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Shipping

April

2011

London

Paris

Rouen

Brussels

Geneva

Piraeus

Dubai

Hong Kong

Shanghai

Singapore

Melbourne

Sydney

SHIPPING BULLETIN

Welcome to the April edition of our Shipping Bulletin.

This edition features four articles, the first two of which concern Libya.

The situation in Libya has resulted in the imposition of sanctions by the UN, US, and EU and these are

considered in the first article. The situation is highly dynamic and those who infringe the prohibitions

risk severe penalties. Given the wide remit of the sanctions any companies trading to Libya or with Libyan

individuals, companies or entities clearly need to exercise considerable caution and would be well advised

to ensure that they are fully informed.

The second article considers the impact on charterparties and contracts of insurance, of Colonel Gaddafi’s

threats to attack commercial vessels in the Mediterranean.

We move on to discuss the UK’s new Equality Act 2010 and how it may affect crew wages.

And finally, we consider another highly topical subject - piracy - and the relationship between an owners’

financing documents and insurance agreements. Inconsistencies as to the time when hijacked vessels

become a “total loss” may require owners to repay loans before they can claim under their insurance, and

owners are cautioned to check that such inconsistencies are avoided when negotiating with their banks.

Should you require further assistance or information on any of the articles please do not hesitate to

contact a member of the HFW team.

David Morriss, Partner, david.morriss@hfw.com

Nick Roberson, Associate, nick.roberson@hfw.com


Sanctions update - Libya

The violent protests and reprisals

in Libya continue to occupy the

front pages, with daily reports of

battles between those loyal to

Gaddafi (written as Qadhafi in official

documents) and rebels for control

of key cities and resources in Libya,

including ports, roads and refineries.

With a mounting humanitarian

crisis, and reports of airstrikes and

other attacks on civilians, a raft of

sanctions were swiftly promulgated

by the UN, US, EU and a number of

other countries.

Our recent briefing (http://www.hfw.

com/publications/client-briefings/

sanctions-update-libya) summarises

the present sanctions imposed by the

UN Security Council, the US President

and the EU Council, first by identifying

the common ground in all three

regimes, and then by discussing the

key differences.

The key point to note is that any

business with links to the EU or

the US, which trades to Libya (or

with Libyan individuals, companies

or entities), must obtain as much

information as possible about the

ownership and control of their

counterparts in Libya. Any indication

that there may be an element of

state control must be carefully

investigated and immediate legal

advice taken to assess whether

there is any risk of a breach of the

applicable sanctions.

Given the significant risk that

a Libyan entity might be statecontrolled

(and the risk that if they

are state-controlled, then they

could well be owned or controlled

by Muammar Qadhafi or another

Designated Person), companies need

to be very careful before they make

any payment to any Libyan entity. In

practical terms, this may mean that

some companies choose not to trade

with Libya at all. The effect of such

a decision on existing contracts will

need to be carefully considered.

HFW will continue to monitor

the situation in Libya and other

sanctioned countries and will provide

updates as events unfold.

For more information, please contact

Anthony Woolich, Partner, on

+44 (0)20 7264 8033 or

anthony.woolich@hfw.com, or

Mark Morrison, Partner, on

+44 (0)20 7264 8396 or

mark.morrison@hfw.com, or Daniel

Martin, Associate, on +44 (0)20 7264

8189 or daniel.martin@hfw.com, or

your usual contact at HFW.

“The key point to note is that any

business with links to the EU or the US,

which trades to Libya (or with Libyan

individuals, companies or entities), must

obtain as much information as possible

about the ownership and control of their

counterparts in Libya.”

02 Shipping Bulletin

Libya - issues for owners and

charterers

On 17 March 2011 Colonel Gaddafi

issued a statement on Libyan state

TV stating: “Any foreign military act

against Libya will expose all air and

maritime traffic in the Mediterranean

sea to danger and civilian and military

[facilities] will become targets of

Libya’s counterattack.” French,

British, US, Canadian and Italian

forces began military action on

19 March 2011 to enforce the UN

sanctioned no-fly zone over Libya.

The mission commenced after troops

loyal to the Libyan dictator broke a

ceasefire and attacked Benghazi.

Within hours, coalition forces had

fired more than 100 Tomahawk

missiles at strategic targets. Colonel

Gaddafi condemned the international

mission saying that “Unfortunately,

due to this [action], marine and air

targets, whether military or civilian,

will be exposed to real danger in the

Mediterranean, since the area of the

Mediterranean and North Africa has

become a battleground because of

this blatant military aggression.”

The recent unrest in Libya has

already affected shipping in the

region drastically and the prospect of

strikes against commercial vessels

is likely to increase disquiet. This

article identifies some issues which

shipowners and charterers who have

contracted to call at Libyan ports

should have in mind.

