We have worked with postgraduate law students at the University of Southampton to consider the legal and practical implications of hot topics in commercial law.
Discussions ranged from new compliance obligations stemming from legislation such as GDPR, to significant shifts in the court's approach to contractual interpretation and enforcement, plus the uncertainties brought by Brexit.
The postgraduate students bring fresh analysis, new perspectives and excellent legal writing skills to the above issues and we're pleased to present these articles in our Student Insight series.
African continental free trade agreement: game changer or road block?
By Ijeoma Pamela Opoko
Regional and continental economic agreements are increasingly common, but remain controversial, in Africa. The African Continental Free Trade Agreement (AfCFTA) entered into force on May 30, 2019. This is targeted towards building a single economic community pursuant to African Union’s Agenda 2063 themed “The Africa we Want”. Currently, the agreement has been signed by 54 African countries and ratified by 28. It establishes the African Continental Free Trade Area and focuses on the liberalization of trade and services in Africa. Its scope extends to trade in goods and services, competition policy, investments and intellectual property rights.
AfCFTA enjoins state parties to accord Most Favoured Nation (preferential) treatment to each other on a reciprocal basis. Such preferences shall be no less than is accorded, nor modify or revoke, previous agreements with third parties. The AFCFTA establishes a single market for goods and services. This is somewhat ambitious considering that only one of the eight Regional Economic Communities in Africa has successfully established a single market. The agreement takes on the two-tier WTO approach of negotiations for trade in goods and services in Phase I while investment, competition policy and intellectual property rights are in Phase II.
The Protocol for Trade in Goods provide that goods produced in other state parties are required to be treated like domestic products after clearance by Customs. The preferred goods and services are those that originate from state parties. These are goods wholly obtained or substantially transformed in a state party. A certificate of origin or declaration of origin must be submitted on importation to another state party for goods to benefit from the Protocol. Preferential safeguards may be introduced where a sudden surge of imported products causes or threatens domestic producers of like or competing products within the territory.
Protocols on trade in goods, trade in services and settlement of disputes exist but are not yet in force. However negotiations for investment, competition policy and intellectual property rights were reserved. The agreement provides for this to be done in successive negotiation rounds by member states after the Agreement has been adopted by the assembly. The Assembly adopted the agreement on March 21, 2019. It has been over a year and the other protocols are nowhere in sight. On July 7, 2019, the Assembly of the AU reaffirmed its commitment to conclude the second phase of negotiations by June 2021.
The protocol on Trade in Goods provides for trade liberalisation by progressive elimination of tariffs, general elimination of quantitative restrictions and elimination of non-tariff barriers. The applicable tariff is to be determined in accordance to the schedule of tariff concessions to be developed by state parties. The said schedule, to form Annex 1 of the Protocol on Trade in Goods, has not yet been developed. However a template for liberalization of tariff has been adopted.
The protocol on Trade in Services also provides for progressive liberalisation for Trade in Services. State parties are required negotiate on sector specific obligations to achieve this. It is noteworthy that there are forthcoming annexes to the Protocol on Trade in Services. These include schedule of specific commitments, among others. The African Union Assembly launched the operational phase of ACTFA by Decision Ext/Assembly/AU/Dec.1 (XII) and Declaration Ext/Assembly/AU/ Decl.1(XII) of July 7, 2019. The decision and declarations was to the effect that Phase 1 negotiations will be concluded by July 1, 2020 and trading under AfCFTA should commence on the same day.
AfCFTA is projected to be beneficial to trade and industry within Africa. The arguments for AFCTA include:
- creation of employment opportunities
- boosting competition
- increases market- accessibility to resources or goods and services
- generating economic growth
- promoting industry and
- promoting African integration.
Concerns are however focused on three core issues. The first is that there are a number of structural issues that may impede AfCFTA. These include infrastructure deficit, lack of effective mechanisms and coordinated border control. Attempts to eliminate these non tariff barriers to trade could take time and delay the full actualization of AfCFTA. Secondly, economic negotiations are characterized by some level of technicality. The interplay of previous economic structures, both national and regional, with the provisions of AfCFTA may work some difficulties. These may bring about some uncertainties that may affect investments. Thirdly, Africans do not have a manufacturing or production culture. They are significantly reliant on imports of manufactured goods or semi-finished products. Also, production bases in Africa are usually owned by foreign investors through foreign direct investments. Hence, the idea of the rules of origin may be good for intra-African trade while the profits would largely go to foreign investors.
AfCFTA is commendable because it takes cognizance of other institutional and regional agreements. It recognises Regional Economic Communities and facilitates application of World Trade Organization’s agreements though similar provisions. This is indicative of its intention to integrate various interests while strengthening existing frameworks. Furthermore, it gives room for development, renegotiations and participation of state parties. In terms of the issues raised, every concept has its constraints. As Professor Michelle Egan notes, all barriers to trade have still not been eliminated by member states twenty years after the completion of EU’s single market programme. Accordingly, the AfCFTA has the potential to be one of the African Union’s greatest initiatives for reinvigorating the African economy.
Incoterms 2020 – Who will bear the costs?
