SHIPPINGNEWSLETTER − JUNE 2007, ISSUE 22

IN THIS ISSUE:• Are anti-suit injunctions made to protect

arbitration proceedings a breach of EU law?

• Incorporation of arbitration clauses byreference

• Seafarers − changes to the Race Relations Act

• The Achilleas

• Preparing for the future

• Expanding environmental social responsibility in the maritime sector

• Community flagship exemption

• To trust or not to trust

ARE ANTI-SUIT INJUNCTIONS MADE TOPROTECT ARBITRATION PROCEEDINGS ABREACH OF EU LAW?

David Semark, a Partner in our Shipping Group, considers this issue, with

which the House of Lords was faced in West Tankers Inc v RAS Riunione

Adriatica di Sicurta Spa (The Front Comor) [2007] UKHL 4.

RAS Riunione Adriatica were the Italian insurers of Erg Petroli SpA, the owners

of an oil jetty at the Santa Panagia refinery in Syracuse, Italy. Erg were also the

Charterers of the FRONT COMOR and West Tankers were her Owners.

In August 2000, during the charter period, the FRONT COMOR collided with

Erg’s jetty, resulting in a claim for €15,587,292 being presented to her Owners.

The Charterparty contained a London arbitration clause and arbitration

proceedings between the Owners and Charterers are currently underway in

London. The claim being arbitrated concerns Erg’s uninsured losses only.

Erg’s insurers, by contrast, commenced proceedings against Owners before

the local court in Syracuse seeking to recover the amounts paid to Erg

under the policies.

In 2004, the Owners obtained an anti-suit injunction from the English Court

seeking to restrain the insurers from proceeding with the Syracuse

proceedings on the basis that they too were subject to the Charterparty

arbitration clause. The first instance judge confirmed the anti-suit injunction

on the basis that he was bound by two decisions in the Court of Appeal,

Through Transport Mutual Insurance Association (Eurasia) Ltd v New India

Assurance Co Ltd [2005] 1 Lloyd’s Rep 67 and The Angelic Grace [1995] 1

Lloyd’s Rep 87 − to the effect that anti-suit injunctions to restrain

proceedings brought in contravention of an arbitration agreement fell within

the arbitration exception in EU Regulation 44/2001.

The insurers obtained permission to leapfrog the Court of Appeal and take their case

to the House of Lords. The House of Lords was asked to determine four questions:

1. Whether the fact that the Italian proceedings were undoubtedly “civil or

commercial” proceedings within the scope of the Regulation meant that

anti-suit injunctions to protect rival arbitration proceedings were

incompatible with the Regulation in light of the decision of the European

Court of Justice in Turner v Grovit [2004] 3 WLR 1193 (where it was

held that an injunction to restrain Court proceedings in another EU state

in favour of local Court proceedings was an abuse of process).

2. Whether the English anti-suit injunction proceedings fell within the

arbitration exception on the basis that they existed to support and

assist arbitration proceedings.

3. Whether an injunction to enforce an arbitration agreement should

ever be granted to restrain proceedings in a state which is a party to

the New York Convention on the mutual recognition of arbitration

awards – principally on the ground that this would deprive the Italian

Court of its right under the New York convention to assess whether a

binding arbitration agreement existed.

4. Whether an English Court should, as a matter of discretion, ever

grant an anti-suit injunction to enforce an arbitration agreement to

restrain rival proceedings in an EU state because the traditional

English justification for granting such anti-suit injunctions has been

fatally undermined by Turner v Grovit.

The House of Lords declined to rule on these questions, but has instead

referred the matter to the European Court of Justice for a decision.

However, their Lordships made their own views on the matter plain.

The leading opinion was given by Lord Hoffman. He stressed the distinct

nature of arbitration proceedings, stating that whereas all EU states are

bound by uniform rules regarding the recognition and enforcement of each

other’s judgments, there is no such uniform approach to arbitration. (In

this, his Lordship is, with respect, undoubtedly correct – one needs only

think of the different approaches taken by, say, the English and French

Courts to the incorporation of arbitration clauses in charterparty bills of

lading to see that national approaches as to what constitutes, for example,

a binding arbitration agreement differ widely across the Community.)

Lord Hoffman also emphasised that the sole purpose of an anti-suit

injunction was to protect a contractual right to have disputes determined

by arbitration. Accordingly, he said, they fall outside the Regulation and

cannot be inconsistent with its provisions.

In his view, however, perhaps the most important consideration at stake turned

on public policy. Parties turn to arbitration, he said, in order to be outside the

procedures of any national court and it is in the commercial interests of the

European Community that the principle of party autonomy is upheld.

It remains to be seen how the ECJ will respond to Lord Hoffman’s

argument. There are at least two reasons why it is likely to find that

anti-suit injunctions are incompatible with the Regulation.

First, in Owusu v Jackson and Others Case C-281/02, (a case concerning

the ability of the English Court to apply the doctrine of forum non

conveniens) the ECJ set its face against endorsing remedies which are

available in one Member state, but not in others. It said that because the

doctrine of forum non conveniens is recognised in only a limited number

of EU States, its recognition would affect the uniform application of the

rules of jurisdiction in Contracting States. The same principle applies

equally to anti-suit injunctions.

Secondly, the central weakness of Lord Hoffman’s principal theme is that it

assumes that anti-suit injunctions are directed only at the original parties to

the arbitration agreement. In fact, the problems which most frequently arise

involve third parties who did not conclude the agreement, but whom the

English Courts regard as being bound by its terms – typical examples

include third party holders of bills of lading and insurers who otherwise

have a right under domestic statutes to proceed before the local courts in

their own name. By allowing anti-suit injunctions in these circumstances,

the English Courts are effectively also deciding the question of who is bound

by these agreements, in circumstances where a Court elsewhere in the EU

would take a different view. That must be incompatible with the Regulation.

SHIPPING NEWSLETTER − JUNE 2007 2

INCORPORATION OF ARBITRATION CLAUSESBY REFERENCE

Lindsay East, a Partner in our Shipping

Group, shares his concerns about the

inadvertent incorporation of arbitration and

jurisdiction clauses in light of the ATHENA,

as evidenced by a recent arbitration with

which he was involved.

I have recently been involved in a case that

shows the danger of not reducing an

exchange of messages into a formal

contract. My clients found themselves

bound to London arbitration quite contrary

to their expectations. Our clients are a ship repair yard. They commonly

offer to contract on the BIMCO Repaircon form. There were discussions in

relation to the repair of a vessel and an offer was set by the yard. The only

reference to any form of jurisdiction or other formal terms was:

“General shipyard conditions in accordance with BIMCO.”

The response from the Owners was merely that they confirmed their

instructions for the repair of their vessel. Unfortunately, the vessel was

severely damaged by a fire whilst in the yard. At the time of the fire, the

yard and the Owners had not reduced the exchange of messages between

them to any written form of formal contract. There was common ground

that the words “general shipyard conditions in accordance with BIMCO”referred to the ship repair contract provisions of BIMCO Repaircon. The

Owners took the view, therefore, that the arbitration provisions of the

Repaircon contract were incorporated into the contract. The relevant

provisions are found in Clause 12, Part II. Clause 12(a) provides, in part,

“…any dispute arising out of or in connection with this contract shall bereferred to arbitration in London…”

The Repaircon form also has alternative jurisdiction provisions. Clause

12(b) provides that the contract shall be governed by American law and

arbitrated in New York. Clause 12(c) provides that the contract will be

arbitrated at a mutually agreed place which could be anywhere. Crucially,

Clause 12(e) provides:

“If Box 18 in Part I is not appropriately filled in, Clause 12(a) of this clauseshall apply.”

