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FEBRUARY 2013INTERNATIONALCOMMERCEStrategic, regulatory and operational insight from Holman Fenwick Willantrade-off:the dearthof financinginsurancecaptives: achanging roleP&I inSURANCE:MUTUAL BENEFITSunfairadvantage?hong kong’s newcompetition legislation


WelcomeAs high street insolvenciesmount in the wake of thefinancial crisis, the use of liens islikely to increase. A landmarkjudgment offers some clarity, butcare and advice is still needed,we explain on page 18.Wary banks are retreatingfrom trade finance. Yet, crisisoften conceals opportunity – on page 10 we look atwho could take up the slack.In protection and indemnity (P&I) insurance, too,operators are looking to alternative models, as wefind on page 12. Mutuals, however, are not a newconcept, but offer advantages increasingly relevantin today’s shipping industry.Insurance captives are also receiving moreattention, as we report on page 6. Organisations arethinking again about how best to use captives toincrease efficiency and avoid regulatory headaches.Indeed, regulatory issues are coming to the fore inmany parts of the world, probably as a consequenceof the ongoing economic crisis. We look at HongKong’s proposed competition legislation on page 16.Criticised as not tailored to the territory, the rules arestill to be implemented, offering valuable time toensure compliance.We hope that International Commerce offersuseful insight in dealing with these emerging issues.Richard CrumpSENIOR PartnerHolman Fenwick WillanCover image: GETTYIMAGES This page: GETTYIMAGES, THOMAS MILLER06122INTERNATIONALCOMMERCE FEBRUARY 2013


ContentsContentsFEBRUARY 2013101604 in brief The consequences of a eurozone collapse; increasinglystrict global energy regulation; disclosure of payments;civil aviation in Brazil; the effects of poor harvestson grain exports.06 unlocking captive potential Captive insurers are far from new, but some companies arelooking again at captives to gain efficiencies, release capital,and drive more focused risk and insurance management.10 trade-off? An estimated 80% of world trade is dependent on tradefinance, but those seeking to access funding are facing apotential perfect storm of obstacles. As banks and exportcredit agencies retreat, who will step in?12 UK P&I club: MUTUAL BENEFITS Hugo Wynn-Williams, Chairman of the UK P&I Clubmanagers Thomas Miller, says the organisation’s legacyoffers expertise that continues to benefit its members today.16 unfair advantage?Hong Kong’s proposed competition legislation iscontroversial and may affect companies differently.But there is still time to ensure compliance and influencethe final regulation.18 landmark judgment on liensFocus on liens will increase as insolvencies mount. A recentjudgment has provided some clarity, but liens need to be setup properly and legal advice sought.19 Around the world A snapshot of developments in HFW’s international offices.If you have any questions about the issues raised in this publication, please contact Tania Phayre, Holman Fenwick Willan, on +44 (0)20 7264 8546Produced by Grist,21 Noel Street, Soho, London W1F 8GPPublishing director: Mark WellingsEditor: Tania PhayreDeputy editor: Sam CampbellArt director: Andrew BeswickCommercial director: Andrew RogersonT: +44 (0)20 7434 1447Website: www.gristonline.comHolman Fenwick Willan LLPFriary Court, 65 Crutched Friars, London EC3N 2AE.T: +44 (0)20 7264 8000 F: +44 (0)20 7264 8888© 2013 Holman Fenwick Willan. All rights reserved.While every care has been taken to ensure theaccuracy of the information at the time ofpublication, the information is intended as guidanceonly. It should not be considered as legal advice.Holman Fenwick Willan LLP incorporates the firm’sLondon, Brussels and Shanghai offices. HolmanFenwick Willan France LLP incorporates the firm’s Parisand Rouen offices. Holman Fenwick Willan SwitzerlandLLP incorporates the firm’s Geneva office. HolmanFenwick Willan Middle East LLP incorporates the firm’sDubai office. Holman Fenwick Willan International LLPincorporates the firm’s Piraeus office. Holman FenwickWillan Singapore LLP incorporates the firm’s Singaporeoffice. Our practices in Hong Kong, Melbourne, Sydneyand Perth remain as partnerships. Our São Paulo officeis operated by a corporate entity.Holman Fenwick Willan is the data controller for anydata that it holds about you. To correct your personaldetails or change your mailing preferences, pleasecontact Craig Martin on +44 (0)20 7246 8109,or email craig.martin@hfw.comwww.hfw.comINTERNATIONAL COMMERCE3


