Court varies order recognising South Korean insolvency proceedings to allow pursuance of claims in London arbitration

Re Pan Ocean Co Ltd [2015] EWHC 1500 (Ch)

The Applicants had entered into a pool agreement and time charter with Pan Ocean, both of which were governed by English law and provided for London arbitration. The agreements were terminated, and the Applicants sought damages. Pan Ocean went into rehabilitation in Korean, and the Applicants submitted claims which were rejected by the administrator. The Korean court confirmed that rejection. The Applicants lodged an objection to the court’s decision, and the proceedings were ongoing in Korea.

The English High Court made a recognition order in respect of the Korean rehabilitation proceedings pursuant to the Cross-Border Insolvency Regulations 2006 Sch.1 art.15. The order stayed the commencement of actions or proceedings against Pan Ocean.

The Applicants applied for the order to be varied so that they could pursue claims against Pan Ocean in London arbitration, on the understanding that they would not seek to enforce any arbitration award or subsequent court judgment against Pan Ocean’s assets without the administrator’s agreement or a further court order.

The application was granted.

In considering whether to vary the order, the Court noted that it had a free hand to do what was right and fair in the circumstances. A stay would usually be lifted when disputed claims needed to be resolved by legal proceedings, and it was right and fair in all the circumstances to implement that need. In this case, the court had to undertake a balancing exercise, weighing various factors including:

  • the lack of evidence to suggest that an arbitration would adversely affect the result of the rehabilitation proceedings;
  • the possibility that arbitration was not the most efficient and cost-effective way of proceeding; and
  • the lack of provision of an alternative, in the event of insolvency, to arbitration in London.

The balancing exercise weighed heavily in favour of varying the stay.

In its conclusion, the Court noted that it may appear strange that the decision to vary the stay was made in England, rather than in the Korean courts where the parties were currently involved in proceedings in respect of the relevant claims. The reason that the decision had to be made by the English court was because it concerned the contractual right of the parties to apply for arbitration of a dispute. The application was required because of a stay established by the English courts, and so it was for the English courts to decide whether to vary it.

The ability to pursue claims against insolvent parties remains a very current issue. It is clear from this case that the English court will consider varying orders recognising foreign insolvency proceedings to allow claims to be pursued in London arbitration. It should be noted however that the order was varied on the understanding that there would be no subsequent enforcement against Pan Ocean’s assets. Where a Respondent is insolvent or in rehabilitation, it could be questioned whether it is cost-effective to obtain an arbitration award which may be unenforceable due to lack of assets. This, however, is a strategic decision to be made based on the circumstances of any given case.

Charterers held to have lost right to cancel where revised loadport orders given

ST Shipping & Transport Inc v Kriti Filoxenia Shipping Co SA [2015] EWHC 997 (Comm)

Charter terms

The charter, on BPVOY3 form, provided that subject to the provisions of clause 24, the vessel would proceed to “1/2 safe port(s) Black Sea excl Bulgaria, Romania, Turkey”.

Clause 17 provided for a laycan period of 1 to 3 April 2003. Clause 24 provided inter alia as follows regarding revised orders:

“If after any loading or discharge port or place has been nominated Charterers desire to vary such port or place, Owners shall issue such revised instructions as are necessary at any time to give effect to Charterers’ revised orders …”

Facts

Charterers nominated Tuapse as the first loadport, then three days later gave a revised nomination of Batumi. The vessel’s estimated time of arrival at Batumi was after the cancelling date, and on that basis Charterers purported to cancel the charter. Owners accepted that cancellation as a repudiatory breach and claimed damages.

Arbitrators’ findings

Owners’ claim succeeded. The Tribunal found that after a revised order had been given under clause 24, the cancellation provisions of clause 17 ceased to apply. Specifically, they did not apply to the revised loadport of Batumi. Even if the right to cancel had survived, Charterers could not cancel where the re-nominated loadport was one which the vessel, at the time of the re-nomination, could not have reached by the cancelling date (as was the case here).

Charterers appealed on two issues: (i) whether the clause 17 right to cancel survived a re-nomination of the first loadport under clause 24; and (ii) if so, whether they were in any event not entitled to cancel where at the time of re-nomination, the vessel’s ETA for the re-nominated port was after the cancelling date.

Findings on appeal

Charterers’ appeal was dismissed.

On the first issue, whilst Charterers had a strong argument based on the commercial value of the cancelling clause, Owners’ position was stronger. Owners cited the commercial undesirability of losing the certainty of an irrevocable nomination while remaining exposed to cancellation rights. The parties could, if they had wished, have drafted an express clause which allowed the cancellation rights to survive, but they had not.

