Damages, Recoveries and Remedies in Shipping Law (Maritime and Transport Law Library) [1 ed.] 1032453036, 9781032453033

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DAMAGES, RECOVERIES AND REMEDIES I N S H I P P I N G L AW

MARITIME AND TRANSPORT LAW LIBRARY CARTNER ON THE INTERNATIONAL LAW OF THE SHIPMASTER On the New Command at Sea Second Edition John A C Cartner ILLEGAL CHARTERS AND AVIATION LAW Alena Soloveva COMMERCIAL AND MARITIME LAW IN CHINA AND EUROPE Shengnan Jia and Lijun Zhao OFFSHORE FLOATING PRODUCTION Legal and Commercial Risk Management Stuart Beadnall, Simon Moore and Max Lemanski THE MODERN LAW OF MARINE INSURANCE Volume Five Edited by D. Rhidian Thomas MERCHANT SHIP’S SEAWORTHINESS: LAW AND PRACTICE Xiankai Zhan & Pengfei Zhang INLAND WATERWAY TRANSPORT The European Legal Framework Massimiliano Grimaldi UNMANNED SHIPS AND THE LAW Bülent Sȍzer DAMAGES, RECOVERIES AND REMEDIES IN SHIPPING LAW Edited by Barɪş Soyer and Andrew Tettenborn

DAMAGES, RECOVERIES AND R E M E D I E S I N S H I P P I N G L AW

EDITED BY BARIŞ SOYER C O N S U LT I N G E D I T O R : A N D R E W T E T T E N B O R N

First published 2024 by Informa Law from Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Informa Law from Routledge 605 Third Avenue, New York, NY 10158 Informa Law from Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 selection and editorial matter, Barış Soyer; individual chapters, the contributors The right of Barış Soyer to be identified as the author of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-032-45303-3 (hbk) ISBN: 978-1-032-45306-4 (pbk) ISBN: 978-1-003-37634-7 (ebk) DOI: 10.4324/9781003376347 Typeset in Times New Roman by Apex CoVantage, LLC

CONTENTS

ix xi xix xxi xxxvii

Editors’ Biographies Contributors Preface Table of Cases Table of Legislation PART I

DAMAGES: FUNDAMENTAL PRINCIPLES AND NEW FRONTIERS

CHAPTER 1

LIMITATIONS TO AND DEDUCTIONS FROM CONTRACTUAL DAMAGES Jonathan Webb, with the assistance of Florian Schacker and George Lawrence

CHAPTER 2

THE REFLECTIVE LOSS DOCTRINE AND SHIPPING LAW: CAN WE WRITE IT OFF YET? Professor Andrew Tettenborn

17

CHAPTER 3

MITIGATION – IS IT RELEVANT WHEN ASSESSING DAMAGES FOR BREACH OF CHARTERPARTY? Simon Croall KC

26

CHAPTER 4

PROSPECTS OF RECOVERING DAMAGES FOR DELAY IN SHIPPING CASES Andrew Preston

35

CHAPTER 5

LIMITS ON A SHIPOWNER’S RIGHT TO REFUSE EARLY REDELIVERY OF A TIME-CHARTERED VESSEL Dr Ceren Cerit Dindar

43

CHAPTER 6

SHIP SELLER’S POTENTIAL DUTY OF CARE IN RESPECT OF BUYER’S DISMANTLING OF VESSEL Grace Asemota

65

v

3

CONTENTS

CHAPTER 7

JUDGMENTS IN BITCOIN? Josephine Davies

PART II

78

EMERGING LIABILITY REGIMES AND DAMAGES

CHAPTER 8

REMEDIES FOR SMART LEGAL CONTRACTS: RECTIFICATION AND RESCISSION RECONSIDERED Dr Adam Sanitt

CHAPTER 9

THE INTERNET OF THINGS IN THE COMMERCIAL INSURANCE CONTEXT – A CASE FOR REGULATION, OR FOR COMMERCIAL SHREWDNESS AND JUDICIAL CREATIVITY? Professor Barış Soyer

CHAPTER 10 DIGITAL BANKING AND LIABILITY ISSUES Dr Andrea Miglionico CHAPTER 11 CONTROL CENTRES IN THE CONTEXT OF UNMANNED SHIP OPERATIONS – THEIR STATUS AND POTENTIAL LIABILITIES Professor h.c. Dr iur. Bülent Sȍzer CHAPTER 12 SHIPPING OPERATORS’ OBLIGATIONS AND LIABILITIES UNDER THE INTERNATIONAL AND EU EMISSION REDUCTION STRATEGY Professor Lia I. Athanassiou CHAPTER 13 DAMAGES FOR LATE PAYMENT OF INSURANCE CLAIMS Peter MacDonald Eggers KC PART III

95

113 125

139

155

174

OTHER REMEDIES AND THIRD PARTIES

CHAPTER 14 SPECIFIC REMEDIES IN SHIPPING – SPECIFIC PERFORMANCE, SPECIFIC ENFORCEMENT AND THE INTERACTION OF “NEGOTIATING DAMAGES” Chris Kidd, with the assistance of Ben Moon, Waled Salih and Jack Maxted

197

CHAPTER 15 THE REBIRTH OF THE EUROPEAN “ANTI-SUIT INJUNCTION” ISSUE POST-BREXIT Dr Aygün Mammadzada

226

vi

CONTENTS

CHAPTER 16 PUNITIVE DAMAGES IN MARITIME CASES – A VIEW FROM ACROSS THE POND Professor Michael F. Sturley CHAPTER 17 LIMITATION OF LIABILITY – NEW TRENDS Frank Stevens

238 269

CHAPTER 18 AM I MY BROTHER’S KEEPER? LIABILITY IN TORT FOR THE ACTS OF THIRD PARTIES Professor Simon Baughen

292

CHAPTER 19 THIRD PARTY LOSS IN CARRIAGE OF GOODS BY SEA Dr Melis Özdel

312

Index

321

vii

EDITORS’ BIOGRAPHIES

Professor Barış Soyer Professor of Commercial and Maritime Law Director of the Institute of International Shipping and Trade Law, Swansea University Professor Soyer directs the Institute of International Shipping and Trade Law at Swansea University and is a member of the British Maritime Law Association and British Insurance Law Association. He is the author of Warranties in Marine Insurance (2001), Marine Insurance Fraud (2014) and many articles published in journals such as the Cambridge Law Journal, Law Quarterly Review, Edinburgh Law Review, Lloyd’s Maritime & Commercial Law Quarterly, Journal of Business Law, Torts Law Journal and the Journal of Contract Law. Warranties in Marine Insurance won the Cavendish Book Prize 2001 and was awarded the British Insurance Law Association Charitable Trust Book Prize in 2002 for its contribution to insurance literature. Marine Insurance Fraud also won the latter prize in 2015. He has also edited large numbers of collections of essays on commercial, maritime and insurance law. In addition, he sits on the editorial boards of the Journal of International Maritime Law, Shipping and Trade Law and is on the editorial committee of the Lloyd’s Maritime and Commercial Law Quarterly (International Maritime and Commercial Law Yearbook). Professor Soyer currently teaches Charterparties and Marine Insurance on the LLM Programme at Swansea. Professor Andrew Tettenborn Professor of Commercial Law Institute of International Shipping and Trade Law, Swansea University Professor Tettenborn has been attached to the IISTL at Swansea Law School since 2010, teaching international trade, payments and banking and admiralty. He has also taught at the universities of Cambridge, Exeter and Geneva, and held visiting positions in Europe, Australia and the USA. Author with Professor Frank Rose of Admiralty Claims, Professor Tettenborn is also general editor of Marsden’s Collisions at Sea and Clerk & Lindsell on Torts and of the leading student textbook on commercial law (Sealy & Hooley’s Text, Cases and Materials). He has authored numerous articles on commercial law and obligations, sits on the editorial boards of Lloyd’s Maritime & Commercial Law Quarterly and the Journal of International Maritime Law, and has advised government departments and the Law Commission.

ix

CONTRIBUTORS

Grace Asemota Partner Hannaford Turner LLP Grace is a partner at Hannaford Turner LLP with 20 years’ experience of international trade and commodities work, as well as advising on a broad range of commercial and shipping disputes. Her practice covers both contentious and non-contentious matters, and she routinely acts for clients across the supply chain including exploration and production companies, commodity traders, shipowners, services companies and financial institutions. She routinely advises on letters of credit, performance bonds, guarantees and commercial contracts. She also handles a broad range of trade, shipping and commodity related disputes, including matters before trade association boards such as GAFTA and FOSFA. Grace has significant experience of trade and investment in Nigeria and West Africa, and in addition to being a solicitor in England is admitted to the New York bar. She is a member of both the ICC UK Banking Committee and the ICC UK Arbitration and ADR Committee. Professor Lia I. Athanassiou, Professor of Commercial and Maritime Law University of Athens, Greece Lia I. Athanassiou is a professor of commercial and maritime law and head of the LLM programme at the Law School of the University of Athens, teaching mainly shipping, company and competition law. She holds a PhD from Paris I-Panthéon-Sorbonne and has been a visiting Fulbright Scholar at Harvard. A member of the Hellenic Association of Maritime Law, and President of the Organising Committee of the triennial Piraeus International Conference of Maritime Law, she has lectured and researched in institutions in the USA, Malta, UK, Italy, France and Germany. A qualified lawyer entitled to plead before the Supreme Court with experience in consulting and arbitration, and also a registered arbitrator at the CAMP and the Hellenic Shipping Chamber, Lia is an appointed member of the Committee of Experts of the ILO in Geneva, President of the Legislative Committee on the Reform of the Greek Code of Private Maritime Law (KIND) and sits on Legislative Committees on various commercial law issues. xi

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She has published extensively on maritime, competition, company, European and transport law. Her publications include Antapassis/Athanassiou, A Treatise on Maritime Law (2020, in Greek); Maritime Cross-border Insolvency (Informa 2018); Antipassis, Athanassiou & Rosaeg (eds), Competition and Regulation in Shipping and Shipping-Related Industries (Martinus Nijhoff, 2009 (in English)); and Athanassiou, Shareholders’ activism and corporate monitoring (1010, Athens (in Greek)). She has authored more than 60 articles and contributions in collective works, in foreign and Greek reviews, in Greek, English and French. Professor Simon Baughen Professor of Commercial Law Institute of International Shipping and Trade Law, Swansea University Professor Simon Baughen has been Professor of Shipping Law in the Department of Shipping and Trade Law at Swansea University since 2013. His research interests lie mainly in the field of shipping law in which he has written extensively over the last 30 years. He is the author of the students’ bible Shipping Law, shortly to enter its eighth edition, and took over editorship of Summerskill on Laytime in 2013 for its fifth edition, with the seventh edition published in August 2022. Simon researches not only in shipping law but also in the interaction between free trade/ investment and environmental protection and human rights, on which he has written two books: International Trade and the Protection of the Environment (2007) and Human Rights and Corporate Wrongs – Closing the Governance Gap? (2015). His work has been cited extensively both in England and in the Commonwealth. Simon Croall KC Barrister Quadrant Chambers Simon Croall KC is an established commercial silk and a former Head of Quadrant Chambers. Named one of the top ten maritime lawyers of 2017 by Lloyd’s List and pronounced Shipping Silk of the Year at the Legal 500 UK awards in 2019, today he is recommended in the leading directories as a leading silk in a wide range of areas, including shipping, commodities, energy and IT. Simon’s appearances read like a who’s who of recent seminal commercial cases: they include Transfield Shipping v Mercator Shipping (“The Achilleas”) [2009] 1 AC 61, Fulton Shipping v Globalia (The New Flamenco) [2017] UKSC 43 and again The Longchamp [2018] UKSC 68. Josephine Davies Barrister Twenty Essex Josephine Davies was called to the bar in 2006 and has practised from Twenty Essex since 2007. Before turning to law, she studied science. As a barrister, Josephine has a very strong foundation in shipping law, appearing regularly (for example) in LMAA arbitrations concerning highly technical disputes about xii

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hydrocarbon contamination, explosions and shipbuilding and also in a number of highly significant cases leading cases in court, including The Astra [2013] EWHC 865 (Comm), Spar Shipping v Grand China Logistics [2016] EWCA Civ 982 and Lakatamia v Su [2014] EWCA Civ 636). She adds to this a strong private international law practice focused on jurisdiction disputes, anti-suit injunctions and foreign judgment enforcement (e.g., SAS Institute Inc v World Programming Ltd [2020] EWCA Civ 599). Using her scientific background, Josephine also has a developing specialism in cryptoassets and the like and has acted in cases involving claims against hackers and others, e.g., Fetch.Ai Ltd v Persons Unknown [2021] EWHC 2254 (Comm) and LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm). Dr Ceren Cerit Dindar Assistant Professor of Maritime Law Faculty of Law, Ankara Yıldırım Beyazıt University Ceren Cerit Dindar obtained her LLM and PhD degrees from the IISTL at Swansea University, with the support of the Turkish Ministry of Education. She is currently an assistant professor in maritime and transport law at Ankara Yıldırım Beyazıt University (AYBU), teaching these subjects to undergraduates and also carriage and charterparties at the LL.M. level. Ceren also coordinates the project entitled Legal Problems Relating to the Autonomous Vessels in Turkey and Potential Solutions, funded by the Scientific and Technological Research Council of Turkey under its 1001 Supporting Scientific and Technological Research Projects Programme. An excellent public speaker and writer, Dr Dindar has presented papers at various conferences and has published several articles in the field of maritime law in academic journals such as the Journal of International Maritime Law. Peter MacDonald Eggers KC Barrister 7 King’s Bench Walk, London Peter is a barrister practising at 7 King’s Bench Walk, specialising in all aspects of commercial law, with a particular emphasis on insurance and reinsurance. Previously a solicitor, he took silk in 2011. He is co-author of Good Faith and Insurance Contracts and editor of Carver on Charterparties, the author of Deceit: The Lie of the Law and The Vitiation of Contractual Consent, and a contributing editor of Chitty on Contracts. A previous chair of BILA, Peter teaches part time at UCL and Queen Mary. He is in addition the immediate past Chair of BILA. Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner Ince & Co Chris is dual-qualified in England and Hong Kong and leads Ince’s shipbuilding and offshore construction team. Between 1995 and 2001 he practised in the firm’s Hong Kong office, during xiii

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which time he was also Secretary of the Hong Kong Maritime Law Association. He retains strong industry links in Hong Kong, China and Korea and is a member of the Council of the LSLC. He specialises in advising shipyards, buyers, owners, offshore wind farm contractors and developers on building, conversion and repair contracts as well as other shipping and other offshore matters. He was closely involved in the development by BIMCO of the very important new standard contract forms WINDTIME, SUPPYTIME 2017, NEWBUILDCON and CONVERSIONCON. Chris’s other expertise concerns renewable energy and yacht and superyacht construction contracts. To this he adds specialist experience in jurisdictional issues, mediation and major London arbitrations and litigation, particularly for claims arising from shipbuilding, conversion and repair contracts. His experience includes LMAA, ICC and LCIA arbitrations as well as cases in the Commercial Court, Hong Kong Courts and liaising with lawyers conducting litigation in other jurisdictions. Dr Aygün Mammadzada Lecturer Institute of International Shipping and Trade Law, Swansea University Aygun joined the IISTL in August 2022, having previously had a varied career at the universities of Baku, Bournemouth and Southampton. She has held various visiting fellowships at different institutions in Europe and is the Managing Editor of Global Constitutionalism, published by the Cambridge University Press. She is a qualified lawyer in Azerbaijan; prior to her PhD studies she worked as a lawyer in private practice and at the Ministry of Education in Baku. Her research focuses widely on trade and maritime law, commercial conflict of laws, intellectual property law, dispute resolution, including arbitration and litigation, as well as law and technology. Dr Andrea Miglionico Associate Professor University of Reading Dr Miglionico, an associate professor in law at Reading, is Programme Director of the commercial LLM and Deputy Director of CCLFR, having previously worked at the Centre for Commercial Law Studies, Queen Mary Westfield, University of London. He has taught a variety of undergraduate and postgraduate law courses in the United Kingdom and Europe. He holds an LLM from the LSE and a PhD from Queen Mary. His primary research is in the areas of banking law and financial markets regulation. Dr Melis Özdel Director, UCL Centre for Commercial Law University College London Melis is convenor for maritime law studies at UCL and also Director of UCL Centre for Commercial Law. She has published extensively in the areas of international trade, xiv

CONTRIBUTORS

carriage, commercial arbitration and conflicts. She edited and co-authored Commercial Maritime Law (2020, Hart), wrote Bills of Lading Incorporating Charterparties (2015, Hart) and co-wrote EU Transport Law (2016, Hart-Nomos-Beck). At UCL, Melis teaches carriage of goods by sea, international trade law and international arbitration. A member of the CIA and a supporting member of the LMAA, she also delivers regular seminars to legal professionals and those working in the shipping and trade industry and acts as a consultant to Birketts LLP. She is also the founder of the UCL Autonomous Shipping Project (see https://uclautonomous-shipping.org), and a member of the CMI’s International Working Group on Unmanned Vessels. She is currently researching the legal implications of autonomous shipping. Andrew Preston Partner Preston Turnbull Andrew is a founding partner of Preston Turnbull, a new shipping and trade firm started in 2019. He acts for a wide range of owners, charterers, banks, corporates, trade houses and insurers on all types of commercial litigation, his particular specialty being shipping and trading disputes. For over 25 years, he has litigated at every level of Commercial Court up to the Supreme Court and was recently successful in defending shipowners in the leading misdelivery case under bills of lading in The Sienna. Because throughout his career he has applied his skills to finding commercial solutions for clients, he has consistently been rated by the directories as one of the leading shipping lawyers, being described by one client as “Probably the best lawyer for head on the block advice. Andrew Preston exercises sound judgment as a gift simplifying even the most complex problems”. Prior to founding Preston Turnbull, he steered Clyde & Co as the Global Head of Shipping for over a decade taking it to a tier 1 ranking. Dr Adam Sanitt Knowledge Director, Digital and Innovation Norton Rose Fulbright LLP Dr Adam Sanitt is Knowledge Director, Digital and Innovation, at Norton Rose Fulbright LLP, with a degree from Cambridge, an Oxford BCL and a mathematics PhD from UCL. He now specialises in banking and finance disputes, with a particular focus on structured finance and cross-border litigation. He is also a member of the firm’s FinTech practice, working on blockchain and artificial intelligence solutions, and the creator of the awardwinning Court Intelligence Database. Adam’s most recent publications include articles on crypto assets and on blockchain disputes risks in the Journal of International Banking and Financial Law and (with Professor Sarah Green) a chapter on smart legal contracts in Davies & Raczynska (eds), Contents of Commercial Contracts (2020). xv

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Professor h.c. Dr iur. Bülent Sȍzer Professor of Maritime Law and Director of Maritime Law Research Centre Piri Reis University, Turkey Dr Iur. Bülent Sȍzer studied law at Istanbul University Faculty of Law and was admitted to Istanbul Bar in 1966; he received his PhD degree in 1973 and in 1980 joined Turkish Airlines as legal adviser. He returned to academia in 1990 and taught at Bosphorus and Koç universities. Having retired in 2005 from full-time teaching, he joined Yeditepe University, responsible for the courses on Maritime Law and the Law of International Carriage. Currently he teaches Maritime Law in Piri Reis University, the only maritime university in Turkey, and acts as Director of that institution’s Maritime Law Research Centre. Besides having written much on shipping law and air law, Dr Sözer is the author of The Legal Environment of Business – A Hand-Book on Turkish and International Business Law and Electronic Contracts (the latter in Turkish). He also wrote the sections on Turkish law in the 4th ed. of Griggs, Williams and Farr (eds), Limitation of Liability for Maritime Claims (2005), and Breitzke, Lux and Verlaan (eds), Maritime Law Handbook (2019). Recently he completed the 5th ed. of his own magisterial Turkish Maritime Law. A past Board Member and Vice-Chairman of the Turkish Maritime Law Association, he is a Visiting Fellow at the IISTL at Swansea University School of Law. Dr Sözer remains a member of two separate International Working Groups of the Comité Maritime International, one on “Ship Nomenclature” the other one on “Unmanned Ships” as well as well a panelist on the Panel of Judges formed by the CMI for the “CMI Young Persons Essay Prize”. Dr Frank Stevens Associate Professor in Law Erasmus School of Law, Rotterdam Dr Frank Stevens obtained his degree from Louvain (Belgium) in 1991; he also has an Admiralty LLM from Tulane, a “Special Degree in Maritime Sciences” from Antwerp (1993) and a PhD from Ghent. He joined the Antwerp Bar in 1993 and has been practising transport and maritime law since then. Since 2016, he has been an associate professor at the Erasmus School of Law in Rotterdam. Dr Stevens is the author of textbooks on carriage by sea and limitation of liability, and regularly publishes and speaks on issues of transport and maritime law. He is Editor-in-Chief of the Tijdschrift voor Internationale Handel en Transport and sits on the Board of Editors of two other legal journals. He is a Titulary Member of the CMI, a member of the Belgian and Dutch Maritime Law Associations and has served as the Belgian MLA President from 2015 till 2019. Professor Michael F. Sturley Professor of Maritime and Commercial Law University of Texas Law School Michael F. Sturley holds the Fannie Coplin Regents Chair in Law at Texas Law School, where he teaches inter alia maritime law and commercial law courses and co-directs xvi

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the Supreme Court Clinic. He received his undergraduate education at Yale and has law degrees from Yale and Oxford. Professor Sturley is a Titulary Member of the CMI (where he served as the Rapporteur for the International Sub-Committee on Issues of Transport Law and currently serves on the Standing Committee on the Carriage of Goods, the Planning Committee and the International Working Group on the Lex Maritima). He is a proctor member of the Maritime Law Association of the United States (where he serves on the Board of Directors and is active on several committees); the Senior Adviser on the US Delegation to Working Group III (Transport Law) of the United Nations Commission on International Trade Law (UNCITRAL); a member of the UNCITRAL Experts’ Group on Transport Law; and a life member of the American Law Institute. He has written extensively on all kinds of maritime subjects; has lectured at numerous law schools and conferences in the United States and around the world; and has been consulted in maritime cases before the US Supreme Court, lower federal courts, and state and foreign courts. Prior to joining the Texas faculty, Professor Sturley was associated with Sullivan & Cromwell in New York. He has held visiting professorships at Queen Mary and the National University of Singapore. Jonathan Webb Partner HFW, London Jonathan specialises in shipping dispute resolution and litigation arising from charterparties, bills of lading, shipbuilding contracts, ship sale MOAs, financing contracts, ship management and crewing agreements, hull insurance policies, bunker supply contracts and general average situations as well as disputes involving commodities, mining, energy and offshore contracts. Cases involving shipping insolvencies, security arrests and enforcement are a speciality. Jonathan handles cases in both arbitration and the High Court and has a special interest in mediation. He is dual qualified being admitted in both England and South Africa and has travelled widely on cases to many jurisdictions maintaining an excellent network of international contacts.

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P R E FA C E

Contracts play a vital role in regulating the relationship between commercial parties, both when things go right, and (more importantly) when they do not. The purpose of this collection is, broadly, to consider contractual and other remedies available when things do not run according to plan. To this end, this book is divided into three parts. Part I concentrates on fundamental common law principles concerning damages, which despite having been developed over a long time still throw up intriguing problems on which a great deal of money can turn. Coverage here includes how courts – and perhaps more importantly markets and drafters of standard contracts – have approached such awkward topics as damages for delay and what happens when a charter is thrown over early; the continuing relevance of the reflective loss rule; mitigation; dismantling contracts; and the problem of crypto. In Part II, we turn to technology and how it affects contracts and remedies. The use of disruptive technologies (such as smart contracts, the internet of things, digital banking and autonomous systems) often come to mind when talking about potential new remedies, and these are considered by various contributors. However, new liability regimes are also regularly introduced by national and international rule-makers, and it is the intention of some contributors to consider such developments in this part. Part III goes on to remind readers that there are contractual remedies other than claims for simple compensatory damages by one contracting party against its co-contractor. We thus deal with issues such as limitation of liability, punitive damages, specific remedies, third party claims and liabilities, and anti-suit injunctions (the latter super-topical since Brexit). This book comes from the 17th Annual Colloquium of the Institute of International Shipping and Trade Law (IISTL) held in September 2022. As always, this event brought leading lights of shipping and commercial world together (in person too, for the first time post-COVID). The papers have of course been polished since, and we are now delighted to edit this book and present it to the commercial and academic world. We hope it will make at least a small contribution to the understanding and development of law in this area. As ever, we are immensely grateful to Informa Law for taking on this project – especially Guy Loft and Amelia Bashford, without whose invaluable support and encouragement, it would never have appeared. We are also grateful to the members of the IISTL for being such an amazing team. Special thanks must go to our research officer Angie Nicholas and our research assistant Alicia Mckenzie for ensuring that this event ran efficiently without any glitch.

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BS & AT June 2023

TA B L E O F C A S E S

Australia Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1.............118 Emperor Goldmining Co v Switzerland General Insurance Co [1964] 1 Lloyd’s Rep 348 ........................................................................................................................193, 194 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 ..............................................................107

Belgium CA Anvers (Verdi & Aster), 4ème Section, 18.11.2013, N° 2010/AR/3051, TBH 2014/1, 111 ..........................................................................................................273, 274

Canada Amchem Products Inc v British Columbia (Workers’ Compensation Board) [1993] 1 SCR 897 ................................................................................................................230 Canadian Pacific Railway v The Sheena M [2000] 4 FC 159 .....................................................279 Connaught Laboratories Ltd v British Airways (2002) 61 OR (3d) 204 .....................................277 Das v George Weston [2018] ONCA 1053; 43 ETR (4th) 173; [2017] ONSC 4129 ..........306, 309 Irving, J.D. v Siemens 2016 FC 69 (2016) ...................................................................275, 277, 283 Peracomo v TELUS 2014 SCC 29; [2014] 1 S.C.R. 621.....................................275, 280, 281, 283

Cayman Islands Xie Zhikun v Xio GP Ltd (unreported) 14 November 2018 (Cayman Islands Court of Appeal)...............................................................................................................................22

European Union Allianz SpA v West Tankers Inc (Case 185/07) [2009] ECR I-00663 ..........................232, 233, 235 Erich Gasser GmbH v MISAT SRL (Case C-116/02) [2003] ECR I-14693.................................232 Gazprom OAO v Republic of Lithuania (Case C-536/13) EU:C:2015:316; [2015] 1 Lloyd’s Rep 610...................................................................................................................234 Kongress Agentur Hagen GmbH Zeehage BV (Case C-365/88) [1990] ECR I-1845 .................232 Marc Rich & Co AG v Soc Italiana Impianti pA (Case C-1980/89) [1991] ECR I-3835............232 Turner v Grovit (Case 159/02) [2004] ECR I-3565 .....................................................232, 233, 235

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TABLE OF CASES

France Accroch’coeur , Cass fr, (Ch com) 26.6.2019, Pourvoi N° 18–12.249 & 18–12.250, DMF 2020, N° 830, (1041), 1050........................................................................269, 285, 289 CA Paris 7.9.2015 [unpublished]; Comm. fr. (Ch Comm), 14.6.2017, Pourvoi N° 16–12.904, ECLI:FR: CCASS:2017:CO00896 ......................................................................................284 CA Versailles, 12ème Ch, 21.1.2021, N° 19–02.675, DMF 2021, N° 834, 336 ..........................271 Cala Rossa, Cass fr. (Ch civ), 8.11.2017, Pourvoi N° 16–24.656, ECLI:FR: CCASS:2017:C101158, DMF 2018, 39, CA Aix-en-Provence, 10ème Ch, 21 July 2016, N° 14/24049. Cass fr. (Ch civ), 8.11.2017, Pourvoi N° 16–24.656, ECLI:FR: CCASS:2017:C101158, DMF 2018, 39 ..........................................270 Caliente/Makira, Cass fr. (Ch com), 29.4.2014, Pourvoi N° 12–25.901, Navires Caliente et Makira, DMF 2014 N° 763, 878........................................................................270 Cass comm 9 July 2013, n° 12.18504, DMF N° 751, p 795, Bull. 2013, IV, n° 116 ...................290 Cass Comm, 11.4. 2018, Pourvoi N° 17–12.975 .........................................................................271 Erika, Cass crim 25.09.2012, 10–82.938 (France) ......................................................................293 Cass Comm, 9.7.2013, DMF 2013, 795.......................................................................................287 IPCom v Lenovo, No RG 19/21426 .............................................................................................231 Motus, Cass fr. (Ch com), 8.3.2017, Pourvoi N° 15–23.220, Voilier Motus, DMF 2017 N°793, 596. 8 Cass fr. (Ch com), 19.9.2018, Pourvoi N° 17–16.679, ECLI:FR: CCASS:2018:CO00709 .......................................................................................................270 Pido, Cass fr, Ch com, 24.3.2021, Pourvoi N°19–13.325, Voilier Pido, DMF 2021, N° 837, 634 ..........................................................................................................................286

Germany BGH 6.6.2007, I ZR 121/04, TranspR 2007, 423 ................................................................273, 274 BGH 17.6.2004, I ZR 263/01, TranspR 2004, 399 ..............................................................273, 274 BGH 25.3.2004, I ZR 205/01, TranspR 2004, 309 ..............................................................273, 274 BGH 11.11.2004, I ZR 10/02, TranspR 2006, 161 ......................................................................274 Continental v Nokia, 6 U 5042/19 ...............................................................................................231 OLG Düsseldorf 2.11.2005, I-15 U 23/05, TranspR 2005, 468...........................................273, 274 OLG München 27.7.2001, 23 U 3096/01, TranspR 2002, 161....................................................273 OLG Nürnberg 30.3.2017, 9 U 243/14, TranspR 2017, 263................................................273, 274 OLG Stuttgart 1.7.2009, 3 U 248/08, TranspR 2009, 309 ...................................................273, 274 OLG Stuttgart 20.8.2010, 3 U 60/10, VersR 2011, 1074, para 76 ...............................................273 OLG Oldenburg 23.5.2001, 2 U 77/01, TranspR 2001, 367........................................................273

Hong Kong Ace Insurance Ltd v Metropolitan Electrical Appliance Manufacturing Ltd [2009] HKCFI 1132.........................................................................................................................118

Ireland Elmes v Vedanta Lisheen Mining Ltd [2014] IEHC 73................................................................297

Netherlands Hoge Raad, 5.1.2001, ECLI:NL:HR:2001: AA9308, NJ 2001/391, 392 ....................................272

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TABLE OF CASES

Hoge Raad, 22.6.2018, ECLI:NL:HR:2018:981, S&S 2018, 48 (Arcturus & VW VI; Coby & Horn IV) .................................................................................................................271 Margreta/Sichem Anne, The, Dutch Supreme Court (Hoge Raad), 2.2.2018, ECLI:NL:HR:2018:142, S&S 2018/61................................................................................289 Oguru v Royal Dutch Shell ECLI:NL: GHDHA: 2021:1825 ......................................................301 Oguru/Efanga v Shell, The Hague Court of Appeal (18 December 2015) ECLI:NL: GHDHA:2015:3588.............................................................................................................301 RB Rotterdam, 6.9.2017, ECLI:NL: RBROT:2017:7912, S&S 2018/28 (Harns) (Dutch Harns Proceedings) ..........................................................................................284, 285 Riad/Wisdom, The, Hoge Raad, 2.2.2018, ECLI:NL:HR:2018:140, S&S 2018/62 ....................289 Stolt Commitment Case, Hoge Raad, 29.5.2020, ECLI:NL:HR:2020:956..................................287 Van der Graaf/AIG Hoge Raad, 29.5.2009, ECLI:NL:HR:2009:BH4041, NJ 2009/245, S&S 2009, 97 .......................................................................................................................276 Vereniging Milieudefensie et al. v Royal Dutch Shell Plc ECLI:NL:RBDHA:2021:5339 on 26 May 2021 ...................................................................................................................307 X v Y, Amsterdam Court of Appeal, 29 January 2019 (ECLI:NL:GHAMS:2019:192).................88

New Zealand Blackley v National Mutual Life Association Ltd (No. 2) [1973] NZLR 668..............................180 Daina Shipping Co v Te Runanga O Ngati Awa [2013] 2 NZLR 799 .........................................279 Lee v IAG New Zealand Ltd [2017] NZHC 2626; [2018] Lloyd’s Rep IR 345 ...........................190 Ruscoe v Cryptopia Ltd [2020] NZHC 728; 22 ITELR 925......................................................80, 8 Smith v Fonterra Co-Operative Group Ltd [2021] NZCA 552; [2020] NZHC 419; [2020] 2 NZLR 394 .....................................................................................................307, 308

Norway Tide Carrier Case 2018 (Eide Carrier, later renamed Tide Carrier, Harrier) (Nov 29, 2020 The Maritime Executive) ...............................................................................75

People’s Republic of China Gao Zheyu v Shenzhen Yunsilu Innnovation Development Fund Enterprise (Shenzhen Intermediate People’s Court, Case April 2020, approved by the People’s Supreme Court) ...........91 Li & Bu v Yan, Li, Cen & Sun (2019) Huu 01 Min Zhong No. 13689 (reported in S. Leong) ......91

Singapore B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 3; [2019] 4 SLR 17; on appeal, [2020] SGCA (I)2; [2020] 2 SLR 20 ...................................................................................80, 83, 105

United Kingdom 2Entertain Ltd v Sony Dadc [2020] EWHC 1490 (TCC) ............................................................190 AA v Persons Unknown [2019] EWHC 3556 (Comm); [2020] 2 All ER (Comm) 704 ................80 AAA v Unilever Plc [2018] EWCA Civ 1532; [2018] B.C.C. 959 .....................................295, 302 AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35; [2013] 1 WLR 1889...............................................................228 AIG Europe SA v John Wood Group Plc [2021] EWHC 2567 (Comm); [2023] 1 All E.R. (Comm) 381...........................................................................................................231

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TABLE OF CASES

AMP (UK) Plc v Barker [2000] EWHC 42 (Ch); [2001] OPLR 197 ..........................................100 ASM Shipping Ltd of India v TTMI Ltd of England (The Amer Energy) [2009] 1 Lloyd’s Rep 293 (QB) .........................................................................................................................10 Achilleas, The. See Transfield Shipping Inc v Mercator Shipping Inc Adams v Cape Industries Plc [1990] Ch 433...............................................................................293 Adler v Dickson (The Himalaya) [1955] 1 QB 158 .................................................................20, 21 Agapitos v Agnew (The Aegeon) [2022] EWCA Civ 247; [2002] 2 Lloyd’s Rep 42 (CA) .................................................................................................................122 Airbus Industrie GIE v Patel [1999] 1 AC 119 ....................................................................227, 230 Aktieselskabet Reider v Arcos Ltd (1926) 25 Ll L Rep 513.....................................................37–39 Alame v Royal Dutch Shell Plc [2022] EWHC 989 (TCC) .........................................................302 Albazero, The [1977] AC 774 ......................................................................................312, 314–317 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.........................................312 Allianz Global Investors GmbH v Barclays Bank Plc [2022] EWCA Civ 353; [2023] 1 All E.R. (Comm) 20 ............................................................................................................19 Allnutt v Wilding [2007] EWCA Civ 412; [2007] BTC 8003........................................................98 Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm); [2021] 1 Lloyd’s Rep 451.....................................................................................105 Altimo Holdings & Investment Ltd v Kyrgyz Mobil Tel Ltd [2011] UKPC 7; [2012] 1 WLR 1804..............................................................................................................................71 American Cyanamid Co Inc v Ethicon Ltd [1975] AC 396 .................................................198, 227 Amstrad Plc v Seagate Technology Inc (1998) 86 BLR 34 ...........................................................15 Angelic Grace, The [1995] 1 Lloyd’s Rep 87 ......................................................................230, 235 Anglia Television Ltd v Reed [1972] 1 QB 60 .................................................................................8 Araci v Fallon [2011] EWCA Civ 668 ........................................................................199, 207–210 Argos Pereira España SL v Athenian Marine Ltd [2021] EWHC 554 (Comm); [2022] 1 All ER (Comm) 345 ...............................................................................................................21 Arnold v Britton [2015] UKSC 36; [2015] AC 1619...................................................................105 Assetco Ltd v Grant Thornton [2019] EWCA Civ 40; [2021] 3 All E.R. 517 ...............................32 Astra, The [2013] EWHC 865 (Comm); [2013] 2 Lloyd’s Rep. 69 ........................................... xiii Astrazeneca Insurance Co v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm); [2013] Lloyd’s Rep IR 290; affirmed [2013] EWCA Civ 1660; [2014] Lloyd’s Rep IR 509...................................................................................................................................194 Atlantik Confidence, The [2016] EWHC 2412 (Admlty); [2016] 2 Lloyd’s Rep 525 .................276 Attorney General v Barker [1990] 3 All ER 257 .................................................................208, 210 Attorney General v Blake [2001] 1 AC 268 .........................................................................215, 221 Attorney General of British Virgin Islands v Hartwell [2004] UKPC 12; [2004] 1 WLR 1273..............................................................................................................................72 Axis Corporate Capital UK Ltd & Ors v Absa Group Ltd [2021] EWHC 225 (Comm); [2021] Lloyd’s Rep. I.R. 195 ...............................................................................................235 Banque Finanancière de la Cité v Westgate Insurance Co Ltd [1990] 1 QB 665 (CA); [1991] 2 AC 249 ..................................................................................................................121 Begum v Maran. See Hamida Begum (on behalf of MD Khalil Mollah) v Maran (UK) Ltd Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330; [2007] NPC 71 ........................44 Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH [2008] EWCA Civ 1257; [2009] QB 72 .......................................................................................................................305 Bonner v Cox [2005] EWCA Civ 1512; [2006] 2 Lloyd’s Rep 152 ............................................123 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 ................................................44 Bowbelle, The [1990] 1 WLR 1330 .............................................................................................279

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Breeze v Chief Constable of Norfolk [2022] EWHC 942 (QB) .....................................................18 Breydon Merchant, The [1992] 1 Lloyd’s Rep 373 .....................................................................290 Bristol & West Building Society v Mothew [1998] Ch 1......................................................107, 108 British Transport Commission v Gourley [1956] AC 185 .............................................................15 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 ............................................................12, 26, 28, 30, 31, 34 Broadcasting Investment Group Ltd v Smith [2020] EWHC 2501 (Ch); [2022] 1 WLR 1; [2021] EWCA Civ 912; ..............................................................................19, 22–24 Brotherton v Aseguradora Colseguros SA (No 2) [2003] EWHC 335 (Comm); [2003] EWCA Civ 705; [2003] Lloyd’s Rep IR 746 .......................................................................122 Brownlie v Four Seasons Holdings Inc [2017] UKSC 80; [2018] 1 WLR 192.............................71 BskyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 862 (TCC) ......................................15 Bulk Ship Union SA v Clipper Bulk Shipping Ltd (The Pearl C) [2012] EWHC 2595 (Comm); [2012] 2 Lloyd’s Rep 533.....................................................................................167 Bunge Corporation v Tradax Export SA [1981] 1 WLR 711.........................................................54 Bunge SA v Nidera BV [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469 .....26, 28, 216, 219, 220, 313 Burnford v AA Developments Ltd [2022] EWHC 368 (Ch); [2022] EWCA Civ 1943............17, 20 Butlin’s Settlement Trust, Re [1976] Ch 251 ..................................................................................97 Bwllfa & Merthyr Dare Steam Collieries Ltd v Pontypridd Waterworks Co [1903] AC 426........13 Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541..................................176, 185 Caparo Industries Plc v Dickman [1990] 2 AC 605 ..............................................72, 298–301, 305 Cape v Lubbe. See Lubbe v Cape Asbestos Ltd Cape Bari, The [2016] UKPC 20.................................................................................................288 Carter v Boehm (1766) 3 Burr 1905 ............................................................................................121 Castanho v Brown & Root (UK) Ltd [1981] AC 557...........................................................227, 228 Castelli v Boddington (1852) 1 El & Bl 66..................................................................................175 Catlin Syndicate Ltd v Amec Foster Wheeler USA Corp [2020] EWHC 2530 (Comm).............235 Cavendish Square Holding BV v El Makdessi [2015] UKSC 67; [2016] AC 1172 ...............62, 199 Cayne v Global Natural Resources Plc [1984] 1 All ER 225......................................................198 Cehave NV v Bremer Handels GmbH (The Hansa Nord) [1976] QB 44 ......................................43 Chandler v Cape Plc [2012] EWCA Civ 525; [2012] 1 WLR 3111....................294, 297, 299, 300 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101...........99, 103, 104 Cine Bes Yapimcilik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669; [2004] 1 CLC 401 ........................................................................................................61 Clarke v Dickson (1858) El Bl & El 148 .....................................................................................108 Clea Shipping Corporation v Bulk Oil International Ltd (The Alaskan Trader (No 2) [1983] 2 Lloyd’s Rep 645...................................................................46, 48, 52, 55, 56 Clearlake Chartering USA Inc v Petroleo Brasileiro SA (The Miracle Hope) (No 2) [2020] EWHC 805 (Comm); [2021] 1 Lloyd’s Rep 543 ..........................................205 Clearlake Shipping Pte Ltd v Xiang Da Marine Pte Ltd [2019] EWHC 2284 (Comm) ........................................................................................................................227, 237 Cohen v Rothfield [1919] 1 KB 410 .............................................................................................229 Castanho v Brown & Root (UK) Ltd [1981] AC 557 ...................................................................229 Connelly v RTZ Corporation Plc [1997] UKHL 30; [1998] AC 954 ..........................................294 Cormack v Washbourne [2000] CLC 1039..................................................................................118 County Personnel Ltd v Alan R Pulver & Co [1987] 1 WLR 916.................................................13 Cox v Bankside Members Agency Ltd [1995] CLC 671 ......................................................118, 121 Craddock v Hunt [1923] 2 Ch 137.................................................................................................97 Cutter v Powell (1795) 6 TR 320...................................................................................................47

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DHN Estates Ltd v Tower Hamlets LBC [1976] 1 WLR 852 ......................................................293 D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch)..............................................................103 Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 2 All ER (Comm) 142 ......................................................................................99 Decro-Wall International SA v Practioners in Marketing Ltd [1971] 2 All ER 216 .....................47 Despina R, The [1979] AC 685 ................................................................................................90, 91 Deutsche Bank AG v Highland Crusader Partners LP [2009] EWCA Civ 725; [2010] 1 WLR 1023.........................................................................................................................227 Di Ferdinando v Simon, Smits & Co Ltd [1920] 3 KB 409 ...........................................................85 Diab v Regent Insurance Co Ltd [2006] UKPC 29; [2007] 1 WLR 797.....................................177 Diamond v Campbell-Jones [1960] 1 All ER 583 (Ch); [1961] Ch 22 .........................................15 Doherty v Allman (1878) 3 App Cas 709.............................................................................207–209 Donoghue v Stevenson [1932] AC 562 ......................................................................67, 69, 72, 116 Donohue v Armco Inc [2001] UKHL 64; [2002] 1 Lloyd’s Rep 425; [2002] 1 All ER 749; .................................................................................................................227, 235 Dorset Yacht Co Ltd v Home Office [1970] AC 1004..................................................................298 Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834; [2004] QB 601; [2004] 1 Lloyd’s Rep 268......................................................................118, 121, 122 Dunlop v Grote (1845) 2 Car & Kir 153........................................................................................48 Dunlop v Lambert (1839) 6 Cl & F 600 ......................................................................................312 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 ...........................61 Dynamic, The [2003] EWHC 1936 (Comm); [2003] 2 Lloyd’s Rep 693 ......................................55 Dyson Technology Ltd v Pellerey [2016] EWCA Civ 87; [2016] ICR 688 .........................208, 209 ED & F Man Capital Markets Ltd v Come Harvest Holdings Ltd [2022] EWHC 229 (Comm) ..............................................................................................................32 Ebury Partners Belgium SA v Technical Touch BV [2022] EWHC 2927 (Comm) .....................236 El Ajou v Dollar Land Holdings Plc [1993] 3 All ER 717 ..........................................................107 El Amria, The [1981] 2 Lloyd’s Rep 119.....................................................................................227 Elbe Maru, The [1978] 1 Lloyd’s Rep 206 ....................................................................................21 Eleftheria, The [1969] 1 Lloyd’s Rep 237 ...................................................................................227 Elena D’Amico, The [1980] 1 Lloyd’s Rep 75 ......................................................28, 29, 31, 33, 61 Elkamet v Saint-Gobain Glass France (No.2) [2016] EWHC 3421 (Pat); [2017] FSR 23 ...........89 Elmes v Vedanta Lisheen Mining Ltd [2014] IEHC 73................................................................297 Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd [2020] EWCA Civ 308; [2020] Lloyd’s Rep IR 397 ...................................................................................175 Evangelismos, The (1858) 12 Moo PC 352 ...................................................................................18 Evening Standard Co Ltd v Henderson [1987] ICR 588 ...............................................................51 Evpo Agnic, The, [1988] 1 WLR 1090; [1988] 2 Lloyd’s Rep 411 .............................................293 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; [2003] EMLR 25 .............................................................................................................215, 222–225 FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361; [2020] Ch 365 ................................................................................................................99, 104 Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886; [2013] 2 CLC 272 ..................117 Fanti, The and The Padre Island [1991] 2 AC 1 .........................................................................175 Farenco Shipping Co Ltd v Daebo Shipping Co Ltd (The Bremen Max) [2008] EWHC 2755 (Comm), [2009] 1 Lloyd’s Rep 81.........................................................202, 203 Federal Mogul Asbestos Personal Injury Trust v Federal Mogul Ltd [2014] EWHC 2002 (Comm); [2014] Lloyd’s Rep I R 671............................................................118 Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254 (Comm); 24 ITELR 566............ xiii, 80, 83

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Forney v Dominion Insurance Co Ltd [1969] 1 WLR 928..........................................................175 Forrer v Nash (1865) 35 Beav 167 ..............................................................................................199 Foss v Harbottle (1843) 2 Hare 461 ..................................................................................18, 22–24 French Marine v Compagnie Napolitaine [1921] 2 AC 494 (HL) ................................................49 Fulton Shipping Inc v Globalia SAU (The New Flamenco) [2017] UKSC 43; [2018] 1 All ER 45; [2017] 2 Lloyd’s Rep 177 .......................... xii, 11, 12, 27, 29, 31–33 Gamatronic (UK) Ltd v Hamilton [2016] EWHC 2225 (QB); [2017] BCC 670 ................109, 110 Gator Shipping Cooperation v Trans-Asiatic Oil Ltd SA (The Odenfeld) [1978] 2 Lloyd’s Rep 357 ........................................................................51, 52, 55, 56, 58, 60 Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523 ......................45, 46 Giles v Royal National Institute for the Blind [2014] EWHC 1373 (Ch); [2014] STC 1631 ..........................................................................................................................96 Glory Bulk v Priyanka. See Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd Glory Maritime Co v Al Sagr National Insurance Co (The Nancy) [2013] EWHC 2116 (Comm); [2014] 1 Lloyd’s Rep 14 ......................................................................................................122 Goknur v Organic Village [2019] EWHC 2201 .............................................................................32 Golden Victory, The [2007] UKHL 12; [2007] 2 AC 353; [2007] 2 Lloyd’s Rep 164.................................................................................11, 13, 14, 16, 26, 28, 44 Gore v Van der Lann [1967] 2 QB 31 ............................................................................................21 Goshawk Dedicated Ltd v Tyser & Co Ltd [2006] EWCA Civ 54; [2006] 1 Lloyd’s Rep 566 ................................................................................................................................123 Grant v Royal Exchange Assurance Co (1816) 5 M&S 439 ...............................................175, 185 Greer v Kettle [1938] AC 156........................................................................................................98 Groom v Crocker [1939] 1 KB 194 .............................................................................................118 Guerrero v Monterrico Metals Ltd [2010] EWHC 160 (QB)......................................................309 Hadley v Baxendale (1854) 9 Ex 341, 156 ER 145.............................................................8, 10, 62 Begum v Maran (UK) Ltd [2020] EWHC 1846 (QB); (on appeal) [2021] EWCA Civ 326; [2021] 1 CLC 514..............................................................65, 67–69, 71–73, 75, 76, 303, 308, 309 Harmony Innovation Shipping Pte Ltd v Caravel Shipping Inc (The Universal Bremen) [2019] EWHC 1037 (Comm); [2020] 1 Lloyd’s Rep 206 ............................203, 224 Hochster v De La Tour (1853) 2 E&B 678........................................................................45, 58, 59 Holtby v Brigham & Cowan (Hull) Ltd [2000] All ER 421.........................................................120 Honeywill & Stein Ltd v Larkin Bros (London’s Commercial Photographers) Ltd [1934] 1 KB 191 ..............................................................................................................................305 Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd (The Hong Kong Fir) [1961] 2 Lloyd’s Rep. 478; [1962] 2 QB 26 (CA).........................................................3, 5, 44 Howard v Pickford Tool Co Ltd [1951] 1 KB 417 .........................................................................45 Howie v Anderson (1848) 10 D 355 ..............................................................................................46 HTC Corporation v Nokia Corporation [2013] EWHC 3778......................................................211 Insurance Co v A Lloyds Syndicate [1995] 1 Lloyd’s Rep 272 (QB) ..........................207, 208, 210 Insurance Corporation of the Channel Islands Ltd v McHugh [1997] LRLR 94 .......175, 177, 185 Irani v Southampton & South West Hampshire Health Authority [1985] ICR 590 .......................51 Irving v Manning (1847) 1 HLC 287...........................................................................................175 Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61..........................................46, 49, 50, 52, 53, 56, 58, 60 Israelson v Dawson [1933] 1 KB 301..........................................................................................175 Ivory v Palmer [1975] ICR 340 .....................................................................................................51

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Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139.......................................179 Jaggard v Sawyer [1995] 1 WLR 269 .................................................................................211, 212 Jay Bola, The [1997] 2 Lloyd’s Rep 279 .....................................................................................235 Johnson v Agnew [1980] AC 367.................................................................106, 107, 221, 222, 225 Johnson v Gore Wood & Co [2000] 2 AC 1...................................................................................19 Jones v Lipman [1962] 1 WLR 832 .............................................................................................293 Josiya v British American Tobacco Plc [2021] EWHC 1743 (QB).............................................304 Jugoslavenska Oceanska Plovidba v Castle Investment Co Inc [1974] QB 292...........................86 Julia, The [2002] EWHC 1405 (QB); [2003] Lloyd’s Rep IR 365 .....................................189, 190 K Line Pte Ltd v Priminds Shipping (HK) Co Ltd (The Eternal Bliss) [2020] EWHC 2373 (Comm); [2020] 2 Lloyd’s Rep 419; [2021] EWCA Civ 1712; [2022] 3 All ER 396.....................................................................................................................35–41 K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The Mercandian Continent) [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep 563 .........................................121 Kallang Shipping SA v AXA Assurances Sénégal [2006] EWHC 2825 (Comm); [2007] 1 Lloyd’s Rep 160 ......................................................................................................22 Kalma v African Minerals Ltd [2020] EWCA Civ 144; [2018] EWHC 3506 (QB)...........304–306, 309, 310 Kennedy v Van Emden [1996] PNLR 409 ........................................................................................4 Kilcarne Holdings Ltd v Targetfollow (Birmingham) Ltd [2004] EWHC 2547 (Ch); [2005] 2 P & CR 8 .................................................................................................................96 King v Brandywine Reinsurance Co (UK) Ltd [2004] EWHC 1033 (Comm); [2004] 2 Lloyd’s Rep 670; [2005] EWCA Civ 235; [2005] 1 Lloyd’s Rep 655 .............................194 Knapfield v CARS Holdings Ltd [2022] EWHC 1437 (Comm)...................................................280 Kommunar, The (No 3) [1997] 1 Lloyd’s Rep 22..........................................................................18 Kuwait Airways Corporation v Kuwait Insurance Co SAK [2000] Lloyd’s Rep IR 678 ...................................................................................................................190 LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm) ........................................................ xiii Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No2) [2004] EWHC 2738 (Comm); [2005] 1 Lloyd’s Rep 632...............................................200–202, 204 Lakatamia Shipping Co Ltd v Su [2014] EWCA Civ 636 ........................................................... xiii Land Rover Group Ltd v UPF (UK) Ltd (in administrative receivership) [2002] EWHC 3183 (QB); [2003] 2 BCLC 222..................................................................199 Langford & Co v Dutch [1952] SC 15 ...........................................................................................49 Latin American Investments Ltd v Maroil Trading Inc [2017] EWHC 1254 (Comm) ..................22 Lee v Lee [2018] EWHC 149 (Ch); [2018] WTLR 197 ................................................................97 Leeds Industrial Cooperative Society Ltd v Slack [1924] AC 851 ..............................................222 Leerort, The [2001] EWCA Civ 1055; [2001] 2 Lloyd’s Rep 291 ..............................................279 Leyland Shipping Co Ltd v Norwich Union Fire Assurance Soc Ltd [1918] AC 350 ...................................................................................................................... 119 Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 ..................................................................4 London & Blackwall Ry Co v Cross (1886) 31 Ch D 354 ...........................................................209 Longchamp, The [2018] UKSC 68; [2018] 1 Lloyd’s Rep. 1....................................................... xii Love v Baker (1665) 1 Ch.Ca. 67; 22 E.R. 698 ...........................................................................229 Lubbe v Cape Plc (No 2) [2000] 1 WLR 1545 ....................................................................294, 310 Luckie v Bushby (1853) 13 CB 864 .............................................................................................175 Lumley v Wagner (1852) 1 De G.M. & G. 604 ..............................................................................51 Lungowe v Vedanta Resources Plc. See Vedanta Resources Plc v Lungowe

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MSC Mediterranean Shipping Co SA v Delumar BVBA [2000] 2 All ER (Comm) 458; [2000] 2 Lloyd’s Rep 399 ....................................................................................................279 McHenry v Lewis (1882) 22 Ch D 397 ........................................................................................229 Mackenzie v Coulson (1869) LR 8 Eq 368 ....................................................................................96 McKew v Holland & Hannen & Cubitts (Scotland) Ltd [1969] 3 All ER 1621 ..........................120 MacShannon v Rockware Glass Ltd [1978] AC 795 ...................................................................229 Mahoney v Purnell [1996] 3 All ER 61 ...............................................................................109, 110 Manchikalapati v Zurich Insurance Plc [2019] EWCA Civ 2163; [2020] Lloyd’s Rep IR 77 .......... 190 Mandrake Holdings Ltd v Countrywide Assured Group Plc [2005] EWCA Civ 840 .................176 Manners v Pearson [1898] 1 Ch 581.............................................................................................85 Marathon Asset Management LLP v Seddon [2017] EWHC 300 (Comm); [2017] FSR 36..............................................................................................................217, 218 Marex Financial Ltd v Sevilleja [2018] EWCA Civ 1468; [2019] QB 173; [2020] UKSC 31; [2021] AC 39 ..........................................................................17–19, 22, 23 Mariella Bolten, The [2009] EWHC 2552 (Comm); [2010] 1 Lloyd’s Rep 648 ...........................21 Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2020] EWHC 2952 (Comm) ........................................................................................................9, 10 Mercandian Continent, The [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep 563......................118 Merthyr (South Wales) Ltd v Merthyr Tydfil CBC [2019] EWCA Civ 526; [2019] JPL 989 ............ 104 Midland Bank Plc v Laker Airways Ltd [1986] QB 689 ..............................................................229 Mihalis Angelos, The [1971] 1 QB 164 (CA) ................................................................................14 Miles v Wakefield MBC [1987] AC 539 .........................................................................................47 Miliangos v Geo Frank (Textiles) Ltd [1976] AC 443 .....................................12, 13, 84–87, 89–91 Miller v Race (1758) 1 Burr 452....................................................................................................82 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch); [2003] 2 All ER 823.........................................................................................................48, 49 Miracle Hope, The. See Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd (The Miracle Hope) (No3)— Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961; [2022] 2 P & CR 10.....................105 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 ..............207, 212–225 Mr Dollar Bill Ltd v Persons Unknown [2021] EWHC 2718 (Ch); [2021] All ER (D) 67...........80 Município de Mariana v BHP Group Plc (formerly BHP Billiton Plc) [2022] EWCA Civ 951; [2022] 1 WLR 4691 ..............................................................................................310 Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR 946...........................................61 Naibu Global International Co Plc v Daniel Stewart & Co Plc [2020] EWHC 2719 (Ch); [2021] PNLR 4 .................................................................................................18–20, 22 National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16; [2009] 1 WLR 1405 .................................................................................................................198, 207 National Provincial Bank Ltd v Ainsworth [1965] AC 1175 .........................................................81 Netherlands Insurance Co Ltd v Karl Ljungberg & Co AB [1986] 2 Lloyd’s Rep 19 ................194 Neurim Pharmaceuticals (1991) Ltd v Generics UK Ltd (t/a Mylan) [2020] EWCA Civ 793, [2021] RPC 7 ...............................................................................................................198 New Flamenco, The. See Fulton Shipping v Globalia Newbigging v Adam (1886) 34 Ch D 582 ....................................................................................108 Ngcobo v Thor Chemicals Holdings Ltd [1995] WL 1082070 ....................................................294 Nichols v Raynbred (1614) Hob 88................................................................................................48 Nikmary, The [2003] EWHC 46 (Comm); [2003] 1 Lloyd’s Rep 151 ..........................................40 Nile Rhapsody, The [1994] 1 Lloyd’s Rep 382........................................................................98, 99

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Noble Chartering Inc v Priminds Shipping Hong Kong Co Ltd (The Tai Prize) [2021] EWCA Civ 87; [2021] 2 Lloyd’s Rep 36 ...............................................................................41 Normhurst v Dornoch Ltd [2004] EWHC 567 (Comm)..............................................................175 Nottingham Building Society v Eurodynamics Systems Plc [1993] FSR 468 ..............................199 OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1.................................................................81, 83 Obestain Inc v National Mineral Development Corporation Ltd (The Sanix Ace) [1987] 1 Lloyd’s Rep 465. ..................................................................................314, 315, 317 Ocean Victory, The [2007] UKHL 12; [2007] 2 AC 353.............................................................313 O’Driscoll v Manchester Insurance Committee [1915] 3 KB 499 ................................................47 Okpabi v Royal Dutch Shell Plc [2021] UKSC 3; [2021] 1 WLR 1294; [2018] EWCA Civ 191; [2018] BCC 668; [2017] EWHC 89 (TCC); [2017] Bus LR 1335 ...76, 295, 299–301, 308 Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm); [2011] 2 All ER (Comm) 155 ..................................................................................................8 Owusu v Jackson [2005] ECR I-1383; [2005] QB 801 .......................................................295, 297 Pacific Concord, The [1961] 1 WLR 873 ....................................................................................120 Padre Island, The. See Fanti, The and The Padre Island Page One Records Ltd v Britton [1968] 1 WLR 157 .....................................................................51 Pan Ocean Shipping Co Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 161; [1994] 1 Lloyd’s Rep 365 ..............................................................................................49 Paragon Finance plc v Nash [2001] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558 ......................123 Paragon, The [2009] EWCA Civ 855; [2009] 2 Lloyd’s Rep 688 ..........................................61, 62 Peak Hotels & Resorts Ltd v Tarek Investments Ltd [2015] EWHC 3048 (Ch) ............................22 Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2011] 1 WLR 2370....................................................................................................................217, 218 Persimmon Homes Ltd v Hillier [2019] EWCA Civ 800; [2020] 1 All ER (Comm) ....................97 Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd’s Rep 599...........................................................................................................122, 123 Pindell Ltd v Airasia Bhd [2010] EWHC 2516 (Comm) ...............................................................10 Poole Borough Council v GN [2019] UKSC 25; [2020] AC 780..................................................73 Pordage v Cole (1669) 1 Saund 319..............................................................................................48 President of India v Lips Maritime Corporation (The Lips) [1988] 1 AC 395.............89, 176, 178, 179, 182, 185 Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 2 AC 4...............................................293 Pride Valley Foods Limited v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120 .........177 Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22; [2021] BCC 1015 .................................................................................................18 Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 ...........................................................................206–212, 214–216, 218–220, 223–225 Puerto Buitrago, The [1976] 1 Lloyd’s Rep 250 .....................................................................51, 53 QBE Europe SA/NV v Generali España De Seguros y Reaseguros [2022] EWHC 2062 (Comm) ....................................................................................21, 231, 235, 236 Quadra Commodities SA v XL Insurance Co SE [2022] EWHC 431 (Comm), [2022] 2 All ER (Comm) 334 ......................................................................186–188, 191, 192 R v Secretary of State for Transport, Ex p Factortame Ltd (No 2) [1991] AC 603 .....................198 R & W Paul Ltd v National Steamship Co Ltd (1937) 59 Ll L Rep 28................................313–316 Racal Group Services Ltd v Ashmore [1995] STC 1151................................................................96

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Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] EWCA Civ 68; [2001] 1 QB 825 ..................................................................................................................176 Redland Bricks Ltd v Morris [1970] AC 652 ...............................................................................210 Reichman v Beveridge [2006] EWCA Civ 1659; [2007] 1 P & CR 20 ...................................51, 58 Reider v Arcos. See Aktieselskabet Reider v Arcos Ltd Richco International Ltd v Alfred C Toepfer International GmbH (The Bonde) [1991] 1 Lloyd’s Rep 136............................................................................................................36–40 Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4; [2018] AC 736...............72 Robinson v Harman (1848) 1 Exch 850 ....................................................................5, 26, 212, 213 Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] EWCA Civ 328; [2013] 1 CLC 596 .................................................................................................228 Royal Boskalis Westminster NV v Mountain [1999] QB 674.......................................................193 Ruxley Electronics Ltd v Forsyth [1996] AC 344 ................................................................220, 221 SAS Institute Inc v World Programming Ltd [2020] EWCA Civ 599 .......................................... xiii SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288 .............................277 Sainsburys Supermarkets v Visa [2020] UKSC 4; [2021] AC 262 ................................................32 Saint Jacques II, The [2002] EWHC 2452 (Admlty); [2003] 1 Lloyd’s Rep 203 ...............276, 279 Salomon v Salomon & Co Ltd [1897] AC 22.......................................................................292, 293 Sanix Ace, The. See Obestain Inc v National Mineral Development Corporation Ltd Sawiris v Marwan [2010] EWHC 89 (Comm) ............................................................................190 ScandinavianTrading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 All ER 763...............................................................................................................49 Schofield v Smith [2022] EWCA Civ 824; [2023] 1 All ER 480 .................................................104 Sea Premium, The (unreported) 11 April 2011 ..............................................................................21 Seaflower, The [2000] 2 All ER (Comm) 169 (QB); [2000] 2 Lloyd’s Rep 37 .............................14 Secimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 550 ............................................................................................123 Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2009] EWHC 2066 (TCC); [2010] Lloyd’s Rep IR 490.....................................................................175, 185 Seismic Shipping Inc v Total E&P UK Plc (The Western Regent) [2005] EWCA Civ 985; [2005] 2 Lloyd’s Rep 359.........................................................................287 Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34; [2008] 1 AC 561 .........................................................................................................................176, 180 Sevylor Shipping & Trading Corp v Atfadul Co [2018] EWHC 629 (Comm); [2018] 2 Lloyd’s Rep 33 ..............................................................................312, 313, 316, 318 Sharp v Harrison [1922] 1 Ch 502 (Ch)......................................................................................208 Shelfer v City of London Electric Lighting Co [1895] 1 Ch 287 .................................................211 Smith v Littlewoods Organisation Ltd [1987] 1 AC 241 .........................................................68, 70 Société Nationale Industrielle Aérospatiale (SNIA) v Lee Kui Jak [1987] AC 871.............229, 230 South Carolina Insurance Co v Assurantie Maatschappij “De Zeven Provincien” NV [1987] AC 24........................................................................................................................228 Spar Shipping AS v Grand China Logistics Holdings (Group) Co Ltd [2016] EWCA Civ 982; [2016] 2 Lloyd’s Rep 447............................................................. xiii, 29, 43 Spiliada Maritime Corporation v Cansulex Ltd [1986] UKHL 10; [1987] AC 460............229, 294 Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111 ................................176, 177, 185 Star Reefers Pool Inc v JFC Group Co Ltd [2012] EWCA Civ 14; [2012] 1 Lloyd’s Rep. 376 ..........227 Starlight Shipping Company v Allianz Marine & Aviation Versicherungs AG (The Alexandros T) [2012] EWCA Civ 1714; [2013] 1 Lloyd’s Rep 217 ...........................176 Stealth, The [2021] EWHC 2288 (Comm); [2022] Lloyd’s Rep Plus 6 ........................................32