By Charis Bagioki
Incoterms 2020 which came into effect on 1 January 2020, aim to improve certain aspects of Incoterms 2010 and address issues which better reflect current commercial practice.
Incoterms 2020 are the standard code of conduct in global trade. They cover the primary obligations of the seller and the buyer, their responsibilities, the delivery of the goods (time, place, carriage) and the point of transfer of risk. They also cover insurance, import and export security clearance and costs relating to the carriage of goods.
Incoterms are not a law or a treaty, but are merely contractual, meaning that they will only bind the parties if they are expressly incorporated into the agreement (in whole or in part). Incoterms are not themselves a complete contract of sale; therefore, specific aspects in the sale contract need to be agreed by the parties. These include the transfer of title to goods, pricing, payment obligations, applicable law and jurisdiction and vessel requirements.
What is new?
The International Chamber of Commerce (ICC) has made the following changes to the obligations of the parties concerning industry matters:
- Bills of lading with on-board notation (FCA – Free Carrier), which did not exist before;
- Different levels of insurance between Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP), which means that if there is a higher level of insurance, there is higher costs;
- Carriage by means of transport of seller/buyer according to which the respective party will obtain the costs;
- Delivered at Terminal (DAT) replaced by Delivered at Place Unloaded (DPU), requiring greater specificity when describing precisely where responsibility passes between parties;
- Security requirements included in the carriage obligations and costs are still general requiring parties to expressly provide for specific security measures and remedies (such as cyber-security) in the contract;
- Detailed explanatory notes for users, which consist of an updated version reflecting current commercial conduct.
How will they affect sale contracts?
Contracts already entered into and incorporating Incoterms 2010 will continue to apply even if performance of the contract will take place in 2020 (unless otherwise stated).
For contracts entered into between September 2019 and January 2020, parties are advised to state expressly which set of Incoterms they want to use; afterwards arbitrators and courts are expected to assume that any reference to Incoterms in new contracts will be for those of 2020, unless there is evidence to the contrary.
For contracts which will be entered into after 1 January 2020, parties have the choice of either Incoterms 2010 or 2020 (which has to be set out in the contract). Otherwise, it will be assumed that the Incoterms reference concerns the new 2020 version unless there is evidence to the contrary.
Why are they important?
The importance of Incoterms depends on the contract. However, the Grain and Feed Trade Association (GAFTA), Federation of Oils, Seeds and Fats Association (FOSFA) and sugar contracts do not incorporate Incoterms. Therefore, parties in such contracts will be unaffected.
However, parties in contracts for standard petroleum, ethanol, coal and metals contracts will be affected. Consequently, parties should check the standard contract forms, the changes introduced by Incoterms 2020 and they should make the necessary changes as introduced by the new version.
The ICC has clearly tried to make the new Incoterms 2020 more transparent, clear, comprehensive and direct. Therefore, parties will be able to identify easily as seller/buyer what their obligations are, what costs they will incur, where the risk passes from one party to the other and how the carriage arrangements should be done. Additionally, they will be able to choose the most commercially suitable term in their sales contract and some industry concerns should be resolved.
However, to avoid disputes, parties are advised to ensure that they expressly set out which set of Incoterms they want to use in their contract by choosing the most appropriate one and by understanding fully what they mean before they are incorporated in the sale contract, especially in light of the new changes.
The court's new mantra: implied terms and business efficacy
By Nikolaos Pourpoutidis
The courts are going back to treating contracts as the sole source of what is to constitute an agreement between commercial parties. This is at least what can be inferred from the recent case of Sports Mantra India Private Ltd and Other v Force India Formula One Team Ltd (in liquidation)  EWHC 2514. This is a shift from the approach adopted the past few years. Courts often used contextual circumstances not mentioned in the contract to interpret the agreement. If the above assumption is correct, courts will imply additional terms only in a very few and necessary circumstances. Below follows a brief analysis of the case, the circumstances which may lead to implied terms, and what is the significance of the case for the commercial world.
Sports Mantra and Force India entered into an agency agreement in 2009. The contract identified the term “Force India” to mean the defendant. Clause 2.1 of the contract stated that if Force India entered into a sponsorship agreement by virtue of Sports Mantra’s work, Sports Mantra was to receive a commission. This clause applied only if the sponsorship agreement was concluded within 12 months of the parties being introduced to each other by Sports Mantra. In July 2009, the claimants introduced a potential sponsor. Sponsorship discussions continued until March 2011, after which the claimants had no further role. In October 2011, the sponsor and the defendant's parent company made an investment agreement, under which the sponsor purchased shares in the parent. The team's name was changed to incorporate the sponsor’s name, the sponsor’s logo appeared on the team's cars, and they obtained hospitality rights. Sports Mantra requested the commission it believed it was entitled to and Force India denied payment.
Sports Mantra based its case on 3 main arguments:
- That the term “Force India” in the contract should be interpreted as including "any member of the group of companies to which Force India belongs". Thus, a term to that effect should be implied. This would obviously include the parent company which entered into the agreement.
- They argued that the nature of the agreement entered into was a sponsorship agreement.
