Current Trends in Shipping Law of Possible Interest to Commodities Traders — PRAVO.UA
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Current Trends in Shipping Law of Possible Interest to Commodities Traders

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This article reviews several key recent cases heard by English courts on issues of shipping and maritime law, which raise matters of key importance for commodities traders, shipowners, charterers and other parties involved in the supply chain. Disputes that take place between commodities traders frequently involve issues of proper mitigation of damages, limitation of liability in case of default of contractual obligations, measure of damages and sometimes even correct interpretation of the terms under the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading (the “Hague Rules”) for the purposes of limitation of liability in case of carriage of goods by sea.

Eugene Blinov|Valeriia Shuliak

This article reviews several key recent cases heard by English courts on issues of shipping and maritime law, which raise matters of key importance for commodities traders, shipowners, charterers and other parties involved in the supply chain. Disputes that take place between commodities traders frequently involve issues of proper mitigation of damages, limitation of liability in case of default of contractual obligations, measure of damages and sometimes even correct interpretation of the terms under the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading (the “Hague Rules”) for the purposes of limitation of liability in case of carriage of goods by sea.

The application of the “but for” test in contractual exceptions clauses

In Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102, the Court of Appeal overruled the first instance judge decision on nominal damages and clarified the application of the compensatory principle of damages.

The case concerned a contract of affreightment (the “Contract”) providing for shipments of iron ore pellets from Brazil to Malaysia between the shipowner Classic Maritime Inc (the “Claimant”) and the charterer Limbungan Makmur SDN BHD (the “Respondent”). Under the Contract, seven shipments had to take place between July 2015 and June 2016.

As to the first two shipments, the Respondent failed to provide any cargo, and accepted that it had no defense. Consequently, it was held liable to pay substantial damages in respect of the first shipment and nominal damages in respect to the second shipment, given that the Claimant suffered no loss.

However, in November 2015 a dam burst caused the stop of the production at the iron ore mine. As a result of the accident at a mine, it was impossible for the Respondent to comply with its contractual obligations. The Respondent relied on the contractual exceptions clause in order to avoid liability for non-performance. The trial judge concluded that the Respondent had to prove “but for” causation meaning that it could and would have performed the contract but for the accident at the mine.

At the first instance, the trial judge found that even though the accident at the mine made the performance of the contractual obligations impossible, the Respondent could not be protected by the exceptions clause given that the Respondent would have defaulted anyway for reasons such as failure to perform two pre-dam burst shipments as well as the collapse in the Malaysian market.

However, the trial judge held that the Claimant was entitled to nominal damages due to the fact that compensatory principle would be breached if the Claimant was awarded substantial damages when it would never have received freight in any event.

On the issue of causation, the Court of Appeal upheld the first instance decision and found that there is no default position with regard to the necessity to prove “but for” causation in order to invoke a force majeure or exceptions clause. Moreover, the Court of Appeal rejected the Respondent’s submission with reference to the decision of the House of Lords in Bremer Handelsgesellschaft GmbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109, as proof of an established position under English law that “but for” causation is not required to invoke force majeure clause. The principle of freedom of contract enables the parties to draft exclusion or force majeure clauses in a way they deemed to be appropriate so that it either requires or does not require proof of “but for” causation. Therefore, the clause of the contract must be interpreted on its own terms in accordance with the ordinary meaning to be given to the terms and pursuant to the rules of contractual construction. The Court of Appeal held that the exceptions clause should be interpreted in such a way that it requires “but for” causation. 

On the issue of damages, the Court of Appeal found that the trial judge had misapplied the compensatory principle. The Court of Appeal distinguished the present case from The Golden Victory and Bunge v Nidera. Both cases were concerned with assessing damages for anticipatory breach, while the present case concerned actual breaches as a result of the charterer’s failure to supply cargoes. It was common ground that the charterer’s obligation to supply cargoes was an absolute obligation.

Moreover, the Court of Appeal emphasized the difference between a contractual frustration clause and an exceptions clause. While a frustration clause is intended to bring a contract to an end, the exceptions clause is aimed at the exemption of liability for the breach of the contractual obligations at a time when the contract remained in existence.

