Interlegal digest – SHIPPING
13 July, 2022
5
Interlegal Quarterly Shipping Newsletter
“Subject to…” – is it an absolute excuse for contract non-performance?
DHL Project & Chartering Ltd v Gemini Ocean Shipping Co. Ltd [2022] EWHC 181 (Comm)
The dispute was arising out of the Charterers repudiatory breach of voyage Charter Party concluded between the parties for the vessel for carriage of coal. A fixture recap was issued preceded by the words “subject shippers/receivers’ approval”. As soon as the C/P was concluded, the Charterers rejected the vessel on the grounds that she had not been approved by the Shippers. The Owners subsequently sought damages for wrongful rejection and applied to arbitration for its recovery. A sole arbitrator in London issued an Award finding that the Charterers repudiated the charter on the basis that the vessel’s approval had been unreasonably withheld.
However, shortly the Charterers successfully challenged the Award pursuant to Section 67 of the Arbitration Act 1996 on the basis that the arbitrator had no jurisdiction.
It was found that the “subjects” provision was a pre-condition to the effectiveness of both the contract and the arbitration agreement contained within it, that is approved by the decision in The Leonidas [2020] EWHC 1986 (Comm). Jacobs J. said: “The placement of this provision at the start, and the use of bold text, reflected the importance of this provision. It indicated, in my view, that it qualified everything which followed. That naturally includes the arbitration clause itself.” Therefore, as “shipper/receiver’s approval” was not in fact obtained, the “subjects” provision was not satisfied, and so neither the contract nor the arbitration agreement became binding on the parties.
LMAA publishes caseload statistics for 2021
Despite the disruption and restrictions of last year, the LMAA has published a solid set of its caseload statistics for 2021. Under the LMAA Terms and Procedures the members reported 2777 new appointments in an estimated 1,657 references.
Reflecting readjustments which occurred in shipping markets after the turmoil of 2020, the numbers are slightly but not significantly reduced compared with 2020’s figures (3,010 and 1,775 respectively). However, there was also a considerable increase in the number of appointments under the Intermediate Claims Procedure (54 up from 43 in 2020), which is designed to deal with claims between US$100,000 and US$400,000.
It is estimated that 531 awards were published in 2021, that is the highest number of awards since 2016. The overwhelming majority of LMAA arbitrations are conducted on documents and written submissions only, but it should be noted, that the pandemic did not even prevent progress with hearings, such as in-person, virtual and hybrid after some interruptions in 2020. 77 awards were made after hearings in comparison to 53 in 2020.
The 2021 statistics show that London-seated arbitration under LMAA Terms and Procedures remains the world’s first choice of arbitration for the resolution of maritime disputes (including shipping, offshore energy and international trade).
Russian Sanctions and Their Wider Implications for Commodities and Shipping Clients
While the Ukraine – Russia war continues, unprecedented global sanctions against Russia continue to be implemented. Reviews of existing contracts, insurance policies and other impacts and contingencies will still need to be undertaken regularly in light of the changing daily landscape.
The EU, among other restrictive measures, imposed import bans into the EU on goods originating from the non-government-controlled areas of the Donetsk and Luhansk regions, as well as restrictions on the direct or indirect provision of financing and insurance and reinsurance of the goods. Restrictive measures also include the prohibition to sell, supply or transfer or export goods and technology within the key sectors (transport, telecommunications, energy, the prospecting, exploration and production of oil, gas and mineral resources) to the mentioned regions.
For the commodities and shipping perspective, since the end of February it has been seen a wide range of legal claims and challenges, from dealing with damaged vessels in ports of Ukraine, to challenging the validity of force majeure notices and disputes arising under price adjustment clauses, and issues relating to increased margin calls.
While the war continues, significant upheaval and adaptations to supply chains and contractual arrangements will need to be undertaken and kept under continuous review.
In the light of above, careful review of existing sanctions and force majeure clauses in contracts will be necessary to consider whether the imposition of sanctions will enable the parties to a transaction to suspend performance without liability and/ or terminate the contract. This may involve not only looking at the scenario where the law directly prohibits performance, but also the scenario where the parties may be faced with the risk of the imposition of sanctions.