- Regarding the time-bar of the clause, they argued that the clock stopped running once negotiations started after the original introduction and re-started once these negotiations ceased. If such an interpretation was adopted, the agreement would fall within the time limit of the clause.
The court dismissed all three arguments. There was no reason for such a term to be implied. In stating so, the court made clear that terms will only be implied if without them the contract would be unworkable and incoherent. A term will also be implied if it is so apparent that it should be there that it would go without saying. Furthermore, it made clear that both the definition of a sponsorship agreement and the time bar are to be interpreted literally. Thus, this was not a sponsorship agreement but an agreement to buy shares. Accordingly, the clock never stopped and re-started, it ran for the duration of 12 continuous months.
Why does this matter?
For two reasons:
- It reintroduces certainty into commercial law. In delivering the judgment the court made clear that it will look at the literary meaning of the words in the contract primarily. Only if the outcome from this is absurd will it consider the context and terms that may need to be implied. Hence, the important question “What forms the basis of my agreement?” receives “The Contract” as the answer. This limits speculations about the parties’ rights and liabilities under the agreement, as they can be easily ascertained.
- It recognises a very important commercial reality. That commercial agreements do not have to be fair. Just because an agreement is unfair does not mean that it is not what the parties intended. More importantly, it is clear that just because an agreement is unfair, it is not also absurd as to make it necessary to imply terms. It is not the job of the courts to create an agreement that was never intended by the parties just because it seems fairer. The most important quote from the judgment which summarises the above arguments is the following: “In the event, I do not accept that this interpretation would lead to a "most improbable commercial result". It may not be the commercial result that Sports Mantra wished for, but it is a commercial result”.
Is this a good outcome or a bad outcome?
It really depends on which side of the coin you bet your money on every single time. But one thing is for sure; it is a certain outcome. The coin may not land on the side you wanted, but you have a much better chance of predicting which side that is going to be.
Offshore oil producers and punitive damages: an industry in flux gains a bit of certainty
By Paul M. Mullen
This year’s United States Supreme Court decision in Dutra Group v. Batterton 139 S.Ct. 934 (2019) created the bright-line rule that punitive damages (that is, damages assessed specifically to punish or make an example) are unavailable to injured seamen in actions for unseaworthiness. Although the impact of Dutra Group has yet to be specifically observed in offshore oil and gas production, the effects of excessive (and often unpredictable) punitive damage awards has been observed for decades.
In the paper The Distribution of the Insurance Market Effects of Tort Liability Reforms, scholars Born and Viscusi studied (inter alia) the effects of punitive damages on the American insurance market. They noted that in the United States in the mid-1980’s, although automobile insurance premiums remained stable, premiums for general liability and medical malpractice – fields with potentially high punitive damage awards – doubled. This had the effect of doctors avoiding certain practice areas (like obstetrics), and pharmaceutical companies avoiding developing medications for pregnant women. In short, what was meant to protect Americans served to limit their choices in medical care. The reader may ask what this has to do with oil production. Let me explain:
Offshore oil production by American producers is often carried out by drilling ships, semi-submersible rigs, and jack-up rigs. Although these massive structures may appear to be permanent fixtures, they are often “vessels” under American maritime law. This is a critical distinction from a fixed drilling platform because those who labor in the service of a vessel are entitled to the “heightened legal protections” of the Jones Act.
The law on what is a “vessel” is two-fold: statute says that “a reasonable observer” would believe it to be a vessel, and the United States Supreme Court says it is “every description of watercraft or other artificial contrivance used or capable of being used, as a means of transportation on water.” In short, if it looks like a vessel and acts like a vessel, it’s probably a vessel. Under US law, if that vessel (or any of its equipment) is not “reasonably fit for its intended purpose,” it may be unseaworthy as a matter of law. If a worker in the service of that vessel is injured as a result, the Jones Act says they may seek compensation under a claim of unseaworthiness regardless of the fault of the vessel owner.
With the 9th and 5th Circuit courts of appeals previously split on this specific punitive damage question, producers were left on shaky ground regarding their potential for incurring unseaworthiness injury liability. In the extreme, the absolute ceiling for their liability was the deprivation of constitutional due process set out by the Supreme Court in BMW of North America, Inc. v. Gore 517 U.S. 559 (1996). That case stated that when punitive damages “exceed some multiple” of compensatory damages, those damages can amount to unconstitutionally excessive. That kind of nebulous limit means uncertainty. Uncertainty means risk. Risk means expense.
It is advisable not to take this as a debate on the ethics or efficacy of punitive damage awards. This is merely a commentary. There is now resolution on a point that has been unresolved since 1920 when the United States Congress absorbed the protections afforded to railroad workers into the Merchant Marine Act and applied them to seamen. For the time being, the question is no longer one of “what if,” but rather “now what.” As long as American producers offer high-wage jobs to workers, the drilling rigs will be staffed. As long as those drilling rigs are vessels, those workers will be seamen. They will continue to enjoy their “heightened protections” as is their right. What Dutra Group really means in the context of offshore production is that the potential expense attached to those protections has finally gotten a bit more predictable.
