January 16, 2017

Marine News January 2017

Hit by a cyber-attack? What to do, who to contact and the importance of a rapid response

Written by Dean Carrigan, John Gallagher and Nitesh Patel

The first 48 hours following a cyber-attack are critical. Making the right calls will manage the threat and mitigate the risk to your business. You need a rapid response - but, what are the right calls? We set out the steps you should take.

The threat

You are the chief information security officer at a high profile, multinational shipping company, well known and well respected. You know about the risks of data breaches and cyber-attacks and convinced the board to include a cyber insurance policy within your suite of cover.

One morning, you are informed by I.T. of evidence your systems could be currently under attack. I.T. suspects that shipping records, including cargo details, customer information and vessel security information, are being targeted. Thousands of clients' data and the safety of your vessels may be at risk.

Lucky you have that cyber policy; that should come in handy... what do you do now?

The "cyber" risk

Much has been written about the real and present risk of a cyber-attack on businesses and individuals and with good reason.

Recent cyber-attacks on motor vehicles, airlines, insurance companies, health organisations, retailers, e-tailers, law firms, hotels, charities, online service providers, restaurants, aerospace companies and government organisations (among others) have categorically demonstrated that every industry has exposure to cyber risk and is susceptible to data breaches.

Government and regulators (both national and international) are increasingly focused on cybersecurity and cyber resilience. Against this background, it is clear that cyber risk management should be at the top of every company's agenda. Like any other risk, cyber risk can be managed and mitigated. Increasingly, cyber insurance (and the response teams that often come with such insurance) is being considered as a key aspect of a business' risk management and mitigation strategy.

The role of a breach coach in a rapid response

In responding to a major cyber-attack, rapid response cover can play a pivotal role in controlling the fallout from an attack and also limit the financial and reputational damage.

The first 48 hours after a company has identified it is under a cyber-attack are pivotal. The decisions made on how to deal with an attack at this time will impact how the matter will be handled going forward.

Ideally, any business facing a cyber-attack will have in place a considered and tested incident response plan to provide guidance on how to react. The importance of preparation in effectively managing a cyber-attack or data breach and some proposed steps were set out in our previous article, 'Data breaches – how to effectively avoid them and manage them if they happen'.

Where rapid response cover is available (through cyber insurance cover or otherwise), a company should immediately contact the rapid response provider (often referred to as a breach coach, details of which are often in the cyber policy or incident response plan) as soon as it becomes aware it has been the subject of an attack.

The breach coach will act in a coordination role, summoning a team of legal, privacy, security, technology and media experts to determine how to handle the current situation in very short order.

THE FOLLOWING MATTERS ARE AMONG THE MOST CRITICAL ISSUES THAT ARE MANAGED BY A BREACH COACH AND DEALT WITH IN THE IMMEDIATE WAKE OF A CYBER INCIDENT:

Manage and protect communications

In the heat of the first 48 hours, it is often the case that purported admissions or incriminating statements can be made by a company's staff (particularly I.T. staff), which can be misinterpreted in the public domain and impact the company's reputation or worse lead to third party claims. It is imperative that these and other communications about the attack are carefully managed and protected as soon as possible.

It is highly recommended that a legal advisor be assigned the duty of coordinating the rapid response team as they will be able to liaise with team members and the company, and claim the protection of legal professional privilege over most of those communications.

The ability to preserve privilege following a data breach has been considered in detail in our article, 'Preserving privilege following a data breach'.

Plugging the hole

It is of course critical that any cyber-attack be stopped as soon as possible. However, depending on the nature of the attack, a heavy handed response is not always best. This is particularly the case with more complex attacks that may be exploiting multiple weaknesses to attack your systems in a multi-pronged manner.

A brute force approach in those circumstances may simply alert the attackers of your knowledge of the attack and cause them to retreat, which may in turn prevent you from identifying all the system weaknesses that were exploited.

To determine the best approach to secure the attack, the breach coach will direct technology and security experts to liaise with the company's staff to determine the best response to the attack.

Where available, a security and technology plan is often executed to respond to the attack, part of which will involve identifying the extent of damage caused by the attack and also to limit the extent of business disruption caused.

Has there been a data breach?

In addition to identifying and plugging the attack, technology and security experts assist in determining if a data breach has occurred and its extent.

Contrary to common misconception, a cyber-attack and a data breach are not the same. While many cyber-attacks have the primary aim of extracting data from a system, constituting a data breach, other forms of attack aim to directly extort funds from a company (for example, certain malware attacks). A 2015 AON Cyber Impact Report revealed that only 29 per cent of cyber-attacks experienced by respondents in the past 2 years resulted in the theft of confidential company data. Many data breaches also occur due to improper internal handling of data.

Breach notifications

If a data breach has occurred, it is important to identify as accurately as possible the extent of the records stolen, particularly the nature of the information stolen and the location (or locations) of the affected entities, which is required for notification purposes.

