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  • Force Majeure, Alternative Modes of Performance and “Eggs in one Basket” - Simon Rainey QC and Andrew LeungView More

    Tue, 18 September, 2018

    Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm)

    Introduction

    A contract contains two modes of performance, A or B. Historically, the obligor has used mode A which becomes unavailable due to a natural disaster. If the obligor can show that it is also impossible to use mode B for reasons beyond its control, can it rely on a force majeure provision to excuse non-performance? Does it need to show it would have performed using mode A but for the mode A-disabling event? Classic Maritime v Limbungan Makmur SDN BHD [2018] EWHC 2389 (Comm) addresses these questions and others in an area of law that is perhaps not as well-settled in all respects as some might think.

    Simon Rainey QC, leading Andrew Leung, represented the successful Defendants, instructed by Julian Clark, Winnie Mah and Trudie Protopapas at Hill Dickinson LLP. 

    The dam burst and the COA

    At 3.45pm on 5 November 2015, the worst environmental disaster in Brazilian history unfolded. A tailings dam operated by Brazilian mining company Samarco Mineracao SA (“Samarco”) collapsed. A tidal wave of 32 to 40 million cubic metres of mining waste swept across green valleys, villages and farmland.

    Iron ore production at Samarco’s mine was brought to an abrupt halt. Shipments of Samarco’s iron ore pellets, hitherto shipped through Ponta Ubu in Brazil, were suspended.

    Ponta Ubu was one of two ports from which the charterers, Limbungan Makmur SDN BHD (“Limbungan”), had the option to load iron ore pellets on the vessels of Classic Maritime Inc., under a COA for 59 shipments of iron ore pellets from Brazil to Malaysia between 2009 and 2017. The other load port was Tubarao, from which another Brazilian mining company, Vale SA (“Vale”), shipped iron ore pellets.

    The parties’ rival positions

    In the Samarco aftershock, it was Limbungan’s case that Vale experienced a surge in demand, earmarked its supply to existing customers, and left newcomers such as itself wanting. Limbungan was therefore prevented from shipping from Ponta Ubu and Tubarao due to circumstances beyond its control. This excused its failure to perform post-5 November 2015 under Clause 32 of the COA, a fairly typical force majeure or exceptions clause, which stated inter alia:

    “Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be responsible for…failure to supply, load…cargo resulting from: Act of God…floods…landslips…accidents at mine or production facility…or any other causes beyond the Owners’, Charterers’, Shippers’ or Receivers’ control; always provided that such events directly affect the performance of either party under this Charter Party.”

    Classic countered that Limbungan had an absolute and non-delegable obligation to provide cargo and had no arrangements to do so. Instead, it hoped to perform with the gratuitous support of two companies within the same broad corporate family, Lion DRI or Antara. Those companies had asked Limbungan to ship their iron ore pellets to their steel-making plants in Malaysia from Ponta Ubu since 2011, but without any contractual nexus existing between them. The bursting of the dam was thus of no legal relevance. The problem was that the now sole supplier, Vale, would not supply Limbungan or its affiliates, although matters would have been different if Limbungan had made proper efforts and pushed for a long-term supply contract.

    What is more, Classic argued that Limbungan would not have performed anyway. It had failed to perform two pre-dam burst shipments as Lion DRI and Antara had not required Limbungan to carry iron ore pellets in a weak market, a state of affairs which would have continued irrespective of the dam burst. The dam burst was not a force majeure event and Classic was entitled to US$20.5 million in damages to compensate it for lost freight.

    Against this, Limbungan argued that it had put its eggs in the Samarco/Ponta Ubu basket as it had exclusively shipped Samarco pellets since August 2011. Whether it had enforceable agreements with Samarco, Lion DRI or Antara was not determinative; its settled practice was clear. The obligation after the dam burst was to make new arrangements ex Tubarao, provided it was possible to do so. Clause 32 applied because it was not possible. This was an alternative modes of performance case per Warinco v Mauthner [1978] 2 Lloyd’s Rep 151, 154 in that Limbungan had opted for one mode of performance which had become unavailable. As it could not avail itself of the one remaining mode, it was excused.

    Further, it was sufficient that Limbungan was prevented from performing by the dam burst. It was contrary to authority to insist that Limbungan had to show it would have performed had the dam not burst and contrary to the compensatory principle to award damages to Classic in respect of shipments which would never have occurred given the dam burst.

    The judgment of Teare J.

    The Court rejected Classic’s claim, and in the process made findings of wider legal significance.

    1. First, Classic’s reliance on the principle that a charterer who has been let down by a particular supplier cannot plead force majeure per The Mary Nour [2008] 2 Lloyd’s Rep and The Kriti Rex [1996] Lloyd’s Rep 171 was not on point. Those cases were not concerned with alternative modes of performance, where the required performance was from Port A or Port B, but with performance from a single port (albeit one possibly served by many suppliers).
    2. Second, for the alternative modes of performance principle to apply, it was not necessary for Limbungan to show it had legally binding arrangements to perform from Pontu Ubu rather than Tubarao when the dam burst. What the Court had to assess were Limbungan’s “intentions or arrangements” per Moccatta J in European Grain & Shipping v J.H. Rayner [1970] 2 Lloyd's Rep. 239, which did not need to display the element of fixity posited by Classic.   
    3. Third, Limbungan had to show that it would have performed but for the dam burst. The House of Lords decision in Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 and a string of other cases, which Limbungan said supported the general proposition that a party relying on force majeure need not show it would have performed but for the force majeure event were, in Teare J’s judgment, cases about contractual frustration provisions, which are intended to mimic the effect of common law frustration. They had no bearing on Clause 32.
    4. Fourth, the Court concluded that neither Limbungan nor its affiliates could have sourced cargoes from Vale ex Tubarao – a topic on which the parties’ market experts spilt much ink. That said, Limbungan could not show it would have performed but for the dam burst: Lion DRI’s steel-making business had effectively been mothballed due to weak demand, Antara had a cheaper COA of its own, and the arrangement whereby Antara had used the more expensive COA and been compensated for the freight differential by Lion DRI was moribund. 
    5. Fifth, though Limbungan could not rely on Clause 32 and was therefore liable under Clause 32, Classic was not entitled to recover damages. This was because even if Limbungan had been able and willing to perform, the dam burst would have supervened and prevented performance, and Limbungan would have been excused by Clause 32. It would violate the compensatory principle, to award substantial damages to Classic when it would never have received performance in any event.
    6. Sixth, the Court rejected Classic’s case to the effect that if the dam burst was due to faulty construction or maintenance by Samarco, it was an event within the “Shipper’s [i.e. Samarco’s] control”, and thus not within Clause 32. No part of the charterers’ obligation to supply and load cargo extended to responsibility for the dam, making it unlikely the parties intended  poor dam construction or maintenance (if proved) to debar Limbungan from relying on Clause 32. This is an important decision on the typical ‘beyond the control of’ provision, analysed in the sometimes misunderstood decision in The Crude Sky [2013] EWCA Civ 905.

    Conclusions

    The case is believed to be the first authority since the Bremer line of authorities from the 1970s and early 1980s to consider whether the party relying on a force majeure or exceptions clause has also to show it would have performed but for the event relied upon to be excused from non-performance. The answer given in those cases was “no”. For the time being, the textbooks may need to be rewritten to reflect the affirmative answer to this question given by Teare J.

    This gives pause for thought. Had Ponta Ubu and Tubarao both been wiped out by a meteor, so that any performance was unquestionably prevented, on one view, asking whether Limbungan could or wanted to perform would be academic. It might be said the parties intended Clause 32 to excuse Limbungan from liability in precisely such a case, particularly since Clause 32 is intended to deal with frustrating and force majeure events, and in the context of frustration, but for causation has always been irrelevant. Not only that: asking whether Limbungan would have performed but for the dam burst is conducive to a doubtful and speculative examination of what Limbungan’s intentions and arrangements would have been in a counter-factual setting, which Megaw LJ Bremer Handelgesellschaft v Vanden Avenne-Izegem PVBA [1977] 2 Lloyd’s Rep 329 cautioned against.

    This also appears to be the first case where the argument has been made (by Classic) – and rejected – that the arrangements necessary to activate the alternative modes of performance principle need to be legally binding. They do not: the arrangements can have a looser, more informal character.

    Finally, this case exemplifies the compensatory principle at work: if Limbungan had performed instead of breaching the COA, it would have performed with Samarco out of Ponta Ubu. The problem from Classic’s perspective is that with the intervention of the dam burst, Limbungan would have been able to claim force majeure under Clause 32 (as on this hypothesis it would have performed but for the dam burst). The outcome in both the breach and non-breach positions is therefore that Classic would not have enjoyed the benefit of contractual performance. Classic cannot be put in a better position than if the breach had not occurred.

    Teare J refused permission to appeal on the ground that Classic’s proposed appeal on the application of the compensatory principle (or perhaps more accurately Classic’s case that the principle allowed it to recover substantial damages to represent loss of charter freights which in fact it could never have earned assuming Limbungan performed rather than breached the COA) had no realistic prospect of success.

    A copy of the Judgment, can be found here

    Simon Rainey QC

    Simon Rainey QC is one of the best-known and most highly regarded practitioners at the Commercial Bar with a high reputation for his intellect, advocacy skills, commercial pragmatism and commitment to client care. He has established a broad commercial advisory and advocacy practice spanning substantial commercial contractual disputes, international trade and commodities, energy and natural resources, insurance and reinsurance shipping and maritime law in all its aspects,. He appears in the Commercial Court and Court of Appeal and also the Supreme Court (with two recent landmark victories in NYK v Cargill [2016] UKSC 20 and Bunge SA v Nidera SA [2015] UKSC 43.) He regularly handles Arbitration Act 1996 challenges.

    He is next in the Supreme Court in October 2018 on the issues as to the burden of proof under the Hague / Hague-Visby Rules raised on the appeal in Volcafe Ltd v Compania Sud Americana de Vapores SA [2016] EWCA Civ 1103.