The punitive damage issue has not been resolved in every milieu – wilful and wonton negligence in the standard tort context can still result in punitive damages – but where oil producers use vessels for production, their analyses have gained a measure of certainty. In a world of fluctuating crude prices, that is saying a lot.
 Born, Patricia H., W. Kip Viscusi, and Dennis W. Carlton. "The distribution of the insurance market effects of tort liability reforms." Brookings Papers on Economic Activity. Microeconomics 1998 (1998): 55-105.
It’s time for a digital revolution in international trade
By Harry Roffey
Volcafe v CSAV  UKSC 61
Following the Supreme Court’s decision in Volcafe, it is now the carrier who has the legal burden of disproving its negligence in cargo claims. This benefits cargo interests, but the future of smart contracts, the Internet of Things (IoT) and Blockchain could see the end of traditional litigation of cargo claims altogether.
Volcafe v CSAV  UKSC 61
Between January and April 2012, 9 consignments of coffee beans were transported in 20 unventilated containers in accordance with shipper’s instructions on CSAV’s vessels. Shipment was from Columbia to destinations in north Germany via Panama. The Hague Rules applied by virtue of a Clause Paramount in the bills of lading.
Coffee beans are a hygroscopic cargo so absorb, and then emit, moisture during transit causing condensation. Containers are lined with paper or cardboard to absorb the condensation and avoid cargo damage. Upon arrival, the contents of 18 of the containers were spoiled to some extent. The resulting claim against the carrier by the cargo owners alleged improper stowage in breach of Article III rule 2, with CSAV pleading the defence of inherent vice under Article IV(2)(m). Whilst a low value claim at $62,500, the dispute progressed to the Supreme Court demonstrating the legal significance attached to this issue.
The Supreme Court provided clarification, and a new approach, to the following two aspects of the burden of proof in cargo claims respectively.
In respect of the burden of proof in a cargo claim under Article III rule 2
The Supreme Court unanimously held that the correct approach in cargo claims was for the carrier to disprove its negligence under the care of cargo obligation in Article III rule 2 of the Hague Rules. This clarified conflicting authorities on where the burden lies. In reaching this conclusion, the court approved the dicta of Wright J in Gosse Millerd v Canadian Government Merchant Marine Ltd (The Canadian Highlander) (1927) 28 Ll L Rep 88 that the contract of carriage is one of bailment, a common law relationship.
The carrier as bailee was therefore subject to the rule that it is liable for any damage in its possession unless it can prove it did not breach its duty of care owed under Article III rule 2. The justification for this is that the carrier has the knowledge of what happened to goods in its care. Cargo interests are often reliant entirely on the bill of lading as their evidence. In this assessment, the court overruled the decisions in Albacora Srl v Westcott & Laurence Line Ltd  2 Lloyd’s Rep 53 and Great China Metal Industries Co Ltd v Malaysian International Shipping Corporation Berhad (The Bunge Seroja)  1 Lloyd’s Rep 512 which held the burden of proof was on the claimant.
The court held that the application of common law principles was not inconsistent with the Hague Rules as they do not exclude application of the common law where they fall silent. As the Rules do not exhaustively deal with all legal matters in relation to the care of cargo, there was room for the common law of bailment to apply. Accordingly, the pro-claimant interpretation of pleading breach of the care of cargo obligation applies for both the Hague and Hague-Visby Rules.
In respect of the burden of proof under the exceptions in Article VI rule 2
The carrier’s reliance on the Article IV(2)(m) defence of inherent vice led the court to overrule the previous authority of The Glendarroch  and instead hold that it is for the carrier to prove the loss was caused by the exception and to consequently disprove its alleged negligence. The court found the result in The Glendarroch unsatisfactory which meant that once a carrier had raised an exception, the burden of proving that the exception did not apply by virtue of the carrier’s own negligence rested on the cargo interests. Thus, negligence became “an exception to an exception”.
New technologies to streamline international trade
The decision in Volcafe represents a better position for cargo interests, but greater responsibility for carriers. However, the adoption of technology in containerised trade could render such routine cargo disputes all but obsolete.
Smart contracts operate with or without blockchain technology. A smart contract is a set of code that uses automation to create, execute and enforce contractual agreements between two parties based on real-time data. It is not a lengthy, written agreement signed by two parties.
For the carriage of goods by sea, this could mean using sensors within the container to automatically adjust freight payable upon any breach of the carrier’s standard of care. In Volcafe, a significant portion of the damages claimed arose from the inspection and sorting of the damaged bags of coffee beans. The use of IoT connected sensors in a smart contract between the carrier and shipper could have quantified the damage and calculated a reduction in the freight due to the cargo’s reduced value.
Such technology could completely automate straightforward claims and, for more complex claims, provide real-time evidence of the cargo’s condition during carriage to assist the carrier in attempting to discharge its burden of proof.
Trials of smart contracts using IoT technology are so far proving successful. A shipment of 17 tonnes of almonds took place on smart contracts and blockchain technology. The project coordinated by the Commonwealth Bank of Australia allowed the shipment to be tracked geographically as well as temperature and humidity in the containers to be monitored. The bill of lading, certificates of origin and customs documents were held on blockchain to further automate and streamline.