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Stewart v Van Ommeren [1918] 2 KB 560 .....................................................................................49 Stocznia Gdanska SA v Latvian Shipping Co [1996] 2 Lloyd’s Rep 132 ......................................57 Strive Shipping Corporation v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002] EWHC 203 (Comm); [2002] 2 Lloyd’s Rep 88 ....................122 Suisse Atlantique Société d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 ................................................................................................................................38 Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7; [2010] 2 All ER (Comm) 1185 ..............................................................................................10 Sutradhar v Natural Environmental Research Council [2006] UKHL 33; [2006] PNLR 36 .......70 Swan and Cleland’s Graving Dock & Slipway Co v Maritime Insurance Co [1907] 1 KB 116 .........................................................................................................................175, 185 Swynson v Lowick Rose LLP [2017] UKSC 32; [2018] AC 313 .................................................313 Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542 (Comm), [2010] 2 Lloyd’s Rep 81 ........................................................................................................10 Taylor v National Union of Seamen [1967] 1 WLR 532 ...............................................................51 Teal Assurance Co Ltd v WR Berkley Insurance (Europe) Ltd [2013] UKSC 57; [2014] Lloyd’s Rep IR 56 ....................................................................................................177 Thames Guaranty Ltd v Campbell [1985] QB 210 ......................................................................100 Thompson v Renwick Group Ltd [2014] EWCA Civ 635; [2015] BCC 855 ...............................295 Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Association Co Ltd [2003] EWHC 3158 (Comm); [2004] 1 Lloyd’s Rep 206 ...................235 Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC); [2007] Lloyd’s Rep IR 283 .......176, 180, 182, 185, 186 Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd (The Miracle Hope) [2020] EWHC 1073 (Comm); [2020] EWHC 726 (Comm); [2021] 1 Lloyd’s Rep 533 ........................................................................................................198, 204–207, 224 Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd (The Miracle Hope) (No3) [2020] EWHC 995 (Comm); [2021] 1 Lloyd’s Rep 552; [2022] EWHC 2234 (Comm) ...............................................................................................................205, 206 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61.................................................................................................... xii, 10, 61, 62 Tropaioforos, The [1962] 1 Lloyd’s Rep 410...............................................................................228 Tulip Trading Ltd v Bitcoin Association [2022] EWHC 667 (Ch); [2023] 4 WLR 16 ............79, 82 Turville Heath Inc v Chartis Insurance UK Ltd [2012] EWHC 3019 (TCC); (2012) 145 Con LR 163...........................................................................................................176, 185 Unicredit Bank AG v. Euronav NV (The Sienna) [2022] EWHC 957 (Comm) .............................xv United Railways of Havana & Regla Warehouses Ltd, Re [1961] AC 1007 .....................84, 85, 87 Vedanta Resources Plc v Lungowe [2019] UKSC 20; [2020] AC 1045; [2017] EWCA Civ 1528; [2018] 1 WLR 3575.........................................................76, 295, 296, 298, 300–302, 308–310 Ventouris v Mountain (The Italia Express) (No 2) [1992] 2 Lloyd’s Rep 281 ....176, 177, 178, 185 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch); [2010] Bus LR D141 .........215 Warner Brothers Pictures, Inc v Nelson [1937] 1 KB 209 ..................................................208, 210 Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The Hill Harmony) [2001] 1 AC 638; 2001] 1 Lloyd’s Rep 147 ....................................................................................167 White & Carter (Councils) Ltd v McGregor [1962] AC 413.....................44–47, 49, 50, 52–54, 59 William Pickersgill & Sons v London & Provincial Marine & General Insurance Co [1912] 3 KB 614 ..........................................................................................................175, 185

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Wilson v Brett (1843) 11 M & W 113 ..........................................................................................280 Wilson v Wilson [1969] 1 WLR 1470.............................................................................................99 Winkfield, The [1902] P 42 ...................................................................................................314, 315 Wise (Underwriting Agency) Ltd & Ors v Grupo Nacional Provincial SA [2004] EWCA Civ 962; [2004] 2 Lloyd’s Rep 483 .....................................................................................118 Woolfson v Strathclyde Regional Council (1978) 38 P&CR 521 ................................................293 Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798..........................212, 215, 221 XX v Whittington Hospital NHS Trust [2020] UKSC 14; [2021] AC 275 .......................................5 Yorkshire Water v Sun Alliance & London Insurance Ltd [1997] 1 Lloyd’s Rep 1 .....................193 Yusuf Cepnioglou, The [2016] EWCA Civ 386; [2016] 1 Lloyd’s Rep 641................................235

United States Air & Liquid Systems Corp v DeVries, 139 S Ct 986, 2019 AMC 631 (2019) ............................266 American Export Lines, Inc v Alvez, 446 US 274 (1980) ............................................................266 American Railroad Co of Porto Rico v Didricksen, 227 US 145 (1913).....................................259 American Society of Mechanical Engineers, Inc v Hydrolevel Corp, 456 US 556 (1982) ..........244 Amiable Nancy, The, 16 US (3 Wheat) 546 (1818) .....................................239, 243, 244, 246, 247 Amoco Cadiz, The [1984] 2 Lloyd’s Rep 304, at 338 and 343–346; affirmed 954 F 2d 2179 (7th Cir 1992) .....................................................................................................293 Andrus v Texas, 140 S Ct 1875 (2020).........................................................................................264 Aparicio v Swan Lake, 643 F 2d 1109 (5th Cir , 1981) ...............................................................261 Atlantic Sounding Co Inc v Townsend, 557 US 404, 2009 AMC 1521 (2009)...247, 248, 250–260, 262, 263, 265, 266 BMW of North America, Inc v Gore, 517 US 559 (1996)....................................................239, 268 Batterton v Dutra Group, 880 F 3d 1089, 2018 AMC 1 (9th Cir 2018), rev’d, 139 S. Ct. 2275, 2019 AMC 1521 (2019) ......................................................................247, 253–260, 262–268 Brickman v Southern Railway, 74 SC 306, 54 SE 553 (1906) ....................................................267 Brown v Memphis & Charleston Railroad Co, 7 F 51 ( Tenn 1881) ...........................................267 Browning-Ferris Industries of Vermont, Inc v Kelco Disposal, Inc, 492 US 257 (1989)....239, 268 CEH, Inc v F/V Seafarer, 70 F 3d 694, 1996 AMC 467 (1st Cir 1995)...............................241, 246 CSX Transportation, Inc v McBride, 564 US 685 (2011) AMC 1521 (2011)......................259, 262 Carlisle Packing Co v Sandanger, 259 US 255, 2009 AMC 1803 (1922) ..................................263 Chandris Inc v Latsis, 515 US 347, 1995 AMC 1840 (1995)......................................261, 265, 268 City of Carlisle, The, 39 F 807, (D Ore 1889) .....................................................................251, 255 Clausen v Icicle Seafoods, Inc, 174 Wash 2d 70, 2012 AMC 660 (2012) ...................................240 Cooper Industries, Inc v Leatherman Tool Corp, 532 US 424 (2001) ................................239, 268 Cortes v Baltimore Insular Line, Inc, 287 US 367 (1932) ...........................................................260 Deepwater Horizon, Re, 21 F Supp 3d 657 (ED La 2014) ..................................241, 246, 247, 268 Denver & Rio Grande Railway Co v Harris, 122 US 597 (1887)...............................................267 Dixon v The Cyrus, 7 F Cas 755 (No 3,930) (Pa 1789) ...............................................................254 Dobbs v Jackson Women’s Health Organization, 142 S Ct 2228 (2022).............................257, 268 East River Steamship Corp v Transamerica Delaval, 476 US 858, 1986 AMC 2027 (1986)...........................................................................................................................238, 264 Evich v Morris, 819 F 2d 256, 1988 AMC 74 (9th Cir 1987)..............................................253, 254

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TABLE OF CASES

Exxon Valdez, Re, 236 F Supp 2d, 1043, 1058–60 (D Alaska 2002) ..........................................240 Exxon Valdez, Re, 270 F 3d 1215 (9th Cir 2001), rev’d on other grounds sub nom. Exxon Shipping Co v Baker, 554 US 471, 2008 AMC 1521 (2008)..................238–241, 243, 246, 248, 252, 254, 258, 264, 265, 268 Fell v Northern Pacific Railway Co, 44 F 248 (1890) .................................................................267 Ferguson v Moore-McCormack Lines, Inc, 352 US 521, 1957 AMC 647 (1957).......................262 Fitzgerald v United States Lines Co, 374 US 16, 1963 AMC 1093 (1963).........................260, 262 GBM Global Holding Co Ltd v Ivan Romanov & Others, AAA Case No. 01–21–0016–1249 ...........89 Glynn v Roy Al Boat Management Corp, 57 F 3d 1496, 1995 AMC 2022 (9th Cir 1995)...............................................................................................................248, 249 Green v Howser, 942 F 3d 772 (7th Cir 2019) ............................................................................247 Guevara v Maritime Overseas Corp, 59 F 3d 1496, 1995 AMC 2409 (5th Cir 1995).......248–250, 255, 257 Gulf, Colorado & Santa Fe Railway Co v McGinnis, 228 US 173 (1913)..................................259 Harbor Tug & Barge Co v Papai, 520 US 548, 1997 AMC 1817 (1997) ...........................265, 268 Harrisburg, The, 119 US 199 (1886) ...........................................................................................251 Hines v JA LaPorte, Inc, 820 F 2d 1187, 1988 AMC 1721 (11th Cir. 1987).......................248, 250 Honda Motor Co v Oberg, 512 US 415 (1994) ...................................................................239, 268 Hopson v Texaco, Inc, 383 US 262, 1966 AMC 281 (1966) .......................................................261 Horsley v Mobil Oil Corp, 15 F.3d 2003, 1994 AMC 1372 (1st Cir. 1994) ................................250 Janus v American Federation of State, County, and Municipal Employees, Council 31, 138 S Ct 2448, (2018) ......................................................................................258 Johnson v Guzman Chavez, 141 S Ct 2271 (2021)......................................................................266 Jones & Laughlin Steel Corp v Pfeifer, 462 US 523, 1983 AMC 1881 (1983) ...........................239 Knick v Township of Scott, Pennsylvania, 139 S. Ct. 2162 (2019)..............................................258 Kolstad v American Dental Association, 527 US 526 (1999)......................................................244 Kopczynski v The Jacqueline, 742 F 2d 555 (1984) ....................................................................253 McBride v Estis Well Service, LLC, 768 F 3d 382, 2014 AMC 2409 (5th Cir 2014) ..........255, 266 McCorpen v Central Gulf SS Corp, 396 F 2d 547, 1968 AMC 1147 (5th Cir 1968) ..................265 McDermott, Inc. v AmClyde, 511 US 202, 1994 AMC 1521 (1994) ...........................................239 McDermott Int’l, Inc v Wilander, 498 US 337, 1991 AMC 913 (1991) ......................261, 265, 268 Mahnich v Southern Steamship Co, 321 U. S. 96, 64 Sup. Ct. 455, 88 L. Ed. 561 ( 1944) ........254 Mahramas v American Export Isbrandtsen Lines, Inc, 475 F 2d 165, 1973 AMC 587 (2d Cir 1973) ........................................................................................................................261 Maine Maritime Academy v Fitch, 411 F Supp 3d 76, 2019 AMC 2139 (D Me 2019)...............260 Mayo Hotel Co v Danciger, 143 Okla 196, 288 P 309 (1930) ....................................................244 Meaux v Cooper Consolidated, LLC, 477 F Supp 3d 515 (ED La 2020) ....................................260 Merry Shipping, Inc, Re, 650 F 2d 622, 1981 AMC 2839 (5th Cir 1981) ...................................250 Michigan Central Railroad Co v Vreeland, 227 US 59 (1913) ...................................249, 252, 259 Miles v Apex Marine Corp, 498 US 19, 1991 AMC 1 (1990) .....................247–259, 264, 266, 267 Miller v American President Lines, Ltd, 989 F.2d 1450 (6th Cir. 1993)..............................250, 252 Milwaukee & St Paul Railway Co v Arms, 91 US 489 (1876).....................................................267 Mitchell v Trawler Racer, Inc, 362 US 539, 1960 AMC 1503 (1960).................................263, 266 Moragne v States Marine Lines, Inc, 398 US 375, 1970 AMC 967 (1970) ................................251 Noddleburn, The, 28 F 855 (D Ore 1886), aff’d, 30 F 142 (Or 1887) .........................................255

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TABLE OF CASES

O’Donnell v Great Lakes Dredge & Dock Co, 318 US 36 (1943) ......................................261–263 Old Dominion SS Co v Gilmore (The Hamilton), 207 US 398 (1907) ........................................251 Osceola, The, 189 US 158, 2000 AMC 1207 (1903)...........................................................249, 263 Ox Labs Inc v PitPay Inc, 848 Fed Appx 795 (2021)....................................................................83 P & E Boat Rentals, Inc, Re, 872 F 2d 642, 1989 AMC 2447 (5th Cir 1989) .....................241, 246 Pacific Mutual Life Insurance Co v Haslip, 499 US 1 (1991).............................................239, 268 Pacific SS Co v Peterson, 278 US 130(1928) ......................................................................252, 259 Panama Railroad Co v Johnson, 264 US 375 (1924)..................................................................249 Philadelphia, Wilmington & Baltimore Railroad Co v Quigley, 62 US (21 How) 202 (1859) ...267 Philip Morris, USA v Williams, 549 US 346 (2007)............................................................239, 268 Plamals v SS Pinar Del Rio, 277 US 151 (1928) ........................................................................261 Planned Parenthood of Southeastern Pennsylvania v Casey, 505 US 833 (1992)......................257 Pope & Talbot, Inc v Hawn, 346 US 406, 1954 AMC 1 (1953) ..................................................238 Protectus Alpha Navigation Co v North Pacific Grain Growers, Inc, 767 F 2d 1379, 1986 AMC 56 (9th Cir 1985) .............................................................................241, 246 Puddu v Royal Netherlands Steamship Co, 303 F 2d 752, 1962 AMC 1194 (2d Cir 1962)........262 Pysarenko v Carnival Corp, 575 US 1037 (2015) .......................................................................265 Reed v The Yaka, 373 US 410, 1963 AMC 1373 (1963) .....................................................261, 265 Rivera v Kirby Offshore Marine, LLC, 983 F 3d 811 (5th Cir 2020) ..........................................261 Robinson v Pocahontas, Inc, 477 F 2d 1048 (1st Cir 1973) ........................................................248 Roe v Wade, 410 US 113 (1973) ..........................................................................................257, 268 Rogers v Missouri Pacific Railroad Co, 352 US 500 (1957)...............................................259, 262 Rolph, The, 293 F 269 (ND Cal 1923), 299 F 52 (9th Cir 1924).................................................255 Romero v International Terminal Operating Co, 358 US 354, 1959 AMC 832 (1959) ..............239 Saba v Compagnie Nationale Air France, 78 F.3d 664 (1996) ...................................................277 St. Louis, Iron Mountain & Southern Railway Co v Craft, 237 US 648 (1915) ..........................252 St. Louis, Iron Mountain & Southern Railway Co v Stamps, 84 Ark 241, 104 SW 1114 (1907) 267 Seaboard Air Line Railway v Koennecke, 239 US 352 (1915) ....................................................259 Seas Shipping Co v Sieracki, 328 US 85, 1946 AMC 698 (1946) ...............................................261 Southwest Marine, Inc v Gizoni, 502 US 81, 1992 AMC 305 (1991) .................................265, 268 State Farm Mutual Automobile Insurance Co v Campbell, 538 US 408 (2003) .........239, 241, 268 TXO Production Corp v Alliance Resources Corp, 509 US 443 (1993)..............................239, 268 Troop, The, 118 F 769 (D Wash 1902), aff’d, 128 F 856 (9th Cir 1904) .............................251, 255 Turner v Norfolk & Western Railroad Co, 40 W Va 675, 22 SE 83, 87 (1895) ...........................267 United States Steel Corp v Fuhrman, 407 F 2d 1143, 1969 AMC 252 (6th Cir 1969)........241, 246 Usner v Luckenbach Overseas Corp, 400 US 494, 1971 AMC 277 (1971) ................................262 Victory Carriers, Inc v Law, 404 US 202, 1972 AMC 1 (1971) ..........................................261, 262 Vimar Seguros y Reaseguros, SA v M/V Sky Reefer, 515 US 528, 1995 AMC 1817 (1995)........259 Wahlstrom v Kawasaki Heavy Industries, 4 F.3d 1084, 1994 AMC 13 (2d Cir. 1993) .......248, 250 Warren v United States, 340 US 523, 1951 AMC 416 (1951) .....................................248, 262, 263 Wilburn Boat Co v Fireman’s Fund Insurance Co, 348 US 310, 1955 AMC 467 (1955)...........238 Yamaha Motor Corp, USA v Calhoun, 516 US 199, 1996 AMC 305 (1996) ..............................238

xxxv

TA B L E O F L E G I S L AT I O N

EU Legislation AI Liability Directive (proposed) 2023 ....136 Alternative Fuels Infrastructure Regulation (AFIR)...............................................163 Brussels I Regulation 2001 .......................231 Art. 5(3).................................................233 Brussels Convention 1968 ........................234 Brussels Judgments Regulation (Recast) 2012...................................................297 Art. 2 .....................................................295 Art. 4 .............................................295, 297 Commission Delegated Regulation (EU) 2016/2071 of 22 September 2016 amending Regulation (EU) 2015/757 of the European Parliament and of the Council as regards the methods for monitoring carbon dioxide emissions and the rules for monitoring other relevant information ..........................161 Commission Delegated Regulation (EU) 2016/2072 of 22 September 2016 on the verification activities and accreditation of verifiers pursuant to Regulation (EU) 2015/757 ............161 Commission Implementing Regulation (EU) 2016/1927 of 4 November 2016 on templates for monitoring plans, emissions reports and documents of compliance pursuant to Regulation (EU) 2015/757 ...........................................161 Commission Implementing Regulation (EU) 2016/1928 of 4 November 2016 on determination of cargo carried for categories of ships other than passenger, ro-ro and container ships pursuant to Regulation (EU) 2015/757 ................161 Council Directive 2003/87/EC of 13 October 2003 establishing a scheme

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for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.......163,171 Council Directive 2016/802 of 11 May 2016 relating to Reduction in the Sulphur Content of Certain Liquid Fuels (codification) [2016]................158 Council of the EU, 6210/23 ............................ Preamble, paras. 19a, 20 .......................170 Preamble, para. 23–26...........................171 Preamble, para. 28.................................171 Preamble, para. paras. 31, 32 ........171, 172 art. 3g(1a) (of revised proposal)............171 art. 3ga(1) (of revised proposal)............163 art. 3gb (of revised proposal) ........164, 170 art. 3gc (of revised proposal) ........170, 172 art. 3gg (of revised proposal) ................172 art. 3ga(2) (of revised proposal)....164, 171 art. 9, para. 10 (of revised proposal) .....171 Directive 2009/16/EC .................................74 Energy Taxation Directive (ETD) (2003/96/EC).....................................163 EU Artificial Intelligence Act 2023...........136 European Convention on Human Rights and Fundamental Freedoms (ECHR) 1950 ...................307 Art. 2 .....................................................307 Art. 8 .....................................................307 General Data Protection Regulation (Reg (EU) 2016/679) ........................ 116 Product Liability Directive (Council Directive 85/374/EEC of 25 July 1985).....................................136 Regulation (EC) No 1013/2006 of the European Parliament and of the Council of 14 June 2006 on shipments of waste (EU WSR) .....74, 75

TABLE OF LEGISLATION

Regulation (EC) No. 401/2009 .................160 Regulation (EU) No. 2012/1215 of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast) — Art. 29 ...................................................232 Art. 31(2)...............................................232 Regulation (EU) No. 2013/525 ...................10 Regulation (EU) No. 2013/1257 of the European Parliament and of the Council of 20 November 2013 on ship recycling and amending Regulation (EC) No 1013/2006 (EU SRR) ......................................74, 75 Regulation (EU) No. 2015/757 (EU MRV Regulation) of the European Parliament and of the Council on monitoring, reporting and verification of carbon dioxide emissions from maritime transport ...........................156, 160–163, 169, 170 recital 34................................................161 Art. 1 .....................................................161 Art. 2 .....................................................161 Art. 19(2)...............................................166 Art. 20 ...................................................162 Art. 22 ...................................................162 Art. 22, para. 3 ......................................162 Annex 1, pt. A1 .....................................157 Regulation (EU) No. 2018/842 on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement and amending Regulation (EU) No 525/2013 in line with its objective of reaching economy-wide climate neutrality in EU by 2050 ......................................160 Regulation (EU) No. 2018/1999 ..............160 Regulation (EU) No. 2021/1119 of European Parliament & Council of 30 June 2021 Establishing Framework for Achieving Climate Neutrality (“European Climate Law”) & amending Regulations (EC) No. 401/2009 & (EU) No. 2018/1999 .....160

Renewable Energy Directive (RED II) .....163 Rome II Regulation (EC) No. 864/2007 ...........................................295 Art. 4 .................................................69, 71 Art. 4(1).................................................295 Art. 7 ...............................................71, 307 Art. 26 .....................................................71 Treaty on the Functioning of the European Union (TFEU) 2009— Art. 81 ...................................................231 Art. 82 ...................................................231 France Code des Transports (France) 2022— Art. L.5121–10......................................286 Germany German Commercial Code (Handelsgesetzbuch (HGB)) 1897— s. 435 .....................................................273 Greece Greek Ministerial Decision 128/2016 (OGG B’ 3958/09.12.2016) implementing Council Directive 2016/802/2016 ..................................158 Greek Ministerial Decision 226/2017 applying arts. 13, 14 of P.D. 55/1998 (providing for fines and penal sanctions) ..........................162 International Legislation (General) Framework Convention on Climate Change (United Nations) 1992–2022.........................................156 Hague Choice of Court Convention (HCCCA) 2005 .........................236, 237 Art. 4.1 ..................................................237 Art. 7 .....................................................237 Hague Conventions...................................237 Hague Judgments Convention 2019 .........237 Paris Agreement (International Treaty on Climate change) 2015...........................................156, 160 Vienna Convention on the Law of Treaties 1986.............................278, 279 Art. 31.3 ................................................279 Art. 31.3(a)............................................278 Warsaw Convention 1929— Hague Protocol 1955.............................154

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TABLE OF LEGISLATION

Art. 22 ...................................................154 Art. 25 ...................................................154 Maritime Legislation (International) Agreed CII ................................................168 sub cl. (b) ..............................................172 sub cl. (c)(ii)(2) .....................................168 sub cl. (c)(i)(iii).....................................172 sub cl. (d) ..............................................172 sub cl. (f) ...............................................168 sub cl. (f)(4) ..........................................168 sub cl. (g) ..............................................169 Attained Annual Operational CII ..............168 Attained CII ......................................168, 169 sub cl. (f)(ii) ..........................................169 Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal 1989................................73, 75 CII Regulations 2023 ................166, 168, 169 CMR................................................................ Art. 29.1 ........................................272, 273 Convention on Limitation of Liability for Maritime Claims 1976 (as amended by 1996 Protocol) ..................6 EEXI Regulations 2023 ............................164 Hague Rules 1924 .........................................6 Hague-Visby Rules 1968 ........................6, 41 Himalaya clauses and indemnities ........20, 21 IMO Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships 2009 .....................74 IMO Resolution (1981–2017)...................278 International Convention for the Prevention of Pollution from Ships (adopted 2 November 1973, in force 2 October 1983) (MARPOL) ..............................156–158, 165, 166, 168 reg. 14 ...................................................157 regs. 19–22............................................157 Annex VI...............................156, 157, 166 Annex VI, Ch. 4 ....................................157 Protocol 1997, Annex VI, reg 5.4 .........158 Protocol 1997, Annex VI, reg 6.1 .........159 Protocol 1997, Annex VI, reg 6.4 .........158 Protocol 1997, Annex VI, reg. 9, para. 11..............................................158

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Protocol 1997, Annex VI, reg. 9.10 ......158 International Covenant on Civil and Political Rights (ICCPR) 1966–1976.........................................307 Arts. 16, 17............................................307 Limitation Convention 1957 .............281, 287 London Convention 1976 (Limitation of Liability for Maritime Claims (LLMC)) 154, 269, 271, 274, 278–281, 284–289, 291 Art. 1(1).................................................284 Art. 1(3).........................................284, 289 Art. 1(4).................................................284 Art. 2 .....................................................290 Art. 2.1(a) ......................................290, 291 Art. 2.1(d), (e) ...............................289, 290 Art. 2.2 ..................................................290 Art. 3(a).........................................289, 290 Art. 4 ............................154, 269, 272, 275, 276, 278–280, 282, 283 Art. 6 .....................................................285 Art. 6.1.a ...............................................285 Art. 6.1(b)..............................................285 Art. 6.2 ..................................................285 Art. 6.3 ..................................................286 Art. 7 .....................................................285 Art. 10 ...................................................287 Art. 10.3 ................................................287 Art. 11 ...................................................287 Art. 11.1 ........................................284, 287 Art. 11.3 ................................................288 Art. 14 ...................................................287 Art. 18.1 ........................................289, 291 Art. L.133–8..........................................271 Protocol 1996 ................269, 284, 285, 287 Protocol 1996, Art. 9.3..........................285 Maritime Labour Convention (MLC) .......................................148, 149 Art. 2/1-f ...............................................148 MARPOL. See International Convention for the Prevention of Pollution from Ships— MEPC Resolution 278(70) (28 October 2016) MEPC 70/18/Add. 1, Annex 3.............................................159 MEPC Resolution 320(74) (17 May 2019)...................................157 MEPC Resolution 323(74) (17 May 2019) MEPC 74/18/Add.1, Annex 19 .........160 MEPC Resolution 335(76) (17 June 2021) MEPC 76/15/ Add.2, Annex 9, p. 4 ..159

TABLE OF LEGISLATION

MEPC Resolution 354(78) (10 June 2022) MEPC 78/17/Add/1, Annex 16 .........159 Salvage Convention 1989— Art. 1(a).................................................289

Contracts (Rights of Third Parties) Act 1999 ................................23–25, 201 s. 1 ...........................................................24 s. 4 ...........................................................24 Copyright, Designs and Patents Act 1988— s. 18A ....................................................218 Data Protection Act 2018 .......................... 116 Enterprise Act 2016...........................184, 187 Explanatory Notes, para. 2. 263, 264....186 ss. 28–30 ...............................................185 s. 30 .......................................................186 Fatal Accidents Act 1976 ............................66 General Data Protection Regulations (UK GDPR) The Data Protection Regulations 1985, SI 1985/ 1465...... 116 art 4(1)................................................... 116 art 5 ....................................................... 117 art 15 ..................................................... 117 art 35 ..................................................... 117 Insurance Act (IA) 2015........... 117, 121, 123, 183–187 s. 2 .........................................................121 s. 3(5)(b-d) ............................................121 s. 5(2) ....................................................121 s. 12(30)(a)............................................121 s. 13A ...........................174, 181, 185–187, 193, 194 s. 13A(1) ...............................................186 s. 13A(2) ...............................................188 s. 13A(3) ...............................185, 188, 189 s. 13A(4) .......................186, 188, 189, 192 s. 13A(4)(a) ...........................................191 s. 13A(4)(b)...........................................192 s. 13A(5) .......................................186, 193 s. 13A(5)(b)...........................................189 s. 14(3) .................................................. 117 ss. 16, 17 ...............................................186 s. 16A ............................................185, 186 Land Registration Act 2002 ......................100 Law of Property (Miscellaneous Provisions) Act 1989— s. 2 ...........................................................98 Law Reform (Miscellaneous Provisions) Act 1934..............................................66 Limitation Act 1980— s. 5 .........................................................186 Lord Cairns’ Act, See Chancery Amendment Act 1858— Marine Insurance Act (MIA) 1906...................................179, 180, 182 s. 1 .........................................................174 s. 17 ....................................... 117, 121, 122

SOLAS ..............................................148, 149 reg. 2 (e)(I) ............................................148 Netherlands Dutch (Netherlands) Civil Code (Burgerlijk Wetboek) reformed 1992...................................................307 Book 6, para. 162).................................307 Art. 7:952 ..............................................281 Spain Spanish Maritime Navigation Law 2014— Art. 465 .................................................235 Spanish Civil Code (1889–2023)— Art. 1902 ...............................................235 United Kingdom Arbitration Act 1950— s. 26 .........................................................86 Arbitration Act 1996— s. 45 .........................................................36 s. 49 .......................................................176 s. 69 .........................................................33 Bills of Lading Act 1855...................315, 316 Carriage of Goods by Sea Act (COGSA)1971 ..............6, 238, 314, 316 s. 2(1) ............................313, 314, 316–318 s. 2(4) ....................................313, 314, 318 s. 2(4)(a)................................................318 Chancery Amendment Act 1858 (Lord Cairns’ Act) .....................221–223 s. 2 ......................................................... 211 Civil Jurisdiction and Judgments Act 1982 ...........................................................234 Civil Liability (Contribution) Act 1978 ....194 Civil Procedure Rules, SI 1998/3132— r. 3.4(2)(a) ...............................................71 r. 6.33(2B)(b) ........................................236 r. 6.37 ....................................................296 r. 6.37(3)(i)–(v) .....................................296 r. 24 .......................................................198 r. 24.2 ......................................................66 r. 24.2(a)(i) ..............................................71 PD6B, para 3.1(3) .........................296, 297 Companies Act 2006— Part 30 .....................................................20

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TABLE OF LEGISLATION

Torts (Interference with Goods) Act 1977............................................316 Withdrawal Act (BREXIT) 2018 ..............295

s. 55(2)(a)......................................281, 282 s. 64(2) ..................................................193 s. 67 .......................................................176 s. 78(1) ..................................................193 s. 78(4) ..................................................193 Sale of Goods Act 1979 (SOGA) — s. 49(2) ....................................................48 s. 50 ...........................................................7 s. 51 .......................................................220 s. 51(2) ......................................................7 s. 51(3) ......................................................7 Senior Courts Act 1981— s. 35A ....................................................176 s. 37(1) .................................197, 209, 227, 228, 236 s. 50 ........................................ 21, 211, 214, 221–223, 225 Statute of Frauds .................................97, 100 Supreme Court Act 1981. See Senior Courts Act 1981—

United States Clean Water Act 33 USC § 1321.......248, 268 Constitution 1787–1789— 14th Amendment, Due Process Clause................................................241 Federal Employers’ Liability Act (FELA) 1908 45 USC §§ 51–60 .....................249 ch. 149, 35 Stat 65.................................249 Jones Act 1920, 82 46 USC § 30104 .......247, 249–253, 255–257, 259–264, 267 28 USC § 1292(b) .....................................253 45 USC § 51 ..............................................260 46 USC § 30104 ........................................260 Supreme Court Rule 10(a) ........................241

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PART I

DAMAGES

Fundamental Principles and New Frontiers

CHAPTER 1

Limitations to and Deductions from Contractual Damages Jonathan Webb, with the assistance of Florian Schacker and George Lawrence I. Introduction It is trite in English law that a breach of contract exposes the guilty party to a claim for damages, or debt, or specific performance or possibly an injunction. Additionally, in the case of a breach of condition (i.e., an essential term going to the root of the contract) or a sufficiently serious repudiatory breach of an innominate term, the innocent party may be entitled to terminate the contract, while also claiming damages for any loss of bargain suffered as a result of the breach.1 In practice, it is claims for damages which are the most important of the remedies for breach of contract (whether the term broken is a condition, a warranty or an innominate term) and it is damages claims which constitute the focus for this chapter. Termination is, by contrast, relatively rare due to the seriousness of the breach required, as explained earlier, while the courts have a discretion in equity to grant damages in lieu of specific performance, or an injunction, and often prefer to do so.2 Similarly, debt claims and claims for liquidated damages (calculated by reference to a formula set out in the contract) fall beyond the scope of this chapter as they are for “sums certain” (or at least readily ascertainable) and the losses suffered by the innocent party do not need to be proved in the same way as a damages claim.3 1 Hong Kong Fir Shipping Ltd v Kisen Kaisha (The Hongkong Fir) [1962] 2 QB 26 (CA), [1961] 2 Lloyd’s Rep 478, 494 (Diplock LJ): “There are, however, many contractual undertakings of a more complex character which cannot be categorized as being ‘conditions’ or ‘warranties’. . . . Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a ‘warranty’”. Readers should of course note that termination in this context is distinct from rescission for misrepresentation which renders the contract retrospectively voidable at the instance of the innocent party. In other words, with rescission, the contractual rights and obligations remain in place unless and until the innocent party opts to rescind the contract, at which point the rescission operates to render the contract a nullity. 2 As an order for specific performance effectively entails the court compelling the party in breach to fulfil its contractual obligations where the party may be reluctant to do so, there are concerns that such orders can be contrary to public policy, quite apart from the fact that there can be difficulties when it comes to monitoring and ensuring compliance with such orders. In practice, therefore, such orders are seldom granted, except, occasionally, in relation to the sale of land. 3 Furthermore, with debt claims, the duty to mitigate and issues of remoteness, as discussed later in relation to damages, do not apply.

DOI: 10.4324/9781003376347-2

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jonathan webb, with the assistance of florian schacker However, although a breach of contract will, in most cases, lead to the innocent party being awarded damages for the losses suffered, it is a misconception that an award of damages is inevitable, or that the innocent party will necessarily be awarded damages for “all” the losses they believe they have suffered. Of course, “breach of contract” and “damages” are intrinsically related and in many respects opposite sides of the same coin, but proof of the former does not give rise to an unfettered right to the latter. Damages are intended to compensate the innocent party for the losses suffered – but not all losses can be claimed as damages and/or can only be claimed as damages upon the innocent party having taken certain steps. What the law is interested in is establishing the claimant’s actual, net loss. As Nourse LJ put it in 1996, damages are intended as “a reward for real, not hypothetical loss”.4 Thus, when a client, feeling aggrieved at an apparent breach of contract by a counterparty asks, at the outset of a matter, “do we have a claim?”, the question for the lawyer to consider with the client is, more accurately, “do we have a claim giving rise to loss that the law will treat as being recoverable and which can be compensated by an award of damages?” This assessment made at the outset of a matter is key to understanding the level of damages which a party may, ultimately, recover. Accordingly, understanding damages and how they are calculated is as important as knowing whether there has been a breach of contract to found a cause of action. The aim of this chapter is to “shed light” on the concept of damages by, firstly, exploring how losses are, conceptually, calculated before, secondly, considering what limitations and deductions are applied by the courts to achieve net values aimed at fairly compensating the innocent party for its actual loss(es). II. Damages and the Compensatory Principle Damages are an award in money to compensate for a civil wrong.5 A “wrong” is a breach of a legal duty; a wrong can therefore be breach of contract, a tortious act of negligence, a breach of a statutory duty or a breach of an equitable duty. If no wrong has been committed, then damages cannot be claimed.6 The general rule for the measure of compensatory damages in tort finds its origin in Lord Blackburn’s judgment in Livingstone v Rawyards Coal Co.7 He defined damages as: that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation of reparation.

4 Kennedy v Van Emden [1996] PNLR 409, 414 (Nourse LJ). 5 J. Edelman, J. Varuhas and S. Colton, McGregor on Damages (21st edn, Sweet & Maxwell 2020), para 1–001. 6 In contract claims for damages, a claim for restitution based on unjust enrichment is not strictly dependent on any wrongdoing. For example, a claimant might bring a claim for money which was paid to the defendant in error, or for money paid under a contract which is subsequently vitiated. In neither of these situations is it necessary that a wrong has been committed but, nevertheless, any money paid may be claimed back in restitution. 7 (1880) 5 App Cas 25 (HL) at 39.

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limitations to and deductions from contractual damages Where the compensatory principle applies to contractual claims, the preferred citation is that of Baron Parke in Robinson v Harman:8 The rule of the common law is, where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it to be placed in the same situation with respect to damages as if the contract had been performed.9

It is also worth observing that while money will not always be a perfect substitute for the injury or loss suffered (especially in tortious cases where the losses will often be non-pecuniary, for instance in defamation cases), nevertheless, money is almost always the only available remedy and “has to compensate, as far as it can, for those injuries which cannot be cured”.10 Exemplary, liquidated and nominal damages were traditionally viewed as exceptions to the compensatory principle, but they can actually be explained in compensatory terms: exemplary damages can be explained on the basis of compensation for injury to feelings; liquidated damages are an agreed alternative to damages normally framed as an estimate of the loss pertaining to specified breaches (and are thus approximately compensatory); and nominal damages do not offer any substantive damages at all where it is found there is no loss (which again broadly follows the compensatory principle).11 It should also be noted that damages do not always specifically respond to loss. For example, inter alia, exemplary damages respond to the need for deterrence, and licence fee damages (also known as “negotiating damages” where the offending party has committed some act which would otherwise have required the authority of the injured party) do not compensate for any loss per se but rather for the loss of business which the licensor would otherwise have enjoyed. For this reason, strictly speaking, it is perhaps best not to consider the words “damages” and “losses” as interchangeable as they are not synonyms and are not necessarily mirror images of each other. III. The Quest for Net Losses As we have established earlier, the starting point for a damages claim is that it should provide compensation for the losses suffered by the innocent party. Traditionally, contractual claims for financial losses are grouped, very broadly speaking, into three categories, namely expectation losses, reliance losses and restitution losses. That said, the last of these traditional categories, restitution losses, may arguably be seen as “logically superfluous”12 within a discussion of contractual remedies as restitution arises where the contract has been rescinded13 and no longer exists.14 Accordingly, for purposes of this chapter, we are not going to include restitution as a third head of loss.

8 (1848) 1 Exch 850. 9 Ibid at 855. 10 XX v Whittington Hospital NHS Trust [2020] UKSC 14, [2021] AC 275 at [1]. 11 McGregor (n 6) 1–008. 12 A. Tettenborn, N. Andrews and G. Virgo, Contractual Duties – Performance, Breach, Termination and Remedies (3rd edn, Sweet & Maxwell 2020), para 21–038. 13 The Hong Kong Fir [1962] 2 QB 26 (CA), [1961] 2 Lloyd’s Rep 478. 14 In any event, restitutionary claims are, in the writer’s experience, seldom encountered in the shipping sphere.

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jonathan webb, with the assistance of florian schacker However, there is another candidate to take its place in that consequential losses are now, increasingly, seen as a category of their own which do not fall neatly within either of the traditional expectation or reliance loss categories, leading some commentators15 to treat consequential losses as the third category of damages, which is the approach we are following in this chapter. Drawing these threads together, the exercise of calculating the gross losses suffered by the innocent party where there has been a breach of contract will be referenced to the following categories of loss, each of which is discussed further later: (i) Expectation loss; (ii) Reliance loss; and (iii) Consequential loss. Once the gross losses have been calculated, the second step is to determine what limitations and deductions have to be applied to convert this “gross loss” figure into a “net loss” figure, which the law will recognise to be claimable as damages. These limitations and deductions are discussed further later and include: (i) (ii) (iii) (iv) (v) (vi)

Causation; Remoteness; Mitigation; Compensation received elsewhere; External factors; and Taxes.

It is, at this stage, worth flagging that, in addition to the categories listed earlier, statutory limitations can also apply to limit the sums that an innocent party may recover. Some wellknown examples of such statutory limitations occurring in the shipping context are, of course, tonnage limitation16 and weight/package limitation under the Hague and Hague-Visby Rules (the latter having the force of law in the United Kingdom pursuant to the Carriage of Goods by Sea Act 1971). Similarly, for good order, and to dispel any confusion at the outset, the term “deduction(s) from damages” is also used frequently in the context of personal injury claims where the success fee is deducted from the sum awarded to the innocent party. It should be noted, however, that this reference to deductions from damages is being employed in a very niche, procedural context, falling well beyond the scope of the general discussion in this contribution. IV. The Measure of Loss in Contract As indicated earlier, the first step is to establish the broad level of loss suffered by an innocent party, which involves looking at (i) expectation loss, (ii) reliance loss and (iii) consequential loss, as discussed further later.

15 A. Tettenborn, N. Andrews and G. Virgo, Contractual Duties – Performance, Breach, Termination and Remedies (3rd edn, Sweet & Maxwell 2020), para 21–039; where the triumvirate of expectation, reliance and consequential losses are described as the “modern categories of damage[s]”. 16 Convention on Limitation of Liability for Maritime Claims 1976, as amended by the 1996 Protocol.

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limitations to and deductions from contractual damages A. The Normal Measure of Loss in Contract – Expectation Losses In contract the normal measure of loss, where one party has breached a term of the contract, is the market value which would have attached to the benefit which the other party would have received but for the breach. Simply put, it is the profit which they would have expected to make had the breach not occurred, i.e. the innocent party’s loss of bargain. This measure applies whether it is a contract for property, a loan or for services; whether it is a case of non-performance, delayed performance or defective performance, whether by the transferor (the giver of the property, loan or service) or the transferee (the person who pays for such). For example, if a seller fails to deliver goods under a sales contract, pursuant to s. 51(2) of the Sale of Goods Act 1979 (SOGA), the position is the same as at common law: The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.

S. 51(3) of SOGA states: Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.

Where it is the buyer who, in breach of contract, refuses to accept goods the position is reversed. That is, the measure of damages will be the contract price minus the market price at which the seller is compelled to sell their goods at the time of breach (and this is again reflected in s. 50 of SOGA). Clearly, in either case, if at the time of breach, the injured parties go to market and they manage to buy at a discount compared to the erstwhile contract price (in the case of the injured transferee) or sell at a profit (in the case of the injured transferor) then they will not have suffered any loss and will not have a claim for damages. Where there is a delay in delivery (whether of property, a loan or services) compensation under contract will be determined by reference to the differential between the market rates at the beginning and end of the period of delay for whatever is the subject matter of the contract. Where there is a defect in the performance of the contract, the loss will be calculated as the difference in value between the value of the contract as represented and the value of the contract as performed in fact. In practice both delay in delivery and defective performance can only really be breaches by the transferor. If the transferee is late in payment this will result in claim for debt, not damages; otherwise, it is difficult to conceive of how any payment might in a meaningful sense be argued to be defective. B. The Alternative Measure of Loss in Contract – Reliance Losses Where it is difficult to say what the lost profits might have been, the injured party, as an alternative, may commence an action for wasted expenses made futile by the breach. A well-known 7

jonathan webb, with the assistance of florian schacker example of such a case is Anglia Television Ltd v Reed.17 A production company made an agreement with the late Oliver Reed that he should star in a film they were producing. Oliver Reed subsequently decided to pull out of the film and the production company could not find an appropriate replacement and had to abandon the film. The production company was unable to say what the profit would have been owing to the uncertain nature of the film industry. But they were able to bring an action for the wasted expenditure which they had invested into the making of the film up to Oliver Reed’s repudiation of the contract. Claimants in these types of cases enjoy the presumption that their ventures will break even though this is rebuttable if the defendants can show otherwise. In any case, these so-called reliance claims (as opposed to “expectation” claims) are still based on the compensatory principle. The claimant will not be able to claim for more than what they might have made in an expectation claim; i.e. if the defendant can show that the contract would have been loss-making this will reduce the amount claimable, and if the defendant can show the claimant in fact made no loss then no claim for damages (whether based on the reliance or expectation measure) will be possible.18 C. Consequential Losses In addition to the normal and alternative measures of losses, the injured party may also, as discussed earlier, have a claim for consequential losses. Indeed, in the globalised world we live in, with interrelated supply chains and where time in the carriage of goods is, often, of the essence, the consequences of a breach of contract can, more often than not, lead to the innocent party suffering not insignificant consequential losses, i.e. losses which do not immediately and directly flow from the breach, but rather arise indirectly as a consequence of the breach. The question for the court to decide, with respect to those consequential losses factually caused by the defendant’s breach, is whether those losses fall within the scope of responsibility assumed by the party in breach of contract or whether they are instead too remote. The test for deciding whether or not consequential damages are too remote or not is set out in Hadley v Baxendale19 and essentially asks whether or not they were foreseeable as at the time of contracting: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may 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.20

This seems right and proper. Unless a party to a contract is especially alerted to a critical consequence of breaching that contract, why should that party otherwise provide in effect 17 [1972] 1 QB 60 (CA). 18 Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm), [2011] 2 All ER (Comm) 155. 19 [1854] 9 Ex 341, 156 ER 145. 20 156 ER 145, at 152.

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limitations to and deductions from contractual damages an indemnity for any and all consequences of breach? Where would the liability stop otherwise? The test for remoteness is determined by asking in the first place if it would be reasonable for the parties to expect whether a given consequence would occur as a result of the breach in question and, in the second place, if the answer to the former question was no, whether the breaching party was put on notice of the consequence in question. Consequential loss as a concept is inextricably linked with that of remoteness. One tempers the other. We will discuss remoteness further later. V. Limitations to and Deductions From Damages – Establishing Net Values As indicated earlier, having set out the three heads of loss for calculating the gross damages (expectation, reliance and consequential losses), we will now move on to the six means by which damages claims are adjusted, to provide the net loss value. These are, of course, as listed earlier, (i) causation, (ii) remoteness, (iii) mitigation, (iv) compensation received elsewhere, (v) external factors and (vi) taxes, all of which we consider in further detail later. It is worth alerting the reader to the fact that there is an argument to be made that the first two items in the earlier list do not really represent a deduction from damages as such. Where a party argues that damages should not be awarded because there is a break in the chain of causation, or because those damages are too remote (which is technically also a break in the chain of causation) they are effectively saying that whatever wrong they might have committed, that wrong did not lead to those damages. Causation and remoteness do not therefore have the effect of deducting from damages but rather they redefine in the first place what losses were caused by the defendant and are available to be claimed as damages. Causation and remoteness redraw the boundaries, so to speak. A. Causation In order for an innocent party to be able to claim a particular loss in damages under contract, they will have to establish: (i) that there was a breach of contract; and (ii) that as a result the value of the contract has been reduced and/or, where consequential losses are concerned, that, but for the breach, those further consequential losses would not have occurred. When considering whether losses are causally connected to a breach, a counterfactual question is asked: whether, had the breach not occurred, would the losses have happened anyway? In these counterfactual scenarios, the only fact which can be varied is that of the breach. By way of example, in Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd,21 the defendant breached its contract by not paying commission for trades it made with the clients of the claimant as it was obliged to do. The defendant presented the following counterfactual defence: if it had followed the contract then it would have required the clients with whom it traded to pay more money up-front, to cover the commission it would then have had to pay to the claimant; therefore, fewer 21 [2020] EWHC 2952 (Comm).

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jonathan webb, with the assistance of florian schacker trades would have taken place; therefore, less commission would have been paid to the claimant; therefore, the claimant’s losses were not as large as claimed. It is an attractive argument because it goes to the heart of what damages aim to do, to put the claimant in the position it would have been had the contract been followed. But the Court rejected that defence pointing out that this counterfactual argument was not available to the defendants; the only relevant consideration must be what would have happened had the breach not occurred, which in this case would have been the payment of commission to the claimants. In summary, the judge pointed out that the defendant’s argument essentially boiled down to “a plea that, if only [it] had known that [its] dishonest behaviour would get found out, [it] would have behaved differently”.22 B. Remoteness If one were only to consider gross losses and stop there, defendants could find themselves inadvertently liable to a great deal of exposure. By way of example, if a taxi driver ran out of petrol while ferrying a customer and had to ask the passenger to walk the rest of the way, and as a result of the delay, that customer missed out on a business opportunity worth millions of pounds, would it be right for the taxi driver to be liable for that loss? It would be a very unwelcome surprise, surely, and it is for this sort of reason that the concept of remoteness of damages has arisen. As mentioned earlier, Hadley v Baxendale represents the orthodox position on remoteness, which is that for losses to be claimable as damages they have to be foreseeable. But still there are cases where foreseeable damages are not awarded and vice versa. In The Achilleas,23 the claimants, who were the owners of a vessel which had been delayed by nine days, claimed loss of hire not only for those nine days but also for the entire length of the next charter which was fixed at a lower rate as a consequence of a fastfalling market. The House of Lords and the parties agreed that, in fact, this sort of loss following late redelivery was foreseeable. Nevertheless, the exact extent of the loss, due to the particular volatility of the market at the time of redelivery, was not foreseeable, and in particular the charterers had not expressly assumed responsibility for those losses. Therefore, the charterers were held not to be liable for those extended losses but only for the loss of hire for the nine days of delay. The Achilleas is regarded as a special case. Subsequent cases which have attempted to follow it, where defendants have argued that they were not expressly alerted to certain consequential losses, have failed.24 The courts have been at pains to point out that The Achilleas did not create a new generally applicable test and that Hadley v Baxendale still ruled the day. In Supershield Ltd v Siemens Building Technologies FE Ltd,25 the defendant supplied a defective ball valve to the claimant which resulted in flooding to an office building. It was held that the risk of flooding as a result of supplying the defective ball valve was very 22 Ibid at 42. 23 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61. 24 ASM Shipping Ltd of India v TTMI Ltd of England (The Amer Energy) [2009] 1 Lloyd’s Rep 293 (QB); Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542 (Comm), [2010] 2 Lloyd’s Rep 81; and Pindell Ltd v Airasia Berhad [2010] EWHC 2516 (Comm). 25 [2010] EWCA Civ 7; [2010] 2 All ER (Comm) 1185.

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limitations to and deductions from contractual damages unlikely as there should have been several additional safety measures in place. Therefore, the risk of flooding was not foreseeable. Nevertheless, the defendant was found liable for the damage caused as a result of this breach because the very purpose of the ball valve was to protect against flooding and the defendants were found, therefore, to have assumed responsibility for the consequences of such a breach. C. Mitigation Following a breach of contract, the innocent party could, in theory, decide to take no action at all, forget about the contract, and instead bring a claim against the party in breach for all the losses which it then suffers. But what if it turns out there were some losses which, had the innocent party taken steps to mitigate them, could have been avoided or reduced? In these circumstances, is it entirely fair to allow the innocent party to recover those losses? The answer, of course, is that it would not necessarily be fair. This is why claimants have a duty to try to mitigate their losses. The duty to mitigate is not an absolute obligation and the innocent party is free to act as it sees fit. However, if the innocent party fails to make any attempt to mitigate its losses, it will not be able to recover any part of its losses which is attributable to that failure to mitigate. The rationale, as already noted, is one of fairness. This was succinctly summarised by Lord Bingham of Cornhill, one of the dissenting judges in The Golden Victory: The rationale of the rule is one of simple commercial fairness. [. . . Fairness] requires that [the innocent party] should not ordinarily be permitted to rely on his own unreasonable and uncommercial conduct to increase the loss falling on the [party who breached the contract].26

The duty of mitigation, in essence, requires the innocent party to take reasonable steps to minimise the loss suffered. There are various aspects to the duty to mitigate. The key elements are as follows: (i)

The innocent party has to give credit for any savings made (e.g. any bunkers saved following early redelivery of a vessel); (ii) If there is an available market, then the reasonable course of action is for the innocent party (in the shipping context at least) to charter alternative tonnage and the damage would be the difference between the charter rate payable under the charterparty which has been breached and the available market rate; and (iii) If there is no available market (and/or the innocent party cannot go out into the market), then, following the decision in The New Flamenco,27 it appears that the damages recoverable are the difference between the charter rate and what could have been earned by employing the vessel under more short-term contracts.

26 The Golden Victory [2007] UKHL 12 [10] (Lord Bingham of Cornhill (dissenting judge). 27 [2017] UKSC 43, [2018] 1 All ER 45.

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jonathan webb, with the assistance of florian schacker The steps which the innocent party has to take must be reasonable and must minimise the losses suffered. What would happen, however, if a charterer, who has had his charterparty repudiated, goes to market and, through good negotiation, manages to charter in a vessel at less than the prevailing charter rate? Does that charterer have to give credit? The answer is yes – provided that the credit cannot be shown to be wholly independent of the breach. In the Court of Appeal decision of The New Flamenco,28 referring to British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd,29 Longmore LJ put it as follows: If a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship of the claimant and the defendant.30

D. Compensation Received Elsewhere An innocent party might attempt to claim a given loss from more than one party. In the shipping context, the best known example is, probably, the cargo owner and holder of the bill of lading who is also the charterer of the vessel on which the cargo was carried – in the case of damage to, loss of or delay to the carriage of the goods, that party may have a claim under the bill of lading and the charterparty with the counterparties being, potentially, different parties. This is fine. But it goes without saying that it is not possible to be awarded damages for the same loss twice as a result of two or more claims. This is called double recovery. If the innocent party were allowed to recover more than once, that would be contrary to the compensatory principle. Of course, in shipping and, more generally, commerce, parties will generally insure their risks which can mean that when a breach of contract arises, causing a loss to the innocent party, that party may have a claim for breach of contract against the party in breach and also, separately, a claim under the relevant insurance policy to compensate for losses. To the extent that a claimant has been able to make recovery from one party, if the same claim is brought against another party, credit must be given for any compensation already received. E. External Factors Lord Wilberforce in Miliangos v Frank (Textiles) Ltd31 referred to the general rule that damages for breach of contract are to be assessed at the date of the breach but observed that: 28 The New Flamenco [2015] EWCA Civ 1299, [2016] 1 Lloyd’s Rep 383 is an example of where the steps taken by the innocent party following the termination of a charterparty were seen as independent of the breach. This case is the central topic in the excellent chapter by Simon Croall KC which is also collected in this volume: “Mitigation – is it relevant when assessing damages for breach of charterparty?”. 29 [1912] AC 673 (HL). 30 The New Flamenco [2015] EWCA Civ 1299, [2016] 1 Lloyd’s Rep 383 [23]. 31 [1976] AC 443 (HL).

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limitations to and deductions from contractual damages it is for the courts, or for arbitrators, to work out a solution in each case best adopted to giving the injured plaintiff that amount in damages which will most fairly compensate him for the wrong which he has suffered.32

Similarly, in County Personnel Ltd v Alan R Pulver & Co,33 Bingham LJ said that the general rule that damages are to be assessed at the date of the breach “should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule”.34 In the majority of cases this should not prove much of a problem, especially if one looks at sale of goods or voyage charterparty disputes; however, the position may be more complicated if one looks at long-term charterparties or bareboat charterparties. If, for example, the charterer repudiates a long-term time charterparty a considerable amount of time before the charterparty was due to come to an end, then, subject to mitigation, the owner would be entitled to claim damages for the entire period between repudiation and the date on which the charterparty would normally have come to an end. Further, what if, between the repudiatory breach which brings such a charterparty to an end and the date when damages come to be assessed, there were an external event which, had the charterparty not been terminated following the repudiatory breach, would have entitled the guilty party to terminate the charterparty? Are such events able to be taken into account? It was precisely this that the House of Lords had to consider in The Golden Victory.35 There, the charterers repudiated the charterparty and the owners, having accepted the repudiation, sought damages for the remainder of the charter period which amounted to some four years. The question then was, what effect did the outbreak of the Second Gulf War, which occurred some two years after the repudiation, and which would have entitled the charterers to terminate the charterparty at that point in time, have on the owners’ entitlement to damages? The House of Lords, by a majority, decided that such an external event which occurred after the repudiation but before the date on which the charterparty would normally have come to an end has to be taken into account and that the date of such external event would be the end point for any damages claimable by the owners. Lord Scott of Foscote noted: The damages should represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more.36

Lord Carswell quoted Lord Macnaghten in Bwllfa and Merthyr Dare Steam Collieries Ltd v Pontypridd Waterworks Co:37 Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?38

32 33 34 35 36 37 38

Ibid at 468. [1987] 1 All ER 289 (CA); [1987] 1 WLR 916. Ibid at 925. [2007] UKHL 12; [2007] 2 AC 353. Ibid at [36]. [1903] AC 426 (HL). Ibid at 431.

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jonathan webb, with the assistance of florian schacker The Golden Victory highlights the importance attached to the compensatory principle which, while aiming to compensate innocent parties for the losses suffered, only compensates for those losses actually suffered as a result of the breach. In The Golden Victory, since the Second Gulf War would definitely have brought the charterparty to an end in any event, this should mark the limit of any damages claimable by the owners. The decision in The Golden Victory is, of course, helpful in clarifying the position where, by the time the assessment is made, the external event has occurred. What if the position is different, and the question before the Court is instead that there is a certain probability that an external event may happen, and what effect might this have on the damages claimable? In The Mihalis Angelos,39 Megaw LJ said: if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then . . . the damages which [the innocent party] can recover are not more than the true value, if any, which he has lost, having regard to those predestined events.

In a subsequent decision, The Seaflower,40 Lord Bingham expanded on this statement: If the contract would inevitably have come to an end earlier than its due date anyway, it is right that the damages should be limited accordingly, regardless of whether or not the event was predestined at the date of repudiation.41

It follows, if an external event has not occurred but there is a possibility of it occurring, then it is down to the judge or arbitrators to decide whether, such a possible or probable future event shall impact on the damages which are recoverable, if any. Calculating or assessing damages is, as set out earlier, a hypothetical exercise of comparing the situation post-breach to the situation in which the innocent party would have been had the contract been performed. F. Taxes In the shipping context, and continuing with the theme of charterparties, any hire or freight earned by an owner can be categorised as income and, depending on the jurisdiction in which the owner is based, will be taxable. Whilst income generally attracts taxation, awards of a court or tribunal generally do not.42 Like any receipt not covered by a specific tax charge, they are prima facie tax free.43 As such, and by way of example, if the loss suffered is £1,000.000 in hire or freight (being a sum on which tax would, but for the breach, have been payable) and the owner is awarded £1,000,000 in damages (on which no tax is payable), then surely the owner

39 [1971] 1 QB 164 (CA). 40 [2000] 2 All ER (Comm) 169 (QB), [2000] 2 Lloyd’s Rep 37. 41 Ibid at [44]. 42 Certainly, from the English law perspective – different jurisdictions may have different rules. 43 A. Tettenborn, N. Andrews and G. Virgo, Contractual Duties – Performance, Breach, Termination and Remedies (3rd edn, Sweet & Maxwell 2020), para 21–028.

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limitations to and deductions from contractual damages has become better off by getting an award for damages. This begs the question, should the court or tribunal make a deduction to account for tax savings? The answer is, strictly speaking, “yes”, per Earl Jowitt in British Transport Commission v Gourley:44 I see no reason why in this case we should depart from the dominant rule or why the Respondent should not have his damages assessed upon the basis of what he has really lost; and I consider that in determining what he has really lost the Judge ought to have considered the tax liability of the Respondent.45

However, the courts, at least in the commercial contract context, tend to proceed on the assumption that taxes on damages mirror the tax on any income those damages replace, meaning that they cancel one another out. As Buckley J stated in Diamond v Campbell Jones:46 If the damages would be taxable in the hands of the plaintiff, in order to give him the degree of indemnity to which he is entitled, I must, I think, award him a gross sum in damages equal to the gross amount of the profit which he would be likely to have made had there been no breach of contract.47

Having said this, it should be noted that some more recent decisions seem to suggest that the courts are, contrary to the preceding, actually looking at the tax position question again.48 It is yet to be seen whether there will be any changes. VI. Concluding Remarks Damages are awarded to compensate the innocent party for losses suffered as a result of wrongdoing at the hands of another party in a civil context, be it in contract or tort. Compensating the innocent party for financial loss, rather than punishing the wrongdoer49 is the guiding principle with an award of damages, and also gives this common law remedy the flexibility to be used by the courts as a convenient substitute for equitable remedies such as set-off or injunctions. However, calculating what damages may be recoverable as compensation for loss(es) suffered is sometimes a challenging exercise which does not lend itself to a single formulaic “principle”. This is because (i) claims and the events which surround and follow on from them tend to be complex, arising, as they do, in a multitude of different contexts, and (ii) the law imposes limits and does not recognise all losses as sounding in damages. In the circumstances, the approach followed in English law to assess damages, once a breach of contract has been established, is to consider broadly what losses the innocent party has suffered based on the three philosophical concepts discussed earlier (expectation

44 [1956] AC 185 (HL). 45 Ibid at 203. 46 [1960] 1 All ER 583 (Ch); [1961] Ch 22. 47 Ibid at 27. 48 Amstrad Plc v Seagate Technology Inc (1998) 86 BLR 34 (QB) and BskyB Ltd v HP Enterprise Services UK Limited [2010] EWHC 862 (TCC). 49 Civil wrongs are not criminal offences.

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jonathan webb, with the assistance of florian schacker interest, reliance interest and consequential loss) and to then apply the various “limitations to and deductions from damages” also discussed earlier, to yield the net value(s) which the law treats as recoverable and which, in the words of Lord Scott of Foscote, “represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more”.50

50 The Golden Victory [2007] UKHL 12, at [36].

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CHAPTER 2

The Reflective Loss Doctrine and Shipping Law Can We Write It Off Yet? Professor Andrew Tettenborn I. Introduction As any commercial lawyer will confirm, the Supreme Court in Marex Financial Ltd v Sevilleja1 a couple of years ago carried out a nifty but thorough brush-clearing operation on our company law. In that momentous decision, it deftly destroyed with one grand slash most of the impenetrable undergrowth which had in the course of 40 years sprouted luxuriantly from the reflective loss rule, leaving merely a bare stem standing. Before the decision in Marex, the rule as developed in the courts had been a veritable minefield, acting as an insidious tripwire for claimants in a wide variety of cases. Potentially it could apply whenever a claim was brought by a shareholder, creditor or employee of a corporation, if (a) the loss the actual claimant sought to have made good in some way reflected a diminution in that corporation’s assets and (b) the corporation itself might have sued the same defendant. Its uncertain and potentially wide ambit was set off by a number of equally ill-defined and uncertain exceptions.2 After Marex, by contrast, life has become much simpler. We now have a bright-line rule, with no (or at least very few) qualifications, limited to one situation only. This can be summed up as follows: an attempt to recover a given head of loss is barred when claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, and in respect of which the company has a cause of action against the same wrongdoer.3 The rule goes no further than this. In particular, only shareholding will do. The fact that A stands to lose from C’s breach of duty to B4 in some other capacity – for example, because he is an employee or creditor of B or for some other reason stands to gain or lose in connection with B’s assets – will not suffice.5 (This was the actual point at issue in Marex.) Nor does the rule go beyond the case where A’s loss is computed by reference 1 [2020] UKSC 31; [2021] AC 39. 2 A useful description appears in the Court of Appeal’s decision in the same case: see [2018] EWCA Civ 1468; [2019] QB 173 (and see too this author’s comment in “Creditors and Reflective Loss – A Bar Too Far?” (2019) 135 LQR 182). 3 Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [79] (Lord Reed); Burnford v AA Developments Ltd [2022] EWHC 368 (Ch) at [57]. 4 From now on the claimant will be designated A (or A1, A2, etc if multiple); the relevant corporation B; and the would-be defendant C (or C1, C2, etc). 5 Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [79]–[89] (Lord Reed).

