Maritime and Shipbuilding Law

Shipbuilding delays (Shipyard’s Perspective)

2011-08-07T19:56:00.002+08:00

Prelude – Jubilation at the yard following the signing of Shipbuilding Contracts for a series of identical proto-type offshore supply vessels was short-lived. A fast track; 18 months multi-million dollars fixed lump sum shipbuilding project soon degenerated into perennial delays. The aftermath: delays of more than 2 years, losses of millions of dollars and loss of goodwill. The causes were multifold; the results predictable and avoidable.

Even though the personnel involved in the contract negotiation were highly experienced in technical and commercial matters, there was no evidence to suggest that they had the required expertise to fully comprehend legal complexity of shipbuilding contract. Thus adequate contract risk management was overlooked. Consequently, shipyard accepted a stringent loop-sided "adhesion" contract.

Basic design was developed by Designers originally employed by the Owner. However shipyard agreed to and thus assumed full responsibility and all risks associated with the design. Having inherited a partially developed design, shipyard could either assume design risk after it had satisfied itself of the technical feasibility or allocate responsibility for design errors from a defined design freeze period. Shipyard chose the former and paid a very high price subsequently. Lack of timely/accurate information and approval (from Owner or Designer or Classification) resulted in delays and significant rework to correct errors. As there was no contractual provision for cost and time adjustment, such delays were for shipyard’s account

Project budget was ineffectively managed resulting in unrealistic costing and under-pricing. Despite having insufficient details to plan its schedule shipyard created an illusion of on-time delivery by developing a schedule with the completion date as reference point and working backwards. The subsequent rush to accelerate the project resulted in construction shortcomings with further delays.

Essential terms in equipment suppliers’ contract were not adequately negotiated to address or allocate risk fairly and appropriately. The end result is three-fold losses comprising of additional overheads, liquidated damages under the main contract and extra expenses for vendors services (inclusive commissioning and start-up) and replacement or correction of defective equipment/parts.

Apathy best describe the efforts of the quality control in place. Sloppy works were offered to the Classification Society and Owners representative for inspection. This resulted in unnecessary rectification, substantial costs and time impact. As the vessel design and scope (specifications, or performance or deliverables) were novel to the yard’s project team, interpretation of quality, acceptance or rejection of work were left entirely to the Owner representatives' discretion. Owner’s representative had a field day with extras and rework. Weakness in this area was never adequately addressed due to unexplained constraint thus rendering any swift turnaround impossible to achieve.

End-Note: “We can choose to learn from our own mistakes or those made by others”

Hold Harmless Indemnity – Subsidiary and Affiliate

2011-05-29T15:28:00.002+08:00

Farstad, chartered their vessel to Asco UK Ltd, (a wholly owned subsidiary of ASCO plc). Under the charterparty, both Companies agreed to indemnify and hold each other harmless in relation to certain liabilities. Farstad further agreed to indemnify Asco UK Ltd’s “Affiliates”.

Enviroco (another wholly owned subsidiary of ASCO plc) was contracted to clean the oil tanks of the vessel. In the process of such work, a fire occurred causing the death of one of Enviroco’s employees and substantial damage to the vessel. Farstad sued Enviroco for the losses it allegedly suffered. Enviroco relied on the indemnity clauses in the charterparty on the basis that it was an “Affiliate” of Asco UK Ltd because each of them was a subsidiary of ASCO plc.

Before the incident, ASCO plc had given the Bank of Scotland security over its shares in Enviroco by registering the shares in the name of the bank (or its nominee).

The Court of Appeal held that as the shares in Enviroco were registered in the name of the bank’s nominee company at the time of the fire, ASCO plc was not a member of Enviroco. As Enviroco was not a subsidiary of ASCO plc it could not rely upon the indemnity clauses. Recently, the Supreme Court have unanimously dismisses Enviroco’s appeal.

Source:

Farstad Supply A/S (Respondent) v Enviroco Limited (Appellant) [2011] UKSC 16

http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2010_0008_Judgment.pdf

Contract concluded in the course of email exchanges

2011-04-14T23:48:00.000+08:00

In the case of Immingham Storage Co Ltd v Clear PLC (1), the court of appeal had to decide whether a contract was made in the course of email exchanges between the parties.

Through a series of email, the parties had negotiated about availability of commingled storage space for ultra low sulphur diesel at the claimant’s terminal. In due course, claimant sent a two page quotation with all essential commercial terms to the defendant via email attachment, with the word headed in bold capitals “Subject to board approval and tankage availability”. The final sentence of the document was “A formal contract will then follow in due course”. There was a space for defendant’s signature under the words “we hereby accept the terms of your quotation subject to your Board approval”. A copy of the General Storage Conditions was also attached.

On 5 January 2009, defendant faxed a signed copy of the quotation to claimant. On 9 January 2009, Claimant emailed defendant under the subject heading “Contract confirmation” accepting defendant’s offer and stating further that “our full contract for this business will now be raised over the next few days by our Head Office and sent for your signature and return.”

Subsequently, claimant sent the full contract to defendant. However, Defendant did not return the contract or utilize the storage facility. It failed to pay claimant for the monthly storage charges and further denied the existence of any contract alleging that “the acceptance of the quotation in principal [sic] does not constitute a formal contract which was never signed by an officer of this company and therefore no agreement exists between us.”

The claimant’s case was that a contract had been concluded by the acceptance in its email of 9 January 2009. The defendant disputed this and contended that the return of the quotation was not an offer capable of acceptance so as to form a contract, because of reference in the quotation that “A formal contract will then follow in due course”. Further, even if such was an offer, claimant had not accepted the same, as it had stated that “our full contract for this business will now be raised …and sent for your signature and return”.

The court of appeal agreed with the judge of first instance that a contract was concluded by the claimant’s email of 9 January 2009. It was of the view that:

a) The quotation contained all essential commercial terms and was expressly subjected only to board approval by the respondent and confirmation of tank availability. These requirements were certain and required no further discussion or negotiation between the parties. Once claimant has fulfilled these requirements and indicated its acceptance, the contract was effective. Also, the absence of a condition such as “subject to contract” was relevant. The terms on which the quotation was signed (“We hereby accept the terms of your quotation subject to your Board approval”) made clear the limited conditionality.

b) These factors point, overwhelmingly to an intention to create a contract if the claimant accepted the defendant’s offer. The provision that a “formal contract will then follow in due course” does not indicate that the claimant’s acceptance of the signed quotation was subject to contract. It was “a mere expression of the desire of the parties as to the manner in which the transaction already agreed to, will in fact go through”.

c) The reference, “full contract” did no more than carry forward the provision in the quotation that “a formal contract” would follow in due course. It did not introduce a variation to the terms of the offer, but corresponded with them.

d) Just as the provision for “a formal contract” did not prevent the signed quotation from being an offer to contract, so the reference to a subsequent “full contract” did not prevent the email of 9 January 2009 from being an acceptance of the offer which immediately created a contract.

e) Further, the reference to a full contract must be read in the context of the entire email, which strongly supports the conclusion of a contract at that stage.

(1) [2011] EWCA Civ 89

Consequential loss – the position in Australia

2011-04-05T10:27:00.001+08:00

“The 2008 decision by the Victorian Court of Appeal in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd¹ (Peerless) and the 2009 decision of the New South Wales Court of Appeal in Allianz v Waterbrook² (Waterbrook) are important cases because they demonstrate a significant change in the way Australian courts approach the definition of “consequential loss”. This new approach broadens the scope of the phrase with the effect that categories of loss that may have previously been considered to be part of the liability regime in a contract containing a clause excluding “consequential loss” may no longer be recoverable from a defaulting party.”

Per article by Cameron Ross - click to link: A loss of no consequence.

On-demand bond – appropriate language and rebuttal of presumption

2011-03-02T23:04:00.000+08:00

In a recent case [1] before the English High Court, a claimant’s application for summary judgment under a Deed of Guarantee and Indemnity was dismissed on the basis that (a) the instrument did not contain language appropriate to a demand bond; (b) as it was a transaction outside the banking context, the presumption, against the interpretation of the instrument as a demand bond had not been rebutted; (c) the respondent has a real prospect of successfully defending the claim. In the process, Mr. Justice Blair considered and reiterated the following principles when construing whether a particular instrument was an on-demand bond.

That the difference between secondary liability and primary liability is not in itself decisive
That the mere incorporation of a principal debtor clause will not usually suffice in itself to determine the nature of the contract
There is no standard nomenclature by which such an instrument can automatically be classified however, and the authorities make it clear that the nature of the instrument in question is a matter of construction of the instrument as a whole without any preconceptions as to what it is. [2] & [3]
That the absence of language appropriate to a demand bond in a transaction outside the banking context creates a strong presumption against the interpretation of the instrument as a demand bond [4] & [5]
That the avowed purpose of the instrument and the overall context of the contractual arrangements may be relevant in determining whether on-demand type liability has been created [6]
Conclusive evidence clauses will be interpreted strictly and any ambiguity resolved in favour of the guarantor

Reference:

[1] 2010 EWHC 1905 (Comm)

[2] Gold Coast Limited v Caja de Ahorros del Mediterraneo [2003] 1 AER (Comm) 142] at [15]

[3] IIG Capital Llc v Van Der Merwe & Anr [2008] EWCA Civ 542 at [7])

[4] Marubeni Hong Kong and South Chinas Limited v Mongolian Government [2005] at [30]

[5] IIG Capital Llc v Van Der Merwe & Anr at [8] to [9]).

[6] (Hyundai Shipbuilding & Heavy Industries Co Ltd v Pournaras [1978] 2 Lloyd’s Rep 502 at 508)

Restraining call on a performance bond – functional and commercial reasons

2011-02-27T13:05:00.003+08:00

As stated in an earlier post, the provision of refund or performance bond is a key element in shipbuilding contract. This is especially significant between parties from different jurisdiction. The nature of such instrument can either be conditional or on-demand, depending on the terms upon which it may be invoked. An on-demand bond is payable without proof or condition independent of the underlying contract. Its purpose is to provide a security which is to be readily, promptly and assuredly realizable when the prescribed event occurs. The English position regarding on-demand bond is that the bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice [1].

However, the position in Singapore is wider. Apart from fraud (which is the traditional ground for restraining a call on a performance bond), unconscionability is a separate and independent ground for the court to grant an interim injunction restraining a beneficiary from making a call on a performance bond. In a recent case [2], the Singapore Court of Appeal reiterated this position and highlighted that the “juridical basis for adopting unconscionability as a relevant ground (separate from and independent of fraud) lies in the equitable nature of the injunction. Considerations of conscionability are applicable in relation to the use of the injunction in other areas of the law, and there is no reason why these considerations should not be applied for the purposes of determining whether a call on a performance bond should be restrained so as to achieve a fair balance between the interests of the beneficiary and those of the obligor.” (Paragraph 13, lines 3 to 8)

It also added that the Singapore position on the circumstances in which the court may restrain a call on a performance bond is justified for functional and commercial reasons.

