SHIPPING BULLETIN - Holman Fenwick Willan

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.
Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences please
contact Craig Martin on +44 (0)20 7264 8109 or email craig.martin@hfw.com
hfw.com