Box 18 is contained in Part I of the Repaircon form and states as follows:

“18. Dispute Resolution (state 12(a) 12(b) or 12(c)) as agreed. If 12(c)agreed state place of arbitration if not filled in 12(a) shall apply).”

As the contract had not been reduced to writing, Clause 12 had not been

filled in. The Owners argued that as Clause 12(c) had been left blank,

Clause 12(a) applied and therefore the contract was subject to London

arbitration. They appointed an Arbitrator and our clients made an

application to the Arbitrators to determine the jurisdiction point.

In essence, the yard argued that the parties did not expressly agree an

arbitration clause and the incorporation of the Repaircon terms did not

supply one either (a) as a matter of construction or (b) because the words of

incorporation used by the parties in their exchange of correspondence,

although effective to incorporate the Repaircon terms generally, were

insufficient to incorporate the arbitration provisions. The yard also sought to

argue that when they did reduce a contract to writing, in other cases, they

ordinarily asked for Polish jurisdiction and ordinarily agreed Polish

jurisdiction. There was considerable evidence to that effect. The arbitration

Tribunal decided that that evidence was irrelevant and declined to consider it.

The Arbitrators firstly dealt with the question of construction. Various

arguments were put forward by the yard; such as that applying the default

provision was contrary to the intention of the parties, deduced objectively

from the exchange, which envisaged that a contract on a BIMCO form

would be drawn up and executed. Part of that process would include the

mutual choice of forum for dispute resolution. The yard also argued that

the purpose of the default provision was that the form should be

completed and if Box 18 was then left blank or inappropriately completed,

then the default provision would apply. It was not intended to commit the

parties at the very outset of the relationship to a choice of forum by

default. The yard pointed out that the BIMCO form had a number of other

provisions in it, such as limitation, which would ordinarily have been

discussed and agreed. The Arbitrators rejected these arguments. They said

that they were taking a broader and more commercial view of the form and

found that what Clause 12 and Box 18 amount to is a provision for the

parties to state a chosen forum for dispute resolution, but which provides

that in default of any specific agreement in that regard, London is to be the

forum. In effect, the Repaircon form provides for London arbitration unless

the parties agree otherwise. The Arbitrators pointed out that it did not

seem to them to be extraordinary or obviously wrong that the parties

could have accepted London arbitration by virtue of a simple exchange of

correspondence. They pointed out that the yard could easily have acquired

Poland as the dispute resolution forum by specifying this at the time. It

could also have stated “subject signature Repaircon”, or one of a number

of alternatives, but it did not.

The yard had an alternative argument on incorporation by reference, which

is a point that has much been litigated recently. The correct approach to the

incorporation of a jurisdiction or arbitration clause into a contract by

reference is a matter of considerable debate and there is a conflict between

the authorities. The starting point is Thomas & Co. Limited v Portsea SS

Co. Limited [1912] AC 1. This case involved a Bill of Lading which had the

words “with other conditions as per charterparty”. The charterparty

provided that any dispute should be settled by arbitration. The House of

Lords held that the arbitration clause was not incorporated into the Bill of

Lading. This point has been litigated frequently, with the Courts coming to

different conclusions. In Aughton Limited v MF Kent Services Limited

[1991] 31 Con LR 60, the Court of Appeal, which had two members,

reached the same decision, but expressed different views. Lord Justice

Gibson took a broad view with regard to incorporation of arbitration clauses

Lindsay Eastlteast@reedsmith.com

3

from another contract. Sir John Megaw took a narrow view believing that

the case should be governed by Thomas v Portsea. The Megaw view, so to

speak, was that an arbitration agreement was a special clause in that it may

preclude the parties to it from bringing a dispute before a Court of law and

that the arbitration agreement had to be written for the purposes of the

Arbitration Act then in force, the Arbitration Acts 1950 to 1979. It is fair to

say that, broadly, the Courts have become more benevolent, see Bingham

LJ in the “FEDERAL BULKER” [1989] 1 Lloyd’s Rep 183 in their view that

general words should incorporate by reference standard terms to be found

elsewhere. Bingham LJ did say, however, that where a Bill of Lading was

involved, a different and rather stricter rule has developed, especially where

the incorporation of arbitration clauses is concerned.

The Tribunal came to the conclusion that there were stricter rules so far as

concerned the incorporation into a Bill of Lading, of an arbitration clause

found in the charterparty. Indeed the Tribunal said that this strict approach

was also to be found in policies of insurance and referred to cases such as

Trygg Hansa v Equitas [1998] 2 Lloyd’s Rep 439 and Dornoch v MauritiusUnion [2006] 1 Lloyd’s Rep I.R. 786. However, the Tribunal also pointed

out that a number of cases do not follow that strict line, but accept

incorporation by reference.

Unfortunately there has been a recent case on this point, in which

Richards Butler, as we then were, were involved, the “ATHENA” [2006]

ALL ER (D)207. That case pointed out that a distinction should be drawn

between what are called “two contract” and “one contract” cases. In a two

contract case, you are talking about one contract seeking to incorporate by

reference terms of another contract between different parties. With a one

contract case, you are looking at a contract which seeks to incorporate

some general terms and conditions or where the arbitration clause is in a

standard form contract which forms the basis of the parties’ contract itself.

There is a whole list of cases on this topic; such as Modern Buildings v

Limmer [1975] 2 Lloyd’s Rep 318, a Court of Appeal decision and many

others. The “ATHENA” was an insurance case and the insurers (whom we

represented) sought to incorporate the rules of the Hellenic Mutual War

Risks Association, which included an arbitration clause. The Court held

that the arbitration clause was included, although it was not expressly

referred to. They held that general words of incorporation will serve to

incorporate an arbitration clause with the exception of “two contract”

cases. The Tribunal found themselves “very much persuaded” by the

approach of the Judge, Langley J, in the “ATHENA” and the distinction

between one contract and two contract cases. Our case was a “one

contract” case. Accordingly, the Tribunal did not accept the contentions put

forward on behalf of the yard in respect of incorporation by reference and

held that Clause 12(a) of Part II of the Repaircon was incorporated into the

ship repair contract and that the contract contained a valid London

arbitration clause.

This decision highlights the dangers of making any reference in an offer to

a standard form of contract and not reserving your position in respect of

the detailed terms of that contract and, in particular, the arbitration and

jurisdiction clause. You could find that you are bound to a detailed contract

without really even thinking about it.

SEAFARERS − CHANGES TO THE RACERELATIONS ACT

Laurence Rees, a Partner, and

Michael Smith, an Associate, both from our

Labour and Employment Group, consider the

impact of the proposed changes to the Race

Relations Act on the UK shipping industry.

The Department for Transport has begun

consultation on proposed changes to the

law which currently permits discrimination

on grounds of nationality against foreign

nationals who work as seafarers on UK

registered ships. The consultation has

arisen from a complaint made to the European Commission that in this

respect the UK legislation infringes EU law.

The Legal Issues

Section 9(1) of the Race Relations Act 1976 (‘RRA’) permits employers

to discriminate against seafarers who apply for or are engaged to work

on UK registered ships outside Great Britain. Such discrimination is only

permitted on the grounds of nationality and then only in relation to pay

(section 9(2) contains a similar provision applicable to contract workers

engaged outside Great Britain by an employment business or agency).

The effect of these provisions is that workers from, say, India, Poland or

Portugal who are recruited outside the UK can lawfully be paid lower

rates of pay on a British ship than British nationals employed on the

same ship.

Under EU law, workers of each member state are permitted to work in

other member states without restriction (subject to certain exceptions for

countries that have recently joined the EU). These migrant workers are

entitled to be employed on the same terms and conditions as resident

workers, including terms relating to pay and benefits. Section 9 of the RRA

prima facie allows breaches of these provisions of EU law. The TUC has

attacked Section 9 as a licence to discriminate against migrant workers

while damaging the opportunities for UK seafarers, as employers are likely

to seek to employ cheaper foreign nationals.