§ A performance bond (especially one given by the contractor-obligor in a building contract) serves a different function from a letter of credit.

The latter performs the role of payment by the obligor for goods shipped to it by the beneficiary (typically via sea or air from another country), and “has been the life blood of commerce in international trade for hundreds of years”... Interfering with payment under a letter of credit is tantamount to interfering with the primary obligation of the obligor to make payment under its contract with the beneficiary. Hence, payment under a letter of credit should not be disrupted or restrained by the court in the absence of fraud. In contrast, a performance bond is merely security for the secondary obligation of the obligor to pay damages if it breaches its primary contractual obligations to the beneficiary. A performance bond is not the lifeblood of commerce, whether generally or in the context of the construction industry specifically. Thus, a less stringent standard (as compared to the standard applicable vis-à-vis letters of credit) can justifiably be adopted for determining whether a call on a performance bond should be restrained

§ Where the wording of a performance bond is ambiguous, the court would be entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand

§ Even where a performance bond is expressed to be payable “on first demand without proof or conditions”, there is no reason why fraud should be the sole ground for restraining the beneficiary from receiving payment.

To adopt such a position is to “apply a standard of proof which will virtually assure the beneficiary [of] … immediate payment … and … does nothing more than to transfer the security from the [paying bank] … to the beneficiary” … This may in turn cause undue hardship to the obligor in many cases. For instance, where a call is made in bad faith, especially a call for payment of a sum well in excess of the quantum of the beneficiary’s actual or potential loss, the beneficiary will gain more than what it has bargained for. Furthermore, if the amount paid to the beneficiary pursuant to a call is subsequently proved to be in excess of the quantum of its actual loss, the obligor runs the risk of being unable to recover any part of the excess amount should the beneficiary become insolvent.

§ Excessive or abusive call can cause unwarranted economic harm to the obligor. This is particularly relevant in the context of the construction industry, where liquidity is frequently of the essence to contractors

§ The mere fact that the employer beneficiary agreed to accept a performance bond in lieu of a cash deposit should not be material in determining whether a call on a performance bond should be restrained

Reference:

[1] Edward Owen Engineering Ltd v Barclays Bank International Ltd & Umma Ban

[2] JBE Properties Pte Ltd v Gammon Pte Ltd [2010] SGCA 46

Charterparty - Withdrawal of ship – entitlement to remuneration outside of contract.

2011-01-17T23:05:00.002+08:00

If a shipowner withdraws his vessel from a charterer’s service for non-payment of hire while cargo is on board the vessel and the shipowner requires the charterer to remove the cargo from the vessel, is the shipowner entitled to remuneration outside the contract and/or to recover expenses incurred in that operation?

The Owners of a double hulled Very Large Crude Carrier (VLCC) chartered the vessel to the Charterers on Shelltime 3 form. Hire under the charterparty was payable monthly in advance, and if it was not paid, the Owners had the right to withdraw the vessel "without prejudice to any other claim Owners may otherwise have on Charterers under this charter". Clause 13, which has a side-note "Bills of Lading", a provision that, "The Master (although appointed by Owners) shall be under the orders and direction of Charterers as regards employment of the vessel, agency or other arrangements ... Charterers hereby indemnify Owners against all consequences or liabilities that may arise … from the Master otherwise complying with Charterers' or their agents' orders …".

The ship was withdrawn from the service of the Charterers while loading cargo because of a failure to pay hire (for a few days after its due date) under the time charter. There were exchanges after withdrawal in which the Charterers asked the Owners to cancel the withdrawal whereas the Owners would only agree to do so at the market rates (which had risen by then). The Parties could not agree on their respective positions and the cargo was finally off-loaded at the same port, 2.64 days after it was withdrawn by the Owners.

The Owners claimed compensation for:

(i) The detention or use of the ship for 2.64 days while the Charterers’ cargo remained on board after the ship was withdrawn;

(ii) Bunkers consumed while the Charterers’ cargo remained on board after the ship was withdrawn;

(iii) Bunkers consumed in unloading cargo; and

(iv) Expenses incurred in providing and maintaining a bank guarantee after the Charterers asserted that the withdrawal was wrongful and that they were entitled to security for their claim.

At first instance, Mr Justice Andrew Smith decided that there was no claim under the express employment and indemnity clause (or any other clause) of the charterparty nor any claim under any implied term of the charter. He also rejected a claim that there was a request by the charterer for further services which created an agreement for remuneration and expenses; he also rejected a yet further claim for a quantum meruit. He upheld, however, a fifth claim made on the basis that the shipowner had a duty to care for the cargo while it continued to be on board the vessel which gave rise to a correlative duty on the charterer to remunerate the owner and pay his expenses while the cargo was being discharged.

On appeal, the Court of Appeal dismissed the Owners’ claims in respect of remuneration for the 2.64 days and the balance of bunkers consumed during that period. However, it allowed Owners’ claim for (a) the bunkers consumed during discharge and (b) the reimbursement of bank guarantee expenses as a cost of action.

Case Reference:

E.N.E. 1 KOS LIMITED v PETROLEO BRASILEIRO S.A. [2010] EWCA Civ 772

English Court of Appeal (Civil): Longmore and Smith LJJ and Sir Mark Waller

Advance Payment Guarantees - performance bonds or contracts of suretyship?

2011-01-13T22:35:00.000+08:00

The claimant, an insurance company issued advance payment guarantees (“APGs”) to the defendants, (i.e. the first defendant and its subsidiary the second defendant), guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts signed between the defendants and a Korean shipbuilder, Huen Woo Steel Co Ltd (“HWS”).

Later, HWS merged with another company, the new company was re-named Buyoung Heavy Industries Co Ltd (“Buyoung”). Some months later, Buyoung partitioned its shipbuilding business and its blockbuilding business. Buyoung continued took on the blockbuilding business while a newly incorporated company, Asia Heavy Industries Co Ltd (“Asia Heavy”) undertook the shipbuilding business. Subsequently, Asia Heavy went into financial difficulties and the defendants served notice of default, terminated the contracts and demanded repayment of the money paid under the contracts with interest. Asia Heavy Industries did not pay any of these demands and the defendants demanded payment from claimant under the three APGs. The defendants also demanded payment from Buyoung on the basis that it was jointly and severally liable in respect of the shipbuilder’s’ obligations to repay under the three contracts.

The claimant sought a declaration that it is not liable under APGs as it only guaranteed the obligations of HWS and not those of its corporate successors. Alternatively, it claimed that as a result of material variations to the shipbuilding contracts by reason of the changes in the corporate identity and extensions of the delivery time of the vessels, it had been discharged from liability. It also argued that as a result of the corporate changes, it was not possible, within the terms of the shipbuilding contracts and the APGs for a contractual demand to be made which triggered claimant’s liability under the APGs. The defendants maintained that the APGs are unconditional performance bonds and it is irrelevant which corporate entity failed to make the refund or whether there have been material variations to the shipbuilding contracts. Alternatively, they argued that if the APGs were classic contracts of suretyship, there was no material variations in the shipbuilding contracts because those contracts provided for changes in the delivery time of the vessels.

There were three issues before Mr Justice Beatson.

Issue 1: Are the APGs performance bonds?

After considering various authorities and counsels’ submission, the Judge rejected claimant’s submissions and concluded that the APGs are performance bonds or demand guarantees.

He noted that the broad structure of the APGs had three of the four attributes which will lead an instrument to be construed as a demand guarantee, namely; (a) the underlying transactions, the shipbuilding contracts, are between parties in different jurisdictions; (b) the APGs do not contain clauses excluding or limiting the defences available to a surety in a classic guarantee where the surety’s liability is secondary; and (c) the undertaking is to pay on demand, in this case, see paragraph [2], to pay “within thirty (30) days after demand is made”. He rejected claimant’s submission that as the APGs were not issued by a bank the strong presumption against them being performance bonds applies. His rationale was that while claimant’s primary business may have been as an insurance company, it was also providing financial instruments in return for a fee. Also, the definition of a “demand guarantee” in Article 2(a) of the ICC Uniform Rules for Demand Guarantees includes “any guarantee…by a bank, insurance company or other body…”.

He referred in particular to the fact that in the present case (a) payment is triggered by a demand upon presentation of specified documents, (b) the guarantee is stated to be irrevocable and unconditional, and (c) it is stated to be subject to the Uniform Rules. He also stated that the provision of the APGs satisfy the definition of “demand guarantee” in the Uniform Rules. The absence of any limitation to or exclusion of any of the defences which would be available to a surety is also a pointer to the instruments being demand guarantees or performance bonds.

Issue 2: If the APGs are contracts of suretyship, has the claimant been discharged from liability under them as a result of the changes in the corporate identity of the shipbuilder or material variations in the shipbuilding contracts?

The Judge stated that it is essential to construe whether there was an agreement by the defendants, to vary the shipbuilding contracts and, if there was, whether the claimant, the guarantor, affirmed the APGs with knowledge of such variation. With regard to changes in the corporate identity of the shipbuilder, the Judge held that the defendants did not agree to the changes as it resulted from the unilateral actions of HWS and then Buyoung. As such, the claimant was not discharged from liability under the APGs. He relied on Holme v Brunskill where Cotton LJ made it clear, at 505, that for the guarantor to be discharged there must be an “agreement between the principals with reference to the contract guaranteed”. Also, the Judge concluded that the claimant was not discharged from the APGs on the grounds of alleged postponement to the delivery dates under the contract as the claimant had affirmed the APGs during the exchange of relevant correspondences.

Issue 3: As a result of the corporate changes, could the defendants make a contractual demand which triggered liability under the APGs?

The Judge held that regardless of whether or not the APGs are performance bonds, the shipbuilding contracts gives the defendants the right to terminate the contracts and demand repayment on an insolvency event including “the dissolution…or liquidation of” the Builder. The APGs give the defendants a guarantee of the repayment of the advance payments upon a demand with a signed statement certifying that their demand for refund “is made in accordance with clause 17…and that the Builder has failed to make the refund”.

He then went on to state at paragraph 92 that : If, as I have decided, the APGs are performance bonds rather than classic contracts of suretyship, there is an additional reason. In the light of the evidence of Korean law, once the merger was effective, Buyoung succeeded to all of HWS’s rights and obligations (save in immaterial respects). Asia Heavy in turn succeeded to all Buyoung’s rights and obligations, although after the partitioning Buyoung remained jointly and severally liable. Accordingly, the defendants could honestly and validly self-certify in accordance with paragraph [4] of the APGs. They did so certify that the demand was in conformity with clause 17. In the absence of an allegation of fraud that is an end to the matter: … and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159.

