The tide is nigh

Financial and political developments on a global scale are driving a renewed focus on shipping law in the City. By Nicholas Poynder

Before corporate and banking work came to dominate the City in the mid-1980s, shipping was one of the top areas of practice for many of London’s leading law firms. The industry combined the glamour of names such as Niarchos, Onassis and YK Pao with high finance and a run of leading court decisions that were responsible for shaping the English law of contract and tort. As well as financial rewards, the range and complexity of issues in shipping provided a real intellectual challenge.

While retaining a formative role in the evolution of the common law and a charm all its own, shipping subsequently lost its place in some of the larger corporate firms. Recently, however, global economic and political developments have led to a revival in shipping, placing it once again at the forefront of commercial and legal development.

Flooding the market
In recent years the sector has witnessed quite astonishing growth, driven principally by demand for raw materials and the flood of exports from the new industrial leviathans, China and India. Charter rates and shipbuilding prices have risen spectacularly alongside trade, as exemplified by China’s insatiable appetite for iron ore. While prices may have reached a plateau for the time being, owners, charterers and commodity players have all benefited enormously.

In this climate the talk is all of developing further commercial opportunities by means of ambitious measures, such as building record-sized vessels, developing new port complexes to handle higher volumes, widening the Panama Canal and even, with the aid of global warming, opening up the fabled Northwest Passage through Arctic Canadian waters between the Atlantic and Pacific oceans.

The increasing cost of litigation together with a growing tendency by the industry’s insurers to keep work in-house had reduced the amount of work available in the legal market. However, those law practices that maintained a presence in this specialist field are now enjoying a renaissance.

Standard charter
A review of some recent reported cases reflects the themes of the market’s vitality while also illustrating that shipping law remains an exciting and intellectually demanding arena within which to work.

The impact of rising charter rates arose in Western Bulk Carriers KS v Li Hai Maritime (2005). This dispute turned on whether the owners were entitled to cancel their contract with the charterers when the owners were owed the princely sum of $500 (£265) in unpaid hire. Ultimately the owners’ case failed, as they were held to have given improper notice when withdrawing the vessel from service.

The skyrocketing cost of chartering ships in 2003 may have had a role to play in all of this. Had the owners been successful in their attempt to withdraw they would have been able to take advantage of a rising market. As it turned out, the price they paid for an illegitimate withdrawal was damages based on the eye-watering difference between the daily charter rate at the time of the withdrawal ($23,000 (£12,000)) and the daily rate paid by charterers ($9,100 (£5,000)) under the contract.

As the presiding judge, Judge Jonathan Hirst QC observed: “This case represents commerce, red in tooth and claw.” The Li Hai case thus illustrates how, in shipping, sharply rising markets may create spectacular wins, but can also lead to equally spectacular losses.

In the present market yards are oversubscribed. continued #+ continuedIndeed, according to the Drewry Shipping Insight publication (July 2006) an astonishing 30 per cent of the global tanker fleet is currently on order. Many yards are fully booked to at least 2009 and the competition for space has become cut-throat.

This issue came up in Covington Marine Corp & Ors v Xiamen Shipbuilding Industry Co (2005). In February 2003 Covington Marine Corp and three others contracted with Xiamen Shipbuilding Industry Co to build four 53,800-deadweight-tonnage bulk carriers at $18m (£9.57m) per vessel. Within the same month the yard signed new contracts with three different parties for essentially the same vessels, refusing to perform the original alleged contracts.

When the buyers took the case to London arbitration, the tribunal concluded that the buyers’ original contracts were merely ‘agreements to agree’ and did not bind the yard. However, the award was appealed and overturned by Mr Justice Langley in the High Court. He held that the yard had wrongfully repudiated the buyers’ contracts.

This case provides an example of what appears to be a growing trend of the courts wherever possible to redress a perceived wrong in the arbitration process. There had been a fear that, following the Arbitration Act 1996, far too few matters were going to appeal, resulting in a stifling of the development of English commercial law (notwithstanding the fact that the act was in part aimed at easing a route to appeal).

Under attack
Recent years have not only been characterised by the bullish shipping market. Despite ever-rising safety standards there continues to be a number of high-profile explosions and casualties, such as The Tricolor, The Hanjin Pennsylvania, The Aconcagua and The Prestige, all of which have made the headlines.

An industry without frontiers would also inevitably be hit with fallout from the global ‘war on terror’. One example of this is the Court of Appeal decision in Hyundai Merchant Marine Co v Furnace Withy (Australia) (2006).

After 9-11, US authorities began stringently screening vessels entering the US. One such vessel was The Doric Pride, which was classed as high risk and detained. During its detention it was delayed further by a serious collision in the vicinity. Who would pay for these delays? The owners or the charterers?
The court had to decide from the provisions of the contract where such a risk should lie. While at first sight the detention appeared squarely to flow from the charterer’s order for the vessel to call at a US port of trading, the Court of Appeal (Lords Justices Rix and Brooke and Sir Paul Kennedy) found that ensuring a vessel met US requirements for port entry was a vessel-related issue, for which the owners remained ultimately liable.

The risk caused by terrorism was illustrated by another case, the attack on The Limburg in 2002, where terrorists drove a small craft laden with explosives into an oil tanker off Yemen. The case generated much media attention as the first example in which a marine terrorist incident resulted in significant pollution and raised a number of other complex issues that were resolved on behalf of the vessel’s managers and war risk underwriters.

As The Doric Pride and The Limburg well illustrate, the shipping industry and its legal problems remain an integral part of the forces shaping the world today. That is unlikely to change in the near future, whatever direction global economics and politics may take.

Nicholas Poynder is a solicitor at Holman Fenwick & Willan