The data breach information the security experts gather is conveyed to the breach coach, who is burdened with the potentially substantial task of coordinating the identification of and compliance with relevant notification laws.

The first step will be to identify jurisdictions that are affected by the data breach. The identification of jurisdictions a company may be exposed to is an often overlooked risk that companies do not properly consider. In fact, AON's report revealed that only 24 per cent of respondents are fully aware of the consequences that could result from a data breach or security exploit in other countries in which their company operates.

Identifying the jurisdictions and breach notification laws of each jurisdiction as soon as possible is critical given the diversity in the requirements that notification laws across the world impose. Advisors with a global reach greatly assist in undertaking this possibly mammoth task within a reasonable time frame.

The variety of the notification requirements for even a relatively minor breach can be surprising, with regulations in some jurisdictions amounting the breach to criminal conduct, whereas no action may be required in other jurisdictions. The deadlines by which a breach needs to be notified also vary.

The breach coach must often prioritise which of the jurisdictional requirements are the most pressing and connect legal advisors in the relevant jurisdictions with company staff so suitable notifications can be drafted in compliance with regulations.

Of course, the breach coach will also need to liaise with the security experts and be mindful to ensure that any breach notification will not further expose the company to additional attacks.

Managing communications

Depending on how serious a breach is and the extent of the notification that will be made, a breach coach may also need to consider, in conjunction with the jurisdictional legal advisors and the company, whether any public relations material or campaigns will need to be prepared to protect the brand and reputation of the affected company.

The extent of public relations involvement may be heavily guided by how successfully communications regarding the breach have been protected. Generally, the more information that needs to be disclosed about a breach, the greater the need for the involvement of public relations and damage control.

What about cyber insurance coverage?

Cyber insurance is somewhat different to other types of insurance. The most comprehensive cyber policies include rapid response cover. Unlike most other policies, the protection afforded by rapid response could come into play as soon as a potential cyber-attack has been identified, before the existence of a claim has been established.

In this respect, in the midst of responding to an attack, coverage issues may also be lingering. However, it is likely that the information required to determine coverage may not be available for days, weeks or perhaps months. For insurers and their agents to be acting in good faith and to minimise the extent of any loss and damage, particularly business interruption losses, coverage issues should not impede a rapid response to a cyber-attack or data breach incident.

Where policies have significant deductibles, the majority of the rapid response costs will likely fall within the ambit of the deductible and to the feet of the insured. Any delay in coverage determination should not adversely affect insurers or insured businesses (as those costs will fall within their deductible) in such cases.

It is not so clear cut where policies have smaller deductibles. However, insurers and insured businesses should work together and structure their policies appropriately to account for rapid response costs.

Cyber insurance - not your traditional policy

The protections afforded under a cyber insurance policy and the steps that insurers and insured businesses need to take to maximise the benefit of the policy are unique.

The most comprehensive policies in the market have a rapid response cover and access to a team of experts on call to respond to a cyber-attack. However, access to a team of experts in and of itself is not enough. That team needs to be quickly and efficiently coordinated by an experienced breach coach to minimise the loss and damage caused by a cyber-attack and to ensure the optimum outcome for all parties.

The shipping industry and market consolidation: What happens when the music stops?

Written by Joseph A. Walsh II, Conte C. Cicala and Matthew T. Drenan

In a follow-up to our article in October 2016 "Market consolidation and the regulatory review process: Which carrier will be left standing?" we consider the continued momentum of consolidation in the liner service space.

With three mergers, three planned alliances, and a bankruptcy to boot, 2016 had already marked the most transformative year in the post-containerized era. The music has not stopped yet, however; the three largest Japanese carriers, Nippon Yusen KK (NYK), Mitsui O.S.K Lines Ltd. (MOL), and Kawasaki Kisen Kaisha Ltd. (K-Line), recently announced plans to merge container operations through the formation of a joint venture by July 1, 2017, with services beginning by April 1, 2018. NYK plans to provide 38 percent of the equity with MOL and K Line each providing equal 31 percent shares. The newly formed joint venture will become the world’s sixth largest container line and enjoy seven percent of the global market share (approximately 1.4 million TEU). While terminal operations worldwide (excluding Japan) will be included in the joint venture, other components of the companies such as bulk and ferry services will remain unintegrated.  

Home to nine of the ten largest container ports, Asia specifically has seen unprecedented market consolidation. Chinese controlled carriers, China Shipping and COSCO kicked off a cascading year of events in February by merging to form a single new entity, China COSCO Shipping Corp. Hanjin Shipping Co. Ltd.’s bankruptcy followed in August.  

These two events inevitably played a role in sparking the third, as the Japanese shipping lines’ announcement came just two months after the world’s seventh largest carrier filed for bankruptcy, in a region where it had once played a very substantial role. As President of NYK, Tadaaki Naito put it, “[t]he purpose of becoming one . . . is so none of us become zero.”[1] Asia’s three prominent shipping countries - China, Korea, and Japan - have now all been affected by the consolidation that has reshaped the global shipping industry in the span of one year.