NEWSistockimagesTax evaders grounded in BrazilIn June 2012, a task force of Brazilian taxand federal police, in collaboration with theBrazilian Civil Aviation Agency (ANAC), seized21 business jets for alleged tax evasion andsince then they have been targeting a numberof other aircraft.The aircraft were apparently being usedregularly in Brazil, but were registered overseas.Investigations revealed that usage patternsconsistent with Brazilian ownership and usewere established through monitoring of flightsand passenger lists.Banks financing business jets have beencarefully monitoring the situation, workingwith owners and operators to avoid becomingembroiled in any future clampdown by theBrazilian authorities. They are also focusingon structures that would see any aircraftflown for a substantial number of hours withinBrazil registered in that country and properlyimported, with customs clearance documentationconfirming that the current rate of tax has beenpaid. This will be an expensive outlay for owners.In recent months Brazil has been inchingcloser to ratification of the Cape TownConvention on International Interests in MobileEquipment and the attendant Protocol to theConvention on Matters Specific to AircraftEquipment. The ratification is widely seen asa step forward for Brazil in raising its profile inthe aviation industry and sending a messagethat the country is adhering to internationalstandards for aircraft finance. But it remains tobe seen what owners will do when it comes topaying the taxes currently required to importbusiness jets.Uncertainty over the actual terms of the Ukrainian wheat exportban and the dwindling of Russia’s exports after a drought,combined with strong demand from Egypt – the world’s biggestimporter – and a poor 2012 US corn crop, is creating concernsover grain supplies.Legal uncertainty is inevitable. Buyers with Russian-originsupply contracts will be worried about reliability of supply and,conversely, higher prices may tempt sellers to find ways toescape existing contracts in search of new ones on better terms.In the event of an outright ban, sellers can generally rely on a prohibition clause in theircontract. The standard GAFTA prohibition clause allows a seller to cancel a contract as a result ofprohibition of export or an executive or legislative act.Force majeure clauses and the common law doctrine of frustration should be considered.However, where rising commodity prices have simply made it more difficult or expensive for oneparty to perform the contract, this will not be regarded as a force majeure or frustrating event,unless such conditions are expressly referred to in a force majeure clause.www.hfw.comRestrictions and poorharvests affect grain exportseventsDiaryTrade Finance ConferenceGeneva, 28 February 2013HFW is co-sponsoring this trade and shipping forum. Anumber of HFW Partners will present at the conference,which will focus on the key issues affecting global trade.HFW Commodities Breakfast BriefingLondon, 12 March 2013HFW is hosting the second in its spring seriesof Breakfast Briefings. HFW Partners and Associateswill present on a range of topics.Global Grain AsiaSingapore, 12–14 March 2013HFW is again sponsoring this annual event, during whichHFW Partner Stephen Thompson will be presenting.CHC Safety and Quality SummitVancouver, 18–20 March 2013HFW is sponsoring this annual conference which focuseson improving aviation safety worldwide. HFW PartnersNick Hughes and Peter Coles will attend.Mining Claims SeminarLondon, 19 March 2013HFW is hosting a seminar focusing on insurance andreinsurance issues in the mining sector. HFW Partner PaulWordley will chair the event and Harry Riley, Editor of Rileyon Business Interruption, will give a keynote presentation.Sea Asia 2013Singapore, 9–11 April 2013HFW is sponsoring the offshore session. HFW PartnerPaul Aston is part of the panel, which will focus on thedevelopment of the the Asia Pacific offshore sector.International Arbitration Seminar SeriesAustralia, Hong Kong & London, March & April 2013HFW is hosting a series of International ArbitrationSeminars focusing on key considerations for choosing anarbitration jurisdiction. HFW Partners Julian Sher, ChrisLockwood, Nick Longley, Peter Murphy and DamianHoney will be presenting.For further details, please contactSarah Vertanness, Events Manager:Telephone: +44 (0)20 7264 8324Email: events@hfw.comINTERNATIONAL COMMERCE5


Unlockingcaptive potentialCaptive insurers are a far from new concept, but some companies have takena fresh look at how they use them: to gain financial and tax efficiencies, releasecapital, and drive more focused risk and insurance management.Words stuart collinsTraditionally, captives have been formed inresponse to periods of market hardening,when a shortage of capacity saw coverlimited or withdrawn, and the cost ofcommercial insurance rocket.A buyers’ market for commercial insurance is, thus,generally not conducive to growth in the captivemarket. However, as companies have grown in size,complexity and geographical spread, captives haveproven to be an important risk management and risktransfer tool. The past 30 years have seen a trendtowards captives.Undoubtedly, captive use has matured, evolvingsteadily to reflect changing risk management practices,insurance regulation, the vagaries of the insurancemarket and international tax legislation.Tax benefits are no longer the key reason forestablishing a captive. The tax benefits associated withthe offshore domiciles favoured by most companieshave been eroded by controlled foreign corporation(CFC) legislation, although the high water of CFCrestrictions is now receding. Yet, captives still offer taxbenefits through the treatment afforded an insurer withregard to loss reserves for incurred but not reportedclaims.Captives remain a prudent safeguard against violentshifts in insurance pricing, but most companies todayview them in a wider context, as part of their overall risk6INTERNATIONALCOMMERCE FEBRUARY 2013