For companies, who directly deals with commodity trading, shipping, or storage and processing industries we also recommend careful reviewing all their insurance policies and made determinations as to which locations, assets or inventories were covered by wartime insurance clauses, which were not, and what actions might be necessary to be taken in occurred circumstances.
Claims Handling on the Danube: breach of the Charter Parties
Since the beginning of hostilities in Ukraine, in the shipping practice of Interlegal, the number of requests regarding the settlement of disputes between Charterers and Ship Owners has significantly increased due to the unlawful termination of the charter parties, which involve a voyage with a ship call to the seaports of Ukraine, especially to ports on the Danube.
In one of such cases, a voyage charter involved the vessel carrying cargo from the port of Reni (Ukraine) to the port of Marmara (Turkey). The ship came to the anchorage in the port of Sulina, but soon, without even starting to move towards Reni, the Owner canceled the charter, referring to the worsening situation in Ukraine, which is certainly an illegal step taken by the Owner.
In another case, the parties entered into a voyage charter, which involved cargo transportation from the port of Reni (Ukraine) to the port of Silistra (Bulgaria). Failing to provide the vessel in the agreed lay/can, the Shipowner canceled the voyage, arguing his position by the fact that the crew was afraid to proceed to Ukraine due to active hostilities and referring to the force majeure clause in the charter, the applicability of which was soon refuted.
Both cases contain different clauses in the charter, different applicable law, different reasons for cancellation, but the subject of the dispute remains the same.
In both cases, Interlegal lawyers were able to successfully prove the illegality of actions taken by the Shipowners, and also continue to help Clients carefully examine the current situation, clarify their rights and obligations, and most importantly, resolve the dispute amicably by conducting Claims Handling. Such a procedure involves professional negotiations between the parties to the dispute, as well as the reservation for the Charterers of the right to claim recovery for all losses caused by the violation of the charter conditions by the Owners, including the difference in freight for obtaining alternative tonnage, cargo storage costs, etc. after the completion of the replacement voyage.
Do Sanctions Create Force Majeure?
MUR Shipping BV v RTI Ltd [2022] EWHC 467 (Comm) Jacobs J.
This recent case in the London Commercial Courts raised an important issue on the extent of a party’s entitlement to serve a force majeure notice in circumstances where an alternative mode of performance, albeit of a non-contractual nature, was available to it.
In June 2016 the Contract of Affreightment (“COA”) was concluded between Mur Shipping BV (“the Owners”) RTI Ltd (“the Charterers”) for carriage of approximately 280,000 metric tons per month of bauxite from Conakry in Guinea to Dneprobugsky in Ukraine. On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) applied sanctions to RTI’s parent company, adding them to the Specially Designated Nationals and Blocked Persons List. This event led to the Owners sending a force majeure notice on 10 April 2018.
The Owners declared that further performance of the COA would be a breach of sanctions, which in turn would also prevent dollar payments as required under the COA. The Charterers responded that sanctions would not interfere with cargo operations, that payment could be made in Euros, and that the Owners, being a Dutch company, were not a “US person” caught by sanctions. Relying upon Force Majeure clause the Owners declined to nominate ships under the COA and the Charterers referred to the arbitration with the claim for recovery of incurred additional costs for substitute alternative tonnage.
The Tribunal succeeded the Owners’ position, but it was one point on which it failed – applying the terms of the force majeure clause, it could have been “overcome by reasonable endeavours from the Party affected.” The tribunal considered that the exercise of reasonable endeavours required the Owners to accept a proposal made by the Charterers to make payment in Euro, describing that this alternative has no detriment to Owners and the Charterers had made it clear in correspondence that they would bear any additional costs.
Soon the Owners appealed arguing that the exercise of “reasonable endeavours” does not require the affected party to agree to vary the terms of the contract or agree to a non-contractual performance, therefore they had not accepted payment in (non-contractual) Euro instead of (contractual) US Dollars.
Having considered the case-law in this area and in particular the well-known cases of Bulman v Fenwick and Vancouver Strikes the Judge held that there was no authority to support the proposition of Charterers and that the exercise of reasonable endeavours did not require the Owners to sacrifice their contractual right to payment in US$, and with it their right to rely upon the force majeure clause.