    He has been cited for many years as a leading Silk in the areas of Commodities, Commercial Litigation and Dispute Resolution, International Arbitration, Energy and Natural Resources, and Insurance and Reinsurance by Chambers UK and/or Legal 500 and is ranked as the “Star Individual” for shipping by Chambers UK in 2015, 2016, 2017 and again in 2018, Simon: ‘impresses with his mastery of the brief... exceptionally gifted, he has the strong confidence of his clients, and is an excellent presenter of complex material....’ and ‘….is one of those super silk guys who has judges eating out of his hands.” “He has the gift of going straight to the problem." He was ranked as Shipping Silk of the year 2017 by both Chambers and Partners UK and Legal 500 UK Awards. He was nominated for international arbitration silk of the year 2017 at the Legal 500 UK Awards and has been shortlisted for Shipping Silk of the Year at the Chambers & Partners 2018 Awards. He was named one of the Top Ten Maritime Lawyers in 2017 and again in 2018 by Lloyd’s List.

    He is frequently appointed as arbitrator (LCIA, ICC, LMAA, SIAC, UNCITRAL and ad hoc, sitting both sole and as co-arbitrator) and has given expert evidence of English law to courts in several countries. He also sits as a Recorder in the Crown Court and as a Deputy High Court Judge (Queen’s Bench and Commercial Court).

    He sits as a deputy High Court Judge in the Commercial Court and is Honorary Professor of Law, Business and Economics, University of Swansea.

    simon.rainey@quadrantchambers.com

    > view Simon's full profile

    Andrew Leung

    Andrew has a broad commercial practice which encompasses commercial dispute resolution, international arbitrations, shipping, insurance and reinsurance and banking and financial services.

    Andrew regularly appears both as sole and junior counsel in the High Court (including the Commercial Court, the London Mercantile Court, Queen's Bench Division and the Chancery Division) as well as arbitrations.

    Andrew’s experience includes several high-value cases, including in relation to the delivery of drill ship with a contract value of over US$517m (with Duncan Matthew QC and Christopher Smith), the loss of the “Bulk Jupiter”, which involved allegations of cargo liquefaction (with Luke Parsons QC and Tim Hill QC), disputes arising out of the construction of two jack-up rigs, each with a contract value of c.US$225 million each (with Lionel Persey QC), the termination of contracts for 2 platform supply vessels (with Simon Rainey QC), Classic Maritime v Limbungan [2018] EWHC 2389 (Comm), a Commercial Court action regarding the performance of a long-term COA (with Simon Rainey QC), and Sea Glory v Al Sagr [2014] 1 Lloyd's Rep 14. an important reported decision in the field of marine insurance involving issues of non-disclosure, breach of warranty, and illegality.

    Andrew is recommended as a leading junior in the Legal 500 UK and Asia Pacific editions, where he is described as ‘Excellent on detail, strategy and responsiveness.’

    andrew.leung@quadrantchambers.com

    > view Andrew's full profile

  • If a Tree Falls in the Forest … Shouldn’t the Saplings in the Clearing Benefit? - Thomas Macey-Dare QC   View More

    Fri, 14 September, 2018

    This article was first published in International Corporate Rescue, Volume 5, Issue 4. To view a copy click here.

    In an important judgment delivered in November 2017, the English Court of Appeal decided that an airline’s right to be allocated take-off and landing slots at UK airports under the EU Slots Regulation survives as a valuable asset which can be realised for the benefit of the airline’s creditors after it ceases to operate and enters administration. The judgment is significant in that it prioritises the interests of creditors, ahead of the stated goal of the Slots Regulation of promoting competition within the airline industry, by allowing a failed airline to receive an allotment of slots and sell them to the highest bidder, rather than requiring those slots to be reallocated fairly among other airlines, including new market entrants who would otherwise be entitled to receive half of the slots. The judgment turns on the construction of the Slots Regulation and is therefore significant, not only in the UK, but throughout the whole of the EU.

    Background

    At the beginning of October 2017, Monarch Airlines collapsed with debts of £630 million, of which £466 million was unsecured. At the time, Monarch was the UK’s 5th largest airline, and the 26th biggest in Europe, operating a fleet of 35 aircraft, serving 43 destinations and carrying many millions of passengers each year. Its failure came after years of mounting financial pressures, caused by competition from other low cost carriers, the long-term decline of the traditional package holiday, increasing operating costs, terrorist attacks and the depreciating value of Sterling. Some 3,500 people lost their jobs. Around 110,000 holidaymakers were stranded overseas, and had to be brought home in what was dubbed Britain’s biggest ever peacetime repatriation. A further 750,000 customers were reported to have paid for flights which they were not able to take.

    Monarch’s collapse was by no means unique. Over 250 global airlines have failed in the last decade alone. Administrators were appointed on 2 October 2017, not with a view to running Monarch’s airline business or selling it as a going concern, but in order to realise the value of the company’s assets in the optimal way for the benefit of its creditors. Specifically, they intended to complete a series of transactions with other airlines, whereby Monarch’s take-off and landing slots at airports including Gatwick and Luton would be exchanged for less valuable slots plus significant payments. By the time Monarch entered administration, these Gatwick and Luton slots were its most valuable assets, and were reported by the press to be worth around £60 million. On the same day that Monarch entered administration, the Civil Aviation Authority (CAA) provisionally suspended Monarch’s Air Operator Certificate (AOC) and commenced the procedure for revoking it. It also commenced the procedure for revoking or suspending Monarch’s Operating License.

    Slots and slot trading

    Slots are an important class of assets for commercial airlines. They are not route-specific. There is great competition among the airlines for the most valuable slots. Within the EU slots are allocated in accordance with the Slots Regulation: Council Regulation (EEC) No. 95/98 on Common Rules for the Allocation of Slots at Community Airports, as amended. A slot is defined in the regulation as the permission given by a public body, the ‘coordinator’, to an air carrier to use the full range of airport infrastructure necessary to operate an air service at a ‘coordinated airport’ on a specific date and time for the purpose of landing and take-off. All major airports in the EU are ‘coordinated’ airports. In the UK, the designated ‘coordinator’ is Airport Coordination Ltd (‘ACL’).

    Under the Slots Regulation, for the purpose of allocating slots, each year is divided into two 6-month scheduling periods: winter and summer. Slots are allocated semi-annually, a number of months before the start of each scheduling period. Article 8(2) of the Slots Regulation – the ‘grandfather rights’ or ‘historic precedence’ provision – states that an air carrier who has been allocated a particular series of slots in one scheduling period, and has utilised them to a sufficient extent, is entitled to be awarded the same series of slots again in the equivalent scheduling period of the following year. Article 8a, entitled ‘Slot mobility’, permits air carriers to exchange slots with each other on a one-for-one basis, subject to the approval of the slot coordinator.

    Monarch’s administrators intended to rely on these provisions in order to renew the valuable slots which Monarch had previously been operating at Gatwick and Luton Airports, for the summer 2018 scheduling period, and then exchange them with other airlines in return for other, less valuable slots, plus substantial cash payments. Monarch had applied to renew their slots a few days before it went into administration. Monarch’s administrators had no intention, and no means, of operating the slots they were to receive under these exchange transactions.

    ACL was due to allocate slots for summer 2018 by 26 October 2017. On 24 October it informed Monarch’s administrators that it considered that it had no obligation to allocate any slots to Monarch; but that it intended to reserve its decision pending the outcome of the CAA’s procedure to revoke or suspend Monarch’s Operating License. Two days later Monarch’s administrators applied for judicial review of ACL’s decision, seeking an order requiring ACL to allocate it slots for summer 2018 in accordance with its grandfather rights under the Slots Regulation.

    R v ACL ex parte The States of Guernsey Transport Board  

    The kind of slot trading envisaged by Monarch’s administrators is perfectly permissible, at least outside an insolvency situation, and is an accepted and important part of the international airline business. The International Air Transport Association (‘IATA’) has for many years operated a semi-annual Schedule Coordinating Conference, following each slot allocation process, in order to facilitate such transactions; and ACL itself sometimes acts to facilitate slot exchanges between carriers, by issuing ‘dummy slots’ with no utility save as an item of exchange. This reflects the fact that, under the Slots Regulation, bilateral exchange of slots is permitted but unilateral transfer is not.

    The practice of exchanging slots in this manner was approved by the English High Court in the earlier case of R v ACL ex parte The States of Guernsey Transport Board  [1999] Eu. L. R. 745, which was decided under the original, unamended, Slots Regulation.

    In that case, Air UK wished to terminate its unprofitable service between Heathrow and Guernsey. It agreed to exchange its valuable Heathrow slots with British Airways, in return for an equal number of much less attractive slots at Heathrow, plus (as was ‘at least highly probable’ according to the judge) a cash payment. BA did not intend to use the Air UK slots for a Guernsey service, but for other, more profitable, routes. Air UK did not intend to use the BA slots at all. It intended to return them, unused, to the ‘pool’ so that they could be re-allocated to other airlines under the Slots Regulation.

    ACL, the slot coordinator for Heathrow, confirmed the exchange. The Guernsey Tourist Board, anxious to preserve direct flights between Heathrow and Guernsey, challenged ACL’s decision by way of judicial review, arguing that the transaction was, in reality, not an exchange of slots, but a disguised transfer of slots by Air UK to BA, which was not permitted under the Slots Regulation.

    Maurice Kay J dismissed the Guernsey Tourist Board’s claim. He held that the exchange of slots was valid and lawful within the Slots Regulation, notwithstanding the accompanying payment, and notwithstanding that Air UK did not intend to utilise the slots it received. In so deciding, he observed (obiter) that the role of the slot coordinator under the Slots Regulation did not extend to conducting investigations into matters such as the value of the slots exchanged, whether monetary consideration had been passed, and whether the recipient of the slots actually intended to utilise them. He noted that imposing such a duty on the coordinator would be unworkable and undesirable, in that it would frustrate the rapid and efficient exchange of slots, and risk ‘the fossilising of schedules to the detriment of customers and others.’

    This reasoning in the Guernsey Tourist Board case emphasises the benefits to consumers and competition of maintaining a highly liquid secondary market for allocated slots. Promoting competition and removing barriers to market entry is, indeed, one of the central aims of the Slots Regulation. The recitals to the regulation state that it is ‘Community policy to facilitate competition and to encourage entrance into the market’, and that ‘these objectives require strong support for carriers who intend to start operations on intra- Community routes.’ Article 10 provides that all new slots, and all slots over which ‘grandfather’ rights are not asserted, are to be placed in a ‘pool’ and distributed among applicant air carriers, with 50% of them being first allocated to ‘new entrants’ as defined in Article 2.

    It is easy to see how, under normal conditions, a liberal slot trading régime tends to further these goals, by preventing ossification in the market. But where an airline has collapsed, and has no realistic prospect of utilising its own slots, or anyone else’s, these objectives are best served by returning the airline’s slots to the pool, from where the coordinator can redistribute them fairly to new entrants or other airlines, and not necessarily to the highest bidder with the strongest market position.   This consideration lay at the heart of the ACL’s refusal to renew Monarch’s slots for the summer 2018 scheduling period.