The Court also found an inconsistency in Charterers’ case. They accepted that an initial loadport nomination could not be given so late that it would cause the vessel to miss the cancelling date, however they contended that a re-nomination under clause 24 was not fettered in this way. This undermined Charterers’ contention that clause 24 was intended to equate a re-nominated first loadport with an originally nominated first loadport, and to confer on them in respect of the former all of the entitlements conferred on them under the charter in respect of the latter.

As regards the second issue, the Court considered whether, once the original nomination was made, the vessel was obliged to proceed both to that original port and as if any other port within the charter range might be substituted. It determined that this approach would be both uncommercial and unsatisfactory. When the original nomination was made, that port became the contractual loadport and Owners were entitled to proceed on that basis unless and until a re-nomination was made. The parties had a duty of cooperation, which meant that where the vessel proceeded in accordance with the charter, Charterers could not cancel if they made a substitute nomination for a port which the vessel would not be able to reach until after the cancelling date.

Comment

This case exemplifies the importance of carefully considering the charter terms before taking drastic steps such as cancellation. It is essential to consider the charter as a whole, and whether the default position under one clause is affected by the operation of another in certain circumstances.

The reciprocal, commercial relationship between the parties appears to have been key to the Court’s decision in this case, with a focus on both the fact that the parties could have agreed an express clause to cover this factual scenario if they had wished to, and on the duty of the parties to cooperate under the charter terms which were agreed.

 

Bank ordered to honour refund guarantees despite foreign court orders prohibiting payment

The Claimant Buyers brought proceedings against the Defendant Bank under refund guarantees issued by the Bank in support of two shipbuilding contracts between the Buyers and Sellers. Pursuant to the contracts, the Claimant had paid instalments on terms that they would be refunded if the contracts were cancelled. When the ships were not delivered on time, the Claimant commenced arbitration against the Sellers claiming repayment of the instalments. It obtained awards in its favour. In the instant proceedings, it claimed payment from the Bank under the guarantees.

The Sellers had meanwhile commenced proceedings in China against the ships’ engine manufacturers and the Buyers, claiming that they had fraudulently agreed to the installation of second-hand engines in the ships. The Chinese court issued orders prohibiting the Bank from making payment under the guarantees. The Buyer unsuccessfully challenged the jurisdiction of the Chinese court, and the Bank was unable to have the orders set aside. The Chinese court ultimately found in favour of the Sellers in the fraud proceedings.

The issue for the English court to decide was whether the Bank could use the Chinese judgments as a defence to the Buyer’s claims under the guarantees. The court ordered the Bank to honour the guarantees.

The guarantees were performance bonds which created an independent, primary obligation to pay. They contained an undertaking to pay “on demand”, and made it clear that disputes between the Buyers and Sellers were irrelevant to the Bank’s obligation to pay.

The obligations to which the Chinese proceedings related were not part of the obligation guaranteed. The guarantees covered the single obligation on the Sellers to refund the advance instalment payments (plus interest) in the event of cancellation of the contracts. Any breach of other terms of the shipbuilding contracts could not as a matter of equity lead to discharge of the guarantees, which related to entirely separate obligations.

The judgment provides a useful summary of the nature and terms of the guarantees and their relationship to the shipbuilding contracts, including a consideration of “on demand” guarantees and the differences between performance bonds and sureties. It exemplifies the court’s preference to hold parties to the terms of their agreement, including their agreement as to jurisdiction. It followed the approach taken in the recent case of Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 in making it clear that disputes between the parties to a shipbuilding contract are separate from and irrelevant to a bank’s obligation to pay under a refund guarantee. It also includes a useful analysis of when a party is to be treated as having submitted to the jurisdiction of a foreign court.

Court of Appeal holds standard clause in bills of lading to be exclusive English jurisdiction clause

Hin-Pro International Logistics Ltd v Compania Sud Americana de Vapores SA [2015] EWCA Civ 401

The Appellant Freight Forwarder commenced actions in China under 70 bills of lading, which incorporated the Respondent’s standard clauses. Clause 23 provided in material part:

“This Bill of Lading and any claim or dispute arising hereunder shall be subject to English law and the jurisdiction of the English High Court of Justice in London. If, notwithstanding the foregoing, any proceedings are commenced in another jurisdiction, such proceeding shall be referred to ordinary courts of law.”

The Respondent subsequently commenced proceedings in London and obtained an anti-suit injunction against the Appellant in respect of the Chinese proceedings. The injunction was made permanent, with the English court finding that clause 23 obliged the Appellant to litigate disputes under the bills of lading in England.