The future of smart technology offers significant advantages to all stakeholders in international trade. Combining smart contracts, IoT technology and blockchain revolutionises security, operational efficiency and accuracy. Replacing documentary systems currently reliant on paper-heavy workflows with smart technology permits the instantaneous execution of contracts, delivery of shipping documents, completion of financing transactions and automatic provision of remedies for any breaches.
The legal framework required to underpin such digitisation is rapidly developing. The UK Jurisdiction Taskforce looking at cryptoassets and smart contracts published a legal statement in November 2019 describing English law as being well placed to deal with technological developments. Their findings state that there are no reasons why smart contracts should be any different, in law, from traditional contracts.
The decision in Volcafe provides even stronger arguments for the shift to smarter shipping. A data-driven industry will benefit both cargo interests with greater control and oversight of their goods, and carriers with real-time evidence to accurately and efficiently address cargo claims.
Insurance fraud - Does the mortgagee's chances of recovery sink with the ship?
By Madison Stevens
Co-assured lenders may not be able to recover losses under a fraudulent mortgagor’s insurance policy, rules the High Court in Suez Fortune Investments Ltd v Talbot Underwriting Ltd  EWHC 2599 (Comm). To avoid losing the money owed under a mortgage, lenders must obtain other security interests beyond the ship mortgage.
On the night of 5 July 2011, the ‘Brillante Virtuoso’ was drifting near the Gulf of Aden on its voyage from Ukraine to China. The vessel, due to the high number of Somali pirate attacks in the area, was awaiting a team of unarmed security. Just before midnight, a group of seven armed men arrived at the vessel in a small boat, claiming to be the anticipated security team. They were subsequently permitted access to the vessel. The shipowner later claimed these men were Yemeni pirates.
In the hours following, the armed men demanded the vessel sail to Somalia. After sailing in the wrong direction and her engine breaking down, a fire broke out in the purifier room and spread to other parts of the engine room. This was caused by an improvised explosive incendiary device (IEID).
At 03:06, the vessel notified various authorities including the vessel’s managers of the piracy incident via the Ship Security Alert System. It was reported that the armed men had left the vessel. The USS Philippine response. All crew, apart from the chief engineer, abandoned the Brillante Virtuoso at just past 04:00. The chief engineer joined them at 07:44.
A salvage tug from a local salvage company, Poseidon Salvage, arrived at the casualty at 07:23. It appeared that the fire had begun to die down. Yet, the fire resurged and spread to the accommodation and wheelhouse by the afternoon. The fire was finally put out by 8 July 2011. The vessel had been badly damaged by the fire and was later found to be a constructive total loss ( EWHC 42 (Comm)).
Mr Iliopolous, the ship owner, claimed on a war risks policy for $77 million. The war risks underwriters, however, alleged that the fire had been deliberately started with Mr Iliopolous’ consent, constituting wilful misconduct within the meaning of s55(2)(a) Marine Insurance Act 1906. Mr Iliopolous’ claim was subsequently struck out after, in breach of a court order, he refused to provide his solicitors with necessary documents and had lied to the court ( EWHC 1085 (Comm)).
The claim was continued by the mortgagee bank as the co-assureds of the war risk policy, and their mortgagee interest underwriters. The war risks underwriters submitted that the vessel was ‘scuttled’ and was not covered by the policy.
Sitting in the High Court, Teare J considered: (1) whether the vessel had been scuttled with the consent of Mr Iliopolous; and (2) If so, whether that fell under an insured peril.
On the first question, the Judge concluded that the Brillante Virtuoso had been scuttled. He relied on a number of factors in reaching this conclusion. These including the lack of reported cases of Yemeni pirates prior and subsequent to the event, the master’s failure to identify the armed men, the fact that the local salvors were able to reach the vessel so quickly and the resurgence of the fire. The judge therefore found Mr Iliopolous was the “instigator of the conspiracy” with the help of the master, the chief engineer and Mr Vergos, the owner of the Poseidon.
On the second question, the judge considered whether the conspiracy was covered by a number of insured perils, most significantly, piracy. The judge was not convinced that a shipowner seeking to defraud insurers could be interpreted as a pirate. As a result, the loss was not an insured peril and not covered by the war risks policy. The bank and mortgagees interest insurers were therefore unable to claim from the war risks insurers.
The mortgagee in The Brillante Virtuoso case was the co-assured and party to the insurance contract. They would only be able to claim if the cause of loss (the scuttling of the ship) was an insured peril. The court held it was not and the mortgagee bank was unable to claim. It is difficult to envisage an insurance policy which insured perils cover the risk of deliberate destruction of property by the co-assured. Similar concerns arise with assignment of the benefit of the insurance policy, another popular method of securing repayment for mortgagee banks. English insurance contract law provides that a claim is lost where the assured commits fraud (Britton v Royal Insurance (1866) 4 F & F 905). The mortgagee who has been assigned the benefit of the insurance policy would also be unable to recover in such situation. As a result, the mortgagee’s rights over the mortgaged property are limited.
The mortgagee will have a personal action against the fraudulent assured who has destroyed the property. However, fraudulent assureds, like Mr Iliopolous, often destroy the insured property due to financial troubles. In such a case, personal rights against the fraudulent assured may be ineffective.