DOI: 10.4324/9781003376347-3

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professor andrew tettenborn to the benefits of his shareholding. So, if (for example) C deceives B into transferring an asset and A into approving the transfer, A may not be able to recover the value of the asset, but there is no reason why he should not sue for his own costs incurred in sleuthing the fraud and hunting down C.6 With the cutting down of the rule to size, moreover, the exceptions that had grown up around it have largely ceased to be necessary and have therefore fallen away.7 The Supreme Court in Marex also dealt with the rationale for the rule. It was predicated on protecting the status of the company’s organs in making administrative decisions as to whether to enforce its rights: in other words, on the need to prevent evasion of the rule in Foss v Harbottle,8 that a shareholder in a company has no standing to enforce rights of the company other than through the proper organs of the company.9 In general, this cleaning-up exercise is wholly welcome.10 It allows commercial lawyers, including shipping lawyers, to sigh with relief. For the most part, they can be assured that when they want to sue professional advisers or third parties, they can put away their books on company law because reflective loss arguments will not raise their heads. But note the words at the beginning of the sentence: “for the most part”. Despite the improvement resulting from Marex, the reflective loss rule may still cause shipping lawyers the odd sleepless night. This contribution continues in two parts. The first describes how the rule can still affect commercial law in the shipping and offshore context. The second discusses the limits to the principle, and how far these can be used to advantage in the structuring of transactions. II. Remaining Applications of the Reflective Loss Rule Operation by multiple-vessel corporations through wholly owned one-ship companies and other subsidiaries such as ship management companies is the norm these days. There are any number of good reasons for this, such as insulation from liability. On occasion, however, owners need to bear in mind that arrangements made through such companies could give rise to traps. Imagine, for example, that A concludes a contract of affreightment with C under which A agrees to provide shipping space to C over a period. One of the vessels that A elects under the contract to charter to C is owned by A’s one-ship company B. Now assume that during the charter relations sour and a dispute arises. C wrongfully arrests the vessel in a foreign port,11 and makes it difficult for B to sue by also taking steps abroad to freeze B’s bank accounts (or even put it into insolvency). A thereupon sues 6 Cf Naibu Global International Co Plc v Daniel Stewart & Co Plc [2020] EWHC 2719 (Ch); [2021] PNLR 4 at [44]–[54], allowing an amendment to claim losses of this kind. See too Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [89] (Lord Reed). 7 Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [70]–[74] (Lord Reed); see too Breeze v Chief Constable of Norfolk [2022] EWHC 942 (QB) at [25]. 8 (1843) 2 Hare 461. 9 Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [34]–[37], [82]–[83] (Lord Reed); Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22; [2021] BCC 1015 at [48]. 10 A. Tettenborn, “Less Law Is Good Law? The Taming of Reflective Loss” (2021) 137 LQR 16. 11 Assume for the sake of argument either C knows it has no proper case against the vessel or is guilty of such gross negligence that such knowledge can be inferred: cf The Evangelismos (1858) 12 Moo PC 352 and The Kommunar (No 3) [1997] 1 Lloyd’s Rep 22, 30.

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the reflective loss doctrine and shipping law C for damages representing the costs associated with the arrest, relying doubtless on an express or implied term in the charter or the contract of affreightment. Here, it must remain arguable that, despite the liberalising effect of Marex, A’s claim will fail. A’s loss of use is in effect reflective of distributions that A will not now get as sole shareholder of B; and B, the owner of the vessel, could equally have sued at the relevant time, namely when the vessel was arrested. Alternatively, suppose an analogous scenario also involving one-ship companies. A vessel owned by A’s one-ship subsidiary B is time-chartered to X, a company run by C; under the contract, to which A is party, hire is to be paid into B’s account unless and until A gives notice to pay it elsewhere. A dispute ensues. C, as in the previous example, causes X to embargo B’s bank account, making suit by B awkward; he then renders X judgment-proof by diverting its assets outside the reach of either A or B. Any suit by A against C for the tort of causing loss by wrongful means12 is again likely to fail. B could have sued for the same tort, and A’s claim would be parasitic on the value of its interest in B. A third possibility is this. Imagine A owns a number of ships through single-ship companies B1, B2, etc; assume further that C is a professional, such as a lawyer or shipbroker, employed to advise A and its one-ship companies fairly indiscriminately, and without drawing much of a distinction between them.13 As a result of negligent advice from C, B enters into a charter which is financially ruinous and makes B1 insolvent. For B1 to sue C is possible but likely to be difficult: but for A to sue C would seem to be impermissible because of the reflective loss rule.14 This is damage that would have been recoverable by B1; and A’s loss is simply a simulacrum of B’s, suffered by A by way of a loss in distributions from B1.15 A. Joint Ventures and Special Purpose Vehicles With ships constantly more costly and maritime business ever more capital-intensive, joint ventures involving the use of marine special purpose vehicles are growing fast. But again, a little bit of thought needs to be given to deciding on these lines in order to avoid complications later. It has to be remembered, after all, that the reflective loss rule applies just as much to partial holdings as to 100% subsidiaries. Imagine, for example, a contract between two joint venturers A1 and A2 on the one hand, and C on the other, under which C agrees to transfer a ship (or some other asset such as an offshore unit, or the shares in an operating company) to a new special purpose vehicle B to be set up by A1 and A2. Assume that something goes wrong: either the asset is defective, or C was guilty of deliberate or negligent misrepresentation made to A1 and B. In either case the venture fails, B collapses, and A1 and A2 lose their investment.16 12 On the basis of C’s breach of fiduciary duty to X aimed at causing loss to B: compare the facts in Marex itself. 13 Compare the facts of Johnson v Gore Wood & Co [2000] 2 AC 1. 14 Cf the facts of Naibu Global International Co Plc v Daniel Stewart & Co Plc [2020] EWHC 2719 (Ch); [2021] PNLR 4. 15 It does not matter what form such distributions take. See Allianz Global Investors GmbH v Barclays Bank Plc [2022] EWCA Civ 353; [2023] 1 All E.R. (Comm) 20. 16 Cf the facts of Broadcasting Investment Group Ltd v Smith [2021] EWCA Civ 912; [2022] 1 WLR 1.

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professor andrew tettenborn This case, it seems clear, is one where a claim by either A1 or A2 against C for breach of contract, or in tort for negligence or deceit, must still fail. Even though they have lost their investment, B could have recovered its own losses from C: the only claims left to A1 and A2 are likely to be such expenses as they can prove they have suffered over and above the damage to B.17 Nor is this the only case where joint venture arrangements can lead to complications. A “buy-in” transaction can also have much the same effect. A typical situation might be this. A1, A2, etc, the partners to a joint venture (for example, a vessel pool), operate it through a special purpose vehicle B. A further party C negotiates to join the venture as a predominant partner by buying a controlling shareholding in B. The deal goes ahead, with C agreeing by contract with A1 and A2 to take steps to preserve their interests as (now) minority shareholders. It then turns out that C has induced A1, A2, etc, and by inference B, to agree to the arrangement by fraud. Furthermore, having got a controlling interest in B, C then so arranges matters that a large proportion of the profits that would have gone to B go instead to itself.18 At this point the options available to A1 and A2 are limited, even though C has acted wrongfully, and their investment has been grievously affected. True, they might theoretically have an unfair prejudice claim against C under Part 30 of the Companies Act 2006, though claims of this sort can be rather difficult to make good. What A1 and A2 cannot do is sue C. A claim against C for compensation for the initial misrepresentation, or for C’s later actions, whether for breach of contract or under a theory of breach of fiduciary duty, will run up against a seemingly immovable reflective loss barrier. A1 and A2’s losses on the joint venture are irretrievably tied to the value of their interests in B: the only way they can formulate such a claim is by reference either to the value of their shares in B, or to the money that they will not now be able to extract from it, both of which are prohibited heads of loss.19 B. Subsidiaries, Groups and Knock-for-Knock Agreements A third area where the reflective loss rule may cause unexpected problems appears, perhaps surprisingly, in the area of knock-for-knock agreements, Himalaya clauses and indemnities. Take a characteristic knock-for-knock agreement (this one, from Supplytime 2017, being typical): [T]he Charterers shall not be responsible for loss of or damage to any property of any member of the Owners’ Group, including the Vessel, or for personal injury or death of any member of the Owners’ Group, arising out of or in any way connected with the performance or nonperformance of this Charter Party whatsoever and in any circumstances, even if such loss, damage or personal injury or death is caused wholly or partially by the act, neglect, breach of duty (whether statutory or otherwise) or default of the Charterers’ Group . . .; and the Owners shall indemnify, protect, defend and hold harmless the Charterers’ Group from any

17 Cf Naibu Global International Co Plc v Daniel Stewart & Co Plc [2020] EWHC 2719 (Ch); [2021] PNLR 4 at [44]–[54]. 18 This has some analogy to the facts of Burnford v Automobile Association Developments Ltd [2022] EWCA Civ 1943. 19 See the Burnford case, referred to in the previous note.

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the reflective loss doctrine and shipping law and against all claims, costs, expenses, actions, proceedings, suits, demands and liabilities whatsoever arising out of or in connection with such loss, damage, personal injury or death.20

Imagine that, against the background of such a charter, X, an employee of the owner C, injured through the negligence of a subsidiary B of the charterer A, sues the subsidiary in a foreign court21 and recovers a substantial amount. Can the charterer sue the owner C for an indemnity relying on the italicised words? The answer may well be no. If B could have obtained an anti-suit injunction against C based on C’s equitable obligation not to sue it (which seems to be the case),22 it appears to follow that having been sued it could on principle also obtain equitable damages from C representing the amount of its liability.23 Furthermore, the loss for which A is suing to be indemnified is essentially a reflection of the amount of the liability wrongly placed on B, which according to Marex is an illegitimate head of claim. A similar position may arise in respect of a Himalaya clause; such a clause in a contract between A and C typically requires C not to sue a third party B connected with A and obliges C to indemnify A if it does.24 An analogous situation would arise were B to be a subsidiary of A and were C, or someone claiming under C such as a subrogated insurer, to sue B and A were then to seek to exercise its right to indemnity. III. An Uncertain Situation: Injunctions So far, we have been dealing with situations where the logic of the reflective loss rule is relatively clear. There is, however, one case where it remains uncertain, and it too could do with a brief discussion. This concerns non-financial orders, notably injunctions and other specific remedies. Assume A, relying on a contract between itself and C, seeks an injunction from C that would enure to the benefit of its subsidiary B: assume further that B could itself have obtained an injunction against C in respect of the same action. Is A barred from obtaining the injunction in the same way that he would have been barred had he sued C for damages reflecting a loss for which B could have sued? The point could matter in the shipping context. One example might be a variant on one of the cases given earlier. Imagine A charters out to C a vessel belonging to A’s subsidiary B, which C then with no justification arrests.25 We have seen that because of reflective loss, A cannot claim damages for loss of use insofar as B could equally have

20 See Clause 14(a)(i) (emphasis added). Clause 14(a)(ii) contains a near mirror image protection for the owners, to which many of the same comments apply mutatis mutandis. 21 If brought in an English court, the action could probably be stayed, thus avoiding the problem: cf The Elbe Maru [1978] 1 Lloyd’s Rep 206 and Gore v Van der Lann [1967] 2 QB 31. 22 Compare the arbitration and exclusive jurisdiction cases of The Sea Premium, unreported, 11 April 2011 (David Steel J) and more recently QBE Europe SA/NV v Generali España de Seguros y Reaseguros [2022] EWHC 2062 (Comm) at [19] (Foxton J). 23 Compare Argos Pereira España SL v Athenian Marine Ltd [2021] EWHC 554 (Comm); [2022] 1 All ER (Comm) 345, making it clear that such awards are possible, and not simply in the form of awards of damages in lieu of specific relief under s.50 of the Senior Courts Act 1981. 24 See, e.g., Conlinebill 2000, Cl.15(c). That an anti-suit injunction against foreign proceedings is available in such a case appears from The Mariella Bolten [2009] EWHC 2552 (Comm); [2010] 1 Lloyd’s Rep 648; by parity of reasoning with QBE Europe SA/NV v Generali España de Seguros y Reaseguros [2022] EWHC 2062 (Comm), referred to earlier, there is likely also to be a breach of an equitable obligation sounding in compensation. 25 The arrest being wrongful, for example, for the reasons given in Note 11 earlier.

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professor andrew tettenborn sued. But what if A is able to get in early, and seek an injunction to prevent the arrest, relying on an express or implied term of the contract between it and C? Another, perhaps more pertinent, instance, is this: might the reflective loss rule affect anti-suit injunctions? Suppose a contract between A and C contains an English exclusive jurisdiction clause, expressed to affect not only A but B, an associated company of A’s. If B is a subsidiary of A, or a special purpose vehicle in which A owns a proportion of the shares, could this affect A’s ability to get an anti-suit injunction from C in the event of wrongful arrest?26 The answer here is unclear. Before the decision in Marex it was thought that the reflective loss bar was largely about double recovery: that is, avoiding the possibility of the same loss being recoverable from the same person by both a company and its shareholder. A series of older authorities had thus held, logically, that the principle did not apply to non-damages claims, where no such problem could arise.27 Since Marex, however, doubt has been thrown on this. Dicta of Lord Reed in that case, emphasising the importance of ensuring that those wishing to enforce the company’s rights go through proper corporate channels, suggest that it is not remedy-specific;28 and in one post-Marex case the reflective loss rule has indeed been held applied to a claim for specific relief (there, specific performance).29 But the matter still remains open: when the latter decision was appealed, the Court held that the issue did not arise, but very pointedly left it open.30 There the matter remains: until the Court of Appeal or the Supreme Court clears things up, lawyers will have to advise their clients that there is no certainty on the point. It is respectfully suggested, however, that despite Lord Reed’s dicta, the better position is that the reflective loss rule should not apply outside money claims. One reason is that, properly viewed, such proceedings are not an evasion of Foss v Harbottle.31 Suppose A, relying on a duty owed by C to him, seeks a specific remedy against C which incidentally benefits B, in which he holds shares, and which C could have sought. Unlike a money claim by A reflecting the drop in value of A’s holding in B or the loss of a money distribution from B, which can be described as merely an indirect grab by A at B’s loss so as to short-circuit B’s own claim, the interests of A and B which such a remedy will vindicate are ex hypothesi different. The other reason is that the reflective loss rule is not a rule about barred claims: it is a rule about unclaimable losses. If A can point to a loss it has suffered which is not derived from a loss suffered by B, it can recover it.32 But this makes no sense with specific remedies, which do not exist to make good losses at all. There is simply no way one can say coherently that a claim by A for an injunction

26 The arrest being wrongful either for the reasons given in Note 11 earlier, or because it evinces an intention to strongarm A illegitimately into litigating in the place of arrest, as happened in Kallang Shipping SA v AXA Assurances Senegal [2006] EWHC 2825 (Comm); [2007] 1 Lloyd’s Rep 160. 27 See, notably, Peak Hotels & Resorts Ltd v Tarek Investments Ltd [2015] EWHC 3048 (Ch) and Xie Zhikun v Xio GP Ltd, Cayman Islands Court of Appeal, unreported, 14 November 2018; also, cf Latin American Investments Ltd v Maroil Trading Inc [2017] EWHC 1254 (Comm). 28 Marex Financial Ltd v Sevilleja [2020] UKSC 31; [2021] AC 39 at [52]–[54]. 29 See Broadcasting Investment Group Ltd v Smith [2020] EWHC 2501 (Ch), esp at [57]–[59]. 30 Broadcasting Investment Group Ltd v Smith [2021] EWCA Civ 912; [2022] 1 WLR 1, at [62] (Asplin LJ). 31 (1843) 2 Hare 461. 32 See Naibu Global International Co Plc v Daniel Stewart & Co Plc [2020] EWHC 2719 (Ch); [2021] PNLR 4 at [44]–[54], referred to earlier.

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the reflective loss doctrine and shipping law that will benefit B is tied to any particular loss suffered by B so that it should fall to be treated as a surrogate for it. IV. Two Possible Commercial Workarounds So far, we have been discussing the reflective loss rule and its possible extent, mentioning a number of cases where the monster may still tiresomely raise its head despite the Supreme Court’s decision in Marex. In this final section, we mention two ways in which, by a bit of deft drafting, those involved in shipping may avoid the effect of the rule. Two in particular are worth discussing in a little detail. A. Indirect Shareholding In its first incarnation, the reflective loss rule was applied where A’s claimed loss mirrored that suffered by a company A itself held shares in. In Broadcasting Investment Group Ltd v Smith,33 however, an important case already referred to and which we will be coming back to later, an interesting point arose: what about indirect holdings? To simplify matters slightly, a number of defendants C had allegedly broken an agreement to transfer an IT business to a joint venture special purpose vehicle B. The shares in B were held as to 39% by A1; A1 in turn was controlled by A2, and A2 by an individual, A3. A1 and A3 were parties to the agreement with C. A3 and A1 sued C: C pleaded reflective loss. The deputy judge held that the plea succeeded as regards A1; rightly so, this being an instance of a paradigmatic reflective loss claim even after Marex. But importantly, he disallowed it as against A3. True, as regards these events A3’s fortunes depended on B’s. But A3 was not itself a shareholder in B and could therefore not be seen as having surrendered to the organs of B his right to complain of the effects of a wrong done to it without doing violence to the separate corporate personality of the intervening company A2. It followed that his claim was not an attempted end-run around Foss v Harbottle and should be allowed to succeed.34 On appeal, A1 and A3 succeeded on a different ground.35 Asplin LJ left the indirect shareholding issue calculatedly open.36 Arnold LJ by contrast was rather sceptical about the deputy judge’s view.37 Coulson LJ, slightly unhelpfully for our purposes, said he agreed with both. A fog of uncertainty therefore lingers. It is suggested, however, that there is much to be said for the deputy judge’s view. Not only is it slightly implausible to say a shareholder in X Ltd implicitly gives up his right to complain of a wrong done to Y Ltd merely because X happens to hold shares in Y. More to the point, the more remote the shareholding, the more remote the connection between the shareholder’s loss and the damage done to Y and the less reason to guard jealously the right of the company organs of Y to decide what to do about it. 33 34 35 36 37

[2020] EWHC 2501 (Ch); (on appeal) [2021] EWCA Civ 912; [2022] 1 WLR 1. See [2020] EWHC 2501 (Ch) at [64]–[65]. That is, the effect of the Contracts (Rights of Third Parties) Act 1999. This is referred to later. See [2021] EWCA Civ 912; [2022] 1 WLR 1 at [63]. See [2021] EWCA Civ 912; [2022] 1 WLR 1 at [66].

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professor andrew tettenborn Meanwhile, if this view is the correct one, then there is a simple, straightforward, and very inexpensive way for shipowners and others to insulate themselves from reflective loss problems: just introduce a new technical corporate layer into one-ship shareholdings. A shipowner A1 Ltd, insofar it does not already do so, would be well advised to hide its one-ship companies B1, B2, etc behind a general holding company A2 Ltd; similarly, any offshore operator A1 thinking of setting up a special purpose vehicle B Ltd for a joint venture should consider interposing a further entity A2 Ltd between them. Until we have a definitive answer to the conundrum raised in Broadcasting Investment, we cannot know definitely whether this tactic will work, but there is little doubt that it is worth trying. It will certainly make life more difficult for defendants who want to make life difficult for claimants by taking a reflective loss point but are not prepared to run the risk and incur the expense of taking the issue to the Court of Appeal. B. The Contracts (Rights of Third Parties) Act 1999 The application of the reflective loss rule depends, as stated earlier, on the right of B to sue; if B cannot do so, no question can arise of barring a claim by A. In this context, the Court of Appeal has now made it clear that the Contracts (Rights of Third Parties) Act 1999 plays a crucial, if surprising, part. In Broadcasting Investment Group Ltd v Smith,38 in connection with the claim brought against C by A1 and A3, the claimants not only admitted, but alleged, that B was a third party beneficiary of the contract between C and themselves under s.1 of the Contracts (Rights of Third Parties) Act 1999. Positively asserting a statutory right of action in B might have seemed foolhardy and indeed counter-intuitive in such circumstances. In fact, however, it was a very shrewd move. Section 4 of the Act runs as follows: “Section 1 [the section allowing the third party to sue if designated] does not affect any right of the promisee to enforce any term of the contract”. The argument by A1 and A3 was as simple as it was bold: where the Act applied, s.4 abrogated the reflective loss rule entirely, and preserved the right to sue even if it would otherwise have been taken away. The deputy judge was having none of it, but the Court of Appeal unanimously reversed him. It reasoned thus. Section 1 of the 1999 Act added B to the list of people who could sue on the contract apart from the Act. True, if the Act had stopped there, it would effectively have taken away with one hand what it had given with the other, by causing the reflective loss rule to be triggered, and thereby bar A1’s claim. But the words of s.4 were, said the court, peremptory: they stated that the operation of s.1 did not “affect” anyone else’s right to sue. Construing s.1 as taking away A1’s rights by causing the reflective loss principle to intervene was thus doing exactly what the Act said could not be done. It followed that insofar as they were contracting parties, s.4 rendered the rights of A1 and A3 immune to the doctrine.39 This is certainly a spectacular holding. It must also be somewhat doubtful whether the 1999 Act was ever intended to allow the kind of evasion of Foss v Harbottle that the reflective loss principle sought to preclude. Nevertheless, short of express Supreme Court disapproval, the law is now clear. As a result, so is the road to very substantial 38 [2021] EWCA Civ 912; [2022] 1 WLR 1. 39 See [2021] EWCA Civ 912; [2022] 1 WLR 1 at [46]–[54].

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the reflective loss doctrine and shipping law neutralisation of what is left of reflective loss for shipowners, offshore operators or anyone else in the shipping business. If you want to do business through a subsidiary – a one-ship company, special purpose vehicle or anything else – and dodge the possibility of specialist advisers or the like pleading reflective loss, your method is simple. All you have to do is state expressly that any contract you enter into with third parties is intended to be enforceable by your subsidiary. True, this may go against the grain. For many years commercial lawyers’ inveterate instinct when grafting any agreement has been to add to the boilerplate a complete exclusion of the 1999 Act so as to remain on the safe side and prevent unexpected complications arising. But in this case things may have to change. One suspects lawyers may have to change their habits, grin and bear it, and accept that in certain situations the simplest solutions are also very often the best.

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CHAPTER 3

Mitigation – Is It Relevant When Assessing Damages for Breach of Charterparty? Simon Croall KC I. Introduction Lawyers practising in the area of international trade are principally concerned with the law of contract. Indeed, within the law of contract, the aspects which really matter when advising clients can be distilled down to a few core subjects. The law relating to the assessment of damages for breach of contract is one such core subject. The student of that topic has instilled into them a number of basic propositions. The first of those is that the purpose of damages for breach of contract is compensation for loss of the benefit that would have been gained under the contract. In the oft cited words of Baron Parke:1 The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

This statement of some apparent antiquity is not some ancient principle with no modern relevance or application. Indeed, it has expressly been identified as the guiding principle in recent years by both the House of Lords in The Golden Victory2 and the Supreme Court in Bunge SA v Nidera BV.3 One specific manifestation of this guiding principle is that where an injured party takes steps in response to a breach to minimise or mitigate the loss it suffers, any benefit it gains is brought into account so as to reduce the damages payable. Otherwise, the award of damages might be said to have put the innocent party in a better position than if the contract had been performed. This principle known as mitigation of loss and the rule(s) of mitigation are derived from a decision of the House of Lords in 1912 in British Westinghouse Electric & Manufacturing Co. Ltd v Underground Electric Railways Company of London Ltd.4 The judgment in that case gave rise to the so-called three rules of mitigation to which Dr McGregor, in his classic text on damages, devotes a whole chapter. That text frequently cited verbatim by English courts identifies three aspects to the rules of mitigation. In summary: (1) The first and most important rule is that the claimant must take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong and 1 2 3 4

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Robinson v Harman [1848] 1 Exch 850, 855. [2007] 2 AC 353; [2007] 2 Lloyd’s Rep 164. [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469. [1912] AC 673 (HL).

DOI: 10.4324/9781003376347-4

mitigation when assessing damages for breach of charterparty cannot recover damages for any such loss which he could have avoided but has failed, through unreasonable action or inaction, to avoid. . . . (2) The second rule is the corollary of the first and is that, where the claimant does take reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong, he can recover for loss incurred in so doing; this is so even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. (3) The third rule is that, where the claimant does take steps to mitigate the loss to him consequent upon the defendant’s wrong and these steps are successful, the defendant is entitled to the benefit accruing from the claimant’s action and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being ones which were required of him under the first rule.5 These principles are of general application and therefore apply with equal force to contracts entered into in the sphere of international trade. Specifically, they appear to apply to contracts such as charterparties. The theme of this chapter is to explore whether, at least in substance rather than name only, that remains the position in the context of claims for breach of charterparty. I am most concerned with the most fundamental of those claims – the claim for damages flowing from a repudiatory breach of a charterparty. Over that the last 14 years such breaches were almost always alleged to have been committed by the charterer (the market conditions being such that any owner could not usually do better in the market and hence had no commercial incentive to terminate early). However, the principles are the same whichever party is making the claim. I will go on later to consider other types of breach of charterparty briefly. I should also disclose an interest. The prompt for this talk is the decision of the Supreme Court in The New Flamenco – a case which I was involved in.6 That decision considered directly, albeit in an unusual context, the assessment of damages when there is a repudiatory breach of charterparty. My arguments in that case were rejected by the court. We are now five years from that decision, so it is possible for me to be a little more objective and for all of us to see how subsequent courts have approached and applied that decision. That decision was perceived by many (including academic commentators) as one about the application of the rules of mitigation in the context of breach of charterparty cases. I will suggest that properly understood what the decision in fact shows is that even where mitigation was previously thought to have a meaningful role in this type of case (i.e., as I shall explain where there is, using the jargon, no available market) that role has now diminished. Subsequent decisions have done nothing to suggest this conclusion is misplaced.

5 J. Edelman, McGregor on Damages (21st edn, Sweet & Maxwell 2020), at 9–002–9006. 6 [2017] UKSC 43; [2017] 2 Lloyd’s Rep 177.

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simon croall kc I have set out the so-called rules of mitigation earlier. At their core is a focus upon the conduct, almost always post-breach conduct, of the innocent party. The rules operate such that: (i)

Where the innocent party takes steps to mitigate the loss caused by the breach and successfully reduces that loss the defendant is entitled to the benefit accruing from the claimant’s action – the so-called third rule, (ii) Where the innocent party takes steps to mitigate the loss caused by the breach it may recover for any additional losses sustained so long as it was acting reasonably – the so-called second rule, (iii) Where the innocent party fails to take reasonable steps to reduce/mitigate its loss it will only be able to recover the loss which it would have suffered if it had acted reasonably – the first rule which coins the well-known expression that a party has “failed to mitigate its loss”. There are rules about where the burden of proof lays with regard to allegations relating to mitigation; however, at bottom, an enquiry into what loss to award will frequently involve a consideration of whether the innocent party had sought to mitigate its loss and with what consequences. But note – there are limits to the principles. To qualify as mitigating conduct/action it must arise out of the breach, and it must have reduced the loss. This is the language used by Viscount Haldane in British Westinghouse.7 In modern parlance it is said to give rise to a requirement of causation – the mitigating actions were caused by the breach. It is time to move from generalities to the specific context of charterparties. II. Assessment of Loss for Damages for Repudiatory Breach A. Where There Is an Available Market In this context, as with all cases involving the supply of goods or services, the law distinguishes between the situation where the equivalent to what has been lost can or cannot be readily acquired in the market. In those circumstances, in the jargon, there is an available market, and the law applies a measure of loss irrespective of the conduct of the innocent party. In the charterparty context, that measure of damages is the difference between the revenue over the unexpired term of the charter and the rate which could be earned on the market for an equivalent charter (i.e., one of the same duration on similar terms).8 For example, if there were two years left on a charter term and it was possible to go out into the market and find a new charterer for a two-year term at the date of breach the loss is the difference between that which would have been earned under the original charter and what will be earned under the new replacement charter. If the market rate has not changed (or has gone up) there is no loss. The measure proceeds on the basis that the innocent party will go into that market to obtain an equivalent to the goods or 7 [1912] AC 673 at 690. 8 See The Elena D’Amico [1980] 1 Lloyd’s Rep 75 (Robert Goff J), approved in The Golden Victory [2007] 2 AC 353; [2007] 2 Lloyd’s Rep 164 and Bunge SA v Nidera BV [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469.

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mitigation when assessing damages for breach of charterparty service that was due under the contract. In so doing the law necessarily disregards the actual actions (if any) taken by the innocent party to mitigate his loss (as was the case in the Elena D’Amico itself). The logic behind this approach is that the rights that have been lost (the balance of the charter) can be valued precisely in the market and hence an award of damages on this basis represents a full indemnity for the loss. There is no doubt this is the law in this scenario (where there is an available market). The same is true if the owner repudiates the charter. The charterers’ loss is the difference between the hire rate it must pay under a charter on similar terms for the balance of the period and the hire it would have had to pay under the repudiated charter. In either circumstance the so-called rules of mitigation have no role to play. The law has developed a measure of loss which makes the subsequent conduct of the innocent party legally irrelevant when assessing loss. B. No Available Market i. The Pre-New Flamenco Position Legal orthodoxy suggested that the position was different where there was no available market. The loss cannot be “fixed” at the date of breach, as in the available market case, because the innocent party is not deemed to have mitigated by entering into the market. Whilst the earnings that would have been made under the charter and the costs of performance remain the same, the losses and benefits arising because the vessel is free to be exploited for the unexpired term cannot be fixed because there is no available market providing a valuation of that benefit. The law landed (in a string of cases) in a place where the benefit of having the vessel freed up early was assessed by reference to what steps the innocent party actually took following breach. This was on the basis that these were acts of mitigation of which account must be taken. The general approach in the absence of the market was stated by Popplewell J (as he then was) in Spar Shipping AS v Grand China Logistics Holdings (Group) Co Ltd, where he said:9 absent any arguments of failure to mitigate, the owner’s loss in such a situation is to be calculated by reference to his actual earnings,

The judge therefore held that the owner’s actual trading of the vessel was relevant to assessing loss in a “no market” case. The three rules of mitigation appeared to be alive and well in this context. ii. The New Flamenco Then came The New Flamenco.10 It is worth reminding the facts of the case briefly. Charterers repudiated a two-year extension to a time charter for a cruise vessel. Owners were unable to find employment upon her redelivery and put her up for sale and within a short period sold the vessel (achieving a very good price for her). The question which

9 [2016] EWCA CIV 982; [2016] 2 Lloyd’s Rep 447. 10 [2017] UKSC 43; [2017] 2 Lloyd’s Rep 177.

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simon croall kc arose was whether the sale was an act of mitigation and hence whether the benefit arising from the sale was to be brought into account when assessing damages. The factual findings of the arbitrator included: (i)

There was no available market in which owners could have fixed an equivalent substitute charter as at the date of breach/redelivery. (ii) The sale of the vessel in October 2007 was an action taken by owners to minimise losses arising from the repudiation of the charter. (iii) The sale of the vessel in 2007 (i.e., the act of mitigation) gave rise to a benefit. (iv) That benefit was assessed to be the difference between the sale price of US$23,765,000 and the vessel’s value in November 2009 (US$7m) i.e., the first date she could have been sold had the extended charterparty been performed. Accordingly, the arbitrator held that credit should be given for this benefit. The trial judge (Popplewell J)11 regarded this as an error of law on the basis that the sale was res inter alios acta (unrelated to the breach). The Court of Appeal allowed the appeal on the basis that the sale of the vessel was an act of mitigation, and the case was in all respects similar to the British Westinghouse case.12 British Westinghouse13 was the case where London Underground bought superior turbines to replace turbines which were not of the contractually warranted efficiency. In the context of a claim against the supplier of the original turbines, the House of Lords in that case held that act of acquiring the new turbines was a mitigating act and the costs of doing so could be claimed but credit be given for the benefits resulting from the operation of the new more efficient turbines. As is clear the appeal to the Supreme Court brought into sharp focus whether and in what way the rules of mitigation operated where there was no available market. The Supreme Court14 allowed the appeal and held that the benefits from the sale of the vessel were not to be considered. What matters, however, for present purposes is the reasoning. Depending on your perspective the reasoning (all contained in the judgment of Lord Clarke) is disappointingly short or admirably brief – taking up six short paragraphs. Either way it can be summarised briefly: (i)

Damages questions are resolved by reference to so-called default rules to give effect to the compensatory measure.15 (ii) Benefits derived from acts of mitigation which are different in kind to the loss may be brought into account but only if the act of mitigation was as a matter of law, caused by the breach.16

11 12 13 14 15 16

[2014] EWHC 1547 (Comm); [2014] 2 Lloyd’s Rep 230. [2015] EWCA Civ 1299; [2016] 1 Lloyd’s Rep 383. [1912] AC 673. [2017] UKSC 43; [2017] 2 Lloyd’s Rep 177. Ibid at [29]. Ibid at [29–30].

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mitigation when assessing damages for breach of charterparty (iii) The sale was occasioned by but not in law caused by the breach and was not therefore an act of mitigation.17 (iv) “In the absence of an available market, the measure of the loss is the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market”.18 (v) If the vessel were sold, say, during the charter period when it would have been employed under the repudiated charterparty, the sale would shorten the period during which the owners could claim to have lost the income stream under the old charterparty. However, if it could be shown that the owners received less for the vessel than they could have done by selling it with the benefit of what remained of the old charterparty, the difference might also be recoverable on the basis that the effect of the sale would be to capitalise the value of the balance of the year’s hire payments.19 Subsequent Courts and academic commentary have identified as the important takeaway (as we shall see) as the point in (ii) – the need for not simply factual but also legal causation for benefits to be brought into account. This is, on its face, the ratio although one that is easier to state than to apply. For example, it is not clear why the acquisition of new turbines in British Westinghouse (which as that case shows could have been bought at any time and would have made sense even if there had been no breach) satisfied this test but the sale of the ship in The New Flamenco did not.20 iii. Position in the Light of The New Flamenco However, with the benefit of time (and the experience of having argued the issues remitted back to the arbitrator in The New Flamenco) I believe the real importance lies in Lord Clarke’s statements.21 In those passages – especially at [29] and [34] Lord Clarke sets out a measure of loss which is now applicable in no available market cases. Just as with the available market cases where the Elena D’Amico (the difference between the charter rate and market rate for the equivalent term) measure applies irrespective of the actual conduct of the innocent party, the Supreme Court has now set out a similar measure applicable where there is no available market. In that situation the measure is the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market. The key is that the enquiry is into reasonable earnings. The fact that this measure applies irrespective of the innocent parties’ conduct is demonstrated by the fact that it is applicable even where the innocent party sells the vessel

17 Ibid at [31–34]. 18 Ibid at [34]. 19 Ibid at [35]. 20 Indeed, the judgment met a decidedly mixed reception amongst commentators who complained about the lack of analysis, citation of authority or reasoning. See, for example, A. Summers and D. McLaughlan, “Litigation and Causation of Benefits” [2018] LMCLQ 171–184 and A. Lee, “The New Flamenco Appraised: A New Framework for Avoided Loss and Mitigation” [2021] LMCLQ 98. 21 [2017] UKSC 43 at [29], [34] and [35]; [2017] 2 Lloyd’s Rep 177.

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simon croall kc and is in fact unable to earn any sums on shorter (or longer) charterparties, i.e., on the facts of The New Flamenco.22 The only exception to the measure contemplated by Lord Clarke is the case where the sale takes place part way through the charter. But that is not because the sale is an act of mitigation but because the sale is an act which brings the loss of income under the charter to an end and capitalises the value, if any, of the balance of the charter in the sale price. However, that alternative is not said to apply in any event – even it seems where that is exactly what happened – The New Flamenco itself. Moreover, it has nothing to do with the so-called rules of mitigation. On this analysis, just as is the case where there is an available market, the rules of mitigation have little or no role to play when assessing damages where there is no available market. It follows that one consequence of The New Flamenco is to further reduce, in fact substantially to eliminate, the role of the rules of mitigation in this area. Certainly, if a straight measure of loss is to be applied whether there is an available market or not: (a) There is no continuing role for the so-called second rule of mitigation (that which allows recovery of additional losses incurred when seeking to mitigate) because they have nothing to do with the applicable measure. (b) There is no continuing role for the so-called third rule of mitigation (which requires the innocent party to give credit for action taken which extends beyond what was required by a reasonable party) because the focus is on what was reasonably earned on income generating contracts. (c) The concept of a failure to mitigate – something of a misnomer in any event – has no meaningful application. The measure assumes that a party is to be treated as earning what it reasonably ought to earn even if it does not. In short, properly understood, I suggest, the position became that the rules of mitigation appeared to have been deprived, at least in this area, of any continuing significance. Hence the title of this contribution. iv. Developments Since the Supreme Court Decision The decision has been referred to in a number of cases.23 In almost all cases this is outside the context of charterparties (or similar contracts). When referred to it is to support the proposition that causation is the central factor in determining whether the benefits arising from action can be brought into account and/or to make clear that legal causation was required. Each of these cases suggests that for this proposition the decision is regarded as sound law. They cast no light on the issue under discussion. The Stealth24 was a decision of Sir Nigel Teare in the charterparty context but was about savings (the avoidance of dry-docking costs during a period of detention) rather than 22 It is right to acknowledge that Lord Clarke states that the loss is measured by the sums which were or ought reasonably to have been earned by the innocent owner. However, it is suggested that actual earnings will only be relevant if they reflect what ought reasonably to have been earned and hence that is the primary measure. 23 See, for example, Sainsburys Supermarkets v Visa [2020] UKSC 4 at [212–214] (SC); Assetco v Grant Thornton [2019] EWCA Civ 40; [2019] Bus LR 2291; Goknur v Organic Village [2019] EWHC 2201 and ED&F Man v Come Harvest [2022] EWHC 229 (Comm) at [598]. 24 [2021] EWHC 2288 (Comm); [2022] Lloyd’s Rep Plus 6.

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mitigation when assessing damages for breach of charterparty mitigation. That was a case where the necessary causal link was found to have existed but is otherwise unremarkable. Of course, there may have been frequent occasions where the decision has been applied in its original context in arbitrations however details of any such occasions are necessarily unavailable. One such arbitration was The New Flamenco itself where the damages issues were remitted back for a decision. As I have said that ruling has now taken place. I am not at liberty to share any of the details however I can tell you that nothing about the arbitrator’s approach is inconsistent with my general thesis and that there will be no New Flamenco No.2 as an application under s. 69 for permission to appeal was refused. III. Broader Implications and Conclusion The New Flamenco was a case where an owner was claiming against charterers for repudiatory breach. However, the same principles would undoubtedly apply if the boot were on the other foot, i.e., if the charterers were claiming resulting from a repudiation by owners. Then the measure would be the difference between the hire payable under the repudiated charter and that paid or that which would reasonably have been paid under alternative replacement fixture(s). However, the implications for the role of the principles of mitigation would be the same or similar. Indeed, wherever a breach of charterparty means an owner loses its employment or the charterer is deprived of use of the vessel such that loss is assessed by reference to the cost of what could be earned under an equivalent charter, it seems likely the same approach as explained earlier will apply. Thus, where there is an available market the Elena D’Amico measure will apply. Where there is not The New Flamenco measure will apply. The measures are in fact very similar animals designed to achieve the same type of result. Lord Clarke regarded them as default rules. Some might say they build mitigation into the measure – or they involve a deemed or assumed mitigation. As I have noted there are a number of judicial comments to that effect in the available market cases. But that is just another way of saying that the traditional mitigation rules have no independent application. My suggestion is that now we have much the same position in the no available market situation. I do not suggest that this is necessarily an adverse development. It has the capacity to be beneficial in a number of respects: (i)

It may provide greater consistency with a similar approach adopted whether there is or there is not an available market. (ii) It may remove the need for any detailed enquiry into the actual post-breach conduct of the innocent party. (iii) It provides parties with a more certain and hence predictable outcome where there is no available market. However, there are consequences which are not so obviously beneficial. It will also mean that the actual financial implications of a breach upon the innocent party may become further divorced from the damages which are awarded. For example, we know, because these were the facts of The New Flamenco, that an owner who because of breach is unable to find any employment at all and as a result sells its vessel to its considerable 33

simon croall kc financial advantage need not bring any accruing benefit resulting from the timing of the sale into account. The same may well apply if the owner, instead of selling the vessel concludes a bare boat charter (perhaps even on deferred sale terms), to its financial advantage. Is it right that the innocent party’s actual behaviour caused by the breach and the benefits accruing from that conduct are legally irrelevant? Viscount Haldane in British Westinghouse thought not – but perhaps the priorities of commercial law have changed over the last century.

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CHAPTER 4

Prospects of Recovering Damages for Delay in Shipping Cases Andrew Preston I. Introduction This chapter considers whether an owner or disponent owner can ever recover damages from a voyage charterer over and above demurrage where a delay in loading or discharging causes another type of loss – usually deterioration in a cargo – following the Court of Appeal decision in K Line PTE Ltd v Priminds Shipping (HK) Co Ltd (The Eternal Bliss).1 It does not consider time charters where the risk of delay falls firmly on charterers and/ or where cargo deterioration occurs, is usually determined by the Inter Club Agreement. Whilst touching on sale of goods issues, the chapter does not give exhaustive answers to whether claims for losses over and above demurrage can be recovered. It considers the first instance decision of Mr Justice Andrew Baker in the Eternal Bliss before considering its impact. The chapter looks at the decision of Lord Justice Males in the Court of Appeal before considering where the Court of Appeal decision takes us when delays in loading or discharging cause losses to an owner or disponent owner for which demurrage is not an adequate remedy. II. Eternal Bliss The case concerned whether demurrage is liquidated damages for all the consequences of a charterer’s failure to load or discharge within permitted laytime or whether an owner can claim losses over and above demurrage where they have suffered other losses flowing from the delay. The case involved K Line as owner chartering to Priminds as charterer for carriage of various bulk cargoes from Brazil to China under a COA based upon the Norgrain 1973 form. The Norgrain form contained a standard demurrage clause (clause 19): Demurrage at loading and/or discharging ports, if incurred, to be declared by Owners upon vessel nomination but maximum USD 20,000 per day or pro rata/despatch half demurrage laytime saved at both ends for part of a day and shall be paid by Charterers in respect of loading port(s) and by Charterers in respect of discharging port(s). Despatch money to be paid by Owners at half the demurrage rate for all laytime saved at loading and/or discharging ports. Any time lost for which Charterers/Receivers are responsible, which is not excepted under this Charter Party, shall count as laytime, until same has been expired, thence time on demurrage.

1 [2020] EWHC 2373 (Comm); [2020] 2 Lloyd’s Rep 419; [2021] EWCA Civ 1712; [2022] 3 All ER 396.

DOI: 10.4324/9781003376347-5

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andrew preston Pursuant to the COA, the Eternal Bliss was nominated and carried 70,133 mt of soybeans from Brazil to China. She arrived at Longkou port, China on 29 July 2015 and discharge was delayed through congestion and completed discharge on 11 September 2015. Upon discharge, the cargo displayed significant moulding and caking leading receivers to sue owners under the bills and a settlement of claims at US$1.1m. They pursued charterers for an indemnity which went case stated under section 45 of the 1996 Arbitration Act to the Court for determination. The assumed facts of the case were as follows and are important to consider the question posed by this chapter, when an owner can recover more than demurrage: (i) (ii) (iii) (iv) (v)

The vessel was detained at the discharge port beyond the contractual laytime, due to port congestion and a lack of storage. The charterer was therefore in breach of its obligation to complete discharge within the permitted laytime. The condition of the cargo deteriorated as a result of the detention beyond the laytime, and not due to any want of care by the shipowner. The shipowner suffered loss and damage and incurred expense as a result of the detention beyond the laytime, including dealing with and settling the cargo claims brought by the cargo interests and insurers. The loss, damage and expense suffered by the shipowner were: (a) not caused by any separate breach of charter other than the charterer’s obligation to discharge within the contractual laytime; (b) not caused by any event which broke the chain of causation; and (c) reasonably incurred.

(vi) The loss, damage and expense suffered by the shipowner were consequences of compliance with the charterer’s orders to load, carry and discharge the cargo. The Baker Judgment reviewed the state of the law on this issue. Before looking at the reasoning, it is important to consider the one authority on this point: Richco International Ltd v Alfred C Toepfer International GmbH (The Bonde).2 III. The Bonde The Bonde was concerned with a claim under an FOB sale contract rather than a charterparty. The seller undertook to load the vessel at the rate of 3,000 mt per weather working day and to pay demurrage at the charterparty rate (but subject to a maximum daily rate of US$8,000) if it failed to do so. As a result of delay in loading, the buyer became liable to the seller to pay carrying charges under the contract of sale. The buyer argued, however, that it should not be liable for such charges in respect of any period when loading was delayed through the seller’s failure to load at the guaranteed loading rate. The issue arose, therefore, whether the buyer could recover damages (in effect, extinguishing its liability for carrying charges) when the only breach committed by the seller was its failure to load within the time allowed. After a careful review of all the authorities Mr Justice Potter held that 2 [1991] 1 Lloyd’s Rep 136.

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prospects of recovering damages for delay in shipping cases where a charter-party contains a demurrage clause, then in order to recover damages in addition to demurrage for breach of the charterers’ obligation to complete loading within the lay days, it is a requirement that the owner demonstrates that such additional loss is not only different in character from loss of use but stems from breach of an additional and/or independent obligation.3

He went on to hold that the same conclusion applied to an FOB contract into which provisions for laytime and demurrage were imported. IV. The Baker Decision4 By way of case stated, Mr Justice Baker answered the following agreed question of law revised during submissions: If the facts were as presently assumed [paragraph 17 above] in respect of the voyage charter of m.v. “Eternal Bliss” in relation to the June 2015 laycan under the contract of affreightment between the parties dated 20 July 2014, is the charterer liable to compensate or indemnify the owner in respect of the loss, damage and expense referred to therein by way of: (a) damages for the charterer’s breach of contract in not completing discharge within permitted laytime; (b) an indemnity in respect of the consequences of complying with the charterer’s orders to load, carry and discharge the cargo?5

In a very detailed judgment, Mr Justice Baker reviewed all the authorities principally Aktieselskabet Reider v Arcos Ltd.,6 to join the long list of judges who had tried to extract a ratio from the three judgments. After considering all the authorities, he concluded, “The result is that in my judgment the reasoning in the Bonde is clearly faulty”.7 He then went on to conclude: “in those circumstances, and other things being equal, I would regard myself as free to conclude, since it is my firm view the [Owner’s] basic argument is sound, that the Bonde was wrongly decided and should not be followed”.8 He added:9 It is a strong thing for a judge of first instance to refuse to follow a prior decision at first instance that has stood without direct criticism in later case-law for a substantial period of time. However, the point raised before me and previously decided by Potter J in The Bonde is a specific, narrow, point, in a specialist field, that does not arise often, on which equally there has not been a fully considered later decision agreeing with Potter J. In the event, though it is now 30 years since The Bonde and over 90 since Reidar v Arcos, I apprehend this may have been the first occasion on which the arguments of principle have been aired fully and the prior authorities up to and including The Bonde examined in detail so as to expose as flawed (i) the notion that if the majority in Reidar v Arcos held there to have been two breaches, that makes Reider v Arcos authority for the proposition that two breaches are required and that Bankes LJ’s approach is wrong

3 4 5 6 7 8 9

Ibid at 142. [2020] EWHC 2373 (Comm); [2020] 2 Lloyd’s Rep 419. Ibid at [19]. (1926) 25 Ll L Rep 513. [2020] EWHC 2373 (Comm); [2020] 2 Lloyd’s Rep 419 at [127]. Ibid at [128]. Ibid at [143]–[144].

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andrew preston in law for a “one breach” case, rather than merely not authority for the proposition that Bankes LJ’s approach is correct for such a case, and in consequence (ii) the idea that what was said about Reidar v Arcos in Suisse Atlantique could or does amount to persuasive authority for such a proposition. In the intervening years, it cannot be said that the view taken by Potter J in The Bonde, on what I have concluded, with respect, was erroneous reasoning, has become the settled wisdom, or that the point has by reason of The Bonde been treated as no longer controversial.

It followed that he answered the question of law on the assumed facts as follows: where a cargo claim arose as a result of delay in discharging but no other breach by charterers, then the owner is entitled to recover damages from the charterer to compensate the owner for his losses to cargo interests. V. The Aftermath The judgment was handed down on 7 September 2020 and caused considerable discussion amongst the shipping community. The London Law Shipping Centre hosted a seminar which attracted one of its largest attendances. Commentaries were written about its effect. Claims which were hitherto not pursued suddenly became reactivated. The author saw claims ranging from indemnities for cargo claims (as per the Eternal Bliss) through to claims for bottom fouling against charterers for protracted delays in discharging. VI. The Court of Appeal Decision10 The case merited consideration by the Court of Appeal who heard the matter on 18 November 2021. The Tribunal consisted of Sir Geoffrey Vos, Master of the Rolls, Lord Justice Newey, and Lord Justice Males – a highly experienced shipping judge. Males LJ gave the judgment of the Court. He postulated the case simply: The issue arising on this appeal is whether demurrage is liquidated damages for all the consequences of the charterer’s failure to load or unload within the laytime, as Mr Justice Potter held in . . . The Bonde . . . or only some of them, as Mr Justice Andrew Baker held in this case.11

Males LJ went through the authorities with commendable brevity and reached the following conclusions:12 It is necessary to examine the cases which have touched on the issue over the last hundred years in order to see to what extent they determine the issue. In summary our conclusions will be that:

(1) Apart from The Bonde, there is no case that decides as a matter of ratio whether unliquidated damages can be recovered in addition to demurrage when the only breach is a failure by the charterer to load or discharge within the laytime.

10 [2021] EWCA Civ 1712; [2022] 3 All ER 396. 11 Ibid at [1]. 12 Ibid at [23].

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prospects of recovering damages for delay in shipping cases (2) Distinguished judges have struggled, in our view without success, to discern a ratio on this issue in the Court of Appeal decision in Reidar v Arcos. (3) Numerous statements can be found in the cases to the effect that demurrage is intended to compensate the shipowner for loss of prospective freight caused by delay in completing cargo operations beyond the laytime. However, none of those cases has held that these are the only losses covered by demurrage and it does not appear that the present issue was in the minds of the judges who made those statements. (4) On the other hand, it has also been said in this court, after The Bonde, that demurrage is the sole remedy for failing to complete cargo operations within the laytime and that general damages for delay cannot be awarded as well. (5) Accordingly, apart from The Bonde, by which we are not bound, the cases are inconclusive. When grappling with Reidar v Arcos he concluded: Many have tried to make sense of Lord Justice Atkin’s judgment in order to discern the ratio of Reidar v Arcos. In our view, however, the ratio of the case on this issue is obscure. It is better to recognise that fact than to continue to search for a clarity which does not exist.13

Many practitioners will thank Males LJ for sparing us the need to review Reidar v Arcos any further to discern a ratio from the three judgments. Having then considered the remainder of the authorities which Baker J had done, he concluded:14 As we have already indicated, in our view the cases are inconclusive. However, as will be apparent from what we have said, we do not agree with the judge (at [88]) that “the preponderance of views evident in dicta” is that demurrage “serves to liquidate the loss of earnings resulting from delay” and nothing more. If anything, the balance tips the other way.

Males LJ then concluded:15 Our conclusion is that, in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them. Accordingly, if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation.

He gave six reasons why he agreed with Potter J and rejected Baker J’s conclusion. The six reasons are critical to understand the thinking of the court, where perhaps they erred, and where the battle lines will be redrawn. (1) Certainty. Males LJ saw the benefit in commercial parties having certainty in their bargain by understanding that liquidated damages meant precisely that and liquidates all damages, not just some. He took the view that if the parties had

13 Ibid at [30]. 14 Ibid at [44]. 15 Ibid at [52].

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andrew preston intended only some damages to be liquidated, then clear language would be needed. None appeared in the standard demurrage clause. (2) Males LJ acknowledged that case law did suggest demurrage was intended to compensate a shipowner for the loss of prospective freight earnings as a result of the charterer’s delay in completing discharge operations. However, the case law stopped short of being conclusive of the principle that demurrage was akin to lost freight which supports the Baker view. He postulated that estimated daily freight rates were simply one factor in calculating demurrage and could consider the risk of other losses arising from delayed discharge. (3) A contrary view would lead to uncertainty. Males LJ framed the point as follows:16 Thirdly, if demurrage quantifies “the owner’s loss of use of the ship to earn freight by further employment in respect of delay to the ship after the expiry of laytime, nothing more”, as the judge held at [61] and again at [88], and does not apply to a different “type of loss” (as he put it at [45]), there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause. Indeed, the judge seems to have recognised that his formulation at [61] was too narrow, as he immediately went on at [62] to refer to the statement of Mr Justice Moore-Bick in The Nikmary [2003] EWHC 46 (Comm), [2003] 1 Lloyd’s Rep 151 at 161 (rhc) that demurrage covers not only the loss of prospective freight, but also “all normal running expenses, including the cost of diesel oil required to run the ship’s equipment”. An example discussed by one commentator is whether fouling of the hull resulting from a delay in tropical waters and leading to a loss of fuel efficiency would qualify as a normal running expense for this purpose (Gay, Damages in addition to demurrage [2004] LMCLQ 72). Mr Rainey, no doubt concerned to minimise the potential uncertainty of the shipowner’s construction, submitted that it would, but this does not seem obvious. Nor would the damages resulting be readily quantifiable. (4) Insurance. In what appears to have been a point which arose during the hearing, Newey LJ suggested cargo claims fell within P&I insurance, but charterers tended not to have insurance for liability to cargo interests. As Males LJ put it:17 Accordingly, the consequence of the shipowner’s construction is to transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not. That seems to us to disturb the balance of risk inherent in the parties’ contract. (5) Certainty (again). Males LJ took the view The Bonde had stood as the law for 30 years “without causing dissatisfaction in the market”. Males LJ suggested since the point was so settled, it explained why the point had not come before the courts until now; alternatively, it was a point that never arose in practice. (6) The Bonde was rightly decided. 16 Ibid at [55]. 17 Ibid at [56].

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prospects of recovering damages for delay in shipping cases In an interesting final paragraph, the Court acknowledged, perhaps, the unfairness of the result on an owner by concluding,18 Finally, to allow the appeal will produce clarity and certainty, while leaving it open to individual parties or to industry bodies to stipulate for a different result if they wish to do so if our judgement does not meet with approval in the market, it should not be difficult for clauses to be drafted stating expressly that demurrage only covers certain statement categories of loss.

It is, in many ways, an odd sign off; acknowledging it was for the market, not the courts to find a way for owners to claim damages from a charterer for cargo claims. VII. Analysis The result of the Court of Appeal decision means the answer to the question posed in this chapter is a short one. Unless an owner can point to a breach of a separate clause and a separate type of loss, then they have no recourse to pursue charterers for damages other than liquidated damages by way of demurrage. Despite the clarity of the judgment, the writer has concerns about the reasoning adopted by the Court to reach this conclusion. The Court started from the premise that an owner facing cargo claims for delay causing deterioration must be quite rare:19 We would observe that if, as is usually the case, the Bills of Lading were subject to the Hague- Visby Rules, the shipowner ought not on these facts to have been under any liability to the cargo receivers, particularly if the shipowner is able to make good its allegation about the high moisture content of the cargo. It may be, therefore that the facts of the present case are unusual.

In the writer’s view, the Court were wrong to start from this point. In my experience, it is the norm for local receivers to assert claims against shipowners obtaining security and forcing claims to be litigated in the jurisdiction of delivery and subject to its laws. Many jurisdictions do not follow the Hague-Visby Rules. Where earlier this year, 7% of the world’s ships were waiting at Chinese ports, delay/deterioration claims were extremely common. Inherent vice defences (alluded to by Males LJ) are notoriously difficult to succeed on, leading to liability for a shipowner when he may have avoided liability if the matter were litigated in a Hague-Visby country. The issues faced in the Eternal Bliss are ones regularly faced by owners and time charterers.20 It is a matter of some financial importance to the market. The court also placed reliance on insurance but had the Court been provided with expert evidence, they may have reached the conclusion that charterer’s liability insurance is the norm and is as perfectly able to respond to cargo liabilities as P&I insurance. Finally, the court postulated that demurrage is not akin to a daily freight rate for the vessel to reflect the lost opportunity to trade the vessel on her next fixture but is arrived at, by factoring in a number of issues including, by inference, the risk of being liable for cargo claims arising from prolonged delay. That reasoning may come as a surprise to chartering brokers. 18 Ibid at [59]. 19 Ibid at [12]. 20 See, for example, Noble Chartering Inc v Priminds Shipping Hong Kong Co Ltd (The Tai Prize) [2021] EWCA Civ 87; [2021] 2 Lloyd’s Rep 36.

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andrew preston When these issues are stripped away, the kernel of the judgment is that certainty is paramount and to accept Baker J’s view would be to open the floodgates to claims. In the writer’s submission, I respectfully disagree. The first instance judgment gave parties the opportunity to allocate claims to the party who decided the voyage, the cargo and the buyer and so, should take the risk of the cargo being damaged through his choices. Be that as it may, the decision of the Court of Appeal does make the position certain. Absent a separate breach and a separate type of loss, an owner is not able to recover damages for losses over and above the liquidated damages in the charter: demurrage. This will leave owners and/time charterers becoming ever more creative in asserting collateral agreements on duration of voyages and/or misrepresentations. The Court in their postscript invited the market to react if their judgment did not find favour. Unless and until common charter forms adopt suitable language, it is down to individual owners and time charterers to amend their additional charter terms to make clear, demurrage is to compensate for lost daily freight rates only and not to exclude liability for cargo claims caused by a charterer’s breach in promptly discharging in the writer’s experience, this is precisely what is now happening in individual Carrier’s standard terms. It seems, the market has spoken.21

21 Although the owners obtained permission to appeal and the case was expected to be heard by the Supreme Court in 2023, this is not going to happen as the parties reached a settlement. This leaves the law in this area in a kind until the matter is one day settled by the Court of Appeal decision.

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CHAPTER 5

Limits on a Shipowner’s Right to Refuse Early Redelivery of a Time-Chartered Vessel* Dr Ceren Cerit Dindar I. Introduction The agreed charter duration indicates the period of time for which the charterer is entitled to use the ship within agreed trading limits in consideration of payment of hire. Under the charter duration term, the charterer impliedly promises that the ship will be redelivered to the shipowner at the end of the period. Due to economic downturns and the surplus of ship tonnages in the shipping industry and the consequent impact these have had on charter rates, early redelivery of the vessel by charterers has become a common occurrence in the chartering practice. This situation clearly causes economic problems from the shipowner’s perspective. In addition, it burdens the shipowner with a very painful litigation process. However, it does at least provide a good opportunity for the law to show a further development in the context of repudiation of contracts. Wrongful early redelivery of the vessel by the charterer amounts to repudiation of the charter. Under English contract law, the meaning of the term “repudiation” is ambiguous. In spite of conflicting views regarding terminology,1 the term “repudiation” is usually used to refer to any breach that confers on the innocent party a right to terminate the contract.2 Therefore, in a general sense the term “repudiation” indeed describes two different kinds of breaches: (1) an anticipatory breach of the contract3; and (2) an actual breach of contract which is serious enough to justify its termination, such as breach of condition or breach * This chapter is based on research conducted by the author for her PhD Thesis, submitted to Swansea University in 2019. 1 For different views regarding how the term should be used see A. Tettenborn, N. Andrews, M. Clarke, and G. Virgo, Contractual Duties: Performance, Breach, Termination and Remedies (3rd edn, Sweet & Maxwell 2020), paras. 5–016–5–017; J. Carter, Carter’s Breach of Contract (2nd edn, Hart Publishing 2018), 286–289. 2 Regarding the meaning of the term “repudiation”, Popplewell J has stated that conduct is repudiatory “if it deprives the innocent party of substantially the whole of the benefit he is intended to receive as consideration for performance of his future obligations under the contract. Although different formulations or metaphors have been used, notably whether the breach goes to the root of the contract, these are merely different ways of expressing the ‘substantially the whole benefit’ test”. See Spar Shipping AS v Grand China Logistics Holding Group Co Ltd [2015] EWHC 718; [2015] 2 Lloyd’s Rep 407 at [208] (decision affirmed [2016] EWCA Civ 982; [2016] 2 Lloyd’s Rep 447). On the other hand, Lord Denning MR has suggested that usage of the term “repudiation” should be restricted to only the cases regarding anticipatory breach: see Cehave NV v Bremer Handels GmbH (The Hansa Nord) [1976] QB 44, 59. However, this is not a general attitude that has been accepted in English law. 3 It should be noted that, while considering the issue of repudiation, Popplewell J made the point that it will be more proper to consider the conducts that “lead the reasonable observer to conclude that there was an intention not to perform [the obligation] in the future” as a renunciation; Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015] EWHC 718, [2015] 2 Lloyd’s Rep 407 at [209]. Although these words suggest that where the breach is anticipatory, it is to be considered as a renunciation, the author sticks to the general adopted approach in this research and considers the category of anticipatory breach under the repudiation term.

DOI: 10.4324/9781003376347-6

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dr ceren cerit dindar of intermediate term that “deprived [the innocent party] of substantially the whole benefit which it was intended that he should obtain from the contract”.4 Both categories of breaches by the charterer give the shipowner a right of election. Regarding the question of the early redelivery of the vessel falls within which category of breach; one view suggests that it is an actual breach5 whereas the other classifies it as an anticipatory breach.6 It was stated in Berkeley Community Villages Ltd v Pullen7 that “[i]f before the time arrives by which a party is bound to perform a contract, that party expresses an intention to break the contract, then he commits an anticipatory breach”.8 Early redelivery of the vessel by the charterer seems to be in compliance with this description. When the vessel is returned to the shipowner before the end of the agreed charter duration, the charterer renounces the charter. He implicitly makes clear that he does not have any intention to perform his prospective obligations under the charter when the time of performance is due, such as paying future charter hire for use of the vessel. Therefore, it is submitted that legal status of the early redelivery of the vessel by the charterer is an anticipatory breach of the charter. Hereinafter in this chapter, this conduct of the charterer will be considered as anticipatory repudiation.9 The charterer’s anticipatory repudiation by redelivering the vessel before the end of the agreed charter duration does not bring the charter to an end automatically.10 The primary reasoning behind this rule relies on the fundamental principle that no one can take advantage of his own wrong.11 It is this principle that prevents the repudiating party, here the charterer, from freeing himself from a contract he no longer wants merely by relying on his own repudiatory conduct.12 Furthermore, if the charterer was able to bring the charter to an end by reason of his own repudiatory conduct, he would have the power to terminate the charter unilaterally despite it being brought into force by mutual agreement. This cannot happen unless the law grants this to one of the contracting parties by reason of the other’s breach13 or unless the charter contains an express agreement in this regard, which is unlikely in practice. Lastly, one of the fundamental principles of the law is that upholding the contract is to be preferred over destroying it. These grounds justify why the charterer’s repudiatory 4 Hongkong Fir Shipping Ltd Co v Kawasaki Kisen Kaisha Ltd, The Hongkong Fir [1962] 2 QB 26. 5 B. Coote, “Breach, Anticipatory Breach, or the Breach Anticipated” (2007) 123 LQR 503, 505. 6 Q. Liu, Anticipatory Breach (Hart Publishing 2011), 177; M. Mustill, “The Golden Victory – Some Reflections” (2008) 124 LQR 569, 570–571. In addition, it can be deduced from Lord Scott’s explanations in The Golden Victory that early redelivery of the vessel was considered as anticipatory breach in that case: see The Golden Victory [2007] UKHL 12; [2007] 2 AC 353 at [35]–[37]. 7 [2007] EWHC 1330; [2007] NPC 71. 8 [2007] EWHC 1330; [2007] NPC 71 at [79] (Morgan J). 9 Since early redelivery of the vessel by the charterer does not constitute a breach itself unless it is accepted by the shipowner, it is thought that the term “anticipatory repudiation” is more convenient to prevent potential misunderstandings. 10 White & Carter (Councils) Ltd v McGregor [1962] AC 413. 11 The Latin maxim is “Nullus commodum capere potest de injuria sua propria”. 12 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339. 13 For example, when one party is in breach of contractual term that is classified as a condition, the other party is entitled by law to terminate the contract unilaterally regardless of the fact that the contract comes into force mutually.