Source:
Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux SA [2010] EWHC 3362 (Comm)

Yacht Construction Contract - Liquidated damages

2011-01-07T20:08:00.001+08:00

In a recent case [1], the High Court held that a liquidated damages clause in a yacht construction contract was not a penalty and therefore enforceable. In so doing, the Court granted summary judgement in favour of the claimant. Azimut-Benetti SpA, a luxury yacht builder in Italy (claimant) had contracted to construct a 60 metre yacht for Shoreacres Ltd, (buyer) an Isle of Man special purpose company wholly owned by the defendant at a contract price of €38 million, payable by instalments. Scheduled delivery date was 30 November 2011. A personal guarantee was issued by the defendant.

Clause 16 of the Yacht Construction Contract dated 25 September 2008 and in particular clause 16.3, provided as follows:

16.1 In addition to such rights as it may have at general law the Builder may suspend construction of the Yacht and/or terminate this Contract at any time by written notice to the Buyer: (a) if the Buyer fails to pay any sum due and owing under this Contract within forty-five days after the due date;

...

16.3 Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the Builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”

The first instalment, 10% of the contract price was not paid and it was some time later on 22 January 2010 that claimant terminated the contract, and demanded payment of €7.1 million being 20% of the contract price of €38 million less €0.5 million paid by way of deposit. A letter of demand for similar sum was also issued against the defendant under his guarantee. The claimant applied for summary judgement against the defendant.

The defendant resists this claim for summary judgment under the guarantee on the basis that the liquidated damages clause upon which the claimant sues in the contract with Shoreacres was a penalty, so that there is no liability on which the guarantee can fasten. The claimant maintains that the defendant does not have an arguable case in that regard; alternatively it argues that by the terms of the guarantee the guarantor is liable even if the clause is unenforceable, and the principal debtor is not, or that an estoppel arises. That is the first issue which I have to decide. The claimant has an alternative claim for the first instalment of the price which had fallen due under the contract at the time of termination. The defendant contends that having elected to sue on the liquidated damages clause, the claimant should not be entitled to summary judgment for the first instalment. That is the second, and only other, issue raised by the defendant by way of defence. [Per Justice Blair at paragraph 1 lines 4-8]

Counsel for the defendant argued that the liquidated damage clause inter alia was a deterrent and as such should be treated as a penalty on ordinary principle. He replied on” the presumption referred to by Lord Dunedin that it is a penalty where a single lump sum is payable by way of compensation on the occurrence of one or more of several events, some of which may occasion serious and others trifling damage. He does however recognise that this is not a “powerful presumption” (as Lord Dunedin makes plain in the passage cited). [In Dunlop Pneumatic Tyre at p. 87]

However, the Judge agreed with claimant’s counsel contention that defendant’s counsel submissions did not take account of the provisions of clause 16.3 as a whole as it places an obligation on the buyer, but it also places an obligation on the claimant, namely an obligation promptly [to] return the balance of sums received from the Buyer together with the Buyer’s supplies if not yet installed in the Yacht.

The claimant relies on in Cine Bes Filmcilik, ibid, at [15]. Citing Lordsvale, Mance LJ pointed out that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all possibilities. There are clauses, he says, which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. As Clarke LJ put it in Murray v Leisureplay at [106], a particular clause may be commercially justifiable, provided that its dominant purpose is not to deter the other party from breach.

The claimant submitted that the evidence shows that clause 16.3 had a clear commercial and compensatory justification, and was not merely a liquidated damages clause, but provided for payments to the buyer also, was not a deterrent, and falls within these principles. The claimant also relied on the exchanges between the parties to the contracts where an alternative clause based on actual loss, but with the attendant possibility of considerable delay in reimbursement were proposed to the buyer. However, the buyer in this case agreed to clause 16.3 as proposed by the builder.

The Judge held that the purpose of the clause was not deterrent and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder.

He added that “This was a contract for the construction and sale of a very expensive yacht, aptly described in the evidence as a “super-yacht”. Both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into. As the authorities referred to above show, in a commercial contract of this kind, what the parties have agreed should normally be upheld. In my view, the clause in question is not even arguably a penalty, and is enforceable in its terms. It follows that the claimant is entitled to summary judgment for €7.1 million being 20% of the contract price of €38 million less €0.5 million paid by way of deposit

On the claimant’s alternative case for payment of the first instalment, he held that in view of his decision on the penalty point, this alternative case for payment of the first instalment due under the contract does not arise. He noted in passing that if he had held that clause 16.3 was unenforceable, the claimant should be able to claim for the first instalment citing the decision in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129, HL where on this question, a majority of the House of Lords held that the builder’s right to the instalment was not affected by the termination of the shipbuilding contract. [other decisions referred to by the Judge included McDonald v. Dennys Lascelles Ltd (1933) 48 C.L.R. 457, 476-477, Johnson v. Agnew [1980] A.C. 367, HL, at p.396].

Source:

Azimut-Benetti SpA (Benetti Division) v Darrell Marcus Healey

[2010] EWHC 2234 (Comm)

http://www.bailii.org/ew/cases/EWHC/Comm/2010/2234.html

Incoterms 2010 by ICC

2010-12-21T21:36:00.004+08:00

Incoterms 2010, launched in September 2010 by the International Chamber of Commerce (ICC) will be effective on January 1, 2011.

To keep up with the rapid expansion of world trade and globalization, the Incoterms rules are revised about once a decade. Since the last revision in 2000, much has changed in global trade and the current revision will take into account issues such as developments in cargo security and the need to replace paper documents with electronic ones. The 2010 edition will include 11 terms instead of the 13 in the previous edition. The following terms from Incoterms 2000 have been deleted from the list: DAF, DES, DEQ and DDU. Two new terms have been added to the list: DAT and DAP. Whilst Incoterms 2000 had four categories, Incoterms 2010 only has two categories.

The Incoterms 2010 are arranged in two categories as follows:

Rules for Any Mode of Transport

CIP - Carriage and Insurance Paid
CPT - Carriage Paid To
DAP - Delivered At Place
DAT - Delivered At Terminal
DDP - Delivered Duty Paid
EXW - Ex Works
FCA - Free Carrier

Rules for Sea and Inland Waterway Transport Only
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
FAS - Free Alongside Ship
FOB - Free On Board

Advance Payment Bond - Shipbuilding Contract

2010-11-25T23:36:00.005+08:00

A recent case concerning advance payment bonds issued to secure repayment of instalments paid under shipbuilding contracts illustrate the need for clarity and precision when drafting such document. The issue before the Court of Appeal was whether the bond guarantees repayment of those instalments in all the circumstances specified by the shipbuilding contract or whether it is more limited than that. The Bank’s case was that the guarantee covers the repayment of the instalments only in the circumstances described in paragraph (2) of the bond.

Significantly, four judges were at odds in their decision. The judge at first instance and Sir Simon Tuckey (the minority in the Court of Appeal) agreed with Buyers, but the majority in the Court of Appeal (Patten LJ and Thorpe LJ) were persuaded by the bank’s argument.

Source: Kookmin Bank v Rainy Sky S.A. & 6 Others [2010] EWCA Civ 582

General Reading: Guarantees in Shipbuilding Agreement

Piracy – Can Charterer rely on off-hire clause in charterparty?

2010-11-20T00:24:00.010+08:00

On 22 February 2009 the vessel M/V “Saldanha” was seized by Somali pirates. It was released on 25 April 2010 and reached an equivalent position to the location at which she was seized on 2 May 2010. Charterers refused to pay hire for the period between 22 February 2010 and 2 May 2010. In ensuing arbitration they relied on CL15 of the charterparty (NYPE form) and contented that the vessel was off-hire. However, the arbitration tribunal ruled in favour of the Owner and Charterers were granted leave to appeal to the English High Court [1] CL 15 of the charterparty provided: “That in the event of the loss of time from default and/or deficiency of men including strike of officers and/or crew or deficiency of… stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, dry-docking for the purpose of examination or painting bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost.” On appeal the charterers sought to advance their case by relying on three causes contained in CL 15 of the charterparty, namely: (a) Detention by average accidents to ship or cargo, (b) Default and/or deficiency of men and (c) Any other cause.

Detention by average accidents to ship or cargo: The Charterer submitted that the reference to an ‘average accident’ neither requires that there be damage to the Vessel nor there be an accident and argued that seizure by pirates was a fortuities which was a marine peril and as such were covered in the clause.

The Court did not accept Charterer’s contention and pointed out inter alia that: An “average accident” merely means an accident which causes damage [2] and as the incident did not result in damage to the vessel the wording did not assist the Charterers, the words ‘accident to the ship’ is a not a natural way to describe a seizure by pirates, the preposition suggests an accident physically affecting (and probably causing damage to) the structure or machinery of the ship, an accident requires lack of intent by all protagonists and an obviously deliberate and violent attack cannot be described as an accident, no matter how unexpected it may have been to the victim, the word “average”, in this context cannot simply to be equated with a peril ordinarily covered by marine insurance as damage to the ship is an essential ingredient for the wording “average accident” to ship to apply and under clause 15 an average accident to ship or cargo was an accident which caused damage to ship or cargo, but not total loss.

Default and/or deficiency of men: The Charterer contended that failure of the officers and crew to take recognised anti-piracy precautions, before and during the attack, resulting in the loss of time and consequent loss of full working of the vessel falls within the exception “default of men”.

However, the tribunal (with whom the Court agreed) construed that “default of men” in cl.15 had the limited meaning where Officers or crew refused to perform all or part of their duties as owed to the shipowner and not the negligent or inadvertent performance of those duties. The Court held that even though the natural meaning of “default” is capable of including the negligent or inadvertent performance of the duties of Master and crew, the history of the clause and the mischief which it is aimed at must be considered.

In Royal Greek Government v Minister of Transport (1949) 82 Ll. L. Rep. 196, charterers’ order to sail having been disobeyed the Court held that “deficiency of men” meant “numerical insufficiency” and resulted in the vessel being off-hire when an adequate complement of officers and crew for working the ship was not available and did not extend to cover a wilful refusal to work. Consequent upon this decision, the clause has for many years frequently been amended, as here, by the addition of ‘default and/or’. The insertion of the phrase with the additional words ‘…including strike of Officers and/or crew…’ indicated that the parties unmistakeably intended that a refusal to perform duties would be an off-hire cause. This additional wording may be seen as suggesting that the clause is focussed on a refusal to perform duties, whether or not amounting to a full-scale strike. The Court was of the view that the additional wording is of limited weight and certainly not decisive but is a pointer towards a narrow construction of “default of men”, consistent with the history of the clause and the mischief at which it is aimed.