Legal definition of “war”

Marine insurance policies are

frequently triggered where there

is a war. One key issue is whether

the current unrest in Libya in fact

amounts to a “war”. There has been

no formal declaration of war against


Libya in the current crisis, although

the British Chamber of Shipping’s

Warlike Operations Area Committee

declared the territorial waters of Libya

to be a Warlike Operations Area on

22 March 2011.

English law does not require the

delivery of a formal declaration of

war by one state against another in

order for “war risk” clauses to be

operative in a charter. Therefore, the

military action in Libya and/or action

against vessels may be enough to

trigger various “war risk” provisions in

charters.

A further issue is whether the

situation in Libya would amount to

a civil war. It has been held by the

House of Lords (when considering

the phrase “excluding war risk”)

that the word “war” in a policy of

insurance includes civil war unless

the context makes it clear that a

different meaning should be given

to the word. Other similar terms

used in war risk clauses are “warlike

operations” and “hostilities”. There

is authority which states that

there is “no reason to doubt that

the [term “hostilities”] applies to

acts committed in the course of a

civil war; and perhaps also to an

organised armed rebellion.” “Warlike

operations” has a wider meaning

and includes such operations as

belligerents have recourse to in war,

even though no state of war exists,

although the acts must be done in the

context of a war or at least conflict.

War risk clauses and illegitimate

orders

Many charters contain a Conwartime

1993 or 2004 clause or equivalent

which provide that charterers shall

not order the vessel into warlike

areas. Given the present situation

in Libya, it is possible that orders to

proceed through the Mediterranean

Sea for example could expose

vessels to “war risks”, depending on

the wording of the charter.

If Gaddafi’s forces attack maritime

traffic there could be disputes

between owners and charterers

about whether owners are obliged to

transit the affected area. Depending

on the wording of the charter, orders

to proceed through areas suffering

or under threat of air strikes could

expose vessels to “war risks” under

Conwartime and similar clauses, and

could make such orders illegitimate.

If illegitimate, owners may reject

orders and call for new ones.

However, for long charters at rates

which compare favourably to the

current market, owners may not

wish to risk themselves being in

repudiation in refusing orders if there

is any doubt as to whether such

orders are unlawful.

An important point is whether there

has been a significant increase in

the war risk since the charter was

concluded. If the level of risk has not

increased it is likely that the risk will

be considered one which the parties

agreed to bear. Owners who perform

such orders should proceed under

protest and reserve their right to

claim damages for charterers’ breach

of their obligation not to order the

vessel to a war/warlike area, for any

hire deducted and for any additional

costs owners have incurred by

reason of charterers’ orders - e.g. the

cost of deploying armed guards on

board. Owners who elect to take an

alternative longer route by not sailing

through the Mediterranean may also

face claims regarding which party

is responsible for the extra time and

bunkers.

Deviation

Owners will also have to review

charters carefully to identify whether

they are entitled to deviate from

calling at Libyan ports or transiting

affected waters. If so, owners must

comply strictly with the express

requirements of the clause, and also

act properly and in good faith, and

not capriciously or unreasonably. If

there is no express clause, an owner

may seek to rely on an implied right

to deviate to save life/property and/

or an argument of “reasonable

deviation” under the Hague Rules.

If in seeking to avoid Libyan waters

owners take a route which is not

the quickest, this could represent a

deviation or a failure to proceed with

utmost despatch. Charterers may try

to claim that in these circumstances

the vessel is offhire, although this

will not be the case insofar as the

breach constituted by an illegitimate

order is an effective cause of the

deviation. However, this depends on

the extent to which the deviation was

reasonable and on the charter terms.

Parties should also remember that

deviation may lead to P&I coverage

issues so insurers should be kept

closely informed and the terms of the

policy should be considered carefully.

Frustration and force majeure

Parties affected by the Libyan

conflict may also attempt to avoid

performing their contract on grounds

of frustration or force majeure. A

contract will be frustrated where

there is an unforeseeable change

of circumstances which either

Shipping Bulletin 03


makes a contractual obligation

incapable of being performed or

which renders performance radically

different from that which was agreed.

Mere inconvenience, hardship or

financial loss will usually not amount

to frustration. There are cases of

frustration being caused by war, and

the situation in Libya could therefore

give rise to frustration.

Force majeure is not a free-standing

principle of English law and very

much depends on the clause in the

contract. War is often included as a

force majeure event.

Other considerations

The conflict in Libya is developing

quickly. Parties should consult local

agents and the relevant industry

bodies to keep up to date with the

impact on their business. Parties

should also obtain legal advice before

seeking to rely on war risk provisions

or deviating from affected areas.

For more information, please contact

Scott Pilkington, Associate, on

+44 (0)20 7264 8323 or

scott.pilkington@hfw.com, or your

usual contact at HFW.

“Parties should

consult local agents

and the relevant

industry bodies to

keep up to date

with the impact on

their business.”