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right to refuse early redelivery of a time-chartered vessel conduct to return the vessel early does not have any immediate impact on the charterparty relationship. Repudiatory conduct is “a thing writ in the water and of no value to anybody”14 until the innocent party determines how he will react against it. Therefore, it is the shipowner that ought to decide how the charterer’s early redelivery of the vessel will affect charterparty relations. The future of the charter should be in the shipowner’s hands not the charterer’s. It was established long ago that when one party repudiates the contract in a way that makes it clear that he does not have any intention of performing his future obligations, the innocent party is granted a right of election.15 Therefore, the shipowner that encounters early redelivery of the vessel by the charterer is given a free choice between two important rights. The shipowner can refuse this anticipatory repudiation of the charterer, keep the charter alive and bring a claim for the agreed charter hire in order to receive the balance of the minimum charter period or alternatively he can accept it, terminate the charter and sue for damages. Since the law provides a choice to the shipowner to elect between two rights in case of the charterer’s repudiation, it seems that he should not be restricted to use one of the alternatives. Although there has been no discussion regarding the availability of the shipowner’s right to accept early redelivery of the vessel, the existence of the right to refuse early redelivery of the vessel and maintain a demand for continued performance (largely in the form of payment) is a bit problematic. This right is open to criticism on the ground that the operation of this by the shipowner means that the shipowner maintains the charter service which the charterer has made clear that he no longer wants and then expects payment of hire from the charterer in consideration of this unwanted and useless service. This situation requires attention to be given to the question of whether the shipowner’s right to refuse early redelivery of the vessel is unfettered. The answer to this lies in the cooperation and legitimate interest qualifications that were introduced in White & Carter (Councils) Ltd v McGregor16 by the House of Lords.17 In this case, the House sought an answer to this question: where the contract requires initial performance by the innocent party in order to require counterperformance of the repudiating party, and when at the time of the repudiation the innocent party has not performed his side of the contract, is the innocent party allowed to ignore the repudiation and deliver unwanted performance? The majority started 14 Howard v Pickford Tool Co Ltd [1951] 1 KB 417, 421 (Asquith LJ). 15 See Hochster v De La Tour (1853) 2 E&B 678; White & Carter (Councils) Ltd v McGregor [1962] AC 413; Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523. 16 [1962] AC 413. 17 This case centred on a contract between the pursuers (White & Carter), who were advertising agents, and the defenders (McGregor), for the display of advertisements of the defendant’s garage business on local council litter bins, which had been renewed for three years when it was about to expire. Immediately after the renewal, the defendant repudiated its obligations under the contract. In spite of the defendant’s repudiation, the claimant fulfilled its side of the contract by displaying the advertisements on the bins. They then sued for three years’ worth of display pricing by relying on clause 8 of the contract which stipulated that: “in the event of an instalment or part thereof being due for payment, and remaining unpaid for a period of four weeks or in the event of the advertiser being in any way in breach of this contract then the whole amount due for the 156 weeks or such part of the said 156 weeks as the advertiser shall not yet have paid shall immediately become due and payable”. The House of Lords by a majority (3/2) held the claimant entitled to sue for the whole contract price.

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dr ceren cerit dindar their analysis by approving the general principle that when one party encountered the other party’s anticipatory repudiation, the innocent party had the right to elect either to accept or refuse the repudiation,18 and stating that he owed no duty to exercise this right in a reasonable way.19 However, they adopted two separate approaches in evaluating how far this general principle could go. Two of the majority, Lords Hodson and Tucker,20 were of the view that it was necessary to stay within the four corners of the general principle, and in particular denied that the innocent party’s right to refuse the repudiation and insist on performance could be restricted by way of equity.21 On the other hand, Lord Reid adopted a more flexible approach. He introduced two exceptions usually termed as the “cooperation qualification” and “legitimate interest qualification” that require that general principles of law can be departed from22 and the innocent party’s right to refuse a repudiation and to seek for agreed contract price can be overridden.23 Although two other majority judges did not make any reference to these qualifications and kept silent in this sense, Lord Reid’s qualifications have been found persuasive and considerable attention has been given to these qualifications in the courts subsequent to the White & Carter case. Therefore, it is now probably more accurate to consider the qualifications as an integral component of the White & Carter principle.24 Those qualifications were considered by Cooke J in The Aquafaith25 in the context of time charters. Regarding the cooperation qualification, it was held that this qualification did not have any role to play in limiting the shipowner’s right to refuse early redelivery. On the other hand, the approach adopted as to the legitimate interest qualification shows that it is still not possible to describe its impact with certainty. The question of whether 18 Howie v Anderson (1848) 10 D 355 (Court of Session). See White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL) 427 (Lord Reid), 444–445 (Lord Hodson). 19 See [1962] AC 413, 430 (Lord Reid). 20 Lord Tucker agreed with reasoning of Lord Hodson: see [1962] AC 413, 434. 21 See [1962] AC 413, 445. 22 See [1962] AC 413, 430–431. 23 It should be noted that when the innocent party’s right to bring a claim for an agreed contract price is restricted, it does not mean that the contract is terminated automatically due to the repudiation. This would be contrary to the principle that repudiation by one party cannot of itself bring the contract to an end. Therefore, it can be said that these two qualifications do not bar the innocent party’s right to keep the contract alive, but they may bar the remedy of contract price. Compare the decision in Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523; also Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader (No 2) [1983] 2 Lloyd’s Rep 645, 651. 24 The House of Lords’ judgment in White & Carter has attracted considerable critical attention. In this regard, see A. Goodhart, “Measure of Damages When a Contract Is Repudiated” (1962) 78 LQR 263; K. Scott, “Contract – Repudiation – Performance by Innocent Party” [1962] CLJ 12; J. Carter, A. Phang and S. Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97; S. Stoljar, “Some Problems of Anticipatory Breach” (1974) 9 Melb Univ LR 355; M. Furmston, “The Case of the Insistent Performer” (1962) 25 MLR 364; W. Bishop, “The Choice of Remedy for Breach of Contract” (1985) 14 J Legal Stud 299, 310; L. Priestley, “Conduct after Breach: the Position of the Party not in Breach” (1991) 3 JCL 218. It has been mostly criticised on the ground that the innocent party is encouraged to continue with unwanted and wasteful performance. In addition, it might be thought that a “commercially just result” required that the innocent party be restricted to its right to claim damages. For views that support the principle in White & Carter, see P. Nienaber, “The Effect of Anticipatory Repudiation: Principle and Policy” [1962] CLJ 213; G. Treitel and E. Peel, The Law of Contract (14th edn, Sweet & Maxwell 2015), paras. 21–009–21–015; F. Dawson, “Metaphors and Anticipatory Breach of Contract” [1981] CLJ 83, 106. 25 Isabella Shipowner SA v Shagang Shipping Co Ltd, The Aquafaith [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61.

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right to refuse early redelivery of a time-chartered vessel the shipowner’s insistence on refusing early redelivery and keeping the charter alive is perverse was used to interpret the legitimate interest qualification. This chapter is in three parts. First it evaluates whether, considering the nature of time charters, it is right to say that the cooperation qualification has no role in limiting the shipowner’s right to refuse early redelivery. Secondly, it focuses on the approach adopted to legitimate interest in previous charterparty cases, indicates some problems surrounding this qualification and suggests a solution. The last part discusses contractual solutions to set aside uncertainty as to the availability of the right to refuse early redelivery of the vessel. II. The Cooperation Qualification Lord Reid has said that in a situation where “the innocent party is unable to complete the contract and earn the contract price without the assent or co-operation of the other party” he cannot continue performance and sue for the agreed contract price.26 In this situation, their only right is to accept the repudiation and sue for damages, unless specific performance is available. Under most contracts, since the innocent party is not able to complete the contract on its own following the repudiation without something being allowed, done or accepted by the repudiating party, it can be said that the cooperation qualification significantly limits the application of the principle in White & Carter, so that the innocent party’s right to refuse the other party’s repudiation. Although this qualification was accepted by him, Lord Reid preferred to keep silent about the reasoning behind it. However, the author thinks that it is necessary to look at this reasoning to determine its applicability in the context of time charters. A. The Reasoning Behind the Cooperation Qualification Most contracts contain two main obligations, which are the making of a payment by one party and the provision of non-monetary performance, such as providing goods or services, by the other. Although most contracts contain these two obligations, the relationship between them can vary. In some situations, they can be mutually dependent. Where performance by one party is a condition precedent to the other party’s duty to pay the contract price, then it can be said that these two obligations are dependent on each other.27 Under this kind of contract, repudiation of the contract by the party obliged to make a payment does not per se entitle the innocent party to bring a claim for a contract price when it is due.28 A condition precedent to the payment, in this case performance, still continues to exist in spite of the repudiation. Therefore, where this kind of contract is repudiated by the party who is obliged to pay the contract price, if the innocent party

26 White & Carter (Councils) Ltd v McGregor [1962] AC 413, 430. 27 Under this kind of contract, unless the contract contains a contrary provision, the contract price is paid when the other party’s performance is completed. This rule is known as an entire obligation rule. See, e.g. Cutter v Powell (1795) 6 TR 320; O’Driscoll v Manchester Insurance Committee [1915] 3 KB 499, 517; Miles v Wakefield MBC [1987] AC 539, 552, 561. 28 Decro-Wall International SA v Practioners in Marketing Ltd [1971] 2 All ER 216, 224.

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dr ceren cerit dindar cannot perform his side of the contract in accordance with the contract terms without the repudiating party’s cooperation, he cannot earn the contract price.29 This shows that the cooperation qualification is just a natural result of existing principles regarding dependent obligations under the contract. Rather than viewing the cooperation qualification as an exception to the innocent party’s right to bring a claim for the contract price in case of repudiation, it is more accurate to say that where the obligation to pay the price depends on performance, the innocent party’s ability to earn the contract price without the need to rely on the cooperation of the other party, following the repudiation, is a condition precedent to his right to sue for the contract price. On the other hand, although it is fairly rare, under some contracts the obligation to make a payment and to provide non-monetary performance can be totally independent of each other.30 This kind of contract is completely outside the ambit of the cooperation qualification.31 This is because in this situation the party is entitled to the contract price independently of performance. Following the repudiation, even if the innocent party cannot perform his side of the contract without the cooperation of the repudiating party, this will not prevent the accrual of his right to keep the contract alive and sue for the contract price.32 B. What Is the Role of a Cooperation Qualification in Time Charter? In order to determine whether the cooperation qualification has any applicability to restrict the shipowner’s right to keep the charter alive in early redelivery cases, it should first be determined the kind of relationship that exists between the shipowner’s duty to provide a charter service and the charterer’s duty to pay the charter hire in the light of the explanations earlier. Are they dependent or independent obligations? In Ministry of Sound (Ireland) Ltd v World Online Ltd,33 the deputy judge said that he did not think “that a right to payment is to be treated as ‘dependent’ on the performance of services solely because the payment was to be made in return for services. . . . [Dependency of performance] denotes a pre-condition to the right of 29 For example, under a sale of goods contract where the right to payment of the contract price depends on the performance of the seller, if the buyer repudiates the contract and refuses to accept the goods, he will prevent the seller passing title. In this situation, since the seller cannot complete his side of bargain, he cannot be entitled to contract price. See Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader (No 2) [1983] 2 Lloyd’s Rep 645, 648. 30 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER 823. For earlier cases regarding independent obligations see the classic decisions in Nichols v Raynbred (1614) Hob 88 and Pordage v Cole (1669) 1 Saund 319. 31 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER 823 844. 32 For example, under the sale contract, the buyer might agree to pay for the goods on a particular day regardless of the delivery of the goods. In this situation, after the contract comes into force, if the buyer refuses to accept the goods without any good reason and repudiates the contract, this will prevent the seller from completing his side of the bargain which is delivery. However, it is irrelevant that the seller does not deliver the goods due to the absence of the cooperation of the buyer (acceptance of the goods). He can still bring a claim for the contract price once the specified date stated in the contract arrives: see the Sale of Goods Act 1979, s 49(2) and Dunlop v Grote (1845) 2 Car & Kir 153. Since the obligations to deliver the goods and pay the price for the goods are obligations independent of each other, there will be no room for a cooperation qualification in this situation. 33 [2003] EWHC 2178 (Ch); [2003] 2 All ER 823.

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right to refuse early redelivery of a time-chartered vessel payment”.34 In view of these words, since under most time charters the charterer is required to make a payment for the charter service in advance,35 it might be thought that the shipowner’s performance was not a condition precedent to payment of hire: in other words, that the shipowner’s and the charterer’s obligations were independent. If so, it could be asserted that the cooperation qualification had no application in time charters because the shipowner was entitled to recover the charter hire following early redelivery of the vessel even if he cannot maintain the charter service without the charterer’s cooperation. Although this logic seems convincing, the author is of the view that the time charter is different in this sense. It is important to note here that the issue of whether the obligations of the parties under a particular contract are dependent or independent is a matter of construction. As such, a duty to pay hire in advance should not automatically be construed as an indication that the obligations of the shipowner and the charterer are independent.36 Under time charters, the charterer is required to pay in advance only because of the need to guarantee that a steady fund is provided to the shipowner to enable him to finance the carriage and meet the expenses of rendering the agreed charter service, such as wages for crew and master, insurance of the vessel, etc.37 Payment made in advance is not considered as final because the shipowner is under an express38 or, in the absence of any express term in this regard, under an implied obligation to repay the charterer for hire not earned.39 This means that the shipowner is required to earn advance charter hire by providing the charter service for the whole period covered by the payment. If the obligation to provide a charter service and to pay hire were independent obligations as it is asserted earlier, it would be irrelevant whether the charter service was provided fully or not by the shipowner, and the shipowner would be entitled to keep the full payment that is made in advance in every case. However, this is not the case. Therefore, it is submitted that the payment of charter hire in advance for cash-flow reasons under the time charter does not make the obligations to pay charter hire and to provide a charter service independent obligations. Advance payment of charter hire by the charterer is wholly in respect of future performance of the contemplated charter service by the shipowner, so that those obligations still have dependent obligations. At this point, it should be emphasised that in The Aquafaith, while coming to the conclusion that the cooperation qualification was not sufficient to take time charters outside the White & Carter principle, one of the grounds which Cooke J relied on was the fact that

34 [2003] EWHC 2178 (Ch) [2003] 2 All ER 823 at [50]. 35 E.g. NYPE 1946, clause 5; NYPE 1993, clause 11.a; NYPE 2015, clause 11.a; Baltime charter, clause 6; BPTime 3, clause 8.2; and Shelltime 4, clause 9. 36 For example, in White & Carter, although McGregor was under an obligation to pay the contract price annually in advance under advertisement contract, the payment was still dependent on prior performance by claimant which is display of advertisement on local bins. In this regard, also see Langford & Co v Dutch [1952] SC 15. 37 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 All ER 763, 767. 38 See lines 111–112 of NYPE 1946, lines 262–263 of NYPE 1993, lines 414–416 of NYPE 2015; also lines 151–152 of the Baltime charter, and clause 9(i) and lines 524–525 of Shelltime 4. 39 Pan Ocean Shipping Co Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 Lloyd’s Rep 365 369; Stewart v Van Ommeren [1918] 2 KB 560 (CA) 564; French Marine v Compagnie Napolitaine [1921] 2 AC 494 (HL) 520.

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dr ceren cerit dindar the charter hire is paid in advance under time charters.40 Following the earlier explanations as to the payment of hire in advance, the author does not think that this fact should have had any role regarding the place of the cooperation qualification in early redelivery cases. As it has now been established that the obligation to provide a charter service and to pay charter hire are dependent obligations, the question of whether the cooperation qualification can eliminate the shipowner’s right to sue for charter hire following early redelivery can now be addressed. The first issue is the shipowner’s capacity to earn the charter hire regardless of the charterer’s anticipatory repudiation. Broadly speaking, under a time charter the shipowner promises to make his charter services available to the charterer and to comply with employment instructions of the charterer. When the vessel is returned early, it is certain that the charterer is refusing to employ her any more or give any instructions regarding her use. At this point, the shipowner is discharged from his obligation to comply with the employment instructions of the charterer. This however does not prevent him from earning the agreed charter hire. As made clear in The Aquafaith,41 he is still capable of performing his side of contract and continuing to earn charter hire without the cooperation of the charterer by merely placing his charter services at the disposal of the charterer during the rest of the charter period.42 It is therefore suggested that the cooperation qualification is not sufficient to eliminate the shipowner’s right to refuse early redelivery of the vessel. This is not because the hire is paid in advance, so as to make payment and service provision independent obligations, but instead because the shipowner can perform his side of the contract without any need of cooperation form the charterer. It should not be forgotten also that it is the parties that determine the kind of relationship they have. Under freedom of contract principles, they are always free to draft dependant obligations under the contract which the innocent party is not capable of completing his side of the bargain on his own in case of repudiation. III. Legitimate Interest Qualification In contrast to the cooperation qualification, the shipowner’s right to keep the charter alive and bring a claim for charter hire following early redelivery might be negatived by relying on the legitimate interest qualification, depending on the facts of the particular case and how it will be construed. This qualification was introduced with the following words: there is some general equitable principle or element of public policy which requires this limitation on the contract rights of the innocent party. It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself.43

These words open a door for the court by way of equity to depart from the general principle that the innocent party has an unfettered right to claim the contract price 40 Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm), [2012] 2 Lloyd’s Rep 61, 68. 41 [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61. 42 See [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 at [37]. 43 See White & Carter (Councils) Ltd v McGregor [1962] AC 413, 431 (Lord Reid).

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right to refuse early redelivery of a time-chartered vessel following repudiation. Since the qualification is vague, it has kept the courts quite busy in subsequent cases regarding how it is to be construed. Surprisingly, as will be seen later, its meaning has mostly evolved through charterparty cases. A. Evolution of the Legitimate Interest Qualification Over Time The process of construing and interpreting the legitimate interest qualification began with The Puerto Buitrago.44 In that case, it was held that the innocent party in a case of repudiation of the contract must not be given the right to keep the contract alive and bring a claim for a contract price where damages would be an adequate remedy.45 As a reason for this, it was stated that when the innocent party brought a claim for the contract price, he was attempting to claim a kind of specific performance, which he was not entitled to do in a case where the damages were adequate.46 It is true that the adequacy of damages is a principal consideration for the courts to decide whether or not specific performance is available to the innocent party.47 However, it should be noted that the action for the contract price following repudiation is not a kind of specific performance but a claim in debt. As such, the transfer of the adequate damages criterion from specific performance cases to the legitimate interest qualification is misguided. Nevertheless, adequacy of damages has been adopted as one of the main criteria in subsequent cases to show whether or not the innocent party has a legitimate interest in continuing performance.48 Great care should nevertheless be taken in the application of the adequacy of damages criterion. For example, when one party seeks specific performance, the difficulty in assessment of damages is in some cases accepted enough to satisfy the adequacy of damage criterion so that specific performance is allowed.49 However, mere difficulty in assessment of damages should not of itself be enough to show that the victim of an anticipatory repudiation has a legitimate interest in performing the contract.50 Conversely, the adequacy of damages criterion should not be put into operation to show an absence of legitimate interest in the same way as it is in specific performance cases: the mere fact 44 [1976] 1 Lloyd’s Rep 250 (CA). The facts were briefly as follows. A vessel demised for 17 months was badly damaged; repairs would cost more than her repaired value. The charterer sought to redeliver her. The owner refused redelivery and insisted she be repaired first, and also claimed hire at the contract rate during repair. It was held by Court of Appeal that the only right available to the shipowner was to bring a claim for damages. 45 See [1976] 1 Lloyd’s Rep 250, 255. 46 See [1976] 1 Lloyd’s Rep 250, 255. 47 See Lumley v Wagner (1852) 1 De G.M. & G. 604; Taylor v National Union of Seamen [1967] 1 WLR 532; Page One Records Ltd v Britton [1968] 1 WLR 157, 166; Ivory v Palmer [1975] ICR 340; Irani v Southampton and Southwest Hampshire Health Authority [1985] ICR 590; Evening Standard Co Ltd v Henderson [1987] ICR 588. These authorities are cited in Q. Liu, “The White & Carter Principle: A Restatement” (2011) 74 MLR 171, 185, fn 88. 48 See, e.g. Gator Shipping Cooperation v Trans-Asiatic Oil Ltd SA, The Odenfeld [1978] 2 Lloyd’s Rep 357; also Reichman v Beveridge [2006] EWCA Civ 1659; [2007] 1 P & CR 20. 49 G. Treitel and E. Peel, The Law of Contract (14th edn, Sweet & Maxwell 2015), para 21–020. 50 In The Odenfeld, the difficulty in assessment of damages for 6/5 years damages was one of the considerations of the court while reaching the conclusion that the shipowner had a legitimate interest in keeping the charter alive, but this was not the sole reason. Moreover, the difficulties in assessment of damages should not be enough to say that the innocent party had a legitimate interest in keeping the charter alive because in spite of the difficulties in assessment of the damages, compensation can still be awarded: see A. Tettenborn, N. Andrews, M. Clarke and G. Virgo, Contractual Duties: Performance, Breach, Termination and Remedies (3rd edn, Sweet & Maxwell 2020), para 7–105.

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dr ceren cerit dindar that damages are an adequate remedy in case of repudiation should not necessarily entail the conclusion that the innocent party has no legitimate interest in keeping the contract alive. This kind of reasoning is inconsistent with the White & Carter principle. If the legitimate interest qualification was just about adequacy of damages, then since damages would have been an adequate remedy for the claimant in the White & Carter case, they would not have been allowed to refuse repudiation and to bring a claim for contract price. This shows that, in introducing the legitimate interest qualification, Lord Reid in fact meant to refer to something more than this. Therefore, in addition to the adequacy of damages criterion, reasonableness of the innocent party’s insistence on continuing performance of the contract following repudiation also needs to be considered as a second criterion to determine whether or not a particular case is within the legitimate interest exception.51 In The Odenfeld it was said by Kerr J that the innocent party’s right to keep the contract alive could be restricted only “where damages would be an adequate remedy and where an election to keep the contract alive would be wholly unreasonable”.52 In that case, where the vessel was redelivered six-and-a-half years before the end of the charter, the shipowner’s insistence on keeping the charter alive for a further nine months was not found to be wholly unreasonable because of the fact that future hires under the charter had been assigned to the owner’s financiers as security under a loan agreement, something which made the maintenance of the charter necessary from the shipowner’s perspective.53 As a result, it was accepted that the shipowner had a legitimate interest in keeping the charter alive. Following this case, in The Alaskan Trader,54 another early redelivery case, Lloyd J expressed the view that the shipowner’s conduct in keeping the charter alive could be restricted by the court where it can be evaluated somewhere between merely unreasonable and wholly unreasonable. By these words, it was confirmed that the shipowner’s conduct must be more than mere unreasonableness.55 More recently, in The Aquafaith,56 where the ship was redelivered three months earlier than the agreed charter expiry, the shipowner was allowed to continue performance and to sue for hire. Market conditions were adverse at the time of redelivery; as a result finding a substitute charter for the remaining period was nearly impossible and trading the ship on the spot market was also difficult. It was clear that keeping the charter alive would prevent the shipowner from suffering as a result of these difficult market conditions, and thus providing him with a substantial benefit. In addition, the financial situation of the charterer was bad, and there was a risk that if the shipowner was restricted to damages, he would not be compensated fully due to the fact that the charterer could use his limited funds to comply with his other obligations (to third parties) until the assessment of those

51 Gator Shipping Cooperation v Trans-Asiatic Oil Ltd SA, The Odenfeld) [1978] 2 Lloyd’s Rep 357; Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader (No 2) [1983] 2 Lloyd’s Rep 645. 52 Gator Shipping Cooperation v Trans-Asiatic Oil Ltd SA, The Odenfeld [1978] 2 Lloyd’s Rep 357, 374 (Kerr J). 53 The loan agreement contained a term that obliged the shipowner to take all necessary steps to procure due performance of the charterer. In case of acceptance of early redelivery of the vessel, this would have resulted in breach of stated obligation. Therefore, the shipowner had reasonable grounds to keep the charter alive. 54 [1983] 2 Lloyd’s Rep 645, 651. 55 See [1983] 2 Lloyd’s Rep 645, 651. 56 [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61.

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right to refuse early redelivery of a time-chartered vessel damages.57 Because of these grounds, it was found that the shipowner had the necessary legitimate interest. Hence, the legitimate interest qualification has been substantially recast as a result of The Aquafaith. Cooke J there said that the shipowner would have no legitimate interest in continuing contractual performance where suing for damages would be an adequate remedy and keeping the charter alive “wholly unreasonable, extremely unreasonable, or perhaps in my words perverse”.58 Interestingly, Cooke J implied that in lieu of such words as “wholly unreasonable” and “extremely unreasonable” he preferred the term “perverse”. Indeed, this new suggested consideration is in compliance with Lord Reid’s explanation regarding the legitimate interest qualification in White & Carter. There he had emphasised that in the same way as penalty clauses were not enforced by the court, if the intention of the innocent party is to penalise the other party by way of keeping the contract alive and bringing a claim for the contract price then this right should not be available to him.59 With these explanations, he indicated strongly that the innocent party’s motivation in insisting on keeping the contract alive should play a role in determining the absence of legitimate interest. If this is right, the author is of the view that the application of the legitimate interest exception has been very substantially narrowed through the application of the “perverse” criterion, if only because subjectivity has now become a part of the analysis. Whilst the “wholly unreasonable” criterion contains an objective element, reference to a “perverse act” brings sharply into focus the state of mind of the innocent party. This is likely to make it much more difficult for a charterer to challenge a shipwner’s right to refuse early redelivery.60 Whilst the legitimate interest qualification has evolved through case law, it has also received some attention from scholars, some of whom have submitted that the criterion that should be considered to determine how far the innocent party can insist on keeping the contract alive following the repudiation should be whether or not “the wastefulness of the victim’s continuing performance outweighs its performance interest in earning the contract price”.61 The White & Carter principle has been criticised as encouraging the innocent party to perform unwanted services giving rise to wasteful performance and expenditure. These commentators seem to take these criticisms into account and try to repel them by way of making wastefulness of performance one of the main elements of the legitimate interest qualification.

57 See [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 at [47]. 58 See [2012] EWHC 1077 (Comm), [2012] 2 Lloyd’s Rep 61 at [52]. 59 See White & Carter (Councils) Ltd v Mc Gregor [1962] AC 413, 431. 60 The shipowner’s insistence on keeping charter alive and claiming both hire and repair expenses which were more than the actual value of the vessel in The Puerto Buitrago was shown as an example for perverse conduct by Cooke J in The Aquafaith: see [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 at [42]–[45]. 61 Q. Liu, “The White & Carter Principle: A Restatement” (2011) 74 MLR 171, 192. Professor Nienaber also suggested similar criterion submitting that the main task should be to compare overall wastefulness of the performance with the innocent party’s interests in keeping the contract alive to determine absence of the legitimate interest. If the first one is out of proportion to the second, then the right to continue performance must be restricted. (P. Nienber, “The Effect of Anticipatory Repudiation: Principle and Policy” [1962] CLJ 213, 232). In this regard, also see J. Carter, A. Phang and S. Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97.

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dr ceren cerit dindar It is seen that the qualification has shown development through cases over time and also through academic discussions. The evolution of the qualification will most likely continue until the issue has been heard in Supreme Court and its limit specifically delineated. The focus will now turn to the kind of approach that it is suggested and should be followed by the court in early redelivery cases while determining whether or not the shipowner has a legitimate interest in keeping the charter alive. B. Legitimate Interest Qualification in the Context of Time Charters In determining the limits of the legitimate interest principle, it might be said that there are actually three different interests in play here: the shipowner’s interests, the charterer’s interests and, lastly, the wider community’s interests. i. The Shipowner’s Interests The primary concern of the court must, it is suggested, be the shipowner’s interests. Upon fixing the charter, each party has an expectation that the other party will keep his promises and will give the other party what is agreed under the charter. When the ship is redelivered early, the shipowner is disappointed in this regard. By refusing early redelivery, what the shipowner wishes to do is to satisfy the expectations that he had at the beginning of the contract and to uphold the agreement. He therefore continues to offer charter service as agreed under the charter and in consideration of this service, he wants to be entitled to the charterer’s contractual performance which is payment of the charter hire. At this point, the principle of sanctity of contract requires that his right to keep the charter alive be protected. In addition, it has been said in the House of Lords that “parties to commercial transactions should be entitled to know their rights at once and should not, when possible, be required to wait upon events before those rights can be determined”.62 Following on from this, it can be said that the principle of certainty of contract also requires that the right to keep the charter alive which is given to the shipowner upon fixing the contract should not be arbitrarily eliminated under the legitimate interest qualification later.63 This is necessary because when the shipowner is aware of the rights that he will have in case of repudiation by the charterer at the beginning, he can act in the best commercial way if this does occur. However, according to the current law the shipowner’s interests in keeping the charter alive can be set aside under the legitimate interest exception if the damages will be an adequate remedy for the shipowner and the shipowner’s insistence will be wholly unreasonable or perverse. The author is of the view that, whilst these are the criteria, in practice it will be extremely difficult to argue that the shipowner has no legitimate interest in maintaining a charter service following early redelivery of the vessel and eliminate his right to refuse early redelivery. Due to the constant insolvency risk of the charterer in the shipping world where the right to bring a claim for damages is exercised by the shipowner following early redelivery, there is always a risk that the charterer becomes 62 See Bunge Corporation v Tradax Export SA [1981] 1 WLR 711, 725. 63 The innocent party’s right to keep the refuse repudiation and contine to perform his side of the contract has been justified by Professor Liu relying on sanctity and certainty of contract: Q. Liu, “The White & Carter Principle: A Restatement” (2011) 74 MLR 171, 181.

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right to refuse early redelivery of a time-chartered vessel insolvent before the amount of damages has been determined and the shipowner is left without full payment. This means that there is an undeniable possibility that damages might not be an adequate remedy for the shipowner. In addition to this, it is unlikely that any charterer will willingly return a ship to a shipowner whilst the market is going up. The main reason that triggers early redelivery is a sudden drop in the market that occurs usually because of surplus tonnage or an economic crisis. Whilst the market is in that condition, the shipowner’s insistence on maintaining the charter service for the rest of the charter period cannot be said to be wholly unreasonable or perverse. This is because by way of continuing to provide a charter service, the shipowner aims to protect himself from an economic storm in the market and does not have to look for arranging alternative employments to mitigate his losses in such difficult market conditions. As a counter-argument to this approach, some might suggest that in order to accept that the conduct is not wholly unreasonable, the mere fact that the shipowner secures the charter hire by way of keeping the charter alive should not be enough. There must be a further reason. This could be, for example, because of the need for continuing performance of the charter service for a particular period to prevent injury to an innocent third party, such as the finance company in The Odenfeld,64 or the shipowner’s inability to find any real alternative other than keeping the charter alive, as in The Dynamic.65 The argument against this is that, if a further reason is always sought to say that the shipowner’s conduct is not wholly unreasonable, the shipowner’s right to keep the charter alive can be dismissed easily. For example, in The Alaskan Trader,66 the vessel, which was chartered for 24 months under a time charter, needed repair during the service. After completion of the repair, the charterer refused to use it in spite of there being seven months before the end of the charter. Following this repudiatory conduct, the shipowner logically wanted to maintain the charter service until the end. In this case, the shipowner’s insistence on keeping the vessel and crew ready for charter service which was unwanted by the charterer was described as “commercial absurdity” by the arbitrator,67 and the conclusion was reached that the shipowner had no legitimate interest in doing so. While the shipowner was allowed to keep the charter alive for a further nine months in The Odenfeld, in The Alaskan Trader this right was not given to the shipowner for even seven months. The fact that charter hire had been assigned to a finance company as security in The Odenfeld was one of the grounds relied on to distinguish The Alaskan Trader from The Odenfeld. It is true that there was a further reason that militated against restricting the shipowner’s right to keep the charter alive. Since existence of this kind of further reason prevents the shipowner’s insistence in keeping the charter alive from being considered as wholly reasonable, it definitely helps the court to refuse the charterer’s argument that the shipowner has no legitimate interest in keeping the charter alive. Absence of a further reason should not, however, automatically be taken to mean that the shipowner has no legitimate interest. This would be an injustice to the shipowner and encourage charterers, aware that shipowners have no further reason to keep the charter alive, readily to return vessels whenever the market is in distress. In this regard, the judgment in The Alaskan 64 65 66 67

[1978] 2 Lloyd’s Rep 357. [2003] EWHC 1936 (Comm); [2003] 2 Lloyd’s Rep 693. [1983] 2 Lloyd’s Rep 645. [1983] 2 Lloyd’s Rep 645, 647.

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dr ceren cerit dindar Trader is open to criticism. The fact that the market was going down at the time of early redelivery of the vessel and the shipowner would secure a charter remuneration and protect himself from the difficult market conditions by way of keeping the charter alive were disregarded. However, this fact on its own should also have been enough to say that the shipowner’s conduct was not wholly unreasonable; it should have been found that he had a legitimate interest in keeping the charter alive. In the light of these explanations, it is submitted that in early redelivery cases, even if the charterer satisfies the court that the damages will be adequate remedy, it seems impossible for the charterer to exceed the wholly unreasonable criterion. As it is clarified earlier, due to difficult market conditions at the time of early redelivery, the conclusion can always be reached that the shipowner’s insistence on keeping the charter alive is not wholly unreasonable, so that he has a legitimate interest for doing so. Therefore, it might be better to evaluate the wholly unreasonableness of the conduct with another criterion to make it meaningful. In The Odenfeld, the obiter dictum of Kerr J indicated that the period for which the shipowner wanted to keep the charter alive might have a role in this regard.68 In other words, even if it is found that the shipowner’s conduct to keep the charter alive is not wholly unreasonable because the shipowner protects himself from an economic storm or any another reason, passage of time might change matters. In addition to passage of time, the charterer’s financial situation might also have a role in this regard. Where the charterer redelivers the vessel because he is in serious financial difficulty and it is clear that he does not have any money to perform his obligations under the charter, even if the shipowner’s insistence on keeping the charter alive is not found wholly unreasonable due to adverse market conditions, the charterer’s weak financial situation might require that the shipowner’s conduct be considered wholly unreasonable. This is because the shipowner insists on performing the charter service for which he will never receive the money from the charterer. However, a contrasting argument is that even if the charterer is in financial difficulty, he can still recharter the vessel and then the sub-charter hire can be allocated to the shipowner. This is certainly true, but if the market conditions are adverse then the charterer may not easily find a sub-charter. Even if he arranges a sub-charter, the rate of the sub-charter will most likely be lower than the head charter rate. In this situation, again he will not have enough money to perform his duty to pay the charter hire.69 The approach which evaluates the wholly unreasonableness of the conduct with other criteria such as passage of time as suggested in The Odenfeld and the charterer’s financial situation, seems sensible because at least it gives the charterer a chance to exceed the wholly unreasonable criterion in early redelivery cases. However, in this situation, the task of the court is to evaluate four different criteria: adequacy of damages, wholly unreasonableness of the shipowner’s conduct or perverse conduct, passage of time and lastly the charterer’s financial situation. The author thinks that instead of evaluating the 68 See [1978] 2 Lloyd’s Rep 357, 375. 69 However, it should be noted that if the underlap period is a short one, such as the two or three months in The Aquafaith, and the charterer is financially weak but still has enough money to maintain his obligations under the charter for a while, it can be said that the shipowner has a legitimate interest in keeping the charter alive. In this situation, if the shipowner is restricted to damages, there is a risk that the charterer might allocate his limited funds to the other parties to meet his obligations until the damages is determined, so leaving the shipowner unpaid. See Cooke J in The Aquafaith [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 at [47].

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right to refuse early redelivery of a time-chartered vessel legitimate interest qualification under these criteria, using the suggested economic efficiency criterion as it was referred to earlier on its own to show the absence of a legitimate interest qualification would be more sensible.70 ii. The Charterer’s Interests It was submitted in Stocznia v Latvian Shipping that it would not be correct to exclusively focus on the innocent party’s interests to satisfy the legitimate interest qualification: “To be a legitimate interest, the innocent party must have reasonable grounds for keeping the contract open bearing in mind also the interest of the wrongdoer”.71 Since the main characteristic of the good faith doctrine is to take into account the other party’s interests under the contract, these words have been construed by some commentators as an indication that good faith might have a role to play in determining whether or not the innocent party can insist upon contractual performance.72 Making good faith a part of the legitimate interest qualification might be a good idea in cases where the contract breaker has repudiated the contract because he really no longer needs the performance.73 At this point, some might suggest that the charterer’s interests must also be made a part of legitimate interest analysis in early redelivery cases. Therefore, it might be asserted that the fact that the shipowner’s insistence on performance of the charter causes the charterer to suffer unwanted performance and be asked to pay for it should not be disregarded by the court during legitimate interest analysis. However, the author is of the view that the charterer’s motivation behind the early redelivery of the vessel and his ability to recharter the vessel prevents his interests from being a part of legitimate interest analysis. These two grounds will be considered in detail later. Firstly, a time charterer is normally a speculator who aims to get profit through subcharter arrangements based on fluctuations in market rates. He accepts that he must bear particular risks that derive from market fluctuations when entering into a charter and fixing the charter hire at a particular rate for a particular period. Upon fixing the charter, while the risk of an increase in the market rate of hire is put on the shipowner’s shoulders, the risk of a decrease in the market rate of hire is borne by the charterer. Unfortunately, when the market starts going down, what the charterer first tries to do is escape from this unprofitable situation by way of returning the vessel to the shipowner. However, the possibility that the market will go down should be already in the charterer’s mind when the charter is fixed. When this is the situation, accepting that the shipowner must bear in mind the interests of the charterer while insisting on continuing to provide a charter service and for his right to be eliminated due to the charterer’s contrary interests will be particularly harsh on the shipowner. This kind of approach may also cause market risks to 70 The details of the application of the economic efficiency criterion to show absence of legitimate interest will be considered later. 71 Stocznia Gdanska SA v Latvian Shipping Co [1996] 2 Lloyd’s Rep 132, 139 (Staughton LJ). In that case, Rose and Hutchison LJ also agreed with Staughton LJ. 72 J. Carter, A. Phang and S. Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97, 118. Also, see J. Carter and M. Furmston, “Good Faith and Fairness in the Negotiation of Contracts” (1994) 8 JCL 1, (1995) 8 JCL 93. Nearly ten years earlier, Francis Dawson had also given signals that good faith could be considered as a part of the legitimate interest qualification, referring Lord Reid’s words that the innocent party’s right to keep the contract alive following repudiation might be restricted by way of equity. For more details see F. Dawson, “Metaphors and Anticipatory Breach of Contract” (1981) 40 CLJ 83, 106–107. 73 See P. Nienaber, “The Effect of Anticipatory Repudiation: Principle and Policy” [1962] CLJ 213, 232–233.

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dr ceren cerit dindar be too easily transferred to shipowners. Most importantly, the division of the risk between the parties that occurred at the beginning of the charter will not have any meaning and the shipowner will be exposed to all market fluctuation risks anyway. Secondly, under a time charter the charterer is given a significant right, which is the ability to recharter the ship to someone else by acting as a disponent owner.74 As it was considered in The Odenfeld and reemphasised by Cooke J in The Aquafaith, if the charterer does not need to use the vessel then instead of returning the ship to the shipowner the charterer can recharter the ship on his own account.75 This is likely to bring about some practical and economic difficulties for the charterer because while the market is going down, it will be difficult for the charterer to find someone who agrees to charter the ship at the existing charter rate. However, the charterer agrees to bear this risk upon fixing the charter. Since the charterer has the ability to recharter the ship to somebody else under a time charter, the argument that if the shipowner is allowed to perform the charter service in case of early redelivery, the charterer will be required to pay for the charter service which is unwanted, thus rendering it useless, must never be something which the court should consider. It should not be forgotten that continuing performance of the charter service is no hardship to the charterer in practice. Even if it is, the charterer as wrongdoer can prevent wastefulness of performance by rechartering the ship.76 iii. The Wider Community’s Interests Imagine that a ship is redelivered at the end of the second year under a ten-year charter. The shipowner wants to keep the charter alive and the charterer insists on not rechartering the ship. The ship is just waiting at the port without making any kind of contribution to the world economy and trade. However, instead of keeping the vessel ready for the charterer’s order which will never come, if the shipowner elects to terminate the charter, then the ship could continue to trade and play a significant role in international trade. This scenario shows that the shipowner’s insistence on continuing to provide an unwanted charter service not only affects the charterer but might also affect the wider community. The impact of the shipowner’s election on the charterer can be disregarded due to the two reasons mentioned earlier. But the economic impact of the shipowner’s insistence on keeping the charter alive on the wider community, in other words, the economic wastefulness of continuing performance, should equally not be disregarded. This is because there have always been suggestions that legal rules should be established to prevent economic waste.77 In addition to this, in Hochster v De La Tour78 it was established that anticipatory repudiation must be treated as a breach and it gives an immediate action right to the innocent party because otherwise there is a risk that “the innocent party is remaining idle 74 See line 16 of NYPE 1946, Clause 18 of NYPE 1993, clause 1.e of NYPE 2015, clause 19 of the Baltime charter, clause 22 of BPTime 3 and clause 18 of Shelltime 4. 75 See The Odenfeld [1978] 2 Lloyd’s Rep 357, 374; and The Aquafaith [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61 at [48]. 76 For the impact in real estate law of the tenant’s ability to sublet on the landlord’s right to keep the contract alive in the case of his anticipatory repudiation, see Reichman v Beveridge [2006] EWCA Civ 1659; [2007] 1 P & CR 20. 77 J. Carter, A. Phang and S. Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97, 121. 78 Hochster v De La Tour (1853) 2 E&B 678.

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right to refuse early redelivery of a time-chartered vessel and laying out money in preparation which must be useless”.79 These words show that possible risk of the economic waste of performance that might occur when the contract is kept alive following anticipatory repudiation results in giving a right to the innocent party to treat himself be absolved from his future obligations. By applying negative logic, it can also be said that economic waste might have a role in the elimination of the innocent party’s right to keep the charter alive. How economic waste can be made part of the analysis will be considered later. iv. What Should Be the Task of the Court During Legitimate Interest Analysis in Early Redelivery Cases? The shipowner’s interests lie on one side and the wider community interests on the other. The task of the court must be to decide when the shipowner’s contractual right can be sacrificed for the wider community interests. At the beginning of the analysis, we suggested that the scales should be weighted in favour of the shipowner because legal certainty and sanctity of contract require that his contractual right is protected as much as possible. However, in considering the economic impact of this continuing performance on the wider community (economic wastefulness of performance), it is possible to consider a restriction of the shipowner’s right to keep the charter alive.80 For example, where the ship is redelivered in the second year of a six-year charter, then it is difficult to argue that the shipowner should be allowed to maintain the charter for a further four years. If this was allowed, then the ship would wait for four years laid-up without being of any benefit to the overall economy. Instead of such inactivity, if she continued in trade, she could carry tonnes of cargo and provide charter services. Immobilisation of the ship for years also causes problems to the ship itself, such as hull fouling and engine problems. This would require repairs to be made later. Following these explanations, it can be said that at the time when the ship is returned to the shipowner, if there is still a lot of time before the end of the charter duration, it will be more accurate to accept that the shipowner’s contractual right to keep the charter alive should be sacrificed for the wider community’s interests. Also, where the charterer is in serious financial difficulty and he does not have any money to pay the charter hire, there is no need to protect the shipowner’s contractual right to keep the charter alive. This is because even if the contractual right is protected and the shipowner is allowed to insist on keeping the charter alive, the shipowner will not be paid anyway. In this scenario, considering the wastefulness of continuing the charter service from the wider community’s perspective and the fact that keeping the charter alive does not provide any benefit to the shipowner in practice, it should be easy to sacrifice the shipowner’s contractual right to keep the charter alive for the wider community. As the law currently stands, no suggestion has been made in the case law that the economic impact of continuing performance should be made a part of legitimate interest analysis. Although it has been said that adequacy of damages and wholly unreasonable 79 Hochster v De La Tour (1853) 2 E&B 678, 691. 80 For inspiration in the discussion of economic waste, the author is indebted to J. Carter, A. Phang and S. Phang, “Performance Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97; P. Nienaber, “The Effect of Anticipatory Repudiation: Principle and Policy” [1962] CLJ 213; and Q. Liu, “The White & Carter Principle: A Restatement” (2011) 74 MLR 171.

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dr ceren cerit dindar or perverse criteria must be considered in order to show the absence of the shipowner’s legitimate interest in previous charterparty cases, the author tentatively asserts that indeed the judges have considered economic efficiency as criterion in the background. This can be inferred from their approaches. For example, in The Odenfeld where the shipowner wanted to keep the charter alive for a further nine months, this was allowed, but it was still emphasised that this judgment did not mean that the shipowner and the charterer could maintain this kind of relationship for the remainder of the charter period (six years). It was said, obiter, that “an insistence to treat the contract as still in being might in time become quite unrealistic, unreasonable, and untenable”.81 With these words, by way of indicating that there was a time limit during which the shipowner can insist on keeping the charter alive, what the judge was most likely trying to do was to promote economic efficiency and to consider economic efficiency as a part of legitimate interest analysis. Also, in The Aquafaith, the court allowed the shipowner to keep the charter alive for three months mainly due to the charterer’s ability to recharter the vessel, the insolvency risk of the charterer and the difficulty of finding a substitute charter from the shipowner’s perspective. If all these facts had remained the same but there had been 20 months until the end of the charter, the shipowner most likely would not have been allowed to keep the charter alive. Cooke J intimated the possibility of this touching on the idea of a time limit that was expressed in The Odenfeld. Because of this ground, it is thought that, to some extent, Cooke J also evaluated the shipowner’s conduct by considering economic efficiency. To sum up, the shipowner does not have an unfettered right to keep the charter alive in case of early redelivery of the vessel. At some point, this right of the shipowner should certainly be restricted under the legitimate interest qualification. It is believed that this restriction should mainly depend on after how long of a time the shipowner’s insistence on keeping the charter alive on foot leads to economic waste so that it becomes necessary to sacrifice the shipowner’s contractual right for wider community interest. IV. Suggestions to Shipowners to Prevent Uncertainty About Availability of the Right to Refuse Early Redelivery Since a shipowner does not know when his right to keep the charter alive will be eliminated under the legitimate interest qualification and when it will not, this brings about uncertainty from his perspective. In spite of the advantages of keeping the charter alive, he may well hesitate to operate this right in practice. This is mainly because where the right to damages is available in every early redelivery case, electing to keep the charter alive and not to mitigate the loss by way of rechartering the ship and taking the risk of not ultimately being entitled to the charter price does not seem sensible to the shipowners. Specific suggestions will lastly be given later which will be beneficial to the shipowner and prevent uncertainty in this regard. Firstly, the parties might add a term in the charter which requires the charterer to pay the charter hire until the end of the charter period even if the ship is redelivered early. Since this kind of term is heavily weighted in favour of the shipowner, it can be quite 81 See The Odenfeld [1978] 2 Lloyd’s Rep 357, 375.

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right to refuse early redelivery of a time-chartered vessel difficult to convince the charterer to accept it under the charter. In addition, the charterer is aware that the shipowner’s right to keep the charter alive will be eliminated at some point in early redelivery cases. Therefore, instead of accepting the term which makes the charter hire immediately due and payable from the date of early redelivery to the end of charter duration, the charterer will logically prefer that, if the vessel is redelivered early by him during the charter service, this length will be determined by a court at a later stage. Even if the shipowner convinces the charterer to add this kind of term to the charter, the clause might be struck down by way of operation of the penalty doctrine. Unfortunately, the enforceability of this kind of clause has not been tested in the courts of England and Wales yet. However, the recent judgment of the Court of Appeal in The Paragon82 might be helpful in this regard. In that case, a time-charterer agreed that if the vessel was redelivered after the agreed charter duration, the charter remuneration for the last 30 days before the latest permissible redelivery date would be made over the market rate and not over the agreed charter rate. Presented with these facts, in order to determine whether the clause was a penalty or not the court considered the traditional test that was established in the 1905 Dunlop case,83 focusing on whether the agreed sum in the clause was a pre-estimate of damage and whether the primary purpose of the clause was to deter the charterer from breaching the contract.84 In this case, the agreed sum was not found to be a genuine preestimate of damage. The shipowner tried to argue that giving an illegitimate order had been outside the charter agreement and that by way of giving it, the charterer had made an offer to perform a new voyage for more than the charter rate, but the court rejected this argument. The primary purpose of the shipowner through this clause was found to have been to deter the charterer from breach of his duty to redeliver on time, even if this was understandable because last voyage orders of the charterer caused uncertainties from the shipowner’s perspective and created a risk of loss of follow-on charters (and attendant losses of profit which could not be claimed).85 The clause was held a penalty and unenforceable. In the light of this judgment, if the validity of the clause which requires the charterer to pay the whole charter hire for the underlap period in case of early redelivery is considered, this clause will most likely be found to be unenforceable too. This clause fixes the level of damages on early redelivery of the vessel. Through this clause, the shipowner wants to put himself in a safe position and be entitled to the contract price anyway following the acceptance of the charterer’s repudiatory conduct. However, under the common law principle, once the shipowner accepts early redelivery and sues for damages, where the market is available, the measure of the damages will be the difference between the charter rate and market rate for the underlap period.86 While this is the case, making the whole charter hire payable for the rest of the charter period upon early redelivery of the vessel seems substantially different from the amount of the damages recoverable under the common law. This is not allowed unless there is a valid justification for it.87 Due to the difficulties that might be experienced by the shipowner in case of early redelivery 82 [2009] EWCA Civ 855; [2009] 2 Lloyd’s Rep 688. 83 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79. 84 See Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86. Also, see Cine Bes Yapimcilik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669; [2004] 1 CLC 401 at [13]. 85 Because of The Achilleas [2008] UKHL 48; [2009] 1 AC 61. 86 See The Elena D’Amico [1980] 1 Lloyd’s Rep 75. 87 Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR 946.

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dr ceren cerit dindar of the vessel, such as the difficulty in finding a new charter easily while the market is in distress, it might be thought that there is a justification for it. Even if this is accepted as correct, in spite of this possible justification again making the charterer liable for the whole charter hire for the rest of the charter period seems out of proportion to common law damages. Therefore, it is difficult to say that the agreed sum in the clause reflects the pre-estimate damage resulting from the breach. Also, it should be noted that although the clause makes the charter hire immediately due and payable from the date of early redelivery to the end of charter duration, it does not make any reduction for the whole payment of the charter hire and does not consider any opportunity of the shipowner to mitigate his losses by way of rechartering the vessel in the market. On all these grounds, it can be said that the primary concern of the clause is to deter the charterer from breaching the obligation to redeliver the vessel on time as it was in The Paragon. Regarding the law of penalties, it should be noted that more recently the Supreme Court has reconsidered the rules on penalties and held that: the correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant and unconscionable when regard is had to the innocent party’s interest in the performance of the contract. Where the test is to be applied to a clause fixing the level of damages to be paid on breach, an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach would amount to a penalty and thus be unenforceable.88

Although the first limb of the test is new, the second limb reflects one of the tests which was previously suggested in order to assist the courts in construction of validity of liquidated damage clauses.89 The clause that requires the charterer to pay the whole charter hire for the underlap period as damages in case of early redelivery of the vessel is within the second limb. Following early redelivery of the vessel, the highest level of damages can be the difference between the charter rate and the market rate where the market is available or his actual loss if there is no market. In addition to this, there might be other damages which the shipowner could suffer following early redelivery, but these would be subject to the rules of causation90 and the remoteness test.91 However, the highest level of damages can never be the whole charter hire for the rest of the charter period.92 If it is accepted that the shipowner’s damages might be the whole charter hire for the underlap period, this would be contrary to the shipowner’s duty to mitigate his loss following the early redelivery. It is clear that there is an extravagant disproportion between the agreed sum in the clause and the highest damages that can result from the breach. Therefore, the clause is a penalty, so it is unenforceable. 88 Cavendish Square Holding BV v El Makdessi [2015] UKSC 67; [2016] AC 1172 at [255]. 89 See Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86. 90 It is not merely enough that a particular loss would not have arisen but for the breach to say that the causation test is satisfied. The answer to the question of whether or not this loss “fairly and reasonably . . . [can] be considered arising naturally . . . from the breach of contract itself” (Hadley v Baxendale (1854) 9 Exch 341, 354) must be affirmative to accept that there is a causal link. 91 Hadley v Baxendale (1854) 9 Exch 341; The Achilleas [2008] UKHL 48; [2009] 1 AC 61. 92 This might be an issue only if the shipowner chooses to refuse the early redelivery, continue to perform the charter and earn the charter remuneration, but even this is not allowed by the court in every case. Also, in this situation, the action will not be a claim for damages but a claim in debt.

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right to refuse early redelivery of a time-chartered vessel Following this conclusion, it can be said that this new test does not offer different results to the conclusion that has been reached regarding the clause under the traditional tests (pre-estimate damage and deterrence). However, it should not be forgotten that the issue is a matter of construction. Each clause should be considered in the light of the particular facts of each case and surrounding circumstances. Also, the Supreme Court has stated that: In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach.93

This indicates that the court can be flexible on the law of penalties depending on the contractual parties’ positions. Since the charter agreement is mostly drafted after long negotiations between the contractual parties and by taking professional advice, enforceability of the suggested term might be challenged under the quoted words of the Supreme Court. Although, the suggested term is most likely struck down by the law of penalties, the parties might instead reach a consensus on a term that allows the shipowner to keep the charter alive for a specific period such as four months following the charterer’s notice that the vessel will be redelivered before the end of agreed charter duration. This kind of term will balance the shipowner’s and the charterer’s situations, and it will definitely reduce litigation regarding early redelivery of the vessel because the parties will not need to go to court to determine how far the shipowner can insist on keeping the charter alive. Especially from the shipowner’s perspective, uncertainty regarding availability of the right will cease. In addition, since the charterer knows that even if he redelivers the vessel, he will still continue to pay charter hire and receive the charter service from the shipowner for the agreed period, this will encourage the charterer to act as a disponent owner and recharter the ship for that period of time. In this way, economic waste will also be reduced to a minimum. It is known that the main reason that triggers early redelivery is fluctuations in the market. Whilst this is certainly the case, the last suggestion is to add a term into a charter which requires that the rate of a charter hire is fixed from time to time in accordance with fluctuations in the market, for example, yearly intervals or every six months.94 If the market goes down where the charter contains this kind of term, redelivering the vessel early, returning the market and trying to find a substitute charterer over lower rate will be a difficult way. Instead of it, it will be easier for him to remain bound with the charter and wait for rearrangement of hire under the term. Although this kind of term does not fit neatly in with the time charter’s general features, if it is mutually agreed by the parties then this term can be really helpful in preventing early redelivery of the vessel especially under long time charters. This kind of term serves benefit of not only the shipowner but also the charterer. Existence of it prevents the shipowner from looking for ways to terminate the charter where the market is going up. Therefore, the term

93 Cavendish Square Holding BV v El Makdessi; Parkingeye Ltd v Beavis [2015] UKSC 67; [2016] AC 1172 at [35]. 94 Clause 12(c) of Supplyime 2005 is an example of such a hire adjustment clause.

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dr ceren cerit dindar can be a helpful tool to secure the charterer’s right to use the vessel and crew until the end of charter duration. Before concluding the explanations made under this heading, it should be however noted that, unfortunately, none of NYPE, Baltime, BPTime 3 and Shelltime 4 standard charter forms have yet adopted any of these suggested terms. V. Conclusion A detailed analysis in this chapter demonstrates that the cooperation qualification introduced in that case is not sufficient to eliminate the shipowner’s right to refuse early redelivery of the vessel. On the other hand, a legitimate interest qualification might have a role in this regard. From the author’s point of view, criteria (adequacy of damages, wholly unreasonable or perverse) which have been introduced over time for determining whether the innocent party has a legitimate interest to keep the contract alive are problematic. A better approach would be to evaluate the extent of the shipowner’s right to refuse early redelivery by focussing on the concept of economic wastefulness of performance. Time will show whether this suggestion has been considered in future cases. However, even if it is adopted, the shipowner would still not know when his right to keep the charter alive would be eliminated under the legitimate interest qualification. Therefore, uncertainty as to availability of the right to refuse early redelivery of the vessel to the shipowner will continue. To engage with this situation, the best thing that the shipowner can do is to include an express clause in the charter that serves the purpose of protecting the shipowner’s right to keep the charter alive as much as possible. However, while such a term is agreed, a doctrine of penalty might always be in their consideration.

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CHAPTER 6

Ship Seller’s Potential Duty of Care in Respect of Buyer’s Dismantling of Vessel Grace Asemota I. Introduction Usual features of second ship sales include negotiation through sale and purchase brokers on behalf of their principals, the formal recording of the terms of sale in a memorandum of agreement, and crucially the transfer of title and risk in the vessel from seller to buyer by delivery of the bill of sale. This is the case whether the sale is of a vessel for continuing trading purposes or for end-of-life recycling or demolition. If questioned, most sellers and shipowners, and most of those who assist them in sales of the ships, would not expect to retain any liability in relation to the activities of the ship following the change of ownership, except in respect of the breach of any specific contractual warranties as to the physical or legal state of the vessel at the time of delivery. However, following the decision of the English court in Begum v Maran,1 shipowners need to be aware that, in the context of sales of vessels at or approaching the end of their working life, they can be exposed to liability arising from the activities of the vessel following the sale, including where the vessel is on-sold for demolition. II. Begum v Maran (UK) Ltd A. Background Facts The claim was brought by the wife of Mohammed Mollah, who fell to his death whilst working on the demolition of a defunct oil tanker in the Zuma Enterprise Shipyard in Chittagong2 in Bangladesh. The vessel was known as the Maran Centaurus for the last 13 years of its working life, and during that period was registered to Centaurus Special Maritime Enterprise (CSME), a Liberian company part of the Angelicoussis shipping group. Pursuant to an operating agreement made on 9 February 2009, CSME appointed Maran Tankers Management (“MTM”), another related company, to operate and manage her. By an agency agreement between MTM and the defendant Maran (UK) Ltd, another related company incorporated in England, Maran UK agreed to provide agency and shipbroking services to MTM in respect of the vessel and 28 other ships. The functions that Maran agreed to carry out on behalf of MTM included “to act as chartering broker”, 1 Hamida Begum (on behalf of MD Khalil Mollah) v Maran (UK) Ltd [2020] EWHC 1846 (QB); (on appeal) [2021] EWCA Civ 326; [2021] 1 CLC 514. 2 Now Chattogram.

DOI: 10.4324/9781003376347-7

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grace asemota “to collect . . . all proceeds realised from the employment of the Ships” and “to attend and deal with the insurance of the Ships”. It was common ground that one of the services performed by Maran UK pursuant to the agency agreement was the negotiation and agreement of contracts of sale as and when the ships reached the end of their working lives. By the summer of 2017, the vessel had come to the end of its useful life and it was decided that it would be sold for demolition. In August 2017, Maran UK made enquiries, obtained quotations and conducted the negotiations for the sale. In accordance with standard practice, the proposed sale was not directly to the shipbreakers themselves, but to a demolition cash buyer who then assumed the credit risk. The highest bidder was Hsejar Maritime Inc., a company incorporated in Nevis. By a memorandum of agreement (MoA) dated 24 August 2017, CSME agreed to sell the vessel to Hsejar for a price of over US$16 million,3 and the vessel was sold “as is” in Singapore. Maran UK, the vessel’s agent and broker was not a party to the MoA. By clause 22 of the MOA, Hsejar agreed that the sale was to be for demolition purposes only and that it would only sell the vessel to a “ship breaker’s yard that is competent and will perform the demolition and recycling of the vessel in an environmentally sound manner and in accordance with good health and safety working practices”. Title was in due course transferred to Hsejar, and on 5 September 2017 Hsejar took delivery of the vessel, which was reflagged from Greece to Palau, had its name changed to Ekta and received a new crew. From that time, no entity within the Angelicoussis shipping group had any direct involvement with the vessel. It left Singapore on 22 September and was beached at Chittagong on 30 September. Following its arrival, demolition works commenced, and Mr Mollah, an experienced shipbreaking worker, was part of the demolition team. During the demolition, he fell from a considerable height and sustained multiple, and ultimately fatal, injuries. Mr Mollah’s widow, the claimant, issued proceedings in England against Maran UK on 11 April 2019, claiming damages for negligence under the Law Reform (Miscellaneous Provisions) Act 1934 and the Fatal Accidents Act 1976, and alternatively under Bangladeshi law. She also advanced a cause of action in restitution, in particular unjust enrichment. An application was brought by Maran UK to strike out the claim and/or for summary judgment under CPR 24.2. Certain factual assumptions were put before the court, accepted by Maran UK for the purposes of the application only. These formed the background against which the Court assessed the issues to be considered. The principal assumptions were as follows: (1) The “beaching” method of demolition carried out in India, Pakistan and Bangladesh since 1960 or thereabouts was an inherently dangerous working practice and accidents killed or injured numerous workers each year. This method had been the subject of international concern for years and the yards in Chittagong were particularly egregious. (2) The proper inference was that Maran UK had known that the vessel would be broken up in Bangladesh, rather than anywhere else, from two factors: namely, the price paid by Hsejar in August 2017 (a lower price would have signified likely 3 The evidence before the court was that this was at the high end of the likely price range.

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ship seller’s duty of care in buyer’s dismantling of vessel

(3)

(4) (5)

(6)

onward sale to a facility which adopted green demolition practices), and the quantity of fuel oil left on the vessel when it was delivered. Maran UK had had complete control over the sale of the vessel, including who it was sold to and for what price. Furthermore, Maran UK for these purposes was legally indistinguishable from MTM (the vessel’s managers) and from the owner of the vessel, CSME. The intervention of Hsejar (as the purchaser of record) in conveying the vessel to Bangladesh was of little or no significance as it did not alter the vessel in any way. The essence of the widow’s claim against Maran UK was that: (a) Maran UK had arranged for the sale of the vessel to a cash buyer who was certain to convey it to Bangladesh; (b) Maran UK had had actual knowledge of the intentions of the cash buyer; and (c) The intentions of the cash buyer had been in flagrant breach of its express contractual obligations to perform safe and environmentally responsible demolition of the vessel. Maran UK had had knowledge of this and turned a blind eye. English law principles should apply.

B. The First Instance Decision The application for strike out and/or summary judgment came before Jay J in June 2020. The primary claim brought by the widow was based on an allegation of a duty of care arising from Maran UK’s autonomous control of the sale of the vessel and its knowledge that, as a result of the sale, the vessel would be broken up in Bangladesh in highly dangerous working conditions. Therefore, the first issue that arose for determination was whether Maran UK had owed a duty of care to Mr Mollah (or at the very least whether the widow had a real prospect of establishing the existence of such a duty on the facts, including those assumed). In pursuing its case of a duty of care, the widow’s primary argument relied on classic Donoghue v Stevenson4 principles of liability arising from a known source of danger. An alternative basis advanced for the alleged duty was by reference to Maran UK being responsible for creating a danger which had then put workers such as Mr Mollah at risk from the conduct of third parties, such as the demolition yard. The purpose of this alternative argument was to demonstrate that the case fell within one of the exceptions to the general rule that there was generally no liability for the acts of a third party. Jay J’s view was that the case did not “fit comfortably within elementary Donoghue v Stevenson principles. In that case there was a chain of contractual relationships, . . ., but there was no intervening action of any sort by a third party”.5 Here there had intervened the actions of the owner of the yard and/or Mr Mollah’s employer in causing him to work on the vessel without taking proper precautions. Nonetheless, Jay J was not prepared to strike out the claim on that basis. 4 [1932] AC 562. 5 See [2020] EWHC 1846 (QB) at [37].