To prevent this uncertainty, lenders will have to secure repayment by other means. One way of securing repayment may be through taking security of other assets in addition to the ship. Common examples include charges over intangibles such as shares and depositing accounts, assignments of earnings, or a guarantee from the holding company of the subsidiary if applicable. Lenders may also turn to alternative sources of financing, which are becoming increasingly popular in the shipping industry. Alternative sources of lending may include project-based financing, high-yield bonds, convertible debt, or capital and operating leases.
There is also the existence of the mortgagee interest insurance, which may be a viable means of eliminating the risk of such events. The Brillante Virtuoso case demonstrates this, as the Bank was able to recover their losses from their mortgagee interest insurance policy. The decision therefore presents a risk to mortgagee interest insurers. Mortgagee interest insurers should adapt their insurance policies to require banks to obtain security additional to a ship mortgage and to exhaust these interests before claiming on the policy.
Update: Incoterms®2020 – What is new, what has changed, what is to keep in mind?
By Amerouche Kessi
The new Incoterms®2020 contain important innovations with regards to insurance with CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To), and the transformation from DAT to DPU. For FCA, a new (on-board B/L) option has been introduced. No new explicit rules have been introduced regarding the Verified Gross Mass (VGM). The Incoterms®2010 can still be used. However, it is imperative that the current version, eg. FOB Incoterms®2010, is then cited.
What are Incoterms®?
The Incoterms® of the International Chamber of Commerce (ICC) are used in international trade to speed up contract negotiations, to avoid misunderstandings, drafting inefficiencies and to simplify calculations in business to business (B2B) sales contracts. The rules describe mainly the tasks, costs and risks involved in the carriage and delivery of goods from the seller to the buyer.
They have no legal status, however their validity is based on an agreement between the parties to the purchase contract. The new Incoterms®2020 are to take effect on 1 January 2020 and introduce important innovations as compared to the Incoterms®2010 currently in force.
What are the relevant changes?
1. New internal order
There has been a significant overhaul of the terms' internal order, the important 10 A/B rules (in which the obligations of the respective parties are regulated in detail) within each clause have been rearranged. In addition, the obligations regarding goods, payment, delivery and transfer of risk of the contracting parties listed in Incoterms®2010 under A1 have now been moved to more appropriate places such as A2 and A3. The changes will require some time and effort for the users, but the better positioning of these terms might improve the clarity and comparability of the individual Incoterms clauses. Most international merchants are roughly familiar with the terms, but sometimes details are important in price and risk calculations or negotiations. Before using the new edition, the user should roughly familiarize himself with the changes in order to be able to orientate himself quickly. The new order is as follows:
- A1/B1: General Obligations
- A2/B2: Delivery (formerly A4/B4)
- A3/B3: Transfer of risks (formerly A5/B5)
- A4/B4: Carriage (formerly A3/B3)
- A5/B5: Insurance (formerly part of A3/B3)
- A6/B6: Transport document (formerly A8/B8)
- A7/B7: Clearance (formerly A2/B2)
- A8/B8: Checking (formerly A9/B9)
- A9/B9: Allocation of costs (formerly A6/B6)
- A10/B10: Notices (formerly A7/B7)
2. Incoterms® 2020: new regulations for insurance cover in CIF/CIP
The majority of transport insurance worldwide is based on the transport insurance conditions of the IUA (International Underwriting Association of London) known as 'Institute Cargo Clauses'. These basically distinguish three categories/levels:
- Institute Cargo Clauses (C): minimum insurance cover for named risks in situations where entire means of transport is confronted with a loss; explicit exclusions
- Institute Cargo Clauses (B): additional coverage for further events, named risks, including entry of sea, washing over board, total losses in cases where packing drops; explicit exclusions
- Institute Cargo Clauses (A): highest insurance protection, ‘All Risks’, but also explicit exclusions
In the case of CIF, the previous regulation with the standard of the institutes Cargo Clauses (C) will be retained. In the case of the CIP, the seller will henceforth be responsible for insurance cover in accordance with Institute Cargo Clauses (A), and not the lower level Institute Clauses (C).
3. Changes in the letter initials from DAT to DPU
The difference between DAT (Delivered At Terminal) and DAP (Delivered At Place) clauses in the Incoterms®2010 was that the delivery was considered fulfilled for the seller at DAT when the goods were unloaded from the arriving means at a terminal (cf. Incoterms®2010 DAT A4). The goods were delivered at DAP when the buyer placed them at the disposal of the buyer on the arriving means of transport read for unloading at the agreed point (cf. Incoterms®2010 DAP A4). In order to emphasise that delivery cannot be made only to one terminal, the DAT clause has been changed to DPU (Delivered at Place Unloaded). In addition, the DAT clause was moved up and now appears in the order before the new DPU clause.
