’s application to the Commercial Court.

The parties’ agreementThe parties’ agreement was contained in a booking note (the “Booking Note”) in Turkish, which contained the following provisions (as translated into English):

“We request pilotage, towage and mooring services for the vessel detailed above which is under our ownership/agency...”...

“Pursuant to our request we undertake and agree to the application of the provisions of the service tariff applied by our company and all instructions and regulations issued by the port and docks, to the application of the United Kingdom Standard Towage Conditions (Revised 1986) to pay [relevant] companies such pilotage, towage and mooring fees as may accrue to them, and [we agree] that if the due and payable invoice debts with respect to

the various services are not paid, our request for services shall be suspended and shall not be complied with, that after the invoice for the service referred to in this letter of request has been issued we may not change the said invoice address, and [we agree also] that the Courts and Enforcement offices of Istanbul shall be competent in the resolution of disputes between the parties.”

The Booking Note therefore incorporated the UK Towage Conditions. Clause 9 of the Conditions provides as follows:

“9(a). The agreement between the Tugowner and the Hirer is and shall be governed by English law and the Tugowner and the Hirer hereby accept, subject to the proviso contained in subclause (b) hereof, the exclusive jurisdiction of the English courts...

(b) No suit shall be brought in any jurisdiction other than that provided in subclause (a) hereof, save that either the Tugowner or the Hirer shall have the option to bring proceedings in rem to obtain the arrest of or other similar remedy against any vessel or property owned by the other party hereto in any jurisdiction where such vessel or property may be found.”

The Claimant alleged that the English Court had jurisdiction over the case because the Booking Note expressly incorporated the UK Towage Conditions. The Claimant said that, although the Booking Note did include an Istanbul jurisdiction clause, this only applied to claims by the Claimant to recover unpaid fees and that, in any event, the Istanbul jurisdiction clause was a non-exclusive jurisdiction clause.

The Defendants, on the other hand, argued that the Istanbul jurisdiction clause applied to all disputes between the parties and, if this was correct, the English jurisdiction clause in the UK Towage Conditions was not incorporated into the Booking Note. The Defendants also argued that, insofar as the Booking Note contained two jurisdiction clauses, they must operate in parallel such that once one of the parties invoked the jurisdiction of Court X, it was then no longer possible for the other party to utilise Court Y.

The Commercial Court decisionThe Judge noted that the burden of proof was on the Claimant to demonstrate a good arguable case that the English Court had jurisdiction and that, to succeed, they had to show that they had a much better argument than the Defendants.

Having heard the arguments, the Judge concluded that, read in context, the reference in the Booking Note to the jurisdiction of the Istanbul Court related solely to the First Defendant’s obligation to pay any fees due for the services rendered by the Claimant and that as such, “it can be seen to do no more than carve out an exception to the exclusive English jurisdiction clause in the Booking Note”. The Judge added that he considered the argument by the Defendants that the Istanbul jurisdiction clause was an exclusive jurisdiction clause was “wholly without merit”.

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The Judge went on to say that there was no overlap between the types of dispute which may be submitted to the Turkish courts and those which must be submitted to the English courts. Therefore, no issue of co-existence between the two jurisdiction clauses arose.

CommentThis is an interesting decision which again shows the attractiveness of the English Court to international litigants, but confirms the need for parties to use clear and concise language in law and jurisdiction clauses to avoid disputes such as this arising in the future.

Catherine EarnshawSolicitor, [email protected]

Bob DeeringPartner, [email protected]

Underperformance disputes under time charterparties

London Arbitration 12/14, LMLN, 29 May 2014

This award is the latest of a number of court decisions and LMAA arbitration awards dealing with issues that frequently arise in time charterparty underperformance disputes.

The background factsThe vessel, a 1998-built bulk carrier, performed a winter voyage from the U.S. Atlantic Coast to South Korea on an NYPE 1993 time charterparty.

Charterers’ router reported a 50.89 hr time loss (based on a 12.26 kt “good weather” speed net of a 0.2 kt assisting current) and 71 mt IFO over-consumption, and Charterers deducted from hire on the basis of these figures.

