Trade Advantage - December 2010

Welcome to the December 2010 commodities update

Welcome to the December edition of our Trade Advantage bulletin.

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Breach of Contract/Dangerous Cargo/Knowledge of the Time Charterer – Compania Sud Americana de Vapores SA v Sinochem Tianjin Import & Export Corp "The Aconcagua" (2010)

The shipper Sinochem appealed against a decision that it was liable for shipping a dangerous cargo of "rogue" Calcium Hypochlorite (the "Cargo") and the damage caused by its explosion whilst in a container aboard the vessel of the time charterer CSAV.

The Cargo had a specific dangerous goods classification (UN 1748) and was capable of self-ignition, which meant that, under the IMDG code, it was to be stowed away from sources of heat. It was in fact stowed in a position such that it was surrounded on three sides by a bunker tank, which was heated later in the voyage in order to transfer bunkers into other tanks on board the vessel. The shipper submitted that the heating of the tank had raised the temperature of the Cargo, hence causing the explosion, whilst CSAV sought the finding that the Cargo was of an unusual nature which led it to self ignite at relatively low temperatures caused by carriage in tropical waters.

The judge in the Commercial Court had found that the heating of the tank in such a way had little or no effect in raising the temperature of the Cargo prior to the explosion and that the elevated ambient temperature, caused by the vessel’s voyage through tropical waters, had been the cause. In any event, despite its dangerous cargo classification, the Cargo should not have exploded at ambient temperatures of the high 20’s (Celsius) or even low 30’s and it was found to have exploded at an unusually low "Critical Ambient Temperature". Following expert evidence the judge had found that the Cargo was very likely to have been a "rogue" material, i.e. not having the normal characteristics expected of Calcium Hypochlorite, and that CSAV had not been aware or made aware, nor had they consented to the shipment of a cargo with such characteristics.

Although it wished to attack the entirety of the Commercial Court judge’s findings, the shipper was restricted in the areas of appeal. The shipper submitted that the Commercial Court judge had found the Cargo to be a rogue material, and the shipper liable only because he rejected its primary case; that the heating of the bunkers had not been found to be a cause of the explosion. The shipper submitted that the judge was wrong to do so without exploring or citing the possibility of causes other than the existence of "rogue" Cargo; that where he relied on factors other than rejection of the shipper’s case, his reliance was misplaced; and that CSAV had failed to prove their case that the shipper had breached the contract by shipping dangerous cargo.

The Court of Appeal found that the judge had not simply leapt to the conclusion that the Cargo contained "rogue" material, and was thus dangerous, because of his rejection of the shipper’s primary case without consideration of other relevant and pertinent facts. In the course of his judgment he had made findings that CSAV did not know, nor should have known, that cargo with dangerous goods classification UN 1748 was liable to explode at a Critical Ambient Temperature ("CAT") of less than 40°C. He had further found that expert evidence and testing carried out at the Cargo’s factory had shown material produced there could, on occasion, be "rogue" material with a CAT in the range of the ambient temperatures aboard the vessel at the time of explosion. It was also noted by the judge that the Cargo’s factory had poor manufacturing standards and inadequate quality control which could add to the likelihood that the Cargo was of a "rogue" nature. The Court of Appeal was also satisfied that the judge had not "lost sight of the elementary principle that it was for the claimants to prove their case"; the judge had simply preferred one expert’s evidence to the other, which he was entitled to do, and there was ample evidence to support CSAV’s case. In summary the Court of Appeal said:

"…if the carriage by a shipowner (or, as in this case, the time charterer) cannot be faulted the likelihood must be, both in common sense and in law, that the claim by the owner/charterer for breach of contract in shipping dangerous cargo is likely to succeed."

Reefers / carrier's exclusion clauses: Exportadora Valle de Colina SA & Ors v AP Moller – Maersk A/S (2010)

The Claimants brought a claim against the shipping line Maersk for damage to their cargoes of grapes shipped in reefer containers during the 2006 season. It was a necessary fact that the containers would experience periods where they were without power, either because they were being moved for consolidation or transhipment (allowed under the Maersk standard bills of lading), or to remove frost from the cooling machinery, and these periods of "power off" were therefore necessary and permissible for operational reasons. However, in the case of almost all containers in respect of which claims arose, the actual periods of power off were in excess of what was necessary or permissible. This had resulted in damage to the cargoes. This damage included both that visible when the containers were unloaded, such as decay and dehydration, and that manifested by the rapid deterioration of the grapes once in ambient temperatures, reducing their shelf life. This had had an impact on the sale price and the marketability of the grapes.