Any other cause: Cl.15 in the charterparty contained the wording “any other cause” rather than the wording “any other cause whatsoever”. In such a case it should be construed either ejusdem generis or at any rate in some limited way reflecting the general context of the charter and clause. [3]

Despite the odds, Charterer argued that in the absence of additional word “whatsoever”, the wording “any other cause” was a sweeping up provision to prevent “disputes founded on nice distinctions” [4] With respect to the ejusdem generis rule, identifying any “genus” which included all of the named causes in cl. 15 was not easy as they all related to the physical condition or efficiency of the vessel (including its crew) or, in one instance, cargo and did not include truly extraneous causes. If “average accident” requires that there to be damage, a fortuitous occurrence normally covered by marine insurance but which happened not to have caused damage, would be within “the spirit” of the clause and caught by the wording “any other cause”. Fourthly, even if “default of men” did not cover negligent errors, given the sweeping up wording, such a “fine distinction” should not determine whether or not the vessel was off-hire. Fifthly, there had here been a “refusal to perform” their duties on the part of Officers and crew and no less so because the Officers and crew were under duress from pirates. Sixthly, it was necessary to consider the effect of piracy as much as piracy itself. The acts of piracy could result in an off-hire event such as grounding; so too, here, they resulted in off-hire by preventing the crew acting as a crew. Seizure by pirates operates by disabling the officers and crew, who are just as much unable to work as if struck down with typhus, and by immobilising the ship, just as much as if it were aground or if there were not enough crew to work it.

The Judge found these submissions unacceptable and pointed out that seizure by pirates was a “classic example” of a totally extraneous cause and the incident falls outside the scope of the sweep up wording. He went on to quote the tribunal’s statement that:

“We cannot accept any of these permutations [i.e., those contained in Charterers’ argument.] They all seemed to us to be attempts to avoid the well known consequences of the wording in the form agreed by the parties. This act of piracy was not eiusdem generis. It did not arise out of the condition or efficiency of the vessel, or the crew, or the cargo, or the trading history, or any reasonable perception of such matters by outside bodies. Unlike a trading history which gave rise to typhus or a well-grounded suspicion of typhus, it was a truly extraneous cause. The effect of the bargain contained within clause 15, construed in its general context, was that Owners did not take the risk of the full working of the vessel being prevented by an extraneous cause such as piracy. The Charterers…did assume that risk.”

In conclusion the Judge pointed out that the seizure of a ship by external actors was a recognised peril, but no such peril was covered by cl. 15 of the charterparty. Also, CL 40 of the charterparty contains a “bespoke” clause dealing, among other matters, with seizures. However, CL 40 did not extend to cover seizure by pirates and if the parties had intended to include seizures by pirates as an off-hire event under a time charterparty, they could do so by way of an express provision in a “seizures” or “detention” clause.

The various submissions advanced by Charterers failed, individually and cumulatively, to satisfy the burden of proof resting on them to come clearly within the wording of the off-hire provisions contained in cl. 15 of the charterparty. The appeal had to therefore be dismissed.

[1] Cosco Bulk Carrier Co. Ltd v Team-Up Owning Co. Ltd [2010] EWHC 1340 (Comm) M/V “Saldanha”

[2]The Mareva A.S. [1977] 1 Lloyd's Rep. 368, at p. 381, Kerr J

[3] The Laconian Confidence [1997] 1 Lloyd's Rep. 139, at pp. 150 – 151

[4] Chandris v Isbrandtsen Moller [1951] 1 KB 240 , at pp. 246-7.

Admissibility of Without Prejudice Communications

2010-11-18T21:21:00.005+08:00

When Parties to a commercial transaction negotiate to resolve contentious issues, the prudent practice is to qualify that communications (oral or written) pertaining to such negotiation is on a “without prejudice” basis. Such without prejudice communications save for certain exceptions are generally inadmissible in court. Judicial decisions [1] in recent years indicate that the rule is much wider, not absolute and without prejudice communication can be referred to when the justice of the case requires it.

In a recent case [2] before the UK Supreme Court, [3] the issue was whether Appellants were are entitled to rely upon two representations or alleged representations made by Respondents as aid to interpretation of the agreement. Respondent sought to exclude the evidence on the ground that it was made in the course of without prejudice negotiations.

It was submitted on behalf of Appellants that “facts which (a) are communicated between the parties in the course of without prejudice negotiations, (b) form part of the factual matrix or surrounding circumstances and (c) would, but for the without prejudice rule, be admissible as an aid to construction of a settlement agreement which results from the negotiations should be admissible in evidence by way of exception to the rule because the agreement cannot otherwise be properly construed in accordance with the well recognised principles of contractual interpretation and because there is no distinction in principle between this exception (“the interpretation exception”) and, for example, the rectification exception.”

On the question of whether the interpretation exception be recognised as an exception to the without prejudice rule, Lord Clarke answered in the affirmative and stated that the interpretation exception should be recognised as an exception to the without prejudice rule as justice clearly demands it. He also stressed that he was neither seeking to underplay the importance of the without prejudice rule nor to extend the exception beyond evidence which is admissible and nothing in this judgment is intended otherwise to encourage the admission of evidence of pre-contractual negotiations.[4]. In allowing the appeal, the Supreme Court reached a different conclusion from the majority at the Court of Appeal but essentially the same conclusion reached by Andrew Smith J at first instance and by Ward LJ in the Court of Appeal.

[1] Cutts v Head [1984] Ch 290 at p 306 Oliver LJ, Rush & Tomkins Ltd v Greater London Council [1989] AC 1280 Unilever plc v The Procter & Gamble Co [2000] 1 WLR 2436, Unilever plc v The Procter & Gamble Co (2000) 1 WLR 2436], Ofulue and another (FC) (Appellant) v Bossert (FC) (Respondent) [2009] UKHL 16

[2] Oceanbulk Shipping & Trading SA (Respondent) v TMT Asia Limited and others (Appellants)[2010] UKSC 44
[3] The UK Supreme Court has assumed the jurisdiction of the Appellate Committee of the House of Lords and the devolution jurisdiction of the Judicial Committee of the Privy Council.

[4] Per Lord Clarke at paragraph 46

Supply of Equipment for Marine, Offshore Oil and Gas (Part 3)

2010-11-14T22:29:00.003+08:00

Scope of Supply - Seller Provided Documents

(Extract - Appendix of Purchase Contract for Seller’s Electrical/Automation Packages for Newbuilt Vessel)

Certified dimension drawings schematic drawings (6 sets), or single line drawings, etc. Installation drawings (6 sets), Test certificates /reports (6 sets), Testing and Commissioning Procedure & Record Form (6 sets), Operation and Maintenance Instruction Manuals (6 sets), Spare Parts Catalog (6 sets), Maker’s and Class Certificates (1 set). These documents must be sent contemporaneous with the delivery of the Equipment, unless otherwise stated or agreed upon between the Parties hereto. Class certificates shall be given within one month after delivery of Equipment to Company's premises. This information shall also be supplied on CD-ROM together with the above-mentioned hard copies when available.

Factory Acceptance Test Document - Seller shall submit test protocol/specification for the Equipment two months before official factory acceptance test and inspection (FAT). Seller shall notify Company at least 30 days prior to the actual date of the FAT to be conducted by Maker at the Maker's premises and witnessed by the Class and/or Regulatory Bodies and/or Company. Factory Acceptance Test to be conducted at the Seller’s factory and Seller shall provide four return air-tickets and sent invitation to attend this test for 4 persons. Seller shall submit to Company certificates of tests and inspection issued by Maker, Class or Regulatory Bodies wherever necessary within 14 days of completion of FAT but prior to shipment of Equipment. The Company shall at all times have the right to visit manufacturer's shops for the purpose of verifying the progress of construction of the Equipment.

Documents for Installation- Seller shall provide Company with a soft copy of all pre-commissioning and commissioning test procedures and list of all test equipment (that cannot be hand carried by Seller’s required for commissioning at least two months before scheduled shipping of the said equipment (as recorded in contract). Seller shall provide a test Protocol after issuance of Construction plans/drawings. Technical information shown in the documents shall be comprehensive and accurate for the purpose intended. The Company reserves the right to claim damages from Seller if such inaccurate information resulted in modification and re-work on the Vessel.

Harbour and Sea Acceptance Test Specification - Seller shall provide 4 copies of specification for Harbour and Sea Trials with the delivery of the Equipment. Seller shall provide Technical Performance Guarantee for open water efficiency and Specific Fuel Oil Consumption as per attachments to. Seller will assist the owner in the effort to reduce soot emission by providing their specialists to engineer the exhaust system such that soot on deck (cargo deck) is minimized.

Delivery Documents - The following documents shall be forwarded to Company upon effective shipment/delivery for reference purposes: 1 copy of Bill of Lading, 1 copy of Packing List and 3 copies of Certificate of Origin.

Certificates - The following Certificates (without limitation) shall be required and timely provided by Seller: (a) Maker's and FAT Certificates; (b) Classification Certificates (Machinery) if necessary; (c) Any other relevant certificates or licences, which may be required for the Equipment for the operation and classification of the Vessel; (d) Asbestos Free Certificate (Seller’s Statement); (e) Manufacturer’s Certificate for Equipment;(f) Classification/Statutory certificate, if required under this Purchase Contract and/or are normally as required by classification and/or statutory authorities.

Interim Certificates to be provided and Final Certificates before delivery of Vessel; (g) Fumigation Certificate when packed in wooden crates (Applicable if Equipment exported from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, Britain, Japan, Korea, Canada and USA; (h) USDA Certificate (only for import from USA); (i) Certificate of Origin for Equipment and (j) All relevant certificates have to be supplied and are deemed to be included in the price/cost of the equipment hereinafter set forth.

Supply of Equipment for Marine, Offshore Oil and Gas (Part 2)

2010-11-11T23:24:00.004+08:00

The Scope of Supply will generally include the specification, description of the equipment, quality and quantity of the equipment, spare parts and optional items, services to be provided, deliverables, documents, certificates, manuals to be supplied, training or technical advice to be provided on storage, operation and maintenance of the equipment, scope of the warranty, all items that are excluded from the scope of supply, installation supervision (if applicable) and commissioning (if applicable). For relatively small or off-the-shelf items, it is usual to indicate the brief description of the equipment, its quality, quantity and price per unit. For complex equipment, more details will be needed and this is usually set out in the Specification.

The Specification will where applicable include representations, capability, data, requirements and limitations relating to design, performance, functional guarantee and system integration, basic system hardware, system interfaces, peripheral equipments, basic system function, functional and performance criteria, means of ascertaining tests, spares and optional parts and services to be provided by the Seller. It will usually also include factory acceptance test and procedure, precommissioning protocol and commissioning activities, other essential technical and performance information, installation procedure, extent of supervision (if required) and the free man-days allowable for commissioning. Apart from technical feasibility, clarity of specification, allocation of responsibilities, rates and commercial aspect of Seller’s engineers’ attendance at site should be addressed adequately to avoid future wrangling. Also, it is prudent to ensure that the Specification should contain only technical terms and not legal or contractual terms. For example: If a Purchase Contract provides for a warranty period of 12 months and the Specification provides for a warranty period of 24 months, this is a contradiction and inconsistency, which will leave an area for dispute.