Owners’ router reported a 23.98 hr time loss (based on a 12.68 kt “good weather” speed) with no over-consumption, and Owners claimed the US$63,435.10 difference between their admitted underperformance figure (based on their router’s report) and Charterers’ deduction.

The charterparty provided as follows:

> The parties deleted NYPE lines 19-20 (“capable of steaming fully laden under good weather conditions at a speed of...”)

> Clause 63 (“Vessel’s Description”): “...abt 13.5/14.0kts on ifo 380cst 34mt(l)/34mt(b) per day +0.1mt mgo per day ...ADA [i.e. “all details about”] ... SPEED AND CONSUMPTIONS OF THE VESSEL AS PER DESCRIPTION ARE REPRESENTATIONS BY THE OWNERS AND ARE A CONTINUOUS WARRANTY THROUGHOUT THIS CHARTER”

> Clause 100 (“Speed Consumption”): “The words ‘good weather conditions’ in line 20 of this Charter shall mean any weather condition in which the wind does not exceed Force 4 at the Beaufort Scale and/or Douglas sea state 3 no advance current/no negative influence of swell...”

> Clause 113 (“Ocean’s Routes clause”): “The vessel shall be capable at all times during the currency of this Charter of steaming as per description. For the purpose of this charter ‘good weather conditions’ are to be defined as weather conditions not exceeding Beaufort force 4 and Douglas 3 no advance currents/no negative influence of swell...”

The following issues arose in the arbitration:

1. Did the deletion of lines 19-20 mean that Clause 63’s ongoing performance warranty was given for all weather conditions throughout the charter (as Charterers said); or was it given for “good weather conditions” as defined in Clauses 100 and 113 (as Owners said)?

2. If the warranty was given for “good weather”, did Clause 63’s “no advance currents” criterion allow assisting currents to be taken into account (as Charterers said) so as to allow their routers to reduce the vessel’s “good


weather” speed by 0.2 kts for the 0.2 kt assisting current; or was it a misprint that only allowed adverse currents to be taken into account (as Owners said)?

3. Which routers’ report should prevail?

The Tribunal’s decision The Owners won. The Tribunal upheld their US$63,435.10 claim and awarded them 4.25% quarterly compound interest, for the following reasons:

Issue (1) – all weather or “good weather” warranty’? The Tribunal preferred Owners’ interpretation. The repeated references to “good weather conditions” in Clauses 100 and 113 strongly indicated that, in accordance with general shipping practice, the performance description in Clause 63, to which Clause 113 referred (“as per description”), was given for the “good weather” conditions set out in Clauses 100 and 113. The deletion of printed lines 19-20 was probably a clerical error and did not affect the Tribunal’s construction of the three rider clauses.

Issue (2) – “no advance currents” The Tribunal again preferred Owners’ interpretation. The essential purpose of a “good weather” definition is to limit the performance warranty to wind/sea conditions in which the vessel can realistically be expected to perform as warranted; and, as is common, currents are mentioned to ensure that the vessel’s performance in those conditions is not impeded by currents. So “no advance currents” really meant no adverse currents.

Issue (3) – whose report should prevail? The Tribunal preferred the report of Owners’ router for the following reasons:

1. The four wind/sea readings each day reported by Owners’ router suggested greater accuracy than the one reading each day by Charterers’ router.

2. The 0.2 kt reduction by Charterers’ router of the vessel’s “good weather” speed for the 0.2 kt assisting current was incorrect in view of the Tribunal’s ruling on issue (2) – though this made a modest difference.

3. Owners’ router had submitted that Douglas Sea State 3 referred to a 0.5-1.25 metre average wind wave and that this equated to a significant wave height (i.e. the 33% highest wind waves plus swell that were encountered) of 2 metres or less (by multiplying it by a 5/8 fraction); and, on this basis, they treated significant wave heights of up to 2 metres as “good weather”. By contrast, Charterers’ router treated “good weather” as (i) swell of up to 2 metres; and (ii) 1.25 metre wind waves on top of that. The Tribunal preferred the approach of Owners’ router and, therefore, its “good weather” days to those of Charterers’ router. Consistent with this, during various of Charterers’ “good weather” days, the swell was on, or forward of, the vessel’s port beam – constituting “negative influence of swell” which precluded those days from being “good weather” days.