In breach of the injunction, the Appellant continued to pursue its claims in China. It appealed against the decision of the English Court. The Court was required to consider:

  1. whether it should entertain the appeal in view of the fact that the Appellant was in contempt of court due to its breach of the anti-suit injunction;
  2. whether there were compelling reasons to set aside the permission to appeal; and
  3. whether clause 23 as incorporated into the bills of lading was an exclusive jurisdiction clause.

The Court noted that it had a discretion not to hear a party in contempt of court until its contempt had been purged. In this instance, however, it decided that it would hear the appeal.

Further, there were no compelling reasons to set aside the permission to appeal, on the basis that:

  • it concerned a clause which was the foundation of the orders the Appellant had disobeyed;
  • it was an appeal against the order which had put the Appellant in contempt;
  • it raised matters of general importance; and
  • it was an appeal for which leave had already been given, subject to provision of security for costs (which was provided).

On the jurisdiction point, the Appellant had argued that the clause did not provide for exclusive jurisdiction. It asserted that the second and third sentences recognised that proceedings may not be begun in England, and made provision for that eventuality. Rather than prohibiting the commencement of proceedings in other jurisdictions, the clause sought to regulate them.

The Court disagreed, and held that clause 23 provided for the exclusive jurisdiction of the English High Court. The words “shall be subject to” were imperative and directory, and did not provide an option. The parties had agreed to submit all disputes to the English Court. This made commercial sense, where providing for optional jurisdiction as the Appellant argued would cause uncertainty. The number of courts that might have jurisdiction would be at least as large as the range of countries in which the cargo may be loaded, transhipped or discharged.

The use of the phrase “if notwithstanding the foregoing…” was a recognition that the preceding sentence required litigation in England as a matter of contract. It was intended to cover a situation where the first sentence was ineffective, for example due to the application of the Hamburg Rules, and proceedings were commenced in another jurisdiction. The aim was to ensure that in such a situation the proceedings would at least be before the “ordinary courts” of that jurisdiction.

The appeal was dismissed, and the Appellant remained subject to the anti-suit injunction.

 

P5+1 and Iran Agree on Framework for Joint Comprehensive Plan of Action, Sanctions Easing Expected June 2015

On April 2, 2014, the P5+1 (the United States, Germany, France, the UK, Russia, and China) and Iran reached an agreed-upon framework outlining the roadmap for a future agreement surrounding Iran’s nuclear program that would include suspension of U.S. and EU nuclear-related sanctions imposed on Iran. For further details, please see the recent Reed Smith Client Alert by Leigh Hansson and Paula Salamoun.

Continuation of Russian Sanctions

Since March 2014, Reed Smith has been closely monitoring developments relating to the situation in the Ukraine and reporting them as Client Alerts and blog updates. For a brief summary of the EU’s decision of 20 March 2015 to effectively leave in place the sanctions imposed last year against Russia, please see the recent Client Alert by Brett Hillis, Sian Fellows, David Myers, Alexandra Allan and Alexandra Gordon.

Is payment of time charter hire a condition? “The Astra” re-considered

In Kuwait Rocks Co v AMB Bulkcarriers Inc (The Astra) (as reported in a previous post), the court determined that the obligation to make punctual payment of hire under the amended NYPE time charter in that case was a condition of the contract, so that failure to pay a single hire payment entitled the vessel owners both to withdraw the vessel and to claim damages for loss of profit for the remainder of the charter period.

On 18 March 2015, judgment was handed down in Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd. The court disagreed with the analysis in The Astra, finding that payment of hire was not a condition of the contract.

Owners had withdrawn three vessels from Charterers’ service due to non-payment of hire. They claimed from the party which had guaranteed Charterers’ performance, inter alia, the unpaid hire which had fallen due and damages for loss of bargain for the unexpired charter periods. In light of the court’s finding that payment of hire was not a condition, Owners were only entitled to damages for loss of bargain if they could show that Charterers’ conduct was repudiatory and/or constituted a renunciation of the charters.

The judgment in this case effectively reverses the somewhat controversial position set out, albeit obiter, in The Astra, a position which had potentially strengthened owners’ position where charterers failed to make full and punctual hire payments. Reed Smith will be publishing a client alert which will consider this case, and the comparison with The Astra in more detail, a link to which will be posted in due course.

 

Court awards as damages costs incurred as a result of a breach of a law and jurisdiction clause

Swissmarine Services SA v Gupta Coal India Private Limited [2015] EWHC 265 (Comm)

The Claimant and Defendant entered into a COA which contained an English law and jurisdiction clause. When the Defendant failed to comply with the terms due to difficulties in despatching and shipping the cargo, the Claimant brought a claim for breach of contract. The Defendant subsequently commenced proceedings in India, claiming damages for defamation and an anti-suit injunction to restrain the English proceedings. After almost two years, the Indian proceedings were dismissed due to lack of jurisdiction.