If there was a contractual right to payment in US$, and a contractual obligation to pay in that currency, then this was a right and obligation which formed part of the parties’ bargain. The exercise of reasonable endeavours required endeavours towards the performance of that bargain; not towards the performance directed towards achieving a different result which formed no part of the parties’ agreement.
The Charterers also argued the defective nature of the force majeure notice given by the Owners, as it did not spell out how the prevention of US dollar payments, in consequence of the sanctions, would impact upon loading and discharge.
According to this point the judge held that it is not necessary for a notice to spell out a detailed case in that regard and that a notice need not contain or be equivalent to a detailed legal submission, particularly bearing in mind that it must be served in a short time-frame, namely within 48 hours of a party becoming aware of a force majeure event.
Furthermore, the notice was sufficient to fulfil the purpose of a force majeure notice as described by Aikens J in Mamidoil-Jetoil Greek Petroleum v Okta Crude Oil Refinery [2003] 1 Lloyd’s Rep 1 at [134]:
“The reason for requiring notice to be given must be that the “other party” can then investigate the alleged force majeure at the time. It can challenge whether it does prevent performance or delay in performance by the party invoking force majeure. Alternatively it can see if there are other means of enabling performance to be continued.”
That it was sufficient was demonstrated by the Charterers’ response to the notice from which it was apparent that the notice had indeed enabled them to investigate the alleged force majeure events and to challenge whether it prevented or delayed performance.
Commercial Court sets aside part of an award for breach of the Tribunal’s duty of fairness under Section 68 Arbitration Act 1996:
The Award in question arose from a dispute between the Owners (Lavender Shipmanagement) and Charterers (Ducat Maritime) under a time charterparty in respect of the m/v Majesty. Owners claimed US$37,831 by way of unpaid hire on the basis of their Final Hire Statement and referred the dispute to the arbitration under the LMAA Small Claims Procedure. Charterers denied that the outstanding sums and further sought to deduct US$15,070 for the Vessel’s underperformance by way of set off and counterclaim.
The Arbitrator succeeded the Owners’ claim, save that one item, US$9,553 for damages for inadequate hull cleaning, was not due and owing. He also rejected Charterers’ underperformance counterclaim.
As a general rule the Arbitrator should have awarded Owners US$28,277.91, that is calculated as the claimed sum (US$37,831.83) less the unsuccessful hull cleaning claim (US$9,553.92). Instead, the Arbitrator added the Charterers’ unsuccessful counterclaim of US$15,070 to Owner’s total claim which led to the Owners were awarded approximately 33% more than they were entitled to. Subsequently the Charterers twice applied to correct the Award on the basis of a clerical mistake or error under section 57(3) of the Arbitration Act 1996. However, the Owners opposed the application and the Arbitrator declined to correct the Award.
Soon the Charterers attempted to challenge the part of the Award submitting that there was an irregularity falling within section 68(2)(a) – failure of the tribunal to comply with general duty of the Tribunal – on two alternative arguments:
(1) The Arbitrator reached a conclusion that was contrary to the common position of the parties, without providing an opportunity for the parties to address him on the issue;
(2) He had made an obvious accounting mistake.
On the first ground, Butcher J held that there was such an irregularity and that the parties had agreed that the Charterers’ counterclaim did not form part of the Owners’ claim. The parties had not made submissions on that point because there was no need to.
According to the second ground, Butcher J found that a gross and obvious accounting/arithmetical mistake may well represent a failure to conduct the proceedings fairly, therefore Section 68 can probably be regarded as applicable, without subverting its focus on process.
Having found that there was an irregularity falling within section 68(2)(a), Butcher J came without any doubt to the conclusion that there was “substantial injustice” and accordingly set aside part of the Award.
The importance of this decision lies in providing the clarity on the recourse a party has under Section 68 of Arbitration Act when faced with an award containing a “glaringly obvious error” which the Tribunal refuses to correct. A decision can be challenged, not on the basis that the tribunal was irrational or illogical in its reasoning, but on the basis that it has departed from the common ground parties implicitly share.