    The key legal question  

    The key legal question in Monarch  was whether, at the time that ACL came to decide on the allocation of slots for summer 2018, Monarch was still an ‘air carrier’ within the meaning of the Slots Regulation. Only an ‘air carrier’ is entitled to be allocated slots under the Slots Regulation. An ‘air carrier’ is defined by Article 2(f)(i) of the Slots Regulation as ‘an air transport undertaking holding a valid operating license or equivalent at the latest on 31 January for the following summer season …’

    Operating license and AOC  

    Within the EU, the grant of an Operating Licence is governed by the Licensing Regulation, (EC) No. 1008/2008, Article 4 of which provides that an undertaking shall be granted an Operating License by the competent licensing authority of a Member State provided that it meets certain conditions, including that (a) its principal business is located in that Member State, (b) it holds a valid (AOC) issued by the national authority of that Member State, (c) it has one or more aircraft at its disposal, (d) its main occupation is to operate air services, and (g) it meets certain specified financial conditions. An AOC is defined in Article 2(8) of the Licensing Regulation as a certificate confirming that the operator has the professional ability and organisation to ensure the safety of the operations specified in the certificate.

    The Licensing Regulation contains provisions which allow the competent licensing authority to suspend or revoke an air carrier’s Operating License in the event of, among other things, financial difficulties. In particular Article 9(2) requires the competent licensing authority, in the event of clear indications of financial distress or insolvency proceedings, to proceed without delay to make an in-depth assessment of the financial situation and on the basis of its findings to review the status of the Operating License within a time period of three months. Article 9(5) of the Licensing Regulation requires the competent licensing authority to suspend or revoke an Operating License immediately if an air carrier’s AOC is suspended or withdrawn.

    The competent licensing authority in the UK, where Monarch had its principal place of business, is the CAA. It is responsible for issuing AOCs as well as Operating Licenses. Within the UK, the Operation of Air Services in the Community Regulations, SI 2009/41, contains detailed procedural rules governing the process by which the CAA may revoke or suspend an Operating License, including rules as to hearings and appeals.

    The rival arguments  

    Monarch argued that it was still an ‘air carrier’ within the meaning of the Slots Regulation because, despite being in administration and no longer operating any aircraft, it still held an Operating License, albeit the CAA was in the process of considering whether to suspend or revoke that license.

    ACL argued that this was unrealistic: Monarch was not an air carrier as it had ceased to be a functioning airline and any suggestion that it could resume the operation of air transport services was no more than a theoretical possibility. According to ACL, the test could not simply be whether Monarch held a current Operating License: that would make a failed airline’s entitlement to slots depend on how quickly the competent licensing authority concluded the process of deciding whether to suspend or revoke it, which might vary from one Member State to the next in an arbitrary way; and it would go against the aim of encouraging competition, which required slots which were no longer needed to be redistributed among other airlines in a fair manner.

    At first instance, the Divisional Court (Gross LJ and Lewis J) accepted ACL’s arguments. That decision was unanimously reversed, however, by the Court of Appeal (Floyd, Newey and Asplin LLJ).

    The decision of the Court of Appeal  

    The Court of Appeal noted that an undertaking does not inevitably cease to be an air carrier for the purposes of the Slots Regulation whenever it becomes unable to operate air transport services. For example, a temporary inability to operate would not have that effect.

    That being so, where was the line to be drawn, between a temporary inability to operate and one which was sufficiently final to justify the conclusion that the undertaking was no longer an air carrier? The Slots Regulation provided no guidance on that question.

    Moreover, assuming that an appropriate test could be identified, the slot coordinator was hardly in a position to apply it. For example, there might be a question mark over whether an airline in financial difficulties had a realistic prospect of being sold as a going concern or emerging from restructuring and resuming trading. The slot coordinator did not have the powers or the procedural framework to carry out the kind of investigation that might be required to resolve that kind of issue, and the Slot Regulation gave no indication that he should undertake that role.

    Matters relating to an airline’s financial circumstances were best left to the licensing process, where the competent licensing authority (the CAA in the UK) would have the resources to undertake the necessary investigations within the appropriate procedural framework. 

    The Court of Appeal concluded that Monarch remained an ‘air carrier’ within the Slots Regulation, notwithstanding that it had no real prospect of ever resuming air transport services. That conclusion left no room for any argument that Monarch should be denied an allocation of slots on the basis that that would be inconsistent with the purpose of the Slots Regulation. The court also rejected a submission that it should refuse to grant Monarch the relief it sought as a matter of discretion.

    Monarch’s slots  

    ACL decided not to pursue a further appeal to the UK Supreme Court. In due course, Monarch received its allocation of slots for summer 2018. It proceeded to exchange the most valuable Gatwick slots with IAG, and the Luton slots with Wiz, in each case for undisclosed sums.

    Discussion  

    The Court of Appeal in Monarch  construed the Slots Regulation in a manner which reflects the anti-deprivation principle, a rule of UK public policy according to which an insolvent entity (and, by extension, its creditors) ought not to be deprived of property by reason of having become insolvent: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd  [2011] UKSC 38 per Lord Collins of Mapesbury at [1-5]. In so doing, it rejected the construction preferred by the Divisional Court, which reflected and gave effect to the stated aim of the Slots Regulation of improving competition and market access.

    The Court of Appeal based its decision, however, not on the competing policy considerations, but on the language of the Slots Regulation and on practical considerations. In particular, it was concerned that the Regulation should be given a construction which was consistent with the functions and resources which the relevant parts of the Community acquis allocate to the different regulatory bodies in the aviation field, and which was both clear and workable. The effect of that construction is, however, is to deprive slot coordinators like ACL of an important power and, with it, the chance for new market entrants to obtain highly sought-after slots in the event of an airline collapse. These slots will now inevitably tend to come to into the hands of the biggest and most established players. That is surely not what the framers of the Slots Regulation intended.

    This is an issue which will need to be rectified by legislation. Such legislation is long overdue. As the Court of Appeal observed in Monarch , when the Slots Regulation was being amended for the third and final time, in 2004, the European Commission proposed that Article 8a(1)(d), which permits exchange of slots, should be amended to provide that slots may be exchanged only ‘where both air carriers involved undertake to use the slots received in the exchange.’ Had this proposal been adopted, it would have abolished the practice of exchanging slots which one party does not intend to use altogether. This proposal was not, however, adopted. The reason given was that the Council was concerned that the whole issue of market access should be considered in the wider context of a more thorough review of the slot allocation rules which could be the subject of separate Commission proposals in the future (see Common Position (EC) No. 22/2004). Fourteen years later, these new proposals are still awaited. The Court of Appeal’s decision in Monarch  might provide the nudge which the Commission requires.

    Thomas Macey-Dare

    Tom is a leading commercial barrister specialising in shipping, energy, international trade, insurance and international arbitration.  He acts and advises in commercial contract disputes, share sale disputes, claims arising out of supply and distributorship agreements, and disputes between partners and joint venturers. He is recognised as a leading practitioner by the Legal 500 UK  and Asia Pacific, Chambers UK  and Global editions, where he has been described as "fantastic", "spectacular", "extremely hard-working and clever", "quick on his feet", "brave", "intuitive", "incredibly practical" and "completely unflappable"; and he has won praise for his "spot-on" understanding of the law, his "exceptionally good" command of technical issues, and his "highly persuasive and very effective" advocacy.

    Tom represents commercial clients, in Court and international commercial arbitrations. He is particularly skilled at handling cases involving complex commercial transactions and technical expert issues. He also specialises in emergency applications including freezing and antisuit injunctions.  

    Recently Tom acted in The "Atlantik Confidence" in Kairos Shipping v AXA[2016] EWHC 2412, one of The Lawyer Magazine's top 10 cases of 2016.

    Tom was editor of Atkin’s Court Forms: Arbitration 1998-2016.  He is admitted as an attorney in New York.

    thomas.macey-dare@quadrantchambers.com

    > View Tom's full profile here

  • Four Nominations for Quadrant at the Chambers & Partners Bar Awards 2018View More

    Wed, 05 September, 2018

    We are delighted to announce that Quadrant Chambers, Simon Rainey QC, Simon Croall QC and Ben Gardner have all been shortlisted for The Chambers UK Bar Awards 2018.

    • Shipping Set of the Year

    • Simon Rainey QC - Shipping Slilk of the Year

    • Simon Croall QC - Shipping Silk of the Year

    • Ben Gardner - Shipping Junior of the Year


    The awards ceremony will be held at The London Hilton on Park Lane on Thursday 25th October 2018. Full nominations can be viewed here.

    Simon Rainey QC

    Simon is one of the best-known practitioners at the Commercial Bar with a broad commercial advisory and advocacy practice spanning substantial commercial contractual disputes, international trade and commodities, shipping and maritime law in all its aspects, energy and natural resources and insurance and reinsurance and has extensive experience of international arbitration. Simon regularly acts in ground-breaking cases including NYK Bulkship (Atlantic) NV v Cargill International SA (The Global Santosh) [2016] UKSC 20 where Simon was brought in to argue the case in the Supreme Court and represented the successful appellants, Cargill. The decision is a landmark one in relation to a contracting party’s responsibility for the vicarious or delegated performance by a third party of its contractual obligations, both in the common charterparty and international sale of goods contexts and more generally. In Bunge SA v Nidera SA [2015] UKSC 43 Simon successfully represented Bunge in a landmark decision by the Supreme Court on GAFTA Default Clause and sale of goods damages after The Golden Victory on points which had been lost at every stage below.

    He is next in the Supreme Court in October 2018 on the issues as to the burden of proof under the Hague / Hague-Visby Rules raised on the appeal in Volcafe Ltd v Compania Sud Americana de Vapores SA [2016] EWCA Civ 1103.  

    Ranked as the “Star Individual” for shipping by Chambers UK in 2015, 2016, 2017 and again in 2018, Simon: ‘impresses with his mastery of the brief... exceptionally gifted, he has the strong confidence of his clients, and is an excellent presenter of complex material....’ and ‘….is one of those super silk guys who has judges eating out of his hands.” “He has the gift of going straight to the problem." He was ranked as Shipping Silk of the year 2017 by both Chambers and Partners UK and Legal 500 UK Awards and one of the Top Ten Maritime Lawyers 2017 and again in 2018 by Lloyd’s List. He has also been cited for many years as a leading Silk in the areas of Commodities, Commercial Litigation and Dispute Resolution, International Arbitration, Energy and Natural Resources, and Insurance and Reinsurance by Chambers UK and/or Legal 500. 

