Parties to a contract: demurrage liability under sales contracts – lessons learned from Gunvor SA v. CruGas Yemen Ltd & CruGas Ltd [2018] EWHC 2061 (Comm)

By Gabrielle Sweidan on 4 March 2019 Posted in Demurrage

Two Ocean Tankers’ vessels were held in Houthi-controlled Hodeidah, Yemen in 2016 due to a payment dispute. That dispute – for around US$19 million (excluding interest) – has now been decided by an interesting commercial court decision that highlights the importance of careful wording in demurrage provisions.

Background

The claimant, Gunvor SA (the Seller), entered into a contract (the Sale Contract) in April 2015 with CruGas Yemen Ltd (and/or CruGas Ltd) (the Buyer) for the sale of gasoline in 12 monthly shipments CIF Hodeidah.

In order to fulfil the Sale Contract, the Seller had entered into a long-term contract of affreightment (CoA) with one of its group companies, Clearlake Shipping Pte Ltd (Clearlake), in January 2015. The CoA stated that, when the Seller needed a vessel, Clearlake would charter-in a vessel from the open market and then sub-charter her to the Seller “at cost”. In other words, the freight and demurrage rate from each charter would be incorporated into the CoA.

Several cargoes of gasoline were delivered to the Buyer without a major issue. However, problems arose under shipments on the Chang Hang Xian Feng (sub-chartered by the Seller around 10 July 2015), Ocean Mars (sub-chartered around 22 July 2015) and Hong Ze Hu (sub-chartered around 10 September 2015 and again around 10 February 2016).

The key issue was the Buyer’s failure to make the agreed pre-delivery payments for each shipment and also to pay outstanding demurrage. The Seller therefore refused to permit the vessels to discharge the gasoline at Hodeidah. While being held, the vessels incurred substantial demurrage (for example, the Hong Ze Hu was on demurrage for 261 days) and expenses such as anchorage fees and increased AWR premiums.

Eventually the Seller terminated the Sale Contract and issued a claim for around US$19 million plus interest. This comprised demurrage which had accrued under each of the three vessels, market losses in relation to the 55,000 tonnes of gasoline remaining on-board the Hong Ze Hu, and other expenses. The key issues which arose during the hearing (which the Buyer did not attend) are summarised below.

Issues

Who was the Buyer – CruGas Yemen Ltd (the first defendant) or CruGas Ltd, the party named in the Sale Contract (the second defendant)?

Mobile rig newbuildings – pre-contract checklist

By Alfred Perkins on 15 February 2019 Posted in Offshore

After several years of very low activity in the mobile offshore rig market, green shoots of growth are starting to appear. Clients in all areas of the market, including owners, charterers and builders of both rigs and drillships have reported increased activity and appetite for investment.

While many are still evaluating the costs and benefits of re-commissioning assets that have spent long periods in stack (whether cold, warm or smart) or buying on the secondary market, we are seeing more interest in newbuildings (albeit at a very early stage) than has been the case for many years.

In view of this renewed optimism, here are some points to bear in mind when preparing your next mobile rig newbuilding contract, drawing on some of the lessons learned from the widespread litigation that flowed from the oil crash:

1) Beware the ghosts of contracts past Continue Reading

Regulation 18 and FONAR – leniency not legitimacy

By Marcus Dodds on 6 February 2019 Posted in IMO2020

There has been a tendency for reference to be made to Regulation 18 (of Annex VI of the International Convention for the Prevention of Pollution from Ships, 1973 as modified by the Protocol of 1978) as containing ‘exceptions’ to Regulation 14 (of the same), which sets out the maximum sulphur content limits for marine fuels. While this may be a convenient short-hand description, it can lead to misunderstandings.

In drafting Annex VI, the International Maritime Organization (IMO) deliberately left it to state parties (be they flag or, more likely, port) to enforce Regulation 14 and it is for state parties to determine what consequences should flow from non-compliance. What Regulation 18 does provide (at sub-paragraph 2) is what a state party should do if a ship is found not to be compliant with Regulation 14, and this includes factors that should be taken into account in mitigation when considering what sanction to apply.

This is clear from sub-paragraph 2.3 of Regulation 18, which holds that “if a ship provides the information set forth in paragraph 2.1 of this regulation [namely: (1) a record of its action taken to attempt compliance; and (2) evidence of its best efforts to obtain compliant fuel oil], a Party shall take into account all relevant circumstances and the evidence presented to determine the appropriate action to take, including not taking control measures”.