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grace asemota Most of the court’s analysis was focused on the alternative basis for the claim: i.e., a duty arising where a party had specific responsibility for protection from third parties. In the earlier case of Smith v Littlewoods Organisation Ltd,6 Lord Goff had identified four circumstances where a duty arose to prevent a third party from causing damage to another, namely: (a) Where there was a special relationship established between defendant and claimant based on an assumption of responsibility by the defendant; (b) Where there was a special relationship between the defendant and the third party based on control by the defendant; (c) Where the defendant was responsible for a state of danger which might be exploited by a third party; and (d) Where the defendant was responsible for property which might be used by a third party to cause damage. Jay J acknowledged that the Maran case was “some distance away from the type of situations where the highest courts have considered the question of third party intervention”. He summed up the position by observing that in the previous cases the third party in question caused the relevant damage or personal injury by deliberate action which in some of the cases was criminal. There was also a more obvious connection between the tortfeasors (in the event that liability existed) and the third parties. In the present case the yard/employer exposed the deceased to the risk of personal injury but did not deliberately cause it. From the defendant’s (and Hsejar’s) perspective, it was inevitable that the deceased would be exposed to that risk, but it was only foreseeable that he would sustain a serious accident.7

He emphasised the need for proximity in the sense of “a measure of control over and responsibility for the potentially dangerous situation”. He considered that there had been no special relationship between Maran UK and Mr Mollah based on an assumption of responsibility and no special relationship between Maran UK and the yard or the employer based on control by Maran. He further considered that Lord Goff’s fourth exception (i.e., responsibility for property which might be used by a third party to cause damage) was reserved for cases of occupiers’ liability and kindred situations. His focus, therefore, was on whether Maran UK could be said to have been responsible for a state of danger which might be exploited by a third party. This situation had been said in Smith v Littlewoods to give rise to a duty where the defendant “negligently causes or permits to be created a source of danger, and it is reasonably foreseeable that third parties may interfere with it and, sparking off the danger, thereby cause damage to persons in the position of the [claimant]”.8 This Jay J described as the “creation of danger principle”. In applying it to the facts, he noted that the sale of the vessel had been legitimate and lawful in the sense that there was no evidence of any collusion between the parties and full value had been paid. However, he considered that the

6 Smith v Littlewoods Organisation Ltd [1987] 1 AC 241. 7 See [2020] EWHC 1846 (QB) at [42]. 8 See [1987] 1 AC 241, 272–273 (Lord Goff).

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ship seller’s duty of care in buyer’s dismantling of vessel contours of the principle remained imprecise, and so he concluded that it could not be said that a claim based on such a duty was bound to fail. The unjust enrichment argument was dealt with swiftly and rejected. Jay J concluded that it could not be said that Maran had been enriched at Mr Mollah’s expense; he also observed that in the event that the law of Bangladesh applied (which was likely), it did not recognise a cause of action based on unjust enrichment. This issue could therefore be dealt with summarily. There were also arguments based on limitation, which in turn addressed two questions: whether English law (under which the claim would not be statute-barred) applied, and, if it did not, what the limitation period was under Bangladeshi law. As to the first question, it was decided that under Article 4 of the Rome II Regulation, the law of Bangladesh applied as that of the country in which the damage occurred unless it was clear from all the circumstances that the claim was manifestly more closely connected with England, and here there was no real prospect of Mr Mollah’s widow demonstrating otherwise. The widow also contended that this was an instance of environmental damage under Article 7 of Rome II, which gave the person seeking compensation for damage the option of basing their claim on the law of the country in which the event giving rise to the damage occurred. She argued that this brought in English law as Maran’s offices were in England. On the basis of brief submissions, Jay J considered that the widow had a real prospect of success on this sub-issue. As to limitation under Bangladeshi law, it was determined that that law had a one-year limitation period commencing from the date of death, and the claim would therefore be statute-barred if governed by that law. Jay J therefore refused Maran UK’s application for summary judgment or a strike-out, having concluded that the claimant had a real prospect of succeeding on the issue of negligence, and of establishing that her claim was governed by English law as involving environmental damage. C. The Court of Appeal Decision Coulson LJ, with whom the other members of the court agreed, delivered the leading judgment. The court agreed with Jay J’s conclusion that the case did not “fit comfortably” within ordinary Donoghue v Stevenson principles. The claimant, it said, would need to establish that Maran UK had had a duty to take reasonable care to avoid acts or omissions which it could reasonably foresee would be likely to injure [Mr Mollah], and that [Mr Mollah] was his “neighbour” because he was “so closely and directly affected by [Maran UK’s] act that [Maran UK] ought reasonably to have him in contemplation as being so affected when [Maran UK] was directing its mind to the acts or omissions which were called in question”.9

It considered that such an argument was heavily reliant on foreseeability, which could not alone create a duty of care. Rather, the claimant needed to show sufficient proximity between Mr Mollah and Maran UK such that Maran ought to have had him reasonably 9 See [2021] EWCA Civ 326; [2021] 1 CLC 514 at [40] (Coulson LJ).

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grace asemota in its contemplation when it chose to sell the vessel to Hsejar. Although the Court thought that this way of putting the case was not straightforward and might even be “unlikely to succeed at trial”, it could not conclude that it was so fanciful that it should be struck out. The alternative basis of the widow’s claim was the “creation of danger” exception to the usual rule that A would not normally be liable for harm done to B by a third party C. This the Court of Appeal accepted to be a recognised exception that could be traced back to Smith v Littlewoods Organisation Ltd. However, Coulson LJ noted that this alternative route was also “not straightforward” and that “it will only be in a relatively extreme case that the ‘creation of danger’ exception will operate”, with much turning on the precise nature and extent of the danger said to have been created.10 Nevertheless, while noting that this contention would face hurdles at trial, the Court thought the point at least arguable and not fanciful. Coulson LJ considered that the factual assumptions made in this case were capable of triggering the “creation of danger” exception. In particular he mentioned: (a) Maran UK’s arguably active role in sending the vessel to Bangladesh, knowingly exposing workers to the significant dangers which working on this large vessel in Chattogram entailed; (b) The fact that this might render the vessel and its demolition dangerous; and (c) The fact that the Zuma Yard’s failure to provide a safety harness or any other protective equipment, and the tragic consequences of their not doing so, had been entirely predictable. The Court, in short, described the widow’s reliance on the “creation of danger” exception as “an unusual extension of an existing category of cases where a duty has been found, but it would not be an entirely new basis of tortious liability”.11 In addressing one argument by Maran UK against the exception applying, the Court considered that the requirement for proximity was met by showing “a measure of control over and responsibility for the potentially dangerous situation”.12 Males LJ, who gave an additional brief judgment, expressed the view that whilst Maran UK had not had control over the working conditions in Chattogram, it had had control over whether Mr Mollah would be exposed to the risk of death or serious injury from working on its ship, adding that this “was a foreseeable risk which the Defendant created by its decision to send the vessel to be broken up in Bangladesh and is arguably sufficient, in my judgment, to create the necessary relationship of proximity”.13 The Court therefore upheld the judge’s conclusion that the alleged duty of care was not susceptible to being struck out or so fanciful that it should lead to summary judgment in favour of Maran UK. The finding in relation to the unjust enrichment claim was not the subject of the appeal. On the other hand, the limitation issues, and the related consideration of the applicable law, were. 10 See [2021] EWCA Civ 326; [2021] 1 CLC 514 at [63]. 11 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [63]–[65] (Coulson LJ). 12 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [128] (Males LJ); see also Sutradhar v Natural Environmental Research Council [2006] UKHL 33; [2006] PNLR 36 at [38] (Lord Hoffman). 13 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [130] (Males LJ).

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ship seller’s duty of care in buyer’s dismantling of vessel Here it was accepted that pursuant to Article 4 of Rome II, the law of Bangladesh applied to the case and with it a non-extendible one-year limitation, meaning that the claim was statute-barred. The issue, therefore, was whether Mr Mollah’s widow had an arguable case either that the one-year limitation could be circumvented by virtue of Article 7 of Rome II (environmental damage) or disapplied by Article 26 (allowing the application of a provision of law to be refused if manifestly incompatible with the public policy).14 On this the Court found that the pleaded duty set out in this case did not arise out of environmental damage but out of workplace safety, so that Article 7 was not engaged. It also dismissed an argument that the one-year limitation period should be disapplied pursuant to Article 26 on the basis of general public policy. However, it considered it arguable that the public policy exception might have been engaged on the basis that the application of the time limit under Bangladeshi law would cause undue hardship. The issue of undue hardship was therefore remitted to be dealt with as a preliminary issue. III. Key Takeaways From Begum v Maran It should be remembered that the application before the High Court and the Court of Appeal did not address the merits of the claim. Rather what was sought by Maran was a strike-out under CPR Rule 3.4(2)(a) because the particulars of claim disclosed “no reasonable grounds” for bringing it and, in the alternative, summary judgment pursuant to CPR Part 24.2(a)(i) because the claim had no real prospect of success. The issue was whether the court was able to conclude, without conducting a mini-trial or anticipating what the processes of disclosure and reviewing oral evidence might provide, that the claim was “bound to fail”.15 It was also noted by the Court of Appeal that it was “not generally appropriate to strike out a claim on assumed facts in an area of developing jurisprudence”.16 Related to the preceding is that the courts here were deciding whether the claimant had an arguable case on facts assumed to be true “unless, exceptionally, they are demonstrably untrue or unsupportable”. At any trial, the assessment would be, as the Court of Appeal noted, whether the claimant had a good case on the facts proved, “which may cast the matter in a rather different light”.17 For liability in negligence to be founded, four key ingredients must be present: (a) a duty of care, (b) breach of that duty, (c) damage caused by the breach, and (d) foreseeability of such damage. Various elements of each of these four areas overlap and any analysis of the facts by reference to these tests will address similar issues. Nonetheless, the first step to be satisfied is establishing that the defendant owes the claimant a duty to

14 The principal argument originally pursued was that the one-year time limit imposed by Bangladeshi law should be disapplied by operation of Article 26 due to the undue hardship that Ms Begum would suffer. The Court Appeal concluded that this aspect could be addressed as a preliminary issue. 15 See Altimo Holdings & Inverstment Ltd v Kyrgyz Mobil Tel Ltd [2011] UKPC 7; [2012] 1 WLR 1804 at [80]–[82] (Lord Collins); also, Brownlie v Four Seasons Holdings Inc [2017] UKSC 80; [2018] 1 WLR 192 at [5] (Lord Sumption). 16 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [23] (Coulson LJ). 17 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [119] (Males LJ).

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grace asemota take reasonable care not to inflict damage on them. Whether or not such a duty of care exists in any given case will depend on the interplay of three factors, namely:18 (a) Foreseeability of harm to the claimant if the defendant acts or fails to act in a certain way; (b) ‘Proximity’ of the defendant’s acts or omissions to the potential claimant; and (c) It must be fair, just and reasonable to impose liability on the defendant. The first of the preceding three factors requires a court to consider whether a defendant has failed to take reasonable care to avoid acts potentially harmful to those whom a reasonable person would have foreseen as likely to be adversely affected by such action.19 As emphasised by the courts, including by both the High Court and Court of Appeal decisions in Begum v Maran, foreseeability alone is insufficient to found a duty of care. There must also be proximity. In most cases, the “proximity” requirement is embodied within the “foreseeability” test and will not require separate consideration. However, as seen in Begum v Maran, even where foreseeability is satisfied, the argument that there is no proximity can be invoked to negate liability, and can be more difficult to satisfy in novel situations. Interestingly, in Begum v Maran, Males LJ commented that if it was true that a sale to an intermediate buyer had been used as a device to distance the shipowner from an “unsavoury sector of the shipping industry”, it would be a reasonable inference that the shipowner had well in contemplation the danger to which those workers would be exposed and was attempting to break the relationship which it perceived to exist; in other words, there would be a relationship of proximity between the shipowner and the shipyard worker.20 The case also reemphasises the well-established exception to the principle that a defendant is not liable for harm caused by the acts of a third party which applies when the defendant is responsible for creating a state of danger which results in the third party causing injury to the claimant. Whilst the established authorities in this area addressed claims against public bodies and local authorities based on the acts of others, such as where a police officer is entrusted with a loaded gun21 and the duty owed by the police towards pedestrians in the immediate vicinity when an arrest is being carried out,22 the Court of Appeal considered its application in this case to be only a “minor incremental step from the existing authorities”.23 The Court also commented on how “one of the most fast-developing areas of the law of negligence at present concerns the scope and extent of this and other exceptions to the general rule that there is no liability in tort for harm caused by the intervention of third parties”.24 In assessing whether or not a duty of care exists, the language of “acts” versus “omissions” had traditionally been used with it being said that the law of negligence usually only imposes responsibility for positive acts and not pure omissions. It is also interesting 18 19 20 21 22 23 24

See generally Caparo Industries Plc v Dickman [1990] 2 AC 605. Donoghue v Stevenson [1932] AC 562, 580 (Lord Atkin). [2021] EWCA Civ 326; [2021] 1 CLC 514 at [132]. AG of British Virgin Islands v Hartwell [2004] UKPC 12; [2004] 1 WLR 1273. Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4; [2018] AC 736. See [2021] EWCA Civ 326; [2021] 1 CLC 514 at [124] (Males LJ). [2021] EWCA Civ 326; [2021] 1 CLC 514 at [61] (Coulson LJ).

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ship seller’s duty of care in buyer’s dismantling of vessel to note that the characterisation of what is an omission and an act and its impact on the assessment of whether a duty of care arises was given less weight in Begum v Maran and considered as outdated. Instead, the court, adopting Lord Reed’s approach in Poole Borough Council v GN,25 drew the distinction between causing harm (making things worse) on the one hand and failing to confer a benefit (not making things better) on the other hand26 as the dividing line that might be drawn in any particular case as to whether a duty ought to be imposed. IV. Demolition – What Next for Sellers? It is interesting to note that the courts in Begum v Maran specifically commented on the need for sellers to ensure that their buyers followed through on their obligation to recycle safely. The example given was a structure which required the buyer to provide proof of delivery to China or any other safe yard, failing which liquidated damages would be payable. The Court’s position was that if the market became aware that shipowners were becoming more responsible and/or that cash buyers were breaching the tacit understandings, price levels would respond accordingly. This was further emphasised in the decision of the Court of Appeal; in particular, Lord Justice Coulson observed27 that the parties could have endeavoured to link the inter-party payments (between the yard, the demolition contractor and the shipowner/seller) to the delivery of the vessel to an approved yard. The inclusion of clause 22 in the MoA between CSME (the vessel’s owner) and Hsejar in the court’s view showed that the inclusion of provisions requiring safe demolition of the vessel in the contract of sale as well was within the reasonable control of the seller. Further evidence was before the court that clauses like clause 22 of the MoA were standard, and so there should be a push to ensure that it was standard also for them to have real force. If the payment arrangements had been different, then both buyer and seller would have had a real interest in ensuring that provisions like clause 22 were more than words on a piece of paper. A seller also has to bear in mind its obligations under broader regulations that impact on ship recycling. The principal international regulations that may be relevant are as follows: (a) The Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal 1989 deals with transboundary movements of hazardous waste. The majority of ships that are at the end of their trading lives contain hazardous chemicals, whether as a result of cargo residues or their structural make-up; the Basel Convention is thus of relevance in the context of ship demolition. In 1995, the Ban Amendment to the Basel Convention was adopted. In force since December 2019, this prohibits the export of hazardous waste from Organisation for Economic Cooperation and Development (OECD) countries to all non-OECD countries for disposal or recovery.

25 Poole Borough Council v GN [2019] UKSC 25; [2020] AC 780. 26 “The law often imposes a duty of care not to make things worse but rarely imposes a duty to make things better” (Poole Borough Council v GN [2019] UKSC 25; [2020] AC 780 at [28] (Lord Reed); see now Begum v Maran [2021] EWCA Civ 326; [2021] 1 CLC 514 at [60] (Coulson LJ). 27 [2021] EWCA Civ 326; [2021] 1 CLC 514 at [68]–[69].

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grace asemota (b) The IMO’s Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships 2009 seeks to minimise and eliminate accidents, injuries and other adverse effects on human health and the environment caused by ship recycling. Regulations under the Convention cover many things: the design, construction, operation and preparation of ships so as to facilitate safe and environmentally sound recycling without compromising the safety and operational efficiency of ships; the operation of ship recycling facilities in a safe and environmentally sound manner; and the establishment of an appropriate enforcement mechanism for ship recycling, incorporating certification and reporting requirements. The Hong Kong Convention applies to ships larger than 500 GRT entitled to fly the flag of contracting states. Key requirements are that ships carry an inventory of hazardous materials (IHM), and that ship recycling facilities provide a ship recycling plan, specifying how each ship will be recycled based on its particular characteristics and its inventory. Although the Hong Kong Convention was adopted in 2009, it only satisfied the requirements for ratification in June 2023 and is now expected to come into force in June 2025.28 (c) The EU Ship Recycling Regulation29 No. 1257/2013 (the EU SRR) is a legally binding framework regulating ship recycling. It is aimed at implementing the principles under the Hong Kong Convention, although it includes safety and environmental standards that go beyond the Convention. It was adopted in 2013 and came into force on 31 December 2018. The Regulation requires ships calling at a port in the European Union (regardless of their flag) to have on board an IHM that specifies the location and approximate quantities of hazardous materials, a requirement mandatory since 31 December 2020. Also, ships flying the flag of an EU Member State must be recycled only in those safe and environmentally sound ship recycling facilities included in the European list of ship recycling facilities. (d) The European Waste Shipment Regulation No. 1013/200630 (the EU WSR) extends the Basel Convention to all waste whether hazardous or not.31 Under the regulation, shipments of hazardous waste and waste destined for disposal are prohibited to non-OECD countries outside the EU. For shipments to OECD countries, they are generally subject to a prior notification and consent procedure which requires the prior written consent of all relevant authorities of dispatch, transit and destination. The EU has also introduced rules on the export, import and intra-EU shipment of plastic waste. 28 The requirements for entry into force of the convention were ratification by 15 states representing 40% of the gross tonnage of the world’s merchant shipping and, the combined maximum annual ship recycling volume of those states must have, during the preceding ten years, constituted not less than 3% of their combined merchant shipping tonnage. Those conditions were only met in June 2023 with ratifications by Bangladesh and Liberia. 29 Regulation (EU) No 1257/2013 of the European Parliament and of the Council of 20 November 2013 on ship recycling and amending Regulation (EC) No 1013/2006 and Directive 2009/16/EC. 30 Regulation (EC) No 1013/2006 of the European Parliament and of the Council of 14 June 2006 on shipments of waste. 31 The EU WSR currently regulates the disposal of waste but, on 17 November 2021, the EU Commission adopted a proposal for a new regulation on waste shipments which, in addition to establishing new rules for EU waste exports, was intended to make it easier to transport waste for recycling or re-use in the EU and set out new measures to better tackle illegal waste shipments. The proposal will have to be adopted by the European Parliament and the Council before it enters into force.

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ship seller’s duty of care in buyer’s dismantling of vessel This regulatory landscape arises against the recognition that shipbreaking/recycling is an activity that carries with it significant risks both to the physical well-being of the workers and the wider environment that have to be properly managed, and also that is an activity concentrated in developing states where such operations are essential for the livelihoods of thousands of families. Interestingly, Jay J in Begum v Maran noted32 that Maran UK (acting on behalf of the seller) had complied with the obligations under the Basel Convention by listing the hazardous substances in or on the vessel at the time of the sale. The Court further noted that (on the basis of the evidence at the application hearing) both Maran UK and Hsejar must have known that the hazardous substances would not be disposed of safely in Bangladesh. However, the judgment does not disclose whether any regulatory approvals in respect of the Basel Convention were obtained prior to the vessel’s movement from Singapore to Bangladesh. The EU SRR had not yet come into force at the time of the sale of the vessel. It is certainly the case that within an EU context, courts and regulators are increasingly ready to take enforcement steps in the event of non-compliance with the laws relating to the movement of waste and ship recycling. For example, there was the criminal prosecution in Rotterdam in 2018 of companies and executives within a Dutch shipping operator after they were found to have breached the EU WSR by indirectly selling ships for demolition in India, Bangladesh and Turkey in 2012. This led to the imposition of fines, although the judgment was overturned in 2020 following an appeal and was scheduled for a retrial. There was also the Tide Carrier case in 2018, where the Norwegian authorities investigated insurers for allegedly aiding the illegal export of a vessel in breach of waste shipment regulations. Criminal liability can, therefore, also apply to other parties involved with the relevant vessel such as marine insurers, surveyors and even banks. It is against this background of developments in regulatory and criminal liability that one has to consider the risk to a seller (as well as those acting on its behalf) of potential civil liability arising from the sale of a vessel for demolition. As part of wider industry initiatives on sales of vessels for demolition and to help sellers minimise their exposure to the risk of unsavoury practices within the shipbreaking industry, sellers are being encouraged to use a form of contract that provides that the ship be recycled in a safe and environmentally sound manner which accords with the Hong Kong Convention. BIMCO, for example, recommends the use of its standard contract for the sale of ships for green recycling, RECYCLECON. The RECYCLECON contract incorporates many of the requirements of the Hong Kong Convention such as the IHM and the Ship Recycling Plan. Where, on the other hand, a seller wishes to protect itself from the risk that following a sale of a second-hand vessel to a buyer, for what it understands to be for trading use by the buyer, the vessel is then onsold by the buyer for demolition, BIMCO is seeking to develop a standard non-recycling clause for use in sale contracts. Essentially, the provision would prohibit any onsale for demolition for a fixed period of time. However, as per the obiter comments by the courts in Begum v Maran, the inclusion of a provision in a contract is not enough to protect a seller/shipowner from

32 See [2020] EWHC 1846 (QB) at [56].

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grace asemota potential liability arising from the subsequent demolition of the vessel. A prudent seller will need to undertake adequate due diligence on the buyer and proposed sale circumstances. V. Wider Trends in ESG Litigation It is useful to also consider Begum v Maran in the wider context of ongoing debates and developments regarding how the law of tort should respond to climate change and activities that potentially have a significant environmental impact. There is a rapidly growing body of climate change litigation around the world, and at the heart of the debates under tort law is establishing whether a duty of care exists to the claimant in the action. A common thread when there is an assessment of the negligence claim is that although the alleged harm may be reasonably foreseeable, the question of whether or not there is sufficient proximity of relationship (either physical or temporal) between the defendant’s actions and the harm suffered by the claimant will continue to be a significant hurdle for these sorts of claim. Although not considered in Begum v Maran the question of whether it is fair, just and reasonable will also be up for debate with policy arguments being made (for example, that recognising a duty of care in those circumstances risks opening the floodgates to limitless future claims, etc). The courts appear to see their role in expanding the scope where a negligence claim may be found to one of “incremental development” rather than a radical change. There has also been increasing willingness by the English courts to hold UK domiciled defendants potentially liable for alleged harms committed by related companies (particularly in the context of parent liability cases) or companies in the “value chain”.33 This again highlights the need for sellers to conduct appropriate level of due diligence on those involved in the sales chain, as the involvement of independent actors in that chain may not serve to break that chain of causation that ultimately links the activity from which liability arises back to the seller. VI. Conclusion Begum v Maran clearly demonstrates the prospect of potential civil liability on a seller (and those such as the agent who acts for or assists the seller in a sale for demolition) following the sale of a vessel for demolition purposes. On the assumed facts in that case, one can see why the courts were unwilling to dispose of the case and see it as part of the trend of incremental development of existing principles in the law. However, one can see the challenges potentially faced by a seller (and its agents) in slightly different scenarios. For example, what if a vessel is at the end of its trading life in one market, perhaps due to emissions regulations in its geographical market and the business focus of its owner, but can still be traded in other markets? Is there sufficient knowledge on the part of the seller of the demolition intention, if the seller in that case is selling the vessel in the expectation that the buyer will continue to trade it for a period? Perhaps the use of BIMCO’s non-recycling clause might assist. Further, whilst a case like Begum v Maran concerns potential civil liability by a seller, the consequences to the shipowner of breaching environmentally sound recycling requirements 33 See, for example, Vedanta Resources Plc v Lungowe [2019] UKSC 20; [2020] AC 1045, and Okpabi v Royal Dutch Shell [2021] UKSC 3; [2021] 1 WLR 1294.

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ship seller’s duty of care in buyer’s dismantling of vessel can extend to potential criminal sanctions, breach of representation or warranty in any financing, insurance or other contractual documents and, of course, reputational damage. Arranged sale of vessels through scrap buyers while being aware that the vessel will be beached is certainly not accepted by European environmental and prosecuting authorities. It is also clear that both in terms of practices and the regulatory burdens that currently exist, there is no uniform and level playing field globally for those involved in ship demolition. There already exists certain jurisdictions (such as in the EU) where stricter requirements are imposed on shipowners and demolition facilities on the one hand and other parts of the world where there are minimal requirements on shipowners (or those standards that do exist are not enforced) and sub-standard demolition facilities. Time will tell whether with this divide, there are sufficient incentives to encourage shipowners across the board to adhere to the stricter standards.

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CHAPTER 7

Judgments in Bitcoin? Josephine Davies

I. Introduction Bitcoin is the best known “cryptocurrency” in the world. It is a decentralised system using blockchain technology, is independent of any state’s control and can be used anonymously.1 Following Bitcoin’s creation in 2009,2 it rapidly became popular for illicit uses because of its anonymity, notably being the only means of payment accepted on the digital black market, Silk Road.3 Bitcoin also grew in popularity as a payment method or investment. Its value in fiat currency4 fluctuated but seemed, generally, to be growing with a rapid surge in late 2020 leading to a high of over £50,000 in November 2021.5 Since then values have dropped dramatically but remain much higher than in previous years.6 Bitcoin has been legal tender in El Salvador since September 2021 and in April 2022, the Central African Republic announced that it too would recognise Bitcoin as legal tender.7 For Ukraine and Ukrainians, Bitcoin has provided a way to access funds notwithstanding the war. The government of Ukraine has sought (and obtained) donations in cryptocurrency to support its defence, while Ukrainian refugees have reportedly found that conversion to Bitcoin has been a useful way to transport their money.8 Set against these developments, there is still considerable scepticism about Bitcoin’s sustainability. The conversion of fiat currency to Bitcoin and vice versa and the general

1 Although a permanent record of each Bitcoin transfer by reference to the public keys of the transferor and transferee is a feature of the system, which means that it is technically pseudonymous. 2 E. Lopatto, “How bitcoin grew up and became big money” (The Verge, 3 January 2019). accessed 6 December 2022. 3 In 2013, the FBI seized about 30,000 bitcoins from the Silk Road. See S. Ember, “Winner of Bitcoin auction, Tim Draper, plans to expand currency’s use” (New York Times, 2 July 2014) accessed 6 December 2022. 4 That is, government-backed currencies like sterling. 5 Market prices for Bitcoin are constantly quoted on, e.g., coinbase.com. 6 In September 2020, 1 BTC traded for about £8,000; in early December 2022, for about £14,000. 7 “Bitcoin becomes official currency in Central African Republic” (BBC News, 27 April 2022) accessed 6 December 2022. More detail of the El Salvador system, and criticism of it, are set out in S. Gorjon, “The Role of Cryptoassets as Legal Tender: The Example of El Salvador”, 2021(4) Banco de España Analytical Articles accessed 6 December 2022. 8 J. Plender, “Crypto vs gold: the search for an investment bolt hole” (Financial Times, 1 April 2022) accessed 6 December 2022.

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DOI: 10.4324/9781003376347-8

judgments in bitcoin? use of Bitcoin are illegal in the People’s Republic of China.9 The International Monetary Fund has criticised El Salvador’s decision, saying it will increase the risk of financial instability.10 Others doubt Bitcoin’s future as a payments network because of its inefficiency and high environmental costs associated with the amount of energy needed to run its proof-of-work system.11 For the moment, though, Bitcoin seems likely to remain significant among cryptocurrencies and so this chapter examines the extent to which the English courts can or should give judgment in Bitcoin. Those questions are echoed in the Law Commission’s Digital Assets: Consultation paper,12 published on 28 July 2022. What emerges is that the English court does have the jurisdiction to give judgment requiring the transfer13 of Bitcoin. This is most obvious in relation to proprietary claims, but there is no reason of principle why specific performance of contractual obligations should not also be ordered, or why judgments should not be given in Bitcoin using a similar formula to that adopted in relation to judgments for foreign currency sums. The real issue is whether it is desirable to obtain judgments in Bitcoin. It is my view that, save in some limited circumstances where a proprietary claim may be the most convenient way to recover some compensation for a fraud, it is unlikely that a judgment in Bitcoin will be particularly useful. A more conventional assessment of damages, awarded in fiat currency, will be more likely to provide full compensation to the claimant. This chapter begins with a discussion of what Bitcoin is (as a legal animal) and then turns to consider how Bitcoin judgments could be made. II. What Is Bitcoin? The concepts behind Bitcoin (and other crypto assets) are well explained in the Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce (UKJT) in November 2019.14 A recent, succinct, summary can be found in Falk J’s judgment in Tulip Trading Ltd v Bitcoin Association.15 This chapter focuses on Bitcoin (also referred to as BTC), but many other cryptocurrencies and crypto assets exist. Some are very similar to Bitcoin in their operation. Particularly notable in that group are those which were formed after a so-called fork in the Bitcoin

9 E. Olcott and E. Szalay, “China extends crackdown by declaring all crypto activities ‘illegal’” (Financial Times, 24 September 2021) accessed 6 December 2022. 10 E. Livni, “The IMF urges El Salvador to end its embrace of crypto as Bitcoin tumbles” (New York Times, 26 January 2022) accessed 27 August 2022. 11 J. Oliver, “Bitcoin has no future as a payments network, says FTX chief” (Financial Times, 16 May 2022) accessed 2 December 2022 (paywall)). 12 Law Commission, Digital Assets: Consultation paper (Law Com No 256, 2022). 13 A term which is used advisedly, having regard to the technical nature of Bitcoin transactions. 14 UK Jurisdiction Taskforce, Legal Statement on Cryptoassets and Smart Contracts (2019). The Legal Statement was written by Lawrence Akka QC, David Quest QC, Matthew Lavy and Sam Goodman. It can be downloaded from: https://technation.io/lawtechukpanel. See too the high-level descriptions of crypto assets and distributed ledger technology which accompanied the UKJT public consultation, and which is conveniently reproduced as Appendix 6 to the Law Commission, Digital Assets: Consultation Paper (Law Com No 256, 2022). 15 [2022] EWHC 667 (Ch) at [16]–[18].

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josephine davies blockchain, e.g., Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV). Others are not.16 As a result the principles outlined in this paper may be applicable to other cryptocurrencies or crypto assets, but an individual assessment would be required in each case. For the purposes of the question addressed by this chapter, the legal characterisation of Bitcoin matters. The central questions are whether it is property, and whether it is money. A. Bitcoin as Property It is very likely that the English courts will hold that Bitcoin is a form of property. The UKJT concluded that this was the case. That Legal Statement has been widely discussed by academics and judges around the world and its analysis generally accepted. Further, in England there have been a number of interim judgments which proceed on the basis that Bitcoin is property in order to satisfy particular requirements for service out of the jurisdiction and to permit the grant of proprietary freezing injunctions.17 Strictly, of course, these interim judgments only demonstrate that there is a serious issue to be tried as to whether or not Bitcoin is property, and it must be noted that the principal defendants in these cases have not attended any hearing to argue one way or the other.18 Having said that, it seems unlikely that the English courts will reach a different conclusion if and when any case comes to final trial.19 Further, the conclusion that Bitcoin is property is consistent with the one Commonwealth case which has so far considered the issue – Ruscoe v Cryptopia Ltd in New Zealand,20 which contains a very detailed analysis of the law.21 The Singapore courts also appear to endorse this approach.22

16 Moreover, the approach taken by a particular network may change over time – for example, Ethereum will change the consensus mechanism it uses from “proof-of-work” to “proof-of-stake” because “it is more secure, less energy-intensive, and better for implementing new scaling solutions”. – see C. Smith, “Proof-of-Stake (POS)” (3 November 2022) accessed 6 December 2022. 17 See AA v Persons Unknown [2019] EWHC 3556 (Comm), [2020] 2 All ER (Comm) 704; Fetch.AI Ltd & Anor v Persons Unknown Category A & Ors [2021] EWHC 2254 (Comm), 24 ITELR 566; and Mr Dollar Bill Ltd v Persons Unknown [2021] EWHC 2718 (Ch), [2021] All ER (D) 67. 18 This is in contradistinction to the respondents to the ancillary disclosure orders made in those cases under the Court’s Norwich Pharmacal and Bankers Trust jurisdictions. The latter form of order depends on the crypto asset in question being classified as property and is important where information is sought from an overseas third party (it being currently impossible to serve a Norwich Pharmacal application out of the jurisdiction). It will be noted that no Bankers Trust respondent has sought to argue that the crypto asset was not property although this may be for pragmatic reasons driven by the desire of many crypto-trading platforms to be regarded as responsible financial institutions (e.g., in the Fetch.ai Ltd claim in which I was instructed, the Cayman-incorporated Binance company which responded to the Bankers Trust injunction did not argue the point but sought to reserve its position). 19 The understandable tendency of claimants in these cases is to resolve the claims as quickly as possible by obtaining judgment in default for a money sum and thereby avoiding the time and expense of a trial during which full legal argument would be required even if the defendant did not appear. This solution has its downsides though – enforcement can be tricky if the only known assets of the defendant are crypto assets held/controlled by a foreign company. A third party debt order requires money to be owed by a third party located within the jurisdiction. See further the Law Commission’s comments on this in its Digital Assets Consultation paper, § 19.156 and fn2009. 20 [2020] NZHC 728; 22 ITELR 925. 21 In particular, see [2020] NZHC 728; 22 ITELR 925 at [50]–[133]. 22 B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 3; [2019] 4 SLR 17; and, on appeal, [2020] SGCA(I) 2; [2020] 2 SLR 20. The Singapore International Commercial Court there held that it was possible for cryptocurrencies to be held on trust and, in so reasoning, accepted that they were property. However, this was undisputed by the parties.

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judgments in bitcoin? A very brief explanation for these decisions is that Bitcoin, at least, is capable of satisfying the requirements laid down by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth:23 Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.

This may not be the perfect basis for the decisions (indeed, the Ainsworth criteria are subject to academic criticism as being, among other things, circular24), but it is an important and easily understood basis. An extensive discussion of how to identify property is found in Chapter 2 of the Digital Assets: Consultation paper where it is pointed out that the Ainsworth criteria are a necessary but not sufficient condition to determine the existence of a property right.25 Bitcoin also clearly meets the test, by reference to functions, stated by Lady Hale in OBG Ltd v Allan:26 The essential feature of property is that it has an existence independent of a particular person: it can be bought and sold, given and received, bequeathed and inherited, pledged or seized to secure debts.

The question which arises next is more controversial. If Bitcoin is property, what sort of property? This matters because not all forms of property are treated in the same way. Clearly Bitcoin is not real property.27 Does it then fall into either of the currently recognised categories of personal property – tangible property (or a thing in possession28) and intangible property (or a thing in action)? This question is subject to detailed discussion in the UKJT Legal Statement,29 which reaches the conclusion that Bitcoin must, by a process of elimination, be a form of intangible property (although this requires a wide view to be taken of the concept of a “thing in action”). In 2022, the Law Commission has addressed the question. In its Digital Assets: Consultation paper it proposes that English law should respond to the challenge identified in the UKJT paper and recognise a third category of personal property designed to capture a range of digital assets. For the purposes of this chapter, it is not necessary to discuss whether this proposal should be accepted, although it clearly has some attractions in principle. B. Bitcoin as Money The final issue is whether Bitcoin is money as well as being property. The most simple and narrow definition of money was proposed by F.A. Mann. It was defined30 as the physical objects (chattels) “to which such character has been attributed On appeal the court discussed the authorities and concluded that there might be “much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property” [43]. 23 [1965] AC 1175, 1247–1248. 24 K. Gray and S. Gray, Elements of Land Law, (5th edn, Oxford University Press 2009), 97. 25 Digital Assets: Consultation paper, § 2.42. 26 [2007] UKHL 21; [2008] 1 AC 1 at [309]. 27 The law of real property concerns land and associated rights. 28 Or chose in possession for those who prefer Latin. 29 See §§ 66–84 particularly. 30 F.A. Mann, The Legal Aspect of Money, (5th edn, Oxford University Press 1992), 14.

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josephine davies by law, i.e., by or with the authority of the State”. That narrow definition is reflected in Halsbury’s Laws of England as the definition of “Legal Money”, which is said to “consist in England either of coins made and issued by the Crown under the exclusive powers it enjoys at common law . . . or of bank notes made and issued by the Bank of England under statutory powers”.31 Bitcoin fails these tests. It is not a chattel, and it is not (save in El Salvador and CAR) recognised by the state as money.32 The narrow approach, although attractive in its simplicity, is rejected in the current edition of Mann on the Legal Aspect of Money whose author favours a definition of money that reflects the modern position that money is an abstract rather than physical concept, although still stays true in some respects to the state theory of money.33 This approach is adopted elsewhere34 but has also been persuasively criticised.35 In any event, Bitcoin cannot meet even these wider criteria because it is decentralised and the proposed criteria include a requirement that the “legal framework for the currency must include a central bank or monetary authority responsible for the issue of the currency and include appropriate institutional provisions for its management through the conduct of monetary policy and the oversight of payment systems”.36 Wider definitions of money can also be found. For example, in Miller v Race,37 Lord Mansfield said (when discussing banknotes) that they: are not goods, not securities, nor documents for debts, nor are so esteemed: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind, which gives them the credit and currency of money, to all intents and purposes.

This is closer to the economists’ definition of money by reference to its functions: as a store of value, a means of exchange and a means of debt settlement.38 Bitcoin does not meet these criteria. It is too volatile to be money.39 It cannot be spent sufficiently widely to really be a means of exchange.40 31 Halsbury’s Laws of England (LexisNexis Butterworths 2021), Vol 49 para 1(1)(i)(a)(3). 32 Indeed, the Bank of England’s Governor has stated unequivocally that Bitcoin “is not money (hence the term cryptocurrency is misleading) and [it] has no intrinsic value because it has no backing”. A. Bailey, “Innovation to serve the public interest”, Speech at City UK Annual Conference (Bank of England, 15 June 2021) accessed 6 December 2022. 33 C. Proctor, Mann on the Legal Aspect of Money (7th edn, Oxford University Press 2012), §§ 1.47, 1.67 and 1.68. 34 Halsbury’s Laws of England (LexisNexis Butterworths 2021), Vol 49 para 1(1)(i)(a)(2). 35 M. Brindle and C. Carpenter, “Money”, in M. Brindle and R. Cox (eds), Law of Bank Payments (5th edn, Sweet & Maxwell 2017). 36 C. Proctor, Mann on the Legal Aspect of Money (7th edn, Oxford 2012) § 1.68(c). A new edition of this text is due in September 2022, and it promises to include a text which “investigates the challenges that virtual currencies like Bitcoin pose to our fundamental assumptions about monetary institutions and to our understanding and definition of money”: C. Proctor, Mann & Proctor on the Law of Money (8th edn, Oxford, forthcoming). 37 (1758) 1 Burr 452, 457. 38 P. Moles and N. Terry, The Handbook of International Financial Terms (1st edn, Oxford University Press 1997). 39 Indeed, the volatility of Bitcoin is the reason why the English court has recently refused to allow it to be used to provide security for costs: see Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 667 (Ch) at [43] (Master Clark). 40 See, e.g., discussion in R. Armstrong, “Unhedged: bitcoin is equity, not money” (Financial Times, 20 May 2021) accessed 6 December 2022 (paywall)

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judgments in bitcoin? III. Judgments in Bitcoin Following Proprietary Claims Bitcoin can, on the basis that it is regarded as property, be the subject of proprietary41 claims.42 Further, although there is room to debate43 whether this is a necessary consequence of it being classified as property, it can be held on trust.44 This makes the standard range of equitable remedies potentially available.45 There are no English cases in which such claims have reached final judgment following trial, but the English courts have already made information disclosure orders46 in order to facilitate the process of tracing47 which is used in fraud cases to locate the assets which are the “clean substitutes” for those which were taken48 and over which a constructive trust may be asserted. Those clean substitutes may include Bitcoin, and, in that situation, a claimant may obtain a judgment for transfer of the relevant amount of Bitcoin. Equally, restitutionary claims founded on unjust enrichment are potentially available and would again give rise to a judgment for transfer of Bitcoin.49 These sorts of claims will follow the ordinary principles of English law, and this chapter therefore does not dwell on them. An issue which will always need to be considered is whether they offer an advantage in any particular situation in comparison with a claim for damages. This will depend on what approach is taken to the assessment of damages (which is discussed further in the next part of this chapter). If the value of Bitcoin has gone up, a proprietary claim will be better than a damages claim if it is assessed by conversion to fiat currency on the breach date. On the other hand, if the value of Bitcoin has gone down, the only advantage of the proprietary claim will be that it actually and C. Nuttall, “Bitcoin’s cryptic mood swings” (Financial Times, 19 May 2021) accessed 6 December 2022 (paywall). Further objections may be raised on the basis that Bitcoin has been designed to have a finite supply of 21 million BTC and this means it will be driven out of circulation by its design: B. Greeley, “How can bitcoin become money if it is too valuable to spend?” (Financial Times, 22 May 2021) accessed 6 December 2022 (paywall). 41 Crypto assets are intangible. This prevents them being the subject matter of a claim for conversion: OBG v Allan [2007] UKHL 21, [2008] 1 AC 1. There are good policy arguments for the law to be changed at least in respect of crypto assets, conveniently outlined at Digital Assets: Consultation paper §§ 19.103–19.122. 42 There is likely still to be some room to debate how this will work. It is interesting to note that in the USA it is possible to claim for conversion of crypto assets (in England it is not: see the previous note). But the Court of Appeal for the Ninth Circuit refused to allow specific recovery of converted crypto assets on the basis that cryptocurrency is intangible. Accordingly, the plaintiffs were awarded damages equivalent to the value of the bitcoins when the defendant sold them: see Ox Labs Inc v PitPay Inc, 848 Fed Appx 795 (2021). 43 K. Low, “Trusts of Crypto Assets”, in R. Nolan, H. Tang, and M. Yip (eds), Trust Law International and Trusts and Private Wealth Management: Developments and Directions (Cambridge University Press, 2021). 44 This was decided in Ruscoe v Cryptopia Ltd. In B2C2 v Quoine, referred to earlier; the SICC found a trust to exist, but this was reversed on appeal for case-specific reasons and not on grounds that crypto assets could not be held on trust. 45 See further, the discussion in Digital Assets: Consultation paper, §§ 19.43–19.87. 46 E.g., cases cited at fn 17 earlier. 47 Tracing, rather than following, is the relevant process because the technical process of crypto asset transfer involves the creation of a new digital object – see the discussion at, e.g., Digital Assets: Consultation paper §§ 19.47–19.50. 48 For example, in a case involving a hack (like the Fetch.ai case) the trading platform may be such that “taking” has to be carried out by a series of “sales” of crypto assets as a significant undervalue. The original assets “stolen” in that case were not in Bitcoin, but a process of transfers involved their conversion to Bitcoin. 49 See Fetch.ai recognising this was possible to the “reasonably arguable case” standard needed for permission to serve out.

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josephine davies guarantees recovery (both generally because an asset is identified and available, and also particularly in insolvency situations). The more interesting question is whether something akin to a money judgment on a debt can be made. IV. Judgments in Foreign Currency The fact that Bitcoin is used as a payment method or alternative currency by some people in some contracts could suggest that the English court should accord it the same status as foreign currency (and, of course, so far as El Salvador is concerned, it is). It is therefore informative to begin by analysing the basis upon which the English courts began their (comparatively recent) practice of giving judgments in foreign currency. Until 1975, the English courts proceeded on the basis that both the claim and the judgment in any case were required to be in sterling.50 This rule applied regardless of whether the claim was framed as being for debt or damages. It was coupled with the “date of breach” rule. This meant that the foreign currency sum due under the contract or claimed by way of damages had to be converted to sterling at the date payment was due or the breach of contract or, in a non-contractual claim, the wrong occurred. In 1975, in Miliangos v Frank (Textiles) Ltd,51 the House of Lords was presented with a case in which these two rules had operated to produce an apparently unjust result. The parties’ contract required payment in Swiss francs. Between the due date and the date on which the court claim was heard, the value of sterling had fallen substantially. This meant that to obtain the contractual sum in Swiss francs some £60,000 was required at the later date rather than the £42,000 which would have been required at the contractual payment date. Conversion at the earlier date therefore would deprive the Swiss claimant of 1/3 of the value of its claim. The House of Lords was therefore called upon to depart from the decision it had made less than 20 years earlier in Re United Railways of Havana.52 In the leading speech, Lord Wilberforce (with whom the majority agreed53) analysed the United Railways case as having three essential steps: (1) that a claim must be in sterling and that judgment must be in sterling; (2) that an action to recover a foreign debt is an action in damages; and (3) that the rules should be the same “for all actions in damages whether for failure to pay a foreign debt or founded on tort or breach of contract”.54 Taken together, these meant that the logical conclusion was that the breach date for conversion must be applied.55 Lord Wilberforce approached the topic narrowly, so that the case decided only the position in relation to actions for breach of an obligation to pay a foreign currency debt. The decision did not elevate foreign currency to the same status as sterling but, instead, was made on the basis that “damages in sterling were not an adequate remedy [for the

50 51 52 53 54 55

Miliangos v Frank (Textiles) Ltd [1976] AC 443, 460 (Lord Wilberforce). Miliangos, at 460 (Lord Wilberforce). [1961] AC 1007. Lord Simon dissenting, whilst Lord Cross, Lord Edmund-Davies and Lord Fraser agreed. Miliangos, at 460 (Lord Wilberforce). Miliangos, at 461–462 (Lord Wilberforce).

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judgments in bitcoin? contractual breach of obligation to pay] so that an order for the delivery of a foreign currency in specie might be made”.56 Lord Wilberforce set out his reasoning as follows:57 The courts have generally power to order delivery in specie whenever, in their opinion, damages are an inadequate remedy. In cases such as the present, indeed, one of the arguments against making orders for payment of foreign currency in specie has been that damages are an adequate remedy (see particularly Lloyd Royal Belge S.A. v Louis Dreyfus & Co (1927) 27 Ll.L.Rep. 288, 294 per Romer J.). But if, in the circumstances of today, damages are not an adequate remedy, as they clearly may not be if the breach date rule is applied in times of floating currencies, this argument, in any case nothing more than an appeal to discretion, loses its force.

It followed, in Lord Wilberforce’s opinion, that orders in the form “the defendant do pay to the plaintiff [the sum in foreign currency] or the sterling equivalent at the time of payment” were “jurisdictionally legitimate and procedurally workable”.58 This is, of course, the form for judgments in foreign currency still prescribed by the CPR (see PD 40B § 10). The only legal principle which required alteration was, therefore, the rule against judgments in foreign currencies. Lord Wilberforce concluded that “objections based on authority against making an order in specie for the payment or delivery of foreign money, are not, on examination, found to rest on any solid principle or indeed on more than the court’s discretion”.59 The rule was commonly justified on the basis that the English court had no power to enforce a judgment for a foreign currency. At the end of the nineteenth century, in Manners v Pearson,60 Sir Nathaniel Lindley MR had said: speaking generally, the Courts of this country have no jurisdiction to order payment of money except in the currency of this country. Whatever sum is ordered to be paid, whether for principal, interest, or damages, must be expressed in English money, or such an order cannot be enforced by the ordinary writs of execution.61

This was described as “primarily procedural” in United Railways but was applied nonetheless.62 In Miliangos, the supposed practical difficulties of enforcement which had weighed heavily in Manners v Pearson and the United Railways case were found not to be real difficulties.

56 Alcoa Minerals of Jamaica Inc v Broderick [2002] 1 AC 371, 377 (Lord Slynn). 57 Miliangos 463B-C (Lord Wilberforce). 58 Miliangos 463A and E (Lord Wilberforce). 59 Miliangos, 466E (Lord Wilberforce). 60 [1898] 1 Ch 581. This case was said to provide the modern origin of the rule see: see Miliangos, at 466 (Lord Wilberforce) and 491 (Lord Cross). 61 See [1898] 1 Ch 581 at 587; also, Di Ferdinando v Simon, Smits & Co Ltd [1920] 3 KB 409, 425 (Scrutton LJ); and Miliangos at 461 (Lord Wilberforce explaining Lord Reid’s views in Havana Railways [1961] AC 1007) and 496 (Lord Cross commenting on Lord Denning MR’s views). 62 Re United Railways of Havana and Regla Warehouses Ltd [1961] AC 1007, 1052. He also asserted, without explanation, that “it would not be right” that a claimant should be allowed to sue in England for payment of foreign currency or for specific performance of a contract to pay foreign currency. This statement was described by Lord Simon in Miliangos as “enigmatic” and explained on the basis that “Lord Reid seems to be saying, ‘He cannot get specific performance because he cannot sue directly’ – not the converse” (Miliangos, at 484).

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josephine davies Lord Cross concluded that the reason given by Lindley MR (“execution by way of ‘fieri facias’ or ‘elegit’ could not issue on such a judgment”) was “a very inadequate reason” as well as being obiter.63 Lord Cross opined that the supposed difficulties of enforcement of such a judgment in England were not insuperable but could readily be resolved if, for example, the court simply “authorise[d] him [the creditor] to levy execution for the sum of sterling which at the date of the authority was equivalent in value to the sum of foreign currency which the defendant failed to deliver”.64 Lord Wilberforce also gave weight to the approach taken in relation to arbitration awards. In particular, he relied on Jugoslavenska Oceanska Plovidba v Castle Investment Co Inc,65 in which the Court of Appeal had held an award expressed in US dollars was valid and could be enforced under s.26 of the Arbitration Act 1950.66 That judgment referred to the fact that the Central Office of the High Court reported that “there is no difficulty in practice in enforcing foreign currency awards: the foreign currency is simply converted into sterling at the rate prevailing at the date of the award”.67 In Lord Wilberforce’s opinion68 the enforcement of arbitration awards in this was “of great importance” for two reasons. First, it showed that a foreign currency judgment could be enforced in the same way as a foreign currency arbitration award. Second, Lord Wilberforce considered that the same rules should apply in relation to arbitration awards and judgments and that having regard to “what commercial experience has worked out” the approach in the court should be aligned with the approach in arbitration. The practical significance of the House of Lord’s decision in Miliangos was that the date on which the foreign currency was converted to sterling was the date of payment of the judgment debt instead of the date on which payment had been due. This meant that the creditor who had contracted to receive a specific currency would “not suffer from fluctuations in the value of sterling” and was therefore the just outcome.69 V. Should Bitcoin Payments Be Treated as if They Were Foreign Currency Payments? There is no reason why the reasoning deployed in the Miliangos should be restricted to contractual obligations to pay denominated in fiat currency. Provided always that the judgment is required to be in the form which includes the words “or the Sterling equivalent at the time of payment” why should a judgment not issue for payment in Bitcoin given that this is what the claimant expected and given that conversion at any time other than the time of enforcement of the judgment would expose the claimant to fluctuations in the value of Bitcoin?

63 Miliangos, at 493 (Lord Cross). 64 Miliangos, at 494 (Lord Cross). 65 [1974] QB 292. 66 I.e., “In the same manner as a judgment or order to the same effect”. 67 Miliangos, at 464 (Lord Wilberforce). 68 Miliangos, at 463 (Lord Wilberforce). 69 Miliangos, at 465. Note that Lord Wilberforce referred not just to the fact that the contract was for a particular currency but that it was the currency of the creditor’s place of business – “he has bargained for his own currency and only his own currency”.

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judgments in bitcoin? The argument for this approach, where Bitcoin is being used as a means of payment rather than being purchased as an investment, is supported by Lord Reid’s analysis in United Railways, which was cited by Lord Wilberforce in Miliangos as demonstrating that “in logic, he [Lord Reid] saw good reason for treating money claims separately”.70 Lord Reid drew the distinction between a scenario where foreign currency was a commodity (like a cow) and where the market measure of damages would apply and, at the other extreme, an agreement to lend dollars in America. In the latter scenario, the dollars could not be treated like a cow. Lord Reid said:71 The original reason for the rule has no application in such a case . . . dollars lent in America are not a commodity, and if they are not repaid at the due date there can be no question of an American going into the market and buying dollars to replace those which the debtor failed to deliver.

Lord Wilberforce’s solution avoids this problem. The court can (and should) conclude that damages are not an adequate remedy and delivery in specie (specific performance) should be ordered (with the alternative of the payment of the sterling equivalent at the time of payment). Once this is appreciated as an important foundation of the Miliangos decision, Bitcoin need not be a currency to make a judgment ordering a payment in Bitcoin. The following example illustrates why logic favours this approach. Alice is a selfemployed coder. She agrees to write an application for Bob in exchange for 0.5 Bitcoins. Alice does the work. Bob does not pay. Applying the “deemed mitigation” approach which underlies the market measure rule applied to sale of goods does not work.72 Alice did not contract to have 0.5 bitcoins rather than the fiat currency equivalent; she contracted to be 0.5 bitcoins better off. The simplest and most natural solution to the problem is for the court to order delivery of 0.5 bitcoins in specie (with an alternative for payment in sterling). This alternative for payment in sterling would, just as it did in the Miliangos case, answer any objections based on procedural reasons such as the supposed difficulty in supervision or execution.73 The loan scenario (like that contemplated by Lord Reid) also points logically to the fact that a defaulting borrower of Bitcoin should be ordered to transfer Bitcoin. Two (conflicting) objections to this approach are identified by Professor Dickinson.74 His view is that [a]n obligation to deliver a cryptocurrency such as Bitcoin . . . is more closely analogous to the performance of a service than the payment of foreign currency – it can only be discharged by initiating a transaction within the cryptocurrency system. The ordinary remedy in English 70 Miliangos, at 461B-C (Lord Wilberforce). 71 United Railways, at 1051. 72 The idea that because the purchaser of a commodity could, if the commodity is not delivered, reasonably as the obvious step in mitigation make itself whole by immediately going into the market and purchasing a substitute then damages for breach should be calculated on the assumption that this has been done. The rule is also rationalised as being concerned with property valuation. 73 This is the objection to specific performance floated by Professor Dickinson in “Cryptocurrencies and the Conflict of Laws”, in D. Fox and S. Green (eds) Cryptocurrencies in Public and Private Law (Oxford University Press 2019), § 5.92. 74 A. Dickinson, “Cryptocurrencies and the Conflict of Laws”, in D. Fox and S. Green (eds), Cryptocurrencies in Public and Private Law (OUP 2019).

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josephine davies law for non-delivery of a cryptocurrency will be a claim for unliquidated damages for breach of contract.

Professor Dickinson also cites the views expressed in an earlier text that Bitcoin would be treated as a commodity.75 The latter objection has already been addressed – the court would and should be able to distinguish between (a) situations where Bitcoin is a payment method and (b) other cases where it is treated as a commodity. Professor Dickinson’s objection that provision of Bitcoin is performance of a service means that the market measure (which is problematic) would not apply automatically to non-payment but that the court would be required to enquire into what damages had been caused (subject to remoteness and causation) by the non-payment of Bitcoin. This could be a considerably more involved process than an order for specific performance of the sort suggested earlier. VI. Support for the Approach From Arbitration and Other Jurisdictions? The commercial community’s acceptance of the idea of judgments in Bitcoin may be said to be demonstrated by several American arbitration awards. Earliest in time are three awards, issued by a US online arbitration system in 2014, pursuant to which a defaulting borrower of Bitcoin was ordered to make payment to the claimant in Bitcoin. In 2019 the Amsterdam Court of Appeal considered whether these should be enforced.76 The support to be gained from these awards is only slight because it appears the merits of the claim were not argued because the defaulting borrower did not contest the claim. This led the Amsterdam Court of Appeal to refuse enforcement of the award in the Netherlands on the grounds that the principle of audi alteram partem had been violated.77 On the other hand, nothing suggests that the Amsterdam Court regarded an order for payment of Bitcoin as inherently problematic. More support may be gained from another arbitration award, again issued by an online arbitration court located in the USA. That award ordered a Greek national to make payment to a German national of a Bitcoin sum which had been loaned to him. In September 2021, however, the Western Continental Greece Court of Appeal confirmed a lower court’s decision that the award would not be enforced. Enforcement was refused on the basis that it was contrary to Greek public policy. The public policy objections reportedly rested on the proposition that importing Bitcoin (or other cryptocurrency) into Greece favoured tax evasion and facilitated economic crime.78

75 M. Howard, J. Knott and J. Kimball, Foreign Currency: Claims, Judgments and Damages (Informa Law 2016). 76 Amsterdam Court of Appeal, 29 January 2019 (ECLI:NL: GHAMS:2019:192, X v Y); J. van Hezewijk, “The future is now (or is it?): net-ARB, Inc online award not recognised due to lack of due process” (Lexology, 2 May 2019) accessed 6 December 2022. 77 Amsterdam Court of Appeal, 29 January 2019 (ECLI:NL: GHAMS:2019:192). 78 See A. Anthimos, “Bitcoin and public policy in the field of international commercial arbitration” (ConflictOfLaws.net, 27 April 2022) accessed 6 December 2022; and D. Papayiannopoulou and E. Mizrahi, “Bitcoin and public policy in international arbitration enforcement” (Norton Rose Fulbright, 8 June 2022) accessed 6 December 2022. 79 GBM Global Holding Co Ltd v Ivan Romanov & Others, AAA Case No. 01–21–0016–1249 (Jus Mundi) . 80 Probably not even in El Salvador or the Central African Republic. 81 The Silk Road was unusual in permitting purchase only in Bitcoin. 82 See HM Revenue & Customs, Cryptoassets Manual (Internal manual, published 30 March 2021, updated 22 February 2022) accessed 6 December 2022. 83 President of India v Lips Maritime Corporation [1986] 1 AC 395; also, Elkamet v Saint-Gobain Glass France (No.2) [2016] EWHC 3421 (Pat); [2017] FSR 23 (Arnold J).

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josephine davies Professor Dickinson’s suggested approach of a claim for damages for non-performance is more likely to be appropriate. It might be objected that the Miliangos decision did not require any assessment of whether the currency in which the contractual payment was due to be made was the currency in which the claimant operated its business. It is quite possible that the paying party may chose the currency of payment and the receiving party will be obliged to convert it to their own currency of business. In that case similar problems to those highlighted earlier could arise. The point was not considered in the Miliangos case itself because in that case, as Lord Wilberforce highlighted at the start of his speech, the contract was governed by Swiss law, the money of account was Swiss francs, the money of payment was Swiss francs, the unpaid party was a Swiss national and the yarn which had been sold was produced in Switzerland.84 It was important to the demands of justice that “His contract has nothing to do with sterling: he has bargained for his own currency and only his own currency”.85 One is left to wonder if Miliangos would have been decided in the same way had everything not been so Swiss. The decision which followed in 1978, The Despina R,86 suggests that the Miliangos decision might, at least, have been more nuanced in such a situation. In The Despina R, the House of Lords (again with Lord Wilberforce giving the leading speech with which all others agreed) decided two appeals addressing the principles upon which the currency of judgment for tortious damages and breach of contract should be assessed. So far as tortious claims were concerned the only real choice was between the currency of the expenditure and the currency in which the claimant bore the loss. The possibility of judgment in sterling applying the breach-date rule was briskly rejected by Lord Wilberforce because “[t]o fix such a plaintiff with sterling commits him to the risk of changes in the value of a currency with which he has no connection”.87 As for the other options, Lord Wilberforce’s opinion was simply that the claimant would need to prove that loss was naturally and foreseeably borne in a particular currency (whether that be the currency in which the claimant conducted its business or the currency of expenditure).88 The position adopted was similar in relation to claims for breach of contract. The only nuance being that the court must first ascertain whether the contract itself was in terms that showed the parties had accepted a particular currency of account in which all payments, including payments of damages, would be made.89 Absent such a choice, the damages “should be calculated in the currency in which the loss was felt by the plaintiff or ‘which most truly expresses his loss’”, and, as in the tort context, this was not limited to the currency in which the loss “first and immediately arose”.90 This would therefore be applied subject only to questions of remoteness.91

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Miliangos, at 457 (Lord Wilberforce). Miliangos, at 465. [1979] AC 685. The Despina R, at 697 (Lord Wilberforce). The Despina R, at 699. The Despina R, at 700–701 (Lord Wilberforce). The Despina R, at 701 (Lord Wilberforce). The Despina R, at 705 (Lord Russell).

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judgments in bitcoin? The approach which flows from The Despina R should be equally applicable to claims for payment in foreign currency since these can be framed as damages claims identifying, with suitable justification, why the currency of loss is not the currency of contractual payment. VIII. Problem: International Enforcement A judgment is only useful if it can be enforced. Domestically, the problem can be resolved in the same way it was in Miliangos – by payment of the sterling equivalent. If international enforcement is likely to be needed, however, a judgment in cryptocurrency may be useless. This is illustrated by the 2021 Greek enforcement decision already described. Again, in the People’s Republic of China, an award which is given in fiat currency in lieu of cryptocurrency may be refused enforcement on the grounds of public policy because PRC laws prohibit the exchange of cryptocurrencies into fiat currencies.92 However, it is also notable that in another case, the Shanghai First Intermediate People’s Court recognised Bitcoins as property and, although (or perhaps because) their fiat currency value could not be determined based on an exchange price, the court ordered specific Bitcoins to be transferred.93 IX. Conclusion No legislative reform is needed to permit the English court to give judgments requiring the transfer of Bitcoin. There is no jurisdictional reason why the court should not give such judgments in appropriate circumstances. Proprietary claims are most likely to be the ones best satisfied by a judgment for Bitcoin. Failures to pay or deliver Bitcoin are much more likely to be properly compensated by a judgment in fiat currency. That is, in essence, because Bitcoin is highly volatile and is not really a means of exchange. These are the same reasons why it cannot truly be regarded as money.

92 S. Leong, “Part II: Key issues in international arbitration of cryptocurrency disputes” (Martindale, 12 April 2022) accessed 2 December 2022; B. Wang and X. Bai, “Award concerning Bitcoin exchange – bit too risky to enforce?” (Kluwer Arbitration Blog, 2 April 2021) accessed 2 December 2022; T. Chang, Speech at ADR in Asia Conference 2021 (Department of Justice for Hong Kong SAR, 27 October 2021) accessed 2 December 2022, reporting Shenzhen Intermediate People’s Court case Gao Zheyu v Shenzhen Yunsilu Innnovation Development Fund Enterprise (LP), Li Bin (2018) Yue 03 Min Te No. 719 (April 2020), a decision which has apparently been approved by the People’s Supreme Court. 93 Li & Bu v Yan, Li, Cen & Sun (2019) Huu 01 Min Zhong No. 13689, reported in S. Leong, “Part II: Key issues in international arbitration of cryptocurrency disputes” (Martindale, 12 April 2022) accessed 6 December 2022.