04 Shipping Bulletin

Equality Act 2010 - all

seafarers are equal but some

are more equal than others

The crews’ wages constitute one

of a shipowner’s major outlays. It

is common practice among the

world fleet to minimise the effect of

this by employing seafarers from

typically poorer nations and paying

them less than seafarers from a

richer country might be prepared to

work for (or might be legally entitled

to). This practice of differential pay

based on nationality, although clearly

discriminatory, was permitted for

UK ships by section 9 of the Race

Relations Act 1976. Section 9 made

no exceptions for EU/EEA nationals -

workers from, say, Portugal, recruited

outside the UK could lawfully be paid

lower rates than British nationals on

the same ship.

The previous UK Labour government,

however, passed the Equality Act

2010 (the Act), principally in order to

conform to EU law. UK shipowners

were dismayed to discover that the

Act does not retain the exception

for foreign seafarers. Therefore,

if enforced, it would be illegal for

a UK shipowner to pay less than

the UK minimum wage (£5.93/

hour) to a seafarer. Furthermore,

shipowners may have to “balance

out” the wages of even more qualified

personnel. Theoretically, Captain

A from Bangladesh being paid

£35,000 yearly would be entitled to

bring a claim against his employer

for discrimination on the basis that

Captain B from the UK, employed

by the same company and of similar

experience and qualification, is

being paid £70,000. The potential

impact of the legislation is significant.

According to some estimates, the

combined potential increase in

annual costs to UK shipowners is in

the region of $412million. However,

the UK government has not yet

introduced the regulations that are

necessary to extend this prohibition

of pay discrimination to seafarers.

The Carter Review

The previous UK Labour government

also commissioned a Review of

financial estimates on the likely

impact of two options. Option

(a) - outlawing the practice of

differential pay altogether and option

(b) - allowing differential pay but

only where it would not operate

to the disadvantage of EU or EEA

nationals (with any difference in pay

corresponding to a difference in

the costs of living in the seafarers’

country of residence). The review

suggested that option (b) was the

bare minimum required by EU law.

Therefore the real question was

whether differential pay to seafarers

resident outside the EU/EEA should

also be outlawed.

The Review heard arguments from

the Chamber of Shipping, which

broadly speaking represents UK

shipowners. It also heard from

three trade unions. The positions

adopted by these parties was hardly

surprising. The Chamber of Shipping

argued that neither option (a) nor

option (b) should be adopted. The

unions (with the exception of Nautilus

International which proposed a

variation of (b)) voted for an outright

ban on the practice of differential pay.

The Chamber warned that either

option would lead to a substantial

increase in costs. Further, it argued

that outlawing the practice would

dent the UK fleet’s competitiveness


in an international market where

differential pay was the norm. The

Chamber also warned that as a result

of the increased costs and reduced

competitiveness, shipowners would

flag out to more owner-friendly

flags, which would have its own

consequences.

In support of their position, the

unions argued that low pay rates

(in some cases as low as £2/hour)

were unacceptable in a modern

European Union. The impact of

outlawing differential pay, they said,

would be sizeable wage increases for

foreign seafarers. It would also lead

to more secure and better paid jobs

for UK seafarers and would bring

about benefits for port towns and

communities in the UK.

Ms Carter acknowledged that either

option would lead to a significant

costs increase for shipowners.

However, she considered that the

impact on competitiveness was

difficult to judge and the extent of

de-flagging was likely to be less than

suggested. She pointed out that the

benefits to non-UK seafarers would

be significant (12,700 seafarers under

option (a) and 2,400 under option (b)

would collectively gain substantial

wage increases). Having reviewed

the estimates and arguments, Ms

Carter noted that the Act was a social

measure intended to bring better

outcomes for those who experience

disadvantage and its implementation

was always expected to involve

significant costs. She considered that

there was no reason why shipping

should be made a special case. The

Review therefore recommended

outlawing the practice of nationalitybased

pay differentials for seafarers

altogether.

Reaction

The Carter Review, published in

June 2010 by the UK’s new coalition

government was met with a wave of

strong opinion, with the unions calling

for swift action to implement the

recommendation and the Chamber

of Shipping describing the Review as

displaying “a breathtaking ignorance

of the nature of the shipping industry”.

Current position

While the unions appeared to have

won the battle, the war may not be

over just yet. UK shipowners may

take some comfort in the attitude of

the new government which appears

sympathetic to their cause. The

Shipping Minister, Mike Penning MP,

has described the Act as a mess

which, as drafted, “would decimate

the fleet”. This is a view echoed

by the Chamber of Shipping which

predicts that implementation of the

Carter recommendation would spell

the demise of the Red Ensign, as UK

registered ships would immediately

switch to a cheaper option.