    He is frequently appointed as arbitrator (LCIA, ICC, LMAA, SIAC, UNCITRAL and ad hoc, sitting both sole and as co-arbitrator) and has given expert evidence of English law to courts in several countries. He also sits as a Recorder in the Crown Court and as a Deputy High Court Judge (Queen’s Bench and Commercial Court).

    > View Simon's full profile

    Simon.Rainey@quadrantchambers.com

    Simon Croall QC

    Simon Croall is an established commercial silk who has appeared in every court (including twice in the last 12 months in the Supreme Court). He is a sought after trial advocate as well as being respected in the appellate courts. In recent years much of his work has been in the context of International Arbitrations.

    He led the team for Owners in landmark House of Lords case on remoteness in contract damages Transfield Shipping v Mercator Shipping ("The Achilleas") [2009] 1 AC 61. Recent reported highlights include another important case on damages Fulton Shipping v Globalia (The New Flamenco) in both the Court of Appeal [2015] EWCA 1299 and below [2014] 2 Lloyd’s Rep. 230, Essar Shipping v Bank of China [2015] EWHC 3266 on factors relevant to the grant of anti suit injunctions, AET Inc v Arcadia Petroluem (“The Eagle Valencia”) [2010] 2 Lloyd’s Rep. 257 (Court of Appeal), Mediterranean Salvage v Seamar [2009] 2 Lloyd's Rep. 639/ [2009] 2 All ER 1127 (Court of Appeal) on implied terms and Dalwood Marine v Nordana Lines (“The Elbrus”) [2010] 2 Lloyd’s Rep. 315.

    Simon is particularly well known for his experience in the following fields: dry shipping and commodities, commercial litigation, International Arbitration, energy,  insurance and Information Technology (see for example De Beers v Atos Origin [2011] BLR 274, a claim arising out of a large scale IT project). He also has a global practice with a depth of experience working with Chinese and south east Asian clients.

    This was recognised by his ranking as a leader in International Arbitration by Chambers Asia Pacific 2018 and in International Arbitration (both Commercial and Shipping) the Legal 500 Asia Pacific Guides.Simon was named one of the top 10 maritime lawyers of 2017 by Lloyd's List.

    > View Simon's full profile

    Simon.Croall@quadrantchambers.com

    Ben Gardner

    Ben practises primarily in shipping, commodities and international trade, energy, insurance and conflict of laws, within a broad commercial practice.  He is recommended as a leading junior by Chambers & Partners and the Legal 500 for his shipping and commodities work, where he is described as "Very clever and a very good advocate", "An excellent barrister, who is precise, commercial and practical in his focus and forceful and effective in his arguments", "very impressive", "A super-bright guy who is very accessible and easy to work with", "a great junior counsel and very user-friendly" and "mature beyond his years" .

    > View Ben's full profile

    Ben.Gardner@quadrantchambers.com

  • John Kimbell QC appointed Deputy High Court JudgeView More

    Tue, 04 September, 2018

    Quadrant Chambers congratulates John Kimbell QC on his appointment as a Deputy High Court Judge, which was announced today by the Judicial Appointments Commission. He joins Simon Rainey QC and Lionel Persey QC to become the third Deputy High Court judge at Quadrant.

    John’s appointment, is for a four year-term and was made by the Lord Chief Justice of England and Wales under section 9(4) of the Senior Courts Act 1981, upon the recommendation of the independent Judicial Appointments Commission. His appointment commences on 1 October 2018 and he is expected to sit in the Royal Courts of Justice in London for a maximum of 6 weeks a year. John will continue to practice as both Counsel and Arbitrator from Quadrant Chambers.

    John Kimbell QC

  • Security for Costs in Disputed Insurance Claims - Mark StiggelboutView More

    Tue, 28 August, 2018

    This article was first published in Insurance Day on 5 July. To view a copy, please click here, the article is on page 7.

    In Deleclass Shipping v. Ingosstrakh Insurance [2018] EWHC 1149 (Comm), the Commercial Court considered two security for costs applications in insurance litigation. In particular, it considered (1) what is expected of a defendant who alleges that the claimant has not made full and frank disclosure of available funding, (2) whether failing to pay an arguable claim on a policy may be treated as a factor causing the claimant’s impecuniosity (and thus militating against an order for security), and (3) whether a defendant may expose itself to an order to provide security by adopting a third party’s claim defensively.

    Background

    The Claimants were the owner and manager of the vessel “SIDERFLY”, which sank in 2013. The Defendant insurer accepted that the vessel was a constructive total loss under the policy but declined to indemnify the Claimants because a third party had intimated that it was the assignee of the insurance proceeds.

    The Claimants commenced proceedings against the Defendant, seeking the policy proceeds. The Defendant issued a Part 20 claim, adding the Third Party who had asserted its entitlement, and seeking a declaration of non-liability to the Third Party. In its counterclaim, the Third Party alleged that it was indeed entitled to the policy proceeds.

    Following the Claimants’ Reply – in which the Third Party’s assignment documentation was alleged to be fabricated – the Third Party failed to respond in the proceedings. The Defendant obtained an ‘unless’ order to the effect that, unless the Third Party responded, its defence and counterclaim would be struck out.

    Failing any further response from the Third Party, its pleadings were struck out. However, on the same day, the Defendant served a Rejoinder in the main action in which it positively advanced the Third Party’s case as its own (viz. that the Third Party was entitled to the proceeds). The Defendant amended its Defence to like effect.

    Accordingly, the Claimants’ claim was denied by the Defendant, and the Court had to consider the parties’ applications for security for costs (made prior to the removal of the Third Party).

    The Defendant’s Application

    The Defendant’s application was pursuant to CPR 25.12(1) “…for security for his costs of the proceedings…” – estimated to be more than £400,000 – and relied on the CPR 25.13(2)(c) ground that each Claimant was “…a company…and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so…”.

    The parties disputed whether the Court should exercise its discretion to order security. The Claimants argued that, if required to provide security, they would be unable to do so, such that their claim would be stifled. Moreover, they contended that, having lost their only substantial asset when the vessel sank, the Defendant’s failure to pay under the policy was itself a cause of their impecuniosity. The Defendants denied that they had caused the impecuniosity, and alleged that the Claimants had not made full and frank disclosure of their ability to obtain funds.

    Deputy High Court judge Andrew Henshaw Q.C. declined to infer that the Claimants’ evidence had not been full and frank. Such an inference would be unfair in circumstances where no specific arguments to that effect had been made prior to the hearing. At [59], he said that “…Whilst the onus is on the claimant to make out its case of stifling on the evidence, I find it hard to see any good reason for a tactic of withholding objections until the last possible moment, with the result that the claimant is not only unable to provide any evidence in response but unable even to take proper instructions…”. On the evidence, the Court was satisfied that the Claimants had limited assets and no real prospect of obtaining funds to provide security.

    As to whether the Defendant could be said to have caused the Claimants’ impecuniosity, this called for consideration of one of the particular security for costs factors identified in Sir Lindsay Parkinson & Co v. Triplan [1973] Q.B. 609, namely “…whether the company's want of means has been brought about by any conduct by the defendants, such as delay in payment or delay in doing their part of the work…”.

    The Defendant argued that this factor applies only where either (a) the claimant can show that it has a strong case on the merits, or (b) the defendant has caused the claimant’s impecuniosity in some way unrelated to the subject matter of the case. However, this was rejected by the judge, who held, at [29], that “…such an approach would make the factor virtually redundant because it would only apply either in the very unusual circumstances where some extraneous action by the defendant had caused the claimant impecuniosity or where the claimant could show a very clear case on the merits…”. Thus, it suffices that “…the claimant has an arguable case on the merits and the evidence demonstrates a causal link between the defendant's alleged non-payment and the claimant's impecuniosity…”. At [87], the judge concluded that it was “…likely that non-payment of the insurance claim has materially contributed to the claimants' lack of means …”.

    Having concluded that an order for security would probably stifle the claim, and that the Claimants were not unfairly using their impecuniosity, the Court decided that it would not be just to require security.

    The Claimants’ Application

    The Claimants had applied for an order that the Defendant provide security for their additional costs of having to enforce any costs order in Russia. However, as CPR 25.12(1) only provides for “…A defendant to any claim…” to apply for security, this raised the question of whether, by having “…chosen to adopt that claim [the counterclaim of the Third Party] wholesale in an apparent bid to avoid having to pay out at all in respect of the loss…” (at [90]), the Claimants were effectively now defendants to “any claim”.

    At [96]-[98], Mr. Henshaw Q.C. decided that there was no jurisdiction to make such an order. Although the assignment claim of the former Third Party was a “claim”, the Defendant had adopted it purely by way of defence to the Claimants’ claim.

    Conclusion and Implications

    The Court accordingly confirmed that (1) allegations of a failure to make full and frank disclosure must be particularised in good time for the claimant to have fair opportunity to respond, (2) an insurer’s failure to pay an arguable claim may itself cause/contribute to the claimant’s impecuniosity, and (2) a party adopting a third party’s claim defensively will rarely be vulnerable to an order to provide security. Whilst the third point arises rarely, the first two will often warrant careful consideration where an insurer seeks security for its costs of defending a claim.

    Mark Stiggelbout of Quadrant Chambers acted on behalf of the Claimants, instructed by Fanos Theophani and Natalie Johnston of Clyde & Co.

    A copy of the transcript can be found here

    Mark Stiggelbout



    Mark has a broad international commercial practice, with particular emphasis in shipping, commodities, aviation, insurance and energy disputes. He is recommended as a leading practitioner in both of the independent guides to the market - Chambers UK and the Legal 500.

    Mark regularly acts as sole counsel in litigation and arbitration proceedings, which has included obtaining freezing injunctions against persons unknown and a Norwich Pharmacal order.

    Mark has published articles in leading journals in the fields of contract, tort and the conflict of laws. These have been cited in leading practitioner texts, academic articles and student textbooks.

    mark.stiggelbout@quadrantchambers.com

    > View Mark's full profile here.