The description of the equipment must be clearly set out. It is usual to quote the model number or its name or technical reference. Where the contract is for the sale of goods by description, there is an implied condition that the goods will correspond with the description. This must be complied with strictly.The quality of the equipment must comply with the Specification. Apart from this, it will also be an implied term that the goods will be of satisfactory quality, where expressly or impliedly known by the Seller, the goods will be reasonably fit for the Buyer's purposes, where goods are sold by reference to a description, the goods will have to correspond with the description.

The test of satisfactory quality is what a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances. The quality of goods includes: Their state and condition, Fitness for all the purpose, Appearance and finish, Freedom from minor defects and Safety and durability. Fitness for Purpose: This requires that where goods are sold in the course of a business and the buyer expressly or impliedly makes known to the seller any particular purpose for which the goods are bought, the goods must be reasonably fit for that purpose, whether or not that is a purpose for which the goods are commonly supplied, except the circumstances show that the buyer does not rely on the seller, or that it is unreasonable for him to do so (s.14 (3)). The quantity will usually be in units, weights or volume. This must be set out with precision. For example, if the Parties are referring to metric tonne, they must indicate clearly that it is “metric tonne”. Where it is stated in approximate weight, the industry standard deficiencies tolerance of 5% to 10% may apply. If the shortfall in quantity delivered is beyond industry standard, the Buyer may reject the equipment.

Section 15A (inserted by the Sale and Supply of Goods Act 1994) provides that a buyer who does not deal as a consumer will have to treat a breach of a term implied by Section 13, 14 or 15 of the Sale of Goods Act as a breach of warranty if the breach is so slight that it would be unreasonable for the buyer to reject the goods. The onus is upon the Seller to show that a breach fell within Section 15A (1) (b).

Supply of Equipment for Marine, Offshore Oil and Gas (Part 1)

2010-11-10T00:14:00.010+08:00

Contracting to supply equipment internationally requires a broad understanding of the issues involved and a comprehensive contracting strategy. Beside the usual contractual requirements applicable to domestic transaction, Parties will need to review and consider additional issues relating to: Country/Political Risk and Party Risk, Export and Import Requirements and Restrictions, Delivery and Shipping Terms, Price, Currency Exchange and Control, Payment Terms, Insurances, Documentation and Certificates, Taxes and Duties, Regulatory Requirements, Third Party Risks, Governing Laws and Jurisdiction, Enforceability of any Arbitration or Court Award and Warranty Issues. Contemporaneous with the issue of governing law, one will also need to consider any international or bilateral trade treaties or convention that may be applicable to their contract. This myriad of issues will certainly require a team effort comprising inputs and support from relevant personnel (estimators, commercial managers, finance/tax managers, lawyers or contract specialists, bankers, insurers, shipping agents, custom brokers, freight forwarders, engineers and other technical experts) to ensure that all pertinent factors are covered comprehensively.

The contracting process for international Supply of Equipment may be summarized broadly into 3 stages: namely, the Pre-Contracting stage, the Contracting stage, the Performance and Completion stage. This article provides a general view of the pre-contracting stage. At this stage, the Parties have to be very clear and careful in their communication, as they can inadvertently commit themselves to legally binding contractual obligations, through the words or language used. An example will be a letter of intent that could prove to be legally binding.

The Buyer initiates the process by sending a request for quotation (RFQ), inviting Sellers (or pre-qualified Sellers) to submit their quotation or bid for the supply of specific equipment. The RFQ will usually include an outline specification, drawings and other technical requirements. Upon receipt of the request from Buyer, the various Sellers review and consider the product range, competency, delivery schedule and other commercial and technical matters. Interested Seller(s) then prepares and sends their Quotation (with or without qualifications) together with Specification, Drawings and other required information to the Buyer. In their quotation, Seller will normally reserve a right to revise the quoted price after the expiry of a stipulated time frame.

The Buyer evaluates the various quotations and invites the most suitable Seller(s) for further discussion. For “off the self” items or less complicated equipment, further communication on clarification and revision will be done through emails or telephone calls. This may eventually lead to the contract signing. Where complex equipments are involved, the Parties will usually hold Technical Evaluation meetings to clarify and revise the Specification or drawings accordingly. The various revisions to the Specification and drawings will be dated and numbered. The Seller will usually indicate a design freeze date, after which any further modification to the design or Specification will be at the Buyer’s expense. Where the equipment is to be integrated with other equipments, computer systems or machines, the vendors of these equipments should also be invited to such meeting to sort out integration and other technical issues.

After the discussion, outstanding items are usually incorporated into a letter of intent setting out the preliminary points of agreement and those that requires further action or discussion. This is usual, as the Seller may need the letter for manufacturing and other essential planning. The Buyer may also need the letter for preliminary discussion with their Sub-Buyer or financiers. Once the conditions and requirements in the letter of intent have been addressed, the Parties will turn their attention to negotiating and finalizing all outstanding contractual and technical details. Usually, this will involve teams from both sides, comprising commercial, legal and technical personnel. It is usual to have two separate teams, one handling the technical issues and the other attending to the negotiations on commercial and contractual issues.

After signing of the contract signing, events will normally be in accordance with the following sequent namely; Payment, Furnishing of Security Documents (where applicable), Seller commences manufacturing of equipment, pre-shipment inspection or factory acceptance test, Shipment of equipment, Receipt of equipment, Inspection of equipment, Installation, pre-commissioning, Commissioning, Completion and Warranty issues.

Risk Allocation in FPSO Conversion – Personal Injuries

2009-08-08T00:08:00.013+08:00

Focal point of this article - effectiveness of indemnity clause.

Background:

The Plaintiff (an electrical engineering technician) was an employee of U-Hin Manufacturing Pte Ltd, first defendant”). The first defendant supplied workers (including the Plaintiff) to BT Engineering Pte Ltd (“the second defendant”) for work on a vessel conversion project called FPSO Mondo for Keppel Corporation. (“FPSO” see [1] below). On 5 June 2007, the Plaintiff while working (under instruction of the second defendant’s foreman) sustained personal injuries and three fingers of his left hand had to be amputated. The Plaintiff was offered $88,200 as compensation under the Workmen’s Compensation insurance. He rejected this and sued the first and second defendant at common law for negligent and breach of statutory duty, “inter alia in not ensuring that the pipe spool was guarded or shored to prevent it from falling or collapsing due to work being carried out in the vicinity.” Both defendants disputed the Plaintiff’s claim. The second defendant further claims an indemnity and/or contribution against the first defendant for the plaintiff’s claim.

Text of the Letter of Indemnity:

“In consideration for your consent for our sub-contracting work in BT Engineering Pte Ltd, we the undersigned hereby undertake to indemnify and shall keep indemnified BT Engineering Pte Ltd against all claims, costs, actions, suits, loss and other expenses whatsoever for any injury, loss of life or damage to property howsoever caused. We warrant and confirm that we have taken out and maintain the insurances following which shall include but not be limited to Workmen’s Compensation. Common Law and Public Liability. We undertake to indemnify BT Engineering Pte Ltd against any and all claims, costs loss, damage and expense which arise from any breach by us or the Sub-Contractor of the warranties herein contained. We hereby further undertake that in the event of any claims, actions, proceedings or threatened claims, or proceedings against BT Engineering Pte Ltd or any costs, loss or expense suffered or incurred by BT Engineering Pte Ltd as a result of or in connection with the Sub-Contract as aforementioned, we shall promptly lodge and make such claims in respect of such Workmen’s Compensation, Common Law and Public Liability Insurance policies as the case may be, or at your option, allow our name to be used in any action or proceeding to lodge, make and pursue such claimsunder the said policies and shall hold such sums as may be received there from wholly for the benefit of BT Engineering Pte Ltd.”

In respect of the Indemnity, the Court held that:

“51......The wording of the letter of indemnity focussed on the issue of workmen’s compensation. A reader of the document would note therefrom that the first defendant was obliged to indemnify the second defendant against liability for any claims for which the first defendant had taken out and maintained insurance coverage. This would apply to the compensation sum of $88,200 in [4] had the plaintiff accepted the amount assessed by MOM. However, the plaintiff rejected the compensation and opted to make this claim at common law.

52 Accordingly, unless the first defendant had taken out insurance coverage for common law claims (for which there was no evidence), the second defendant cannot look to the first defendant under the letter of indemnity to escape liability for its own negligence.

53 It bears noting too, based on Wong’s testimony ... which the second defendant’s witnesses neither challenged nor refuted, that the PO containing a similar indemnity provision under cl 2 therein was issued and given to the first defendant after 5 June 2007 but backdated by the second defendant to 15 May 2007, in an obvious attempt to escape liability.” Per Lai Siu Chiu J

The Plaintiff’s failed in his claim against the first defendant but succeeded against the second defendant. The second defendant was order to pay damages (to be assessed) and costs. The Plaintiff was ordered to pay the first defendant’s cost. However, such cost was to be recovered from the second defendant under what is known as a “Bullock Order” [2].

Comment:

The ruling on indemnity aspect reminds us once again that accuracy and precision is vital for efficacy of indemnity clause and risk allocation.

End-Note:

[1] FPSO or Floating Production, Storage and Offloading are typically ship-shaped offshore production facility capable of storing and offloading crude oil to shuttle tankers. It can also be used asproduction facilities to develop marginal oil fields or fields in deepwater areas.

[2] Bullock v London General Omnibus Co [1907] 1 KB 264

“In a Bullock order, the plaintiff is liable to pay the costs of the successful defendant but is entitled to recover those costs as well as his own costs from the unsuccessful defendant”

Reference:

http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/judgment/63275.html

Ma HongFei v U-Hin Manufacturing Pte Ltd and Another [2009] SGC 172

Shipbuilding Contract - Refund Guarantee and Damages

2009-06-25T23:01:00.008+08:00

In an earlier post [October 21, 2008], - Seller had contracted to construct three bulk carriers for the Buyer but failed to deliver the same by its delivery date or within 150 days or by the drop-dead date as stipulated under the shipbuilding contracts. The Buyer recovered monies plus interest from the Refund Guarantor (which has issued refund guarantee to secure instalment payments on behalf of the Seller) in accordance with the provisions of the contracts and further claimed damages at common law.