The RRA only applies in England, Wales and Scotland and does not extend

to Northern Ireland. The NI administration is currently considering

corresponding amendments to NI law to bring this in line with EU law on

the free movement of workers.

SHIPPING NEWSLETTER − JUNE 2007 4

Laurence Reeslrees@reedsmith.com

The Consultation

The Government has commenced consultation on possible amendments to

section 9 of the RRA. The consultation is to continue until 14th September

2007. The Government has set out three options:

1. maintaining the status quo

2. amending section 9 so that discrimination would be permitted only

against seafarers not from EEA (the EU member states together with

Norway, Iceland and Liechtenstein) and other designated countries,

as set out in Annex I to Regulatory Impact Assessment of the

Consultation Paper, including 79 African, Caribbean and Pacific Group

States as well as 10 countries with relevant association agreements

with the EC e.g. Russia, Turkey, Switzerland

3. repeal section 9, so that no discrimination at all would be permitted

The Department for Transport’s consultation paper states that the risk in

Option 1, maintaining the status quo, is that the European Commission

may commence infraction proceedings against the UK, which might result

in heavy financial penalties if the UK is found to be in breach of EU law.

The Consultation Paper also states that as the Government’s general

position is not to “over-implement” EU law, it is unlikely to pursue Option

3. Indeed, one particular concern with Option 3, raised during a previous

consultation on amendments to section 9, is that many UK registered

ships actually operate outside the EU and recruit local seafarers on terms

comparable with the local employment market. The Government

understands that this is in line with global shipping practice and the

imposition of a complete prohibition would damage the UK shipping

industry. Consequently it seems that Option 2 may be the way forward.

Impact of the possible reforms on UK ship owners

Adopting Option 2 will affect ship owners who have ships registered under

the UK flag and who employ seafarers from various EEA or designated

states on different rates of pay. The Department of Transport’s Regulatory

Impact Statement attached to the Consultation Paper (“RIA”) estimates

that under Option 2 the total increase in staffing costs would be around

£8.8 million per annum for vessels under the UK flag. Under Option 3, the

total increase would rise to £21 million per annum. Ship owners who

currently only employ UK or “Old EEA” seafarers (i.e. seafarers from the

original 18 EEA countries, such as France, Germany, Italy and

Luxembourg, and not including recently joined members such as Poland,

Lithuania and Latvia) should not be affected as there is unlikely to be

significant wage discrimination. If Option 2 is adopted, ship owners may

continue to pay lower wages to those employees recruited from any

country not identified specifically in Option 2; this would include countries

where seafarers are commonly recruited, such as India and the

Philippines. Seafarers from the new EU accession states such as Poland,

Lithuania and Latvia will, however, be protected. If Option 3 were adopted,

those who would not be protected by Option 2 (such as seafarers from

India and the Philippines) would be protected.

In practice, the options open to ship owners will be threefold: (1) to

increase the wages of newly protected employees, (2) to decrease the

wages of UK and “Old EEA” seafarers to bring them in line with these

employees, or (3) to terminate their employment and no longer re-recruit

or employ them. Employers planning to reduce pay or terminate contacts

of employment will have to tread carefully and take employment law advice

to establish the extent of the rights which UK law gives their employees

and other workers providing services. Under a UK employment contract a

reduction of pay without consent, or in the absence of any contractual

provision permitting this, would entitle the employee to resign and claim

constructive dismissal. The correct approach would be to terminate the

contract by giving proper notice and re-offering employment on the lower

rate of pay. Where the employees have UK unfair dismissal rights, it will be

important to follow the correct procedure. Failure to do so would expose

employers to the risk of claims by such employees for compensation for

unfair dismissal. Furthermore, foreign seafarers on UK flagged ships are

entitled to the UK’s national minimum wage in respect of any service while

they are in the UK. Other constraints on pay to consider are the

International Labour Organization’s minimum wages for seafarers, the

International Bargaining Forum established by the International Trade

Federation, International Maritime Employers’ Committee and any relevant

agreements with national shipowner associations.

In spite of the UK Government’s aim to encourage ship owners to register

under the UK flag, a likely consequence of adopting Options 2 or 3,

according to the Chamber of Shipping, is that ship owners will change the

flag of their vessels so that they are not subject to the new race

discrimination laws. The downside of this for employees is that their

working conditions may be detrimentally affected due to the less rigorous

health and safety laws of many foreign flag states. For those ship owners

who do not ‘flag out’, the RIA suggests that over the course of time, the

5

wages which employers offer will adjust downwards, with the

consequence that seafarers from the “Old EEA” countries may change

employer or drop out of the seafaring employment market. This could have

an adverse impact on the shore based sector where wages will have to

increase to attract suitable alternative labour, or shore-based firms may

even move to lower wage economies to avoid paying higher wages.

According to the RIA, the proposed changes should not have any negative

impact on smaller ship owners. Indeed, there is the possibility that

employees of smaller owners may find it harder to bring race

discrimination claims under the proposed new law than employees of

larger companies. This is because a Claimant must find an actual or

hypothetical comparator engaged in similar employment, which will be

more difficult for a smaller pool of employees in smaller companies.

The RIA provides that it is unlikely that either Options 2 or 3 will have

significant negative impact upon competition within the sector. In fact, it

suggests that the proposed changes may favour new entrants to the

market, who are free to choose their employment structure at the

outset, rather than having to make changes in light of the changes

proposed to the RRA. However, shipping is a global industry and ships

registered under the UK flag are in competition with ships registered to

other countries with much less stringent regulations. While EC law

applies across the EEA, so there should be fewer competition issues

with regard to other EEA countries' fleets which are also subject to the

same laws. Owners of vessels registered under the UK flag will

nevertheless be at a disadvantage in comparison with competitors

whose vessels are flagged in non-EEA countries which do not have

similar laws. However, as the RIA suggests, ‘flagging out’ is always a

relatively low cost option and, under Option 2, ship owners of UK flag

vessels will still have the option of employing solely third country

nationals (such as workers from India or the Philippines) as a means of

reducing wage costs.

SHIPPING NEWSLETTER − JUNE 2007 6

THE ACHILLEAS − WHAT LOSSES ARE NOWRECOVERABLE

Helle Kjaerstad, an Associate in ourShipping Group, considers the extent towhich the scope for recovering loss ofprofits for breaches of charter and othercontracts has been significantly extendedfollowing the Commercial Court’s decisionin The Achilleas.

In December 2006, a decision was handed

down by Mr Justice Clarke of the

Commercial Court in The Achilleas [2006]EWHC 3030, a case concerning a

shipowners' entitlement to recover, as against his outgoing time

charterer, loss of profits under a subsequent charter incurred by reason

of late re-delivery.

The key facts of the case were that Mercator Shipping Inc owned the MV“ACHILLEAS” which they had chartered to Transfield Shipping Inc on theNYPE 1946 form for about six months at a daily rate of US$13,500. WhenTransfield tendered their contractual 10 day re-delivery notice, Mercatorwent firm on a fixture with Cargill at a daily rate of US$39,000, which wasbelieved to be exceptionally high, even in the prevailing market.

In the ensuing period before re-delivery was to take place, and because of

various delays caused by Transfield’s sub-charterers, it became clear that

Transfield would not be able to re-deliver the vessel on time and that

Mercator, in turn, would not be able to meet the cancellation dates under

their new charter with Cargill. Accordingly, where the market had fallen

somewhat in the short period since the Cargill fixture was concluded, and

where Cargill would otherwise have been at liberty to walk away from the

charter because of the delay, Mercator and Cargill renegotiated terms and,

in exchange for Cargill extending the cancellation date, Mercator agreed a

very significant reduction of US$8,000 in the daily hire rate. Presumably,

this reduction reflected the corresponding drop in the market that had

occurred in the period from when the Cargill fixture had originally been

concluded.