The closest that Regulation 18 comes to creating an exception is at sub-paragraph 2.2 of Regulation 18 where it provides that state parties should not require (or expect) a ship “to deviate from its intended voyage or to delay unduly the voyage in order to achieve compliance”. However, how each state party, particularly port states, interpret this remains to be seen.

It is not that Regulation 18 is a new addition to Annex VI; it is just that it has only really been put to the test in the context of emission control areas (as defined in Regulation 14 paragraph 3) (ECAs), which are still relatively limited in terms of geographical scope. States that are not within an ECA are unlikely to have been put to the test yet.

The reason for this is that, while sulphur content limits for marine fuel have been in force since 19 May 2005 and were reduced on 1 July 2010, these earlier limits (4.5 and 3.5 per cent m/m respectively) were comparatively easy to comply with in terms of availability. Indeed, the original 4.5 per cent m/m limit was above that of almost all of the marine fuels on the market at such time. This is not the case for the new 0.5 per cent m/m limit, since there is both an absence of compliant residual marine fuels available on the market and an (anticipated) shortage of compliant distillate marine fuels available as an alternative.

Even with the revised lower (0.1 per cent m/m) limit that has been in force since 1 January 2015 for ECAs, the demand for such fuel has still been comparatively low. The issue for ships when required to enter into an ECA was usually whether they had sufficient compliant fuel onboard when ordered in and, if not, whether such fuel could be obtained on passage before entering into the ECA. Aside from those ships calling into the United States (particularly in 2015 after the new limit entered into force), comparatively few ships seem to have tested whether sub-paragraph 2.2 of Regulation 18 would protect them if compliant fuel was not available on passage to an ECA. That is why the fuel oil non-availability report (FONAR) system is still being developed, with a final template expected to be submitted to and approved by the IMO at MEPC 74 in May 2019.

Even so, FONAR may be misunderstood. It is (as currently envisaged) nothing more than a standardised form of presenting evidence to satisfy the information that a state party is entitled to require of a ship under sub-paragraph 2.2 of Regulation 18, namely: “evidence that it attempted to purchase compliant fuel oil in accordance with its voyage plan and, if it was not made available where planned, that attempts were made to locate alternative sources for such fuel oil and that despite best efforts to obtain compliant fuel oil, no such fuel oil was made available for purchase.”

As such, FONAR is not a panacea, but it should assist in encouraging a more uniform approach to non-availability and the protection that sub-paragraph 2.2 of Regulation 18 should offer a ship. A standard form of FONAR should also make the management and assessment of non-availability reporting easier for party states (flag and port). For it it should be remembered that Regulation 18 is not one-sided. It also requires state parties to “promote the availability of fuel oils” that comply with Annex VI, including the sulphur content limits, and to “inform the [IMO] of the availability of compliant fuel oils in its ports and terminals”.

Update on the impact of Brexit on English jurisdiction

By Lindsay East on 6 February 2019 Posted in Brexit

On January 18, the European Commission published guidelines outlining the impact a no-deal Brexit will have on the recognition and enforcement of UK judgments in the remaining 27 EU countries (EU 27). The Commission states that where the judgment concerned requires exequatur, and the UK court has obtained exequatur before March 29 (or any extended exit date) but the judgment has not yet been enforced in an EU 27 country, then that judgment can still be enforced in the EU 27. In any other circumstances, EU rules will no longer apply to UK judgments in the EU 27 even where:

– the judgment was handed down before the exit date; or
– the enforcement proceedings were commenced before the exit date.

Instead, the Commission states that the domestic rules of each EU member state will apply to the enforcement of any such UK judgment. This is as we foreshadowed in our earlier client alert. Also, it should be noted that, on December 28, 2018, the UK deposited its instrument of accession to the Hague Convention on Choice of Court Agreements 2005. In the event of no deal, the UK will be a party to the Hague Convention (again, see our earlier client alert), and it is intended that the UK will be a party to the Hague Convention from April 1.

Blockchain Boost for the Shipping Industry

By Herbert F. Kozlov and Le-el D. Sinai on 24 January 2019 Posted in Blockchain

After several successful trials over the last year, Israel’s largest cargo shipping company, Zim, has implemented a blockchain platform for electronic bills of lading. According to Zim, this technology could replace paper bills of lading and further improve other activities which rely on physical means of transfer.