The inability to perform a contractual obligation is irrelevant to the assessment of damages in circumstances where a party undertook an absolute and non-delegable duty to provide a cargo for loading, and the exceptions clause provides it with no defense. Consequently, in the event of non-performance of the primary obligation to supply cargoes, the Respondent must instead perform its secondary obligation to pay damages. Thus, the Claimant was held to be entitled to substantial damages even if it would have never received performance in any event.

Mitigation efforts embrace causation

In Globalia Business Travel SAU (formerly TravelPlan SAU) of Spain v Fulton Shipping Inc the UK Supreme Court overruled the decision of the Court of Appeal and clarified the law on mitigation of damages in the context of the repudiatory breach.

The dispute concerned M/V New Flamenco (the “Vessel”), a cruise ship which was chartered by Globalia Business Travel (the “Charterers”) from Fulton Shipping Inc (the “Owners”). In 2007, the parties agreed on a two year extension of the charter. Then the Charterers changed their mind and redelivered the Vessel in October 2007. Due to the early redelivery, the Owners treated this act as a repudiatory breach. Given that there was no available charterparty market, the Owners had to sell the Vessel for USD 23,765,000.

Due to the global financial crisis of 2008-2009, if the Vessel had been redelivered, as was agreed by the parties in 2009, the sale value of the Vessel would have been only USD 7,000,000, a fall in value of USD 16,765,000.

The question was whether the benefit obtained by the Owners should be brought to account by way of mitigation of damages. Potentially, if the increase in sale value could be regarded as an act of mitigation and set-off, the Owners could not recover any damages for the Charterers’ repudiation.

The arbitrator reached the conclusion that the sale of the Vessel could be considered an act of mitigation, but on appeal to the High Court, the award was held to be wrong in law. It was held that the benefit subsequently obtained by the Owners lacked causation to the Charterers’s breaching act. The Court of Appeal took a different view and supported the decision of the arbitrator.

The Supreme Court put an end to this dispute and agreed with the decision of the High Court. The benefit received by the owners from the sale value of the Vessel could not be considered an act of mitigation, given that the sale of the Vessel was incurred as a result of the Charterers’ breach of contract.

This decision is of significant importance, and provides useful guidelines on mitigation of damages in the context of the repudiatory breach for commodity traders in the event of a party’s default and a non-available market.

No limitation of liability in “units” for bulk cargoes

In Sea Tank Shipping A.S. v Vinnlustodin HF and others [2018] EWCA Civ 276 the courts gave useful guidance on limitation of liability provisions of the Hague Rules.

The dispute arose out of the voyage charter for the carriage of fish oil on board M/V AQASIA from Iceland to Norway. The cargo of about 2,000 tons of fish oil was loaded in Iceland and a further 500 tons were loaded and commingled with this original cargo at a second load port. At the port of discharge some of the cargo was damaged. The charterer consequently claimed over USD 367,000 with interest and costs. Even though the owner admitted it was liable, it submitted that the liability was limited to GBP 57,730 under article IV Rule 5 of the Hague Rules. The charterer argued that this rule was not applicable to bulk cargoes.

The English Commercial Court found that the owner was not entitled to limit its liability, given that the term “unit” means a physical item of cargo and not a unit of measurement. This decision was upheld by the Court of Appeal. Moreover, the Court of Appeal found that even in the event that the notion “unit” applied either to a unit of measurement or to a freight unit, it would not be applicable to rely on in the circumstances of the present case.

The Court of Appeal clarified the uncertainty of the term “unit” as used in the Hague Rules and gave a specific interpretation of the circumstances for the limitation of liability under the said rules. This is a landmark decision in shipping law given that from the time of existence of the Hague Rules there has been no uniform understanding and interpretation of the term “unit”, which occasionally caused uncertainty and ambiguity for charterers and shipowners. 

Conclusion

English courts have in recent years delivered numerous landmark decisions, which set new vectors in the development of shipping and maritime law. It is extremely important that the players of commodity markets follow these trends and adjust their contracts accordingly. The decisions in the cases outlined provide answers to tricky questions, which arise constantly but, for whatever reason, remained unanswered.

 

Eugene Blinov
is a partner at Eterna Law

Valeriia Shuliak
is a junior associate at Eterna Law

 

 

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