4. On-board B/L under Incoterms® clause FCA
A new option has been introduced for the FCA clause. The Contracting Parties can agree that delivery is made at a container terminal in accordance with FCA. In this case, the buyer instructs his carrier (on his own cost and risk) to hand over a B/L to the seller, stating that the goods have been loaded on-board. The seller can then send it to the bank and receive the payment from the letter of credit. This new variant of the FCA clause is an additional, optional option. However, it is often necessary, since in many countries buyers and banks still prescribe an on-board B/L. Here only the already usual practice/mechanism was considered.
5. Further Changes:
FCA, DAP, DPU and DDP – The Incoterms®2020 rules now cover the situation where either the buyer or the seller transports the goods with his own vehicles without using the services of a third party.
There is also more detail on allocation of costs arising from security requirements. Costs for transport-related security requirements are the responsibility of the party who arranges this. The security costs associated with the export clearance shall be borne by the seller (except EXW); the security costs associated with the import shall be borne by the buyer (except DDP).
6. What is the VGM (Verified Gross Mass), who is responsible for it under Incoterms®?
It concerns cargo that is transported in containers. The gross mass of the containers must be verified in compliance with the regulations. Gross mass means the combined mass of a container's tare mass and the masses of all packages and cargo items, including all packing and securing material packed into the container (cf. MSC.1/Circ.1475Annex, 2.1.6)
It is prohibited to load containers with missing (formally correct) VGM information. The addressees of the loading ban are terminal operators and shipping companies.
The VGM were inserted in SOLAS by Resolution MSC.380(94) of the Maritime Safety Committee (MSC) of the IMO. They entered into force on 01.07.2016.
The VGM regulations oblige the shipper, Chapter VI/2.4, 2.5 Annex SOLAS. Shipper means a legal entity or person named on the B/L or equivalent document as shipper and/or who (or in whose name or on whose behalf) a contract of carriage has been concluded with a shipping company (cf. MSC.1/Circ.1475Annex, 4.1, 2.1.12)
The new Incoterms®2020 do not introduce new regulation regarding the VGM. But the relevant factor is which party to the commercial transaction is responsible for arranging the contract of carriage (shipper). The Incoterms®2020 interpretation rules assign in A4/B4 the responsibility for the conclusion of transport. Correspondingly, A2 (with regard to the Seller's delivery obligations) and A9/B9 (with regard to cost allocation) may be used.
The Arctic Shipping Route: Is the Transpolar Passage set to become a main shipping route?
By Tatiana Irina Kupeczki
It is anticipated that by around 2050 the Arctic will remain ice-free during the summer months. Commercial responses include several projects to create a viable shipping route through the Arctic. Such a route would shorten journeys by thousands of miles and is, in theory, more time and cost-effective. This will undoubtedly be of interest not only for the maritime industry but also for tourism operators, fisheries and natural resources mining companies. However, certain legal and practical issues should be taken into consideration.
It is hard to predict if the transpolar passage will ever become economically feasible. It is most likely that sea ice will refreeze during the colder winter months, resulting in the required assistance for pilotage and ice-breaking support. Besides, specialist vessels and experienced crew will be crucial to deal with bad ice-conditions and unpredictable weather. Thus, insurance costs will be significantly higher too. Moreover, the lack of infrastructure might be unattractive for certain types of merchant ships. Particularly for container traffic that is usually trading cargo along the journey.
Having said that, bulk carriers that are operating on a more flexible schedule could take advantage of a shorter route. Additionally, the price of bunker fuel plays an essential role too. Mainly during periods of high costs for fuel, the Arctic shipping route would provide a much cheaper alternative to the traditional shipping routes. Another benefit would be to entirely avoid piracy around the Horn of Africa and the Strait of Malacca..
The Arctic features a pristine and fragile ecosystem. Hence, a shipping accident could cause devastating consequences, with extremely limited salvage and port of rescue options. Emission of black carbon and pollution by ships create further risks. Furthermore, invasive species could be introduced to polar waters.
The International Maritime Organization (IMO) issued the Polar Code, which entered into force on 1st of January 2017. The Code sets a legal framework for shipping-related issues while navigating through polar waters. The main objective is to ensure that vessels can conduct safe operations in this remote region, and it acts to supplement the already existing Safety of Life at Sea (SOLAS 1974) and Marine Pollution (MARPOL 1937/1978) convention. If the flag state of a ship is a member of any of those two conventions, the application of the Polar Code is mandatory. Two key provisions are:
1. that all vessels that wish to operate in the polar waters need to obtain a Polar Ship Certificate; and
2. that all vessels carry a Polar Water Operational Manual.
It is furthermore anticipated, that industry standards will become a necessity to deal with the varying ice conditions in the polar region.
Environmental organizations criticize that the scope of the current regulation is not broad enough to guarantee marine safety. A fair number of carriers, for instance, CMA CGM and MSC, have thus already rejected the use of Arctic Shipping Routes due to environmental apprehensions.
The 1982 United Nation Convention on the Law of the Sea (UNCLOS) allows each of the five Arctic states to have a 12 nautical miles long territorial sea boundary as well as an exclusive 200 nautical miles long economic zone. The open water lying north of the set Exclusive Economic Zone (EEZ) is considered as high seas and is outside of national jurisdiction.