Seasoned veteran and former Federal Maritime Commission (FMC) Chairman Richard A. Lidinsky, Jr. described the Japanese carriers’ decision to merge as a proactive one, following Hanjin’s failure, amid a global audience. Moreover, the former Chairman noted that the strengthened formation of China Shipping COSCO Shipping Corp., hurt the individual Japanese carriers, who have never been able to gain much traction in the Chinese market, and likely spurred initial talks that began in Spring 2016. 

But the Japanese shipping lines’ merger is not a revelation, as carriers are implementing survival techniques akin to corporate Darwinism. Cutting costs is the name of the game, with mergers and alliance-shifting aimed at squeezing every bit of efficiency out of redundant corporate make-ups. An unprecedented surplus in market capacity (excess tonnage) and a stagnant world-economy have made freight rates none other than a race to the bottom.

Mass consolidation also comes as no surprise to Lidinsky: “Consolidation is something we have expected for the last ten to twelve years. This is not something we should be afraid of – the market will rebound, it’s just a matter of time.” The shipping industry is certainly entering a brave new world, and as Chairman Lidinsky recognized, “a lean market has never been adverse to the interests of the shipper.”  

The nuts and bolts of the merger will essentially require worldwide regulatory approval, including that of the United States’ Department of Justice (DOJ) Antitrust Division, and the Federal Trade Commission (FTC). The DOJ/FTC Horizontal Merger Guidelines detail the techniques utilized to determine whether a merger will reduce competition. The Guidelines explain that mergers “should not be permitted to create, enhance, or entrench market power or to facilitate its exercise . . . . A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.”[2]

The Japanese merger emulates an all too common narrative. Like others, the merger tracks previous plans to realign, and combine resources through a newly-formed alliance. “THE Alliance” was originally slated to include six carriers, including Hanjin, Hapag-Lloyd, UASC, Yang Ming, MOL, K-Line, and NYK Line.  Now the alliance will include just three, following the merger of Hapag-Lloyd and UASC, and the now dominant presence of the Japanese joint venture. The former five carriers will now partner with just Yang Ming, one of the few Asian shipping lines left completely intact.

A horizontal merger, such as the Japanese joint venture, does not fall within the regulatory scope of the FMC, as the Commission – through the enforcement of the Shipping Act of 1984, as amended – exclusively evaluates the anti-competitive efficacy of proposed ocean carrier agreements. It is undeniable, however, that market consolidation (and concentration) reduces competition, which will inevitably complicate the approval and monitoring process of agreements moving forward.

The long-term question ultimately is, how much consolidation is too much? “Only time will tell,” noted the former Chairman, “but one thing is for sure, there is a tipping point at which decreased market diversification [i.e. fewer carriers] could negatively impact the shipper/consumer.”  The FMC, given its view of itself as principally a consumer protection agency, will inevitably view the market through the lens of the shipper.

Regardless of perspective, consolidation, alone, may not normalize freight rates unless the overcapacity saturating the market is similarly resolved.  

EDITOR’S NOTE: Since Publication, Maersk Line announced it has reached an agreement to acquire German container shipping line Hamburg Süd.  The acquisition of the world’s seventh largest vessel- operating common carrier will strengthen Maersk’s North – South service, and solidify its position as the industry leader with 18.6% of the market share (3.8 million TEU).  Regulatory evaluation by key nations - China, Korea, Australia, Brazil, the United States and the EU, among others -  is expected to last until the end of 2017. 

Like CMA CGM’s acquisition of trans-Pacific leader Neptune Orient Lines (APL), Maersk’s purchase of Hamburg Süd eliminates a competitor, and grants it greater access to niche markets, such as Latin America.  This planned acquisition marks the fourth “M&A” deal in 2016, and comes in the wake of the European Commission’s conditional approval of the Hapag-Lloyd UASC merger

[1] Leo Lewis and Kana Inagaki, Japanese companies bury the hatchet to survive, Financial Times, Nov. 3, 2016.

[2] U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines (2010), available at https://www.ftc.gov/sites/default/files/attachments/merger-review/ I 00819hmg.pdf.

Maritime liens and the bunker industry – How do they operate globally?

Written by James Kennedy

As the repercussions of the bankruptcies of OW Bunker and now Hanjin Shipping continue to be debated in multiple courts across many jurisdictions, attention has turned to the efficacy – or otherwise – of the maritime lien. We take a closer look at this curious and complex legal instrument.

In the context of bunker fuel supply, maritime liens are commonly referred to but often misunderstood. Their use and application have been brought back into sharp focus by the problems caused by the collapse of OW Bunker, in November 2014 and Hanjin, in August 2016.

The collapse of OW Bunker has resulted in an ongoing debacle over who owes what to whom, with shipowners seeking ways to protect themselves from the potential risk of double (or triple) payment, and with aggrieved suppliers persevering in their pursuit of payment for unpaid bunkers from non-contractual parties.