The vessel was eventually redelivered nine days late. There was no dispute

between Mercator and Transfield as to liability − Transfield were very

clearly in breach of their re-delivery obligations, it being irrelevant that the

delays were not caused by Transfield themselves but by their sub-

charterers. They disagreed, however, about the quantum of damages to

which Mercator would be entitled as a result of that breach, and that issue

proceeded to arbitration before a panel of LMAA arbitrators.

The arbitrators, by a majority decision, awarded Mercator damages in the

sum of US$1.3 million. This award was calculated on the basis of the

US$8,000 per day reduction in the hire rate agreed with Cargill multiplied

by the duration of the Cargill fixture.

In the reasons for the award, the Tribunal noted that it had duly considered

the two-limb test for the recoverability of damages for breaches of

contract as established in Hadley v Baxendale (1854) 9 Exch 341. Very

briefly, this established that, in relation to breaches of contract, an

innocent party is entitled to recover from the party in breach those losses

that may (1) fairly and reasonably be considered as arising naturally, ie

according to the usual course of things, from such breach of contract

itself, or (2) reasonably be supposed to have been in the contemplation of

both parties at the time they made the contract, as the probable result of

the breach of it. To be recoverable under either of these two limbs, losses

must be shown to have been “liable to result” and “not unlikely”.

Briefly, it is worth noting in the context of the Hadley v Baxendale test that

when dealing with more unusual types of losses which would fall within

the second limb, it is crucial that the claimant is able to show that the

Helle Kjaerstadhkjaerstad@reedsmith.com

party in breach had actual knowledge at the time that the relevant

contract was entered into that the particular losses being claimed were

likely to result from the breach in question.

Returning to The Achilleas, and its application of Hadley v Baxendale, the

Tribunal found that Mercator’s loss of profits from the reduction agreed

with Cargill fell within the first limb of that test as being losses that would

arise naturally and according to the usual course of things from late

redelivery, that these losses were likely to have resulted from the late re-

delivery, and that, accordingly, Transfield were liable for the same.

The minority arbitrator, in his dissenting reasons, said that he would have

awarded Mercator US$160,000, which was the difference between the hire

rate under the Transfield charter and the market rate at the time when the

vessel should have been re-delivered, multiplied by the 9 day delay in re-

delivery. In fact, this has been the long-established and widely accepted

formula for the calculation of damages for late re-delivery prior to the

decision in this case.

Unsurprisingly, Transfield appealed the Tribunal’s decision to the

Commercial Court, but Mr Justice Clarke upheld the award for US$1.3

million. Giving detailed reasons for his judgment, Mr Justice Clarke stated

that whereas the prima facie measure of damages for late re-delivery is the

difference between the market and charter rates for the period of the over-

run, being losses falling within the first limb of Hadley v Baxendale, there

was no reason why losses of profit under subsequent charters could not

be awarded under the second limb of Hadley v Baxendale as being losses

that could "reasonably be supposed to have been in the contemplation of

both parties at the time they made the contract as the probable result of a

breach of it". He also held that Mercator’s lost profits under the Cargill

charter were not too remote where (in his finding) Transfield knew that it

was a hazard of late re-delivery that the vessel could miss her cancellation

date under her next fixture and that this was not unusual. Moreover, Mr

Justice Clarke held that rapid fluctuation in market rates was widespread,

knowledge of which Transfield should be deemed to have been aware of at

the time of entering into their own charter for the "ACHILLEAS".

In my view, Mr Justice Clarke reached his decision by mistakenly applying

by analogy the well-known case of Hall v Pim [1928] 30 Lloyd’s Rep 159,

which relates to the recoverability of lost profits arising under sub-

contracts. Previously, Hall v Pim had, in effect, been limited in application

to cases involving chains of contemporaneous contracts, such as

commodities contracts, where it is very often the case that a seller under

one contract is fully aware that his buyer intends immediately to enter into

a sub-contract (often on back-to-back terms) for the re-sale of the same

cargo with a view to making a profit, and where in the event of a failure by

the seller to perform the contract, a question then arises as to whether the

buyer is limited to claiming damages on the usual basis (being the

difference between the contract price and market value of the cargo as at

the date of the breach), or if he would alternatively be entitled to claim any

profit lost under his sub-contract where the market may have fallen, or the

profit lost under the sub-contract which may be far greater than the

difference between the contract and market prices. In this type of scenario,

it is easy to see why a party in breach (in this example the seller) under

one such contract can be said to have had the necessary knowledge of the

loss of profits that the innocent party (the buyer) would potentially suffer

under his sub-contract at the time the contracts were concluded as a

result of his breach. It is difficult to see how this applies, by analogy, to

what, in my view, is a very different scenario of subsequent time charters

that are typically concluded, say, 6, 12 or 18 months apart and where any

loss of profits that the owner may suffer towards the end of the time

charter in relation to a subsequent charter are far less foreseeable at the

time when the initial charter was entered into, let alone that the charterer

could be said to have any actual knowledge of such future losses.

To sum up, it seems that Mr Justice Clarke has done away with the

requirement by a claimant to show actual knowledge by the party in

breach of the likelihood of any "unusual" losses, despite such knowledge

being at the very heart of the requirements for recovering losses under the

second limb of Hadley v Baxendale. Mr Justice Clarke has thereby opened

up the possibility of owners claiming - and recovering - loss of profits that

would previously have been considered too remote, such as loss of profits

covering the whole of the duration of a long-term subsequent fixture, as

did Mercator in this present case. Not only that, the decision as it stands

can also be applied to a whole range of other types of breaches of

charters, and, indeed, any other contracts, and would facilitate a wide-

ranging recovery of consequential losses.

Mr Justice Clarke’s decision is under appeal to the Court of Appeal, which

heard the appeal in late May. For the time being, the immediate effect of

his decision as it stands is that we are likely to see far more frequent, and

larger, claims for damages for late redelivery than has been the case to

date, where previously the amounts at stake would generally have been

relatively modest, and the parties would usually reach an early commercial

compromise as to the amount of any damages payable.

From a more practical point of view, as far as owners are concerned, and

where faced with a claim for late redelivery, it is now worth looking at the

losses that may be said to have been caused in relation to the subsequent

fixture, as opposed simply to looking at the difference between the charter

and market rates for the period of the late redelivery. It may well be worth

presenting a claim covering such losses.

As for charterers, in light of the much greater exposure to substantial

claims for damages, they should seek to incorporate into their time charters

a clause in the following terms to limit the damages for late re-delivery:

“If re-delivery is delayed for whatever reason, then Owners’ recovery will be

strictly limited to the charter rate of hire up to the date when re-delivery should

have taken place and then thereafter and until actual re-delivery takes place

based on the differential between the charter rate of hire and the market rate.”

An update will follow after the Court of Appeal delivers its judgment. My

guess is that the decision of Mr Justice Clarke will be overturned, but then

there have already been two surprising decisions in this case, at the arbitral

and court level, respectively, so anything is possible, and watch this space!

7

PREPARING FOR THE FUTURE

Lesley Davey, an Associate in our

Competition & European Group, considers

the future for shipping lines after the

demise of the European block exemption for

liner shipping conferences.

On 25th September 2006, the European

Ministers for the Internal Market, Industry

and Research meeting as the

Competitiveness Council (the Council)

adopted a regulation that will finally see the

demise of the European block exemption for

liner shipping conferences. From October 2008 shipping lines, which are

currently members of a liner shipping conference, will no longer be able to

cooperate and publish tariffs.

After three and half years of intensive debate, this move was not

unexpected. The European Liner Affairs Association lobbied hard for an

exchange of information regime to replace the conference system. It is

expected that the European Commission will publish draft guidelines on

information exchange during the summer.