insuranceFor many companies, captives are not on their urgent list ofthings to do, but they need to think smart about how they usetheir captives, and not just allow them to drift along.richard spiller, Holman Fenwick Willanistockimagesmanagement and controls, and to optimise theirinsurance purchasing whilst making cost savings.“There are two big trends in the captive sector atthe moment – increasing levels of self-insurance andcaptive rationalisation,” says Paul Wordley, GlobalHead of HFW’s insurance and reinsurance group.“As large organisations rely less on insurance theytend to retain more risk. We also see a number ofcompanies looking to rationalise their captives toreduce costs and free up capital and managementtime where possible.”Changes in the business environment andregulatory landscape may require occasionalchanges in captive strategy, says Richard Spiller,Partner in the insurance transactions and regulationteam at HFW. Right now, companies are looking forefficiencies and cost savings, and this hasimplications for captives. “Companies need to thinksmart about how they use their captives, and not justallow them to drift along,” Spiller adds. “For manycompanies, captives are not on their urgent list ofthings to do, but they do need a regular spring cleanto ensure that they are being used in the mosteffective way and that they meet the company’s riskmanagement and financial objectives.”ConsolidationMergers and acquisitions, for example, have leftmany large corporates with more captives than theyneed. “Companies do not need five captives whenonly one or two will do,” says Wordley. A number oflarge companies, including Shell andGlaxoSmithKline, have restructured their captives inrecent years, consolidating, merging, migrating andclosing captives.The ease of winding-up a captive is dependent onthe jurisdiction and the state of the captive’s records,says Spiller. Some jurisdictions allow assets andliabilities to be transferred through court- orregulator-sanctioned mechanisms, while reinsurersare increasingly offering products targeted atcaptives. “There is now a market for buying captivesand there are a number of products and techniquesthat can release capital.” One insurer has evendeveloped a virtual captive concept that provides adegree of risk transfer but without the administrativeburden of owning a captive, he says.“There is an increasing trend to move captives todomiciles which have tax treaties with the parent’shome territory or where they are able to underwriteonshore without the need for fronting insurers,” saysSpiller. Captives are unable to underwrite risks in countriesthat insist insurance contracts be issued locally, requiringfronting insurers to provide local policies andadministrative services for a fee. “The frictional costs ofusing fronting insurers are increasing, driven by higherregulatory costs. Fronting fees are increasing and insurersrequire greater security in the form of collateral forreinsurance risks ceded to the captive. Where long-tailrisks are involved, the collateral costs can be substantial.”Regulatory pressuresThe changing regulatory environment for insurers is alsohaving an impact on captives, especially those domiciledwithin the EU, such as in Dublin, Gibraltar andLuxembourg.Europe’s proposed new capital and risk managementregime for insurers, Solvency II, will, in principle, notdifferentiate between captives and commercial insurers,potentially increasing the cost of capital and administrationfor captive insurers. “Like insurance companies, captivesWhat is a captive?Captives have been around in some form since the 1920s, and the principlesof pooling risks can be traced back to maritime traders in the 1500s. But thedevelopment of the modern captive market is credited to Frederic M. Reiss, a USinsurance broker. He coined the word ‘captive’ in the 1950s and took the concept toBermuda, which from the 1960s became the leading offshore domicile for captives.The concept was slow to take off, but accelerated in response to shortages ofinsurance cover and increased rates during the US liability crisis of the 1980s and1990s, and again following the September 11, 2001 terrorist attack.Ratings agency AM Best estimates that there are in excess of 5,000 captivesworldwide today, compared with 1,000 in 1980.Captives are typically formed to provide insurance to a parent company,although they can offer insurance to third parties such as contractors, suppliers andcustomers. Captives are also sometimes owned by multiple companies that havecommon risks, such as a group of energy companies or charities.Traditionally captives have been located offshore – Bermuda, Cayman Islands,Barbados and Guernsey have historically been the most popular – but in recentyears the trend has been towards onshore domiciles in the USA and Europe asjurisdictions pass specific captive legislation.The vast majority of Fortune 500 companies own at least one captive, andare most prevalent in finance, healthcare, real estate, construction, energy andmanufacturing.www.hfw.comINTERNATIONAL COMMERCE7


insuranceCompanies are looking to rationalisetheir captives to reduce costs and free upcapital and management time.Paul Wordley, Holman Fenwick WillanCase study – captives in miningThe past five years have seen anunprecedented level of large losses inthe mining sector, in particular relating toflooding in Queensland Australia in 2008,2010 and 2011. In 2011 alone, there werean estimated $3 billion of insured lossesfrom some 60 catastrophe and operatingclaims, which included earthquakes, floods,explosions, fires and machinery failure.Several claims since 2007 have endedin protracted disputes, prompting a reactionfrom both insurers and insureds.High commodity prices have led to aballooning of business interruption (BI) costs,which historically account for a significantproportion of mining property claims. As aresult the insurance market has steppedback and the supply of insurance coverhas become limited and more onerousclauses or exclusions are being applied,especially for certain perils and risks suchas large BI exposures resulting from naturalcatastrophes.“Large mining companies have had toreflect on their appetite for risk retention, whichhas resulted in the greater use of captives insome instances,” says Richard Jowett, HFWinsurance and reinsurance Partner.Mining companies can use captives toprovide BI insurance cover that insurersare no longer willing to provide, at least atadequate limits and at acceptable terms.Going globalAs companies have gone global, captives haveproven to be a useful tool for centralising riskmanagement and underpinning an internationalinsurance programme. As part of a global programme,captives can help provide consistency of cover –between local subsidiaries and the corporate centre.“There is also a trend toward companies introducing aContract certainty and claims handlinghave become important issues: byself-insuring through a captive, miningcompanies are able to reduce the potentialfor conflict and misunderstandings overcover. Captives can tailor insurance to bettermeet specific needs, for example, policiesfocused on the impact of weather, such asthe many different ways flooding can effect acomplex operation like mining.Captives can also help miners gain morecontrol of the claims process, which canreduce or eliminate the risk that an insureror reinsurer – with just a small percentage ofthe risk – can drive the claim.We are also seeing some companiesusing captives to encourage operating unitsto take greater responsibility for risk and toencourage ownership of risk issues, saysJowett.“For example, a captive might providea high level of cover, but it only kicks inat a high level. The individual businessunits have very high deductibles, so areeffectively self-insuring for all the smallerclaims,” he says. “The captive is operatinglike an insurance company, but is very muchpart of the organisation’s enterprise riskmanagement. The high deductible cover thecaptive is offering becomes a driving forceto encourage risk management rather thanrisk transfer.”For more information,please contactPaul Wordley, Partner,Holman Fenwick Willan,+44 (0)20 7264 8438paul.wordley@hfw.commechanism that deals with core wordings versusthose used by policies issued by fronting insurers,”says Wordley.Claims protocols can also be established within acaptive to better suit the characteristics of theorganisation, and to reduce the likelihood of disputes,says Wordley. “Policies need to reflect the desire toavoid conflict and embrace the spirit of cooperation.Escalated dispute resolution is key – by setting up adispute resolution process for management and makingclear what is and what is not insured, it is possible toavoid unnecessary disputes and confrontation.”Captives also have an important role in managingretentions by providing in-fill cover to parentorganisations where the insurance market does notprovide a solution. For example, if the marketinsurance contained a deductible of $5 million perclaim subject to an aggregate deductible of $10million, the captive could insure $4.5 million per claimup to an aggregate of $9 million. The captive couldthen purchase aggregate reinsurance protection in themarket of $5 million excess of $4 million, thus limitingthe group’s aggregate annual retention to $5 million.As the surplus within the captive builds up, the captivecan reduce its reliance on reinsurance and retain moreof the risk itself.The largest companies in sectors like energy,finance and now mining are buying insurance moreselectively, limiting insurance purchase to compulsoryclasses and risks where insurers provide value-addedservices such as specialist claims-handling expertise.Since they are much larger than their insurers, thelevels of catastrophe risk cover required by suchcompanies are beyond the capacity of the insurancemarket to provide it. For example, the world’s fivelargest companies each have a market capitalisationgreater than the combined US property/casualtyinsurance industry.In the current business environment, it is even morepertinent for risk and insurance managers to undertakea regular review of their captive operations.Captives will continue to evolve with changingapproaches to risk management, tax and regulation,so risk managers need to periodically assess theircaptives in terms of fitness for purpose, asking if theyare operating efficiently and achieving their riskmanagement, financial and fiscal objectives.• Stuart Collins is former Managing Editor of Insurance Day and Deputy Editor of Business Insurance Europe.www.hfw.comINTERNATIONAL COMMERCE9