On appeal from an Arbitration award, the questions before Commercial Court were: (i) Whether Article 10 is a contractual code which excludes all rights of termination in respect of the events that occurred here (“the first issue”); (ii) Whether the exclusion clause in Article 10 of the contract excludes any claim for damages in respect of what has occurred (“the second issue”) and (iii) Whether the termination of the contracts pursuant to and in reliance upon the contractual termination provisions (coupled with the claim in each case made upon [the bank] under the refund guarantee) precludes the buyer from subsequently claiming to have terminated at common law (“the third issue”). (Quoted)

The Commercial Court [2008] EWHC 944 (Comm) had held that Buyer, having affirmed the three contracts and recovered monies plus interest from the Refund Guarantor in accordance with the provisions of the contracts is precluded from claiming damages at common law. This has now been reversed by the Court of Appeal. [2009] EWCA Civ 75

Commercial Object of Performance Bank Guarantees

2008-10-31T17:45:00.010+08:00

Clough Engineering Ltd (Clough) entered into a lump sum Contract with Oil and Natural Gas Corporation Ltd (ONGC) for the development of oil and gas fields and construction of associated onshore facilities. Pursuant to the Contract, Clough furnished to ONGC unconditional and irrevocable performance bank guarantees provided by three banks in Australia. Disputes arose between the Parties over extension of time for performance, issues relating to the extension of the guarantees and insurances cover. ONGC terminated the Contract and made a call upon the guarantees. Clough applied for interlocutory injunction against ONGC and the three banks. They contended that there was a genuine dispute between parties as to whether it was in breach of its obligations under the Contract and that any breach was caused by ONGC’s failure to perform.

Two principal issues which arose were (a) whether under the circumstances and upon a proper construction of the Contract, was ONGC entitled to call upon the performance guarantees and (b) whether the call on the performance guarantees contravened s51AA of the Trade Practices Act 1974(Cth) (TPA) as being unconscionable within the meaning of the unwritten law of Australia. Clough relied on Clause 3.3.3 of the Contract which states that “The Company shall have the right under this guarantee to invoke the Banker’s guarantee and claim the amount there under [sic] in the event of the Contractor failing to honour any of the commitments entered into under this Contract.” They argued that ONGC’s right to call upon the bank guarantees was conditioned on “breach” not “asserted or claimed breach”. They had to establish that Clough failed to honour its commitments.

The Court of first instance considered the question of whether the Contract contained an express or implied negative stipulation qualifying the right of ONGC to call upon the performance guarantees andconcluded that ONGC was entitled to call upon the performance guarantees where it had a “bona fidebelief” that Clough was in breach of the Contract. It also found that Clough had breached the Contractin relation to the extension of the guarantees and certain insurance policies and ONGC.

It concluded that: “if ONGC could not call on the guarantees until there was admitted or established breach of contract, the time at which the matter might be determined by the arbitral tribunal or court could be well after the performance guarantee had expired. Such a construction would not make commercial common sense” and “that a commercial object of the performance bank guarantees under the Contract was to allocate the risk of a party being out of pocket pending the resolution of a dispute and that ONGC was entitled to call upon them even where a genuine dispute existed as to whether or not Clough was in breach and whether or not damage had been suffered”

The Court of Appeal agreed with the Judge of first instance. They stated inter alia that there was no contention that ONGC had made a fraudulent claim and that the banks liability under theGuarantees was “absolute and unequivocal” as they were required to pay “without any demur, reservation, contest or protest and/or without any reference to the contractor”. They held that notwithstanding the existence of a dispute between the Parties, ONGC was entitled to invoke the guarantee.

Source: Clough Engineering Limited v Oil and Natural Gas Corporation Limited

[2008] FCAFC 136, FEDERAL COURT OF AUSTRALIA (22 July 2008)

Link between Refund Guarantees and Common Law

2008-10-22T16:07:00.007+08:00

Affirmation of Contract, Refund Guarantee and Damages

2008-10-21T12:32:00.018+08:00

Seller had contracted to construct three bulk carriers for the Buyer but failed to deliver the same by its delivery date or within 150 days or by the drop-dead date as stipulated under the shipbuilding contracts. The Buyer recovered monies plus interest from the Refund Guarantor (which has issued refund guarantee to secure instalment payments on behalf of the Seller) in accordance with the provisions of the contracts and further claimed damages at common law.

The relevant Clauses in the shipbuilding contracts provided under Clause 10; that …The Purchaser shall not be entitled to claim any other compensation and the Seller shall not be liable for any other compensation for damages sustained by reason of events set out in this Article and/or direct consequences of such events other than liquidated damages specified in this Article. Clause 10.7; that “Upon termination of this Contract by the Purchaser in accordance with the provisions of Article 10 or any other provision of this Contract expressly entitling the Purchaser to terminate this Contract, the Seller shall forthwith repay to the Purchaser all sums previously paid to the Seller under this Contract, together with interest accrued thereon calculated at the rate of 1 month LIBOR per annum from the respective date(s) of payment of such sums until date of refund plus the original cost (invoice value) of the Purchaser’s Furnished Equipment if any delivered to the Seller.”

The issues: (a) Whether Article 10 is a contractual code which excludes all rights of termination in respect of the events that occurred here (“the first issue”); (b) Whether the exclusion clause in Article 10 of the contract excludes any claim for damages in respect of what has occurred (“the second issue”); and (c) Whether the termination of the contracts pursuant to and in reliance upon the contractual termination provisions (coupled with the claim in each case made upon ABN Amro Bank under the refund guarantee) precludes the buyer from subsequently claiming to have terminated at common law (“the third issue”).

It was held that there was no clear words ”to rebut the presumption that [the Purchaser] retained its common law rights arising for a repudiatory breach and that, in the light of the fact that there was such repudiatory breach,… the Purchaser was not precluded by Article 10 from accepting such repudiation..” Clause 10 does not extend to exclude or limit liability in respect of damages for repudiatory breach. The Buyer, having affirmed the contracts and recovered monies plus interest from the Refund Guarantor in accordance with the provisions of the contracts is precluded from claiming damages at common law.

Stocznia Gdynia SA v Gearbulk Holdings Ltd [2008] EWHC 944 (Comm)

Prequalification of Shipyard

2008-10-20T13:33:00.002+08:00

The following is a list of basic questions for pre-qualifying shipyards bidding for new project. It could also serve as a draft which could be expanded (when necessary) to provide specific information for financiers and for developing investor’s package and marketing strategy.

Corporate Information – History, kind of entity, nationality, prior corporate names, parent company, subsidiaries, affiliated companies and yard locations.

Experience and qualifications of Management Team and Key Personnel.

Financial Data – Audited Financial Report for at least the previous three years, plus unaudited quarterly reports since the last audited report.

Performance Bonds – Recent ability to acquire Performance Bonds, amount of coverage, and any cases in which bond issued on behalf of company was drawn down.

Liens, (if any) – Number of liens filed against the company during the past three years, and the average and maximum values for those liens.

Litigation, (if any) – Information on all legal or arbitration process filed against the company during the past three years.

Cost Overruns – Indicate the cumulative value during the past three years of shipyard claims for extra work that were disallowed by the owner or arbitration tribunals or the courts.

Schedule Delays – Enumerate the initial contractual delivery dates and the actual or projected delivery dates for the last twelve largest projects that were awarded to the company during the past three years.

Shipyard Experience – Summary of projects (vessels: PSV, RSV, FPSO, semi-submersibles, rigs etc) that have been upgraded or constructed at the shipyard and similar projects that would qualify the shipyard for this project.

Shipyard Facilities – Yard layouts, covered work areas, blasting and painting facilities, panel line throughput or steel fabrication capacity per month, pier length and water depth alongside the pier, dry-dock size, crane capacities, width and depth of channel to open water, any height restrictions and similar information.

Fabrication Yard Facilities – Yard layouts, covered work areas, blasting and painting facilities, steel fabrication capacity per month, pier length and water depth alongside the pier, crane capacities, width and depth of channel to open water, any height restrictions and similar information.

Engineering - Summary of in-house engineering, planning, and scheduling capabilities.

Workloads – Number of personnel by crafts during the past 24 months, current staffing by crafts, and anticipated workloads during the calendar years of (year of intended work duration).

Health and Safety – Number of injuries, lost time accidents, number of fatalities, and total lost days for each of the past three years, with specific details on any fatalities.

QA / QC – Summary of company policy and procedures.

Statement of Qualification – Statement indicating interest in and explaining why the company believes it is well qualified to accomplish the proposed project.

References – Provide names of companies that can be contacted about the company past performance; including the name of individuals and current telephone or Email address.

Other Information – Any other information that may be helpful to the evaluation exercise.

Consequential Loss - Damages for Late Redelivery under a Time Charterparty

2008-10-07T11:42:00.013+08:00

In this case [1] the charterers had contended that their liability in damages for late redelivery of a vessel under a time charterparty was confined to the difference between the market rate of hire and the charter-party rate for the period of late redelivery. The owners’ claim however extends to include the owners' loss of profit under a follow-on fixture.

“The charterers submitted that if they had asked their lawyers or their Club what damages they would be liable for if the vessel was redelivered late, the answer would have been that they would be liable for the difference between the market rate and the charter rate for the period of the late delivery…" The arbitrators (by a majority), found for the Owners. On appeal, Christopher Clarke J and the Court of Appeal upheld the majority decision. However, the dissenting arbitrator position was that “a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and "any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable."

The House of Lords allowed the Charterers’ appeal. “The owners submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact: see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law.“ per Lord Hoffmann

The following comments from Lord Rodger of Earlsferry are worthy of note:

“I would enter two caveats. First, it may be that, at least in some cases, when concluding a charter-party, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry (Windsor)Ltd v Newman Industries Ltd [1949] 2 KB 528, 542-543.Because of the agreement on figures, the matter was not explored in this case and I express no view on it. But, even if some such loss of business could have been reasonably contemplated, as Victoria Laundry shows, this would not mean that the owners' particular loss of profit as a result of the re-negotiation of the Cargill fixture should be recoverable. To hold otherwise would risk undermining the first limb of Hadley v Baxendale, which limits the charterers' liability to "the amount of injury" that would arise "ordinarily" or "generally".

Secondly, the position on damages might be different, if, for example… the owners drew the charterers' attention to the existence of a forward charter of many months' duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v Baxendale might well come into play. But the point does not arise in this case”

[1] Transfield Shipping Inc v Mercator Shipping Inc

Liabilities and Indemnities - Clause 12(b) Bimco Supplytime 89

2008-06-09T17:31:00.011+08:00

Collision between a dumb barge which was towed by a tug (both owned by Owner) and a navigational beacon belonging to the Port Authority. The beacon was damaged beyond repair. Tug was time chartered under Bimco Supplytime 89.Owner contended that the Charterer was obliged to indemnify it against the Port Authority's claim. The Charterer disputed this. As between Owner and Charterer, the issue of liability for the damage sustained by the Port Authority depended upon the construction of the indemnity clause under the Bimco Supplytime 89. Clause 12 (b) Liabilities and Indemnities provides that “Notwithstanding anything else contained in this Charter Party excepting clause ..., the Owners shall not be responsible for loss of, damage to, or any liability arising out of anything towed by the Vessel, any cargo laden upon or carried by the Vessel or her tow, the property of the Charterers or of their contractors and sub-contractors, including their offshore units, ..”