Clause 6 of Maersk’s standard bill of lading excluded liability for loss or damage caused by inherent vice, insufficient or defective packing and bad stowage. The Court held that, under Clause 6.1(b) of the bills, which closely mirrored Art 18(2) CMR Maersk only had to show that the damage could have been caused by one of the excluded causes. It would then fall to the Claimants to show, on the balance of probabilities, that in fact none of the excluded causes caused the damage. However, there was no requirement for the Claimants to go further and prove the cause of the damage: provided they could show that the grapes were in good condition on loading into the containers, that there was damage to them on unloading, and that the damage had not been caused by the excluded causes, Maersk’s liability, as the carrier, was proven.

As it happened, the Claimants were able to show that the grapes were loaded in good condition and that the consignments had suffered damage. Although Maersk had attempted to show that one of the three exclusions applied, that is, that there had been inherent vice, insufficient or defective packing, and bad stowage, the Claimants were able to show, on the balance of probabilities, that this was not the case. By contrast, the Claimants had the evidence of "temptales" which recorded the temperature at either end of the container during transit, and here showed the containers had experienced unusually high temperatures, whilst the records for the containers showed periods of power off which the Court determined were either for excessive periods or for reasons which were unexplained (e.g. not during consolidation or transhipment). The vast majority of the containers had experienced power offs in excess of three hours, the maximum permitted period for chilled cargo allowed in Maersk’s own operations manual. The periods of power off constituted breaches of Maersk’s obligations under the contracts of carriage or as bailees. In addition, Maersk were unable to show what proportion of the damage had been caused by legitimate power offs and were therefore liable for the entirety of the damage.

The Claimants would recover the difference between the value of sound grapes on arrival and the sale price the damaged grapes achieved, plus reasonable repackaging costs. Consequential losses were however excluded by Clause 8.1 of the bill of lading.

Arbitration / Security for appeals to the court - A v B (2010)

In this case the underlying disputes relate to two contracts that B alleges were entered into between B as buyers and A as sellers, for the sale of two parcels of Kazakh rapeseed. The two parcels were not delivered and B commenced two arbitrations against A under the FOSFA Rules of Arbitration and Appeal, claiming damages for non-delivery. A alleged that no binding contracts had been concluded, and raised the objection that the tribunal lacked substantive jurisdiction, asking the tribunal to rule on its jurisdiction.

The First Tier arbitrators disagreed on the issue of jurisdiction and the same umpire was appointed in both arbitrations. He found that no binding contracts had been concluded.

B appealed to the FOSFA Board of Appeal, which allowed the appeal, holding that the arbitrators did have jurisdiction and that B's claims for damages succeeded.

A then issued arbitration claim forms seeking orders pursuant to s67 of the Arbitration Act 1996 (the "Act") that the appeal awards were of no effect, because the tribunals did not have substantive jurisdiction and alternatively, seeking permission to appeal on a question of law under s69 of the Act.

B applied under s70 (7) of the Act for security for the sums awarded to it by the FOSFA Appeal Board, pending the determination of A's applications to the court challenging those awards.

Section 70(7) reads as follows:

"The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with."

The court held, dismissing the application, that:

1) The court should exercise caution in exercising its discretion to make an order under s70 (7) where there was a challenge to the jurisdiction of the tribunal pursuant to s67, which might in other circumstances have been made under other sections of the Act (s32 - determination of preliminary point of jurisdiction or s72 -saving for rights of person who takes no part in proceedings). In most cases there will be a threshold requirement that the party making the s70 (7) application demonstrates that the challenge to the jurisdiction is flimsy or otherwise lacks substance.

2) As regards the matters relied on by B as demonstrating that the challenge was flimsy, it would be for the judge who heard the s67 application to determine the merits of it. All that was advisable or appropriate for the court to do at this stage was to look at the points raised to determine if the threshold requirement could be met by B. Overall, although A's case faced some evidential difficulties, it was not possible to categorise it as flimsy or lacking in substance. Therefore B had not met the threshold requirement and B's application should fail on that ground alone.

3) As a general principle the court should not order security under s70 (7) unless the applicant could demonstrate that the challenge to the award would prejudice its ability to enforce the award. Often this would require the applicant to demonstrate some risk of dissipation of assets, although there might be other ways in which enforcement could be prejudiced. On the facts of the instant case, based on the material before the court there was no evidence that A's applications to challenge the awards would prejudice enforcement of the awards by B.

Disclosure and legal professional privilege

Two cases this year have reviewed the approach to legal professional privilege, firstly from the perspective of in-house lawyers and secondly accountants.

In-house lawyers
Akzo Nobel Chemicals Limited and Akcros Chemicals Limited v Commission of the European Communities case C-550/07 P

This was a decision referred to the European Court of Justice ("ECJ"). The issue was whether documents obtained during a dawn raid at a company's UK premises could be used against that company in an EC probe. The documents included emails exchanged between non-legal employees and an in-house lawyer. The company argued that the documents were protected by legal professional privilege and an in-house lawyer enrolled at the Bar or Law Society is as independent as an external lawyer due to the nature of professional conduct.