trade-off?An estimated 80% of world trade is dependent on trade finance, but thoseseeking to access funding are facing a potential perfect storm of obstacles.As banks and export credit agencies retreat, who will step in?Words simon watkinsThe USA faced the prospect of falling off afiscal cliff at the end of last year and at theeleventh hour postponed the problem toFebruary 2013 rather than address it; China’seconomic growth rate has been dwindling; and theeurozone often seems on the brink of collapse –liquidity in the global markets has rarely been tighter.New regulations on capital requirements for financialinstitutions that were originally due to come into forceat the start of this year also complicate the situation:although the EU and a number of countries are late inimplementing the regulations, once they are in forcethere will be far-reaching consequences for capitalallocation in general, and trade finance in particular.The Basel III accord will have a significant impact ontrade finance, says Robert Finney, HFW Partner. Theaccord, which was scheduled to apply from 1 January2013, lays out much more stringent rules for financialinstitutions’ capital adequacy, leverage and liquidityrisk. Basel III rules are general and apply to variouskinds of banking activities including such safe activitiesas trade finance and activities widely perceived asrisky, such as exotic derivatives trading. “Basel IIIlargely standardises the treatment of on- andoff-balance sheet assets in calculating the newleverage ratio that will apply from 2018, but bereported on from 2015,” explains Finney. “This is waytoo pessimistic a view for most trade finance deals.”In fact, the 2008–11 default rate for letters of credit(LOC), which are the foundation of trade in manyemerging markets and low-income countries, wasaround 0.8%, and the rate of loss was around 0.08%,but the view of the Basel Committee on BankingSupervision is that the leverage ratio should be simpleand rely on gross- rather than risk-weighted exposures.Pushing players outBasel III’s goal of preventing financial institutions frombuilding up leverage beyond a certain point, both onand off their balance sheets, presents furtherSwissCantonal Banksand some in theMiddle Easthave been notableexceptions.Damian Honey,Holman Fenwick WillanFor more information,please contactRobert Finney, Partner,Holman Fenwick Willan,+44 (0)20 7264 8343robert.finney@hfw.comobstacles. “Trade finance deals are grouped in withmuch riskier asset classes for leverage ratiopurposes, so all off-balance sheet trade finance dealshave to be converted at a rate of 100% for onbalancesheet capital requirements, compared to the20% rate that applies in calculating risk-based capitalrequirements,” says Finney. “If you have $1 billion inoff-balance sheet trade finance deals, this will countas $1 billion of on-balance sheet exposure for thepurposes of calculating the leverage ratiorequirements.”This will particularly hit LOCs, which, of course, areoff-balance sheet items. The requirement that certainbanks must calculate risk-based capital requirementsas if these credit exposures last at least one year onlyworsens the overall treatment of trade instruments.The time risk of trade finance deals is typically onlyaround 90 days. This means that, in so far asleverage ratio will drive their capital requirements,banks will need to keep capital for exposures whichare considered longer than they actually are, that isthey will need to keep more capital in reserve. VitaliyKozachenko, HFW Associate, explains that the effectof this rule was mitigated in late 2011 when the BaselCommittee decided to waive the ‘one year maturityfloor’ for those banks that use the advanced internalratings based (AIRB) approach to weighting assets forcredit risk purposes. Following intense industrypressure, the Committee agreed that it isinappropriate to apply this floor to short-term,self-liquidating trade finance instruments and thatcalculation of capital requirements should be basedon the effective maturity.Fortunately, the recent changes announced by theBasel Committee to the short-term liquidity coverageratio (LCR), will also help trade finance. The changes,widely reported as a weakening of the Basel IIIliquidity framework, will allow domestic regulators toapply ‘relatively low’ run-off rates (or outflowassumptions) to contingent funding obligations10INTERNATIONAL COMMERCE FEBRUARY 2013


