What is the EU ETS and how is it changing?

The EU Emissions Trading Scheme (“EU ETS”) is a legislative scheme by which the EU caps emissions of greenhouse gases from certain industries by requiring emitters to surrender emission allowances to offset the gases they emit. A limited number of emitters are granted some free emission allowances, but most allowances must be purchased in auctions arranged by the European Energy Exchange (the “EEX”), which allowances may then be traded, before being surrendered to a competent authority by the emitters. Hence, the EU ETS is a “cap and trade” emissions scheme.

Change is underway to include certain emissions from shipping within the EU ETS, by phasing in requirements to report emissions and to purchase and surrender allowances for increasing proportions of carbon dioxide (CO2), nitrous oxides (N2O) and methane (CH4) emissions from shipping activity within the EU, between now and 2026.

Continue Reading EU formalises its plans for the expansion of the EU ETS into shipping in 2024

Just as there is no easy route to decarbonisation, there is no straightforward way of balancing a shipowner’s obligation to comply with the MARPOL Carbon Intensity Indicator (“CII”) Regulations with a time charterer’s right to direct the employment of a vessel.

That much is clear from the long-awaited BIMCO CII Operations Clause for Time Charters 2022 and, more tellingly, from the industry reaction.

Now that the dust is settling: what does the clause actually say? What are the key sticking points? And how are owners and charterers positioning themselves before the CII Regulations come into force on 1 January 2023? In this briefing, we take a closer look at some of the emerging themes.

Continue Reading BIMCO CII Clause for Time Charters – The dust begins to settle

There have been several decisions in 2022 about carrier’s defences to misdelivery claims under bills of lading.

Carriers face misdelivery claims when they deliver cargo without production of original bills of lading, but then someone else claiming to be the ‘lawful holder’ of the bills complains the cargo should have been delivered to them instead. A common scenario is where a bank has financed the import of a cargo, but the finance has not been repaid. The bank then looks to the bills of lading it holds as a form of security. Unfortunately, the bank often finds the financed cargo has already been discharged from the ship (usually under a letter of indemnity) and cannot be traced. The bank finds it has no security for its claim against its defaulting customer, and brings a claim against the carrier for misdelivery under the bills of lading, arguing the carrier should not have discharged the cargo without the production of the original bills of lading. The carrier in turn looks to the letter of indemnity under which it agreed to discharge the cargo without the original bills.

Did the bank suffer any loss as a result of the misdelivery?

In April 2022 the English High Court found in UniCredit Bank v Euronav [2022] EWHC 957 (which is pending in the Court of Appeal) that the carrier could rely on two complete defences. One defence was that the bank knew the cargoes it financed were being delivered to its customer’s buyers without bills of lading, and had implicitly approved that arrangement. The bank therefore suffered no recoverable loss, because the carrier performed the contract of carriage in the way the bank wanted it to. The evidence was that the bank’s relationship manager knew her customer’s cargoes were being delivered without bills of lading, which was risky, but relied on trade credit insurance to cover the risk of default. In order to succeed in a “no loss” defence, it seems a carrier must show the same chain of events would have happened in any event, i.e. that even if original bills had been available, the bank would have ordered delivery to the same person who in fact received it.

Did the bank even have the right to sue the carrier for misdelivery?

The Court in the UniCredit Bank v Euronav case found the carrier could rely on a second defence: that the bill of lading did not give the bank the right to sue the carrier for misdelivery. In the rather unique circumstances of the case, the Court found the bank’s bill of lading was not in fact a contract of carriage giving a right to sue, but a mere receipt. That was because the carrier and the previous holder of the bill of lading were party to a charterparty for the hire of the ship – so the contractual relationship between them was covered by the charterparty and not by the bill of lading. The bill of lading was a mere receipt for the cargo. The charterparty was then novated to another charterer, and the bill of lading was later passed to the bank. The Court found the bill of lading remained a receipt and not a contract, and therefore Unicredit Bank never obtained a right to sue the carrier under it. The reasoning behind this decision is unclear and is subject to an appeal, but financing banks should consider in each trade whether they have become party to the contract of carriage or whether they have merely been passed a receipt for goods.

This was also an issue for the Singapore High Court in The “STI Orchard” [2022], SGHCR 6 on which Reed Smith has reported here. It is thought that in both English and Singapore law, it must have been intended at the time of the transfer of a bill of lading that rights to sue will also be transferred with it, otherwise the new holder will not inherit the right to sue. The Singapore Court thought the bank’s financing arrangements suggested it was not relying on the cargo or bills of lading as security, but was instead taking security over the proceeds of its customer’s sale of the cargo after delivery. Also, the bank did not ensure either that the bills were made out to its order or indorsed in blank. Instead, the bank allowed the bills of lading to be issued or indorsed to the receiver’s order. The court’s view is that these points indicated the bank may not have been transferred the right to sue under the bill of lading. This was a summary judgment decision, so the full trial is yet to take place, but the same reasoning was followed in Standard Chartered Bank v Maersk Tankers [2022] SGHC 242.