The Owner argued that by Clause 12(b), it is exempted from liability for "loss of, damage to, or any liability arising out of anything towed by the [tug]. The damage to the Port Authority's beacon was caused by the towing of the barge. Thus, it is said, the damage arose out of "anything towed by the tug" within the meaning of this phrase in the clause” Therefore, the charterer, is required to indemnify Owner against such liability.

Charterer argued inter alia that the phrase in Clause 12(b), "the property of the Charterers or of their contractors and sub-contractors, including their offshore units",… qualifies the heads of liability that precede it, namely liability arising out of "anything towed by the [tug]" and "any cargo laden upon or carried by the [tug] or her tow".They submitted that, as neither the beacon nor the barge was their property, Owner is not exempted from liability for damage to the beacon, and is not entitled to an indemnity in respect of damage to it.

On appeal it was held that “… as a whole, the clause - according to its natural meaning - provides for an exemption from liability on the part of the owners, and an indemnity by the charterers, where the owners are responsible for loss or injury caused in any way by "anything towed by the vessel", or by "any cargo laden upon or carried by the vessel or her tow" or by "the property of the charterers ...".

Source: Stirling Marine Services Pty Ltd v Austral Piling and Constructions Pty Ltd & Anor [1999] WASCA 6 (6 May 1999), Supreme Court of Western Australia.

Time Charter Parties - Early Redelivery

2008-06-05T10:11:00.007+08:00

Summary of some English Cases

Reindeer Steamship v Forslind [1908] 13 Com Cas - If there are special provision for payment of charter hire right up to the termination date, charter hire was payable irrespective of early redelivery.

White & Carter v McGregor [1962] AC 413 - If a party attempts to wrongly repudiate a contract the innocent party can reject the wrongful repudiation and continue the contract.

The Puerto Buitrago [1976] 1 Lloyd Rep 250, English Court of Appeal - In respect of the early return of a vessel, damages would be sufficient and the owner could not insist on hire till the end of the charter period.

The Odenfeld [1978] 2 Lloyd’s Rep] - Even though there is a duty on the owner to attempt to rehire the vessel and thus mitigate potential losses, for a limited period the owner may continue to hold the vessel at the charterer’s disposal and continue to claim hire.

The Ocean Frost – Armagas Ltd v Mundogas S.A. [1986] 2 Lloyd’s Rep 109 - The House of Lords confirmed that an owner, subject to the duty to mitigate his losses, would be entitled to damages for early re-delivery

Computation of Damages:

Miranos International Trading Inc. v. VOC Steel Services BV [2005] EWHC 1812 Comm - Calculation of damages for early redelivery – the difference between the charter rate and the market rate for the vessel for the period of the early redelivery or, if there was no market rate, the normal and direct loss suffered by the owners.

Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The "Golden Victory") [2007] UKHL 12 - A case involving wrongful termination of long term time Charter Party. Issue: Whether in quantification of damages, future events can be taken into account? Held: That in quantifying the damages recoverable for wrongful repudiation of a long-term time charter, a tribunal was right to take into account an event occurring subsequently to the termination, even when the occurrence of that event was uncertain at the time of termination. [House of Lords, majority decision]

Marine Construction Contract Clauses - Title to Goods

2008-04-24T00:10:00.019+08:00

In a previous post it was said that the purpose of retention of title clause is to ensure that even if goods (or equipment) are delivered into the custody or control of the buyer, title shall not pass to the buyer until some condition(s) - usually payment - are fulfilled. This is useful for recovery of unpaid goods or proceeds of sale thereof, in the event of the buyer’s insolvency [a]. Conversely, some contract clauses may provide that title or ownership of goods shall pass to Company even before full payment of the purchase price.

Consider this clause in a marine construction EPC contract:

“Title to the Work, materials and equipments to be supplied by Contractor for incorporation as permanent part of the Work and Installations shall pass to the Company on whichever is the earlier of the following:(a) When delivered to the work site, or (b) When it crosses the ship’s rail at the port of shipment, or (c) When Contractor receives payment from the Company. Under such contracts payment schedule will usually be based on various milestone completions or by agreed progressive payments. Therefore, title will pass when the events in (a) or (b) has occurred and before substantial payment has been made.

If Contactor does not perform - Company will usually be protected by security provided by the Contractor in the form of Performance Bond, Refund Guarantee and/or Parent Company Guarantee.

However, if Company inadvertently goes into receivership or compulsory winding-up - Contractor’s claim will be good, but only on paper for the unpaid portion of the contract price, ranking as unsecured creditors after statutory and secured creditors have had the first bite of the cherry. Unless Company has made full payment of the contract price or the same has been secured by payment guarantee from a reputable bank or a parent company with deep pockets…the Contractor may be left with an ineffective claim or paper judgment.

End Notes:

[a] "The broad purpose of an agreement that a seller retains title to goods pending payment of the purchase price and other money owing to him is to protect the seller from the insolvency of the buyer in circumstances where the price and other moneys remain unpaid. The seller's aim in insisting on a retention of title clause is to prevent the goods and the proceeds of sale of the goods from becoming part of the assets of an insolvent buyer, available to satisfy the claims of the general body of creditors." Compaq Computer v Abercorn Group [1993] BCLC 602 at p. 611 per Mummery J.

Wisdom

2008-01-02T21:23:00.000+08:00

Thoughts for the New Year… to pursue Wisdom

Wisdom is the right use of knowledge. To know is not to be wise. Many men know a great deal, and are all the greater fools for it. There is no fool so great a fool as a knowing fool. But to know how to use knowledge is to have wisdom. Charles Haddon Spurgeon (1834 - 1892)

What is "wilful misconduct"?

2007-08-22T18:31:00.007+08:00

From the Bench:

["There have, over the years, been many attempts to define wilful misconduct. In National Semiconductors (UK) Ltd v UPS Ltd [1996] 2 LL Rep 212 at 214, Longmore J, as he then was, having cited various authorities said:-“If I summarise the principle in my own words, it would be to say that for wilful misconduct to be proved there must be either (1) an intention to do something which the actor knows to be wrong or (2) a reckless act in the sense that the actor is aware that loss may result from his act and yet does not care whether loss will result or not or, to use Mr Justice Barry’s words in Horobin’s case, “he took a risk which he knew he ought not to take” [1952] 2 Lloyd’s Rep. at p.460

In Forder v Great Western Railway Co [1905] 2 KB 532 at 535-6, Lord Alverstone CJ adopted the following definition given by Johnson J in Graham v Belfast and Northern Counties Railway Co [1901] 2 IE 13:- “Wilful misconduct . . . means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself, who knows and appreciates that it is wrong conduct in his part in the existing circumstances to do, or to fail or to omit to do (as the case may be), a particular thing, and yet intentionally does or fails or omits to do it, or persists in the act, failure or omission, regardless of the consequences.” Lord Alverstone continued:- “The addition which I would suggest is “or acts with reckless carelessness, not caring what the results of his carelessness may be.” Beldam LJ, in Lacey’s Footwear v Bowler International [1997] 2 LL Rep 369 at 374 put it this way:- “Further a person could be said to act with reckless carelessness towards goods in his care if, aware of the risk that they may be lost or damaged, he nevertheless deliberately goes ahead and takes the risk, when it is unreasonable in all the circumstances for him to do so.”

As regards the burden and standard of proof, there was no issue between the parties and the judge correctly directed himself by reference to a passage from Brooke LJ’s judgment in Lacey’s Footwear at p 381 where he said that the trial judge:- “should also have directed himself that since a charge of wilful misconduct was a serious charge to make, the evidence ought to have satisfied the degree of probability appropriate to the seriousness of the charge before it was appropriate to find it proved (Hornal v Neuberger Products Ltd [1957] 1 QB 247 and Khawaja v Secretary of State for the Home Department [1984] AC per Lord Scarman at pages 113-114).”

The judge also quoted a useful passage from the judgment of Andrew Smith J in Datec Electronic Holdings Ltd v UPS Ltd [2005] 1 LR 470 at 481 where he said:- “I should add that I was properly reminded by counsel that the principle set out in such cases and as in Re H and others (Minors) Sexual Abuse: Standard of Proof [1996] AC 563 where Lord Nichols observed that “built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation” (at p 596f), however Lord Nichols explained that this simply means that the inherent probability or improbability is itself to be taken into account when weighing the probabilities in deciding whether, on balance, the event occurred. Although in this case the allegation is one of theft from an employer I do not regard this possibility as so improbable that there is a particularly heavy burden upon the claimants to prove their case. I have simply concluded that there is not proper evidence to support the claimants’ allegation . . .”] per Lord Justice Waller in TNT Global SPA v Denfleet International [2007] EWCA Civ 405

Reciprocal Indemnities

2007-08-13T12:45:00.004+08:00

In the shipbuilding, marine and offshore construction industries, risk of loss or damage to property, personal injury including fatal injury and disease are usually allocated by means of "knock for knock" or reciprocal indemnity [1] in the contract. The preferred view in some circle is that such clause should allocate liability between the parties regardless of fault. This ensures certainty, is cheaper and also avoid costly and protracted litigation follow an accidents. Others prefer uncertainty by subjecting such indemnity to exceptions. i.e. negligence, gross negligence or wilful misconduct.

In the case of Caledonia North Sea Limited v. British Telecommunications Plc (Scotland) and Others [2002] UKHL 4, Lord Bingham, commenting on the market practice to take account of the peculiar features of offshore operations, referred to an article on the standard practice during construction as described by Sharp, Offshore Oil and Gas Insurance (1994), p 108:

"(iv) Injury or Death of Employees

The position in respect of employers' liability is invariably dealt with by the exchange of mutual indemnities in respect of injuries to or deaths of employees. There is perhaps a simple reason for this. If an individual is injured he will expect to have a right to sue any party who may have been guilty of negligence leading to the circumstances which caused the injury. This party may be another contractor, the Principal or his employer, or any combination of all three. The issue can become complicated by reason of contributory negligence. Determining liability and awarding costs can be a lengthy process in these circumstances, and this can only add to the anguish of the injured party, or the dependents of the deceased who may have been the sole breadwinner. The employer therefore accepts a responsibility to provide for his employees and will generally give the party with whom he is contracting a full indemnity in respect of any suit or action brought against that other party."

A similar practice is customary when the installation has become operational see Sharp, p 277: "Again, in an offshore context, the liability of an oil company for loss of life or personal injury is invariably going to be governed by a contract, either with another party carrying out services in or about the installation or drilling rig, or with an employee, or a party providing consultancy services. It is usual for such contracts to leave the responsibility for damages or compensation with the party employing the injured person. Nevertheless there are many situations where a genuine third party position will exist. A contractor's employee, if injured on a platform as a result of an incident for which he was, himself, blameless, will have an action for damages against the platform owners. The platform owners may, in turn, be indemnified by the contractor, but in the first instance the action lies against the platform owners. Such a position arose in the case of the 'Piper Alpha' casualty, as a result of which compensations were sought from the Operator and its co-venturers for significant amounts. A third party position will also exist as between one contractor's employee and another."