Similarly, the collapse of Hanjin resulted in out-of-pocket bunker suppliers looking beyond their contractual counterparty to other vessel interests for payment of unpaid bunkers. The legal measure that has stood out amongst others in both of these sagas is the maritime lien, particularly as a maritime lien gives rise to the nuclear option of ship arrest.

Therefore, in the current climate of uncertainty with higher risks of counterparty insolvencies, it is as important as ever for bunker suppliers, bunker traders, charterers and shipowners to better understand what maritime liens are, how they operate, when they can be used and how they might be avoided/resisted.

In the context of bunker supply, a maritime lien is generally treated as a claim on a ship in respect of goods supplied to it. It is a special type of maritime claim which often has priority over other creditors without the need for registration and survives the sale of a vessel. Importantly, it is distinct from a contractual maritime claim so it gives the supplier a claim against the ship even if the bunker purchaser is not the shipowner. It will also generally allow for the arrest of a vessel as security for a claim, which is why maritime liens often polarise opinion.

Specific clauses which provide that the supply of goods gives rise to a contractual lien can often be found in bunker supply contracts; however, it should be noted that a maritime lien becomes effective as a matter of law and procedure, so including a specific term providing for a contractual lien may be of limited value. Having said this, it is essential to review contractual terms to understand the precise position under the agreement, and in particular how the terms may impact on the question of what the applicable law is for determining whether the supply gives rise to a maritime lien.

Maritime liens are often misunderstood as they require a wide understanding of different jurisdictions and laws and how they interact.

The laws of jurisdictions which do not recognise maritime liens for the supply of bunkers are most notably England and Commonwealth countries with English law traditions. The laws of jurisdictions which have traditionally recognised maritime liens for the supply of bunkers are most notably the United States, Panama and signatories to the 1926 Convention on Maritime Liens and Mortgages, i.e. France and Italy.

Although US law has traditionally recognised maritime liens for the supply of bunkers, this position has recently been thrown into some doubt. There is currently an ongoing spate of litigation on the issue of whether a maritime lien may be asserted by a physical supplier of bunkers to a vessel. In particular, there are ongoing actions before the US Court of Appeals for the Fifth Circuit (Texas and Louisiana) and the US Courts of Appeals for the Second Circuit (New York). Whilst shipowners and operators have welcomed recent US decisions restricting the operation of maritime liens, there remains some uncertainty over their application, particularly whilst the decisions are subject to appeal.

However, saying that a certain law does or does not recognise a maritime lien for the supply of bunkers is not the end of the matter. As a maritime lien is a claim against the vessel and the claim will be brought in the jurisdiction where the vessel is located/arrested, it will depend on the rules of that jurisdiction as to which law it applies to determine the existence of a maritime lien.

Different countries will have different rules to determine what the applicable law is for establishing the existence of a maritime lien.

For example, in the United States, the courts will apply a test of connecting factors to determine the applicable law, such as the law of the contract, the law of the place of supply, the law of the place of arrest, the law of the flag and the laws of the domicile in which the parties are registered or operating. The courts will examine whether there are sufficient connecting factors to apply US law and it can prove difficult to assess which applicable law the courts will favour.

Some jurisdictions may apply the law of the flag to determine whether a bunker supplier can rely on a maritime lien (e.g. Italy). Some jurisdictions may apply different tests in different regions (e.g. France) or be difficult to predict due to a lack of precedent (e.g. Poland). Some jurisdictions will place greater weight on the contractual terms and conditions (e.g. Panama).

Notwithstanding any contractual terms or any other factors, the English Courts will apply English law to determine the questions of whether the supply gives rise to a maritime lien. This is why, until 2015, it was generally thought that a supplier would not be able to arrest a vessel on the basis of a maritime lien in England and most Commonwealth countries.

In 2015, the Australian Federal Court in the Sam Hawk case held at first instance that a maritime lien could be established based on the US law choice of law clause in the bunker supply contract (which expressly provided for US law to determine the existence of such a lien). As a result of this decision there was an increase in ship arrests in Australia.

However, in September 2016, the Full Court of the Australian Federal Court of Appeal overturned this earlier decision and reinforced the English law position that the substance of the dispute was not contractual and that the choice of law clause in the bunker supply contract was, therefore, irrelevant.

Generally, a supplier will therefore not be able to arrest a vessel on the basis of a maritime lien in England and Commonwealth countries, or when the laws of England or Commonwealth countries are the applicable law in determining the existence of a maritime lien.

Given the above, parties wishing to maximise or, alternatively, minimise exposure to potential maritime liens may wish to consider various options. A shipowner or charterer wishing to minimise exposure may attempt to avoid bunkering and trading in "maritime lien-friendly" jurisdictions, although in practice, this may be difficult to do. It could try to resist US law maritime lien clauses in bunker supply terms but this would only be of benefit in jurisdictions which would consider the contractual choice of law clauses. Alternatively, the Master may write on the bunker delivery note or provide the supplier with a note of protest indicating the supply does not give rise to a maritime lien, but this too may be of a limited value.