Is it time barred?

Lastly, in September 2022 the English High Court issued its decision in Fimbank v KCH Shipping (on which Reed Smith reported here) , confirming that the 12 month time bar under the Hague-Visby Rules is likely to apply to most cases of misdelivery, unless the bill of lading document itself contains clear words to the contrary or indicating the Hague-Visby Rules cease to apply. We note that permission to appeal this decision has been granted.

The law on the defences available to a carrier continues to develop rapidly, and bill of lading holders cannot consider a misdelivery claim to be an ‘open goal’.

With thanks also to Counsel, Charles Holroyd at 7KBW.

In DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd 2022-000247 [EWCA], the Court of Appeal, in a judgment upholding the High Court’s judgment of Mr Justice Jacobs, clarified the scope of the separability principle in relation to arbitration clauses in contracts, including the scope of s 7 Arbitration Act 1996.

A “subject” provision in a putative fixture requiring “shipper/receivers approval” was held to be of an unqualified character such that the contract would not become binding unless and until DHL (“Charterers”) lifted the “subject”, which, on the facts, had never occurred. That meant that not only the fixture, but also the arbitration agreement contained therein, was never concluded.

Background – Tribunal and High Court

As discussed in our blog earlier this year, Charterers and Owners negotiated the main terms of a putative fixture for a proposed voyage of the “Newcastle Express” (the “Vessel”) from Australia to China in late September 2020, containing the said ‘subject’ provision, until Charterers informed the broker that the shippers had requested a new vessel and they were releasing the Vessel, without having ever lifted the “subject”.

Owners treated this as a repudiatory breach of the contemplated fixture and commenced arbitration. The Tribunal accepted Owners’ submission that there was a binding charterparty and that the “subject” provision in the recap was to be read together with Clause 20.1.1 of the pro forma charterparty, meaning that “shipper/receivers approval” was “not to be unreasonabl[y] withheld”.

However, in DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd [2022] EWHC 181 (Comm), Charterers succeeded in their application against the Owners to set aside the arbitration award pursuant to section 67 of the Arbitration Act 1996. Mr Justice Jacobs held, in summary, that the effect of the “subject” was that no binding contract was concluded until the subject was lifted, which never happened. Just as when agreement is reached “subject to contract”, the common practice in the chartering market of a vessel being “fixed on subjects” has the effect of negativing any intention to enter into contractual relations until the subjects are “lifted”, leaving both parties free to withdraw in the meanwhile. That subject covered the entire agreement including the arbitration clause.

The Commercial Court granted leave to appeal with the Court’s reasoning being that “a decision of the Court of Appeal would provide guidance and certainty” on issues of general public importance, although the first instance judge was not persuaded that the proposed appeal had any real prospects of success.

Court of Appeal

The Court accepted that the “subject” in this case was a pre-condition to the contemplated fixture, the effect was “to negative any intention to conclude a binding contract until such time as the subject was lifted”, and, as a result, “either party was free to walk away from the proposed fixture at any time, and for any reason, until the subject was lifted”.

It was notably mentioned that any commercial parties would reasonably expect that such a “subject” should be applicable to the proposed contract in its entirety rather than with the exclusion of any arbitration clause. In particular, the Court held that negativing of an intention to conclude a binding contract (by not lifting such “subject”) applied as much to the arbitration clause as to all of the other clauses set out in the contemplated charterparty.

The Court clarified that an arbitration agreement is “a contract like any other” and, as such, it calls for no different treatment with the result that the question whether such an agreement has been concluded is subject to the usual contract formation rules.

It therefore held that the separability principle (upon which Owners sought to rely) is not relevant in circumstances where “the issue is whether agreement to a legally binding arbitration agreement has been reached in the first place”. The Court determined that the respective parties had agreed in their negotiations merely that if a binding contract was concluded (by way of the Charterers’ lifting the “subject”), that contract would contain an arbitration clause. This did not amount to the agreement of an arbitration clause. The Court agreed with the Charterers’ submission that “if there is no binding arbitration agreement in the first place, there is nothing to which the separability principle can apply”.

The Court emphasised the difference between contract validity and contract formation. In cases of contract formation “the argument that no contract was ever agreed necessarily affects the arbitration clause because it means that the arbitration clause was not agreed either”.  In cases of contract validity, such as Fiona Trust (Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, [2007] 4 All ER 951), however, “it is necessary to consider whether the ground of invalidity in question is one which amounts to “an attack on” or “impeaches” the arbitration clause.  It will not necessarily do so and, indeed, will be presumed not to do so unless the points relates directly to the arbitration agreement”.

In response to the Owners’ submissions that as a matter of policy, parties should be encouraged to resolve any disputes in arbitration and in line with the modern “one-stop” dispute resolution presumption in contractual interpretation, the Court said in clear terms: “One-stop shopping is all very well, but if the parties have not entered into an arbitration agreement, the shop is not open for business in the first place”.