4. Charterers’ router purported to apply The Didymi’s “good weather” performance test (i.e. ascertain the performance during good weather and extrapolate over the whole voyage) in the following manner:

(1.) Notional warranted voyage time: 10,960.9 nm (voyage distance) ÷ 13 kts = 843.15 hrs

(2.) Notional voyage time at the “good weather” speed: 10,960.9 nm ÷ 12.26 kts = 894.04 hrs

(3.) Time loss: 894.04 hrs minus 843.15 hrs = 50.89 hrs

However, Owners’ router argued that this failed to factor in the actual time taken during the voyage or any reduced speed during non-“good weather” days on account of operational/navigational reasons, i.e. the “necessary adjustments and extrapolations” referred to by the Court in The Didymi. They applied the following approach, which they said applied the reality of the actual voyage:

(1.) “Good weather” speed shortfall: 13 kts less 12.68 kts = 0.32 kts

(2.) Allowed voyage time: 10,988.9 nm ÷ [11.88 kt actual voyage speed plus 0.32 kts] (12.20 kts being the speed she should have achieved in the absence of her 0.32 kt shortfall) = 900.73 hrs

(3.) Time loss: 900.73 hrs minus 924.70 hrs (actual voyage time) = 23.98 hrs

The Tribunal preferred the approach of Owners’ router for the reasons they gave. Consistent with this, they noted that the router’s 12.68 kt “good weather” speed represented a 2.5% shortfall compared with the 13 kt warranty which, netting down the 924.7 hr voyage time by 2.5%, produced a 902.15 hr allowed voyage time and a 22.55 hr time loss figure, which was much closer to the 23.98 hr figure of Owners’ router than the 50.89 hr figure of Charterers’ router.

5. The Tribunal also considered that the 10,988.9 nm voyage distance of Owners’ router, which corresponded with the figure derived from the Master’s, was more reliable than the 10,960.9 nm figure of Charterers’ router.

6. The over-consumption figure of Charterers’ router was incorrect because (i) it failed to allow 5% for “about” with regards to the warranted consumption figure (applying the “ADA” provision); and (ii) its consumption figure was directly linked to its incorrect time loss figure.

CommentThe Tribunal’s decision appears to have properly applied the charterparty’s performance provisions. However, it does highlight the need for parties to be clear whether a performance description applies in “good weather” (“all weather” warranties being very rare) and how/when currents should be taken into account.

In addition, the time loss calculation, which the Tribunal preferred, seems to properly apply the principles set out in The Didymi for the reasons set out above. However, approaches can


vary in practice. In London Arbitrations 15/05 and 20/07, the Tribunals applied the approach which Charterers’ router was advocating here. At any rate, it is unclear that the calculation by Owners’ router in 4 above was the real reason for the difference between the routers’ time loss figures – applying Owners’ router’s “voyage distance” and “good weather” speed figures to Charterers’ router’s calculation (so as to compare the calculations based on the same underlying figures) results in a 21.33 hr time loss figure (i.e. very close to, and in fact slightly better than, the 23.98 hr figure of Owners’ router). The real difference appears to be due to the different “voyage distance” and “good weather” speed figures – as to which see 2, 3 and 5 above.

Finally, the dispute as to which sea state conditions qualified as “Douglas Sea State 3” highlights the differing views on this and the need for a charterparty to be clear about this so as to avoid confusion.

Evangelos Catsambas Partner, [email protected]

Berth damage

Terminal Contenitori Porto di Genova SpA v. China Shipping Container Lines Limited (Xin Xia Men) [2014] EWHC 1629 (Comm)

Instances of vessels making contact with and damaging a berth are fairly common. Disputed claims on liability are much rarer, given that often it is very clear that the vessel bears 100% of the fault. In this recent first instance decision, the High Court was asked to consider allegations of negligence directed at the terminal.