Other steps for a shipowner or charterer would include minimising connecting factors to countries favouring maritime liens by avoiding flagging/registering vessels in those jurisdictions or insisting on English law, although again the value of such actions may be limited.

From the point of view of a supplier wishing to maximise their chance of obtaining a potential maritime lien, the reverse of the above would apply: waiting for the vessel to call at "maritime lien-friendly" jurisdictions (bearing in mind applicable time bars), insisting on US law maritime lien clauses in bunker supply terms, and resisting no-lien comments on bunker delivery notes.

In any event, a precise legal assessment of the position to determine the most effective options available for maximising or avoiding the exercise of a lien might be considered. This can be a complex task and, in our experience, requires lawyers with the required specialist knowledge, experience and international network to properly advise and assess the potential risks, and if necessary, take action.

Counterparty default in the bunker industry remains an ongoing risk with current market conditions. It is as important as ever for all parties in the bunker industry to develop an acute understanding of maritime liens and how to maximise their use or, alternatively, how to resist them more efficiently.

As there is no one-size fits-all answer, each case must be assessed on its merits, and will often benefit from early legal advice from a global team of bunker specialists. 

First published in Bunkerspot in December 2016.

So what does "in light ballast condition" mean exactly?

Written by Amy-Jo Clarke

In Regulus Ship Services Pte Ltd v (1) Lundin Services BV (2) Ikdam Production SA [2016] EWHC 2674 (Comm), the Court revisited the meaning of "in light ballast condition" after it was first considered ten years before in Ease Faith Ltd v Leonis Marine Management "The Kent Reliant" [2006] 1 Lloyd's Rep 673, and confirmed it referred to the minimum ballast required to enable a vessel to proceed safely and in a seaworthy condition.

Facts

The dispute concerned the tow of an FPSO from Tunisia (later Malta) to Malaysia, a voyage of over 12,500 nautical miles via the Cape of Good Hope. The claimant was the owner of the tug and it contracted for the tow with the defendants, the owner of the FPSO and its affiliate and disclosed agent, on BIMCO's TOWCON form. It was an express term of the TOWCON that the FPSO would be provided "in light ballast condition". 

Prior to the tow, the parties had engaged in correspondence regarding the amount of ballast that the FPSO was to carry, with the claimant requesting de-ballasting to reduce drag through the water and to achieve a significant stern trim in order to increase directional stability. In contrast, the respondents considered that the FPSO would tow more efficiently with sufficient ballast to submerge the blunt vertical plate that had replaced the bulbous bow. Though it was not reported, the respondents likely also considered that this would prolong the life of the FPSO by reducing fatigue on the hull.

The parties agreed that, since the FPSO would be manned, ballast could be adjusted during the voyage, and so the convoy departed Malta on 6 October 2012 with the ballast, displacement, trim and drafts still under discussion.

Almost immediately, and despite some de-ballasting, the convoy was unable to maintain an average speed of 4.5 knots which the claimant thought was possible (and which was the limit imposed by the marine warranty surveyors), using the agreed quota of two of the tug's engines.

The convoy proceeded with the claimant claiming a breach of the term "in light ballast condition" and pressing for their delay claim to be settled. The respondents acknowledged that some sums were due to the claimant.

Following a two week stand-off in Mauritius, the parties reached an interim agreement over payment, thus allowing the convoy to continue. Further negotiations were unsuccessful and the convoy deviated to Singapore in order for the claimant to assert a possessory lien as security for the unpaid delay claim.

After a series of further discussions, a refusal by the FPSO's Master to heave up anchor and commencement of an in personam claim by the respondents, the TOWCON was terminated with both parties alleging that the other had repudiated the contract. The respondents then arranged a separate towage contract with a third party and the FPSO eventually reached Malaysia in April 2013.

Decision

Phillips J rejected the suggestion that, in order to be in “in light ballast condition”, a tow must inter alia be "legally fit" for the towage (i.e. in a condition that meets with the requirements of a marine warranty surveyor, including whatever ballast condition that surveyor deems necessary, and within the vessel’s Class). He concluded that the effect of the decision of Andrew Smith J in Ease Faith Ltd v Leonis Marine Management "The Kent Reliant" [2006] 1 Lloyd's Rep 673, the only previous authority on the meaning of the term, was:

           "… that light ballast condition is concerned with ensuring physical fitness, primarily stability, for the tow’s voyage …" and that this consisted of "…the minimum ballast that would enable her to proceed safely  and in a seaworthy condition on her intended voyage".

Accordingly, the test was one of physical assessment, capable of producing, in theory, a single ascertainable figure. To adopt a subjective approach would have the effect of removing the protection that the provision was intended to confer for the claimant. 