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PART II

EMERGING LIABILITY REGIMES AND DAMAGES

CHAPTER 8

Remedies for Smart Legal Contracts Rectification and Rescission Reconsidered Dr Adam Sanitt I. Introduction Smart legal contracts are legally binding agreements where at least some of the performance is automated, so that it is entirely outside the control of the parties to the agreement. New technology has taken them from a theoretical curiosity to an essential and ubiquitous part of the rapidly developing crypto financial system. Meanwhile, legal systems are struggling to incorporate them into existing doctrines of contract law. Smart legal contracts operate, at least in part, automatically through computer code deployed on systems that are outside the control of the contracting parties. This code, although it may be implemented directly by those computer systems, is generally less comprehensible to the contracting parties than natural language. The prospect of contracts being automatically and unstoppably performed in ways not anticipated poses difficulties for the application of legal remedies. In this chapter, we show that rectification and rescission are compatible with smart contracts and arguments to the contrary are incorrect. Our key insight is that unstoppable future performance is analogous to past performance, and this provides a foundation to extend existing remedies to this new paradigm. Smart legal contracts have been realised through the application of distributed ledger technology.1 We aim to take a technology-agnostic approach – this is a legal not a computer science chapter – but it may be helpful to mention some of the key characteristics of smart contracts as they have been implemented. Smart legal contracts contain executable code installed on a computer. This code may be compiled into executable form – that is, understandable by a computer – from source code – that is, text understandable by a human or, at least, a computer programmer – and it may be supplemented by other natural language documents that have legal effect and may be interpreted in the usual way as part of the contract. The computer that runs the code is a distributed system consisting of multiple copies of timestamped records that are maintained in an identical state through a pre-established system of consensus enforced by cryptographic protocols. That is, the computer is not a physical object but a shared system. The computer is, accordingly, under the control of no individual person and cannot be stopped or altered. The code will typically effect changes to this computer system, such as the transfer of assets recorded on the system. These changes, and the code itself, are permanent and unalterable.

1 We use the terms distributed ledger technology, DLT and blockchain synonymously throughout – this is a slight abuse of terminology in the service of clarity.

DOI: 10.4324/9781003376347-10

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dr adam sanitt Rectification is a remedy that, with its emphasis on amendments to physical documents, appears ill-suited to dealing with smart legal contracts. However, we show that the criteria for its use are peculiarly relevant to smart legal contracts and that its mode of action can be adapted to them. Similarly, we show how rescission applies to smart legal contracts. We end with a mention of how dispute resolution mechanisms may be incorporated into smart legal contracts – these mechanisms should be designed to work smoothly with rectification and rescission as well as other remedies. The unstoppable and automated nature of smart contracts turns out to be no impediment to rectification or rescission. Determining this requires a careful analysis of the operation of distributed ledger technology and smart contracts and how to extend traditional legal remedies to that technology. II. Rectification The remedy of rectification corrects a written document to correspond to the true agreement between the parties. The remedy applies when there exists a “written instrument” which, through mistake or misapprehension, does not express the accord between the parties.2 And numerous examples make it clear that a written expression is a necessary precondition for rectification – it does not affect legal rights and obligations without the imposition of a physical document that may be amended. This point has been repeatedly made. “[R]ectification does not alter the bargain itself; it merely alters the written record of the bargain”.3 Again, “Courts of Equity do not rectify contracts; they may and do rectify instruments purporting to have been made in pursuance of the terms of contracts”;4 yet again, “[E]quity has power to rectify a written instrument so that it accords with the true intention of its maker”.5 This is reflected in the form of an order for rectification: it will set out the precise words that are to be amended in the document and may require that a copy of the order is to be physically attached to the document. A. Whether Rectification Applies to Smart Contracts This raises the question as to how this form of order can apply to a piece of computer code that is beyond the reach of the parties – that is, where they do not have the power to amend it or to prevent it from continuing to run. (We consider later how parties may be given powers to do these things in specific situations, but here we deal with the general case.) At first, it appears inapplicable. The document cannot be rectified. But, in fact, a closer look at how rectification works shows that it may still be used. The end result of rectification is to alter the legal rights and obligations of the parties. So why does the Court not just do so directly, rather than by interposing the rigmarole of correcting a physical document? In fact, in some situations we shall consider later, it does act directly, but the amendment of a physical document is required when that physical document 2 Racal Group Services Ltd v Ashmore [1995] STC 1151, 1154 (Peter Gibson LJ). 3 Kilcarne Holdings Ltd v Targetfollow (Birmingham) Ltd [2004] EWHC 2547 (Ch); [2005] 2 P & CR 8 at [231] (Lewison J). 4 Mackenzie v Coulson (1869) LR 8 Eq 368, 375 (James V-C). 5 Giles v Royal National Institute for the Blind [2014] EWHC 1373 (Ch); [2014] STC 1631 at [25] (Barling J).

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remedies for smart legal contracts has a particular legal status. There exists a legal rule which creates legal rights and obligations depending on the form of that document. And the rationale for that rule makes amendment of the physical document necessary. Rectification has been applied to a wide variety of documents: for instance, a voluntary settlement creating a discretionary trust,6 a disclosure letter qualifying warranties in a share purchase agreement7 or a notice of severance of a joint tenancy.8 In all these cases, the document itself creates legal rights and obligations, including rights and obligations affecting third parties, and also provides evidence of those rights and obligations. For instance, a voluntary settlement involves trustees and beneficiaries who may not be party to the original document and will rely on it to determine their rights and obligations. There is a clear logic in requiring the document itself to be amended rather than simply determining that the rights and obligations are other than set out in it. The situation we are principally concerned with is the rectification of a contract. Here, the physical manifestation is generally a written and signed document (although, as we have seen, it may be a notice given under a contract). The legal rule that applies to this sort of document states that where an agreement has been rendered into a signed written document, the process of objective interpretation shall apply to that document. We consider later the circumstances where rectification may be granted, but what is crucial is that rectification is distinct from interpretation and the courts signal this difference by applying rectification to the written document rather than directly to the rights and obligations of the parties. That is, the chain of reasoning starts with the process of offer and acceptance that creates a contract, then the expression of that accord in signed writing and finally the interpretation of that written document to determine the rights and obligations of the parties. Rectification intervenes at the stage of the written document, altering the relevant facts – the content of the document – so that the process of interpretation takes a different path, thereby altering the rights and obligations of the parties. This is not an empty fetishisation of the physical document. The document performs a legal role, and it is in the capacity of fulfilling that legal role that it is changed – what happens to the document itself is incidental. This is shown by the following: (1) The effects of rectification do not date from when the document is modified but operate retrospectively. In Craddock v Hunt,9 a signed agreement for the sale of land was followed by a deed of conveyance carrying out the terms of the agreement. The Court of Appeal held that both the agreement and the deed of conveyance could be rectified, even though the conveyance was executed in compliance with the written agreement before it was rectified: “After rectification the written agreement does not continue to exist with a parole variation; it is to be read as if it had been originally drawn in its rectified form”.10 It was further argued that where the Statute of Frauds required signed writing, e.g., for the sale of land, this could not be satisfied by the rectified document. The Court of Appeal held that the Statute of Frauds was satisfied – the effect of rectification was that the creation of legal rights and obligations was determined as if there had been an 6 Re Butlin’s Settlement Trust [1976] Ch 251. 7 Persimmon Homes Ltd v Hillier [2019] EWCA Civ 800; [2020] 1 All ER (Comm). 8 Lee v Lee [2018] EWHC 149 (Ch); [2018] WTLR 197. 9 [1923] 2 Ch 137. 10 Per Lord Sterndale MR at 151.

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dr adam sanitt appropriate signed writing when the document was first completed “when the memorandum has been rectified the signatures must be taken as affixed to that document”.11 That is, for the purposes of applying a legal rule that requires a certain physical state of affairs, relating to the form and content of a physical document, rectification allowed the Court to consider that state of affairs subsisting, notwithstanding whether it did or not. And while the Court would order the physical state of affairs to be brought into correspondence with the presumed state, this was not a precondition to applying the legal rule on the basis of the presumed state. The fact that the Court would apply the presumed state retrospectively makes this distinction completely unarguable. This principle has been applied in numerous cases since. It extends to the doctrine of estoppel by deed – that is, rectification will prevent a party from relying on estoppel based on the original form of the deed.12 It applies to statutory rules concerning interests in land, although these may be modified by rules expressly modifying rectification in this context.13 And it applies to tax rules that depend on the date an instrument is executed, although subject to a judicial reluctance to allow rectification where there is not a genuine issue between the parties.14 Again, these are all legal rules that hinge on the form of a physical document and that are modified by rectification both before and after that document is actually changed. (2) The effects of rectification may be felt even though the document has not actually been rectified. In The Nile Rhapsody,15 the Court of Appeal gave effect to an agreement for the jurisdiction of the Egyptian courts that had been agreed orally but mistakenly left out of the written contract. The defendant sought a stay of proceedings on the basis of the Egyptian jurisdiction agreement but not rectification of the written contract to reflect this agreement, as they were concerned that this might lead to arguments that they had submitted to the jurisdiction. The Court of Appeal stayed English proceedings without actually ordering rectification, holding that their equitable jurisdiction allowed them to treat a transaction as rectified without actually rectifying it: In many cases, where the document is a document of title, or is a contract which is still to be performed, it will be necessary to rectify the document either by the execution of a substitute document or by the insertion of a correction or by the attachment of a sealed copy of the order for rectification. In the present case, however, it seems to me quite unnecessary that any formal rectification should take place. Equity can treat as done that which ought to be done. Once it has been found that there was an oral agreement relating to jurisdiction, the Court should give effect to it.16 The Court of Appeal distinguish past and future performance, specifying that rectification is still required for future performance. Clearly, where legal rights and 11 12 13 14 15 16

Per Lord Sterndale MR at 152. Greer v Kettle [1938] AC 156. Law of Property (Miscellaneous Provisions) Act 1989, s 2. Allnutt v Wilding [2007] EWCA Civ 412; [2007] BTC 8003. [1994] 1 Lloyd’s Rep 382. Per Neill LJ at 389.

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remedies for smart legal contracts obligations are being determined based on a past state of affairs, if the Court determines that the past state of affairs should have been different, it can modify the rights and obligations directly and changing the state of affairs going forward appears superfluous: as Buckley J has said, “it seems to me that it would not be necessary for the court to go through the double process of first rectifying the deed and then giving effect to it as rectified”.17 Interestingly, this was not quite the situation in The Nile Rhapsody. The jurisdiction agreement was a continuing obligation that still bound the parties, not a one-off obligation that may or may not have been performed in the past. Yet the Court of Appeal held that it fell within the rule that allowed the effects of rectification without actual rectification being ordered. In fact, the category that they carve out of this rule is legal rights and obligations that are tied directly to the continuing physical form of a document. This is shown by the explicit mention of “document of title” as a category that would need actual rectification. The form and content of a document of title has direct, legal, non-discretionary consequences. Third parties rely on those contents to determine the applicable rights and obligations. It is also shown by the reasoning in The Nile Rhapsody which turns on the discretionary approach to determining stays of jurisdiction. That is, the relevant legal rule does not impose a stay automatically depending on whether a jurisdiction agreement does or does not exist; rather, the Court has a discretion whether or not to impose a stay and a jurisdiction agreement is simply an important factor in the exercise of that discretion. Rectification itself is also a discretionary remedy. Therefore, there was no impediment to applying the Court’s discretion directly to the rectified form of the agreement without actually ordering rectification. (3) Tying rectification to the physical document allows a clear distinction between the doctrines of rectification and interpretation. Interpretation of a signed document seeks to determine legal rights and obligations based on the objective intention of the parties without recourse to parole evidence as to their prior negotiations. Rectification allows a far wider range of evidence in order to construct a different agreement based, in some cases, on the subjective intentions of the parties. Without going into the details of the recent controversy as to the scope of rectification and particularly the role of subjective intention,18 it is crucial that the two doctrines are clearly delineated. Indeed, rectification often operates by way of exception to the limitations built into the process of interpretation, particularly in the use of extraneous evidence and the relevance of subjective intention. Earlier, we set out the chain of reasoning via the expression of written accord that is then subject to interpretation. If the rules of rectification applied directly to determine contractual rights and obligations without reference to that written expression, it would threaten to undermine interpretation by blurring the boundaries between the two doctrines. Accordingly, the courts’ insistence on requiring amendments to the physical document can be seen as a preservation of the document’s role as a prerequisite to legal rights and obligations rather than its effect on the physical world. 17 Wilson v Wilson [1969] 1 WLR 1470, 1474. 18 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101, Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 2 All ER (Comm) 142 and FSHC Group Holdings Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361; [2020] Ch 365.

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dr adam sanitt The common theme of these different aspects of rectification is that when the courts require amendment of a physical document, they do so to satisfy a legal rule that embodies the physical document itself with certain legal consequences. Courts determine legal rights and obligations on the basis of the factual circumstances – normally, they do not seek to alter the factual circumstances so as to justify their judgments. As we have seen, this allows them to determine rights and obligations based on a written document retrospectively, as if it had been altered at some point in the past, applying the rules of interpretation to a state of affairs that did not actually exist. And where the ongoing physical document is not necessary to applying a particular legal rule, such as a power to stay proceedings that is in any case discretionary, the court will simply assume the new state of affairs exists without requiring it be brought about. Where the courts do insist on actual change, then, it is not just to conform a physical document to an assumed state of affairs used to infer legal rights and obligations, because the Court can do that without changing the document. Rather, it is because there is a legal rule that states the document itself embodies a legal obligation – the document is what may be termed as “legally performative”. One example is a document of title. Another is a document to which the Statute of Frauds applies, such as an agreement for the sale of land. These rules are often for the benefit of third parties, who rely on the form and content of the document for an accurate picture of the relevant rights and obligations, such as whether a guarantee exists or who owns a tangible asset. Even where the courts apply rectification retrospectively, they will exercise their discretion to avoid prejudicing third parties who relied on those rules, such as bona fide purchasers for value without notice.19 The conclusion is that rectification is subject to an actual change to a document not where the physical document is performative, in the sense of having effects on the real world, but only where it is legally performative, meaning that the document itself embodies a legal obligation. In this situation, the connection between the legal right and the document is so close that the courts do not change the legal right without also changing the document and ensure that those who relied on this connection are protected. Finally, we turn to how this affects smart contracts. Consider a chunk of source code that, by appropriate means, is rendered part of a signed, written agreement between the parties and is also, by other appropriate means, compiled or interpreted into a series of commands that are or will be carried out by a computer system. Assume that this system is immutable, and the commands are irrevocable – perhaps because it is part of a public blockchain. There is an important and fascinating question about the relationship between the (legal) interpretation of the contract and the executable commands to be carried out by the source code in the contract, but we put this to one side to focus on rectification rather than interpretation. The source code in this example is performative in two different ways. By virtue of legal rules that accord a special status to signed writing, it creates legal rights and obligations. By virtue of a public blockchain or other technical systems, it creates physical

19 Thames Guaranty Ltd v Campbell [1985] QB 210. Note that, for interests in land, the position is modified by the Land Registration Act 2002. For an example not involving land, see AMP (UK) Plc v Barker [2000] EWHC 42 (Ch); [2001] OPLR 197 (rectification of an occupational pension scheme allowed as scheme members had not given consideration specifically for the additional rights removed by rectification).

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remedies for smart legal contracts or electronic acts carried out or to be carried out. But there is no connection, from the perspective of the law of rectification, between these two things.20 It is tempting to pursue the analogy between these two and conclude, wrongly, that source code contained in a contract cannot be rectified. Once the source code has been compiled and loaded as executable code into a public blockchain, performance is inevitable. It is too late to order a change to the source code – the relevant acts will still be carried out automatically. But, as shown earlier, rectification is not aimed simply at preventing physical acts. The paradigm example is rectification of past acts, rectifying a document with retrospective effect. Acts in the past cannot be changed, but the legal rights and obligations are amended retrospectively – so prior performance by one party could now constitute a breach of contract – and the document is amended prospectively. Similarly, the conduct in crystallised form embedded in the blockchain – whether past or future – is irrelevant to the availability of rectification. What is being amended by rectification is the legally performative document, not the computationally performative document. What the courts do not require is that the physical document be amended in the past (presumably using some form of time travel); nor will rectification be defeated if there is one particular physical copy of the document that cannot be amended. Stated in this way, this proposition appears obvious, but commentators have struggled to apply it to permissionless distributed ledger technology.21 In particular, rectification does not require that blocks in the blockchain be replaced or deleted so that the copy placed on the blockchain at some point in the past is no longer there. This would be the equivalent of requiring the physical document to be amended in the past. The blockchain is immutable precisely because it is a record of the consensus as to reality shared by its users. Changing that record would be to change past facts accepted by that consensus, effectively requiring the users to discard that blockchain entirely (and replace it with a different one). Rectification may require changing a document (and, as we have seen, may give retrospective legal effect to that change), but the equivalent of that – in blockchain terms – is adding a new block with a new copy of the contract, not replacing the old block. Similarly, while courts will order a particular copy of a document to be physically amended if it has some inherent legal effect, the fact that a copy of a contract – one with no legal status above any other copy – is unamendable will not prevent rectification. The fact that commands automatically executed by a computer system on the basis of a smart contract on the blockchain will continue to be executed after rectification is irrelevant – those commands will simply now be out of compliance with the contract, just as performance inconsistent with a rectified contract will be retrospectively considered breaches of contract.

20 When it comes to interpretation, however, the connection between these two aspects of written contracts including source code may be extremely important. The courts are yet to determine how executable instructions created by source code are to be used in interpreting a contract. The Law Commission has suggested adopting the viewpoint of “the reasonable coder”, who will then determine what executable instructions should be created by the code and use this to influence its legal interpretation: Law Commission, Smart Legal Contracts Advice to Government (Law Com No 401 2021). But note that this is not quite the same as comparing the actual executed instructions to the legal rights and obligations. 21 See, for example, many of the comments in the Law Commission, Smart Legal Contracts Advice to Government, (Law Com No 401 (2021)). The Law Commission itself, while occasionally expressing cautious sympathy with these views, is careful to draw attention to the retrospective effect of rectification and its practical effects.

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dr adam sanitt Stating what is not required by rectification is perhaps less useful than attempting to state what is required. We turn to this question next. B. How Rectification Applies to Smart Contracts Courts should apply rectification to source code as follows. Assuming that the conditions for rectification are satisfied and the court has determined the correct text of the source code, it may give an order in the usual form for rectification of the source code. The correct text may be included in the form of order itself.22 In some circumstances, the court may also order the agreement to be re-signed by the parties or for the new wording to be appended to a physical form of the agreement.23 This approach is used for rectification of documents where the physical form or particular instance of the document plays a legal role, but not generally for written agreements. A signed physical document does trigger legal rules – for instance, as evidence of a legal contract that prevents prior negotiations from being used to determine the content of that contract. But the court order itself can be used as evidence of the correct content of the written document. In particular, the rule according special status to signed written agreements only affects the parties to the contract and so there is no danger of any third party relying on the unrectified form of the document to their disadvantage. In practice, courts do not generally impose any extra requirements in the rectification order and simply apply the new wording straight away to determine the rights and obligations of the parties even, as we have seen, retrospectively. In most cases, then, the rectification order will stand on its own to determine what the correct source code should have been, and the rights and obligations will be determined in accordance with this correct version. Even where a rectification order requires changes to an existing physical document, that is only so that legal rights and obligations conform to the legal rule that depends on the form of that document. Here, that is a contract that includes source code – simply a written agreement. Crucially, it is not a particular set of instructions in the process of being carried out by a computer. Of course, once the source code has been rectified, the instructions will not correctly carry out the source code, just as past actions carried out by the parties themselves do not conform to a rectified agreement. The rectification order does not seek to change past or future actions of the parties – it only changes their legal rights and obligations. Where those actions no longer correspond to the rights and obligations, further remedies – such as damages – may become available. The same will apply to instructions carried out by a computer – whether before or after the rectification order is made – that similarly fail to correspond. Where the court is concerned about the effect on third parties, there is a simple solution to ensure appropriate notice of the rectification is provided to the world: it may order that a note of the amendment be applied to the blockchain. Parties may choose to supplement this with a new smart contract that will bring the overall set of automated actions into compliance with their legal rights and obligations, as determined by the court. In fact, 22 D. Hodge QC, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (2nd edn, Sweet & Maxwell 2010). 23 Ibid App 1–09, where the order of rectification in respect of a will contains the requirement that it be permanently affixed to the grant of probate of the will.

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remedies for smart legal contracts it would be prudent to equip a smart contract in advance with the appropriate facility to allow the parties collectively to make this sort of change – we amplify this suggestion later. Permissionless distributed ledgers are in this sense ideal for dealing with the issue of notice to third parties – the shared consensus is available to all users with precise timestamping. Instead of promulgating an order for rectification and adding some ad hoc requirements for further publication, the court will order that the amendment be published on the blockchain.24 This clean approach may encourage courts in ordering rectification. In conclusion, an order for rectification may be granted in respect of a smart contract that includes source code. The legal rights and obligations created by the smart contract will be amended by the rectification so that they may no longer be synchronised with instructions carried out by computers that were instantiated by that source code. The remaining question is, given the weighty requirements for the remedy of rectification, why its availability should be so crucial for the success of smart contracts. This is the question we turn to next. C. When Rectification Applies to Smart Contracts Contracts recorded in written form are accorded a special status. Despite the manifold imperfections and ambiguities of natural language, it is seen as a more accurate method of recording a complex agreement than, for instance, witness evidence of oral negotiations. Signed writing is then used as the basis of legal rights and obligations through the process of contractual interpretation. The risks of interpretation going badly astray are minimised by the explicability of the written agreement to the parties and the formal procedures around execution of contracts. But it is exactly here that smart contracts differ. There are many variations of smart contracts: mixed natural language and code, formalised natural language that is partially machine readable, pure code, code with a reference to natural language terms and conditions, and so on. What they all have in common is a section of the contract that is in written form but not necessarily directly understandable by the parties. Whatever the process of contractual interpretation produces as a, necessarily hypothetical, measure of the objective intention of the parties, the chance that this does not correspond to what they expected is much higher than for contracts purely written in natural language. Although the background “factual matrix” is available for the process of interpretation, prior negotiations and other extrinsic evidence of the intention of the parties are excluded. This has clear practical advantages in commercial certainty and predictability where the parties have chosen to comply with the formality of creating a written contract. Accordingly, this exclusion is applied strictly. It extends not only to the contract as a whole but to particular words and phrases. The modern statement of this rule is set out in Chartbrook Ltd v Persimmon Homes Ltd25 by Lord Hoffmann: The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact 24 The court has already adopted this approach for service of process: see D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch); [2022] 6 WLUK 545. 25 [2009] UKHL 38; [2009] 1 AC 1101.

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dr adam sanitt which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.26

Its applicability to individual words and phrases was emphasised by Leggatt LJ in his summary of the rule by Leggatt LJ in Merthyr (South Wales) Ltd v Merthyr Tydfil CBC:27 What is not permissible, as the decision of the House of Lords in the Chartbrook case confirms, is to seek to rely on evidence of what was said during the course of pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean. It is also clear from the Chartbrook case that it is not only statements reflecting one party’s intentions or aspirations which are excluded for this purpose but also communications which are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense.28

And this statement of the law was adopted in Schofield v Smith,29 where, for example, the Court of Appeal refused to allow evidence of discussions between the parties as to the scope of a settlement agreement in interpreting the meaning of the defined term “affiliates” in the agreement. But it is exactly those sorts of disputes – the meaning of a particular word or phrase that is used in a stylised form, perhaps as part of source code or of a standard set of definitions intended to be easily transferable to computers – that are likely to arise in smart contracts. The test for rectification is now set out in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd,30 in the judgment of the Court delivered by Leggatt LJ: before a written contract may be rectified on the basis of a common mistake, it is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an “outward expression of accord” – meaning that, as a result of communication between them, the parties understood each other to share that intention.31

This test is – by design – difficult to satisfy. Likely modes of negotiating and concluding smart contracts may satisfy the test more often than traditional contracts. For instance, take the following cases: (1) There may be a separate series of communications between the parties that leads to a concluded written agreement that is then transcribed partly into computer code by a distinct set of people. Unlike a superficially similar process that leads to a Head of Terms agreement that is then completed by lawyers, the purpose of the transcription is not to document a written agreement but to re-write it in a form that can be transformed into a set of instructions carried out by a computer. For the purposes of rectification, the prior written understanding may be

26 27 28 29 30 31

Ibid at para [42]. [2019] EWCA Civ 526; [2019] JPL 989. Ibid at para [54]. [2022] EWCA Civ 824; [2023] 1 All ER 480. [2019] EWCA Civ 1361; [2020] Ch 365. Ibid at para [176].

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remedies for smart legal contracts used as evidence of a prior contract or as the “outward express of accord” of a common intention. (2) The parties may agree a written specification in a specific format that is designed to be given to a set of coders to produce code that conforms to that specification. Again, the written specification may serve to found a rectification claim. (3) There may be a pre-existing set of sections of code and a dictionary of written definitions and descriptions specifying pieces of corresponding code. Parties may then assemble a written document incorporating financial terms and references to the existing code. Here, there may be less extraneous material from which to manufacture a rectification claim, especially when the code is well-established, and its effects widely known. (4) Parties may give general instructions to pieces of software that automatically conclude contracts expressed entirely in code in accordance with those instructions. The legal characterisation of this sort of arrangement is yet to be fully determined – it may be seen as a contract concluded via an agency relationship (although then it is not clear who is the agent) or as an agreement in accordance with a common intention expressed at an earlier time (when the instructions are given to the software or even when the software is originally written). Given this uncertainty, the role of rectification – and mistake generally – is still uncertain, but it clearly may become significant.32 These and other permutations all demonstrate a gap between the expressed intention of the parties as determined by interpretation of the final written contract and what they understand themselves to have agreed. Objective intention is in this situation a poor proxy for the actual intention of the parties. Courts have grappled with similar situations when determining the meaning of a formula contained in a contract. When using a formula, the parties have expressed their agreement in a form which, although written, they may not understand as clearly as natural language. In Monsolar IQ Ltd v Woden Park Ltd,33 the Court of Appeal considered a formula in a rent review clause which increased the rent each year not by the inflation rate for that year but by the total inflation since the lease had been entered into. The court held that they could correct this by means of interpretation as an obvious “drafting error” that gave an “arbitrary and irrational” or “nonsensical” result (and was thus to be distinguished from an unambiguous formula that was merely extremely disadvantageous to one party, as in Arnold v Britton34). Although they were able to deal with the error using interpretation, the court accepted the reasoning of the first instance judge (Fancourt J) that, if it had not been clear both that there had been an error and what the drafters had intended to write, correction of the formula could only have been accomplished through rectification. In Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd,35 a contract contained both a formula with a narrative explanation and a series of worked examples. Where these

32 This situation has been considered in the Singapore International Commercial Court: see B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 3; [2019] 4 SLR 17. 33 [2021] EWCA Civ 961; [2022] 2 P & CR 10. 34 [2015] UKSC 36; [2015] AC 1619. 35 [2020] EWHC 1891 (Comm); [2021] 1 Lloyd’s Rep 451.

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dr adam sanitt contradicted each other, the Court found as a matter of interpretation that the worked examples were to be preferred: Narrative explanations and formulae may disguise (or at least, not make clear) their consequences when applied to various factual situations. The whole point of the “Worked Examples” is to demonstrate with clarity the consequences of the formulae.36

It is notable that the court preferred to apply its interpretive faculties to the natural language examples rather than the formula. There is an implicit recognition that, although written, the assumptions of interpretation of objective intention are less applicable to this form of expression. Although not pleaded in this case, rectification would have been another route to correct the formula. D. Conclusion on Rectification Smart contracts may be more likely to satisfy the test for rectification and more likely to need rectification in the first place. As we have seen, there is no legal impediment to applying rectification to smart contracts, even where the source code in them has been implemented and is running on an automated system. Rectification may assume greater prominence as smart contracts become more common. III. Rescission Much of what we have said about rectification applies also to rescission. The prospective effect of adding new transactions to the blockchain is not inconsistent with the retrospective effect of rescission. In fact, blockchain transactions are generally suitable for being rescinded. Rescission here refers not to rescission as a form of termination for breach of contract but only to rescission as a remedy for certain vitiating factors. The two are clearly distinct, and it is only the latter that operates retrospectively.37 Rescission is the process of avoiding a subsisting contract on account of a vitiating factor, such as misrepresentation or undue influence. The restoration involves the retransfer of property and, with some exceptions, the cancellation of future executory legal rights and obligations and those previously accrued. It is in this sense that rescission is said to operate retrospectively.38 The argument that retrospectivity limits the applicability of rescission to smart contracts is a familiar one. Blockchain entries are immutable. Once a smart contract has been entered onto the blockchain, it cannot be removed or amended, and it will continue to perform irrespective of the actions of the parties. Therefore, the argument runs, the smart contract is immune to cancellation and cannot be rescinded. This can be phrased in two different ways: either the contractual rights cannot be removed or restitution for their cancellation cannot be given. Again, the response to the argument is familiar. It turns out that legal 36 Ibid at para [74]. 37 See for example Johnson v Agnew [1980] AC 367. 38 The general definition should not conceal that there are many areas of uncertainty in the scope and application of rescission: see, for instance, J. O’Sullivan, “Rescission as a Self-Help Remedy: A Critical Analysis” [2000] CLJ 509. The fact situations we deal with here tend to avoid any of these areas and we shall only mention them when necessary.

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remedies for smart legal contracts and physical consequences are treated differently – it is only legal consequences that are changed retrospectively. As with rectification, rescission may alter existing legal rights and obligations retrospectively. In Johnson v Agnew,39 Lord Wilberforce, quoting the earlier judgment of Dixon J in McDonald v Dennys Lascelles Ltd,40 contrasted the situation with termination for breach, where “[b]oth parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired”.41 That is, the previous actions of the parties, carried out in fulfilment of a subsisting contract, are recharacterised retrospectively as not having been acts of agreed contractual performance. The court does not seek to annihilate those physical acts but only the legal rights and obligations that existed at the time they were carried out. This retrospective annihilation is carried out in an extremely limited way. Not only physical acts, but also legal consequences of those acts, are left untouched, in a way that is arguably almost too pedantic. In Bristol & West Building Society v Mothew,42 a solicitor acted for both lender and purchaser on the sale of a house. It was a condition of the loan that the purchaser should not resort to further borrowing to finance the purchase. The solicitor, through an oversight, failed to mention in its report to the lender that the purchaser was intending to take a further loan. The Court of Appeal held (among other things) that, in advancing the loan to the purchaser, the solicitor had not been committing a breach of trust. The loan had been held by the solicitor on trust and its authority to advance the money to the purchaser could have been rescinded at any time for misrepresentation. But, once the loan was made, a later rescission, even acting retrospectively, would not remove the solicitor’s authority. Giving the leading judgment, Millett LJ said: Misrepresentation makes a transaction voidable not void. It gives the representee the right to elect whether to rescind or affirm the transaction. The representor cannot anticipate his decision. Unless and until the representee elects to rescind the representor remains fully bound.43

Millett LJ recognised, however, that this analysis raised another problem: if no impediment to the transfer was imposed retrospectively, then there appeared to be no ground for tracing the funds as part of the remedy of rescission.44 His solution to this was to impose a lesser retrospective burden on the transfer – a sort of “equity” that could found tracing: The right to rescind for misrepresentation is an equity. Until it is exercised the beneficial interest in any property transferred in reliance on the representation remains vested in the transferee. In El Ajou v Dollar Land Holdings Plc [1993] 3 All E.R. 717, 734 I suggested that on rescission the equitable title might revest in the representee retrospectively at least to the extent necessary to support an equitable tracing claim. I was concerned to circumvent the supposed rule that there must be a fiduciary relationship or retained beneficial interest before resort may be had to the equitable tracing rules. The rule would have been productive of the most extraordinary anomalies in that case, and its existence continually threatens to frustrate attempts to develop a coherent law of restitution. Until the equitable tracing rules are made 39 40 41 42 43 44

[1980] AC 367. (1933) 48 CLR 457. The quotation comes from pp 476–477. [1980] AC 367, 396. [1998] Ch 1. Ibid at 22. We deal with this aspect of rescission further later.

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dr adam sanitt available in support of the ordinary common law claim for money had and received some problems will remain incapable of sensible resolution. But all that is by the way. Whether or not there is a retrospective vesting for tracing purposes it is clear that on rescission the equitable title does not revest retrospectively so as to cause an application of trust money which was properly authorised when made to be afterwards treated as a breach of trust.45

As Millett LJ recognised, this solution is not completely satisfactory. A transfer pursuant to rescinded authority is not retrospectively unauthorised, but nor does it remain entirely authorised. It occupies a middle ground, retrospectively marked with an amorphous equity that has no clear proprietary effect other than to enable tracing. More honest would have been to accept the logical consequence of retrospective annihilation of legal rights and obligations: that the transfer was unauthorised. Instead, the contractual authorisation is removed but its legal consequences remain as a ghostly imprint on the transfer. It is to be hoped that further development of the law of tracing allows a more principled approach to be taken to the retrospective legal consequences of rescission. In the meantime, the indistinct dividing line is at least clear in one respect: it limits legal retrospectivity not just to legal as opposed to physical consequences but also to a specific sub-class of legal consequences. That is, some legal rights and obligations are removed retrospectively by rescission, and some are not. What should then be abundantly clear is that rescission cancels out some – but not all – legal rights and obligations but does not seek to remove the underlying physical acts. The objection that a smart contract will continue to carry out physical acts in reliance on a contract that no longer exists, and so cannot be rescinded, accordingly carries no weight. The performance of the smart contract may be given a different legal character – it is no longer action in performance of a contract – but this does not prevent the contract being rescinded. And removal of the relevant block from the blockchain would not be the equivalent of deleting the legal right and obligation – that is accomplished by the court – but of reshaping reality so that the relevant physical acts never took place – which is, unsurprisingly, not something the court has sought to achieve. As with the earlier discussion of rectification, deletion of existing legal rights should not be confused with the annihilation of completed physical acts or, the counterpart of this in the blockchain universe, the deletion of existing blocks from a blockchain. In the absence of any ability to change the past, the remedy of rescission deals with the real-world effects of the rescinded contract through a process that seeks to restore the parties to their prior position, restitutio in integrum. The classic description of this process given by Bowen LJ in Newbigging v Adam46 is “a giving back and a taking back on both sides”. The obligation is to “put the parties into their original state before the contract”.47 Notably, this process is phrased in terms of future actions that reverse the effects of past actions, not in terms of cancelling out past actions. Initially, then, it appears well-suited to the blockchain universe, where future transactions can be created that precisely reverse the effect of past transactions.

45 Ibid at pp 22–23 (emphasis in the original). 46 (1886) 34 Ch D 582. 47 Clarke v Dickson (1858) El Bl & El 148, 154 (Crompton J).

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remedies for smart legal contracts The question of how exact the reversal must be to satisfy the requirements of rescission has been considered in a variety of different fact-situations. In equity, a precise reversal is not necessary; instead, the obligation is only to achieve a state of affairs that is “practically just”, particularly where third party rights are not affected. Nevertheless, a transfer of value is not sufficient – rescission is not simply a damages claim. Property that has been transferred must be restored to its original owner, not just its value at the date of rescission or the date of the original transfer.48 This obligation may be displaced in certain circumstances, depending on the degree of culpability of the parties, the nature of any change to the assets and the involvement of third parties – many of the cases explore these permutations. For our purposes, a relevant illustration is Gamatronic (UK) Ltd v Hamilton.49 In a dispute involving a share purchase agreement (SPA), the High Court held that rescission was not available unless the shares transferred by the SPA were returned to the seller. The buyer was reluctant to return the shares as the relationship between buyer and seller had broken down, complicating any continuing relationship as shareholders of the same company. But reluctance was not on its own a sufficient reason to depart from the general rule. It was not sufficient to transfer the value of the shares at the date of the SPA (whether or not they had subsequently reduced in value): “the effect of this would be that the parties would not be placed in their original positions or anything near it”.50 Yet this was exactly what was allowed in Mahoney v Purnell.51 A purchase of shares in a hotel business was rescinded (for undue influence) once the hotel had been sold and the company had been wound up. The High Court allowed rescission but did not require the shares to be returned – instead, the buyer received the value of the shares at the time of the sale, less an allowance for later payments and receipts. On the face of it, this is exactly the transfer of value that rescission avoids. May J justified this path accordingly: [T]ransactions may be set aside provided that the court can achieve practical justice by obliging the defendant to give up advantages while at the same time compensating him for value which he has contributed. No doubt that balance will usually be achieved by taking an account. But where that precise route will not achieve practical justice, an analogous permissible route to that end may be to balance the value which the plaintiff surrendered against any value which he has received and to award him the difference. That is not, I think, to award him damages, but fair compensation in equity as an adjunct to setting aside the agreement.52

This decision was cited with approval in Gamatronic. These cases show that there are two opposing policy considerations: placing the parties in their “original positions” and achieving “practical justice”. Gamatronic followed the former, but only because the circumstances did not justify the latter. Gamatronic and Mahoney together show that the former may be displaced by the latter when special circumstances constrain what can be 48 The question of whether the transfer of a crypto asset is treated for legal purposes as the movement of a single asset or the extinction and creation of a practically identical asset, so that its value is transferred, is still not resolved. See Law Commission, Digital Assets Consultation Paper (Law Com No 256, 2022). We use here the non-legal term “transfer” to accommodate all possibilities. We generally prefer the intuitive understanding of the crypto assets as persistent items that move but the same effect should be achieved if they are seen as immovable in essence and transferred by value to equivalent items – invocation of the “practically just” standard may be required at a slightly earlier stage. 49 [2016] EWHC 2225 (QB); [2017] BCC 670. 50 Ibid at para [219]. 51 [1996] 3 All ER 61. 52 Ibid at 89.

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dr adam sanitt returned. Examples of relevant circumstances are the blameworthiness of the defendant and conversely the innocence of the claimant, the fact that changes in the relevant property are beyond the control of either party and the absence of any detriment to third parties. Applying this to smart contracts, rescission will in fact generally be more straightforward than in relation to non-smart contracts. Where a smart contract transfers a particular on-chain asset, the same asset may be re-transferred by means of a further blockchain transaction. This is, looking just at the blockchain itself, a perfect transfer – there is no concern about “wear and tear” or damage that might apply to return of a physical object. Where the blockchain objects are fungible, as may be the case for a cryptocurrency, return of equivalent blockchain assets may also be acceptable. Where the blockchain assets have been transferred onwards, rescission may not be possible unless the assets can be retrieved or traced. Although rescission may be straightforward from the viewpoint of the blockchain itself, the linking of blockchain assets to objects or rights in the real world gives a more complicated picture (many NFTs – non-fungible tokens – fall within this category). For instance, a blockchain asset may be a token that represents ownership of an asset in the real world. Where re-transfer of the token also re-transfers the asset (as would presumably be how that blockchain was intended to operate), this would satisfy the requirements for rescission – again, in a way that is potentially simpler than for many real-world assets. But real-world ownership might not be re-transferred: the asset may have been sold or otherwise transferred in the real world or it might have been damaged or destroyed or lost. Tokens may also be used to represent ownership of legal rights. Again, re-transfer of the legal right may not automatically follow re-transfer of the token if there is some legal impediment. Even where the associated tangible or intangible asset is still associated with the token and can be re-transferred, there may have been a change in the character of that asset. For instance, the token may represent a share in a company that has been dissolved or a ticket to an event that has taken place. These potential issues with links to real-world items are similar to those considered earlier. The approach taken in Gamatronic and Mahoney shows that courts will deal with these complications by resorting to a “practically just” solution. Where the linked asset has suffered a catastrophic change in its identity or value, the Court may still order rescission but substitute return of the asset with payment of an appropriate value – as in Mahoney where the shares were rendered worthless by subsequent events. This flexibility applies directly to assets linked to the blockchain and there is no reason to think that courts will not apply rescission. There is one situation involving rescission of smart contracts which is genuinely novel. Consider a smart contract that provides for a series of payments or transfers of crypto assets. Rescission may be ordered when some of those payments are still in the future. If the smart contract cannot be amended, can the contract be rescinded? Applying the principle of “practical justice”, it is likely that courts would allow rescission in those circumstances. A further smart contract could create reverse future transfers, cancelling out the effect of the previous smart contract. This would not be quite the same as the original transfers never taking place: the crypto assets would take a round trip on each future date. Even so, courts should not let this impediment prevent them from granting rescission. IV. Dispute Resolution Mechanisms The immutability by design of smart legal contracts brings with it a certain rigidity that may complicate enforcement of remedies such as rectification and rescission. But within 110

remedies for smart legal contracts this rigidity is also an opportunity: immutable dispute resolution mechanisms may be incorporated into the original smart legal contract.53 If an arbitration clause is embedded in the smart contract, it could allow either party to initiate the appointment of an arbitrator who will then be empowered by the smart contract to transfer crypto assets or otherwise to alter the functioning of the smart contract. This has clear advantages. Enforcement is often automatic. If the arbitrator’s decision calls for the transfer of a crypto asset or a change to the smart contract, the arbitrator will be able directly to bring that about, rather than calling on the parties to do so, which may require them to seek further means of enforcement. Built-in dispute resolution mechanisms would also ease the implementation of rectification and rescission and other remedies. Future transfers of value could be cancelled; the entire smart legal contract could be removed from the blockchain prospectively. Previous transfers could be reversed by re-transfers. Overall, rectification and rescission could be accomplished more precisely than with conventional contracts. But these advantages have a price. Immutability and certainty are the reasons for using smart legal contracts – a binding arbitration mechanism threatens these attributes. In particular, if a single person can change any aspect of a smart legal contract, the parties may not trust that it is entirely immutable. Mitigation of that risk can be built into the arbitration mechanism: for instance, use of a trusted independent arbitral body, procedures for appointment and legal and blockchain recourse to the arbitrator. These mitigations may well be sufficient, but they rely ultimately not on the coherence of the blockchain and its underlying technology but on a combination of practical and legal steps to minimise risk. Balancing certainty and adaptability is not an all-or-nothing process. Different actors in the blockchain ecosystem will apply different weights to these factors. Where the smart contract is contained in a permissioned blockchain, it will already be susceptible to control and alteration by a defined group of people. The scope of this control is likely to be defined in contracts underpinning the permissioned blockchain, so that immutability is already a function of contract. In this situation, the advantages of binding arbitration are likely to outweigh the disadvantages. Indeed, operation of the permissioned blockchain itself will require a contractual dispute resolution process, and the same arbitration mechanisms could be used for both. Users of smart contracts in unpermissioned blockchains may be more reticent to hand over control to an arbitrator. Here, the immutability is a function of the consensus protocol of the entire system, which, for crypto assets such as bitcoin, is long-established and fundamental. Our discussion of rectification and rescission is primarily aimed at this sort of structure and shows that these remedies are applicable even in the absence of dispute resolution mechanisms. A new potential limiting factor in the use of built-in dispute resolution mechanisms is implicit in the Law Commission’s proposal for the recognition of crypto assets as personal property, contained in their July 2022 consultation paper on digital assets.54 To be recognised as personal property, according to the proposal, a crypto asset must satisfy certain criteria, including “rivalrousness” and “excludability” – both of these broadly relate 53 A notable attempt to regularise this process is contained in the UK Jurisdiction Taskforce’s proposed Digital Dispute Resolution Rules 2021 (available online at https://lawtechuk.io/explore/ukjt-digital-disputes-rules). 54 See Law Commission, Digital Assets Consultation Paper (Law Com No 256 2022).

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dr adam sanitt to the control that an owner can exert over a crypto asset to exclude others from it – as well as existence independent from any individual person. The proposal recognises that there may be a degree of fragility in the satisfaction of these criteria by a crypto asset – one example they give is for permissioned blockchain systems, where factual and legal surrounding circumstances might alter the characterisation of the crypto asset as property. But a dispute resolution mechanism that hands over control to an arbitrator might also create fragility in an underlying crypto asset. While this will depend on the precise facts, the interaction between crypto assets wrapped in smart contracts and applicable dispute resolution mechanisms may complicate their treatment as personal property. Another dispute resolution option arises from considering some of the practical difficulties in rectification and rescission. This is to create a mechanism that allows any transfer of crypto assets dealt with in the smart contract to be put into effect by the agreement of both parties. At first, this seems counterintuitive: if there is a dispute between the parties, then there is by definition no scope for them to agree on the disposition of any assets involved in the dispute. But many of the difficulties in resolving a dispute using rectification or rescission arise after a judicial determination, simply in bringing about what is ordered in an efficient way. At this point in the dispute – when it has been won or lost – both parties may share an interest in a quick and efficient resolution. So, it is not fanciful to suppose that they may cooperate in doing so. While this does not deal with the theoretical problems we have discussed, it does suggest a practical solution that has no cost and may apply in some situations. Whatever the attitude of the parties to these various forms of dispute resolution, it is vital that the question of an appropriate dispute resolution mechanism is addressed when the smart contract is created. V. Conclusion Smart contracts promise convenient, low-cost, secure transactions between parties, perhaps separated geographically, without the need for escrows or other mechanisms to reduce risk or substitute for trust. They assure future performance, not through legal means, but via technology which makes performance certain and independent of any person. These smart contracts may also be legal contracts: smart legal contracts. This raises the issue of how existing legal methods of enforcement apply when future performance is inevitable. We have seen that this conundrum can be resolved by appealing to an analogy with past performance. Rectification and rescission have both developed techniques for dealing with past performance, so that courts can grant these remedies even when contracts are in the process of being performed. Applying the same techniques to future immutable performance yields a simple and logical approach to enforcement. Many other issues will present themselves as smart legal contracts and other manifestations of distributed ledger technology engage with the legal system. The traditional flexible approach of the English legal system, together with some legislative nudges in the right direction where necessary, should make this engagement a success.

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CHAPTER 9

The Internet of Things in the Commercial Insurance Context – A Case for Regulation, or for Commercial Shrewdness and Judicial Creativity? Professor Barış Soyer I. Introduction There is no universally accepted definition of the term “internet of things” (IoT) but it can be broadly interpreted as a world of interconnected, sensor-laden devices and objects1 that can be used to measure and interact with the physical environment; gather information from that environment; and transmit that information to other devices, people or environments.2 On that basis, the IoT can primarily perform three functions: (i) capturing data from the surrounding environment, (ii) transmitting the data captured over an internet-connected network and (iii) enabling data collectors to process and analyse the data collected or transmitted. Given that “data” plays a prominent role in insurance, it has been mooted that the IoT might bring sizeable opportunities for insurers providing cover against commercial risks.3 The potential benefits identified have been: (i)

Enhancement of the risk-rating process as a result of gathering behavioural data relating to the risk (more granular and accurate risk assessment); (ii) The prospect of developing new insurance products (e.g., development of usebased insurance products);4 (iii) Provision of assistance in the claims process (e.g., gathering information from the surroundings which can assist in the investigation of the claim); and (iv) The potential of using the data obtained as a risk management tool (e.g., by programming an IoT device to send a notice to the owner of a vessel if an abnormal pressure in her engines is identified). It is undeniable that insurers would consider utilising any technology that could provide them an advantage in product development, risk rating and control, and claims assessment. The key question is whether any regulation is required so that such devices could be

1 S. R. Reppet, “Regulating the Internet of Things. First Steps Towards Managing Discrimination, Privacy, Security and Consent” (2014) 93 Tex L Rev 85, 98. 2 See, W. K. Robinson, “Economic Theory, Divided Infringement and Enforcing Interactive Patents” (2015) 67 FLA L Rev 1961, 1981. 3 M. Canaan, J. Lucker and B. Spector, Opting In: Using IoT Connectivity to Drive Differentiation (Deloitte University Press) https://www2.deloitte.com/tr/en/pages/financial-services/articles/innovation-in-insurance-internet-of-things-iot.html> (last accessed on 1 January 2023). 4 In motor insurance, this model is already in use with the aid of telematics. There is potentially no reason why a similar technology cannot be used, for example, in hull insurance.

DOI: 10.4324/9781003376347-11

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professor barış soyer employed without creating any unexpected social problems or unequal bargaining, or whether the IoT could be used in commercial insurance within the parameters of insurance law and principles supplemented by contractual adjustments. This chapter will argue that in commercial insurance context the latter is the case. Put differently, the risks associated with the use of the IoT as part of the insurance relationship are not a matter of public concern and should be left to parties to allocate such risks as they deem appropriate in their contracts. That said, it is not argued here that this holds true for consumer insurance. The use of the IoT in the context of consumer insurance might create privacy and human rights issues.5 It might also mean that certain individuals due to their genetic predisposition might find it difficult, if not impossible, to obtain insurance as a result of a granular risk assessment process facilitated by data obtained through the IoT (e.g., health and fitness trackers). In that case, the regulators might feel obliged to intervene to further social solidarity,6 and very few would object to such an intervention. However, it will be argued and illustrated in this chapter that commercial insurance is essentially a risk-allocation mechanism and adding an additional component to the equation, in this case behavioural data acquired on risk-related matters through IoT, does not alter the essence of that relationship. This is not to say that additional legal difficulties or coverage-related problems will not arise if the IoT are employed for various tasks by insurers. There certainly will be difficulties; but it will be argued that the legal rules and doctrines of insurance law could be applied in a creative fashion to deal with any legal difficulty emerging, and various amendments/supplements to existing policy wordings should be considered to provide a comprehensive coverage.7 To that end, after highlighting some issues that might delay or hamper the use of IoT technology in commercial insurance context in part II, the legal issues and problems that can emerge at different stages – (i) data collection, (ii) data transmission and (ii) data processing – will be elaborated in part III, with suggestions for potential solutions. II. Could the IoT Deliver Its Potential Promise to the Insurance Sector? The jury is still out as to whether there is a strong business case for commercial insurers to utilise the IoT in the process of providing insurance cover for their clients. To our knowledge, there is no robust data or study showing that the gains insurers will obtain from the use of the IoT (i.e., increase in the volume of business or reduction of the expected loss ratio) will justify a significant investment in the infrastructure needed. To be able to utilise the IoT in the marine insurance context, insurers will obviously need to invest in 5 Much of the data processed by IoT systems, particularly those in business-to-business applications, will not include personally identifying information, and thus will not raise personal data privacy issues. However, this is obviously not the case in the context of consumer insurance. 6 See, for example, T. Prosser, “Regulation and Social Solidarity” (2006) 33 Jo Law & Soc 364. 7 As the use of artificial intelligence (AI) in the insurance context becomes more common, a debate as to whether existing insurance rules and principles serve the needs of contracting parties, and the society becomes necessary. Some authors have already raised these issues: G. Meggitt, “A Leap of Faith – Insurtech and the Doctrine of Uberrimae Fidei” [2018] Jo Comp Law 261; P. Manes, “Legal Challenges in the Realm of Insur Tech” (2020) European Business L Rev 129; L. Lin and C. Chen, “The Promise and Perils of Insurtech” [2020] Singapore Jo Legal Studies; L. Barry and A. Charpentier, “Personalization as a Promise: Can Big Data Change the Practice of Insurance?” [2020] Big Data & Society 1; and B. Soyer, “Use of Big Data Analytics and Sensor Technology in Consumer Insurance Context – Legal and Practical Challenges” [2022] CLJ 165. Although it is not in the scope of this chapter to engage in that kind of debate, it is hoped that this contribution will help to raise awareness as to the need for more debate on the subject.

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the internet of things in the commercial insurance context reliable infrastructure to ensure the uptime and accuracy of sensors, transfer mechanisms and processing of such data, as well as having in-house expertise. Alternatively, they could partner with a third party IoT solutions provider, but that would also come with a cost. One should also not lose sight of the fact that employing IoT devices on board a vessel that can operate around the world is rather different from, and more complex than, putting telematics on a vehicle that is restricted to a given geographical location. Also, there will be a cost of converting IoT data into insights that can assist in a dynamic risk assessment process by actuarial models used for risk rating or pricing. Most insurance companies do not have that kind of expertise, so it is very likely that they will need to rely on third party providers, which will again increase the cost of risk assessment.8 There is also some doubt as to whether additional data obtained could, in fact, help to achieve more granular risk assessment. Those who argue that this will be the case might be ignoring the fact that the data obtained will be unstructured, that there likely will be difficulties in building such unstructured data in calculations, and that in reality such data may make little difference.9 There are also experts who believe that current actuarial models cannot fully incorporate the data delivered by IoT devices.10 In any event, more investment might be needed on the part of insurance companies to devise models that can harness the data obtained to achieve more refined risk classifications.11 III. Use of the IoT in the Commercial Context – Legal and Regulatory Issues and Potential Solutions A. Specifications of the IoT and Cyber Security Standards Used in Commercial Insurance At the moment, this is a wholly unregulated area. Insurers contemplating using the IoT as part of their business-to-business insurance products are bound by no regulatory regime concerning the specifications of such devices or the cyber-security standards expected of them. There are two primary reasons for this: first, there is no national hub with the responsibility to gather intelligence on how various disruptive technologies are impacting on social and economic affairs. Admittedly, this is not a problem unique to the insurance sector, but obviously unless any pressure comes from the government,12 the regulators (especially the Financial Conduct Authority (FCA)) will have no urgency to focus on the use of the IoT and AI in general in the commercial insurance field.13 Second, even if the relevant regulator 8 For more technical and comprehensive analysis on this subject, see, OECD, “The Impact of Big Data and Artificial Intelligence (AI) in Insurance Sector” (OECD 28 January 2020). 9 A. Prince and D. Schwarcz, “Proxy Discrimination in the Age of Artificial Intelligence and Big Data” [2020] Iowa L Rev 1257, 1273–74. 10 L. Moor and C. Lury, “Price and the Person: Markets, Discrimination, and Personhood” [2018] Jo Cult Econ 501. 11 R. Swedloff, “Risk Classification’s Big Data (R)evolution” [2014] Connecticut Insurance Law Journal 339, 359. 12 The UK government’s plan (published on 18 July 2022) is to delegate power to various regulators, but it looks like such regulators will be encouraged to take a risk-based approach when it comes to regulating AI and accordingly consider “light touch” options, such as guidance, voluntary measures and creating sandbox environments before AI technology is introduced into the wider market. 13 The FCA, with the introduction of the Consumer Duty dating from July 2013, requires retailers (including insurers) to take a more proactive approach, and it introduces an overarching customer principle that firms must

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professor barış soyer decides to act given that the cyber threat landscape evolves in a dynamic and often unpredictable fashion, there might not be adequate information available to regulators to devise robust cyber security specifications for such devices. It is often pointed out that any regulation attempt that is progressed without adequate understanding or without adequate information on risk and risk indicators is likely to contain blackspots or side-effects.14 However, the author believes that it is in the interest of the developers of such products to engage in industry-wide discussions with a view to be developing voluntary standards concerning specifications and cyber standards expected of such products. A motivating factor here could be that developing better products would open new commercial opportunities for developers as more insurers come on board. Better and more reliable products might certainly give confidence to insurers to make more use of IoT technology in the commercial insurance context. Also, such voluntary standards might come in handy when defending any potential lawsuits from third parties in tort (or actions for product liability).15 Compliance with specific industry standards are not necessarily adequate to demonstrate that reasonable care has been exercised by the developer, as the key issue in such a litigation will be whether a reasonable person in the shoes of the defendant (developer) ought to have foreseen that there was a real possibility of someone in the claimant’s position suffering the type of harm that the claimant has suffered if the defendant failed to take reasonable care.16 However, it is submitted that compliance with voluntary regulatory standards should go a long way in determining whether a defendant has met reasonable standard of care; especially as, in such new products, reliable information about the frequency and severity of particular types of accidents, and even about the real cost of particular precautions, will be unavailable.17 B. Problems and Issues Concerning Data Collection The primary objective of an IoT device will be to gather data (e.g., areas of navigation, prevailing weather conditions, condition of engine parts, etc). This data will potentially be used to monitor for behavioural change (e.g., determining whether a risk has increased or remains at the same level),18 or for extension of the scope of cover (e.g., providing additional cover when a vessel navigates in certain areas), as well as for evidential purposes (i.e., claim assessment). Given that the IoT will be used as part of a commercial insurance product, the data obtained do not come under the data protection legislation.19 Hence, no limit is imposed by law on commercial insurers regarding the manner in which act to deliver good outcomes for their customers. This is likely to cover the use of AI and related products, but at this stage it is not clear how the FCA will be able to respond to consumer complaints to the effect that AI is not used in an appropriate fashion by an insurer offering insurance products to consumers. 14 R. Baldwin, “Why Rules Do Not Work” (1990) 53 MLR 321. 15 As we shall deliberate later, it is very likely that producers or such technology will address the issue of allocation of liability with insurers using their devices for insurance purposes by contractual means. 16 Donoghue v Stevenson [1932] AC 562. 17 See, J. S. Boghetti, “How Can Artificial Intelligence Be Defective?” in S. Lohsse, R. Schulze and D. Staudenmayer (eds), Liability for Artificial Intelligence and the Internet of Things, (Nomos/Hart 2019) pp 63–76. 18 This could allow insurance companies to customise the insurance product (commonly known as “risk customisation”). 19 As far as UK law is concerned, the relevant legal framework in this context can be found in UK General Data Protection Regulation (UK GDPR), which is based on EU General Data Protection Regulation (Reg (EU) 2016/679), and the Data Protection Act 2018, designed to supplement UK GDPR. UK GDPR, Art 4(1) defines “personal data” as “any information relating to an identified and identifiable natural person”.

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the internet of things in the commercial insurance context they could use data obtained through the IoT for risk customisation or any other purpose. However, several legal problems could still arise. One important issue is the ownership of the data obtained through IoT devices placed on the insured property. This is a matter that needs to be addressed in the contract or accompanying licencing agreement to avoid any potential conflict at a later stage. One would assume that assureds would feel rather uncomfortable if ownership of data that might reveal commercially sensitive information regarding their operations is transferred to the insurers by agreement so that the insurers can commercially exploit such data. In the context of consumer insurance (in particular motor insurance where telematics is employed), we have not come across any standard insurance agreement where ownership of such data is transferred to the insurers. It should be stressed that it is debateable whether ownership claims made in contract terms will be effective.20 It is also vital that the agreement between the insurer and the assured determines issues such as: (i) how the data will be stored and to what extent the insurer is responsible for the security of such data; and (ii) what other purposes insurers could utilise such data for.21 With regard to the second point, if the matter is not addressed contractually, an interesting question arises as to whether the good faith doctrine could be utilised to restrict insurers from using data collected for different purposes. For example, in the absence of any restriction imposed by the contract, could an insurer be prevented from using data obtained from IoT devices during the claim assessment stage for risk-rating purposes during the renewal stage? It is worth noting that s. 17 of the Marine Insurance Act (MIA) 1906, following the modification made by the Insurance Act (IA) 2015,22 now stipulates that a contract of insurance “is a contract based upon good faith” without specifying any remedy. It can, therefore, be argued that good faith doctrine can be used as the basis of giving courts a right to intervene in cases such as this (i.e., where the insurers decide to use the data obtained from IoT devices for an entirely different purpose) on the basis that the insurer’s conduct in that case is unconscionable, to say the least.23 Support for this can be drawn 20 UK courts have taken the view that data are not eligible to be the subject of a common law lien (Your Response v Datateam Business Media [2014] EWCA Civ 281; [2015] QB 41) and no proprietary right is deemed to exist in the context of an email (Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886; [2013] 2 CLC 272); but with the developments in digital technology, one should expect further legal developments in this area. 21 If data protection legislation had applied in this context (i.e., if the assured had been a natural person), the relevant legislation would have expected insurers to observe several safeguards. The processing of personal data for undefined or unlimited purposes is unlawful as it does not enable the scope of the processing to be precisely delimited (Art 5 of the UK GDPR). Article 15 of UK GDPR gives the data subjects (i.e., consumers) the right to request from data controllers (insurers) more extensive information about the personal data processed about them, including the legal basis of processing, the period of data storage, information about access and other rights over the data (including the right to complain to the Information Commissioner Office). Finally, insurers engaged in data processing for risk assessment purposes would be required to engage in piracy impact assessment (Art. 35 of UK GDPR). 22 Insurance Act 2015, Section 14(3). 23 The Law Commissions explicitly recommended preserving the role of good faith ostensibly as an “interpretative principle” with one eye on future developments; see, Insurance Contract Law: Business Disclosure; Warranties; Insurer’s Remedies for Fraudulent Claims; and Late Payment, Cm 8898, SG/2014/13, Chap 30. It has been highlighted by several commentators that this takes a rather narrow view of the doctrine. See for example, B. Soyer and A. M. Tettenborn, “Mapping (Utmost) Good Faith in Insurance Law – Future Conditional?” (2016) 132 LQR 619 and M. C. Hemsworth, “The Fate of ‘Good Faith’ in Insurance Contracts” [2018] LMCLQ 143. It is also out of line with the manner in which the good faith doctrine is developing in other jurisdictions; see R.

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professor barış soyer from a number of documented cases where the courts have intervened on the basis of a lack of utmost good faith. For example, there are decisions suggesting that considerations of utmost good faith may on occasion control (and where necessary, invalidate) the exercise of rights arising under an insurance contract. One instance is the liability insurer’s invariable right to take over and control legal proceedings against the insured. In Groom v Crocker24 the Court of Appeal were in no doubt that, because of the obvious potential conflict of interest involved, insurers could only do this “in what they bona fide consider to be the common interest of themselves and their assured”.25 Hence there the court took the view that an insurer could not legitimately admit fault by the assured for reasons not of forensic tactics but to safeguard the insurer’s own private knock-for-knock arrangement; and subsequent cases have made it clear that for the same reason where liability cover is limited the insurer also owes at least some duty not to compromise the assured’s position regarding uninsured liabilities.26 Again, where an insured has been guilty of nondisclosure but the insurer has “blind-eye” knowledge of other facts which might make that non-disclosure innocuous, then there are suggestions in the Court of Appeal that it may be contrary to good faith for the latter to avoid, at least without consulting the assured.27 Drawing analogy from these cases, it can be plausibly argued that the good faith doctrine could be deployed to prevent an insurer from using data obtained for a specific purpose by utilising an IoT device for a different purpose for its commercial benefit even if the contract is silent on this matter. However, as indicated earlier, this problem can be avoided if limits on the use of the data obtained through IoT devices is placed on the insurer by express terms of the contract. C. Problems and Issues Concerning Data Transmission An IoT device usually transmits data obtained from its host and the surrounding environment through WiFi, Bluetooth mobile phone networks or the internet, where it is stored using Merkin and Ö. Gűrses, “The Insurance Act 2015: Rebalancing the Interests of the Insurer and the Assured” (2015) 78 MLR 1004, 1026–1027; B. Soyer and & A. M. Tettenborn at 631–32. 24 [1939] 1 KB 194: compare more recently Ace Insurance Ltd v Metropolitan Electrical Appliance Manufacturing Ltd [2009] HKCFI 1132 (where the duty was accepted but found not broken). 25 Ibid at 203 (Lord Greene MR); also, at 223 (Scott LJ); Cox v Bankside Members Agency Ltd [1995] CLC 671 at 680 (Lord Bingham MR); Cormack v Washbourne [2000] CLC 1039, at 1048 (Auld LJ). Sometimes, indeed, this may be expressly provided: an example is the asbestos liability policy in issue in Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd [2014] EWHC 2002 (Comm); [2014] Lloyd’s Rep I R 671, requiring the defence to be conducted “in a business-like manner in the spirit of good faith and fair dealing, having regard to the legitimate interests of the parties to this Policy and of the reinsurers thereof”. 26 Cormack v Washbourne [2000] CLC 1039 at 1048 (Auld LJ); The Mercandian Continent [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep 563 at [22] (Longmore LJ). See too the Australian decision in Distillers Co BioChemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at [51] (Stephen J). 27 Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834; [2004] QB 601 at [87] and [91] (Rix LJ), at [144] (Clarke LJ) and at [177] (Pill LJ). Here the assured was a motorist who failed to disclose a speeding conviction. Under the rating system used by the insurer, the non-disclosure would have amounted to an increase in the premium only if the assured’s wife, who was a named driver on the policy, was involved in an accident where she was at fault. In fact, the assured’s wife was involved in an accident which initially was recorded as a fault incident on the broker’s computer system, but the claim was later settled in favour of the assured’s wife and the incident was classified as a non-fault incident in the system. After the insurer became aware of the speeding conviction it sought to avoid the policy for non-disclosure, but the Court of Appeal held that it could not. These dicta were referred to with apparent approval by Rix LJ in Wise (Underwriting Agency) Ltd & Ors v Grupo Nacional Provincial SA [2004] EWCA Civ 962; [2004] 2 Lloyd’s Rep 483 at [48].