The background factsOn 5 June 2011, during strong wind and rains, Xin Xia Men (the “Vessel”), a container ship owned by China Shipping Container Lines Limited (the “Owners”), was blown off the quay at Genoa’s container terminal (the “Terminal”) and impacted with the Terminal’s shore crane PT4.

The wind speed was measured at various sources around the Terminal, but the anemometer on crane PT4 indicated that the wind speed shot up from about 7km/h at 1713 to 77km/h just 30 seconds later. There were gusts of around 80km/h until 1715 when it dropped to 60km/h. Footage from the Terminal’s CCTV showed the Vessel begin to move away from the quay as the wind speed increased. By 1715, the Vessel was about 20m parallel to the quay. It stopped at around 1716 then began swinging back in four minutes later. At 1725, the Vessel stopped moving. The Vessel’s starboard bow connected with the leg of crane PT4 at some point between 1714 and 1725. The crane derailed and was damaged.

Owners sought to defend the Terminal’s subsequent claim on the basis that the damage was caused or contributed to by the unsafety of the berth and/or the Terminal’s negligence.

There were six issues for Mr Justice Hamblen in the Commercial Court to determine. We consider each in turn.

The Commercial Court decision1. Was the Vessel negligently moored and was this the cause

of the Vessel being blown off the berth?

The Judge concluded that yes, the Vessel was negligently moored and that the Vessel was blown off the berth as a result. The Vessel was moored with four head lines and two spring lines forward and four stern lines and two spring lines aft. The experts agreed that this was the usual arrangement for container vessels of this size in non-adverse weather conditions. As the arrangement was not of itself negligent, the likely cause was human error in slackening one of the stern lines.

In coming to this conclusion, the Court was assisted by expert evidence on whether the load was greater than the brake design render limits (72 tonnes). This turned on (i) the wind speed; and (ii) the wind co-efficient. Whilst the crane anemometer had measured winds of around 80km/h, the crane was 70.5m above sea level. The internationally accepted Beaufort scale adopts a 10 minute mean at a height of 10m. Did this mean that the wind speed had to be revised downwards to reflect the lower height of the Vessel?


The Terminal’s expert said yes. The industry standard computer programme used to calculate wind loads, OPTIMOOR, adopts a 10m standard, so a 1/7 exponent had to be applied to the wind profile power law equation. Owners’ expert disagreed, because these were not normal wind conditions. He treated the wind speed acting on the Vessel as being the same as recorded at crane height and claimed it would be accelerated by containers stacked around the berth. The Judge agreed with the Terminal. Owners’ expert evidence was largely anecdotal and the expert’s theory was not supported by literature, articles or papers.

As regards the wind coefficient, the Terminal used the coefficient of 0.87, as applied by OPTIMOOR. By contrast, Owners’ expert used a co-efficient of 1.5, for reasons not explained in his expert report. When challenged, he told the Court it was based on his own experience and could not point to data or literature in support. Again, the Court agreed with the Terminal. There was no way of testing Owners’ qualitative assessment and besides, it produced counter-intuitive results: it resulted in the same loads on the Vessel as experienced by a ship with almost twice the windage area.

Whilst Owners’ results showed that the Vessel was at the limits of safe operation, their calculations were rejected. As the loads were not greater than the render limits, the only remaining possible causes involved negligence. The Court found that the moorings were inadequately tensioned: this was the effective cause of the lines rendering and the Vessel being blown off the berth.

2. When did the Vessel strike the crane?

The Terminal said that the Vessel struck the crane on its return to the berth. Owners said contact may have occurred when it was being blown off the berth – and, as result, any subsequent negligence was causally irrelevant.

The Court agreed with the Terminal. Whilst Owners did not submit any eye witness evidence to support their version, two of the Terminal’s witnesses gave evidence that contact occurred on re-berthing. They both saw the Vessel move away from the berth and then heard the loud bang of the Vessel hitting the crane. The Court rejected Owners’ attempt to introduce a new positive case on causation in final submissions that the witnesses had only heard the crane derailing. This case was not put to the witnesses, and in any event the crane’s operator was adamant that the ship was moving away from the berth as he descended from the crane. If the crane had been struck whilst he was coming down the stairs, he would have felt the impact.