  • Tribunal secretaries and decision-making in arbitration - Claudia Wilmot-SmithView More

    Thu, 16 August, 2018

    By Claudia Wilmot-Smith

    (This blog was first published on the Practical Law Arbitration Blog on 3 August 2018. To view the original post. please click here.)

    Just as the increasing use of law clerks in the US court system has led to increased academic study and public discussion of their role and function, so too has the increased use of tribunal secretaries in international arbitration promoted discussion about their use and role. However, the nature of international arbitrations is such that issues regarding the use of tribunal secretaries are different from those regarding the use of judicial assistants or law clerks.

    The express role of a US law clerk is to affect the behaviour of a judge. They are employed in order to make the opinion (which is ultimately the judge’s) more “accurate” by seeking to ensure that it is based on the correct facts and law. Judges accept not only that their clerks’ work may influence the outcome of a case; they characterise this as a good thing. (The results of a survey of 81 justices on 35 state high courts showed that, on average, litigants (or their legal representatives) had failed to bring the court’s attention to facts or law critical to the resolution of a case in 1/10 cases. In other words, in 1/10 cases a law clerk will discover facts or law critical to the outcome of a case. Thus a clerk may directly influence the outcome of a case, but since, “Making accurate legal decisions is generally a goal of judges… clerks who uncover outcome-changing legal authority are furthering their judges’ goals, not obstructing them.”: see Good Stewards: Law Clerk Influence in State High Courts by Rick A. Swanson and Stephen L. Wasby.)

    It is also possible that an arbitral tribunal might do a better job of achieving justice if it is assisted, and even influenced by, its secretary. However, the position of an arbitral tribunal is materially different to that of a federal judge. Courts are publicly funded. Rising caseloads and decreasing judicial budgets have necessitated the use of judicial assistants / law clerks, both in the USA and in England and Wales. However, in arbitrations, the parties pay. Unlike a judge, an arbitrator can turn down an appointment if he is too busy to carry out his appointment without the use of a secretary. In the words of one ICSID arbitrator:

    “During cross-examination it was asked why and questioned how some arbitrators could do so many cases. One way is to farm out the drafting to others, in the case of ICSID to the Secretariat. There appears to be much appreciation for this by busy arbitrators but it is improper.” (Compania de Aguas del Aconquija S.A. and Viviendi Universal S.A. v Argentine Republic ICSID Case No. ARB/97/3, Additional Opinion of Professor JH Dalhuisen at paragraph 8.)

    However, as a general rule, the role of arbitrator is intuiti personae (because of the person). If the parties are not aware that the tribunal’s secretary will be carrying out a substantial number of tasks for their appointed tribunal, there is a real sense in which the parties have not got that for which they bargained.

    The decision of Popplewell J in P v Q has made it clear that parties have very limited, if any real rights of recourse in the event that a tribunal secretary has performed a more extensive role than anticipated, even if the tribunal secretary has effectively usurped the role of the tribunal. Popplewell J saw the test for annulment to be one of “substantial injustice”. Thus, even if it could somehow be shown that the tribunal secretary made the decision and wrote the award, the parties would have to show that the arbitrators themselves would have come to a different conclusion if they wanted the court to annul the award. Further, it is hard to see the basis upon which a party could formulate, let alone quantify, a damages claim in such circumstances.

    Whilst there may therefore be a limited amount a party can do in the case of unauthorised delegation (whether they can prove it or not), parties who are alive to the issue at an early stage can at least seek to anticipate the issue by clearly delineating the secretary’s role.

    Parties negotiating dispute resolution agreements should be alive to the fact that different arbitral institutions adopt different restrictions on the role of tribunal secretaries; and some provide no guidance at all (a helpful overview of the rules / guidance of the major international associations can be found in a 2015 article on the IBA website by Michel Polkinghorne and Charles B Rosenberg, The Role of the Tribunal Secretary in International Arbitration: A Call for a Uniform Standard, Tuesday 5 March 2015). These differences have the potential to enhance the autonomy of the parties, who are free to include (or exclude) particular arbitration institution rules in their dispute resolution agreements. Some parties might be happy for a tribunal to rely heavily on a secretary, based on the view that this enables them to achieve substantive justice at a lower cost. Others may place greater weight on the intuiti personae nature of arbitration, and may be happy to bear the increased cost of a tribunal that uses its secretary only for the most routine of administrative tasks.

    Further, different costs rules employed by different institutions are likely to influence the parties’ decision as to the scope of their agreement to the secretary’s participation.

    The ICC is the most widely used arbitration institution in the world. Under ICC Rules, the secretary’s fees (other than the justified reasonable expenses for hearings and meetings) are to be paid by the tribunal out of the total funds available for the fees of all arbitrators. Thus, the apportionment of time between the tribunal and its secretaries may not have any impact on the cost to the parties.

    The LCIA requires a tribunal intending to pay an hourly rate to the tribunal secretary to inform the parties of the same (and the parties must consent). Thus, if the tribunal’s use of a secretary is such as to make the process cheaper and more efficient, the parties will reap the costs benefit.

    Given the substantial amount of costs incurred in many large international arbitrations and the increasing use of tribunal secretaries, parties may therefore benefit from paying attention to the costs rules employed by different institutions when seeking to agree the use, and limits on the use, of a tribunal’s secretary.

     

    ClaudIa Wilmot-Smith

    Claudia has a broad and international commercial practice, covering banking and finance, international trade, professional negligence, cross-border insolvency, shipping, and insurance and reinsurance. 

    She has appeared as sole and junior counsel in the Court of Appeal, High Court (primarily in the Commercial Court and Chancery Division), and before arbitral tribunals under the rules of a range of international organization rules.  Many of her cases raise conflict of laws issues, and she is experienced in obtaining, and resisting applications for, anti-suit and anti-enforcement injunctions. 

    > View Claudia's full profile

    Claudia.Wilmot-Smith@quadrantchambers.com

  • Quadrant Chambers International Arbitration Newsletter Summer 2018View More

    Tue, 07 August, 2018

    We are delighted to bring you the Summer 2018 issue of Quadrant Chambers’ International Arbitration Newsletter.

    Arbitrator and former Supreme Court Judge Lord Clarke of Stone-cum-Ebony provides the editorial, considering the recent 2018 International Arbitration Survey by Queen Mary University of London and White & Case.

    This issue includes a guest article on the recent Halliburton v Chubb decision on apparent bias from Peter Ashford at Fox Williams.

    Quadrant’s John Russell QC looks at two recent decisions and asks if the Fiona Trust “one-stop” presumption is under attack.

    > download the Quadrant Chambers International Arbitration Newsletter

    Over recent months, members of Quadrant Chambers have authored a number of articles and blog posts on interesting and highly topical issues arising in arbitration. We have brought these together in an extended version of this newsletter.

    If you would like to catch up on this extended version, please download here

    Date for the diary - our next international arbitration event will be taking place on 14 November, further details will follow

  • When is – or might – a sub-sale be relevant to the assessment of damages for breach of a contract of sale? - Caroline PoundsView More

    Thu, 26 July, 2018

    Consideration of Euro-Asian Oil SA v Credit Suisse AG [2018] EWCA Civ 1720

    The Issue

    A seller enters into a sale contract with a buyer for the sale and purchase of generic goods.  The buyer in turn enters (or has already entered) into a sale and purchase contract (‘the sub-sale’) with a sub-buyer for the sale and purchase of the same generic goods.  The seller breaches its contract with the buyer, in that the goods are either (for example) not delivered at all (‘non-delivery’) or delivered in a defective condition (‘defective delivery’).

    Is the sub-sale relevant to the assessment of the buyer’s damages for breach of the sale contract?

    Overview

    In a judgment handed down on 25 July 2018, the Court of Appeal (‘CA’) has considered this issue in the context of a claim analogous to one for non-delivery.  The answer that the CA has given is that it “depends on the particular circumstances”, being an answer which it is suggested accords with both basic contractual principles and earlier authority (properly understood). 

    The Starting Point – Sections 51 / 53 of the Sale of Goods Act (‘SOGA’) 1979

    The starting point of any assessment of damages for claims in respect of non-delivery or defective delivery is sections 51 and 53 (respectively) of the SOGA 1979.

    As regards non-delivery, section 51 of the SOGA provides:

    “ …(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.

    (3) Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.”

    In similar vein, as regards defective delivery, section 53 of the SOGA 1979 provides:

    “…(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.

    (3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”

    Sub-sections 51/53(2) amount to a statutory codification of the well-known rule in Hadley v Baxendale (1854) 9 Exch. 341.  Sub-sections 51/53(3) then lay down a presumption of a market replacement measure (in the case of non-delivery) and a difference in market value measure (in the case of defective delivery), i.e. in both cases, a ‘market measure’.  Whilst this is trite law, it is worthy of repetition.  In the words of Lord Sumption in Bunge SA v Nidera BV [2015] UKSC 43 at [16], “Section[s] 51 … reflect[s] common law principles which had already been established at the time of the earlier Act.  Section 51(2) states the compensatory principle in the context of a seller's non-delivery. Subsection (3) states the prima facie measure of damages where there is an available market, but it is not so much a rule as a technique which is prima facie to be treated as satisfying the general principle expressed in subsection (2)”. 

    The rationale for this presumptive market measure is straightforward; put simply, the law presumes that, where there is an available market, the buyer both can and should go out into the market to purchase replacement goods in the event of a default by the seller. 

    The Apparent Controversy and Earlier Case Law / Commentary

    The question that has given rise to some controversy (arguably more apparent than real) in both the case-law and commentary is: in what circumstances might this presumptive market measure be displaced?  In particular, when might it be possible – and appropriate – to take a sub-sale into account?  Early case law has often been understood as suggesting that, in the event that there was an available market, then such circumstances are very few (if any).  In Rodocanachi v Milburn (1886) 18 QBD 67 (CA) (at pages 76-77), Lord Esher MR held it to be “well settled that in an action for non-delivery or non-acceptance of goods under a contract of sale the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods”.  Whilst this dictum was made in the context of a claim for non-delivery under a contract of carriage, its reasoning was followed and endorsed by the House of Lords (‘HL’) in Williams Bros v Agius [1914] AC 510, in which the HL held that, in a claim for non-delivery, where goods sold were available on the market and there was evidence of a market price at the date of the seller’s breach, the buyer’s damages for non-delivery were not to be reduced by reference to the fact that they were in fact resold at a price below the market price at the time fixed for delivery.  Lord Moulton noted (at page 530) that “Rodocanachi v. Milburn case rests on the sound ground that it is immaterial what the buyer is intending to do with the purchased goods.”