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the internet of things in the commercial insurance context cloud-based applications. The transmission process might potentially create a vulnerability for the subject matter of insurance, as it might broaden the cyber-attack surface for hackers. Imagine, for example, that those acting with malicious motives by interrupting the transmission manage to gain entry into the computer systems of an insured vessel and disable navigational aids on board, leading to grounding or a collision with another vessel. It is highly likely in this hypothetical scenario that the cyber incident (attack) is going to be treated at least as a proximate cause of the loss.28 In contemporary practice, hull policies, at least those sold in the London market, will contain a cyber exclusion worded in the following way:29 This clause shall be paramount and shall override anything in this insurance inconsistent therewith. 1. In no case shall this insurance cover any loss, damage, liability, or expense directly or indirectly caused by, contributed to by, or arising from: 1.1 the failure, error or malfunction of any computer, computer system, computer software programme, code, or process or any other electronic system, or 1.2 the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system. As a result, cover is unlikely to be available because of a vulnerability created from the transmission of data from a IoT device placed on board for insurance purposes. This certainly creates an anomaly and directs our attention to the fact that using cyber exclusions indiscriminately in policies where the IoT are utilised by insurers on board of an insured vessel should be reconsidered. The assureds would have justifiable expectation that any cyber exclusion should be redrafted allowing recovery in cases where evidence points to the fact that the IoT device is the source of a cyber-attack on board of a ship. Of course, once gaining access to a ship’s computer system, it is possible for hackers to use this as a back door entry point into the entire network system of the shipowning company, as it is very likely that the ship’s system will be linked to other systems within the shipowning corporation (for logistical or monitoring purposes). This could potentially expose the relevant corporation to various economic losses (e.g., business interruption, restoration/repair costs, crisis management costs, regulatory fines). Such losses are normally insured against by separate cyber risk policies;30 but the shipping sector has been

28 In identifying the proximate cause, one needs to identify the efficient cause of the loss, not the one which is closest in time. In Leyland Shipping v Norwich Union [1918] AC 350, Lord Shaw, said, at 369: To treat proxima causa as the cause which is nearest in time is out of the question. Causes are spoken of as if they were distinct from one another as beads in a row or links in a chain, but – if this metaphysical topic has to be referred to – it is not wholly so. The chain of causation is a handy expression, but the figure is inadequate. Causation is not a chain, but a net. At each point influences, forces, events, precedent and simultaneous, meet; and the radiation from each point extends infinitely. At the point where these various influences meet, it is for the judgment as upon a matter of fact to declare which of the causes, thus, joint at the point of effect was the proximate and which was the remote cause. . . . What does “proximate” here mean? To treat proximate cause as if it was the cause which is proximate in time is, as I have said, out of the question. The cause which is truly proximate is that which is proximate in efficiency. 29 LMA5402 published by the Lloyd’s Market Association (11/11/19). 30 For more comprehensive analysis on cyber risk insurance in the shipping context see, B. Soyer, “Cyber-risk Insurance – Developing a New Cover in the Market” in B. Soyer and A. Tettenborn (eds), Ship Operations: New Risks, Liabilities and Technologies in the Maritime Sector (Informa Law 2021) 111–124.

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professor barış soyer slow in appreciating the magnitude of such risks, and it is fair to say that most shipping corporations do not have adequate degree of cyber insurance cover. At first sight, one might understandably assume that an assured whose vessel (or other insured property) is exposed to additional cyber perils as a result of the data transmission vulnerability created by the IoT device might have a remedy in tort (or product liability) against the manufacturer and/or provider of such device in a case where its insurance policy fails to respond due to cyber exclusion. However, we believe that such an action is fraught with difficulties: (i)

It is very likely that an IoT device will have an extensive supply chain that involves numerous manufacturers, developers, suppliers, coders and sellers. A potential claimant would, therefore, need to demonstrate which part or manufacturer was responsible for the cyber vulnerability in a tort claim, and that can be very difficult to determine.31 In any event, the determination of any breach of the manufacturer’s or provider’s duty of care will be a fact-sensitive inquiry. (ii) Similarly, causation is likely to be another area of contention, especially given the fact that the IoT product might need to be updated from time to time, particularly against cyber risks. It is possible that actions (or inactions) of the assured (user) for not updating software might breach the chain of causation.32 (iii) Another difficulty for a claimant might be proving that the industry standards with regard to cyber security specifications of the IoT device have not been followed. As discussed earlier, there is no regulatory standard in place for this yet, but IoT manufacturers have a lot to gain from the development of industry standards in this regard. If such industry standards are developed and as long as they have been followed by manufacturers, it will be very difficult for a claimant to establish that the security measures taken to reduce cyber vulnerabilities of the IoT device were inherently less safe than other alternatives. (iv) Last, but perhaps most significantly, the assured might be required to enter into an end-user-agreement with the provider of the IoT device to be used on board the subject matter of insurance, which could limit or restrict any tort action against the providers. In summary, the prospect of bringing any action against the manufacturers or providers of the IoT device employed on the subject matter of insurance for cyber vulnerabilities created is rather slim. This naturally focuses the attention to cyber exclusions, which are extensively used in marine insurance contracts, and it is evident from the analysis carried out in this part that there is a necessity to reconsider coverage-related issues in such policies, especially taking into account the prospect that any IoT device used might create additional cyber vulnerabilities for the subject matter of insurance.

31 For a similar issue in a different context, see, Holtby v Birmingham Cowan (Hull) Ltd [2000] All ER 421. 32 See, for example, McKew v Holland & Hannen & Cubitts (Scotland) Ltd [1969] 3 All ER 1621 (HL); The Pacific Concord [1961] 1 WLR 873.

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the internet of things in the commercial insurance context D. Problems and Issues Concerning Data Processing Given that the main objective of utilising IoT devices in the commercial insurance context is to gather additional data, the next question is whether the sheer amount of additional data collected could displace the sensitive balance between the parties established with the aid of insurance law rules and principles. There are strong indications that this might be the case, as will be discussed in detail here. First, imagine the position of an insurer who obtains data from an IoT device confirming that the insured vessel is in a very good condition and operated in a very efficient and safe manner, but it fails to take this information (that could potentially lead to a reduction in premium) into account during renewal or variation of the policy. When it comes to the assured’s duty of fair presentation, the IA 2015 explicitly states that its provisions apply during variation of the contract,33 and of course the same is true at the renewal stage, given that renewal leads to a new insurance cover.34 However, the Act only deals with the assured’s duty of fair presentation of the risk pre-contractual (or variation stage). In this scenario, the focus is on the insurer and its potential failure to act in good faith at the renewal (or variation) stage. The IA 2015 does not deal with the insurer’s duty of good faith specifically, but given that s. 17 of the MIA 1906 stipulates that the duty of good faith is reciprocal and there is judicial recognition that the insurer is expected to act in good faith at the pre-contractual stage,35 it can plausibly be argued that a duty comparable with the pre-contractual duty of good faith of the assured should be imposed requiring the insurer to act in a fair fashion to the assured during the process of risk assessment for renewal or variation purposes. Of course, problems in identifying the scope of such a duty and potential remedies in case of its breach will emerge; but now that “avoidance” is not the only remedy in this context,36 it is open to courts to develop the insurer’s duty of good faith in an organic and coherent fashion. Therefore, it is submitted that the judicial intervention here could ensure that an insurer who fails to take into account favourable data obtained from the IoT devices for the benefit of the assured will be held to account. Another critical issue is whether the influx of information through IoT devices might have the effect of reducing the scope of disclosure duty on the part of the assured. The assured is not obliged to disclose material information to the insurer if the insurer knows or ought to know or is presumed to know relevant circumstances.37 The key provision here is s. 5(2) of the IA 2015, which stipulates that an insurer ought to know information if the relevant information is held by the insurer and is readily available to the underwriter(s) concerned. Therefore, in a case where behavioural data is obtained by IoT devices concerning the attributes of the risk, could it be said that the insurer will be deemed to have known such data at the renewal (or variation) stage, so the assured will be excused for 33 Insurance Act 2015, Section 2. 34 K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The Mercandian Continent) [2001] EWCA Civ 1275; [2001] 2 Lloyd’s Rep 563 at [21] (Longmore LJ). 35 Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905, 1909; famously said: “The policy would equally be void, against the underwriter if he concealed: as, if he insured a ship on her voyage, which he privately knew to be arrived, an action would lie to recover the premium”. See also, Banque Finanancière de la Cite v Westgate Insurance Co Ltd [1990] 1 QB 665 (CA); [1991] 2 AC 249 (HL); Cox v Bankside Members Agency Ltd [1995] CLC 671 and Drake Insurance Plc v Provident Insurance Plc [2003] EWCA Civ 1834; [2004] QB 601. 36 Insurance Act 2015, s. 14 (a). 37 Insurance Act 2015, s. 3(5) (b-d).

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professor barış soyer not specifically disclosing such data? Obviously, the issue is yet to be tested before the courts but is submitted that the information obtained by IoT devices might be treated as being held by an insurer, assuming that such information remains assessable by the underwriter within the insurer’s organisation. This is because the insurer’s constructive knowledge for the purposes of this sub-section is broadly defined, and the key element in the equation seems to be the accessibility of the knowledge within the insurer’s organisation for decision-making purposes. It will be very difficult for an insurance company to argue that data collected by IoT devices is not within the reach of the relevant underwriter through its computer screen.38 The matter might seem to be more complicated if decisions concerning renewal or variation are taken by algorithms (AI) rather than an individual, but the earlier premise of the analysis remains the same. The insurer would find it hard to argue that data obtained from an IoT device are not available to the algorithm that is trusted to make underwriting decisions, given that such data are retained by the insurance company for risk rating and control purposes. Perhaps a more challenging question is whether the good faith principles would require an insurer to inform the assured if it discovers something fundamental to the business affairs of the latter as a result of the data captured by an IoT device. For example, if the data obtained through an IoT device point to certain practices of the employees of the assured that can have harmful consequences (e.g., collaboration with a terrorist group), is a marine insurer expected to disclose these to the assured, especially considering that such risks are often excluded from marine hull cover?39 This is not a straightforward issue, but the legal question here is whether silence on the part of the insurer in such circumstances might be at odds with the continuing duty of good faith imposed on both parties by s. 17 of the MIA 1906.40 Put differently, could the continuing duty of good faith dictate that insurers share any information they obtain regarding the business affairs of the assured even though such information would have no relevance with regard to the insurance contract they are party to with the assured? There have been instances where courts have been prepared to imply a term into an insurance contract as part of the “business efficacy” test. For example, in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd41 it was held that in a reinsur-

38 Although, Blair J in Glory Maritime Co v Al Sagr National Insurance Co (The Nancy) [2013] EWHC 2116 (Comm); [2014] 1 Lloyd’s Rep 14 at [175] made the following remarks in a slightly different context (whether an insurer is deemed to know data on an electronic database), it is submitted that they are relevant here: “information available to an underwriter online does not necessarily give rise to a presumption of knowledge. . . the question ultimately reduces to whether there has been a fair presentation of the risk in all circumstances . . . [and] is something which has to be judged on the particular facts”. 39 One assumes that it will be in the interest of the insurer to inform the assured if the activities identified are capable of leading to an insured loss (e.g., if there is evidence to the effect that its employees are cooperating with pirates, given that “piracy” is an insured peril in most marine policies). 40 Although the existence of this duty has been judicially recognised, there is no consensus as to its scope. This was a matter that was repeatedly brought to spotlight at the turn of the millennium; see, in particular: Strive Shipping Corporation v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express) [2002] EWHC 203 (Comm); [2002] 2 Lloyd’s Rep 88; Agapitos v Agnew (The Aegeon) [2022] EWCA Civ 247; [2002] 2 Lloyd’s Rep 42 (CA); Brotherton v Aseguradora Colseguros SA (No 2) [2003] EWHC 335 (Comm); [2003] EWCA Civ 705; [2003] Lloyd’s Rep IR 746 (CA); Drake Insurance plc v Provident Insurance plc [2003] EWCA Civ 1834; [2004] 1 Lloyd’s Rep 268 (CA). 41 [1985] 2 Lloyd’s Rep 599.

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the internet of things in the commercial insurance context ance treaty the reinsurer had an implied right to the reassured’s records insofar as they related to the covered business. Hobhouse J put it in the following way:42 The relevant terms have to be implied primarily so that the reassured shall conduct his business in a proper and business-like fashion, but, for the present purpose, so that the reinsurer may also be able to find out what his rights are . . . there is no ground for curtailing the obligation which would probably be imported anyway by the duty of good faith, and which could also be enforced by way of discovery and inspection in any subsequent litigation.

In similar fashion, in Goshawk Dedicated Ltd v Tyser & Co Ltd43 the Court of Appeal was prepared to imply a term into the contract between the Syndicates and the assureds giving the claimant Lloyd’s Syndicate a right to inspect and take copies of placing and claiming documents held by the brokers. Rix LJ, who delivered the judgment of the Court, indicated that although the implication was to be made on the traditional basis that it is necessary for business efficacy, the doctrine of good faith that applies in the insurance context supported that conclusion.44 However, in those instances the term implied was deemed essential for the functioning of the contract in question. The situation is rather different here. The contract between the assured and insurer could function without the need to imply a term requiring the insurer to protect the overall business interests of the assured. This brings us to the issue of whether continuing duty of good faith could play a role here. The author is of the opinion that some kind of limitation on the scope of the continuing duty of good faith is necessary. Otherwise, there is a risk that s. 17 might be utilised by parties in a fashion to undermine the balance that exists between two contracting parties. It is clear that wherever that line is drawn by courts in the future on the boundaries of the duty of continuing duty of good faith,45 it is not an appropriate function of that doctrine to impose a requirement to insurers to act as some kind of advisor to the assured regarding their business affairs. These contracts are in essence risk allocation tools negotiated by parties who stand at arm’s length to each other, and continuing duty of good faith should only intervene in extreme circumstances where a party clearly abuses its position or uses its contractual rights to the detriment of the other party.46 This is hardly the case when an insurer finds out information on the assured’s business that has no relevance to the contract in question. The analysis carried out earlier illustrates that as AI becomes more prominent in insurance practice, further discussion on the ability of traditional insurance doctrines and statutory rules to cope with the effects of such disruptive technology is vital. There are clear indications that even by stretching traditional doctrines such as “good faith”, it might be 42 Ibid at 614. 43 [2006] EWCA Civ 54; [2006] 1 Lloyd’s Rep 566. 44 Ibid at [53]; Bonner v Cox [2005] EWCA Civ 1512; [2006] 2 Lloyd’s Rep 152. 45 Some suggestions as to the potential limits of the continuing duty of good faith made in B. Soyer and A. M. Tettenborn, “Mapping (Utmost) Good Faith in Insurance Law – Future Conditional?” (2016) 132 LQR 619; Sir B. Rix “General Reflections on the Law Reform” in M. Clarke and B. Soyer (eds), Insurance Act 2015 – A New Regime for Commercial and Marine Insurance Law, (Informa Law 2016), 107–122. 46 It is worth noting that continuing duty of good faith has been used only in a handful of cases to imply a term into a contract of insurance usually when a discretion is conferred upon one of the parties by the contract: Secimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s Rep 550 and Paragon Finance plc v Nash [2001] EWCA Civ 116; [2008] 1 Lloyd’s Rep 558.

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professor barış soyer difficult to answer some of the potential issues emerging. The ability of judges to push the boundaries of such doctrines should also not be overstated, as they will be mindful of being accused of assuming an unauthorised legislative role and also hesitant to stretch legal principles or creating ad hoc exceptions to deal with difficult cases. Last but not least, it is always possible the data provided by the IoT devices could be misleading or for the system that utilises that data to fail to calibrate it accurately. Imagine, for example, the position when a use-based insurance product, one that determines the amount of premium payable for a vessel by using data transmitted through an IoT device, charges the wrong amount of premium because of the IoT device sending wrong information concerning the location of the insured vessel, or such data being processed in an inaccurate fashion by the system. It is prudent (and expected) that the insurance contract would specify how such an error can be rectified, but even in the absence of such contractual clarification, it is very likely that the equitable remedy of rectification would be available to amend the coded terms of a smart contract even after the code has been executed.47 Rectification, of course, would not provide an effective remedy for the assured, whose motivation here would be to reverse the effects of the code’s performance, but it will be of value insofar as it provides a basis for the contention of breach of contract by the insurer (e.g., the insurer charging more premium than entitled under the contract).48 IV. Concluding Remarks There is no doubt that the insurers will utilise IoT devices if there is a business case to do so. In the light of the analysis in this chapter, it is clear that when such devices are employed in commercial insurance practice, contractual adjustments need to be made to deal with new and unexpected legal issues emerging. Judging the way insurers have redesigned their contracts when the IoT are employed in consumer insurance contracts (especially in motor insurance utilising telematics), it is evident that they are well aware of the potential problems that might emerge. However, it is undeniable that commercial insurance contracts and the relevant context (i.e., the wide-ranging geographical area where an IoT device would operate in marine insurance) are more complex, and additional coverage issues might arise that need to be factored in when redesigning policies employing IoT devices. As far as commercial insurance contracts are concerned, there is no urgent need to regulate the design and security requirements of IoT devices mainly because parties to such contracts are sophisticated enough to decide whether they wish to rely on new (and perhaps less known) forms of technology; and also data protection and privacy issues do not come to the fore. However, this chapter demonstrates that legal problems and uncertainties would emerge as a result of attempting to stretch the boundaries of traditional legal and statutory rules. Therefore, rather than hoping that creativity of judges would address these issues if and when they arise, it is submitted that the time is ripe to start a discussion as to how we accommodate more common use of technology and AI in insurance practice by considering amending traditional legal rules and doctrines. 47 See, Law Commission, Smart Legal Contracts – Advice to Government, Law Com No 401 CP 563, (2021), 5.22–5.26. 48 S. Green, “Smart Contracts, Interpretation and Rectification” [2018] LMCLQ 234, 251.

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C H A P T E R 10

Digital Banking and Liability Issues Dr Andrea Miglionico

I. Introduction The widespread use of data technology systems (e.g., machine learning, neural networks and adaptive algorithms) in the banking industry has resulted in an increase in automated decisionmaking processes to expedite compliance with regulatory requirements.1 Specifically, automated practices such as sandbox programs and application programming interfaces (APIs) support regulatory oversight over fintech products through sophisticated software which requires advanced IT infrastructure.2 However, automated mechanisms must be designed, customised, set up, maintained and overseen: for example, natural language processing and cognitive computing need the intervention of human capital in order to avoid disruption for customers.3 Financial firms have become hardwired into digital platforms, which raises concerns about the potential risks of increased competition and disintermediation: the increase in data breaches and cyber-crimes brings a degree of uncertainty in digital banking.4 Market users rely on artificial intelligence (AI) to assess business products and formulate investment decisions, but they have limited understanding of the negative effects of undesired outcomes on their choices.5 This contribution examines the impact of digitalisation on customer transactions and considers the extent to which banking rules are amenable to algorithmic treatment, and what will be the implications for the quality of regulation and the exercise of judgment by supervisors. It discusses whether the automation of management actions can promote effective compliance processes, ensuring information disclosure and contractual certainty and predictability of enforcement actions. It also observes that digitalisation of banking services can hide poor reporting process and vulnerability of software technology, which raise concerns about the degree of liability for inaccuracies based on the data used. The main downside is the risk that the deployment of automated models will exacerbate the

1 K. A. Bamberger, “Technologies of Compliance: Risk and Regulation in a Digital Age” [2010] 88 Tex Law Rev 669. 2 S. T. Omarova, “Dealing with Disruption: Emerging Approaches to Fintech Regulation” [2020] 61 Wash U J L & Pol’y 37–38; C.-Y. Tsang, “From Industry Sandbox to Supervisory Control Box: Rethinking the Role of Regulators in the Era of FinTech” [2019] 2019 U Ill JL Tech & Pol’y 386–387. 3 J. Armour, R. Parnham and M. Sako, “Augmented Lawyering” [2022] Univ Ill Law Rev 71. 4 P. H. de Cos, “Trust, digitalisation and banking: from my word is my bond to my code is my bond?”, Speech at Eurofi 2022 Financial Forum (BCBS, 9 September 2022) accessed 1 March 2023. 5 R. Van Loo, “Digital Market Perfection” [2019] 117 Mich Law Rev 815.

DOI: 10.4324/9781003376347-12

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dr andrea miglionico possibility of technology malfunctioning and failing to achieve its stated purposes.6 A degree of care is expected from the professional users who are responsible for managing AI: faulty conversion of data and automation biases can create potential damages which lead to discriminatory practices to customers. The contribution proceeds as follows. After the introduction, section two depicts financial innovation in banking industry along with the technological advances in the payment and lending system. It examines whether banking conduct rules and prudential risk assessment are “algorithm ready” and presented in a way which would allow automated software-based compliance. It is argued that the employment of technology can improve bank internal controls, restoring the discipline of failure and supporting better allocation of capital to effective banking activities. This can result in a substantial reduction in regulatory requirements for liquidity and remove any temptation for policy makers to protect incumbent banks against competition from technology-based innovators. Section three considers how automated systems can incentivise a greater use of principles and judgment in banking regulation and supervision even though the need to make the rulebook machine-readable might initially favour a shift away from principles and towards rigidly applied rules. It discusses the data standardisation which is the main concern in the adoption of standard approaches for recording, summarising and communicating data on credit and other banking exposures. The challenge is more about obtaining agreement on change across the industry rather than imposing a regulatory mandate on banks to undertake steps which they do not perceive as being in their own interest. Achieving the full benefits of technology in regulatory oversight will therefore require standardised access to institutions’ operating systems and the data they contain. The opportunities provided by technology can be used to transform monitoring functions in ways that will yield far wider benefits than are sometimes envisaged. Section four addresses the liability issues with respect to technology systems used to enhance data collection, data processing and regulatory reporting in the bank risk management. It considers the agency relationship between digital software and user as a potential avenue for responsibility in the case of faulty decision-making processes. Illegitimate outcomes deriving from errors in the machine program pose a challenge for regulators and supervisory authorities: manufacturing malfunctioning is unlikely to be detected, and evidence of negligent conduct is difficult to prove. On this view, shifting the responsibility for converting regulation into code to a central body raises concerns about the degree of liability if there are errors in the conversion. The last section provides concluding considerations about the recent developments of accountability rules for artificial machines. II. Technology-Driven Innovation in Banking Services The digitalisation of banking services generally refers to the process of conversion of a series of data, stored for transmission and computer analysis both in investment contracts and in the business strategy.7 The application of technology involves the use of online 6 B. W. Jackson, “Artificial Intelligence and the Fog of Innovation: A Deep-Dive on Governance and the Liability of Autonomous Systems” [2019] 35 HTLJ 35. 7 D. T. Llewellyn, “Financial Technology, Regulation, and the Transformation of Banking”, Banco d’Espana, SUERF conference: Financial Disintermediation and the Future of the Banking Sector (Madrid, 30 October 2018), 11.

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digital banking and liability issues platforms which are alternative forms of intermediation, offering the possibility of a substantial reduction of compliance costs and achievement of desired regulatory outcomes.8 Digital transformation requires specific organisational structures and entails consequences for the metrics used to calibrate performance.9 Machine learning, cloud computing and blockchain software aggregate, analyse and transfer large amounts of data to potential users with the aim of improving transparency of operations and reducing the opaqueness about risk exposures that is inherent in conventional firms.10 These technology programs are algorithm-based and run within set parameters, but it is expected that self-learning algorithms will operate beyond the control of their programmers, which will make the role of traditional mutual forms of financial intermediary (e.g., building societies and credit unions) increasingly virtual rather than face-to-face.11 The digitalisation process requires devices to be able to interpret and elaborate information based on behaviour patterns, while performing human actions through automation of consumer’s choice profiles.12 For example, digitalisation of lending transactions through automated reading of data can enhance traceability of customers (e.g., verification of a customer’s identity) and disclosure of information.13 Digital banking holds the potential to increase the speed of client on-boarding and contain risk as a distributed shared ledger acts as an immutable assured audit trail of all know-your-customer (KYC) due diligence processes and automation of account opening.14 By employing digital solutions, an intermediary can rapidly verify the identity of its clients and assess the potential risks of illegal intentions for the business relationship. Digital technologies introduce new forms of intermediation which provide users access to virtual payment systems. Crowdfunding (donation-based, reward-based and equity)15 and peer-to-peer lending (P2P)16 allow users to lend capital to borrowers and investors, and to receive a credit claim to document the principal’s commitment without recourse to bank intermediaries. This in turn can create inclusionary financial services for disadvantaged consumers, notably automated access to loan portfolios and innovative types of funds; 8 A. W. A. Boot, P. Hoffmann, L. Laeven and L. Ratnovski, “Financial Intermediation and Technology: What’s Old, What’s New?” (2020) IMF Working Papers WP/20/161, 10–11 accessed 1 March 2023. 9 P. C. Verhoef et al, “Digital Transformation: A Multidisciplinary Reflection and Research Agenda” [2021] 122 J Bus Res 889. 10 W. S. Frame, L. Wall and L. J. White, “Technological Change and Financial Innovation in Banking: Some Implications for Fintech” (2018) Federal Reserve Bank of Atlanta Working Paper 2018–11, 2. 11 K. Yeung, “Why Worry about Decision-Making by Machine?” in K. Yeung and M. Lodge (eds), Algorithmic Regulation (OUP 2019), 24–25. 12 B. Bennett and A. Daly, “Recognising Rights for Robots: Can We? Will We? Should We?” [2020] 12 Law Innov Technol 60. 13 D. W. Arner, D. A. Zetzsche, R. P. Buckley and J. N. Barberis, “The Identity Challenge in Finance: From Analogue Identity to Digitized Identification to Digital KYC Utilities” [2019] 20 Eur Bus Organ Law Rev 55. 14 Y. Lootsma, “Blockchain as the Newest Regtech Application – the Opportunity to Reduce the Burden of KYC for Financial Institutions” [2017] 36 Banking & Financial Services Policy Report 16. 15 Crowdfunding donation-based, reward-based and equity-based are methods of financing characterised by the motivation of investment of funders and what they expect in return for their money. See I. Jenik, T. Lyman and A. Nava, “Crowdfunding and Financial Inclusion” (March 2017), World Bank CGAP Working Paper, 5 accessed 1 March 2023. 16 G. W. Peters and E. Panayi, “Understanding Modern Banking Ledgers Through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money” in P. Tasca, T. Aste, L. Pelizzon and N. Perony (eds), Banking Beyond Banks and Money (Springer 2016), 239–240.

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dr andrea miglionico however, digital banking does not work for consumers who experience difficulty in acquiring devices and connectivity problems.17 P2P, marketplace or loan-based crowdfunding is one of the many new technology-based types of investment platform.18 Specifically, P2P platforms offer automated lending options replacing the chain of intermediation in the assessment of borrowers’ creditworthiness and loan requests.19 This enables the loan application and loan approval processes to be expedited, facilitating timely credit decisions for applicants. In the case of P2P lending platforms, investors participate directly in lending by acquiring a participatory ownership share in loans made to a diversified range of typically more than 200 individual borrowers, without recourse to bank or other loan intermediaries, with returns depending directly on loan performance.20 A variety of methods can be used to match investors and borrowers, raising questions of whether retail investors are adequately informed and protected.21 Technology is transforming personal investment in many ways. A range of new applications, often based on the transactions data made available through Open Banking, offers support for savings and decisions; along with programs making automated investment decisions and “robo-advisors” proffering investment advice. Technology underpins the growth of comparison sites and their use as an alternative to advice from brokers or the media in making saving and investment decisions and is increasingly used in both passive and active investment vehicles. Automated market-making and trade execution maintains the net asset value of exchange-traded funds (ETFs) against their benchmark and the index tracking of passive mutual funds.22 A range of active investment funds are increasingly using machine learning and other technology-based decision making in their portfolio allocations alongside management judgments.23 Further, new technology-supported asset classes are emerging, including loan-based crowdfunding and crypto assets. Regulation of these automated investment solutions poses challenges both old and new. The old challenges, which arise with all savings and investment products marketed to retail customers, are ensuring that customers are making properly informed decisions, with appropriate advice, and are not investing in unsuitable products.24 The new challenges 17 S. Venkataramakrishnan, “Fintech for good needs careful handling” (Financial Times, 31 October 2022) accessed 1 March 2023. 18 D. Chen, A. Kavuri and A. Milne, “Growing Pains: The Changing Regulation of Alternative Lending Platforms” in R. Rau, R. Wardrop and L. Zingales (eds), Handbook of Technological Finance (Palgrave 2021), 441–442. 19 K. Judge, “The Future of Direct Finance: The Diverging Paths of Peer-to-Peer Lending and Kickstarter” [2015] 50 Wake Forest L Rev 603. 20 R. Lenz, “Peer-to-Peer Lending: Opportunities and Risks” [2016] 7 Eur J Risk Regul 688. 21 A. Milne and P. Parboteeah, “The Business Models and Economics of Peer-to-Peer Lending” (2016), CEPS, ECRI Research Report No 17 accessed 1 March 2023; O. Havrylchyk, “Regulatory Framework for the Loan-based Crowdfunding Platforms” (2018) OECD Economics Department Working Papers No 1513 accessed 1 March 2023. 22 J. Cullen, “Exchange-traded Funds (ETFs) and FinTech: Market Efficiency and Systemic Risk” in I. H-Y Chiu and G. Deipenbrock (eds), Routledge Handbook of Financial Technology and Law (Routledge 2021), 229–230. 23 W. A. Kaal, “Financial Technology and Hedge Funds” in D. Cumming, S. Johan and G. Wood (eds), The Oxford Handbook of Hedge Funds (OUP 2021), 233–234. 24 This has led to regulatory intervention of several kinds including: (i) limiting distribution, for example preventing risky or complex products such as hedge funds from being open to retail investors; (ii) requirements on disclosure, for example the “key investor information documents” summarising information on investment objectives, risks, costs and historical performance that must be provided for all retail investment products in the EU, both UCITS and other collective and alternative and structured investment products; (iii) product intervention with

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digital banking and liability issues arise from the oversight of automated systems and emergent phenomena. These include the use of comparison sites and potentially adverse consumer impact, e.g. behavioural pricing, based on how people search online, a drive to pure price rather than price and quality-based decisions.25 The appropriateness of recommendations emerging from “roboadvisors” that offer relatively low cost personal investment advice creates interesting legal issues.26 The service is potentially superior to advice from human advisers although it does not automatically protect customers from faulty advice which results in undesired regulatory outcomes.27 Technological applications give the opportunity for training and checking robo-advisory outcomes through a regulatory requirement for the sharing of underlying granular data, although a main concern is whether a particular firm’s roboadvice differs substantially from those of others.28 III. Granular Data Processing The potential gains from employing data technologies to improve banking services are from extracting essential information from the granular data held within the various bank operational systems. Critically, such an approach based on processing data at a granular level brings significant benefits to banks themselves, supporting improvements to their management information, accounting and risk reporting systems.29 Therefore, the challenges of adoption are primarily around coordination across the industry, ensuring that all firms, across all jurisdictions use agreed standardised approaches to data access and processing. Data technologies, specifically those now available for employing the standardised representation of financial contracts to granular financial data, can be used to improve the outcomes of risk management, with the prospect of making these much more fully automated processes even for large complex institutions.30 Further, standardisation of data and operational systems can allow greater standardisation of the mandated investment disclosures. The standardised collection and processing of granular data are emerging as central to the current efforts to automate regulatory reporting being conducted in the UK through the Bank of England (BoE) and Financial Conduct Authority (FCA) plans for transforming

specific rules and regulations on particular retail investment products, especially those with favourable tax treatment; and (iv) further rules on the provision of investment advice. N. Moloney, “Regulating the Retail Markets” in N. Moloney, E. Ferran and J. Payne (eds), The Oxford Handbook of Financial Regulation (OUP 2015), 756–758. 25 A. Datta, M. C. Tschantz and A. Datta, “Automated Experiments on Ad Privacy Settings. A Tale of Opacity, Choice, and Discrimination” [2015] 1 PoPETs 92. 26 An example is Nutmeg www.nutmeg.com/. For a commentary see D. Tammas-Hastings, “WealthTech: The challenges facing the wealth management industry” (LSE Business Review 2017) accessed 1 March 2023. 27 This is the case of robo-debt which poses challenges of predictability and consistency with statutory or common law requirements. See M. Zalnieriute, L.B. Moses and G. Williams, “The Rule of Law and Automation of Government Decision-Making” [2019] 82 MLR 425. 28 M. S. Gal, “Algorithmic Challenges to Autonomous Choice” [2018] 25 MTLR 59. 29 R. Bedeley, “Big Data Opportunities and Challenges: The Case of Banking Industry” [2014] SAIS 2014 Proceedings, 2 accessed 1 March 2023. 30 Bank of England, “Artificial Intelligence and Machine Learning” (2022), accessed 1 March 2023.

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dr andrea miglionico data collection.31 As the BoE observes, making such a data collection effective requires a novel collaborative approach to regulation, engaging with regulated institutions to develop the required supporting data standards and persuading them of their collective interest in adopting common standards and investing in improved reporting systems. Bank information systems are inherently complex, with multiple solutions each tailored to specific products and exposures, including secured loans, credit cards, money-market lending and borrowing, investments, derivative contracts and other assets, liabilities and off-balance sheet exposures. However, the challenge is linking the information held in these different systems, not inherent underlying complexity.32 Bank contracts – amortising loans, lines of credit, etc – make promises on cashflows that can be described in a coherent general framework, using a relatively small number of parameters. This in turn means that, provided the required underlying granular data can be accessed, modern data technologies allow for the calculation of the distribution of future cash flows across all the assets and liabilities of any institution to be rapidly estimated in purely algorithmic fashion, depending only on input data and estimations of the future evolution of key drivers of risk.33 Much of this required granular data continues to be stored in legacy formats, using operating systems whose core architecture can date back decades. It is nowadays possible to question these systems using APIs for the automated transfer and processing of this data at granular level.34 This is the initial step towards the sharing of data on a standardised basis, which is crucial through further application in management information, accounting statements, risk reports and regulatory stress testing for effective risk communication and risk governance that meets the needs of all stakeholders, including shareholders, creditors and market counterparties.35 A central task in the internal control processes is the valuation of assets, liabilities and other exposures. With access to granular data on a standardised basis mapped into “cash flow” representations of financial contracts, valuation can then be made on one or both of two broad approaches: present discounting of future cash flows, based on the major drivers of risk, and their expected future joint distribution.36 These will principally involve market and macroeconomic developments: yield curves, foreign exchange rates, unemployment statistics, corporate earnings data, prices of property and other collateral. These are precisely the same inputs that are required for value-at-risk and credit-at-risk 31 Bank of England, “Transforming Data Collection From the UK Financial Sector: A Plan for 2021 and Beyond” (2021) accessed 1 March 2023. 32 P. Kavassalis, H. Stieber, W. Breymann, K. Saxton and F. J. Gross, “An Innovative RegTech Approach to Financial Risk Monitoring and Supervisory Reporting” [2017] 19 J Risk Finance 39; W. Breymann, N. Bundi, J. Heitz, J. Micheler and K. Stocking, “Large-scale Data-driven Financial Risk Assessment” in M. Braschler, T. Stadelmann and K. Stockinger (eds), Applied Data Science. Lessons Learned for the Data-Driven Business (Springer 2019), 387–388. 33 OECD, “Enhancing Access to and Sharing of Data. Reconciling Risks and Benefits for Data Re-use across Societies” (2019) accessed 1 March 2023. 34 M. Zachariadis and P. Ozcan, “The API Economy and Digital Transformation in Financial Services: The Case of Open Banking” (2017) SWIFT Institute Working Paper No 2016–001 accessed 1 March 2023. 35 K. Houstoun, A. Milne and P. Parboteeah, “Preliminary Report on Standards in Global Financial Markets” (2016) accessed 1 March 2023. 36 A. Milne, “Data Standards, Information and Financial Stability” [2016] 27 J Financ Stab 155.

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digital banking and liability issues modelling and for regular stress testing of a bank’s capital.37 Alternatively, where contracts can still be traded in liquid markets, valuation can also be based on marking to current market prices. Exposures should be marked to market, otherwise valuations can be based on a simulated distribution of risk factors.38 These two approaches are complementary. Where both can be applied, then market prices can be used to check the parameters of risk distributions and the discounting of anticipated future cash flows in present discounting. Where mark to market is not possible, then the present discounting, validated against market prices, can be the basis for valuation. With these underlying elements in place, enabled by the appropriate technologies, the valuation of a bank’s assets, liabilities and off-balance sheet commitments becomes a matter of operational execution that can be carried out in near real-time.39 Such calculations provide the basis for establishing a reasonable price for sale or assets or the necessary transfer of value along with liabilities or derivative obligations. A. Data Standardisation Improved data quality and data sharing frameworks would allow firms to obtain a more accurate, systematic view of suspicious activity on financial system infrastructures.40 From the regulatory perspective, data will need to be held in consistent formats, or at least to be rapidly translatable into consistent formats, across all institutions. This will include a variety of granular data, balances by asset type, payment and arrears histories, and current credit standings. Data standardisation would facilitate regulators’ oversight with information relating to banks’ accumulating risk exposures derived from a common risk quantification and reporting framework.41 Risk modelling needs valuation which involves projections of future cashflows and distributions of outcomes: this is where there may be significant overlap with established stress testing processes. Being able to calculate working valuations swiftly and accurately will foster improved confidence among potential acquirers, in turn aiding the regulatory priority of effective bank risk management. The need for standardisation goes beyond granular data: it applies to all stages of the valuation process. Agreement and support on the part of regulators for standardised representations of contracts will support greater efficiencies in many aspects of regulatory reporting and oversight.42 Standardisation of risk factors in risk modelling is an essential aspect of capital modelling and stress testing. Valuation, while involving an inherently 37 M. Crouhy, D. Galai and R. Mark, “A Comparative Analysis of Current Credit Risk Models” [2000] 24 Bank Finance 59. 38 J. Bessis, Risk Management in Banking (4th edn, Wiley & Sons 2015), 57–58, ch.8. 39 A. N. Berger and L. K. Black, “Bank Size, Lending Technologies, and Small Business Finance” [2011] 35 J Bank Financ 724. 40 M. Zachariadis, “How ‘Open’ Is the Future of Banking? Data Sharing and Open Data Frameworks in Financial Services” in M. R. King and R. W. Nesbitt (eds), The Technological Revolution in Financial Services: How Banks, Fintechs, and Customers Win Together (Rotman-UTP 2020), 129–130. 41 A. D. Grody and P. J. Hughes, “Risk Accounting – Part I: The Risk Data Aggregation and Risk Reporting (BCBS 239) Foundation of Enterprise Risk Management (ERM) and Risk Governance” [2016] 9 J Risk Manag Financ 130. 42 D. W. Arner, J. Barberis and R. P. Buckley, “FinTech, RegTech, and the Reconceptualization of Financial Regulation” [2017] 37 Northwest J Int Law Bus 371.

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dr andrea miglionico subjective element, can still be carried out and enhanced by using more standardised procedures, and the underlying data and contractual representations and risk factor simulations can be made available to external parties seeking to reach their own judgments on the valuation of assets and other exposures.43 Improved standardisation would then help to facilitate the execution of a near real-time “auction” process among potential acquirers. Potential acquirers would have access to improved, transparent data to apply their own risk modelling and valuation techniques. Valuation is essential regardless of the assessment procedures and the options open to regulators – transfer to an acquiring institution, bail-in of bondholders (creditors bearing a share of losses, but without the bank going into insolvency), which should also increase monitoring incentives for bondholders.44 It is the role and potential future application of technology that is key in limiting potential failure on the part of regulators. The standardisation of contractual data can help support the resolution of distressed financial firms, allowing asset portfolios to be valued and transferred, and also minimising the legal uncertainties associated with the commingling of assets and the rehypothecation of collateral. Furthermore, data standardisation and access to granular data is an essential precursor to making further progress on the modelling and quantification of systemic financial risk.45 There has been an explosion of work on systemic risk providing conceptual insight and new modelling frameworks for risk emergent at the level of the financial system as a whole, but the absence of granular data limits the ability of using the new methods to quantify these risks.46 B. Open Banking and APIs Accessing granular data using APIs has been innovative in the banking industry. The experience of the open banking initiative in the UK shows how an agreement on, and investment in, standardised APIs can result in a transformative unlocking of internal bank data.47 The development of these APIs for automated exchange of data between software was a regulatory remedy deployed against excessive market power required by the UK Competition and Markets Authority.48 APIs are not only useful for open banking, but they also have equally important internal application, making it possible for all the data in internal bank systems to be made available, in an appropriate form, for improving

43 D. McNulty and A. Milne, “Bigger Fish to Fry: FinTech and the Digital Transformation of Financial Services” in T. King, F. S. S. Lopes, A. Srivastav, J. Williams (eds), Disruptive Technology in Banking and Finance (Palgrave 2021), 263–264. 44 A. A. Jobst, “It’s All in the Data – Consistent Operational Risk Measurement and Regulation” [2007] 15 J Risk Manag Financ 423. 45 R. M. Heath and E. Bese Goksu, “Financial Stability Analysis: What are the Data Needs?” (2017) IMF Working Paper No 17/153. 46 W. Silva, H. Kimura and V. Amorim Sobreiro, “An Analysis of the Literature on Systemic Financial Risk: A Survey” [2017] 28 J Financ Stab 91; review the wide range of contributions. 47 D. Awrey and J. Macey, “The Promise and Perils of Open Finance” (2022) ECGI Working Paper Series No. 632, 10–11 accessed 1 March 2023. 48 Joint statement by HM Treasury, the CMA, the FCA and the PSR on the future of Open Banking (2022), Policy Paper, accessed 1 March 2023.

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digital banking and liability issues management information systems.49 Further, they also facilitate the preparation of data for external use in a variety of situations, whether for audit, stress testing or a valuation of exposures in resolution.50 In the payment system, open banking introduces alternative forms to card-based networks such as account-to-account transactions, enabling consumers to share data with third parties.51 Developing these APIs so that they adequately respect data security and customer privacy and ensure proper use of shared data requires a mandated industry collaboration on standard open banking. The development of APIs, or more generally of open finance with sharing of customer data in the full range of retail financial services, involves valuation of risky transactions.52 A relatively simple valuation is possible based on appropriately determined required returns on capital which will differ according to exposure.53 The deposit insurer or other regulatory authority managing the process of resolution can use relatively conservative valuation metrics to establish a minimum valuation. This in turn can be used for an initial payment to creditors, according to their ranking in the hierarchy of creditors with the prospect of a subsequent sale of assets occurring at a higher price point leading to payments to creditors lower in the hierarchy.54 The calculation of future loan payments, arrears and recoveries will mimic much of what is already done for calculation of credit value at risk in bank loan portfolios. Data technologies provide external authorities access to these calculations assuming that the models and methods are set up to comply with agreed external standards.55 This is also very much the same process involved in external stress testing. However, embedding the processes into management systems takes this to an internal, day-to-day operational focus for the institution. This should be an “algorithmic” process, something that happens on a regular basis in order to assure regulators that the processes are correctly tested and ready for application, if and when a bank falls into a situation of financial distress.56 The use of technology in the bank management can reduce or eliminate the differences between regulatory regimes in the earlier stages of prudential policy, in capital requirements and stress testing. An agreed standard for the valuation of bank exposures based on granular data, would allow regulatory authorities to share information about the financial conditions of distressed banks in real time and support decisions on how

49 C. Reimsbach-Kounatze, “Enhancing Access to and Sharing of Data: Striking the Balance between Openness and Control over Data” in German Federal Ministry of Justice and Consumer Protection Max Planck Institute for Innovation and Competition (ed), Data Access, Consumer Interests and Public Welfare (Baden-Baden 2021), 51–52. 50 J. Ofoeda, R. Boateng and J. Effah, “Application Programming Interface (API) Research: A Review of the Past to Inform the Future” [2019] 15 Int J Enterp Inf Syst (IJEIS) 76. 51 S. Venkataramakrishnan, “Account-to-account payments pose fresh threat to credit card networks” (Financial Times, 14 November 2022) accessed 1 March 2023. 52 O. Borgogno and G. Colangelo, “Data, Innovation and Competition in Finance: The Case of the Access to Account Rule” [2020] 31 Eur Bus Law Rev 573. 53 A. Milne and M. Onorato, “Risk-Adjusted Measures of Value Creation in Financial Institutions” [2012] 18 Eur Financ Manag 578. 54 D. Hoople, “Data Standardisation” (2021) IADI Fintech Briefs No. 2 accessed 1 March 2023. 55 C. Abbot, “Bridging the Gap – Non‐state Actors and the Challenges of Regulating New Technology” [2012] 39 J Law Soc 329. 56 K. Yeung, “Algorithmic Regulation: A Critical Interrogation” [2018] 12 Regul Gov 505.

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dr andrea miglionico to resolve the failing institution.57 More generally, the potential role of technology in improving audit and external monitoring of public companies is a key supporting aspect of investor protection. In this context, the collapse of the German payment processor Wirecard, disturbingly reminiscent of previous audit scandals such as those of Parmalat and Enron, raises the question of whether the use of technology to access granular data might be a defence against detecting accounting manipulations and holding managers responsible for their actions.58 IV. Liability Regimes in Digital Banking The advent of data technologies in the banking sector has led to the proliferation of decentralised autonomous systems which require advanced market infrastructures and risk metrics in order to deliver digital products. This complex network of online platforms has rapidly changed the traditional model of financial intermediation, allowing new players (e.g., fintech companies) to operate in the credit channels.59 Digital offerings have replaced conventional banking services by fast and interconnected activities, making access to payment transactions easier.60 Virtual banks such as Revolut and Monzo in the UK provide various services through mobile applications utilised on lending platforms and e-commerce business models.61 While supportive of innovation, regulators are also alert to potential problems with new devices, including bias or discrimination and the lack of transparency about what underlies the outcome of artificial intelligence driven decisions, especially when applied to customer processes or for assessment of risks.62 Algorithm-based systems produce their outcomes with little understanding on the part of users about the data sources used in the software. For example, facial recognition technology presents accountability issues given the opaque metrics involved to formulate sensitive decisions.63 A similar concern emerged in the widely used FICO credit scoring model in the US, which shows biased pricing of products, based not on actual risk of loss but other customer characteristics such as age, religion or ethnicity.64 The reliance on training data has been subject to criticisms in terms of poor disclosure and the opaque

57 C. Ullersma and I. van Lelyveld, “Granular Data Offer New Opportunities for Stress Testing” in J. D. Farmer, A. M. Kleinnijenhuis, T. Schuermann and T. Wetzer (eds), Handbook of Financial Stress Testing (CUP 2022), 191–192. 58 L. Enriques and W.-G. Ringe, “Bank – Fintech Partnerships, Outsourcing Arrangements and the Case for a Mentorship Regime” [2020] 15 CMLJ 374. 59 L. Wewege, J. Lee and M. C. Thomsett, “The Digital Banking Transformation: Disruption, Synergy toward FinTech Frontier” (CeFIMS SOAS University of London Research Paper, 2020) accessed 1 March 2023. 60 L. Wewege and M. C. Thomsett, The Digital Banking Revolution. How Fintech Companies are Transforming the Retail Banking Industry Through Disruptive Financial Innovation (3rd edn, de Gruyter 2020), 87–89. 61 P. Yeoh, “An International Regulatory Perspective of Digital Banks” [2020] 41 Bus Law Rev 204–205; S. Venkataramakrishnan, “Revolut receives green light to run UK cryptocurrency business” (Financial Times, 27 September 2022) accessed 1 March 2023. 62 C. He, D. T. Llewellyn and A. Milne, “Financial Technologies and Financial Regulation” (2022) EBI Working Paper Series No 123 accessed 1 March 2023. 63 J. Purshouse and L. Campbell, “Automated Facial Recognition and Policing: A Bridge Too Far?” [2022] 42 Legal Studies 209. 64 M. Hurley and J. Adebayo, “Credit Scoring in the Era of Big Data” [2016] 18 YJoLT 148. See also D. Keats and F. Pasquale, “The Scored Society: Due Process for Automated Predictions” [2014] 89 Wash Law Rev 1.

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digital banking and liability issues methods by which the “black-box” of predictive judgment design is embedded in the AI internal models.65 The employment of data technologies to assist manual intervention in decision-making processes and monitoring functions raises questions about the appropriate liability regime for harmful acts involving errors in formulating outputs. Algorithmic machines operate as agents of principals (e.g., firms, supervisors, regulators) elaborating the data provided in the system, however the legal status of financial technologies is the crux of the matter. The interaction between AI and users can be considered a type of agency relationship where humans delegate to automated algorithms the processing of inputs into “intelligent” solutions.66 Such a principal-agent relationship entails duties, i.e., to provide accurate outcomes and elaborate data fairly, although it does not require any fiduciary duty with respect to customers. In the scholarly debate, the autonomous personality for softwarebased applications and the ground of responsibility that can be attributed to intelligent machines with legal personhood has been considered.67 The algorithmic codes formulate a series of statements which reflect the behaviour and routine habits of consumers: specifically, the analysis of the information uses complex statistics based on patterns which transform raw assumptions into tuned predictions. Data technologies have become hardwired in life domains and have become a central component of everyday decisions, although the legal treatment with respect to third party users remains debatable. Automated predictions are driven by algorithms which influence consumer preferences and inform human assessment: they also influence how regulators design norms and legislative frameworks.68 The transparency and the fairness of the algorithmic procedures inherently affect individuals’ expectations of accurate performance, however the allocation of responsibility between producers and owners of autonomous devices comes up against obstacles owing to the lack of legal status for artificial systems.69 Customers generally rely on the precision of computer programs and have limited capacity to evaluate whether the machine elaborates the data correctly. For example, smart contracts are legally binding agreements operating through blockchain ledger technologies;70 they automate transfers and execute parties’ orders, making it easier to deliver transactions without recourse to manual intervention. Similarly, robo advisors operate through algorithms and provide lower-cost digital investment services by matching consumers’ profiles and the assessment of products (e.g., saving plans and

65 S. Bush, “Beware the rise of the black box algorithm” (Financial Times, 20 September 2022) accessed 1 March 2023. 66 O. Rachum-Twaig, “Whose Robot Is It Anyway? Liability for Artificial-Intelligence-Based Robots” [2020] Univ Ill Law Rev 1141. It is argued that the principal-agent relationship struggles to apply to AI-based robots. 67 L. M. LoPucki, “Algorithmic Entities” [2018] 95 Wash U L Rev 887; D. C. Vladeck, “Machines without Principals: Liability Rules and Artificial Intelligence” [2014] 89 Wash Law Rev 117; G. Scopino, Algo Bots and The Law (CUP 2020), 14–15. 68 N. Festic, “Same, Same, but Different! Qualitative Evidence on How Algorithmic Selection Applications Govern Different Life Domains” [2022] 16 Regul Gov 85. 69 T. D. Krafft, K. A. Zweig and P. D. König, “How to Regulate Algorithmic Decision-making: A Framework of Regulatory Requirements for Different Applications” [2022] 16 Regul Gov 119. 70 Smart contracts are a set of instructions in the form of bytecode which implies the compilation of source code into machine readable bytecode. For a commentary on distributed ledger technologies see D. Zetzsche, R. Buckley, D. Arner and A. Didenko, “Liabilities Associated with Distributed Ledgers: A Comparative Analysis” in J. Madir, Fintech. Law and Regulation (Edward Elgar 2019), 192–193.

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dr andrea miglionico pension management).71 They collect information supplied by the consumers and operate through algorithms.72 Although robo advisors and smart contracts are considered automated agents, they do not have the legal capacity to act, and are not subject to rights and duties, which means they do not bear the status of legal personhood.73 This in turn makes it difficult to identify the appropriate liability regime for automated entities. In this context, it has been observed that the AI system performs as a substitute or conduit for the actions of natural persons thus granting artificial personhood and providing a legal form that enables responsibilities to be imposed.74 On this view, it remains questionable whether digital technologies grant forms of legal personality, which leads to the conclusion that the principal-agent relationship might not resolve the liability issue.75 At the EU level, the Commission has reinforced the concept of safety in the use of technology to protect consumers and users. Proposals to establish “vicarious liability” for robots have been advanced by regulators and policymakers, however it is not clear which applicable enforcement mechanism should be adopted in the case of the allocation of costs for any potential harm.76 The EU Artificial Intelligence Act does not provide indications as to how machines should be treated as entities capable of bearing responsibility and supporting damages claims.77 The European regulators propose to establish a civil liability regime borne by operators for any harm caused by an autonomous activity, device or process driven by an AI-system. This legislation has been complemented by the Commission’s Proposal for a Directive on adapting non-contractual civil liability rules to artificial intelligence,78 and the Proposal for a revised Product Liability Directive.79 The AI Liability Directive aims to ensure adequate protection for victims of defective devices which, in most cases, will not be compensated unless the owner of the system provides a mandatory liability insurance to cover losses. It also introduces a presumption of causality to ease the victims’ burden of proof, offering the possibility to access disclosure of information about high-risk AI systems. This in turn can expedite compensation claims and harmonise liability rules for damage caused by AI services. In parallel, the revised Product Liability Directive amends the existing regime by incorporating new provisions 71 An example is Nutmeg accessed 1 March 2023. For a commentary see D. TammasHastings, “WealthTech: The challenges facing the wealth management industry” (LSE Business Review, 2017) accessed 1 March 2023. 72 C. Carney, “Robo-Advisers and the Suitability Requirement: How They Fit in the Regulatory Framework” [2018] CBLR 586. 73 For a discussion on legal personhood see G. Wagner, “Robot, Inc: Personhood for Autonomous Systems?” [2019] 88 Fordham Law Rev 591. 74 C. L. Reyes, “Autonomous Corporate Personhood” [2021] 96 Wash Law Rev 1453. 75 S. Chesterman, “Artificial Intelligence and the Limits of Legal Personality” [2020] 69 Int Comp Law Q 819. 76 European Commission, “Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics” COM [2020] 64 final. 77 Proposal for a Regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) and amending certain union legislative acts COM [2021] 206 final. 78 Proposal for a Directive of the European Parliament and of the Council on adapting non-contractual civil liability rules to artificial intelligence (AI Liability Directive) COM [2022] 496 final. 79 Proposal for a Directive of the European Parliament and of the Council on liability for defective products COM [2022] 495 final.

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digital banking and liability issues regarding the AI product’s defectiveness and the manufacturer’s fault and recognises that providers of digital services may be liable for flawed product work. Both EU Proposals do not address the question of autonomous machines personhood leaving doubts about the effectiveness of current liability rules given that it is not clear to whom liability will be attributed in the case of digital harms.80 As a result, the lack of legal personality makes machines immune from deterrence, which does not rule out automated devices being under an obligation of technical performance, e.g., internal models need to be consistent with technological standards in order to produce a reliable outcome. Assuming that the AI system has been manufactured with highly sophisticated software to process a large volume of data, the machine (without human control) carries out a series of actions in accordance with the designed programme in order to fulfil the programmed result. The conduct of machines lays down an obligation to prevent unexpected failures in elaborating the desired outputs: technical analyses of data are developed through predictable parameters and variables which measure the performance of an algorithm.81 This in turn would make it feasible to make devices liable for faulty predictions and allocate the risks of damages between the manufacturer, the designer and the owner of data technology. Such an approach would instil a “shared liability” which would reduce the burden of proof for damages deriving from machine’s malfunctioning and errors in converting information into code.82 In finding potential avenues for the accountability of autonomous artificial systems, the use of sandboxes as a policy tool for regulating innovation would facilitate the identification of the liability regime for digital banking services and address the limitations of current rules.83 The sandbox model creates a controlled digital platform to test new technologies, allowing firms to monitor fintech products before they are admitted to the financial markets without the burden of regulatory requirements.84 As argued, the sandbox can best be regarded as a monitored space involving a fintech company and a supervisory authority designed to secure “a policy regarding the enforcement of the existing legal framework”.85 Further, sandboxes are considered distinct online platforms which assist regulators and regulated entities to reduce uncertainty and undesired outcomes for consumers: their main function is to bridge the gap of information imbalance about

80 For a commentary of both Proposals see O. Dheu, J. De Bruyne and C. Ducuing, “The European Commission’s Approach to Extra-Contractual Liability and AI – A First Analysis and Evaluation of the Two Proposals” (2022) KU Leuven CiTiP Working Paper Series, 21–22 accessed 1 March 2023; P. Hacker, “The European AI Liability Directives – Critique of a HalfHearted Approach and Lessons for the Future” (2022), Computers and Society, Cornell University accessed 1 March 2023. 81 W. Kowert, “The Foreseeability of Human – Artificial Intelligence Interactions” [2017] 96 Tex Law Rev 181. 82 M. Chinen, Law and Autonomous Machines. The Co-evolution of Legal Responsibility and Technology (Edward Elgar 2019), 14–15. 83 J. Truby et al, “A Sandbox Approach to Regulating High-Risk Artificial Intelligence Applications” (2022) 13 Eur J Risk Regul 270. 84 Financial Conduct Authority, “Regulatory Sandbox” (FCA, 2020) accessed 1 March 2023. See also “The Digital Sandbox Pilot” (FCA, 2 May 2020) accessed 1 March 2023. 85 S. Philipsen, E. F. Stamhuis and M. de Jong, “Legal Enclaves as a Test Environment for Innovative Products: Toward Legally Resilient Experimentation Policies” [2021] 15 Regul Gov 1.

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dr andrea miglionico the automated operational procedures.86 On this view, sandbox programs can support policy strategies to establish a sufficient degree of harmonisation that regulates liability in technological applications.87 The downside is that users of sandboxes remain liable under applicable national legislation, which can create divergences across jurisdictions for any harm caused to third parties as a result of the testing carried out in the sandbox. V. Conclusion Digitalisation of banking services offers the possibility of “algorithmic” regulation by substantially automating all the mechanical aspects (e.g., key information for the decisionmaking process) that are involved in the bank business models, thereby allowing supervisory authorities to focus on risk exposures. This in turn makes it clear that the appropriate and successful deployment of technology is central for the purposes of alignment with regulatory requirements. The employment of valuation metrics applied to standardised granular data can greatly enhance the efficiency of bank internal controls, allowing the near real time valuation of assets, liabilities and other bank exposures, even in the case of complex institutions present in multiple jurisdictions. Such an approach is consistent with the most recent developments in banking regulation insofar as it seeks to ease the burden of regulatory compliance through automation of reporting mechanisms and can further enhance both risk management and the required stress testing of bank vulnerability in the event of a systemic crisis. Data systems for valuing assets and assessing risks are critical to all approaches: this can work for smaller institutions but can be more difficult for large systemically important banks. However, this is a responsibility of bank corporate governance, based on often inadequate metrics of returns and judged in large part by compliance with regulatory requirements. Digital technology can allow a reduction of the current demanding requirements for capital and liquidity, and their consequent high level of regulatory involvement in bank governance. Consequently, it could be easier for banks to accept credit risk and provide their essential financial support for economic activity across private industries. Further, it can avoid any need to protect banks from loss of earnings resulting from the incursion of new technology-based start-ups and fintech providers, so enhancing the provision of banking services to both consumers and firms. However, many of the changes required in order to use technology to achieve more effective information disclosure also deliver private commercial benefits. The principal issue is that many of these are coordinated changes, for example the adoption of standard approaches for recording, summarising and communicating data on credit and other banking exposures. The challenge is more about obtaining agreement for change across the industry rather than imposing a regulatory mandate on banks to undertake steps which they do not perceive as being in their own interest. 86 W. G. Johnson, “Caught in Quicksand? Compliance and Legitimacy Challenges in Using Regulatory Sandboxes to Manage Emerging Technologies” [2022] Regul Gov accessed 1 March 2023. 87 C. Ford and Q. Ashkenazy, “The Legal Innovation Sandbox” (2022) Am J Comped Law (Forthcoming 2023), 45–46 accessed 1 March 2023.

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C H A P T E R 11

Control Centres in the Context of Unmanned Ship Operations – Their Status and Potential Liabilities* Professor h.c. Dr iur. Bülent Sȍzer I. Introduction The subject of this chapter concerns a novel, indeed rather revolutionary, conception, commonly called an “unmanned ship”. This idea is apt to change very drastically, and to a large extent distort, our established ideas about the meaning of the word “ship”. So disruptive is the concept of the “unmanned ship”, indeed, that it still has no generally accepted name, alternative titles including “autonomous ship”, “self-steering ship” or “unmanned maritime vehicles”. And this is quite apart from certain doubts as to whether in law it can be considered as a ship or not.1 The idea of the “unmanned ship” has upended our conception of a “ship” by splitting it in two. Whereas the ship as we used to know it was a single unit, unmanned ship technology requires a duality between components on land and at sea. The part at sea, the physical entity which we used to refer to as the ship, is deprived of the element that once managed and operate her since the dawn of time, that is the human element. The part on the land, meanwhile, will neither be part nor extension of the ship. But it will carry huge significance, and indeed constitute the focal point of unmanned ship operations. Though functionally attached to the part at sea, it is physically separated from it, often by thousands of miles. II. Definitions A. Ship Those who are, even remotely, associated with the shipping world know that there is no definition for ship that is universally accepted. However, taking into regard some elements in the definitions one comes across in international conventions,2 which may serve as * This chapter draws on research conducted for the writing of the book Unmanned Ships and the Law (ISBN 9781032057415) that the author is publishing with Informa Law from Routledge. 1 See, on the classification issue as it affects vehicles that are capable of controlled, self-propelled movement in water without any personnel on board, R. Veal, M. Tsimplis and A. Serdy, “The Legal Status and Operation of Unmanned Maritime Vehicles” (2019) 50 Ocean Development & International Law 23; H. Ringbom and R. Veal, “Unmanned Ships and the International Regulatory Framework” (2017) 23 Jo Int Mar Law 100. The IMO uses the title “Maritime Autonomous Surface Ship (MASS)” and defines it as a “ship, which to a varying degree, can operate independent of human interaction”. See accessed January 2023. 2 This study is limited to international conventions only and declines to get entangled with domestic legislation. In this regard, see particularly, the report by the present author attached to CMI International Working Group,

DOI: 10.4324/9781003376347-13

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professor h.c. dr iur. bűlent sȍzer common denominators, I propose to define it as: “A navigable seaborne craft, used or capable of being used, for the carriage of passenger and/or cargo”. B. Unmanned Ship As already stated, there is equally no commonly accepted definition for an unmanned ship. After all, except from some specimens used for experimental purposes, we don’t as yet have one that looks like those depicted in representations, such as we find produced by corporations like (for instance) Rolls-Royce. For these purposes, however, I would like to propose the following one: “A ship which has the capability to navigate without being under the command of an on-board crew”. C. Control Centre For the time being, and – to use an old metaphor – despite gallons of ink spent, there is as yet no control centre in existence. Therefore, we have no live specimen to examine, except from some local units offering limited and restricted services. Hence, what the reader will find in the following pages will be largely theoretical and speculative propositions. The control centre by definition is central to unmanned ship operations and needs to be regarded as the “foundation stone” of the whole scheme; so its definition is important. Taking into account what materials currently come to hand, I propose to define a control centre as follows: an “assemblage of computer hardware, telecommunication equipment and various high-tech tools, managed and operated by assigned personnel, whose purpose is to ensure safe and proper navigation of unmanned ships”. III. The Control Centre A. An Overview The control centre3 (hereinafter referred to as the CC) will, as stated, occupy the focal point in unmanned ship operations. Its weight and importance will be enormous: this is not only control, but, depending on the automation levels,4 the function of steering and “Ship Nomenclature” (CMI) < https://comitemaritime.org/wp-content/uploads/2018/05/Letter-to-Presidents-ofNMLAs-re-IWG-on-Vessel-Nomenclature-080316.pdf> accessed January 2023. 3 I will call it the control centre, but it is also sometimes termed the “shore-based control centre” (see S. Baughen, “Unmanned Vessels and International Conventions for the Carriage of Goods by Sea” in B. Soyer and A. Tettenborn (eds), Artificial Intelligence and Autonomous Shipping (Hart Publication 2021) pp 81–98; S. Baughen, “Who Is the Master Now? Regulatory and Contractual Challenges of Unmanned Vessels” in B. Soyer and A. Tettenborn (eds), New Technologies, Artificial Intelligence and Shipping Law in the 21st Century (Informa Law from Routledge 2020) pp 129–147, or if one does not wish strictly to limit it to land-based units, the “remote control centre”; A. Buğra, “Insuring Remotely Operated Vessels: Tempestuous Waters for Hull Insurers?” (2019) CML Working Paper Series, 19/08, NUS Law Working Paper. 4 There are different definitions of the levels (or degrees) of automation, I will cite only the one applied by the IMO: Level 1: A ship with automated process and decision support. Seafarers are on board to operate and control shipboard systems and functions. Some operations may be automated and at times be unsupervised but with seafarers on board ready to take control.