3. Was the re-berthing of the Vessel carried out negligently?

Following the Court’s finding on question 2., negligence in re-berthing remained in play. The Court concluded that the Master must have brought the Vessel back alongside the berth at an angle, causing contact with the crane.

According to the Master’s witness statement, by 1717 the

Vessel was still off the berth but was back under control. There was an inconsistency between the Master’s witness statement and his contemporaneous accident report as to whether he had used the bow thruster to port. There was a further inconsistency between the statements of the Master and the Chief Engineer: the Master said the Chief Engineer was instructed to look out for the distance off the berth, but the Chief Engineer said he could not see the crane. Owners’ decision not to call the Master or the Chief Engineer to give evidence meant that inconsistencies in their evidence could not be resolved before the Court.

The Master’s decision not to use tugs was criticised. Both experts agreed that this was a difficult operation to carry out without tugs. The Owner’s expert tried to excuse the decision as it was made in an emergency situation and “the agony of the moment”, but the Court was not persuaded. The Master’s evidence was that the Vessel was back under control by this point. He had time and tugs were available.

The Court took a dim view of an eleventh-hour amendment to Owners’ case that the Vessel was being pushed alongside by tugs without the Master’s knowledge. The Judge dismissed the amendment as a late expert-based case not supported by any factual evidence and described the way it was raised as “unsatisfactory”. The Judge concluded that the failure to re-berth in parallel must have been due to the Master’s negligence: either he was negligent in its execution or, if the manoeuvre was so difficult that its failed execution could not be said to be negligence, then the Master was negligent in not getting assistance from the tugs.

4. Was the berth unsafe?

Following the findings on 1-3, any unsafety was causally irrelevant. In any event, all five allegations of unsafety – none of which had been considered in Owners’ expert report – were rejected as a matter of fact.

5. Was there contributory negligence?

No. The Terminal was not negligent in not moving the cranes away from the berth.

6. Quantum

The Terminal recovered its principal claim for crane repair costs, business interruption and survey fees totalling €1,546,277.94. The Court did not agree to the Terminal’s claim for interest at 10.41% – what the Terminal claimed was the standard commercial loan rate for Italian banks at the date of the incident, or “finanziamenti alle imprese”. A usual commercial Euro interest rate was applied.

CommentThis case provides a stark reminder of the importance of calling witnesses to give live evidence, particularly when liability is heavily dependent on the facts. Whilst evidence in person is always preferable, international witnesses should consider giving evidence via videolink.


The case also highlights the importance of getting early expert evidence, to ensure that all possible causes are pleaded upfront. Deus ex machine, like the expert reconstruction of tug involvement introduced a month before the hearing or the new causation case introduced in final submissions, were deemed not credible and are highly unlikely to be accepted.

Max CrossPartner, Hong [email protected]

Kirsty CattanachSenior Associate, Hong [email protected]

Court upholds LMAA tribunal’s jurisdiction to rule on costs

Sun United Maritime Ltd v. Kasteli Marine Inc (IMME) [2014] EWHC 1476 (Comm)

In this recent case, the Commercial Court has affirmed the jurisdiction of the appointed arbitrators to rule on whether the parties reached a binding agreement regarding the recoverable costs of the arbitration.

The background factsIn a LMAA charterparty dispute between Sun United as Charterers and Kasteli as Owners, Owners’ claims had been secured by money paid into an escrow account in the name of Charterers’ solicitors.

There were claims and cross-claims in the arbitration, but Charterers ended up as the paying party. The principal/interest sums payable were paid from the escrow account to Owners’ solicitors; the balance of the escrow funds was sufficient to cover Charterers’ liability for costs.

Before the Tribunal published their Award on costs, an agreement was said to have been reached between the parties’ solicitors over the telephone on 29 May 2013 in respect of Charterers’ liability for costs. Charterers’ solicitor said that it had been agreed during that telephone conversation that Charterers would pay €50,000 in respect of Owners’ recoverable costs; however, Owners’ solicitor said that it was a stated condition during that telephone conversation that a written agreement be drawn up in order for there to be a binding agreement (because only a written agreement would be sufficient in order for the costs to be paid from the monies held in escrow).