    Similar reasoning was applied by the CA in the later well-known case of Slater v Hoyle & Smith Ltd [1920] 2 KB 11, being a case of defective delivery under a contract for the sale of cloth.  The buyer had entered into a sub-contract for the sale of the cloth and was in fact able to deliver the defective cloth under its sub-contract without facing any claim for damages by its sub-buyer.  The CA nonetheless upheld the buyer’s claim for damages based on the market measure (i.e. the difference between the market value of the sound cloth and the damaged cloth), rejecting the seller’s argument that damages should be assessed with reference to the sub-sale.  In so doing, Scrutton LJ reasoned as follows (at page 20):

    “Neither sub-contract formed the basis of the original contract; the buyers were under no obligation to deliver the goods of the original contract to the sub-buyer … It is well settled that damages for non-delivery or delay in delivery of goods, where there is a market price, do not include damages for the loss of any particular contract unless that contract has been in contemplation of the parties to the original contract: Horne v. Midland Ry. Co. The value of the goods in the market independently of any circumstances peculiar to the plaintiff is to be taken”

    This reasoning suggests two potential ‘exceptions’ to what Scrutton LJ expressed as the general ‘rule’ (i.e. the irrelevance of the sub-sale): the first, where the buyer is under a legal obligation to deliver the very same goods sold under the original contract under the sub-contract; and the second where the sub-sale is in the contemplation of the parties to the original contract.  What is not immediately obvious from Slater v Hoyle, however, is why a legal obligation to on-sell the very same goods should matter, or the sort of situation when a sub-sale may properly be taken to have been in the contemplation of the parties such that it may be taken into account in the assessment of damages.

    This second point arose directly for consideration in the equally well-known case of Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87.  The claim was one for damages by a buyer in respect of the defective delivery of vinyl film bought from the seller as raw material for the buyer’s manufacture of decals (self-adhesive transfers for use in identifying bulk containers) to be sold to multiple third parties.  The vast majority of the film was sold on as decals before the buyer discovered the defect and, whilst the film was found by the trial judge to be worthless, very few of the ultimate users complained.  The trial judge nonetheless awarded the market measure of damages.  On appeal, the CA (by majority) overturned that decision, finding as a fact that the seller had had detailed knowledge of the buyer’s business and knew at the time of contracting the specific use to which the buyer intended to put the film.  In those circumstances, the CA reduced the damages award in respect of the film that had been on-sold to one based on the buyer’s liability (if any) to the ultimate users.  In other words – and in what some have (it is suggested mistakenly) viewed as a volte face in terms of the earlier case law – the buyer’s damages were based on the sub-contract, notwithstanding that there was an available market.

    Whilst the majority’s reasoning in Bence Graphics v Fasson was not entirely consistent in all respects, on the key points, its reasoning was unanimous:

    (1) Otton LJ emphasised (at 97C) that section 53(3) laid down only a prima facie rule, from which the court could depart in appropriate circumstances (the burden of proof lying on the party who sought such a departure).

    (2) Otton LJ also held that (at 100B) that, in circumstances where the cloth had been converted in the manner contemplated by the parties then damages were to be assessed with reference to the sub-sale, “whether the plaintiff likes it or not”.  He made the further point that it was not for the claimant to choose the outcome most favourable to it; rather it was for the court to determine the correct measure of damages.

    (3) Otton LJ summarised his reasoning at 101A as follows: “Thus, in my view, at the time of making their contract the parties were aware of facts which indicated to both that the loss would not be the difference between the value of the goods delivered and the market value and accordingly the prima facie measure ceased to be appropriate.”

    (4) The reasoning of Auld LJ at 102B-C was similar in all essential respects: “As to section 53(3), there is, in my view, a danger of giving it a primacy in the code of section 53 that it does not deserve. The starting point in a claim for breach of a warranty of quality is not to determine whether one or other party has “displaced” the prima facie test in that subsection. The starting point is the Hadley v. Baxendale principle reproduced in section 53(2) … namely an estimation on the evidence, of “the . . . loss directly and naturally resulting in the ordinary course of events from the breach of warranty.” The evidence may be such that the prima facie test in section 53(3) never comes into play at all.”

    The CA’s reasoning in Bence Graphics v Fasson was the subject of criticism by G.H. Treitel in his article “Damages for Breach of Warranty of Quality” LQR (1997) Vol. 113 at pp. 188-195.  Treitel’s criticisms are adopted in Chitty on Contracts and received a measure of obiter endorsement at both first instance and in the CA in OVM Petrom SA v Glencore International AG [2015] EWHC 666 (Comm); [2016] 2 CLC 651 (CA).  Treitel’s criticisms found themselves on two main points.  First, Treitel states that the CA wrongly treated the issue as one of remoteness; whereas remoteness is not relevant where the claim is simply for the difference in value between what was contracted for and what was received.  Second, Treitel stresses the significance of whether or not the buyer is under a legal obligation to use the identical goods purchased under the sale contract for the purposes of the sub-contract.  In the absence of such a legal obligation, according to Treitel, the sub-contract is irrelevant.

    It is respectfully suggested that neither point is correct.  The first merely begs the question of the buyer’s actual loss (assuming the actual loss in all cases to be equivalent to the market measure) and puts the cart before the horse:  the proper starting point is ss. 51/53(2) and not ss. 51/53(3) SOGA 1979 (as per Lord Sumption and Auld LJ above).  That is contrary to both the compensatory principle and the rule in Hadley v Baxendale.  The second point seeks to ascribe too much significance to Scrutton LJ’s reference in Slater v Hoyle to the relevance of such a legal obligation (see above).  The reason why such a legal obligation to on-sell the very same goods is relevant is because, in that situation, the buyer neither cannot – nor can the buyer be expected to – go out into the market and mitigate its loss.  It is thus merely one example – perhaps the paradigm example – of where the market measure (which itself internalises questions of causation and mitigation) may be displaced.  But as Bence Graphics v Fasson and now the decision in Euro-Asian Oil SA v Credit Suisse AG make clear, it is not necessarily the only situation in which it may be so, even where there is an available market.

    The Facts of Euro-Asian Oil SA v Credit Suisse SA

    It is pertinent at this juncture to consider the facts of Euro-Asian Oil SA v Credit Suisse AG.  The claim arose out of a sale contract concluded between Abilo UK and Euro-Asian for the sale and purchase (respectively) of Ultra-Low Sulphur Diesel (‘ULSD’).  Pursuant to a sub-contract concluded between Euro-Asian and a further company, Real Oil (on the same date), Euro-Asian agreed to sell an identical quantity of ULSD to Real Oil.  Cranston J at first instance found as a fact that both Abilo UK and Real Oil were creatures of a Mr Igniska and that the raison d’être of the transactions was that it was a financing arrangement for the benefit of Mr Igniska (enabling him to obtain larger quantities of gasoil than he could otherwise afford, and save on costs such as freight), the incentive for Euro-Asian being its ‘financing fee’, comprising the difference between contract sale price and the sub-contract price.

    The sale contract which was the subject of the claim was the fourth in a series of similar contracts (and sub-contracts).  As regards those earlier sale contracts, Cranston J found that they had been performed by way of what was described as ‘carousel’.  In short, the carousel operated by way of Abilo UK presenting documents (comprising a letter of indemnity (‘LOI’) and invoice in lieu of a bill of lading) under the relevant letter of credit in respect of a shipment previously discharged at the discharge terminal and providing a holding certificate (representing the physical ULSD in the terminal) based on the subsequent sale contract concluded with Euro-Asian.  Upon the collapse of the carousel, Euro-Asian was left in the position whereby it had paid for four cargoes of ULSD, but received only three.  It accordingly brought a claim against Credit Suisse as co-signatory to the LOI on the ground that Credit Suisse had warranted to it that Abilo UK had passed title to Euro-Asian of a cargo of ULSD, which was never in fact delivered to Euro-Asian (i.e. the claim was analogous to one for non-delivery).  It was common ground that there was an available market for the ULSD and Euro-Asian claimed the sound arrived value of the ULSD, agreed at US$18,360,320.  Credit Suisse, however, sought to limit Euro-Asian’s damages to US$15,889,500, being the sale price under its sub-contract with Real Oil.

    Decision of Cranston J

    Cranston J found that Credit Suisse was liable to Euro-Asian under the LOI.  Having recorded that there was an available market for the ULSD (at [352]), Cranston J rejected Euro-Asian’s argument on damages in brief terms, holding that (in a single paragraph at [353]):

    “In my judgment Euro-Asian’s damages should be capped at US$15,889,500, the price which Euro-Asian invoiced Real Oil under the Fourth Real Oil contract. It was always contemplated that Euro-Asian would nominate the same cargo to perform the Real Oil contracts which Abilo had nominated to perform the sale contracts. The market value rule for damages for failure to deliver goods under section 51(3) of the Sale of Goods Act 1979 is displaced.”

    The Arguments on Appeal

    Cranston J’s ruling on damages was the subject of a cross-appeal by Euro-Asian[1], on the alleged ground that there was no proper basis for disapplying the measure of loss set out in s. 51(3) of the SOGA 1979 in circumstances where there was an available market for the ULSD.  The thrust of Euro-Asian’s case was that Cranston J’s decision was inconsistent with what Euro-Asian described as the ‘classic damages logic’ represented by Slater v Hoyle (namely, on Euro-Asian’s case, the irrelevance of the sub-contract).  For good measure, Euro-Asian also sought to adopt the criticisms of Treitel summarised above.

    Credit Suisse’s case in response was two-fold.  First and foremost, Credit Suisse emphasised that, on the facts as found by Cranston J, Euro-Asian’s actual loss was US$15,889,500, being the price it would have been paid for the ULSD by Real Oil.  The considerably greater market measure of US$18,360,320 was an entirely theoretical loss which in no sense reflected the position that Euro-Asian would have been in, had the sale contract been properly performed.  The sole purpose of both transactions was for Euro-Asian to acquire ULSD that it would immediately sell to Real Oil and there was never, submitted Credit Suisse, any possibility of (and neither party would ever have contemplated) Euro-Asian doing anything else with the ULSD.  Nor was there ever any realistic prospect of Euro-Asian ever going out into the market to purchase a replacement cargo in the event of Abilo UK’s failure to deliver the ULSD under the fourth sale contract – a fortiori in light of the carousel (of which the Judge had found Euro-Asian was well aware at the time of conclusion of the fourth sale contract).