However, even where the customary practice is known to most in the industry, such indemnity clause must be crafted with certainty and precision to minimize costly and time consuming litigation. Some salient examples:

Campbell v Conoco (UK) Ltd and other [2002] EWCA Civ 704 [Subcontractor (Salamis SGB Ltd), unsuccessfully disputing liabilities on cross indemnity given to contractor (Amec Process and Energy Ltd)]; and

Caledonia North Sea Limited v. British Telecommunications Plc (Scotland) and Others [2002] UKHL 4 [where the contractors unsuccessfully relied on three defenses that (a) they could not be liable to indemnify the operator unless they had themselves been liable to their employee, on grounds of negligence or breach of statutory duty; (b) as the action was a subrogated claim, their liability to the operator has been discharged by the payments made by the underwriters; and (c) disclaimer of "indirect or consequential losses suffered.]

There has also been attempt to modify the customary reciprocal indemnity by introduction of “gross negligence” exception (“…unless such injury, death, damage, loss or destruction was caused by the gross negligence or wilful misconduct of the party which would otherwise be indemnified”). This essentially erodes the element of certainty (i.e. the parties are leaving it to the court to decide on the circumstances which must be weighed in the balance to ascertain whether an act or omission merits the description "gross") providing ample avenue for costly, time consuming legal wrangling. For contractors with limited resources, the prospect of exposure to protracted multi-million suit for the unforeseeable is indeed something to mull over seriously. When confronted with suggestion to accept a less traditional indemnity clause, the writer's preferred view is that one should insist on the kind of reciprocal indemnity described by Sharp above. Otherwise, additional insurance cover for "gross negligence" claims could be arranged. However, it is understood that comprehensive insurance for all expenses connected with such claims may not be possible.

End Note:

For judicial consideration of “Gross negligence” see:

Grill v General Iron Screw Collier Co. (1866), 35 LJCP 321,330, where Willes J observed that “gross negligence is ordinary negligence with a vituperative epithet.”

Armitage v Richard Nurse 1997 2 AER 705 and other: where the court said that “….we regard the difference between negligence and gross negligence as merely one of degree”

Red Sea Tankers Ltd v Papachristidis 1997 2 Lloyd’s Rep 547: where it was said that the term "gross" negligence is clearly intended to represent something more than the failure to exercise proper skill and care that would constitute “mere” negligence. This would include "conduct which a reasonable person would perceive to entail a high degree of risk of injury to others, coupled with heedlessness or indifference to or disregard of the consequences". It was also said that all circumstances must be weighed in the balance to ascertain whether an act or omission merits the description "gross".

The word “other” as a key to true interpretation

2007-08-09T17:44:00.000+08:00

In the case of University of Keele v Price Waterhouse [1], concerning a negligence suit in respect of advice provided by Price Waterhouse on a profit related pay scheme, the terms about limitation of liability were as follows:

“ We will use all reasonable skill and care in the provision to you of the Services set out in this letter.

In no circumstances shall any liability (whether arising in contract, negligence or otherwise) of Price Waterhouse, its partners or employees, relating to Services provided in connection with the engagement set out in this letter (or any variation or addition thereto) exceed £1,700,000 being twice the anticipated saving to Keele University from the implementation of the Profit-Related Pay Scheme.

Subject to the preceding paragraph we accept liability to pay damages in respect of loss or damage suffered by you as a direct result of our providing the Services. All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme....”

In the Court of Appeal, arguments centred on the third paragraph above containing two sentences. The first sentence were referred to in argument as the “first limb” and the second sentence as the “second limb”. Counsel for Price Waterhouse submitted that “the effect of reading the first and second limbs together is that the loss and damage referred to in the first limb must be interpreted as excluding the failure to realise anticipated savings or benefits.” In contrast, counsel for the University argued that the first and second limbs have separate purposes; the former to define the liability which Price Waterhouse accepts and the latter to exclude liability for “other” liability, that is liability for losses other than those covered by the first limb.

It was held that the word “All other liability” would, “ by reason of the opening words of the first limb and the preceding paragraph imposing the cap, include losses within the first limb but exceeding £1,700,000... Loss and damage is excluded by the second limb only if it represents loss not covered by the first limb... The word “other” at the start of the second limb is the key to the true interpretation of the first and second limbs. It tells the reader which of the two limbs has precedence: it is the first. The first limb must be given an interpretation which enables the liability accepted by Price Waterhouse to take effect according to its tenor.” : Per Arden LJ

Lord Justice Buxton went on to say inter alia that : “The liabilities set out in the second sentence are said to be liabilities “other” than the liability in the first sentence. Where x is said to be other than y that means that x is different from, and not included within, y.”

Other reminder/pointers from this case:

The first principle in the interpretation of documents is that the document should be read as a whole.
It is not necessary to rely on the contra proferentem rule if the document properly construed has a clear meaning.
An exclusion clause will be construed strictly against the proferens. In order to be effective it must be clearly and unambiguously expressed. However this principle will not apply in its full rigour when considering clauses merely limiting liability.

[1] 2004 EWCA Civ 583

Consequential loss or damage

2007-08-06T16:17:00.003+08:00

The rule in Hadley v Baxendale [1], enumerated that "where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either (a) arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or (b) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it." [see also the House of Lord's case of Jackson v Royal Bank of Scotland [2005] UKHL3, on issues relating to damage]

Where the terms of a limitation of liability clause in contractual documents merely refers to "indirect or consequential loss", this will not exclude liability for "direct" losses which fall within the first limb of rule (a) above. Such clause will only exclude losses which fall within the second limb, (b); that is indirect or special losses which, the parties at the time of the contract contemplated as being the probable result of a breach of contract.

In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [2], the Court of Appeal in reversing the trial judge’s decision that loss of profit was a special circumstance not drawn to the defendants’ attention as a potential consequence of breach, went on to decide that, 'knowing what they did of the plaintiffs' business, the defendants must be regarded as having known that some loss of profit was liable to result from their breach, though not profit on other contracts of which they knew nothing...'. The claim for loss of profit on the special contract was disallowed as it was not “ reasonably foreseeable”. Similarly, in Millar’s Machinery Co Ltd v David Way and Son [3], the clause excluding “responsibility for consequential damages” was held not to exclude liability for damage occurring naturally or directly. ["Maugham LJ is recorded in indirect speech as having held that “the word ‘consequential’ had come to mean ‘not direct’,” and Roche LJ as having applied this reading to the contract'].

Recent cases:

Croudace Construction Ltd v Cawoods Concrete Products Ltd [4]: concerned the late delivery of masonry blocks which the buyers required for the construction of a school. The contract of sale provided that the sellers were: "Not under any circumstances to be liable for any consequential loss or damage caused or arising by reason of late supply ...." Parker J held that the word “consequential” did not cover any loss which directly and naturally resulted in the ordinary course of events from late delivery. Losses which had began to “clock up at once”, (namely the cost of idle men and plant etc.) were regarded as direct and not consequential. This decision was upheld by the Court of Appeal.

British Sugar Plc v NEI Power Projects Ltd [5]: Limitation clause stated that "… the Seller's liability for consequential loss is limited to the value of the contracts". The consequential loss exclusion was held not to apply to increased production costs or loss of profits caused by the breakdown of defective equipment.

Deepak Fertilisers Ltd v ICI Chemicals and Polymers Ltd [6]: The court of appeal had to construe a clause which expressly excluded liability for loss of profits as well as “indirect or consequential damage”. The cost of rebuilding the plant and wasted overheads during reconstruction were allowed. However, lost profits, though not too remote, could not be recovered because they were excluded in the contract.

BHP Petroleum Ltd v British Steel PLC [7]: British Steel, entered into a contract with BHP, and supplied large quantity of high quality steel piping and associated equipment for an offshore oil and gas production development of BHP. A clause in the contract as modified by the terms of the purchase order provided that: 'The Supplier shall immediately remedy, at the contractual point of delivery, at his expense any defect in the Work . which shall appear within 18 months of the date stated in the Purchase Order or any such longer period but not later than 24 months after delivery of the Work, at which time all liability of the Supplier relating to the Work shall terminate.' Defects appeared in the pipes, and the claimants commenced proceedings against the defendants. As the words were clear and unambiguous and since the defects had not been brought to British Steel's attention until after expiry of the 24 month rectification period, British Steel was entitled to rely upon them to exclude its liability. The relevant clause excluding liability for consequential loss provided that: 'Neither the Supplier nor the Purchaser shall bear any liability to the other ... for loss of production, loss of profits, loss of business or any other indirect losses or consequential damages arising during and/or as a result of the performance or non-performance of this Contract …' .It was held that the clause did exclude liability for loss of production, loss of profit and loss of business and BHP's claims for financial losses due to deferred production and losses incurred in mitigation of such loss of production were excluded.

Hotel Services Limited v Hilton International Hotels (UK) Ltd, [8] The limitation clause: "The Company [HSL] will not in any circumstances be liable for any indirect or consequential loss, damage or liability arising from any defect in or failure of the System or any part thereof or the performance of this Agreement or any breach hereof by the Company or its employees." The Court of Appeal decided the case, much as Victoria Laundry was decided, "... on the direct ground that if equipment rented out for selling drinks without defalcations turns out to be unusable and possibly dangerous, it requires no special mutually known fact to establish the immediacy both of the consequent cost of putting it where it can do no harm and - if when in use it was showing a direct profit – of the consequent loss of profit. Such losses are not embraced by the exclusion clause, read in its documentary and commercial context”. Per Lord Justice Sedley

Finale:

The usage of all-compassing term like “indirect or consequential loss” to exclude a particular type of loss, (i.e. loss of profits, loss of production, loss of contract or business, demurrage, or wasted management time) or any other specific loss will be inadequate. These particular loss should be specifically enumerated, preferably as a separate category and sub-clause. Note: Harvey McGregor QC in McGregor on Damages rejects the distinction between general and special damage in favour of “normal” and “consequential” losses: According to him, "The normal loss is that loss which every plaintiff in a like situation will suffer; the consequential loss is that loss which is special to the circumstances of that particular plaintiff". In respect of time charterparty, see Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia (The "Achilleas") [2006] EWHC 3030, on the modern approach and comment on whether loss of earnings under a subsequent fixture is recoverable under the first limb of the rule in Hadley v Baxendale.

[1] [1854] 9 Ex. 341
[2] [1949] 2 KB 528
[3] (1935) 40 Com. Cas. 204
[4] (1978) 2 Lloyd's Rep 55
[5] (1997) 87 BLR 42
[6] [1999] Ll.L.R.387
[7] [1999] 2 Lloyd's Rep 583
[8] [2000] 1 All ER (Comm) 750