trade financeCORBISarising from certain credit and liquidity facilitiesincluding trade-related obligations directly underpinnedby movement of goods or the provision ofservices, documentary trade LOCs and shippingguarantees.Regional refusalBasel III’s global reach is accompanied by relatedlegislation (the US Dodd-Frank Wall Street Reformand Consumer Protection Act 2010, and the upshotof the UK’s Vickers Report 2011) that all imply greatercapital requirements, less leverage, and moretransparency. Many big banks are having to choosebetween putting capital towards their trade financeoperations or moving it to other areas, which have thepotential to make greater returns. US, European,Asian and Middle Eastern banks are all under thesame Basel III-type strictures; trade finance is not anarea that many wish to prioritise any longer. The risingprice of commodities over the past few years ties upincreasingly large amounts of capital, especially forAsian banks.Rabih Bleik, Head of Trade Finance for NationalBank of Abu Dhabi in Geneva, says the effect of BaselIII on European banks has been exacerbated by thebroadly deteriorating euro–dollar exchange rate.“Global trade finance is basically US dollardenominatedso when that strengthens, as it hasbeen doing broadly over time against the euro, thenthe strain on European banks’ capital is even greater,as they suffer from rising exchange rate costs, as wellas rising cost of capital. Major Middle East banks whohave dollar-pegged currencies and available liquidityare becoming more prominent players and increasingtheir market share,” he says.Damian Honey, HFW Partner, confirms that themajor Middle East banks alongside the SwissCantonal Banks have been noticeable exceptions to40% is thepossible drop intrade in the post-Basel III world.Global tradecould drop by atleast 2% in termsof volumes andby 6% in termsof trade financeavailable.Global GDPcould fall by0.05% to 0.15%per year in themedium term,according to theOECD.this general trend. These banks did not dabble soextensively in the credit derivatives that decimatedmany other regions’ banks (in the Swiss case due togeneral prudence, and in the Middle East because ofprudent risk management and also for some Islamicbanks due to Islamic finance rules forbiddingspeculative activities), and consequently have soundbalance sheets from the Basel III perspective. Also,they have been able to hire staff leaving banks thatare downsizing their trade finance departments.A way forward?The cost of trade finance as a whole could increasesignificantly without other sources of finance. Exportcredit agencies (ECAs) currently finance orunderwrite about $430 billion of business activityabroad. However, Matthew Parish, HFW Partner,says that there is no sign of their taking up the slackleft by the banks – they are caught up in the newregulatory malaise.The quick reactions demanded by trade financeand the OECD regulations, which often take the viewthat ECAs should avoid concentrating in one area forfear of providing unfair advantages, complicate thesituation.Spencer Gold, HFW Associate, says there aresigns of increasing activity from other institutionalplayers, such as trading houses, insurancecompanies, pension funds and hedge funds, as theyseek to fill the gap which is left by more traditionalfinance providers. Through appropriate structuringand security arrangements, the market hopes to seemore activity from these entities, who may not be asconstrained as fully regulated financial institutions.This, of course, will involve the scaling-up ofinvestable trade finance packages, and a broaderand deeper secondary market. But there areopportunities in tapping this sector for liquidity.• Simon Watkins was named Freelance Journalist of the Year 2012.www.hfw.comINTERNATIONAL COMMERCE11


UK P&I CLUB:MUTUAL BENEFITSHugo Wynn-Williams, Chairman of the UK P&I Club managers Thomas Miller, saysthe organisation’s legacy offers expertise that continues to benefit its members today.Words sam campbellThe UK P&I Club is one of the oldest in theworld, having built expertise across theglobe since being founded in 1869. Ofcourse, shipping has changed considerablyin that time, moving away from sail and steam totoday’s much larger high-tech ships. The cover haschanged too – in Victorian times, crew liabilities weresmall and environmental responsibility an almost alienconcept. Liability regimes have gradually increasedthe pressure on shipowners.Nevertheless, “ships are still carrying cargo from oneend of the earth to the other,” says Hugo Wynn-Williams, Chairman of the UK P&I Club managersThomas Miller. “The liabilities created have always beenaround: injuries, damage to cargo, collisions.”He says that complexity has grown but drawsattention to some enduring legacies, such as paperbills of lading. “Despite the incredible sophistication ofsome ships, the electronic age still has yet to takeover – at the heart of most cargo voyages, thedocuments are much the same as 100 years ago.“At its heart, insurance is about keeping shipstrading. That hasn’t changed, although the amount ofinsurance needed and the amount of reinsurance wehave to buy has increased exponentially.”Common interestInsurance, especially protection and indemnity (P&I)cover, is vital. P&I insurance offers owners or operatorsof ships protection from the third-party liabilities andexpenses from incidents such as personal injury, cargoliabilities, loss of personal effects and property (otherthan cargo), diversion, environmental pollution,collision, wreck, fines and legal costs.Chauncy MaplesThe Chauncy Maples, a ship almost thesame age as the UK P&I Club and witha fascinating back story, offered a “nearperfect way to celebrate our anniversary”,says Hugo Wynn-Williams, Chairman ofThomas Miller (see photo essay over thepage). “We saw that if we could renovatethis ship, we had the opportunity to dosome real good in Malawi – a countrythat ranks among the poorest in theworld.”Both the ship and the bishop it isnamed after are well known in Malawi.Soon to be reborn as a floating clinicoffering the priceless gift of health tothousands, the ship will help locals avoidThe sums covered can be enormous and the coverextremely complex.Some choose to source this protection from fixedpremium insurers but mutual insurance offersadvantages. “A mutual is an insurance companyowned by the assureds, as opposed to shareholders.At the UK P&I Club, the board is drawn from ourmembers so the cover that is provided should beadapted to meet the need of the members,” saysWynn-Williams.Mutual insurance means that risk is shared withlike-minded individuals, Wynn-Williams explains.the risks of travel by dugout canoe,including attacks from crocodiles andhippos. With a shallow draft of only twometres, the Chauncy Maples can accessmost areas of the lakeshore, carrying acrew, a medical team and equipment forprimary healthcare.Thomas Miller and the clubs it manages(including the UK P&I Club) have donatedover £500,000 in cash and services tothe project. Holman Fenwick Willan, forexample, is one of the top three donors,having passed more than £60,000 in cashand £40,000 in ongoing pro-bono work.The Chauncy Maples project should befinished in early 2014.12INTERNATIONAL COMMERCE FEBRUARY 2013