Owners contended that because there was no written agreement, there was no binding agreement with regards to costs. They therefore referred the costs issue to the Tribunal.

Charterers contended that an agreement had been reached in relation to costs and that the Tribunal therefore had no jurisdiction to deal with costs on that basis. The Tribunal held that no written agreement had been reached and awarded Owners the sum of €55,661.11 in respect of their recoverable costs.

The Commercial Court decisionCharterers applied to the Commercial Court under section 67 of the Arbitration Act 1996 (the “Act”) on the grounds that the Tribunal had no jurisdiction to make the costs award and also sought permission to appeal under section 69 on the basis of an alleged error of law by the Tribunal.

The section 67 applicationThe Court, observing that neither party had been able to refer to any authority or textbook on point, held that the dispute did not fall within the scope of section 67 (and so Charterers’ application failed on this first hurdle).

The Act defines a section 67 challenge to the Tribunal’s “substantive jurisdiction” to make its Award as a challenge as to (a) whether there is a valid arbitration agreement; (b) whether


the Tribunal was properly constituted; or (c) whether matters have been submitted to arbitration in accordance with the arbitration agreement.

Charterers contended that the issue here (as to whether there remains a dispute in the arbitration reference) fell within (c) in the present case.

The Owners argued in response that the Tribunal had not been asked any of the questions in (a) to (c) – it had been asked to rule whether the parties had bindingly settled all questions of costs; and since the parties had agreed for it to rule on that question, they were bound by its decision.

The Court ruled in favour of the Owners:

1. Owners’ claim for recoverable costs was a claim which had been brought in the arbitration reference (which reference includes the power to make an award on costs) and the alleged fact of settlement would be a defence which the Charterers could bring to Owners’ continuing claim for their costs – though even where there is a settlement, it does not generally bring the arbitration reference to an end.

2. The issue here was whether a matter which had already been submitted to the Tribunal had been resolved by agreement. It was not an issue as to whether “matters have been submitted to arbitration in accordance with the arbitration agreement”.

3. On this basis, section 67 did not apply.

Was there a binding agreement on costs?The Court alternatively held that, even if section 67 did apply, on the evidence it was satisfied that a written agreement was an essential condition for the costs settlement to be binding – so there was no binding settlement without it. It followed from this, therefore, that the Tribunal had jurisdiction to rule on the issue as to costs.

The section 69 challengeThe Court held that the question of whether or not a final and binding agreement was concluded in the telephone conversation on 29 May 2013 was an issue of fact. As it did not therefore raise any question of law, the Court had no jurisdiction to grant permission to appeal.

CommentThe Court found on this occasion that neither section 67 nor section 69 of the Act applied, as the Tribunal had simply made a finding of fact in relation to the question of whether a matter submitted to arbitration had been resolved. This is not something that falls within section 67 or section 69. However, it is suggested that the case may show some support for the arbitral principle of “competence-competence”, namely that the Tribunal has jurisdiction to rule on the existence and scope of its own substantive jurisdiction, as expressed in section 30(1) of the Act.

Of course, parties seeking to compromise any aspect of their arbitral claims would be well advised to make it clear that all verbal discussions are provisional only and subject to written agreement. If it is unclear and a dispute arises in relation to whether a verbal conversation has resulted in a binding agreement settling some aspect of the dispute, this case appears to confirm that there is no basis for challenging the Tribunal’s finding either on grounds of jurisdiction or error of law.

Evangelos Catsambas Partner, [email protected]

Chris WardSolicitor, [email protected]


SHIP FINANCE Loan agreement relating to yacht construction contract construed as “on demand”

Swallowfalls Limited v. Monaco Yachting & Technologies S.A.M. & Anr [2014] EWCA Civ 186

This Court of Appeal case provides further support for the construction of contracts in the manner most consistent with “commercial common sense”. It also shows that the English Court will be slow to imply terms into commercial contracts beyond what is necessary to make such contracts effective. The Court of Appeal also held that the loan, which was the subject of the dispute, was repayable on demand.