Unfortunately for the claimant, although it succeeded in establishing that the FPSO was never in the required light ballast condition, it failed to prove that the excess ballast caused any loss of progress, which would have entitled it to contractual delay payments under Clause 17 (a)(ii) of TOWCON.

Phillips J concluded that Clause 17 is triggered only by a deliberate decision by a tug to slow-steam, for example, because it considers that the tow cannot be towed at the originally anticipated speed. The Clause does not operate where, for other reasons, the tug does not deploy all of its resources to tow/attempt to tow at the contemplated speed, or where the tow can in fact be performed at that speed (if all resources are utilised or otherwise).

As for the repudiation, the judge found that the claimant had repudiated the TOWCON first by serving an invalid cancellation notice which included a backdated 48 hour notice period, thereby committing an anticipatory breach of the TOWCON, and entitling the respondents to damages for the cost of the alternative tow to Malaysia.

Comment

At the time of writing, it is not clear whether the case will be appealed, although it seems unlikely that the meaning of the phrase "in light ballast condition" is open to further interpretation. It is the minimum quantity of ballast required to enable a vessel to proceed safely and in a seaworthy condition on the intended voyage. As for the termination of the contract, it is a reminder to a party wishing to exercise such an option to do so according to the terms of the agreement, otherwise the termination may amount to an anticipatory breach, which may render that party liable in damages to their contractual counterparty. 

"CORAL SEAS" – Owners liable for underperformance despite following charterers' orders

Written by Catherine Baddeley

The Commercial Court has upheld on appeal an LMAA arbitration finding that owners had assumed the risk of a fall-off in vessel performance as a result of marine fouling constituting fair wear and tear under a continuing performance warranty. An indemnity for compliance with charterers' orders had no application. 

Background

MV "ANNY PETRAKIS" (the Vessel) was time chartered to Bunge SA (the Head Charterers) by consecutive time charters, each on an amended NYPE 1946 form, by the then Vessel owners. The Vessel was then transferred to Imperator I Maritime Company (Owners), the charterparties novated, and the Vessel renamed "CORAL SEAS". The Head Charterers fixed the Vessel to C Transport Panamax Ltd (Sub-Charterers) on effectively back-to-back terms with the head charterparties (save as to rates). On Sub–Charterers' instructions, the Vessel spent a few weeks in tropical waters in/off Brazil. It was immediately apparent on departure from Brazil that the Vessel performance had fallen off significantly. On arrival in Singapore, an inspection found light fouling on the hull bottom and heavy fouling of the propeller by barnacles. The Sub-Charterers made hire deductions to set-off damages for breach of the continuing speed warranty, which were passed up the chain. Arbitrations were subsequently commenced under the relevant charterparties and heard concurrently.

At Clause 29(b) of the charterparties, Owners warranted that the Vessel would be capable of maintaining a certain average speed on all sea passages, under fair weather conditions.  

Clause 29

(a) Vessel’s description

D Speed/consumption (expected as a new building)

About 14.5 knots ballast/about 14 knots laden on about 33.5 mts ISO 8217:2005 (E)RMG 380 plus about 0.1 mts ISO8217:2005 (e) DMA in good weather condition up to Beaufort scale four and Douglas sea state three and calm sea without adverse current … [in the case of the sub-charterparty the equivalent provision concluded “… up to Beaufort Scale 4 and Douglas Sea State 3 with not current and/or negative influence of swell (sic)”].

Plus: 

Daily Generator Consumption about 2.5 mt at sea/about 2.0 mt (at sea/idle) ISO 8217:2005 (E)RMG 380 …

All details about

 All details are given in good faith as per shipbuilders’ plans and as a new building vessel can be described.

[In the case of the sub-charterparty these details were simply followed by the words “All details about”]

(b) Speed Clause

Throughout the currency of this Charter, Owners warrant that the vessel shall be capable of maintaining and shall maintain on all sea passages, from sea buoy to sea buoy, an average speed and consumption as stipulated in Clause 29(a) above, under fair weather condition not exceeding Beaufort force four and Douglas sea state three and not against adverse current.

[In the case of the sub-charterparty the equivalent provision concluded “… not exceeding Beaufort Force 4 and Douglas Sea State 3 with not against adverse current (sic)”].

The arbitrators found that, as a matter of fact, the Vessel did not maintain the warranted speed, that the cause of the Vessel's reduced speed was the underwater fouling which developed from the lengthy stay in tropical waters, and that the marine growth constituted fair wear and tear incurred in the ordinary course of trading.

The arbitrators concluded that Owners had assumed the risk of a performance fall-off under clause 29(b) for all sea voyages, including those after a prolonged wait in tropical waters at Charterers' orders.

Appeal pursuant to s.69 Arbitration Act 1996

Owners appealed on the following point of law:

Where under a time charter the owner warrants to the time charterer that the vessel shall maintain a particular level of performance throughout the charter period, and the time charterer alleges underperformance in breach of that warranty, is it a defence for the owner to prove that the underperformance resulted from compliance with the time charterer's orders?