P&I insuranceThe liabilities created bycarrying cargo have always beenaround: injuries, damage tocargo, collisions.Hugo Wynn-Williams, Chairman of the UK P&I Clubmanagers thomas miller“Members may be competing with each other but interms of liability exposure they have a common interest.“We are able to provide levels of cover that wouldotherwise not be available in the commercial market atcost and, because we are not driven by the profitmotive, we can be more flexible in providing covers thatwould otherwise be unprofitable.”A striking example of this is ‘omnibus cover’: thediscretion to pay claims that are not expressly covered.Wynn-Williams notes that this “distinct advantage” hasits roots in the historical need for such cover. “Ourorganisation is based on a nineteenth century model andit continues to work well,” he says.Size and strengthYet, the incoming Solvency II directive could change theface of mutual insurance. “Mutuals have actually begunto talk about capital rather than reserves. Traditionally, amutual wouldn’t have had capital,” Wynn-Williams says.The best remedy may be size: “As a mutual, thegreater your scale, the more efficient you can be withyour capital. Size also allows greater flexibility in riskappetite and more risk retention before buyingreinsurance.”The UK P&I Club is one of the largest mutual marineprotection and indemnity organisations, currentlycovering around 118 million tons of owned ships and 80million tons of chartered ships from more than 50countries. The Club is financially strong; its current S&Prating ‘A-’ with a ‘positive’ outlook.Members enjoy the lower premiums this stabilitybrings but Wynn-Williams emphasises that theadvantages of scale are about more than just money.The UK P&I Club has developed specialist skills andexpertise to a level of sophistication seldom seen in thefield. It can also offer diverse opportunities, helping itattract talent. But there are potential downsides to beguarded against. “We have to ensure that, while takingthose economic and financial advantages, we are notthrowing away the personal service. We have the mostextensive network of regional offices, for example.”In fact, this regional approach is vital, Wynn-Williamssays. “There is no doubt that a Japanese shipowner’spriorities may look different to a Greek shipowner’spriorities so it is very important that P&I clubs continue toprovide a non-commoditised service. One way to do thatis bring service to their doorstep and speak theirlanguage, seeing them both on a business level and on asocial level.”Heading off claimsMoving forward, Wynn-Williams says mutuals are havingto deal with fewer attritional claims but more large,‘spiky’ claims. He adds that, with around 80% of claimsdue in some way to human error, risk management andprevention, such as the UK P&I Club’s high-level lossprevention programme, is taking a more central role.The present economic climate means advice thathelps reduce costs and insurance premiums, such asin-depth risk profiling tailored to a fleet, is well received.Anticipating and reacting to future changes in themarket is crucial. “There is a paradox: in the short termrecessions seem to bring claims down as there seems tobe less commercial pressure and people make fewermistakes. But in shipping booms P&I clubs see moreclaims. P&I clubs have to be careful that, when claimspick up, they aren’t left unprepared. You need to be aliveat this point in the cycle.”www.hfw.comINTERNATIONAL COMMERCE13


• Sam Campbell writes for clients including The Guardian andThe Economist and specialises in editing business publications.The Chauncy Maples story1In 1874, a 22-year-old ChauncyMaples arrived in Central Africa(today divided into Mozambique,Tanzania and Malawi). He continuedhis work as a missionary until 1895,when he returned to the UK and wasmade a bishop. On the returnjourney, at the very last stage, as hecrossed Lake Malawi to theheadquarters of the mission he wasto head, his boat sank in a storm.Perhaps weighed down by his heavybishop’s cassock, Chauncy Mapleswas the only one of 15 passengersto drown.2An eponymous ship was built inhis memory in Glasgow in 1899by Sir John Barrie and Henry Brunel,son of Isambard Kingdom Brunel,also the engineers of Tower Bridge.The ship was constructed ina factory, not a shipyard, anddismantled before being shipped toAfrica and taken up the Zambezi andShire rivers on a barge.3The 3,481 boxes, each around25 kilos, were then shoulderedby porters who walked the 350 milesof uncharted land to Lake Malawi.The boiler, which weighed 11 tons,was pulled by 450 people.Unfortunately, the carefully numberedparts had been galvanised over,meaning the precision assemblybecame a painstaking jigsaw puzzlethat took two years to complete.4From 1901 until the mid-1950s, the Chauncy Mapleswas a mission ship, featuring afloating school, a church and a clinic.An interlude in the First World Warsaw the ship become a troop/gunship when Tanzania becameGerman East Africa, but the biggestchange came when the ship wassold in 1953.5Chauncy Maples was used as afishing trawler before beingbought by the Malawi government. In1967 she was refitted as apassenger and cargo vessel: manyMalawians still remember travellingon her to school or work. A lack ofmaintenance saw her slip intoobscurity until the Chauncy MaplesMalawi Trust was formed totransform her into a floating clinic.6Phillipe Stark and MartinFrancis, the well-known yachtdesigners, have helped redesign theChauncy Maples for the 21stcentury. Only the hull will be reused,complemented by an aluminiumsuperstructure that will be sent toAfrica as a ‘flat pack’.7Chauncy Maples will visit 20villages on the north-west shoreof the lake in a monthly rotation,sending a medical team ashore in asmaller boat to offer GP-styleservices: curative and preventativemedicine, especially treatment forHIV/AIDs, malaria and TB. They willalso provide ante-natal care,distribute condoms and mosquitonets and give inoculations. There area mere 250 doctors in the whole ofMalawi for around 15 million people,so the Chauncy Maples will bestaffed by nurses.14514INTERNATIONAL COMMERCE FEBRUARY 2013


P&I insurance2 3The stripped downChauncy Maples onLake Malawi67www.hfw.comINTERNATIONAL COMMERCE15