    On these particular facts, it was Credit Suisse’s case that the Real Oil sub-sale was not res inter alios acta (as the sub-contract in Slater v Hoyle was found to be:  see Scrutton LJ at p. 22) and was not too remote (as were the sub-contracts in each of Rodocanachi v Milburn, Williams v Agius and Slater v Hoyle).   On the contrary, on the particular facts of the case, the sub-sale was inextricably linked with the principal sale contract and both parties had contracted with reference to it.  They would accordingly have contemplated, in the event of breach, that Euro-Asian’s loss would be the price it would have been paid for the ULSD under its contract with Real Oil.  In those circumstances, Cranston J had properly awarded damages with reference to the sub-sale.  Indeed, it was Credit Suisse’s case that not to do so would flout both the compensatory principle and the rule in Hadley v Baxendale, for it would be contrary to the basis on which the parties had contracted and would serve to put Euro-Asian in a much better position than it ever would have been in but for the breach.

    As regards any alleged tension between Slater v Hoyle and Bence Graphics v Fasson, it was Credit Suisse’s case that, properly analysed, there was in fact no such tension, with the consequence that Treitel’s criticisms were misplaced.  Rather, each case was correctly decided on its own particular facts in accordance with the basic principles of causation, mitigation and remoteness.  But Credit Suisse also submitted that it was not in fact necessary for the CA to determine that point in light of Credit Suisse’s case that the application of the reasoning in Slater v Hoyle itself to the particular facts of the case led to the conclusion that the sub-sale was to be taken into account.

    The CA Decision

    In its judgment handed down yesterday, the CA dismissed Euro-Asian’s cross-appeal and upheld Cranston J’s damages award based on Euro-Asian’s sub-contract with Real Oil.  In so doing, the CA expressly referenced the compensatory principle and the rule in Hadley v Baxendale (as relied upon by Credit Suisse) and considered the earlier case-law such as Williams v Agius, which it relied on as making clear that “in such cases what was referred to as ‘accidental between the plaintiff and the defendant’ for example a contract between the plaintiff and a third party was irrelevant” (see the Judgment at [69], emphasis added).

    Having done so, however, the CA then returned to the wording of section 51 of the SOGA 1979 and the particular facts of the case, and held as follows at [72]-[73]:

    “72. The normal measure of damages for a failure to deliver goods is the estimated loss directly and naturally resulting, in the ordinary course of events from the seller's breach of contract, see s.51(2). Where there is an available market for the goods, the measure of damages is prima facie the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver, see s.51(3). However, the application of s.51(2) may mean that the prima facie rule in s.51(3) is not applied, or may be ‘displaced’ in the particular circumstances of the case. An example was given by Devlin J in the Kwei Tek Chao case (above): a string contract for specific goods. The issue in each case depends on the particular circumstances.

    73. In the present case, the sale contracts formed part of a series of what were effectively financing transactions involving Abilo, Euro-Asian and Real Oil (or another of Mr Igniska’s companies). They were not exactly string contracts, and I would accept that Euro-Asian could have performed its delivery obligation under the sub-sale other than through the purchase from Abilo.  Nevertheless, there was a proper factual foundation, as set out at [72]-[79] of the judgment, which I have endeavoured to summarise at [12] to [14] above, for the Judge’s conclusion that ‘it was always contemplated’ that Euro-Asian would nominate the same cargo to perform the Real Oil contracts that Abilo nominated to perform the sale contracts, so that he was entitled to his view that the damages he awarded was the measure of loss contemplated by the parties.”

    Thus, the CA found that, in circumstances where the parties would only ever have contemplated a loss based on the sub-contract, the prima facie market measure was displaced and Euro-Asian’s damages fell to be assessed with reference to its sub-contract with Real Oil.

    Commentary

    It is submitted that the CA’s decision was correct on the facts before it.  Properly understood, even the case-law relied upon by Euro-Asian does not support the existence of any ‘rule’ that a sub-contract cannot be taken into account in the assessment of damages where there is an available market (or that it can only be taken into account where the buyer is under a legal obligation to supply the very same goods under the sub-contract).  Rather, and as the CA has confirmed, whether or not a sub-contract should be taken into account will depend on the particular facts and the application of the basic principles of causation, mitigation and remoteness to those particular facts.

    As numerous judges at all levels have emphasised, and the CA in Euro-Asian Oil SA v Credit Suisse AG has reiterated, the presumptive market measure in sections 51/53 SOGA 1979 is based on a presumption that losses can – and can reasonably be expected to be – avoided by a particular type of mitigation, i.e. going out into the market.  Where, as in Euro-Asian Oil SA v Credit Suisse AG, there are facts to rebut that presumption, it should not apply.

    The fact that a loss is not too remote is a necessary – but not in and of itself sufficient – factor that may lead to the displacement of the presumption.  By parity of reasoning, the presence of a legal obligation to use the identical goods under the sub-contract might suffice to render the sub-contract relevant, but it is not necessary.

    Put another way, it is suggested that a sub-contract will determine the assessment of damages for non-delivery (or defective delivery) where that sub-contract is within the reasonable contemplation of the parties and the parties contemplate that, in the event of non-delivery / defective delivery, the buyer could not or would not buy replacement goods in the market and his action in not doing so would be reasonable.  In such circumstances, where the buyer cannot reasonably be expected to go out into the market to mitigate its loss, or cannot do so in fact, the parties would never have contemplated that the innocent party would suffer a loss in the amount of the market measure.  Nor, in such circumstances, does the breach in question cause the innocent party to suffer a loss in the amount of the market measure.  Instead, in these circumstances, the buyer’s actual loss based on the sub-contract is the loss directly and naturally resulting in the ordinary course of things from the seller’s breach of contract.  Such reasoning has the benefit of principle and, once applied to the particular facts of the particular cases, obviates any suggestion of inconsistency between cases such as Bence Graphics v Fasson and Slater v Hoyle.

    A decision on Euro-Asian’s application for permission to appeal is awaited as at the time of writing.

    Caroline Pounds acted on behalf of Credit Suisse AG, led by Jeffrey Gruder Q.C. and instructed by Jeremy Davies, Olivier Bazin and Caroline West of HFW, Geneva. A copy of the judgment is available here.


    [1] Credit-Suisse having (in the event, unsuccessfully) appealed the finding that it was liable to Euro-Asian.

     

    Caroline Pounds

    Caroline’s practice encompasses the broad range of general commercial litigation and arbitration.  Her particular areas of specialism include shipping, carriage of goods, shipbuilding, energy and commodities.  She undertakes drafting and advisory work in all areas of her practice and regularly appears in the Commercial Court and in arbitration, both as sole counsel and as junior. She is a sought after junior and enjoys a significant amount of led work. In particular, she is regularly led by Luke Parsons QCSimon Rainey QCLionel Persey QC, and Simon Croall QC

    > view Caroline's full profile

    caroline.pounds@quadrantchambers.com

  • Trade Finance Banks Beware: You are Subject to Arbitral Jurisdiction under Bills of Lading You No Longer Hold – Chirag Karia QCView More

    Thu, 26 July, 2018

    Trade finance banks facilitate international trade by providing short-term, “self-liquidating” finance to their trader customers.  Being able to hold the bills of lading covering the cargoes they have financed to secure repayment of the purchase price, without getting involved in the underlying contract of carriage unless absolutely forced to, is crucial to their business model. 

    Such banks are likely to find the ruling of Popplewell J in Sea Master Shipping Inc v. Arab Bank (Switzerland) Limited (“The Sea Master”) [2018] EWHC 1902 (Comm), handed down on 25th July 2018, surprising to say the least.  That is because he held that such banks are subject to the jurisdiction of an arbitral tribunal appointed under bills of lading previously held by them as security, even if they were merely intermediate holders who had neither rights nor obligations under those bills at the time the arbitration was commenced.

    In the underlying arbitration, the shipowners claimed demurrage from a Swiss trade finance bank that had financed the purchase of a cargo of soyabeanmeal by the ship’s charterers.  As the charterers were no longer good for the money, the owners claimed the demurrage from the bank, arguing inter alia that the bank was liable because it was the original party to the contract contained in and/or evidenced by a replacement/“switch” bill of lading issued at the bank’s counters in Zurich in exchange for the original bills of lading held by the bank as security for its loan to the charterers.  The charterers needed the “switch” bill because they had lost their buyer at the discharge ports in Morocco named in the original bills and their substitute sale contract required delivery in Lebanon.  They therefore paid the owners an additional sum to sail to, and issue a switch bill of lading providing for discharge in, Lebanon. 

    The tribunal held that it lacked jurisdiction because, inter alia, the bank was not an original party to the switch bill of lading.  The owners challenged that decision under section 67 of the Arbitration Act 1996 on the sole ground that, contrary to the tribunal’s ruling, the bank was the original party to the switch bill; and the parties argued only that question.

    However, Popplewell J approached the jurisdictional question from a different angle.  He held that the tribunal had jurisdiction over the bank even though the bank possessed neither rights nor obligations under the switch bill at the time the arbitration was commenced.  He held that the fact that the bank had, albeit as an intermediate holder of the switch bill and only temporarily, previously been vested with rights of suit under that switch bill pursuant to section 2 of the Carriage of Goods by Sea Act 1992 (“COGSA 1992”) gave the tribunal the required jurisdiction.  He ruled that to be the case even though the bank (i) never became subject to any obligations under the switch bill pursuant to section 3 of COGSA 1992 and (ii) had even lost its right of suit under section 2 by the time the arbitration was commenced as a result of its endorsement of the switch bill to the new Lebanese buyer. 

    Popplewell J reached that conclusion in reliance on the doctrine that the arbitration agreement “has a separate and independent existence from that of the matrix contract in which it is found,” such that it may confer jurisdiction on the arbitrators to determine disputes “notwithstanding the termination or even initial invalidity of the matrix agreement giving rise to the disputes”.  In his view, that doctrine of separability meant that one could not assume that COGSA intended to treat rights and obligations under the arbitration agreement in the same way as the substantive rights and obligations of the parties under the bill of lading contract. 

    He concluded that the effect of the bank becoming a lawful holder of the switch bill “was to subject the Bank to an obligation to arbitrate disputes falling within the scope of the arbitration clause it contained ”; and that was so even though the bank had ceased to have any rights of suit under that bill. 