Currently, there are two coastal shipping routes commonly used in Arctic waters, namely the Northern Sea Route (NSR) and the Northwest Passage (NWP). Vessels sailing through the NSR will have to obtain permission from the Russian authority and pay fees as the route lies within their EEZ. In contrast to that, the Transpolar route would mostly avoid territorial waters of Arctic states as it lies in the high seas. This makes the route especially interesting for big shipping nations. It comes therefore as no surprise that several of these countries such as China, Singapore and South Korea gained observer status to the Arctic council in 2013, despite their lack of territory in the Arctic circle.
China even characterized their country as a "near-Arctic" state in their first-ever white-paper on Arctic Police of 26 January 2018. China's Arctic Policy is mostly focused on ensuring access to commercial opportunities. The strategy of monetary development manifest in the idea of a "Polar Silk Road", a connection from China with Europe via the Arctic. It comes there as no surprise that China's state-owned shipping company COSCO plans to step up its operations in polar waters.
Sea-ice remains a considerable challenge for the transpolar passage. The development will be dependent on conditions favourable to navigation. Therefore, a commercially viable shipping route is still decades away. Moreover, there are environmental and climatic uncertainties such as harsh weather conditions and ice floes. This creates safety hazards for individuals and the environment. Most likely a dual-route model would be the most realistic, meaning that during bad ice-conditions already existing shipping routes would be used. Thus, the transpolar shipping route would only be supplemental. Despite the numerous drawbacks, as the route lies mostly outside of territorial jurisdiction from any state it is nonetheless of appeal for the maritime industry. The push from big shipping nations to increase shipping operations in the Arctic might be the deciding factor if a feasible Transpolar Passage is bound to happen.
A new era for marine insurance
By Magdalini Efthymiou
Is the marine insurance market ready to accept the challenges set by the new technological methods of transactions and especially those coming from the use of a blockchain platform?
Blockchain first appeared with the cryptocurrency bitcoin in 2009. It was not long before the blockchain established itself as an autonomous technology capable of resolving long-lasting problems as the problem of tracking the cause of damage or loss to a shipment regarding marine insurance. The dynamic of this system led to the estimation, repeatedly stated in reports published by markets, that the blockchain’s global market value is expected to reach 7683.7 million US dollars by 2022.
It is true that even today the majority of transactions are mostly conducted traditionally relied on a great amount of paperwork and personal contacts, yet more and more businesses are gaining an interest in finding new methods of work, which could secure them time and safety.
Blockchain and safety in marine insurance transactions
It is estimated that more than 80 billion dollars a year is spent on fraudulent claims by insurance companies only in North America. Could the risk of a fraudulent claim be reduced to a minimum given its severe impact on an insurance company’s finances?
Nowadays, marine insurance transactions and safety could be deemed as interwoven terms due to the existence of blockchain. Through this system, data are stored in blocks in a permanent way. Each new block is built upon the recorded history of its previous one. All the blocks contained in the network are linked together in a chronological order to form a continuous chain. Thus, the data contained in a specific block can be modified only by meeting the specific requirements of the consensus mechanism, and even then, modifications are likely to remain visible as a "fork" in the blockchain. One has to delete and reform the data contained on each and every block anew in order to alter its content. Undoubtedly, such a process eliminates human errors coming from manual methods of updating information providing parties with even more security.
Furthermore, since various consensus protocols are needed to validate one entry, the risk of a duplicate entry which could lead to a fraudulent claim is obliterated. Thereby, the risk of a fraudulent claim is minimized heavily. That is definitely the case when parties handle a large amount of paperwork and they face the risk of these papers getting out of their control and being found in the hands of someone who wants to distort their content.
Consequently, it is understood that the precision derived from the mechanisms of the blockchain can eradicate potential ambiguities coming from marine insurance contracts dealt in the traditional way, ambiguities that take time to be clarified and they are often construed in favour of the assured.
Additionally, the blockchain adds to the transparency of the transactions. All the parties can have access to important information, such as bills of lading and charterparties without wasting time by rifling through papers to find them. All this information constitutes a collective database for all the parties adding to the elimination of the possibility of someone’s furtively interfering with the data.
Automation of payment
Delays in payments as a result of a tedious process of verifying data can now be avoided due to the transparent and efficient nature of the blockchain.
The entire history of parties’ exchange is stored in the blockchain system and it can be downloaded so that parties can have access to it anytime. In doing so, parties do not run the risk of losing a payment and they cannot maintain that they have already proceeded on a payment when, in reality, they have not.
A bright future
We live in a world where technology is dominant and time is money. Consequently, blockchain appears to be boosting the economy in several ways giving solutions to the thorny problems of the business world. This innovative technology seems to have all the potential to help the marine insurance world to adapt to the demands of the society arising from the radically changing technology.
Despite the fact that the blockchain was initially treated with some distrust from the majority of the business world mostly because it is still a developing system, unregulated for the most part, there is an increasing interest within the marine insurance companies to benefit from the technology especially after the start of its use in companies like Maersk. Also, this interest is depicted in the idea suggested by several companies of using training employees so that they can become accustomed to the new technology within a short time. Such attempts illustrate that the blockchain may be very soon adopted by the majority of the business world.