However, it is not just liner shipping that needs to be considering its future.

The Council’s regulation also widens the European Commission’s

enforcement powers when enforcing Europe’s competition rules. These

rules prohibit restrictive agreements between competitors, which can result

in price fixing, exchange of confidential information and market sharing.

The European Commission is now able to enforce these rules at a European

level in respect of cabotage and tramp shipping (non-liner operators such

as carriers of forestry products or liquid gas). Until now, only national

competition authorities and the courts in the European member states have

been able to apply competition rules to non-liner operators.

Many operators believed that the European Commission did not havepower to enforce the competition rules as they did not apply to the sector.This was not the case. All operators in the maritime sector have alwaysbeen subject to Europe’s competition rules. The only difference now is thatthe European Commission can enforce those rules and fine non-lineroperators up to 10% of their worldwide turnover.

Non-liner operators and vessel pool managers have had time to digest theeffect of the new regime, proposals for which were first announced inDecember 2005. The European Commission has already started preparingitself for its new investigative powers. It commissioned a study into thissector to help it to understand the mechanics of the sector and theagreements and arrangements which govern vessel pools. This waspublished in February 2007.

So, what should non-liner operators be doing to prepare themselves for

this new regime? First and foremost they should be undertaking audits to

ensure that their business practices, arrangements and agreements do not

breach competition rules which could result in an investigation, either by

the European Commission or a national competition authority. This means

obtaining a legal opinion on the compatibility of their arrangements with

the competition rules to ensure that they are prepared for any questions

the European Commission, or a national competition authority, might ask.

Arrangements therefore need to be reviewed to see if any restrictions can

be justified. For example, it is said that pool members are price takers as

the spot market determines a price rather than the vessels’ owners or the

pool managers.

Non-liner operators, especially those operating in vessel pools need to ask

themselves whether they are prepared for the new regime and a possible

investigation by the European Commission and/or a national competition

authority. They therefore need to undertake a competition compliance audit

to check their practices to ensure they are not illegal.

If you would like more advice about the application of the competition

rules to the maritime sector or a competition compliance audit, please

contact Marjorie Holmes on 020 7816 3837 (mholmes@reedsmith.com) or

Lesley Davey on 020 7816 3754 (ldavey@reedsmith.com).

SHIPPING NEWSLETTER − JUNE 2007 8

Lesley Daveyldavey@reedsmith.com

EXPANDING ENVIRONMENTAL SOCIALRESPONSIBILITY IN THE MARITIME SECTOR

Marjorie Holmes, a Partner in our

Competition and European Group, with

input from the Reed Smith Environmental

Group concerning information in relation to

California, looks at the options being

considered by Europe to reduce the

environmental effect of the shipping

industry on the environment.

Europe and California seem to be leading

the way in creating protection to the

environment in their own jurisdictions.

Europe has a wide Environmental Action Programme and, as mentioned in

our last newsletter, has just introduced legislation REACH (Registration,

Evaluation, Authorisation and Restriction of Chemicals) Regulation (EC)

No. 1907/2006 which requires testing/risk assessment and appointment of

representatives in Europe in order to import chemicals into Europe.

California is watching and looking at introducing the same or similar

legislation into California.

Meanwhile, California has just introduced very controversial new

regulations on emissions from diesel auxiliary and diesel electric engines

on ocean-going vessels operating into ports in California and within 24

nautical miles of the California coastline. The new regulations became

effective on 6th December 2006 and establish standards for diesel

particulate matter, sulphur dioxide and nitrogen oxides. The regulations in

Title 13, §2299.1 and Title 17, §93118 of the California Code of Regulations

apply to U.S. and foreign-flagged vessels operating in California waters.

This has resulted in a law suit in the Eastern District of California − “PacificMerchant Shipping Association v Catherine E. Witherspoon, ExecutiveOfficer of the California Air Resources Board”. The Plaintiffs in that case

contend that the regulations are pre-empted by federal statutes and conflict

with the Commerce Clause of the United States Constitution, as well as the

federal Clean Air Act and the Submerged Lands Act.

In Europe, just at the time that the European Commission received a

budget of €57 million in aid for short sea shipping lines in 2007 (an

increase of €35 million on the 2006 figure) to help shift cargo from the

congested roads to the sea, the Commission has also announced that,

unless the IMO (International Maritime Organisation) moves forward,

Europe alone may move forward to limit greenhouse gas omissions from

shipping and include the maritime sector in CO2 emission trading. This will

put an extra financial burden on shipping.

In any event, it is not a simple matter because of:

• the issues to do with calculating emissions

• the limits on Member States as a result of International Conventions

• the effect on competition between ports

There are at least three indices for calculating CO2 emissions performance:

• IMO index (distance sailed with cargo)

• BSR index (for containers) (distance sailed with cargo + distance

sailed in ballast)

• Inter-tanko index (distance sailed with cargo + distance sailed in

ballast)

Shipping is a global business and is the subject of several international

conventions (primarily of relevance to this issue are Marpol VI (not yet

implemented by the US) and UNCLOS (Law of the Sea Convention)) which

create obligations and differing powers on Port States and Coastal States,

depending on whether the ships are sailing in:

• internal waters

• territorial waters

• EEZ (Exclusive Economic Zone)

• international waters

Within internal and territorial waters, Member States have the power to

impose additional charges for vessels responsible for greenhouse gas

emissions. Indeed, two schemes exist – one in Norway in relation to

nitrogen oxide (NOx) and another in Sweden in relation to sulphur oxide

emissions (SOx).

Critics of this approach, however, warn that if Member States implement

such schemes individually within Europe, ships can switch ports in Europe

much more easily than aircraft. Advocates of the approach claim that

“tackling climate change can complement wider goals of economiccompetitiveness and energy security” (Mark Watts MEP, Lloyd’s List, 4th

April 2007). Certainly, investors including important financial institutions

are starting to take non-financial considerations into account. Major

lending banks are adopting the Equator Principles (EP), which are

voluntary social and environmental investment guidelines.

Supermarkets, such as Morrisons and Tesco, announce that corporate

social responsibility is important to them. Sir Terry Leahy of Tesco recently

gave a speech on the theme of “Green Grocer? Tesco, Carbon and the

Consumer”. The highlights on Tesco’s website include:

• “We will begin the search for a universally accepted and commonly

understood measure of the carbon footprint of the products we

sell and will take the first steps towards developing a Sustainable

Consumption Institute to lead this work. This will enable us to

label our products so that customers can compare their carbon

footprint easily.

• We will promote and incentivise energy efficient products through our

Green Clubcard scheme and also extend Green Clubcard points to

environmentally friendly products from a wider range of categories,

for example organic food, products made from recycled or

9

Marjorie Holmesmholmes@reedsmith.com

biodegradable materials and Fairtrade. We will also bring down the

cost of going green, beginning by halving the price of energy-efficient

light bulbs.

• We will reduce the carbon footprint of our existing stores and

distribution centres around the world by 50 per cent by 2020 and

ensure that all new stores we build between now and 2020 emit on

average at least 50 per cent less carbon than an equivalent store in

2006.

• We will seek to restrict air transport to less than 1 per cent of our

products and will put an aeroplane symbol on all air-freighted

products in our stores.”

If Tesco are serious about this, perhaps they could link this to helping to

get cargo off the roads into short sea transit, given that it is generally

accepted that, per ton, travel by sea results in less carbon emissions than

by air or road.

A report on greenhouse gas emissions for shipping paid for by the

European Commission (available at

http://ec.europa.eu/environment/air/transport.htm#3) concluded in January

2007 that one of the most promising options to reduce pollution would be

the inclusion of CO2 emissions from shipping in an ETS (Emissions

Trading Scheme). Under this policy, ship operators would have to

surrender EU allowances for CO2 emissions on their voyage to EU ports.