    Popplewell J’s analysis certainly provides an interesting and different perspective on the effect of COGSA 1992 on arbitral jurisdiction.  However, with respect, it is difficult to understand how the operation of section 2 of COGSA 1992 could be said to impose “an obligation to arbitrate” on the bank given that it explicitly deals only with “rights of suit” (emphases added), and sections 2 and 3 draw a clear distinction between rights and obligations.  The fact that the bank did not even have those rights of suit at the time the arbitration was commenced makes the analysis even more difficult.  Furthermore, his ruling is directly inconsistent with the obiter analysis of Aikens J in Primetrade AG v Ythan Ltd (“The Ythan”) [2006] 1 Lloyd’s Rep 457, which mirrored that of the dissenting arbitrator in that case, Mr Anthony Diamond QC, a recognised expert on COGSA 1992. 

    It is respectfully submitted that Aikens J’s analysis in The Ythan is to be preferred over that of Popplewell J in The Sea Master: the correct position is that an intermediate bill of lading holder is not under any obligation to arbitrate unless it has become subject to the liabilities under the bill of lading contract pursuant to section 3 of COGSA 1992 or it seeks to make a claim against the owner falling within the terms of the bill of lading’s arbitration clause.  However, since Popplewell J decided the issue as a matter of ratio whereas Aiken J’s analysis was obiter, The Sea Master will be followed until the Court of Appeal gets an opportunity to review this issue. 

    Chirag Karia QC acted for the defendant bank in the Commercial Court action. A copy of the judgment is available here.

    Chirag Karia QC

    Chirag Karia QC has a broad commercial, shipping, insurance and international trade practice. He appears regularly in the Commercial Court, the Court of Appeal and international arbitrations. He is listed as a ‘Leading Silk’ for Shipping and Commodities disputes by both Chambers UK and The Legal 500. 

    Chirag is instructed on high level and important shipping and commodities cases, usually multi-jurisdictional and vigorously fought. Over the past few years he has acted on: Unipec v BP & others, a complex series of inter-related Commercial Court actions and LCIA arbitrations claiming over US$80 million in damages from multi-national oil companies as a result of the sale of salt-contaminated crude oil;  The Ratna Suradha, a multi-party dispute, involving the sovereign states of Sudan and South Sudan as parties as to title to a US$60 million cargo of oil; Great Elephant Corp. v. Trafigura Beheer BV (“The Crudesky”), a five party “chain” dispute in which Chirag’s clients succeeded in the Commercial Court and then secured a substantially increased recovery from the Court of Appeal; and The Yusuf Cepnioglu, in which Chirag secured anti-suit injunctions against actions brought against his P&I Club client by third parties under Turkey’s right of direct action against liability insurers.

    > view Chirag's full profile

    chirag.karia@quadrantchambers.com

  • Striking out Arbitration Claims for Want of Prosecution - David SemarkView More

    Wed, 25 July, 2018

    Dera Commercial Estate v Derya Inc [2018] EWHC 1673 (Comm) is the first opportunity the English Courts have had to examine, in any depth, the principles applicable to the operation of s. 41 (3) of the Arbitration Act 1996 when an arbitral tribunal is asked to dismiss a claim for “inordinate” and “inexcusable” delay.

    For maritime lawyers, the decision of Mrs Justice Carr clarifies the longstanding debate as to whether it is still the case that, in a contract of carriage governed by the Hague Rules, a geographic deviation from the contractual route displaces the entire bill of lading contract, including the timebar provisions in Article III Rule 6 of the Rules.

    The matter came before the Court by way of the Appellant cargo claimant’s (“Dera’s”) appeal under s. 68 and s. 69 of the Arbitration Act against the dismissal by a LMAA Tribunal of its cargo claim for want of prosecution.

    Dera were the owners of a cargo of maize carried from ports in India to the port of Aqaba in Jordan. The vessel arrived at Aqaba on 16th August 2011 but discharge of the cargo was not permitted by the authorities due to its damaged condition. On 8th November 2011 her Owners instructed the vessel to sail  from Aqaba to Turkey without obtaining the Jordanian authorities’, or Dera’s, permission to leave port. Dera’s case was that the vessel had absconded from Aqaba in circumstances where it was still trying to discharge the cargo in Jordan and that Owners thereby converted the cargo and/or caused the vessel to deviate from the contractual voyage.

    The arbitration proceedings were commenced in September 2011. Dera’s cargo claim was particularised in June 2015. In May 2016, the vessel’s Owners applied to have Dera’s claim struck out for want of prosecution. The Tribunal’s Award dismissing Dera’s claim pursuant to s. 41 (3) was issued in June 2017.

    Dera obtained permission to appeal under s. 69 on the following four questions of law:

    (a)   Whether a claim which is particularised within the 6 year limitation period applicable to contractual claims pursuant to s. 5 of the Limitation Act 1980 can nevertheless be struck out for “inordinate delay” under s. 41 (3) of the Act because the parties have contracted for a shorter limitation period (here 1 year under Article III Rule 6 of the Hague Rules)?

    (b)   Whether, in a contract evidenced by a bill of lading subject to the Hague Rules, a geographic deviation precludes a carrier from relying on the 1 year time bar created by Article III Rule 6 of the Hague Rules?

    (c)   In circumstances where the 1 year time bar created by Article III Rule 6 of the Hague Rules is applicable, is the period between (i) the time the cause of action arises, and (ii) the expiry of the contractual time limit, to be taken into account when assessing whether the delay is “inordinate” under s. 41 (3) of the Act?

    (d)    What is the proper order, burden and/or standard of proof applicable to a Tribunal’s assessment of whether a delay is “inexcusable” within the scope of s. 41 (3) of the Act?

    The relevance of a short contractual timebar

    In assessing the Court’s own power to strike out claims for delay the Court of Appeal held in Trill v Sacher that only in exceptional cases can a claim be struck out for want of prosecution within the limitation period. The issue for Mrs Justice Carr was whether the position is different where the contractual limitation period was (arguably) 1 year pursuant to Article III Rule 6 of the Hague Rules.

    Dera argued that it was wrong to focus on the one-year Hague Rules timebar as the yardstick for assessing whether a delay in particularising a cargo claim is “inordinate” and that inordinate delay in the context of cargo claims should be measured instead against what is regarded as acceptable according to the standards of those normally involved in that type of arbitration.

    Mrs Justice Carr disagreed, holding that absent any agreed extensions of time or consent to the delay, “…there is no reason why the one-year rule is not objectively relevant for the purpose of assessing delay. It sets the tone and content for that exercise.” [69] However, the Judge was careful to stress at [64] that “It would nevertheless be wrong to elevate the relevant limitation period to the status of being “the” yardstick.  Rather it is “a” yardstick, albeit an important one…”.

    The effect of a geographic deviation

    On the second question, Mrs Justice Carr found at [117] that the Tribunal had erred in law in concluding that a geographic deviation does not preclude a carrier from relying on the one year time bar created by Article III Rule 6.

    In reaching this conclusion, the Judge found that she was bound by the ratio of the House of Lords’ decision in Hain Steamship v Tate & Lyle that a geographic deviation displaces all the terms of a contract of carriage in the event it is accepted by the shipowner’s counterparty as bringing the contract to an end. She held that this had not been overruled in the House of Lords’ subsequent decisions in Suisse Atlantique and Photo Production. Mrs Justice Carr confirmed however that absent such binding precedent, she would have reached the same conclusion as the Tribunal.

    The relevance of the period prior to the expiry of the contractual limitation period for assessing “inordinate delay”

    The Tribunal had stated that it was “entitled to consider the full period of the delay from the time the cause of action arose, once the limitation period has expired…” when comparing this to the 1-year Hague Rules time limit. Dera argued that the Tribunal had applied this period mechanistically, without regard to the usual or inevitable delays inherent in any arbitral proceedings.

    Mrs Justice Carr confirmed that this exercise cannot be “a purely mechanical” one, and that “[in] cases where there are periods of procedural activity and non-activity, it will normally be appropriate to assess individual periods of delay separately and distinctly, arriving at a cumulative picture of overall delay…” [127] However, she concluded that on the facts of this case the Tribunal had not adopted a purely mechanical approach because here there had been no substantive procedural activity which would have obliged the Tribunal to demarcate individual periods of delay.

    The burden of proof in s. 41 (3) applications

    Dera said that the Tribunal had erred by failing to take into account the difference between an evidential burden and a legal burden when assessing whether its delay was inexcusable.

    Mrs Justice Carr confirmed at [137] that the legal (or persuasive) burden of proof lies at all times on the applicant on a s. 41 (3) application to establish (on a balance of probabilities) not only that there was inordinate, but also inexcusable, delay.

    The Judge said at [139], that “beyond the question of legal burden, as presaged in Trill v Sacher, it could be said that there is a shift of evidential burden on to the responding party once inordinate delay is established by the applying party…” but expressed the view that it will seldom be necessary, or helpful, to talk of a shift of evidential burden.

    This was on the basis that “…[if] the responding party has good reason for the delay it will no doubt come forward with that evidence, for the applying party then to address as it can…” and that “… although each case will be fact specific, as a matter of practice it will be the responding party that identifies what it contends to be a credible excuse for the delay.  Otherwise, a tribunal will normally be driven to the conclusion that there is (probably) no such excuse.” [141]

    Disposal

    Mrs Justice Carr remitted the Award back to the Tribunal for findings as to whether there had, on the facts, been a geographic deviation which Dera had elected to accept as bringing the contract of carriage to an end. The Owners were given permission to appeal the Judge’s finding that she was bound by the ratio in Hain Steamship. However, the Court granted the Owners an extension of time to file their Appellant’s Notice pending the Tribunal’s reconsideration of their Award on remission.

    David Semark represented the Appellant cargo claimants in the High Court proceedings. A copy of the judgment is available here.

    David Semark

    David ‘Produces excellent work and represents exceptional value for an experienced litigator.’ (Legal 500). A former army officer David also previously trained in the Shipping Department of one of South Africa's leading maritime and international trade firms, before joining and later becoming a partner at what is now known as Reed Smith. He retrained as a barrister and became a member of Quadrant in 2010.

    David specialises in commercial law, with a particular emphasis on shipping and maritime law (especially dry shipping disputes), international trade and commodities, jurisdictional disputes and insurance. Although his practice is primarily as an advocate, he is also an LCIA arbitrator.

    He is the co-author of P&I Clubs: Law and Practice (2010, 4th ed.) and Maritime Letters of Indemnity (2014, 1st ed.)

    > view David's full profile

    david.semark@quadrantchambers.com