There are also concerns that the

recommendation, if accepted, would

undo the success achieved over the

last decade as a result of the UK

tonnage tax regime.

Mr Penning may have his work cut

out for him though - on 27 January

2011, the European Commission

requested the UK government to

amend its legislation allowing for

differential pay of non-UK seafarers.

The government has two months to

comply, failing which the Commission

may decide to refer the UK to the

EU’s Court of Justice. The Shipping

Minister has, however, pledged to

do the “absolute bare minimum” in

complying with the EU requirements

and to legislate in a way that

minimises the potential threat to the

UK flag.

It is not clear what form compliance

will take. The new legislation is

likely to bring in, as a minimum,

requirements similar to option (b)

of the Carter review, allowing pay

differentiation that does not operate

to the disadvantage of nationals of

the EU, EEA or other states with

corresponding rights. Whether it will

go any further remains to be seen.

For more information, please contact

Tunde Adesokan, Associate, on

+44 (0)20 7264 8273 or

tunde.adesokan@hfw.com, or your

usual contact at HFW.

“The new legislation is likely to bring

in, as a minimum, requirements similar

to option (b) of the Carter review,

allowing pay differentiation that does not

operate to the disadvantage of nationals

of the EU, EEA or other states with

corresponding rights.”

Shipping Bulletin 05


Piracy - effect of hijacking on

financing agreements

The hijacking of a ship is obviously

a traumatic experience for all

concerned. Whilst the owner’s

attention will naturally be on

recovering the vessel and her crew,

it is also important for the owner

to have regard to its financing

documents to ensure that the

hijacking does not trigger an early

repayment of its financing for the

vessel. Indeed, with piracy becoming

an ever-increasing menace, owners

and their banks are advised to give

careful thought to the consequences

of a hijacking when negotiating any

new financing documents.

One of the key issues relating to

hijacking is whether, or rather at what

point, the hijacking will be treated

as a total loss for the purposes

of the financing documents. The

significance of this is that most loan

agreements contain a provision

stating that the loan has to be repaid

early upon a total loss occurring.

This is a matter of negotiation

and it has become increasingly

common for banks to include in their

documentation a provision stating

that the vessel will be deemed to be

a total loss if the hijacking continues

for a specified period. Until recently,

capture and seizure of a vessel was

typically only covered expressly if it

was made by or on behalf of a

“One of the key issues relating to hijacking is whether, or rather

at what point, the hijacking will be treated as a total loss for the

purposes of the financing documents. The significance of this

is that most loan agreements contain a provision stating that

the loan has to be repaid early upon a total loss occurring.”

06 Shipping Bulletin

government. Capture by pirates was

usually only caught implicitly by the

constructive total loss provisions.

This had the advantage of matching

the deemed total loss date for

triggering any repayment with the

total loss date agreed by insurers.

The concern now is that mismatches

may occur. Owners are therefore

cautioned to check that a hijacking of

its ship will not trigger a repayment

obligation before a total loss has

occurred for insurance purposes.

Otherwise, the owner may be

forced to prepay the loan before it is

entitled to make any claim under the

insurances.

Other points for the owner and its

bank to consider are:

• If the financing is based on a

particular employment contract

for the vessel, will the vessel be

on hire during the hijacking and,

if not, will she be covered by loss

of hire insurance?

• To what extent should the bank

require the owner to take out

kidnap and ransom insurance?

• What provisions are appropriate

to prevent technical defaults by

the owner during the hijacking

period (e.g. the owner cannot

comply with the obligation to

maintain and repair the vessel

during that time)?

For more information, please contact

Gudmund Bernitz, Associate, on

+44 (0)20 7264 8413 or

gudmund.bernitz@hfw.com, or your

usual contact at HFW.


Conferences & Events

Chamber of Shipping Members’

Networking Evening

Chamber of Shipping, London

(28 March 2011)

Marcus Bowman

Seatrade Awards

Guildhall, London

(4 April 2011)

Richard Crump, Marcus Bowman,

James Gosling and George Eddings

7th Official Combating Piracy Update

Hamburg, Germany

(6-7 April 2011)

Bill Kerr

3rd Annual Offshore Support Vessels

Forum

Singapore

(11-13 April 2011)

Paul Dean, Barry Stimpson, Simon

Sloane, Chanaka Kumarasinghe and

Andrew Gray

Background to Shipping

Prospero House, London

(11-15 April 2011)

John Forrester and David Brookes

Shipping Bulletin 07


Lawyers for international commerce

HOLMAN FENWICK WILLAN LLP

Friary Court, 65 Crutched Friars

London EC3N 2AE

T: +44 (0)20 7264 8000

F: +44 (0)20 7264 8888

© 2011 Holman Fenwick Willan LLP. All rights reserved

Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be

considered as legal advice.

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contact Craig Martin on +44 (0)20 7264 8109 or email craig.martin@hfw.com

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