The background factsSwallowfalls commissioned the construction of a yacht from Monaco Yachting & Technologies (“MYT”) in 2006. The construction agreement between Swallowfalls and MYT provided that Swallowfalls would pay the price of the yacht in 11 instalments, due when MYT had achieved certain milestones in respect of the yacht’s construction. It was understood that the actual construction work was to be carried out by a sub-contractor of MYT. MYT had difficulty in meeting its obligations under the sub-contract, and Swallowfalls realised that it would have to provide interim finance to MYT.

Swallowfalls made funds available to MYT in a series of four amendments to the original construction agreement. In 2008, a loan agreement (the “2008 Loan Agreement”) was made at the same time as the second amendment. Article 2.5(a) of the 2008 Loan Agreement provided:

“The Loan and Interest shall be repaid by the Borrower; (1) within thirty (30) days from receipt of a demand letter by the Lender, (2) upon termination of the Agreement or the Loan Agreement or (3) the earlier of the expiration of the Term hereunder... or the date of the Stage Certificate for instalment 11 under the Agreement.”

The funding difficulties continued, and, in 2010, the parties entered into a fourth amendment and a new loan agreement (the “2010 Loan Agreement”) that replaced the 2008 Loan Agreement.

Under the heading of Further Finance Facility, Article 3.11 of the Fourth Amendment provided:

“From the signing of this Fourth Amendment until the Delivery or until the termination of the Agreement, or upon demand for repayment by [Swallowfalls], whichever is the earliest, [Swallowfalls] agrees to provide the Loan Facility of up to Euros 38,327,600.”

Clause 2.5(a) of the 2010 Loan Agreement provided:

“Unless previously repaid or prepaid pursuant to this Loan Agreement the Borrower shall repay the Loan... on the first to occur of: (i) the date on which the Lender gives the Borrower notice that the Loan is immediately due and

repayable; (ii) the date on which the Agreement terminates; (iii) an Event of Default; (iv)the Completion Date; or (v) upon Delivery.”

After MYT’s repeated failures to repay the loan, Swallowfalls gave notice under Clause 2.5(a) of the 2010 Loan Agreement that the loan was immediately due and payable. Swallowfalls obtained summary judgment against MYT. MYT appealed, arguing that the loan was not repayable on demand but only when an Event of Default had occurred or the Agreement was terminated.

The Court of Appeal decisionThe dispute turned on the construction of Clause 2.5(a) of the 2010 Loan Agreement. The Court of Appeal applied a natural construction to the provision, agreeing with the trial judge. The Court held that:

“If a clause provides that a loan is to be repaid ‘on the first to occur of’ a number of events (i) to (v) and one of those events is ‘the date on which the Lender gives the Borrower notice that the Loan is immediately due and payable,’ the natural construction of the words is that, once such notice is given, the loan is to be repaid.”

The Court added that the natural construction of the provision was confirmed by Article 3.11 of the Fourth Amendment, whereby Swallowfalls agreed to provide the loan facility from the signing of the Amendment “until the Delivery or until termination of the Agreement or upon demand for repayment by the Buyer”.

The Court underscored the importance of considering a disputed provision in its relevant contractual context and history, including the purpose for which the parties entered into the agreement. In Swallowfalls, the Court observed that if the repayment on demand provision was in the first amendment, “one could legitimately say that the contract was somewhat one sided.” On this basis, the Court rejected MYT’s argument that the provision would lead to uncommercial consequences, given that the 2010 Loan Agreement only came about as a result of MYT’s repeated failures to meet its repayment obligations under the loans.

This decision also reminds us of the well-established “rule” of contract interpretation that plain, clear and unambiguous contract wording should be interpreted as such, and such terms given their natural and ordinary meaning. This was also the proper construction of the contract in a commercial context.

The Court was also asked to consider whether two implied terms proposed by MYT should be incorporated into the 2010 Loan Agreement. The Court agreed with MYT that it was appropriate to imply a provision that Swallowfalls would cooperate with MYT in confirming the completion of milestones in the construction process. The reason for this implied term was nothing more than “an ordinary implication in any contract for the performance of which co-operation is required.” However, there was no need to imply another term that Swallowfalls would not prevent MYT from repaying the loan, or delay MYT from repaying the loan, as the implied term as to cooperation would suffice to make the contract work.