The Court analysed the relevant authorities. It is well established that, as a general rule, Owners have an implied right to indemnity for following charterers' employment orders, but such indemnity does not extend to the usual perils of the voyage in respect of which Owners must be taken to have accepted the risk. In The Kitsa (2005) 1 Lloyd's Rep 432, cleaning costs of a fouled hull following a delay in warm waters were held to be outside the scope of the indemnity, being a foreseeable risk that the shipowner must be taken to have agreed to bear. 

In the appeal, Owners sought to refocus their case away from an emphasis on the implied indemnity, arguing that the continuing speed warranty under clause 29(b) was given on the basis that the Vessel continued to have a clean hull. In the event of a drop-off in speed, Owners would be responsible for cleaning the hull, but the Charterers would not be entitled to treat the Vessel as off-hire, nor claim for a dip in performance.

The Court did not accept this argument. The continuing performance warranty was given in wide and unqualified terms. It was open to the parties to include an express restriction excluding the performance warranty following the vessel's stay in warm water ports, but they did not do so. Mr Justice Philips concluded that:

Where a vessel has underperformed, it is not a defence to a claim on a continuing performance warranty for the owners to prove that the underperformance resulted from compliance with the time charterers' orders unless the underperformance was caused by a risk which the owners had not contractually assumed and in respect of which they are entitled to be indemnified by the charterers.

Comment

This case highlights the limits to an owner's implied right to an indemnity in respect of the consequences for following charterers' orders. The indemnity has no application in respect of risks or costs which owners have expressly or implicitly agreed to bear in the charterparty. It is, however, open to owners expressly to exclude any risk which they would otherwise be taken to have assumed. In respect of vessel performance, it is now common to exclude the performance warranty in respect of voyages occurring after a vessel has been waiting in warm water ports. 

First published in Maritime Risk International, October 2016 - "Underperformance results in risk assumption"

New Saudi arbitration centre signals the rise of a new regional and global arbitration hub

Written by Ben Cowling

It is common knowledge that the Kingdom of Saudi Arabia is the largest economy in the Arabian Gulf and has the second largest proven oil reserves in the world. It is less well-known that, in recent years, the Kingdom has developed an advanced arbitration system – starting with the 2012 Arbitration Law based on the UNCITRAL Model Law and now the publication of world-standard arbitration rules by the Saudi Centre for Commercial Arbitration (SCCA). Such developments put the Kingdom on a direct path to becoming a regional and global arbitration hub – including the seat of choice for the many Saudi disputes that, historically, have been determined by other local and international dispute resolution fora.

The context

Historically, disputes concerning commercial dealings in Saudi Arabia have been referred to international arbitration centres (such as the International Chamber of Commerce (ICC), Dubai International Arbitration Centre (DIAC), the DIFC-LCIA Arbitration Centre and the Singapore International Arbitration Centre (SIAC)) or to the local courts (particularly in relation to government contracts). As such, significant barriers to the efficient resolution of Saudi commercial disputes exist – including, in the case of offshore arbitration, additional cost, inconvenience and obstacles to the enforcement of awards.

In 2012, a new Saudi Arbitration Law was enacted by Royal Decree M/34. The Arbitration Law is based on the UNCITRAL Model Law and intended to be consistent with the principles enshrined in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which the Kingdom acceded to in 1994. Saudi Arabia was the first of the Gulf States to adopt a form of the UNCITRAL Model Law into its domestic law, thereby leading the region in bringing its arbitration law into line with international standards.

The SCCA

Established by a Cabinet decision in 2014, the SCCA is an independent body governed by a Board of Directors from the private sector (who are prohibited from also holding government positions). It is the SCCA's aim to be the preferred alternative dispute resolution choice in the Gulf region by 2030.

The SCCA Rules

In 2016, the SCCA released its Arbitration Rules (effective 31 July 2016) (SCCA Rules)1. The SCCA Rules are the first rules of arbitration for general application to commercial dealings to be released in the Kingdom.

The SCCA has stated that its starting point for the development of the SCCA Rules was the UNCITRAL Arbitration Rules, although the SCCA has not been afraid to make significant amendments to the template, as exemplified below:

  1.  Administration – While the SCCA Rules are based on UNCITRAL, they provide for institutional, and not ad hoc, arbitration with the SCCA acting as the "appointing authority". 
  2. Emergency procedures and interim measures – Consistent with the trend across all sets of major institutional rules, the SCCA Rules contain a provision for the appointment of an emergency arbitrator with power to grant relief prior to the appointment of the arbitral tribunal.
  3. Joinder – The SCCA Rules provide for the joinder of third parties beyond the claimant and respondent stated in the original notice of arbitration. Again, this is reflective of multi-party changes introduced to many sets of arbitral rules, most recently the SIAC Arbitration Rules. 
  4. Seat and language of arbitration – Under the SCCA Rules, parties are free to specify the seat of the arbitration, as well as the language of the arbitration, as they see fit. 
  5. Governing law – Consistent with UNCITRAL, the SCCA Rules state that the arbitral tribunal is bound to decide in accordance with the terms of the contract, taking account of any usage of trade applicable to the transaction. That said, these provisions of the SCCA Rules are expressly stated to be subject to the rules of Sharia and any international conventions to which the Kingdom is a party.
  6. Appointment of arbitral tribunal – In a significant departure from UNCITRAL, arbitral tribunals consisting of three members (unless the parties have agreed otherwise) are not constituted by each party nominating one member and those two members selecting a chairperson. Instead, the SCCA provides a common list of candidates from which the parties are to try to agree the members of the arbitral tribunal, failing which the SCCA will select the members based on those "approved" by both parties from the list and ranked in order of preference.
  7. Pleadings and procedure – Unlike UNCITRAL, the SCCA Rules do not require pleadings and the arbitral tribunal has a wide discretion to determine its own procedure – including deciding preliminary issues and bifurcating proceedings.
  8. Privilege – The SCCA Rules state that the arbitral tribunal shall take into account the applicable principles of privilege, including those involving the confidentiality of communications between lawyer and client. In particular (and uniquely in the region), the SCCA Rules state that when the parties, their counsel or the documents would be subject under applicable law to different rules, the arbitral tribunal should, to the extent possible, apply the same rules to all parties, giving preference to the rule that provides the highest level of protection.  
  9. Awards – In addition to the usual procedures for the making of awards under UNCITRAL, the SCCA Rules state that the final award is to be made no later than 60 days from the date of the closing of the hearing unless otherwise agreed by the parties, specified by law or determined by the Administrator.
  10. Fees – Finally, consistent with an ICC approach, the SCCA Rules fix administrative and arbitrators' fees as a percentage of the value of the amount in dispute.
  11. A bright future

The establishment of the SCCA and the release of its impressive Arbitration Rules is an extremely positive development and should promote further foreign investment and business confidence in the Kingdom's economy. We have already seen parties adopting the SCCA Rules and believe that they recognise a further shift towards a recognition by Saudi parties that arbitration is a commercial, robust and reliable method for dispute resolution that should considered and embraced.

[1]http://www.sadr.org/en

US Lifts Sanctions on Sudan

Written by Douglas Maag, Senior Counsel

On January 13, 2017, the US Treasury Department announced that a new general license will authorize all transactions prohibited by the Sudanese Sanctions Regulations (SSR) and related presidential executive orders (the New License).

In concise, sweeping language, the New License provides:

All transactions prohibited by this part and Executive Orders 13067 and 13412 [i.e., the SSR and the related executive orders], including all transactions that involve property in which the Government of Sudan has an interest, are authorized.

The New License became effective on January 17, 2017, just days before Donald J. Trump took office as US president, and will be codified in section 538.540 of the SSR.

A related Treasury Department press release notes that under the New License:

  • All property and interests in property blocked pursuant to the SSR will be unblocked.
  • All trade between the United States and Sudan that was previously prohibited by the SSR will be authorized.
  • All transactions by U.S. persons relating to the petroleum or petrochemical industries in Sudan that were previously prohibited by the SSR will be authorized, including oilfield services and oil and gas pipelines.
  • U.S. persons will no longer be prohibited from facilitating transactions between Sudan and third countries, to the extent previously prohibited by the SSR.

The Treasury Department’s announcement was made in conjunction with President Obama’s issuance of an executive order that, conditionally, will essentially provide for full revocation of US-Sudan sanctions (the Executive Order). The Executive Order was issued based upon actions taken by the Sudanese government, including:

a marked reduction in offensive military activity, culminating in a pledge to maintain a cessation of hostilities in conflict areas in Sudan, and steps toward the improvement of humanitarian access throughout Sudan, as well as cooperation with the United States on addressing regional conflicts and the threat of terrorism.

The revocation of US-Sudan sanctions is to become effective on July 12, 2017, provided that State Department publishes a report stating that the government of Sudan has sustained the positive actions that gave rise to the Executive Order.

Despite the New License, it should be noted that:

  • Exports and re-exports to Sudan of US agricultural commodities, medicines and medical devices must still be shipped within twelve months of entering into the export/re-export agreement;
  • The US Commerce Department’s broad controls on exports and re-exports of other US goods to Sudan remain in effect; and
  • Individuals and entities blocked under US-Darfur sanctions program, of which there are currently eight, will remain blocked.

For nearly a decade, the US has maintained an extensive embargo on Sudan, similar to the embargos on Iran, Cuba, Syria and North Korea. The dramatic changes announced on January 13 stand in sharp contrast to the Obama Administration’s incremental easing of sanctions under the Iran and Cuba programs. Whether the incoming Trump Administration will support these changes remains to be seen.