The legal professional privilege claims were rejected by the Commission and the dispute went to the Court of First Instance (now the General Court). The Court of First Instance also dismissed the company’s arguments, finding that none of the documents were covered by legal professional privilege. The company further appealed.

Advocate General Kokott recommended that the ECJ dismiss the appeal in its entirety. His view was that salaried, enrolled in-house lawyers are not sufficiently independent from their employees (as opposed to external lawyers) to justify the extension of legal professional privilege.

The ECJ followed the Advocate General and dismissed the appeal. It held that regardless of the national professional rules and ethical obligations to which in-house lawyers are subject, due to their economic dependence and close ties with their employers, in-house lawyers do not enjoy a level of professional independence comparable to that of an external lawyer.

Accountants
R (on the application of Prudential Plc) v Special Commissioner of Income Tax (2010)

Here the English courts were asked to consider whether legal advice sought from accountants was subject to the same legal privilege rules as lawyers.

The government tax inspector had requested that Prudential provide documents in the course of an investigation into tax avoidance schemes. Prudential had sought legal advice on tax matters from lawyers and accountants and claimed that documents produced by the accountants in relation to that advice were covered by legal professional privilege. Prudential brought proceedings in the Administrative Court to challenge the requests and to establish the scope of legal professional privilege.

Prudential contended that a client’s communications with his advisers should be just as much protected from disclosure if the advice, being legal advice, is sought from and given by an accountant as if it were sought from a lawyer. The Administrative Court acknowledged the strengths of Prudential’s arguments, in principle, that "the extent of the right to refuse disclosure should not relate to the nature of the legal qualification of the person giving the advice." However it nevertheless felt constrained by the state of the law and refused to grant an extension of legal professional privilege.

Prudential appealed. The Court of Appeal upheld the Administrative Court’s finding that the rule on legal professional privilege was only intended to apply to communications with members of the legal profession and could not be extended by the courts to communications with accountants or other non-lawyers. Any extension to the rule could only be granted through new legislation from Parliament.

EU Advance Cargo Declaration Regime

From 1 January 2011, "The Security Amendment to the Community Customs Code" will come into force applying various EU regulations to all sectors of the shipping industry. These new requirements are intended to provide greater security for the EU in relation to its imports and exports as well as greater commonality in paperwork/regulations across the European goods supply chain. However they may prove to be onerous burdens on ship operators and/or their representatives. For the import or export of goods into and out of the EU ship operators (or their representatives) will now have to declare cargo information in advance to the relevant customs office of the relevant EU Member State. Responsibility and liability for these declarations should be considered in the drafting of any contracts and vessel sharing agreements as penalties will be imposed on any party failing to comply.

Information Required
All information is to be submitted electronically, so ship operators and/or their agents/representatives should ensure that they have the computer systems in place that are compatible with those of the customs services of all EU Member States with whom they intend to deal. Ultimately the responsibility and liability for submission of advance information rests with the ship operator, even if they have designated the task to agents. There are only two exceptions to this:

1) Combined Transport where responsibility passes to the truck company/driver; and

2) Vessel Sharing Agreements where the B/L carrier is responsible.

a) Import of Goods
Information must be in the form of an "ENS" (Entry Summary Declaration) submitted to the customs office of first entry into the EU irrespective of whether the goods are due to be unloaded/discharged at this port. This will include information provided under the traditional discharge manifest (whilst not replacing this document) and any further information that is required by the relevant Member State’s national laws. In addition, and immediately upon arrival at the first EU port, an "AN" (Arrival Notice) must be submitted to the customs office to allow it to identify the goods aboard the vessel. This can either list all relevant information relating to the movement of the vessel or it can be in the form of a list of the MRN numbers.

b) Export of Goods
Information must be in the form of either a customs declaration for export, re-export or outward processing, or, in the case where a declaration does not apply, an "EXS" (Exit Summary Declaration) submitted to the customs office of exit. This information must be sufficient to allow the relevant EU customs office to carry out a risk assessment of the cargo before it is exported.

Time Provisions
Ship operators and their representatives should be aware of the various different time restrictions for which such advance information should be provided to the relevant EU customs office.

a) Deepsea Containerised Shipping
Twenty-four hours before loading either at the EU port of departure for export, or at the Non-EU port of loading of the particular cargo for import (not just the last Non-EU port of loading).

b) Deepsea Bulk Shipping
Four hours before arrival in the first EU port for import or before departure from an EU port for export.

c) Shortsea Shipping and Combined Transport
Two hours before arrival in the first EU port for import or before departure from an EU port for export. (Shortsea shipping is considered as that which takes place between neighbouring EU and non-EU countries located on the Baltic or Mediterranean seas.)