The Claimant alleged that it had suffered loss as a result of the Defendant’s breach of the English jurisdiction clause. It claimed as damages its costs incurred in the Indian proceedings, which the Court awarded. The Court found that the contract was clear as to law and jurisdiction, and the Defendant had been well aware of this, but had nevertheless commenced the Indian proceedings. The Claimant had demonstrated that the substantial costs incurred in India were properly incurred and had been incurred as a result of the Defendant’s breach. On that basis they were recoverable as damages.

The Claimant had also claimed for damages resulting from the Defendant’s failure to meet its shipment obligations. The Court awarded damages, and considered the correct method of assessment. There was clearly a contract between the two parties, the Defendant was in breach and the Claimant was entitled to damages. The Claimant had given the Defendant an extension of time to perform, which meant that the market price to be used in the assessment of damages was that at the time when the contract could last have been performed (i.e. when the extension granted by the Claimant expired). A further consideration in the assessment of damages was whether there was an available market at the time for the Claimant to find replacement shipments: if so, this could be set off against their loss. In this case, there was no such available market.

This case will be of assistance to parties who incur legal costs in foreign jurisdictions as a result of their counterparty’s breach of an English jurisdiction clause. Those costs will be recoverable as damages, provided that they are reasonably incurred, and that causation can be proved. However, a party which does not participate in English legal proceedings may be unlikely to pay any sums awarded, and so further costs may be incurred in enforcing the judgment.

Loss of cargo due to piracy held not to be an “in-transit loss”

Trafigura Beheer BV v Navigazione Montanari SpA [2015] EWCA Civ 91

The subject vessel was chartered to carry a cargo of oil from Abidjan, Ivory Coast to Lagos, Nigeria. Clause 46 of the charter (on an amended BPVOY3 form) incorporated the Hague-Visby Rules, which contain exemptions in respect of loss or damage arising or resulting from inter alia “act of public enemies”, “perils of the sea”, and “any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier”. It was common ground that loss resulting from piracy would fall within one or more of these exemptions.

The charterparty also contained the following in-transit loss (ITL) clause:

“In addition to any other rights which Charterers may have, Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.5% and Charterers shall have the right to claim an amount equal to the FOB port of loading values of such lost cargo plus freight and insurance due with respect thereto. In-transit loss is defined as the difference between net vessel volumes after loading at the loading port and before unloading at the discharge port.”

During the course of the voyage, pirates took control of the vessel and removed part of the cargo. Charterers alleged that Owners were liable for the loss pursuant to the ITL clause.

At first instance, it was held that the cargo loss did not fall within the ITL clause and that even if it did, the incorporation of the Hague-Visby Rules excluded Owners’ liability. Charterers’ appeal against this judgment was dismissed by the Court of Appeal.

The words “in transit loss” were held to connote loss incidental to the carriage of the cargo, not loss caused by an event such as a piracy incident. There was a clear commercial rationale behind ITL clauses, in that it is very difficult to determine oil shortage claims, and it is sensible for the parties to agree that any unexplained difference will be recoverable where it exceeds a certain percentage. That ITL clauses only apply to short-delivery losses as encountered on a normal voyage was supported by the wording of the clause in this case which defined in-transit loss as the difference between volumes after loading and before unloading.

Clause 46 and the Hague Visby exceptions were held to apply whether or not the loss fell within the ITL clause. Charterers cited The Olympic Brilliance as authority that an owner could not rely on the Hague Visby Rules to claim back freight which had been correctly deducted in respect of unexplained losses which fell within an ITL clause, and that it followed that the Rules could similarly not be relied on to meet a claim which fell within such a clause. The Court disagreed. The Olympic Brilliance was authority for the point that an owner could not rely on the Hague Visby Rules to claim back freight correctly deducted in accordance with an ITL clause. However, it did not necessarily follow that the Rules could not be relied upon in respect of alleged liabilities for loss as distinct from an entitlement to freight.

This case exemplifies the importance to contractual interpretation of the commercial rationale behind a clause. Although cargo removed by pirates during a voyage could be said, on a purely factual interpretation, to be “in transit loss” because it occurred during transit of the cargo, that was not the intention of the ITL clause. It also exemplifies the court’s reluctance to disapply the Hague Visby Rules exemptions by analogy. The courts are likely to be reluctant to extend the situations in which charterers can recover from owners.

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