On 22nd March 2007 the Financial Times reported that the European

Commission had announced that unless the IMO discussions move

towards a global scheme, Europe will consider implementing such a

scheme in Europe anyway. With European companies accounting for 43%

of global tonnage, this would have a massive knock-on effect on shipping.

The EC’s timetable is very progressive, aiming to have something in place

within a year.

Currently, the world’s largest CO2 trading scheme is the European Union

Emissions Trading Scheme (EU ETS), but it does not include shipping.

Under the EU ETS, EU Member State governments are required to set an

emissions cap for all installations covered by the EU ETS by allocating

allowances to those installations to emit a specified quantity for the

particular phase. (Installations covered under the EU ETS Directive are

defined by reference to specified activities (such as production of ferrous

metals and energy activities such as mineral oil refineries and coke ovens)

and production output).

Each Member State has to produce a national allocation plan (‘NAP’) for

approval by the Commission. This specifies the total number of allowances

it intends to issue during the particular phase and how it proposes to

distribute those allowances to installations that are subject to the EU ETS.

Member States must ensure that each installation covered by the EU ETS

holds a greenhouse gas emissions trading permit and its annual emissions

must be reported and verified. Each permitted installation will receive an

allocation of allowances based on the NAP.

At the end of each year, installations are required to ensure they have

sufficient allowances to account for their installation’s actual emissions.

The installations have flexibility to buy additional allowances or to sell

surplus allowances generated from reducing their emissions below their

allocation.

Each Member State must set up a national registry for recording

allowances and trading. Any person can hold allowances and buy and sell

allowances and the national registries are open to the public.

In addition, the EU has established a central administrator which maintains

a Community independent transaction log of the issue, transfer and

cancellation of EU Allowances.

How this would work with ships, many of which fly non-European flags,

is unclear. The scheme has been extended to cover the aviation sector

from 2011. For shipping to be covered there would need to be

amendments to Marpol VI, which is signed by 35 countries and

which restricts state control over emissions from foreign-flag vessels to

its own internal/territorial waters. Account would need to be taken of

the obligation to avoid undue detentions or delays pursuant to

Article 7 of MARPOL/73/78 which is explicitly linked to entitlements

to compensation.

UNCLOS is also an important convention. Where it applies (and it includes

the Strait of Dover), foreign ships have a right of transit passage subject to

no violations which cause or threaten “major damage to the marine

environment of the strait”.

Thus MARPOL and UNCLOS would certainly need to be amended.

SHIPPING NEWSLETTER − JUNE 2007 10

Whether the European Member States would have to withdraw from the

conventions to implement their proposals is a matter for debate. There is a

case already before the European Court which challenges the right of

Member States to implement a directive on criminal sanctions for ship-

source pollution (Directive 2005/35 EC). It has been brought by The

International Association of Independent Tanker Owners (INTERTANKO)

and others against the Secretary of State for Transport in the

Administrative Court of the Queen’s Bench Division of the High Court of

Justice in England and Wales [2006] EWHC 1577 (Admin).

The Directive covers all ships irrespective of their flag. It introduces, as a

criminal offence, pollution if committed with “intent, recklessly or by

serious negligence” i.e. discharge of polluting substances in (a) internal

waters; (b) territorial waters; (c) straits used for international navigation;

(d) the Exclusive Economic Zone; and (e) the high sea and it includes

liability to third parties, not just the owner, master and crew.

The challenge is based on the fact that to implement this directive is in breach

of the international conventions. The challenge to the directive was made in

the English High Court and has been referred by this court to the European

Court of Justice in Luxembourg. The four questions referred are as follows:

1. Whether it is lawful for the EU to impose criminal liability in respect

of discharges from foreign flag ships on the high seas or in the

Exclusive Economic Zone, and to limit Marpol defences in such

cases.

2. Whether it is lawful for the EU to exclude Marpol defences for

discharges in the territorial sea.

3. Whether the imposition of criminal liability for discharges caused by

“serious negligence” hampers the right of innocent passage.

4. Whether the standard of liability in the directive of “serious

negligence” satisfies the requirement of legal certainty.

Summary and conclusion

The findings of the ECJ will have a major effect on whether Europe can be

an effective world leader in implementing measures to reduce climate

change without waiting for agreement on an international basis.

Europe and California are creating waves on the world stage in their

endeavours to protect our environment. It is to be hoped that this will

generate a thorough impact assessment on the proposed and newly

implemented legislation to protect the environment, and result in a

commitment from all sectors worldwide.

11

COMMUNITY FLAGSHIP EXEMPTION

Philippa Roles, an Associate in our Tax,

Benefits & Wealth Planning Group, reports

on the continuation of the disapplication of

the requirement to be community-flagged

for the UK Tonnage Tax Regime for the

07/08 financial year.

The UK Treasury has opted, for the financial

year 2007/08, to continue with the

disapplication of the requirement under

Schedule 22, paragraph 22A of the Finance

Act 2000, which requires ships entering the

UK Tonnage Tax regime to be Community-flagged. This disapplication is

made under the Tonnage Tax (Exception of Financial Year 2007) Order

2007, and came into effect on 1st April 2007.

The requirement for a ship to be Community-flagged in order to enter the

UK Tonnage Tax regime was introduced in the Finance Act 2005 in order to

bring the UK Tonnage Tax regime into line with the revised European

Community Guidelines on State Aid to Maritime Transport, which were

published in January 2004. The Commission Guidelines require that any

tonnage tax regime must contain an obligation that ships operating within

the tonnage tax regime carry an EU flag in certain specified circumstances.

These rules were introduced into the UK through the Finance Act 2005,

and took effect from 1st July 2005.

The Finance Act 2005 provides that in certain circumstances there is a

requirement to register new ships in one of the Member States’ registers.

If a new ship is not flagged in the EU, it will not be regarded as a

qualifying ship for the purposes of Schedule 22 to the Finance Act 2000,

and profits arising from its operation will not be subject to tonnage tax

treatment. However the UK Government reserved an exception to allow the

Treasury to disapply the flagging requirement for a given financial year.

The Treasury can exempt a financial year if it is satisfied, on the basis of

information available to it, that the proportion of all vessels within the

tonnage tax regime flying an EU flag has not reduced on average over a

prescribed three year period. The 2007 statutory instrument exempts the

financial year 2007/08.

The aim underlying the Community-flagging requirement is to create a

low tax environment to help the EU shipping industry to be more

comprehensive: “the objective of State Aid within the common maritime

policy is to promote the competitiveness of the EC fleets on the global

shipping market” and “… promoting a safe and competitive [European]

Community fleet with the employment of the highest possible number of

Community seafarers.” This in turn has led to the conclusion that:

“support measures for the maritime sectors should aim at reducing

fiscal and other costs and burdens borne by the EC shipowners and EC

seafarers towards levels in line with world norms”. However, whilst it

continues to be the case that the proportion of vessels within the

tonnage tax regime flying EU flags is not diminishing, it is to be

anticipated that the UK Treasury will continue to exempt the Community-

flagging requirement.

Philippa Rolesproles@reedsmith.com

SHIPPING NEWSLETTER − JUNE 2007 12

What is your full name?

Rebeca Walter-Jones.

Mother/father’s nationality?

Both are Welsh.

Where were you born?

Heath Hospital, Cardiff.

Any lawyers in family before?

None whatsoever, the majority are/were teachers.

What jobs, other than the law, did you consider?

When I was very young, I wanted to be a police officer, pilot or travel

agent.

What other jobs did you do in your summer hols etc?

Working in Golf Club bar, Spar convenience shop, looking after children

at outdoor activity centre in West Wales, selling ice cream at B & Q.