Competition lawin Hong KongThere will be winners and losers with Hong Kong’s new competitionlaws. But companies still have time to ensure compliance and seize avaluable opportunity to influence the final regulation.Words polly botsfordEvery year, the World Bank ranks the world’seconomies according to the ease of doingbusiness there; in the 2013 Doing Businessreport Hong Kong was second only afterSingapore. A new competition law introduced in HongKong should ensure that the city retains its leadingedge. But the laws are complex and sanctions fornon-compliance are heavy – the Bill has been hotlydebated inside and outside Parliament since it wasfirst introduced two years ago.Though not yet in force, the Competition Ordinancewill prohibit anti-competitive practices betweenbusinesses, such as price-fixing, bid-rigging orallocating customers, and any abuse by a companyof its substantial market power in its sector, such aslimiting production or so-called predatory behaviourtowards competitors.Wrong fit?The Hong Kong law is based on existing tried-andtestedEU and Australian competition laws, enablingHong Kong to conform to internationally recognisedstandards. But this also means that the rules have notThe science of complianceThree steps can help ensure a business is compliant with competition rules:1. Risk assessment – undertake a full audit of the business to analyse allpractices and arrangements with competitors and other players in the sectorregarding price, distribution and other factors.2. Take early action – if the audit raises any particular concerns, changepractices.Companieshave a goodopportunity to gettheir messageacross aboutconcerns on aparticular aspectof the law or itsimpact on theirbusiness.Nick Luxton,Holman Fenwick Willan3. Implement robust compliance policy – the policy must be tailored to therisk areas and ‘red flag’ key issues. Training on policy is key.been tailored to suit the Hong Kong economy.The British Chamber of Commerce in Hong Kongraised this potential issue during the Bill’s gestationperiod, says Timothy J. Peirson-Smith, Chair of theBusiness Policy Unit at the Chamber. “The EU andAustralian laws are highly complex and for large andcomplex markets. Hong Kong is a small city state andthe law is not bespoke, and has not been thoughtthrough to suit Hong Kong’s needs.”For multinationals operating in Hong Kong, newrules may not be such a problem because thesecompanies also operate in those jurisdictions wherecompetition legislation is well known so they arefamiliar with the laws and their interpretation, and willalready have systems in place to ensure compliance.But there are plenty of businesses that do notoperate in other markets and are unversed incompetition law. Indeed, the Hong Kong GeneralChamber of Commerce, which represents 4,000 HongKong businesses, has called the new law “far fromdesirable”.The vast majority of Hong Kong’s businesses arelocal small- and medium-sized enterprises: thegovernment estimates that 98% of all operations areSMEs. Many will have had little exposure to the rigoursof competition jurisprudence and there has beenconfusion about whether or not they fall into one of theOrdinance’s exemptions. The government did makeconcessions during the passage of the Bill exemptingcertain categories of business, but the exemption isqualified.Peirson-Smith explains: “The government gave theimpression that SMEs were exempt from the lawcompletely. They are not. They are only exempt fromaction being taken against them in relation tonon-serious, ‘non-hardcore’, anti-competitivepractices, but only then if their annual turnover is below16INTERNATIONAL COMMERCE FEBRUARY 2013


hong kongthree-year maximum). It can also take away any illegalprofits that have been made. Directors and otherofficers can be separately fined or disqualified fromoffice for a period of up to five years. A person whoobstructs a competition investigation is at risk of a fineor imprisonment. On top of all this, there may befollow-on actions by private parties once a Tribunalhas made a finding of an infringement – as has beenseen in the airline industry in the EU.GETTYIMAGESHK$40 million (US$5 million).” Peirson-Smith predictsthat many of these businesses will be significantlyimpacted and may even have to rethink their businessmodel completely to be competition compliant.There is also concern about whether a business’sparticular practice will fall within the definition ofanti-competitive behaviour. Clearly, arrangementssuch as price-fixing or bid-rigging will be deemedanti-competitive. But there is an area where it is notclear on which side of the line a practice will fall. In theinternational shipping and aviation industries, forexample, there may be pricing agreements forreasons of market efficiency, or research anddevelopment agreements in the absence of whichR&D would be prohibitively expensive. Then thequestion turns on whether or not such agreementsmay be exempted from the rules.Getting it wrong has serious repercussions. TheCompetition Tribunal will have considerable sanctionsavailable to it. Fines can be levied, which are up to10% of turnover in Hong Kong for the whole timeduring which the infringement occurred (with aTowering advantage?Some claim the rules givebig firms the upper handFor more information,please contactNick Luxton, Associate,Holman Fenwick Willan,+852 3983 7774nick.luxton@hfw.comMalleableNevertheless, in some respects, the Hong Konggovernment has taken a conservative approach to theconcept of competition law, as Nick Luxton, an HFWAssociate observes: “Elements of competition lawhave not been introduced – the rules do not includemerger activity except in the telecoms sector, wherethere were already rules in place, nor do they allow forindependent litigants to bring cases other than asfollow-on actions to the Competition Commission, theinvestigating body. The government is cautious inenacting new legislation and doesn’t come to itlightly.”Some of the issues will be clarified during the nextstage of the process. In order for the Ordinance to bebrought into force, the Commission needs to beestablished, as does the tribunal that will decide casesand enforce them. The Commission must also publishmore detailed guidance.Until these agencies are up and running, however, itis hard to predict how robust their attitudes will be.But businesses would not be advised to take await-and-see approach. Anthony Woolich, a HFWPartner, says thinking ahead is crucial. “Companiesneed to ask themselves some questions about theirpractices, about any joint ventures or associationsthey have entered into. Then they have time to changethings internally.”Also, given that there is still so much that has to beworked through, such as on the guidance, there is awindow to try to engage with the process andinfluence the outcome, Luxton says. “Companies andsectors have a good opportunity to get their messageacross about concerns that they have on a particularaspect of the law or its impact on their business, orwhether their particular agreement is efficient ratherthan anti-competitive.”Nor is it all bad news for everyone. Competitionshould deliver benefits to consumers and theeconomy as a whole, and should also attract newentrants to markets in some of Hong Kong’s busiestsectors such as real estate, construction and retail,and enable barriers to be broken down. As Woolichconcludes: “The new rules need not be bad forbusiness; they are an opportunity.”• Polly Botsford is a legal and current affairs journalist.www.hfw.comINTERNATIONAL COMMERCE17