Zim recently conducted several transactions in which bills of lading were transferred to the receiver less than two hours from the vessel’s departure, a process that typically takes days or can take weeks. Following these successful trials and initial transactions, Zim will soon be entering the next phase, providing an opportunity for all of its customers to take advantage of electronic bills of lading utilizing blockchain technology.

Zim’s successful implementation of blockchain-enabled bills of lading, demonstrates the power of distributed leger technology to add efficiency and reduce costs in memorializing and settling financial transactions.

Read the full article on our Fintech blog here.

Update on BIMCO 2020 Fuel Transition Clause for Time Charter Parties

By Marcus Dodds on 9 January 2019 Posted in IMO2020

On 21 December 2018 we commented on the newly released BIMCO clauses intended to address the International Maritime Organization’s revised sulphur content limits with regard to the consumption and carriage of marine fuel (in accordance with Regulation 14 of Annex VI of the International Convention for the Prevention of Pollution from Ships, 1973 as modified by the Protocol of 1978, MARPOL), which enter into force on 1 January and 1 March 2020 respectively.

The crossing rule and narrow channels – Court of Appeal hands down judgment in the Alexandra 1

By Joel Cockerell on 20 December 2018 Posted in Court of Appeal

On 5 October 2018, the English Court of Appeal confirmed the High Court decision in National Challenge Ltd. v. Evergreen Marine (UK) Ltd [2017] EWHC 453 (Admlty) that the crossing rule does not apply where one vessel is approaching a narrow channel intending to enter it and another vessel is navigating in the narrow channel intending to exit it, so as to involve risk of collision. This decision seeks to provide certainty in such situations and promote safe navigation; however, the decision may not be relevant in all situations when vessels are crossing, whilst navigating in or near a narrow channel.

Background

On 11 February 2015, a laden VLCC, Alexandra 1, and a laden container vessel, Ever Smart, collided just outside the dredged entrance channel to Jebel Ali in the United Arab Emirates. At the time of the collision, the Alexandra 1 was inbound and the Ever Smart was outbound.

As previously reported, at first instance the Admiralty Judge, Mr. Justice Teare (“Teare J”), held that Rule 15 of the International Regulations for Preventing Collisions at Sea, 1972 (the Collision Regulations), the crossing rule, did not apply and that when Alexandra 1 approached the narrow channel she was not under a duty to keep out of the way of Ever Smart. Instead, the navigation of the two vessels was governed by: Rule 9, the narrow channel rule, in the case of Ever Smart; and Rule 2, the requirement of good seamanship, in the case of Alexandra 1.

Significant amendments in the pipeline to Singapore’s Merchant Shipping Act

By Mohan Subbaraman, Resource Law LLC, Adrian Aw, Resource Law LLC and Mohamed Fadhil, Resource Law LLC on 10 December 2018 Posted in Singapore

The Merchant Shipping (Miscellaneous Amendments) Bill was read in the Singapore Parliament for the first time on 19 November 2018.

The Bill proposes to make a number of significant amendments to Singapore’s merchant shipping legislation. These include:

enacting the International Convention on Salvage 1989 as part of Singapore law; and
adopting the 1996 Protocol to amend the Convention on Limitation of Liability for Maritime Claims, 1976.

The Bill is expected to be debated in parliament over the coming weeks. A further update will follow if the Bill is passed.

The 2020 Global Sulphur Cap: Whitepaper

By Ron Clark on 22 November 2018 Posted in IMO2020

On 1 January 2020 amendments to the International Maritime Organization’s (IMO’s) International Convention for the Prevention of Pollution from Ships (MARPOL) enters into force.

Read our Shipping Group’s latest whitepaper, by Ron Clark, on the 2020 Global Sulphur Cap here.

Including topics covering:

2020 SOx issues
An introduction to marine fuels
Abatement technology
Scrubbers
Control and regulation
BIMCO
Industry response
Alternatives

ICA Incorporation Clauses: An update

By Jeb Clulow and Catriona Casha on 13 November 2018 Posted in Inter-Club Agreement

Readers will recall from Reed Smith’s recent blog that concerns have been raised regarding common Inter-Club Agreement (ICA) incorporation clauses.

A London Tribunal, in a recent arbitral award in which Reed Smith acted, held in favour of Reed Smith’s client that a traditional ICA incorporation clause incorporated the entire ICA, including clause 9 (i.e. the entitlement to security).