CommentThis decision is in line with the Supreme Court’s decision in Rainy Sky S.A. and others v Kookmin Bank [2011] UKSC 50 (an Ince case), in which it was held that, where a term of a contract is ambiguous, it is generally appropriate to adopt the interpretation that is most consistent with “commercial common sense”. Swallowfalls serves as a reminder of the importance of careful drafting of commercial contracts in order that the language used correctly expresses the contracting parties’ intentions.

Maureen PohAssociate, [email protected]

John SimpsonPartner, [email protected]

PRC Rules relating to the provision of cross-border security are relaxed: new SAFE regulations come into force

The Provisions on the Administration of Foreign Exchange for Cross-Border Security (the “New Regulations”), published by the State Administration of Foreign Exchange (“SAFE”) in the PRC came into force on 1 June 2014 and replace 12 existing regulations providing for cross-border security.

Reflecting a huge step forward by SAFE, the New Regulations apply to and regulate all kinds of cross-border security structures, including the following three categories, which are based on the places of registration of the parties:

1. Nei Bao Wai Dai or “Outbound Security,” where the security provider is registered onshore (i.e. Chinese), and the obligor and the creditor are both registered offshore; thus, for example, where a guarantee is given but only the guarantor is Chinese.

2. Wai Bao Nei Dai or “Offshore Security,” where the security provider is registered offshore, but the obligor/debtor and the creditor are both registered onshore (i.e. Chinese); using the same example again, where a guarantee is given, the guarantor is not Chinese, but both the other parties are.

3. Any other types of cross-border security in which either the creditor or debtor is onshore (Chinese) but the other is offshore, and thus the cross-border element is between these two parties; the security provider may be either onshore or offshore.

The main changesThe main changes are as follows:

> The validity of any cross-border security agreement is no longer subject to SAFE approval, registration, filing or other SAFE administrative requirements. A security agreement would include, for example, a mortgage, pledge, guarantee or standby letter of credit.

> In relation to (1) Outbound Security and (2) Offshore Security, the previous system of quota management and pre-approval has been replaced with a requirement for registration of the security following its execution. Prior approval of the security is not required.

> For (3), any other types of cross-border security, no registration or filing is required.

> The distinction in the administrative schemes regarding security for finance purposes and security for non-finance purposes has been abandoned. This means that banks are no longer subject to any quota management in relation to security for finance purposes.

> Individuals are now explicitly permitted to provide Outbound Security by reference to the corresponding rules applicable to non-banking institutions.

> SAFE approval on the enforcement of security is abolished.


In practice, these changes mean:

> In relation to charterparties, where, for example, a Chinese guarantor provides to a foreign shipowner a parent guarantee of performance by the charterer of a charterparty: if (a) the charterer is a foreign company, the guarantor must register the guarantee with SAFE within 15 days, but; if (b) the charterer is a domestic Chinese company, then the guarantee will be characterised as (3) above, “any other type” of cross-border guarantee, and will not require any form of filing, registration or approval.

> For an English P&I Club providing a guarantee, then: (a) if this is provided directly to a Chinese company as claimant on behalf of a foreign shipowner, no registration will be required, but; (b) if it is provided on behalf of a Chinese shipowner, this will fall within type (2) above and will require registration.

> In relation to refund guarantees, the position is as follows; at present, where a Chinese yard is obliged under a shipbuilding contract to procure a refund guarantee from a Chinese bank, that Chinese bank will file general information regarding that guarantee (and any material amendment to it) with SAFE on a monthly basis as part of a risk management requirement, although prior SAFE approval is not required, nor is SAFE registration. Under the New Regulations, that position would appear to be unchanged.

CommentWe expect that these New Regulations will be warmly welcomed by the international market, offering, as they do, flexibility, certainty and accessibility when using cross-border security.

Haoran ZhangAssociate, [email protected]

Vincent XuPartner, [email protected]

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