Significance

Mr Justice Jacobs referred this matter to the Court of Appeal precisely for the purpose of resolving any ambiguity created by previous judgments delivered by lower Courts.

This judgment will be welcomed both by the shipping market, given the usual commercial practice of fixing a vessel “on subs”, and also more widely by all parties who are negotiating contracts including arbitration clauses.

The Court was at pains to explain that its conclusion would not necessarily lead to the need for multiple proceedings, as it would be open to the parties to agree to an ad hoc arbitration to determine whether a binding contract had been concluded, without prejudice to any issue as to whether such an ad hoc agreement is necessary.

The question of whether demurrage liquidates all or just some of the damages arising from a charterer’s breach in failing to complete cargo operations within the laytime has divided practitioners and academics for decades and, more recently, the English Court in K Line Pte Ltd  v. Priminds Shipping (HK) Co Ltd [2021] EWCA Civ 1712 (The Eternal Bliss). Now, in granting permission to appeal to the shipowners, it is a question which the Supreme Court has said it will answer.

Continue Reading The Eternal Bliss – Permission to appeal granted by the UK Supreme Court

It is settled law that a carrier who delivers goods without production of the bill of lading is typically liable for any consequential losses suffered by the bill of lading holder. In the course of prosecuting its claim against the carrier, the bill of lading holder may seek to obtain summary judgment without trial on the basis that there is plainly no defence to its claim.

In the recent case of The “STI Orchard” [2022] SGHCR 6 where the plaintiff bank (“Plaintiff”) sought summary judgment against the defendant shipowner (“Defendant”), the General Division of the High Court of Singapore granted the Defendant unconditional leave to defend the Plaintiff’s claim for misdelivery. A key issue identified by the Court was whether the bills of lading were intended to be relied on as security for the Plaintiff’s financing in the underlying transaction.

Continue Reading Claims for misdelivery of cargo without presentation of B/Ls: “good faith” and “consent”

“It is good that I make you build, of this ship which shall sail on the sea, the hull, the decks and the mast, and then on a sunny day, like on a wedding day, I have you dress her of sails and gift her to the sea.”

Whether it is, as for Antoine de Saint-Exupéry, a result of one’s poetic nature, or for more prosaic purposes, there are a variety of reasons for ordering new vessels. Some shipowners do so to satisfy their specific trading needs or to take advantage of more favourable credit and tax opportunities while others want to make the switch to new fuels and technology, take advantage of market rates as they repeatedly set new all-time highs or to expand or diversify activities; and sometimes for a combination thereof. From cruise ships to containerships, tankers, and bulk carriers, and offshore vessels, shipowners are always on the lookout for financial partners to assist with the capital needs associated with newbuilds. Various forecasts anticipate that the shipbuilding market will grow over the next few years, off the back of the industry effort towards green shipping and the ever growing appetite for seaborne trade.

Continue Reading Ship finance without a ship? Addressing the risks of newbuild financing

Pacific Pearl Co Limited v Osios David Shipping Inc [2022] EWCA Civ 798

The Court of Appeal (“CA”) has overturned the decision of Justice Teare that security tendered under the Admiralty Solicitor Group form ASG 2 (Collision Jurisdiction Agreement) (“CJA”) needed to be subjectively acceptable to the offeree. Instead the CA has determined that it is sufficient that it be objectively acceptable.

The case

The decision followed the earlier ruling by Sir Nigel Teare (as reported in Lloyd’s Law Reports, [2022] 1 Lloyd’s Rep. 261) in an action brought by owners of the Panamax Alexander (“PA”) against the owners of Osios David (“OD”), with whom they collided, alleging breach of the CJA clause C. This clause provides that “Each party will provide security in respect of the other’s claim in a form reasonably satisfactory to the other.”

The owners of the PA proposed security which contained a sanctions clause (the scheme of the ASG 2 is that it is expected to be used with a plain security in the form of ASG 1). This was rejected by the owners of the OD on the basis that it was not reasonably satisfactory to them. In the first instance it was held that such security from a prominent International P&I Club must be objectively reasonable but that there was nothing in the CJA that compelled the recipient to accept it and that they were at liberty to seek better security elsewhere including by arrest.

Continue Reading Court of Appeal overturns judgement on acceptable security in collision matter

On June 3, 2022, the European Union Council adopted a sixth package of sanctions against Russia, which will phase-out the import of Russian oil and petroleum products over the next six to eight months.  This particular round of sanctions will not restrict the import of gas, but official guidance warns that “nothing is off the table”.

Continue Reading EU sixth package of sanctions against Russia

In our October 2021 blog “Possession as we (don’t) know it!”, we discussed the existing position under English law in respect of electronic trade documents and the scope for reform in light of the Law Commission’s consultation paper and draft legislation “Digital assets: electronic trade documents (2021) Law Commission Consultation Paper No 254”, published on 30 April 2021.

Continue Reading Solving the ‘possession’ problem – Law Commission publishes draft legislation for the legal recognition of electronic trade documents