opinionLandmark judgment onliens gives support totransport operatorsFocus on liens will increase as high street insolvencies mount,warns Holman Fenwick Willan associate Matthew Wilmshurst.While a recent judgment has provided some clarity, liens needto be set up properly and legal advice sought.iStockphotoLiens, which give rights over a debtor’sproperty when in the possession of acreditor, can help logistics providers, butcould be an obstacle for logistics buyers.The use of liens has been increasingly common inthe past 18 months as the number of retailcollapses rises in the current harsh economicclimate, causing problems for both logistics buyersand providers.If goods are in transit when a retailer goes intoadministration, a lien may be the best route for thelogistics provider to ensure payment. Liens becameheadline news with the recent notable success forthe freight forwarder in the landmark English HighCourt case Re La Senza.Administrators had initially demanded thatUniserve, who handled the carriage of goodsbought from overseas by La Senza, deliver upgoods with a value of about £2.2 million, without anindemnity for third-party claims or the immediatepayment of Uniserve’s charges. However, the rulinggave Uniserve permission to enforce its general lienand sell La Senza’s goods in accordance with itsterms and conditions. The judge awarded costsagainst La Senza, the lingerie chain that was onceowned by Theo Paphitis of BBC’s Dragon’s Den.ClarityThis judgment finally gives freight forwarders, carriersand road hauliers clarity as to when they can enforcetheir general lien clauses against administrators. Mostsuch disputes end in negotiated settlements but, forthose who have to litigate in similar circumstances,two lingering areas of doubt have been cleared up: acourt can enforce a general lien under themoratorium imposed on liens by the Insolvency ActA lien maybe the best routefor a logisticsprovider to ensurepayment.Matthew Wilmshurst,holman Fenwick WillanFor more information,please contact MatthewWilmshurst, Associate,Holman Fenwick Willan,+44 (0)20 7264 8115matthew.wilmshurst@hfw.com1986, and a court will not order administrators todeliver up goods without an indemnity protectingthe forwarder or carrier from consequent costs andthird-party claims.Overseas, laws relating to liens vary. Courts insome jurisdictions tend to give shippers morerights than they would have under English law, andcan be reluctant to recognise liens. This year wehave encountered several cases where a supplierfrom the Indian subcontinent or Asia has signedup to English law contracts with a UK retailer andalso with the logistics provider; the lien isundoubtedly valid under English law but the localcourts have thrust those matters aside and, usingvarious technicalities, ruled in favour of the shipperrendering the lien ineffective.Seek adviceIs there a threat from banks with fixed and floatingcharges over the insolvent company’s assets? Notmuch: the lien is a type of security over assets thatare not permanent features such as buildings,which are normally the subject of fixed and floatingcharges. It is not permitted to enforce any type ofsecurity (including a lien) against a company onceit goes into administration without the permissionof the court but, as some of the legal pointsrelating to exercising liens still remain undecided inlaw, they could arguably be considered to put thelogistics provider in a better position than banksand corporate lenders with fixed or floatingcharges.It remains unarguable, however, that each casehangs on its own facts; liens need to be set upproperly. Legal advice should be sought at thefirst sign of difficulty.18INTERNATIONAL COMMERCE FEBRUARY 2013


global newsHFWaround the WORLDA snapshot of developments involving Holman Fenwick Willan’s lawyers.1 SingaporeObituary: Bill KerrHFW is deeply saddened to announce the deathof Bill Kerr, a Partner in the firm’s Singaporeoffice. Bill was killed on 30 December 2012 in atraffic accident in the Philippines. An ex-mariner,he specialised in handling all forms of marinecasualties and insurance, and was recognised byleading legal directory Chambers as ‘one of thetop wet lawyers in the business’. Our thoughtsand condolences are with Bill’s family and friendsat this very sad time.2London, Dubai and Hong KongHFW wins important industry awardsJames Gosling and Richard Neylon were awardedthe Lloyd’s List Global Maritime Lawyer of the YearAward, a reflection of their team’s pioneering workin resolving issues relating to marine piracy. ALBThe Brief awarded HFW’s Dubai office theShipping Law Firm of the Year 2012 Award andalso, for the eighth time in nine years, the firm hasbeen awarded the ALB HK Shipping Law Firm ofthe Year Award in recognition of excellence andoutstanding achievements.3SerbiaHFW advises Serbian state-owned gascompany Srbijagas on loan dealsA HFW team led by Partner Alexis Kyriakoulishas advised the Serbian state-owned gascompany JP Srbijagas on loans to be providedby Deutsche Bank and Amsterdam TradeBank, part of the Alfa Group. The loans,backed by Serbian state guarantees, arebeing provided following a formal tender runby the company to secure a total of €190mfrom domestic and international banks.42553221664 LondonHFW advises Sonali Bank (UK) Ltd on financingfor Biman Bangladesh AirlinesA HFW team of corporate and regulatory lawyershas advised Sonali Bank (UK) Ltd on financingpre-delivery payments for two Boeing 777-300ERaircrafts for Biman Bangladesh Airlines. HFW’steam, led by Partner Adam Shire, advised on anumber of regulatory aspects from an FSAperspective and liaised with local counsel onBangladeshi requirements.5 Paris and LondonHFW strengthens insurance andreinsurance practicePierre-Etienne Kuehn, formerly the Headof Legal and Compliance at AXA Group,joins the Paris insurance and reinsuranceteam as a Partner, while John Barlow, aspecialist in financial institutionsinsurance and reinsurance, joins as aPartner in London. Both add an extradimension to HFW’s international service.6 Sydney and SingaporeHFW strengthens shipping capabilityin Asia PacificNic van der Reyden and Dominic Johnson havebeen promoted to Partner. Van der Reydenrelocates from Melbourne to Sydney and willcontinue to grow HFW’s shipping capability on theeast coast. Johnson moves from London toSingapore and joins a team with an excellentreputation in the region for shipping and offshoreenergy work.Holman Fenwick Willan has offices in São Paulo, London, Paris, Rouen, Brussels, Geneva, Piraeus, Dubai, Hong Kong, Shanghai, Singapore, Melbourne, Sydney, Perth.www.hfw.comINTERNATIONAL COMMERCE19

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