How does working at RSRB compare to them?

Working at RSRB involves a lot more sitting down than any of the

above mentioned jobs.

What has been your favourite holiday destination to date?

Vietnam.

Have you been anywhere of particular interest on business?

I went to Wuhan in China in November – just for two days. A very

bizzare place.

If you could go to one place in the world where would it be?

There are too many places to mention. Anywhere long haul would be

nice – provided I can fly first class of course.

Car?

A little silver mini.

Where do you live in London?

I live in Putney.

How do you get into work?

I take the District line.

Have you bought a CD recently?

I bought the new Take That CD. I’ve listened to it so much that I can’t

stand it now.

Last concert you went to?

Robbie Williams in Milton Keynes last September. It was a really awful

experience, and I nearly got beaten up. Never again.

Last item of clothing you bought?

It will hopefully be a pair of shoes for work this lunch time. A long

overdue purchase.

Last five things on credit card?

Beauty treatments during a holiday to Dubai in February, and a hotel for

eleven people for a friend’s hen weekend in Paris in May.

Last film you went to see?

Hot Fuzz.

How do you relax?

Usual stuff − gym, seeing friends, going away, being outdoors.

We are meant to learn from our mistakes – what will you never forget?

Always take your keys when leaving home. I managed to lock myself

out of my flat the day after I moved in, and again recently. The

locksmith had to drill a hole in the new front door which had been fitted

the previous day.

Rebeca Walter-Jonesrwalter-jones@reedsmith.com

13

“TO TRUST” OR “NOT TO TRUST”INTERNATIONAL INTERLINE FREIGHTCHARGES

Mike C. Buckley, a Partner, Reed Smith LLP,

in Oakland, CA, looks at the growing

uncertainty under U.S. bankruptcy law over

the “trust fund” status of freight charges

collected by carriers for interline

movements, which is adding a new element

of business risk to handling international

freight into or out of the U.S.

Virtually all of the cargo containers shipped

into and out of the United States move as

the result of “interline” operations by

trucking companies, railroads and ocean freight carriers. One common

carrier, usually a local trucking company, will receive a container and

transfer it to another common carrier, perhaps a railroad, or directly to an

ocean cargo vessel for foreign delivery. Importing simply reverses the

process, so the great majority of movements begin or end with a trucking

company, perhaps a very small one. Because trucking is a highly

competitive and mostly unregulated industry in the U.S., financial failure of

trucking companies is relatively common. The trucking companies’

position as the receiving or delivering carrier means that financial failure

may disrupt the payment of substantial amounts of freight charges

resulting from interline operations.

To facilitate interline transportation, the U.S. Congress enacted laws

requiring carriers to participate in the interline transport of freight. Title 49,

U.S.C. §§ 10100 et seq. Licensed U.S. common carriers may not refuse to

accept interline freight and must establish specific tariffs for the movement

of interline freight. The statutes authorize a single bill of lading covering the

movement of the freight from origin to destination even though multiple

carriers in multiple jurisdictions are involved. In freight prepaid situations,

the shipper pays the carrier who issues the original bill of lading for the

entire movement. That carrier is then responsible for dividing the payment

among the various interline carriers involved. In freight collect or paid by

customer situations, that role falls to the delivering carrier.

Historically, U.S. federal courts have extended the statutory framework

created for the railroad industry to other transportation industries by

applying common law principles derived from the statutory scheme. One

significant aspect of the interline payment system was the generally

accepted idea that the carrier collecting the freight charges held the

payment in trust for all of the interline carriers entitled to share in the

revenue. This “trust fund doctrine” raised overall confidence in the system,

protected the non-collecting carriers against the financial failure or other

business mishap of the collecting carrier, and significantly reduced the

operating expenses of the freight charges collection system, because only

one customer collection needed to be made per shipment. However, some

recent U.S. bankruptcy court decisions have repudiated the trust fund

doctrine, thereby jeopardizing the smooth operation of the international

interline payment system.

The trust doctrine started with the bankruptcy case in the matter of Penn

Central Trans. Co., 486 F.2d 519 (3rd Cir., 1973), in which the court held

that “[a] common sense interpretation of this [interline] system would

indicate that funds collected by one railroad for and on behalf of another

railroad are held in trust by the collecting railroad until the monies are

transmitted.” The court concluded that interline railroads were entitled to

monthly reconciliation of their mutual interline accounts for passenger and

freight revenue by set off and payment where appropriate, and those set

offs and payments, being done through the trust, could not be stopped by

other, non-interline carrier creditors. Application of the trust fund doctrine

gained recognition in subsequent cases. In Norfolk & Western RR Co. v.

Bergman (In re Bergman), 103 B.R. 660 (Bkrtcy., E.D. Pa. 1989), the Court

held that interline freight collections paid to the North Central Texas RR

were held in trust for interline carriers. NCTR was indirectly owned by

Bergman, and NCTR owed Bergman substantial sums. Bergman was paid

Mike C Buckleymbuckley@reedsmith.com

On the 3 May 2007 the European Commission announced that officials had carried out inspections at the premises of several marine hose producers

in France, Italy and the United Kingdom in connection with an alleged price fixing cartel. Marine hoses are used in transporting crude oil and

petroleum products by sea. The Commission also coordinated its investigative measures with the US Department of Justice in the context of a

suspected worldwide cartel concerning marine hoses.

The fact that the European Commission carries out such inspections does not mean that the companies are guilty of anti-competitive behaviour.

If the Commission finds that there has been unlawful price fixing, customers of those marine hose producers including shipping and oil companies

may claim damages for having overpaid when buying marine hose. Under UK law, ‘follow on’ class actions may be brought on the basis of an

existing infringement decision. Earlier this year the Consumers’ Association brought the first UK ‘class action’ competition claim for compensation

for customers from JJB Sports for fixing the price of replica England and Manchester United football shirts.

If you believe your company may have suffered from anti-competitive behaviour, please contact our specialist Competition and EU law team:

(+44 (0) 20 7772 5786).

SHIPPING NEWSLETTER − JUNE 2007 14

by NCTR using funds Bergman knew were held subject to the trust fund

doctrine. In Bergman’s personal bankruptcy case, the Court held he owed

the money received from NCTR to the interline carriers and that the debt

was non-dischargeable because Bergman was fully aware of the fact that

the funds were held in trust by NCTR.

The doctrine seemed firmly established with respect to rail carriers that

were part of the interline accounting system. Parker Motor Freight Inc. v.

Fifth Third Bank, 116 F.3d 1137 (6th Cir., 1997); Ann Arbor RR Co. v.

Committee of Interline Railroads (In re Ann Arbor RR Co), 623 F.2d 480

(6th Cir., 1980). Other courts extended the trust fund doctrine even to

railroads that were not part of the formal Association of American

Railroads interline accounts clearing house system and thus had not

entered into formal agreements for set off and payment. Missouri Pacific

RR Co. v. Escanaba and Lake Superior RR Co., 897 F.2d 210, 213-4

(1990). The doctrine was also applied to the natural gas pine line

transportation industry. In re Columbia Gas Systems, Inc., 997 F.2d 1039

(3d. Cir., 1993).

Since early in the life of the doctrine there has been the dissenting view

that, unless there existed formalities of establishing a trust with writings

and procedures such as segregation of funds, then there was no trust

fund. Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562, 566

(7th Cir. 1986); Union Pacific RR Co. v. Moritz (In the Matter of Iowa RR

Co.), 840 F.2d 535, 536-7 (7th Cir. 1988). However, the doctrine seemed

to be widely recognized and applied.

Now, recent decisions cast doubt on the viability of the trust fund doctrine.

In Bangor & Aroostook RR, 320 B.R. 226 (Bkrtcy D. Maine, 2005) the trial

court rejected applying the trust fund doctrine even though the debtor and

its fellow interline railroads had expressly agreed that collected interline

freight charges were held in trust. The court reasoned that a failure to

segregate the funds, and a lack of notice to the world that such funds were

held in trust, defeated the application of the doctrines. Another trial court

rejected applying the trust fund doctrine to interline balances collected by

an ocean freight company for a railroad: in re Muma Services, Inc., 322

B.R. 541 (Bkrtcy., D. Del. 2005) the court reasoned that the parties had

not acted as though the funds were held in trust: the funds were not

segregated; no interest was paid on the balance; no specific agreement

existed as to apportionment.

The most troubling challenge to the trust fund doctrine is from a Ninth

Circuit case, Norfolk Southern Railway Co. v. Consolidated Freightways

Corp., 443 F.3d 1160 (9th Cir. 2006). The Ninth Circuit covers the entire

U.S. West Coast, Alaska, Hawaii and Pacific dependencies. Over half the

U.S.’s ocean freight moves through ports in the Ninth Circuit. The decision

is quite simple − the trust fund doctrine is not “justified” and, thus, does

not exist in this Circuit. So, unless all the parties to an interline movement

enter into comprehensive agreements to treat collected interline freight

charges as trust funds (and actually do so), the funds are not held in trust

and are available to all the creditors of the insolvent carrier. The Court also

found that principles of U.S. bankruptcy law (equality of distribution to

creditors, presumption that property held by debtor is property of its

estate) weighed heavily against the creation of a federal common law trust

fund doctrine.

The Court noted that federal law does not specifically make payments for

interline freight charges trust funds. That principle was established by

court made law, and the Ninth Circuit met Norfolk Southern’s suggestion

that federal common law creates a trust for interline freight charge

payments with scepticism. The Court noted that some statutes encouraged

the Courts to formulate national uniform policy to supplement the explicit

provisions of the statute, but the Transportation Act contains no such

direction. Language in the Transportation Act which states that an interline

carrier is entitled “to actually receive its earned division” of the interline

freight charge, was viewed by the Court as procedural rather than

substantive and the Court declined to make it the lynchpin of a

constructive trust approach to the interline freight charges problem.

In rejecting the contrary circuit court cases, the Ninth Circuit intimates that

any trust arrangement would have to be established, if at all, under state

law, but the Court does not suggest what state law should govern. In many

cases the freight in question will be picked up in one state, handed off to a

second interline carrier in another state and finally delivered in a third

state, or, perhaps, overseas, all by carriers incorporated in other states or

nations and headquartered in yet other states or nations, all using bank

accounts in other jurisdictions. What law should apply? A federal common

law trust fund applicable to freight charges on all movements beginning or

ending in the U.S. would cut through that Gordian Knot, but the Ninth

Circuit declined to simplify the problem in that fashion.

The Court also failed to address Norfolk Southern’s suggestion that major

disruptions in interline movements could occur if interline carriers began

to use self-help mechanisms to assure payment. What would happen if a

railroad refuses to commence the transportation of a container received

from an interline trucking company until actual payment of its portion of

the interline freight charges is made. Under U.S. law it cannot refuse to

take the shipment, but it can store the freight until its charges are paid. A

container could be detained for two or three days until the payment was

actually received. Alternative assurance of payment such as cashier’s

cheques or letters of credit seems administratively far too cumbersome to

be practical. None of these scenarios seem to support Congress’ idea that

interlining would facilitate and speed up interstate and international

transport of freight.

Finally, the Ninth Circuit also neglected to address the fact that

railroads and ocean freight carriers are almost certain to be the most

disadvantaged by the rejection of the trust fund doctrine, compared to

motor transport carriers. Since the great majority of movements begin

or end with the trucker, that is where the money will be held up by a

financial failure, leaving those in the middle of the movement

potentially unpaid.

15

WELCOME TO ...

Rupert Talbot-Garman joined our Shipping

Group, as an Associate, on 30th April

2007 and is now working with Mark

O'Neil, Alex Andrews and Stephen

Kirkpatrick. Rupert trained with Constant

& Constant in London and, upon his

qualification in May 2004, joined E.G.

Arghyrakis & Co. He is fluent in Spanish

and has both Spanish and Anglo-Chilean

family connections, is a member of the

Executive Committee of the BSLA (British

Spanish Law Association) and is Secretary

of the BCCC (British Chilean Chamber of Commerce) Next Generation

Association. He holds an LL.B (Hons) and LL.M. (Hons) in Maritime Law,

the latter from the University of Southampton. He acted (with his previous

employer) for the Owners and P&I club of the "Hakki Deval" in the recently

reported case of Owners and/or Demise Charterers of the m/v "Eleftheria" v

Owners and/or Demise Charterers of the m/v "Hakki Deval" [2006] EWHC

2809 (Comm): 9 November 2006.

Michaela Domijan-Arneri joined the

Shipping Group as an Associate on 30th

April 2007 and is now working with Nick

Shaw and Lindsay East. Michaela trained

with Swinnerton Moore Solicitors and

qualified in November 2006. She has

travelled extensively and has lived in

various European locations which has

provided her with an advantage of

speaking 5 languages (Dutch, French,

German, Croatian and Italian). After

completing the Maritime Law Short Course

at the University of Southampton last year, Michaela took advantage of her

contacts and arranged a secondment at the Japan P&I Club in Tokyo.

Jennie Scott recently joined Reed Smith

Richards Butler as Business Development

Executive for the Shipping and Energy

Trade & Commodities Groups. She

graduated from the University of Durham

in Ancient History and has recently

completed her Chartered Institute of

Marketing, Professional Diploma.

Jennie will provide targeted and focussed

business development support to the

Groups. She is looking forward to

increasing her knowledge of Reed Smith Richards Butler’s clients and

gaining a better understanding of their needs and how the firm’s

capabilities can best meet these.

Yvonne Percival qualified as a lawyer in

1995 and joined Richards Butler in 2006,

having returned to London from Shanghai

where she was deputy chief representative

at the representative office of

Eversheds/Khattar Wong. Yvonne studied,

lived and worked in China for over two

decades and is fluent in Mandarin. She

often advises on China related matters

relating to both inward and outward

investment.

Yvonne has worked on a wide range of issues arising out of international

transactions including shipping, international trade and international

commercial arbitration. She is on the China International Economic and

Trade Arbitration Commission panel of arbitrators and is a member of the

Chartered Institute of Arbitrators.

Rupert Talbot-Garman

rtalbot-garman@reedsmith.com

Jennie Scott

jscott@reedsmith.com

Michaela Domijan-Arneri

mdomijan-arneri@reedsmith.com

All of this suggests that the U.S. Congress ought to confirm the trust fund

status of carrier collected interline freight charges. Congress addressed a

corollary issue in the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005. It greatly expanded the rights of sellers of goods

to claim reclamation of those goods from an entity that declares

bankruptcy soon after buying (and not paying for) them. Title 11, U.S.C.

§546(c). Even if reclamation is not possible because the goods have been

sold or used, a seller who would be entitled to reclamation, but cannot

actually get it, has a payment priority in the bankruptcy case. Title 11,

U.S.C. §503(b)(9). A change in the U.S. bankruptcy law to protect

interline carriers against the financial failure of an initiating or delivering

carrier seems to be the best solution.

Yvonne Percival

ypercival@reedsmith.com

The information contained in this Newsletter was compiled for its clients by Reed Smith Richards Butler as a summary of the subject matter covered and isintended to be a general guide only and not to be comprehensive, nor to providelegal advice. Reed Smith Richards Butler accepts no responsibility whatsoever forloss which may arise on information contained in this Newsletter. This Newsletterwas compiled up to and including April 2007. ©Reed Smith Richards Butler 2007.

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