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control centres in the context of unmanned ship operations navigating a ship and thereby, albeit under strictly defined rules and procedures, commanding her through remote control devices. Further, the CC, again remaining within the parameters strictly defined, will be tasked in any case with operating the vessel remotely in cases of emergency. In other words, regardless of how sophisticated her design, equipment and outfitting, an unmanned ship will unavoidably be monitored and kept under constant supervision by the CC. This supervision will normally be land-based but could at least theoretically be situated on board another vessel. The CC should nevertheless not be entirely identified with the ship. It will not be a part, or an extension, of her; nor will it be seen as a kind of surrogate bridge. The personnel employed there will, as like as not, not be seafarers. True, there may be some exceptions to these propositions, but this will be the paradigm which I will apply as I proceed with the subject. B. Likely Features of the CC Most probably more than one CC will at various times be assigned to monitor and control a given ship, depending on the routes she operates and the distances she covers. The different CCs may well be in different countries. A CC is likely in most cases to be either a stand-alone building, or a space within an office building, containing not only the relevant equipment, tools and machinery but also accommodation such as a lounge for relaxation, catering facilities and even possibly sleeping quarters for those working in shifts who do not live nearby. Within these premises, there will be the core of the CC comprising the main service units, their numbers depending on the number of vessels controlled by the centre. These are likely to be physically separated from each other, possibly in enclosed cubicles. The mechanical and electronic functions essential for unmanned ship operations would be largely performed by these individual service units. Hence in any CC, alongside many metres of “wiring and piping”, there would have to be a large array of other machinery, such as generators, communication network infrastructure, mainframe computers and the like; e.g. computer hardware (mainframes),

Level 2: A remotely controlled ship with seafarers on board. The ship is controlled and operated from another location. Seafarers are available on board to take control and to operate the shipboard systems and functions. Level 3: A remotely controlled ship without seafarers on board. The ship is controlled and operated from another location. There are no seafarers on board. Level 4: A fully autonomous ship. The operating system of the ship is able to make decisions and determine actions by itself. In practice Levels 1–2 have nothing to do with automation, for the great majority of the conventional ships ploughing the oceans are already equipped with these facilities. As the automation level increases, the functions of the CC decrease, reduced to almost nil at Level 4, except from monitoring and maybe warning the persons responsible for the algorithms in case of emergencies. This probability will also affect the liability of the CC, for which we shall elaborate later in this contribution. For detailed and comparative analyses of levels (degrees) of automation, please see: S. Baughen and A. Tettenborn, “International Regulation of Shipping and Unmanned Vessels” in B. Soyer and A. Tettenborn (eds), Artificial Intelligence and Autonomous Shipping (Hart Publication 2021) pp 7–24 at 8–10.

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professor h.c. dr iur. bűlent sȍzer several ancillary equipment, etc. To this would have to be added safety features, such as sensors and cameras to monitor the outer periphery of the building.5 It needs to be remembered, however, that the services and support provided by a CC can equally be delivered from offshore, either from a facility installed on board a ship moored or lying at anchor, or on a barge or floating platform. There are, moreover, some arguments in favour of siting CCs offshore. For one thing, land can be expensive and hence reduce the return on investment, even if what is chosen is a few hundred square metres in some godforsaken place in the back of beyond. Secondly, there is the advantage of flexibility. A CC could be set up on board the ship that it was assigned to monitor and control, or alternatively on board one of the vessels in a fleet where it could provide services to all that vessel’s sister ships as they operated their regular commercial services. In either case, whether on land or offshore, the focal point must be the service unit or units that in practice provide the control services. Each, it is likely, will have to be under the management of one person, who can be termed the chief controller. In practice many of the functions of the CC will be overseen by that person. They would nevertheless be assisted by others, notably other controllers or, lower down the hierarchy, a group best named a “support group” responsible for the proper functioning of the multifarious machinery, tools and equipment comprising the CC. C. Tasks and Functions of the Control Centre i. In General The CC is likely to be the mainstay or “command post” of unmanned ship operations. The ship herself will be deserted, and fairly helpless if contact with the centre is interrupted or, worse, totally ceases. It follows that unmanned ships will have to be constantly monitored and kept under control and supervision by CCs. The degree and the level of intensity of the control required will be related to the automation level of the vessel, decreasing as the latter increases. Such controlling and monitoring clearly require high-tech communication systems and a properly arranged and structured network. Even emergency or “fall-back” procedures depend on proper functioning of such connections. It goes without saying that algorithms of both ship and CC must be fully compatible with each other and able to operate synchronously. It equally follows that it is vital for an unmanned ship to be equipped with both hardware and software that are capable of sustaining the link between the ship and the control centre in almost all conditions, and that such a vessel should not be considered seaworthy if not so equipped. Alternatively, the CC will also be under obligation to have and operate a communication system that has the capacity to maintain the communication between the CC and the ship. This raises the question of each party’s accountability for damage to the other party due to deficiency in its communications systems, whether resulting from ordinary causes

5 It becomes apparent that even a modest size CC will need fairly sizeable premises and cannot be represented as simply a chair and screen, squeezed into one unused room, as sometimes depicted.

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control centres in the context of unmanned ship operations or from actions such as hacking or cyber-attacks. For these purposes I propose a new “worthiness”, which I venture to christen “communicationworthiness”.6 Communicationworthiness should, I suggest, encompass both the ability to sustain connectivity and the capacity where appropriate to provide expected services and support. This will lead to three-pronged duty: equipment must (a) have sufficient quality and technical attribute to enable the communication between the ship and the CC to proceed without delay; (b) be immune from and resistant to interference; and (c) in the case of the ship, have the capacity to process and both respond to and fulfil the instructions coming from the CC. ii. Controlling Controlling the ship assigned to it would obviously be the primary duty and responsibility of the CC. It should be regarded as an active duty to be performed continuously and unceasingly and should not be limited to mere observation. Controlling is a multi-faceted function, relating not only to the navigation of the relevant vessel, but also to safety. Safety is here used in the widest sense of the term. True, it covers the navigation of the vessel; but it also includes the safety of other vessels, of maritime traffic in the vicinity and also environmental considerations. The control centre should thus be responsible for following every single move of the ship, in an analogous way to watch-keeping in accordance with the relevant rules at present. iii. Monitoring Unmanned ships need to be monitored and kept under surveillance at all times, and this should also be one of the basic duties of CCs. This should include not only physical monitoring, but also more widely data collection and storage. Whatever has been transmitted to the control centre’s screens should have to be stored in appropriate and dedicated places for future uses, both as source data for AI and also because such precise data would also be of utmost importance in illuminating the situations in allegations of liability, especially during court proceedings. iv. Navigating The CC will have to be able to make sure the ship can be steered in cases of emergency, in the case for example of disruption or severance of communication connections, the breakdown of computer systems or software, or the occurrence of unforeseen events, like unpredictable tornados or tempests. It will have to have similar abilities in the event of marine congestion, collision of ships in the vicinity of or on the route of the vessel under control and similar navigational incidents. The major distinguishing factor between an unmanned ship and a conventional one is of course a possible total absence of direct manual involvement of human element in the navigation of the vessel. There will be no person available to handle the helm, communicate over the engine-room telegraph or manipulate the levers and switches in the engine-room. With an unmanned ship all commands and interventions must be sent reliably through computerised means utilising the necessary algorithms. 6 The extreme importance of the communication between the ship and the CC could justify the proposition of a new concept as “communicationworthiness”, or at least inclusion of this element as a significant factor in assessing the seaworthiness of vessels in unmanned ship operations.

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professor h.c. dr iur. bűlent sȍzer These algorithms will be tasked with determining any need to interfere with the navigation and with warning the CC to take any necessary measures or run any necessary software. The controller will not be sending commands directly over such things as satellite connections, but instead will have to choose the program that was designed for the prevailing circumstance and instruct the computer to run it.7 Bearing in mind the ever-present possibility of unexpected and unplanned reactions by, or simple unresponsiveness of, the computer systems, I suggest the necessity of formally designating a superior authority, that is a person with special powers to intervene and override the systems when they do not react as necessary in cases of emergency. This person would have the power to allow running of programs without endorsement by the system or bypass the system completely and assume manual handling of the ship in cases of ultimate emergencies, where the algorithms do not provide support or when systems stop functioning completely. This power should be allowed to be exercised only as a last resort, for instance where non-intervention would definitely cause irreversible and catastrophic consequences: for instance, where a fully-laden supertanker lost control when sailing towards a heavily populated area. v. Data Collection While monitoring and keeping the ship under continuous control, the CC must also be tasked with the duty to collect and store data transmitted from the ship (including internal data, such as information about conditions in the holds and other places where cargo is stowed). Such a data collecting process is vital to ensure proper situation awareness and proper responsiveness; the CC will after all be likely to take decisions based on the data received. D. Legal Regime Applicable to the Control Centre The CC will now become the “nerve-centre” of the unmanned ship, as most of the operations conventionally performed and executed from the bridge will now be discharged from the CC instead. Largely pre-programmed computerised systems will take over, allowing only a very limited authority to the human element which hitherto has controlled the vessel from the bridge. As stated earlier, however, it is a fundamental principle that the CC will not as such be a part of the ship; it is not an extension of her, nor will it be a surrogate shoreside bridge. This is important as regards legal consequences. It will considerably affect the legal status of the CC and the personnel who work in it. CCs can be set up anywhere in accordance with the management plans of the shipowner, regardless of the regular or planned routes of the ship it ostensibly relates to; the presence of computers and telecommunication networks means that those in the CC will not need, nor even have the opportunity, to see the ship directly and physically. There are sometimes proposals that one CC could control more than one ship.8 I find this arrangement totally unacceptable and will discuss it at length in due course. For the 7 The programs will be designed and prepared not by only taking into regard the planned course of the voyage, but also the critical points of the voyage, such as currents, straits, sand banks, coral reefs, shallow waters, etc. 8 A. Buğra, “Insuring Remotely Operated Vessels: Tempestuous Waters for Hull Insurers?” (2019) CML Working Paper Series, 19/08, NUS Law Working Paper, pp 19, 22; S. Baughen and A. Tettenborn, “International

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control centres in the context of unmanned ship operations moment, however, I will assume that even if there is an appearance of one CC controlling several ships, in fact there will be several controllers in a CC complex, with each in control of one ship only. Conversely, however, it may be necessary for one ship to be monitored, controlled and supported from time to time by more than one CC. This may be necessary where the range of communication networks may not be sufficient, or where governmental authorities require vessels to connect to the CCs they are operating while entering and leaving ports and/or sailing in their territorial waters. It follows that the ship and the CC to which it is related, are likely, quite frequently, to be of different nationalities.9 The CC, from a purely legal point of view, should not be identified with the “ship”, being neither a part of, nor an extension to, her. Instead, regardless of its importance in the unmanned ship context, it is likely to be treated more as any other workplace, office or unit within the corporate organisation of the company which owns and operates it. It follows that CCs will have to be subject to the laws prevailing where they are set up, with their juridical status determined in accordance with the relevant local rules. Thus, rights in the CC will have to be determined by the rules of the relevant national legislation, particularly as regards selling or hypothecating it. Similarly, any claim to seize or enforce the sale of an onshore CC will necessarily be conducted in accordance with the terms and conditions of the local law. This applies both to the physical premises and also to any movable property, like computer hardware, communication tools and equipment, etc, used in connection with it. So too with other areas of law. Planning rules and limits on the use of the premises10 will be set in accordance with the local rules; financial obligations will be those of domestic law,11 as will penal law, employment law, workers’ protection, maternity leave and so on. More importantly, the legal status of the personnel working in it, for example whether they count as seafarers, will be determined in accordance with the provisions of the local rules. This also means that the legal system to which a control centre is subject will, not infrequently, be different from the one that applies to the ship, or ships, as the case may be, which it controls12 and therefore over which it enjoys a certain power and authority. E. Legal Nature of the Control Centre The CC is, quite like the unmanned ship herself, a unique invention, and at least for the moment somewhat alien to the maritime world. In terms of legal classification, it will be a service provider since it will not manufacture or produce anything. Further, the CC (or speaking more precisely the controllers in it), when analysed critically, will not be directly Regulation of Shipping and Unmanned Vessels” in B. Soyer and A. Tettenborn (eds), Artificial Intelligence and Autonomous Shipping (Hart Publication 2021) 12; R. Veal, M. Tsimplis and A. Serdy, “The Legal Status and Operation of Unmanned Maritime Vehicles”, (2019) Ocean Development & International Law, pp 35–37. 9 This is a situation somewhat similar to one that one comes across quite frequently: a company is created under the laws of one state, the ships it owns are registered in different states, and each fly different flags and therefore all have different nationalities. 10 Think of a compulsory purchase order from the municipality to create something like a children’s playground. Reverting to legal means to prevent this may be available, but it is certainly something of a “sword of Damocles”! 11 “Tax Havens” may look attractive when money is spoken, but they are rather unpredictable! 12 To reiterate my understanding that each ship is controlled by separate, individual controllers.

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professor h.c. dr iur. bűlent sȍzer involved with the steering of the vessel, but will act at one remove: they will have to ensure that whatever the algorithms require and direct regarding the navigation of the vessel is done. Only under exceptional circumstances would the controllers become responsible to directly steer the ship, but again this would only be through computerised systems and exclusively in accordance with the commands and instructions imposed as well as the parameters drawn by the relevant algorithms. When the legal nature of the CC is characterised as a service provider, then the contract between the CC and the recipient of services will have to be categorised as a service contract. A contractual relation will materialise where the CC and the ship belong to different legal entities; where the CC is a department of the shipowner, the duties and responsibilities will be determined by the company’s internal regulations. F. Who Owns or Operates a Control Centre? One can think of several possibilities here. I shall go over the feasible options in this section. This subject matters since it will bear vital importance on the liability issue, especially concerning limitation of liability. i. The Shipowner This is the most simple and straightforward approach: a shipowner conducting its unmanned ship operations through a CC which it owns and operates through its own employees. In this context, “shipowner” means a company with its own legal personality to enter into legal relations with third parties, who happens to be the proprietor of an unmanned ship, whether a single one or a fleet of several. The CC in this case will be a department, or a division, of the shipowner, i.e., the shipowning company, and the personnel employed in the CC would be its employees. Consequently, the whole arrangement, especially the questions of liability between the CC – or rather the controllers – and the shipowner will be subject to the rules and regulations of the shipping company. ii. The Operator of the Unmanned Ship Another possibility is the operator: that is, the person, most probably a company, that uses a ship on its own behalf without owning it (often referred to as owner pro hac vice in legal parlance). In other words, we are talking of a person who operates a ship, as if it were her owner, but without legally owning her: classically, a bareboat charterer. Admittedly, this option may not look very feasible for an operator. To build and manage a CC would be a rather burdensome enterprise, except maybe where the charter is for a long period – say five years or more – or where more than one vessel is chartered, or where the operator undertakes to use the CC to serve other shipowners and earn money in the meantime. iii. A Shipowner Providing Services to Other Shipowners Another possibility is that a shipowner, while running its unmanned ship operations from a CC it owns, may in the meantime offer services to other shipowners and operators. This option may carry with it risks connected with its responsibility for the operations 146

control centres in the context of unmanned ship operations of potential competitors (something that could be called the “stepchild syndrome”). Nevertheless, it could still be attractive when looked at from an economic perspective and the need to utilise management efficiently, especially when tied to a properly and carefully drafted contract with other recipients. One important risk in this arrangement would be that the persons employed in the control centre would not be the employees of the other shipowners. The latter would consequently be deprived of entering direct relation with the controllers and other persons in the control centre. This subject may be settled through clauses in the contract, somewhat resembling “Employment Clause” in time charters, offering comparable powers to the contracting party, but it could still be risky for the contracting shipowners. iv. An Independent Contractor It may be a reasonable and practical, as well as an economically attractive, alternative to have a CC run by an independent contractor. This avoids the “stepchild syndrome” problem but may still give rise to concerns by one or more clients that others are more favoured than they are. v. An Official Body – A Governmental Agency Taking into regard the risks involved, some governments may very possibly opt to set up their own special departments to perform CC services. These units will of course be subject to and operate in accordance with the relevant rules of the domestic legislation. Therefore, while in some countries they may be functioning under private law, in some countries they may be at least partly subject to the provisions of administrative law. Littoral states could possibly use these arrangements in a limited way, for example requiring the use of their own state CC when an unmanned ship requests entry to one of its ports or an adjoining strait, and possibly even when it seeks to pass through its territorial waters. The shipowners and ship operators will have to enter legal relations with these units, whether based on private law or administrative law; hence the service conditions may be somewhat flexible or rather more rigid. Problems could arise in this context over the relations between CCs owned and operated by private entities and those run by governmental offices; particularly in cases when one CC needed to transfer a ship to another, as could be the case where it becomes necessary because of communication problems, or legal constraints imposed by the local authorities. G. The Personnel Employed in Control Centres i. In General CC personnel would, speaking generally, be employees of either the shipowner or the owner of the CC. In either case they would not, it is suggested, be regarded as seafarers, since they would be neither employed, nor bound to perform their duties, on board a ship (unless of course the CC was itself installed on board a ship: see later). Instead, their legal status would be determined by the local rules of the jurisdiction where the CC was situated. 147

professor h.c. dr iur. bűlent sȍzer Admittedly, some authors propound the view that controllers, having analogous duties as regards navigation to those otherwise attaching to on-board crew, should be treated as members of the crew: similarly, the chief, or principal, controller, or whoever was primarily responsible for the operations, would be equivalent to the master.13 I do not agree with this view. But in any case, the legal status of the personnel employed in the CC would logically have to be determined by the relevant provisions of the domestic legislation. ii. A Control Centre Situated on Land Regardless of its physical location, a CC on land will be regarded in the same way as any office or workplace, factory, bank or supermarket. It will have no physical relation with the ships it monitors and supports. Consequently, the persons working there will not be regarded as seafarers, unless of course the local rules stipulate to the contrary,14 since the CC as a whole and the persons employed there would be subject to the local terrestrial law. Moreover, as will be discussed later, the international conventions that deal with “seafarers” do not contain any rule apt to encompass the persons working in the CC which is situated on land. (One must admit, however, that this is not very surprising: these conventions did not envision unmanned ships or CCs.) Therefore, without regard to the position and the job-definition, the “controller(s)” cannot be regarded as seafarer(s). It equally follows that other personnel employed in other capacities on a land-based CC would also not qualify as seafarers. iii. A Control Centre Situated on Board a Ship If the CC was on board a ship, by contrast, it is likely that the persons working there would be regarded as seafarers and that they would be subject to the law of the relevant vessel’s flag. Furthermore, in this alternative, the provisions of the Maritime Labour Convention could, importantly, become applicable. Art. 2/1-f of that Convention defines a seafarer as “any person who is employed or engaged or works in any capacity on board a ship to which this Convention applies”. Furthermore, except as expressly provided otherwise, this Convention applies to all ships, whether publicly or privately owned, ordinarily engaged in commercial activities, other than fishing vessels and ships of traditional build such as dhows and junks. Under this clause, unmanned ships will be covered by the provisions of the Convention, when they have crew on board. Additionally, it is worth looking at the relevant provisions of SOLAS. In this, Reg. 2 (e) (I) defines seafarers as “The master and members of the crew or other persons employed or engaged in any capacity on board a ship on the business of that ship”. According to both these provisions, the key factor, the principal determining element, is that of working on board a ship. The kind or nature of the work is not important, because these provisions specifically stipulate that it is sufficient to be “employed or engaged in 13 S. Baughen, “Who Is the Master Now? Regulatory and Contractual Challenges of Unmanned Vessels” in B. Soyer and A. Tettenborn (eds), New Technologies, Artificial Intelligence and Shipping Law in the 21st Century (Informa Law from Routledge 2020); R. Veal, M. Tsimplis and A. Serdy, “The Legal Status and Operation of Unmanned Maritime Vehicles” (2019) Ocean Development & International Law, pp. 35–37. 14 Even then, it is difficult to say that they will in the true sense of the term be seafarers.

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control centres in the context of unmanned ship operations any capacity” to be considered as seafarer. Nor is the skill or ability, nor of course the rank, of the subject employee relevant, since the provisions refer to “any person” and does not look for any qualification. The aforementioned provisions, moreover, very explicitly refer to “any person . . . in any capacity” and “or other persons . . . in any capacity”, and hence leave no room for an interpretation that excludes certain personnel from the application of the conventions. This is in accordance with the scheme of the relevant conventions, whose objective was to treat everybody on board a ship equally, i.e., equal treatment of those facing the risks of the sea, regardless of their position or status. If so, it should follow that such people as computer experts, coders, communication technicians and the like will also be regarded as seafarers and covered by the provisions of these conventions, merely because they were working on board a ship and confront the inconveniences and more importantly perils of the sea. Without going into much detail, I would like to draw attention to the employment problems that may arise from this. While these persons are on land, their employment conditions will be subject to the local rules, or to a collective agreement, which was drafted, again, in accordance with the relevant domestic legislation.15 Neither MLC nor SOLAS is applicable for the employment arrangement there, since a CC is neither a ship nor a part of it. Nevertheless, when they work on a sea-based CC, their work conditions will be subject to the law of the flag, or to the collective agreement drawn, again, pursuant to the law of the flag but within the limits as prescribed by the applicable international conventions governing employment conditions, primarily the MLC. Let us assume that a group of the defined personnel, after working for a certain period in the control centre, go out to sea with the unmanned ship and spend a month there, before being transferred to another ship of the shipowner, but one flying a different flag. What law will govern their rights? H. Liability of the Control Centre i. An Overview – Some Fundamental Precepts I do not intend here to go into the details of rules regulating liability, but merely repeat the fundamental principles and then try to develop a theory, which I think could be taken as a basis in designing the liability regime for unmanned ships. I begin with a most fundamental principle: whoever inflicts damage must pay for it unless certain rules provide a means of defence. Where this applies, the universal maxim is Restitutio in Integrum, i.e., full reparation,16 unless, again, certain rules stipulate for a lesser amount, which may take place either in conventions or national legislations. Secondly, we are here talking of damage caused – speaking generally – either by a tortious act or through breach of a contractual duty.17 In both cases, for a liability to attach, 15 Personnel posted to a CC established in a foreign country may still be subject to their original contract, insofar as its provisions do not infringe the mandatory rules of the local laws. 16 See J. Gray, “Restitutio in Integrum”, in Lawyers’ Latin, London: Robert Hale Limited, 2006. 17 A damage may be caused also through unjustified enrichment, but this is a very rare probability within the context of the present subject.

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professor h.c. dr iur. bűlent sȍzer law, again as a general rule, requires the existence of fault. Exceptionally, however, there may be liability without fault, or absolute or more often strict liability. Fault liability is the older idea, and the one more commonly encountered. Strict liability is more modern, and tends to be based on the development of humane concerns for the protection of the aggrieved parties; but it is rather the exception, its application depending on its being expressively stipulated by provisions of the applicable law, even if justifiably gaining ground. Another fundamental principle is that the damage must be fully compensated, in other words, the compensation must be equal to the damage, “neither a penny more nor a penny less”. This principle is also called full and complete redress. As opposed to this rule there is the “limited liability” or principle of “limitation of liability”. This is another exceptional rule and was devised as a counterbalance against the strict liability principle. The party liable will not be obligated to pay for the whole damage but will be allowed – or granted the privilege – to pay only some lesser amount stipulated and designated by the relevant law. The “liability” then as a concept, can be divided into and theoretically analysed and examined under the following headings: (i) (ii) (iii) (iv)

Contractual liability/tortious liability; Fault liability (liability based on fault)/absolute (strict) liability; Personal (direct) liability/vicarious liability; Full liability/limited liability.

ii. Legal Nature of Liability Strict liability does not depend on actual negligence or intent to cause harm. It is imposed without the claimant having to prove that the defendant was at fault, and with no room for the defence that the defendant took reasonable care. Mere occurrence entails liability, although certain limited grounds for exoneration may be afforded, as will be discussed in due course. The fundamental principle and also the essential objective that should be taken into regard in designing the liability regime for unmanned ship operations, which will also be in line with the contemporary understanding in the law of carriage in general, should be I suggest that the party seeking redress must not spend much time and effort to prove its case and get compensated. The claimant must not be left in a position to struggle in the labyrinths of procedural rules to prove who did what and how, and therefore ought to be held accountable to pay damages. It is therefore submitted that the most appropriate liability regime for the damages caused by unmanned ships or speaking more generally, the liability for the damages that are related to unmanned ship operations, would be strict liability/liability without fault. Liability based on fault requires that the claimant must prove the fault of the defendant. But it will be extremely difficult, if not entirely impossible, for the claimant to prove fault in unmanned ship operations. The principles of justice and fairness mandate that the claimant should not be put under this ordeal. Unmanned ships involve high technology, of an extremely complex and complicated nature. Moreover, they are likely to be the product of several manufacturers, a substantial number of whom will not be of the category normally – and traditionally – involved with conventional ship construction, 150

control centres in the context of unmanned ship operations such as manufacturers of computer hardware, system analysts, software developers and so on. Many will take part as sub-contractors and will remain anonymous even to the main contractor, the shipyard. Then there will be the CC, equipped with a number of sophisticated tools and materials. In litigation involving unmanned ships, it will be not only the ship, but the CC whose liability is at stake. A claimant should not be called on to prove not only what was wrong with the ship and the human elements related thereto, but also what may have been the problem with the CC and its personnel. Further, unmanned ships may well be operated with different levels of autonomy depending on the conditions, sometimes relying more heavily on the support from the CC, but sometimes navigating autonomously, thereby making it difficult to determine at which stage the event that gave rise to the damage took place, and creating further hurdles for the claimant. For all these reasons, it appears that reasonable and justifiable rule should be the strict liability of the responsible party. If so, then the burden on the claimant will be to prove only (a) the loss, (b) the event and (c) the causal connection. Grounds for evading liability should be limited, perhaps, to (a) force majeure, (b) wilful misconduct by a third party and (c) lack of causal connection, with contributory negligence by the claimant available to reduce damages in a suitable case. iii. Who Should be Held Liable? a. In General We can begin with a straightforward proposition. There are two principal parties, or actors, who are also the biggest entrepreneurs as well as the employers in the shipping world: the shipowner and the ship operator. Carriers may also be added as possible defendants. It is submitted that the person who appears in the ship register as the owner of the ship which caused the damage should be held liable for the consequences of that damage. Once the ship has been delivered to the shipowner, in other words, it will bear overall responsibility for the ship. It will of course be entitled, under and in accordance with the applicable law, to rent or lease or charter its ship to other people but will remain liable for the damages the ship may give rise to. Where a ship was being used by an operator at the time of the event, the operator should also be held liable. But here the liability must be joint and several. Handing over the vessel to a person who qualifies as an operator should not be an instrument of relief from liability. The third actor, the carrier, also has a part to play, and a quite important one at that, in most maritime ventures. The liability of the carrier is regulated separately from the liability of the shipowner; moreover, it is subject to different rules depending on whether the contract of carriage was for passenger or cargo. The unique characteristic of the unmanned ship introduces yet another potential subject of liability, the CC. Although there is still no clear understanding on the legal nature of the CC and no unanimity as to its status, especially concerning whether claims can be brought against it or not, the CC will, all the same, play a role in almost all the problems involving unmanned ship operations, insofar as a causal link can be established whereby the CC can be held accountable. In this brief study, only the liability of the CC will be examined. 151

professor h.c. dr iur. bűlent sȍzer b. The Liability of the Control Centre (I) GENERAL

What should first be mentioned on this point is the interrelation between the level of automation and liability as well as seaworthiness.18 Unmanned ships may well have to sail at different automation levels at different times, because of weather conditions or of legal requirements; they might, for example, navigate at Level 1 of automation when entering and leaving port, or passing through canals and straits, even though they may otherwise have the capability to sail even at Level 3 or 4. Levels 1 and 2 have no serious relevance to an unmanned ship, since at these levels of automation she will be under the command of, and steered by, an on-board crew under the authority of a master, As a corollary of this situation, even if a CC were set up with a view to operations at automation Levels 3 and 4, it would have no function or responsibility throughout Level 1 and 2 passages. This situation also affects the seaworthiness of the ship, for being looked upon as a conventional ship, she must respond to the requirements of seaworthiness applicable to conventional ships. In this respect, the CC should not carry any responsibility while the ship is sailing at Level 1 or 2, since she will be under the command of the on-board crew. Conversely, there ought to be sufficient number of crew on board with the required rating for that voyage or stage. A further point is worth noting: insofar as the necessity for alteration of automation levels was, or could have been, foreseen while the voyage plan was made, any failure in this respect will entail unseaworthiness at the commencement of the voyage. Subject to what I have said earlier, the liability of the CC could be examined under the following headings: (i)

Liability for damage which the ship herself suffers, while she is under the control of the CC, and (ii) Liability for damages caused to third parties by the ship while she is under the control of the CC. Taking into regard probable alternatives, this subject can be explored as the following. But it must be borne in mind that the proposed liability regime is for the damages caused by unmanned ships and therefore will not apply to disputes arising from contractual relations between shipowners and CCs. (II) A CONTROL CENTRE OWNED AND OPERATED BY A SHIPOWNER19

1. A Ship Also Owned by the Shipowner Suffers Damage, for Instance by Grounding or Sinking In a case where the ship herself suffers a damage, the proposed rules will not be applicable. This probability would be an internal matter of the organisation of the shipowner and the company rules and regulations would apply.

18 See supra notes 4 and 6. 19 In the following scenarios, the CC is organised as a department of the shipowner and not as an independent juridical person or a corporate entity nor constituted as a subsidiary of the shipowner, and therefore, cannot be sued separately from the shipowner.

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control centres in the context of unmanned ship operations But, in case the ship was carrying cargo and the cargo suffers a damage, the shipowner will be liable and will have to compensate the damage in its capacity as the owner of the CC, pursuant to the rules described earlier. If the shipowner was also the carrier, the cargo interests will have the right to sue as well, but the result will be the same, since the carriers are also among the parties that will be held accountable. 2. A ship Also Owned by the Shipowner Causes Damage to Third Parties The ship may collide into another ship or damage harbour/port installations, or may otherwise cause loss of or damage to property, or gives rise to loss of life or personal injury. The aggrieved parties will sue the shipowner, again in its capacity as the owner of the CC. The cargo owners may sue their carriers, but this will also be subject to the proposed liability regime, as the carriers are also named as parties that can be held liable. Where the carriers pay the damage, they will have the right of recourse against the shipowner. After the shipowner pays the damages, it may take recourse against the CC, but as in the former case, at this stage the internal rules and regulations will apply. 3. A Ship Owned by a Contracting Party Suffers Damage This involves the situation where there is a contract between a shipowner and the owner of the CC, according to which the CC provides services to ships owned by other shipowners. As indicated earlier, the recommended liability regime is for the damages caused by unmanned ships, here the ship herself suffered a damage while being under the control of a CC, providing services under a contract. Therefore, this case will not be subject to the proposed rules, but to the terms and conditions of the contract between the parties. First, the terms and conditions of the contract between the shipowner – who owns the CC – and the contracting shipowner would be taken into regard. For disputes concerning points not governed by the contract, provisions of the applicable law will be given effect. If there was a cargo on board the said ship, the cargo interests would have the right to sue the owner of the ship as well as the owner of the CC pursuant to the proposed liability regime for unmanned ship operations. 4. A Ship Owned by a Contracting Party Gives a Damage to Another Ship, for Instance She Collides With Another Vessel This will be a probability comparable to the one written in 4. The aggrieved shipowner will sue the owner of the ship that has collided with its ship, but also will have the option to sue the CC. In case the owner of the colliding ship pays the damage, it will sue the CC by way of recourse. (III). A CONTROL CENTRE OWNED AND OPERATED BY AN INDEPENDENT CONTRACTOR

In this alternative, there will be a business enterprise with a CC it owns, offering services to other shipowners through contract. There will be no question of a ship that is owned by such independent contractor, since it is not in the business of shipowning. Therefore, the contractor will be liable if the ship of the recipient shipowner herself suffers damage, or the ship causes damage to third parties such as those enumerated in the preceding sub-paragraphs. 153

professor h.c. dr iur. bűlent sȍzer I. Limitation of Liability i. General It is submitted that the liability regime for unmanned ship operations should be susceptible to limitation. Limitation of liability is regarded as a counterbalance to the strict liability: for instance, this is the system of liability acknowledged by international conventions governing carriage. Therefore, it is quite justifiable to introduce limited liability to unmanned ship operations also. To give effect to this, a clause to this effect should be given place in any proposed international convention covering this area as a whole, or as the case may be, should be inserted into each individual convention in the sphere of maritime law. The parties who will bear responsibility are enumerated earlier in this chapter: namely, the shipowner, the operator, the carrier and the owner of the CC. They should be entitled to limit their liability, unless there is a reason to disallow limitation, as will be discussed later. There are several discussions on who should or ought to be granted the right to limit liability. This discussion is especially relevant concerning servants and agents and the independent contractors; while the former are acknowledged the right to limit, the latter group generally is not, unless an explicit and unambiguous rule of law stipulates otherwise. Consequently, it appears that an appropriate solution would be to channel the liability to the parties listed earlier and bar direct action against other persons. This alternative would both clarify and demarcate the defendants and limit the parties entitled to limit. However, in case any claimant takes advantage of a rule in the applicable domestic law and obtains the possibility of suing persons, other than the ones mentioned, such defendants should then be allowed to take advantage of the limitation rules also. One highly important topic about the limitation of liability relates to the control centre. The whole scheme of limitation, since the concept was introduced, has been based on the “ship”. All conventions, and also the national legislative provisions based on them, limit liability with reference to ship’s tonnage. But this is clearly not appropriate in the days of unmanned ships and CCs. Put briefly, a simple answer is advocated here: the CC should be expressly added to the class of those entitled to limit. It should, in other words, be made clear that the liability of a CC, or to be more precise, the owner of the CC, should, in an analogous manner to the 1976 Convention on Limitation of Liability for Maritime Claims, be limited by reference to the tonnage of the ship, which causes damage while sailing under the control of that CC to the same extent that the owners of that ship herself could have limited their liability. ii. Loss of Right to Limit Briefly put, the provision in Art. 4 of the 1976 London Convention (LLMC) could be used as the basis of the rules about loss of the right to limit. This formula has been accepted practically universally since it was first introduced by the Hague Protocol to the Warsaw Convention; it has now become almost the classical expression.20 20 Art. 25 of The Protocol reads as follows: “The limits of liability in Article 22 shall not apply if it is proved that the damage resulted from an act or omission of the carrier, his servants or agents, done with intent to cause damage or recklessly and with knowledge that damage would probably result, provided that, in the case of such act or omission of a servant or agent, it is also proved that he was acting within the scope of his employment”. The LLMC, Art 4, follows it closely: “A person liable shall not be entitled to limit its liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result”.

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C H A P T E R 12

Shipping Operators’ Obligations and Liabilities Under the International and EU Emission Reduction Strategy Professor Lia I. Athanassiou I. Introductory Remarks* Green economy and global commitment to GHG (greenhouse gas) emission reduction are interrelated and uncontested policy goals, ranking first in the international agenda. No one would ever dare to doubt the need for action to address climate change, in order to protect the future of our children and the preservation of our planet. Among other industries, the issue also concerns shipping (and will strongly continue to do so for years to come), as maritime transport is nowadays widely “conceived” as one of the planet’s major polluters. Indeed, the last decade shipping has been brought under the spotlight, as a factor continuing to exert pressure on the environment due to the considerable consumption of fossil fuels. Studies and statistics are regularly published to that end, illustrating that ships’ operation is a significant contributor to the climate change; GHG emissions and sulphur oxides emanating from shipping and port activities are by a great deal considered co-responsible for the global warming which leads amongst others to the rise of sea levels and to an increase in the frequency of extreme weather events occurrence. In fact, 940 million tonnes of CO2 emissions per year are attributed to shipping industry,1 corresponding to 13% of the total EU GHG emissions, the latter percentage being more than the emissions of any EU State. In the same line, it is pointed out that, if the shipping sector were a country, it would rank sixth in emissions in the world.2 In view of the future expansion of seaborne trade, IMO’s fourth greenhouse gas study3 highlighted that global shipping emissions are projected to increase 90%–130% by 2050. Based on the preceding, as well as multiple other elements and forecasts, publicly available, global awareness has been progressively built for greening shipping; we will take these assumptions as given for the purposes of that publication, although doubts could be raised for the structure and

* Many thanks are owed to F. Alexandrakis for the collection of a great part of the sources and the legal research conducted for the purposes of the present contribution. 1 A. Braakman, “Climate and Covid-19: Will the Shipping Industry Succeed in Charting the Right Course between Scylla and Charybdis?” JIML 26 (2020) 102, at 105. 2 Ibid. 3 J. Faber et al, “Fourth IMO Greenhouse Gas Study 2020” (IMO, 2021). last accessed 8 March 2023.

DOI: 10.4324/9781003376347-14

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professor lia i. athanassiou presentation of the statistics,4 the correctness of the forecasts, as well for the soundness of the conclusions drawn.5 In any case, the focus on shipping, despite its more limited impact compared to that of the land industries, would be easier to understand if replaced in the wider context of the sustainability-driven debate. This debate is wider as far as both the goals and the actors are concerned. It goes beyond the emissions and the climate change, addressing more general environmental, social, economic and corporate sustainability issues;6 in the same vein, it advocates a holistic, cross-cutting approach dismantling the path-dependent compartments of various economic sectors, countries and corporations, in order to serve the overarching goal of a coherent sustainability policy;7 under this perspective, which will be much discussed in the years to come, the non-inclusion of transport and logistics is seen as undermining the said need of coherence and interaction. II. Regulatory Roadmap A. Regulatory Action at International Level i. Sulphur and GHG Emissions The environmental impact of emissions being by definition an issue of global concern, shaping rules at an international level would be the only way to proceed to its confrontation. In fact, there has been observed a multi-faceted regulatory action to that end. The first initiative was taken by United Nations already from 2015 with the introduction of the Sustainable Development Goals (SDGs)8 and adoption of the Paris Agreement. The main objective of this agreement is to limit temperature rise to well below 2 degrees, maybe even 1.5.9 As far as shipping is concerned, IMO has been indicated as (and still remains) the most appropriate forum for regulatory action. Indeed, MARPOL devotes its Annex VI to the prevention of air pollution from ships.

4 One could read the numbers differently: 30% of the total CO2 emissions is anthropogenic, while 2–3% of the above 30% is attributed to shipping; [Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2015/757 in order to take appropriate amount of the global data collection system for ship fuel oil consumption data, 4.2.2019, COM (2019) 38 final at pg. 1]. On the other hand, agriculture and landused industries are responsible for 50%, and Energy and Factories for 18%. 5 Policy goals seem quite often to be contradictory if not mutually exclusive. For example, while focusing on the negative impact of shipping, it is also widely accepted that carriage of goods by sea and rail consumes less energy per tonne per kilometre than transport by road and air; thus, a change of transport modes in favour of shipping is highly advisable (European Environmental Agency, Specific CO2 Emissions per Tonne-Km and Per Mode of Transport in Europe, 2018). 6 See for example, B. Sjåfjell, “Responding to the Great Challenge of Our Time” in E. Eftestol-Wilhelmsson, S. Sankari and A. Bask (eds), Sustainable and Efficient Transport: Incentives for Promoting a Green Transport Market (Edward Elgar 2019), at 2. 7 Ibid at 13. 8 SDGs are namely 17 goals and targets that UN Members are expected to take into account in order to frame their policies over the next years on the way to a greener and more sustainable planet. From these targets, “goal 13” focuses on climate issues and highlights the necessity to take actions in order to combat climate change. 9 The Paris Agreement builds on the UN Framework Convention on Climate Change, bringing all nations into a common cause to reduce GHG emissions rapidly and to strengthen the ability of countries to build resilience and adapt to the impacts of climate change, including the need to ensure adequate support for developing countries.

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operators’ obligations, liabilities under reduction strategy The first attempt to specifically address the reduction of sulphur10 is now settled.11 Essentially from 1 January 2020 it was introduced a global 0.5% sulphur cap and from 1 March 2020 onwards an obligation not to have non-compliant fuel on board the vessel. If any of these two prohibitions is violated, i.e. either the shipowner uses fuel with highsulphur content exceeding the permissible limit under MARPOL on or after 1 January 2020 or he has non-compliant fuel on board on or after 1 March 2020, then he will face penalties and detention at the next port of a state that is party to MARPOL.12 The second broader initiative is related to the reduction of GHG emissions; our analysis that follows will mainly focus on this ongoing process targeting mainly but not exclusively decarbonisation. IMO has, as from April 2018, issued resolutions concerning the initial strategy to be followed on reduction of GHG emissions from ships;13 its ambition is to reduce the carbon intensity of international shipping by 40% by 2030 and by 70% by 2050 and GHG emissions by at least 50% by 2050, compared both to 2008 levels.14 A revision of the IMO’s initial strategy is expected to be conducted within 2023.15 ii. CO2 Emissions a. Newbuilding Vessels From a policy perspective, it was easier and more feasible to first regulate the newbuildings. CO2 emissions from newbuild vessels were addressed in Chapter 4 of ANNEX VI of MARPOL and more specifically in Regulations 19–22, adopted in 2011 and applicable as from 2013. The main attributes of these Regulations are the Energy Efficiency Design Index (hereinafter EEDI) and the Ship Energy Efficiency Management Plan (hereinafter SEEMP). EEDI applies to all newbuilding vessels, and it is essentially a significant technical measure aiming to promote the use of more energy efficient, and hence less polluting, engines and equipment to the vessels. The EEDI requires a minimum energy efficiency level per capacity mile for different types of ships. The specific figure that accounts for a particular vessel is calculated on the basis of a formula which takes into account the technical design parameters of the said vessel and is expressed in grams of CO2 per ship’s capacity mile. Following the implementation of EEDI, every new ship’s16 design has to meet a specific target in reduction of CO2 levels. Basically, the initial phase 1 of EEDI in 2015 aimed at 10% 10 The rules limiting the sulphur content of marine fuels for ships are specified in Regulation 14 of MARPOL. 11 IMO, issued in May 2019 guidelines for the consistent implementation of the 0.5% sulphur limit under MARPOL Annex VI. MEPC Res 320(74) (17 May 2019). See also, from the point of view of Greek law, Ministerial Decision 128/2016 (OGG B’ 3958/09.12.2016) implementing into the Greek legal order Council Directive 2016/802 of 11 May 2016 relating to reduction in the sulphur content of certain liquid fuels (codification) [2016] OJ L132/58. 12 S. Baughen, “Only Following Orders: Time Charters, Compliant Fuel and the Owner’s Indemnity” in B. Soyer and A. Tettenborn (eds), Ship Operations: New Risks, Liabilities and Technologies in the Maritime Sector (Informa Law 2021) at 193. 13 Marine Environment Protection Committee Res 304(72) (13 April 2018) MEPC 72/17/Add/1, Annex 11. 14 As it is stated in IMO’s initial strategy MEPC Res 304(72), the strategy constitutes “a pathway of CO2 emissions reduction consistent with the Paris Agreement temperature goals”. 15 IMO, “IMO’s work to cut GHG emissions from ships” accessed 8 March 2023. 16 As new ship is meant every ship for which a building contract was placed on or after 1 January 2013, or in the absence of a building contract every ship the keel of which is laid or which is at a similar stage of construction

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professor lia i. athanassiou reduction in CO2 levels; phase 2, implemented in 2020, targeted a 20% reduction; whereas phase 3, which will commence in 2025, aims at a 30% reduction. The levels are expected to become stricter gradually every five years, which means that EEDI is expected to advance continuing innovation and technical developments of all the components influencing the fuel efficiency of a ship in order to meet the set targets of CO2 reduction. On the other hand, SEEMP has as its main purpose the establishment of a mechanism for a company and/or a vessel so as to improve the energy efficiency and reduce the carbon intensity of a ship’s operation through four steps: planning, implementation, monitoring, and self-assessment and improvement. In other words, SEEMP is a management plan similar to the ISM Code’s well-known Safety Management System (SMS) – maybe SEEMP forms part of SMS as well – which details the important and necessary policies, practices and procedures that are to be followed and implemented so as to promote the energy efficient operation of the vessel (e.g. improved voyage planning, speed and routing optimisation, cleaning the underwater parts of the ship and the propeller more often, fitting a new propeller or introducing technical measures such as waste heat recovery systems or low energy light bulbs, installation of solar/wind auxiliary power for accommodation services).17 In addition, its part II shall be devoted to a monitoring plan that each company and/or vessel shall have in place in order to facilitate the collection of data in regard to the CO2 emissions. Essentially, the development of a proper SEEMP is an essential prerequisite for the compliance of the vessel with the said EEDI’s target, as it safeguards the implementation of the mandatory rules and regulations, codes, guidelines, best practices and standards recommended by the IMO and other concerned maritime organisations. To that end, IMO issued comprehensive guidelines in order to facilitate the proper development of a SSEMP.18 The compliance of the vessel with the requirements set by the EEDI and the SEEMP is certified by the International Energy Efficiency Certificate (IEEC)19 which is issued by the competent authority of the Flag State Administration following a survey of the vessel in accordance with the provisions of MARPOL.20 The IEEC will be issued for new buildings upon the initial survey before the ship is put into service and it will be valid throughout her lifetime.21 b. Existing Vessels IMO’s technical requirements for energy efficiency and reduction of carbon intensity were decided to be extended from 1 January 2023 to existing vessels as well, with two main instruments: the Energy Efficiency Existing Ships Index (EEXI) and the Carbon Intensity Indicator (CII). EEXI is a measure relating to the technical design of the vessel and its on or after 1 July 2013 or every ship the delivery of which is on or after 1 July 2015 (see MEPC Res 203(62) (15 July 2011) MEPC 62/24/Add.1.) 17 IMO, “Initial IMO GHG Strategy” accessed 8 March 2023. 18 Marine Environment Protection Committee Res 346(78) (10 June 2022) MEPC 78/17/Add/1, Annex 8. 19 See The International Convention for the Prevention of Pollution from Ships (adopted 2 November 1973, entered into force 2 October 1983) (MARPOL) Annex VI of the Protocol of 1997 (as amended from time to time), reg 6.4. 20 See MARPOL Annex VI, reg. 5.4. 21 See MARPOL Annex VI, reg. 9.10. Para 11 of Reg. 9; describes also the circumstances in which the IEEC ceases to be valid.

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operators’ obligations, liabilities under reduction strategy approval must be obtained once in the vessel’s lifetime. In order to meet the requirements introduced by EEXI, most shipowners are expected to proceed to technical modifications to the vessel either in regard to her Engine Power Limitation (EPL)22 or in relation to her Shaft Power Limitation (SHAPOLI).23 This differs substantially from the CII which relates to the operational aspect of the vessel and its assessment will be conducted on a continuous basis. The CII specifies the annual carbon reduction factor which is required in order to ensure the continuous improvement of the vessel’s operational carbon intensity within a specific rating level. Carbon intensity links the emissions to the amount of cargo carried over the distance travelled. The actual annual operational CII achieved will be recorded and will be compared to the required annual operational CII. Based on that comparison, the vessel’s operation carbon intensity will be rated24 on a scale of A, B, C, D or E indicating in that way a major superior, minor superior, moderate, minor inferior or inferior performance level.25 That performance level will need to be recorded in the vessel’s SEEMP. Both EEXI and CII will apply to all existing ships over 5,000 gross tonnage. The IEEC will be issued for existing vessels as well. However, the IEEC survey for vessels already in service will take place in connection with an intermediate or renewal survey of the International Air Pollution Prevention Certificate (IAPP).26 In other words, the IAPP survey windows will also become the IEEC initial survey date for the existing vessels. iii. Data Collection All ships, both existing and newbuild, above 5,000gt are required to collect consumption data for each type of fuel oil they use.27 The collected data will be reported to the vessel’s Flag State after the end of each calendar year and the latter, if all the necessary requirements are fulfilled, will issue a Statement of Compliance to the vessel. The aggregated data will be transmitted thereafter by the Flag States to the IMO and they will be stored in a centralised database, the IMO Ship Fuel Oil Consumption Database, in order to be used for the production of an annual report summarising them and to provide a solid basis on which future decisions and resolutions on additional measures or amendment of the existing rules can be made. That monitoring and reporting process is known as IMO’s Data Collection System (DCS) and its first calendar year of implementation was 2019.

22 Engine Power Limitation (EPL) system means a verified and approved system for the limitation of the maximum engine power by technical means that can only be overridden by the ship’s master or OICNW for the purpose of securing the safety of a ship or saving life at sea (see MEPC Res 335(76) (17 June 2021) MEPC 76/15/ Add.2, Annex 9, p 4. 23 Shaft Power Limitation (SHAPOLi) system means a verified and approved system for the limitation of the maximum shaft power by technical means that can only be overridden by the ship’s master or the officer in charge of navigational watch (OICNW) for the purpose of securing the safety of a ship or saving life at sea see MEPC Res 335(76) (17 June 2021) MEPC 76/15/Add.2, Annex 9, p 4. 24 MEPC Res 354(78) (10 June 2022) MEPC 78/17/Add/1, Annex 16. 25 The significance of such rating is demonstrated in cases when a vessel rated E or D for three consecutive years will have to submit a corrective action plan so as to prove how the required CII (C or above) will be achieved. 26 See MARPOL Annex VI, Reg. 6.1. 27 MEPC Res 278(70) (28 October 2016) MEPC 70/18/Add. 1, Annex 3.

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professor lia i. athanassiou iv. Cooperation The reduction of GHG emissions from ships is an overarching aim concerning all the stakeholders involved in the shipping industry. Therefore, IMO addressed an invitation to Member States to encourage the voluntary cooperation between ports and the wider shipping sector in an attempt to contribute to reducing emissions.28 Indeed, ports are able to play a key role in the decarbonisation of shipping. Their contribution may be achieved by infrastructure developments such as shoreside/onshore power supply from renewable sources, facilities to support the safe and efficient bunkering of alternative low-carbon and zero-carbon fuels as well as further optimisation of the logistic chain and port calls schedule facilitating the just-in-time arrival of the vessels. B. The EU Perspective i. Reasons for EU’s Action The global environmental awareness could not leave unaffected the European Union. Although EU is a leader in climate actions29 investing a lot of money and resources to environmental projects,30 it was initially reluctant regarding any regulatory initiatives in the shipping sector. Indeed, maritime transport was for a long time the only sector not expressly addressed by an EU emission reduction policy or by specific mitigation measures.31 That reluctance may be explained by the fact that EU’s role is supportive to the international legislation. As I had the opportunity to mention earlier, writing about maritime safety, the relationship between EU and international legislators could be qualified, from a macroscopic point of view, as more coordinated than conflictual, with some minor exceptions.32 Generally speaking, EU law’s involvement normally aims at: (i) triggering international reaction; (ii) complementing and strengthening international rules/guidelines by introducing regional standards or sanctions to monitor compliance; (iii) accelerating their entry into force; (iv) extending their scope of application, geographically, ratione materiae or ratione personae; and (v) rendering compulsory the IMO’s soft rules.33

28 MEPC Res 323(74) (17 May 2019) MEPC 74/18/Add.1, Annex 19. 29 Indeed, EU introduced in 2019 the European Green Deal, a set of proposals to make the EU’s climate, energy, transport and taxation policies fit for reducing net GHG emissions by at least 55% by 2030 compared to 1990 levels (COM (2019) 640 final). Apart from that, EU Commission adopted the Climate Law (i.e. Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”)) and the Climate Target Plan (CTP) (COM (2020) 562 final), in an attempt to follow up the EU’s climate commitment under the Paris Agreement (i.e. Regulation (EU) 2018/842 on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement and amending Regulation (EU) No 525/2013) in line with its objective of reaching economy-wide climate neutrality in EU by 2050 (COM (2018) final 773, p 2). 30 See generally K. Kulovesi and S. Oberthür, “Assessing the EU’s 2030 Climate and Energy Policy Framework: Incremental Change towards Radical Transformation?” RECIEL 2020 (29), at 151. 31 European Commission, “Proposal for a Regulation of the European Parliament and the Council amending Regulation (EU) 2015/757 in order to take appropriate account of the global data collection system for ship fuel oil consumption data” COM (2019) 38 final, p. 1. 32 L. Athanassiou, “Maritime Safety-Greece” in J. Nawrot and Z. Peplowska-Dąbrowska (eds), Maritime Safety in Europe, A Comparative Approach (Informa Law 2021) 135. 33 Also, cf H. Ringbom, “Maritime Liability and Compensation in EU Law”, in B. Soyer and A. Tettenborn (eds), Pollution at Sea: Law and Liability (Informa Law 2012) at 156.

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operators’ obligations, liabilities under reduction strategy The EU’s target of reducing net GHG emissions by at least 55% by 2030 is also known as “Fit for 55”. The “Fit for 55” package is a set of legislative proposals in order to revise and update the EU legislation and to implement new initiatives aiming at ensuring that EU policies are in line with the climate goals agreed by the Council and the European Parliament. In 2013, the Commission started preparing the field by launching a strategy for progressively integrating maritime emissions into the EU’s policy for reducing GHG emissions.34 ii. Data Collection Mechanism Regarding data collection, EU aimed indeed at triggering international reaction; it was the first to introduce a data collection mechanism by virtue of Regulation 2015/757 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport (hereinafter EU MRV Regulation). The EU MRV System aspired to serve as a model for the implementation of a global MRV system. In order to facilitate such development, the EU Commission should share the pertinent information to the implementation of this Regulation with the IMO and other relevant international bodies on a regular basis.35 That legislative initiative was completed in 2016 with two Delegated36 and two Implementing Regulations.37 The EU MRV Regulation prescribes rules for the accurate monitoring, reporting and verification of CO2 emissions from all ships above 5,000gt, regardless of their flag, calling (i.e. either arriving at, within, or departing from EEA ports) at EEA ports in order to promote the reduction of CO2 emissions in a cost effective manner.38 The first reporting year was 2018 and, thus, all companies from 1 January 2018 onwards were required to monitor CO2 emissions for each of their ships on a per-voyage and on an annual basis by applying an appropriate method for determining CO2 emissions among those specified by the EU MRV Regulation.39 In case a company fails to comply with the monitoring and reporting obligations set out in the EU MRV Regulation, sanctions and penalties, as 34 European Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Integrating maritime transport emissions in the EU’s greenhouse gas reduction policies” COM (2013) 479 final. 35 EU MRV Regulation (EU) 2015/757 [2015] OJ L 123/55, Recital 34. 36 Commission Delegated Regulation (EU) 2016/2072 of 22 September 2016 on the verification activities and accreditation of verifiers pursuant to Regulation (EU) 2015/757 [2016] OJ L 320, p. 5 and Commission Delegated Regulation (EU) 2016/2071 of 22 September 2016 amending Regulation (EU) 2015/757 of the European Parliament and of the Council as regards the methods for monitoring carbon dioxide emissions and the rules for monitoring other relevant information [2016] OJ L 320/1. 37 Commission Implementing Regulation (EU) 2016/1927 of 4 November 2016 on templates for monitoring plans, emissions reports and documents of compliance pursuant to Regulation (EU) 2015/757 of the European Parliament and of the Council on monitoring, reporting and verification of carbon dioxide emissions from maritime transport [2016] OJ L 299, p 1–21 and Commission Implementing Regulation (EU) 2016/1928 of 4 November 2016 on determination of cargo carried for categories of ships other than passenger, ro-ro and container ships pursuant to Regulation (EU) 2015/757 of the European Parliament and of the Council on monitoring, reporting and verification of carbon dioxide emissions from maritime transport [2016] OJ L299, p 22–25. 38 EU MRV Regulation (EU) 2015/757 [2015] OJ L 123/55, arts 1 and 2. 39 Companies should have submitted by 31 August 2017 to the authorised verifiers a monitoring plan for each of their ships indicating the method chosen to monitor and report CO2 emissions and other relevant information required. As Annex 1, Part A of the EU MRV Regulation provides for, there are four methods among which the shipowners can choose: (i) Bunker Fuel Delivery Not (BDN) and periodic stocktakes of fuel tanks; (ii) bunker fuel tank monitoring on board; (iii) flow meters for applicable combustion processes; and (iv) direct CO2 emission measurements.

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professor lia i. athanassiou designed by Member States, shall be imposed to the companies.40 The main aim of the EU MRV Regulation was to collect verified data about CO2 emissions of the aforementioned ships41 and to provide trustworthy information in order to facilitate future policy-making as well as to encourage the uptake of new technologies to make ships greener.42 So far, the lack of reliable data on vessels’ fuel consumption and GHG emissions has constituted an impediment for shipowners to invest in energy efficiency improvements.43 The EU MRV Regulation preceded the IMO Data Collection System (DCS). However, from 2019 both collection data instruments coexist and shipping operators have to comply with the requirements imposed by both of them. The coexistence of both monitoring and reporting systems was anticipated by Art. 22 of EU MRV Regulation which provides for the international cooperation between EU and IMO and other relevant international bodies. In fact, para 3 of Art. 22 stipulates the obligation of the Commission to review the MRV Regulation and propose potential amendments in case that an international agreement on global monitoring of GHG emissions comes into force so as to ensure the alignment of both instruments. For the fulfilment of its obligation the Commission issued a proposal for amending the EU MRV Regulation;44 which was recently adopted as Regulation 2023/957,45 with a much wider scope in order to be streamlined with the amended ETS Directive. In addition to the CO2 emissions, the new text includes in the reporting system (from January 2024) the methane CH4 and nitrous oxide N2O emissions as well as the GHG emissions from offshore ships; from January 2025, the MRV will be further extended to apply also to offshore and general cargo ships of lesser tonnage.46 At the same time, the amendment aims at the facilitating the simultaneous implementation of both reporting systems, international and European, and reducing the administrative burden for all stakeholders, while preserving the positive impact of the EU instrument (robust data, independent verification, transparency); to that end, the submission of aggregated emissions data at company level is introduced47 as from 2025, while the Commission is authorised to adopt detailed delegated acts clarifying and rationalizing collection, submission, monitoring and compliance at all levels. A significant aspect of the proposal is to streamline technical reporting elements, while preserving the required transparency and the independent verification by third parties. iii. EU Emissions Trading System Besides the monitoring process, the main area of European action is the EU Emissions Trading System (EU ETS), which has no counterpart at international level. Although the 40 EU MRV Regulation (EU) 2015/757 [2015] OJ L 123/55, art 20. Under Greek Law, see Ministerial Decision 226/2017 applying arts 13, 14 of P.D. 55/1998 (providing for fines and penal sanctions). 41 European Commission, “2020 Annual Report on CO2 Emissions from Maritime Transport” (Staff Working Document) SWD (2021) 228 final. 42 European Commission, “Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2015/757 in order to take appropriate account of the global data collection system for ship fuel oil consumption data” COM (2019) 38 final, p 2. 43 European Commission and Maddox Consulting, “Analysis of market barriers to cost effective GHG emission reductions in the maritime sector” (9 September 2012) CLIMA.B.3/SER/2011/0014, 65–66. 44 COM (2019) 38 final. 45 Regulation (EU) 2023/957 of 10.5.2023 amending Regulation (EU) 2015/757, OJ L 130, 16.5.2023, p. 105. 46 Offshore ships above 400gt and general cargo ships between 400 and 5,000 gt. 47 Art. 11a.

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operators’ obligations, liabilities under reduction strategy goal is the same, EU has opted48 for the so-called market-based measures (MBM) aiming, on a more flexible design, at internalising the societal costs from the undesirable behaviour of economic undertakings.49 The Directive 2003/87,50 initially not applicable in shipping, established a scheme for allowing trading greenhouse gas emissions within the European Union. That system is the world’s first major carbon market and is the cornerstone of the EU’s policy to promote reductions of GHG emissions in a cost-effective and economically efficient manner. In a nutshell, the EU ETS is based on the “polluter pays” principle and it is structured on a “cap and trade” mechanism.51 That is to say, a cap is placed on the aggregate amount of greenhouse gases that can be emitted by the installations covered by the system. That cap is reduced gradually so as to limit the total emissions permitted. Within the cap, installations have to buy or receive emissions allowances, which are a necessary prerequisite in order to cover their emissions. If at the end of the year each installation does not provide enough allowances to fully justify and cover its emissions, then it will have to face heavy fines and penalties. The key point, in order for the emissions allowances to gain value, is that their total number is limited. Therefore, installations are motivated to reduce their emissions so as to save their spare allowances for future needs or even to trade them with other installations which are lacking allowances and they need them more. That system is so far implemented on electricity and heat generation, on energy-intensive industry sectors as well as to aviation industry. Part of the “Fit for 55”52 package was a proposal53 for amending that Directive with an aim to expand the scope of the EU ETS to maritime transport as well, which was adopted in May 2023 as Regulation 2023/959.54 The amended text broadens the geographical scope by covering:55 (i) emissions from ships performing voyages between ports of Member States; (ii) emissions at berth in a port under the jurisdiction of a Member State; (iii) half of the emissions from ships performing voyages arriving at port of a Member State from 48 IMO has, instead, opted for purely regulatory measures, perhaps due to the lack of an international efficient supervisory mechanism. 49 E. Rosaeg, “Measures for the Sustainable Shipping of Goods” in E. Eftestol, S. Sankari and A. Bask (eds), Sustainable and Efficient Transport: Incentives for Promoting a Green Transport Market (Edward Elgar 2019) 19 at 23. 50 Council Directive 2003/87/EC of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC [2003] OJ L 275/32. 51 E. Eftestol and E. Yliheljo, “Paving the Way for a European Emissions Trading System for Shipping-EU and IMO on Different Paths” in B. Soyer and A. Tettenborn (eds), Disruptive Technologies, Climate Change and Shipping (Informa Law 2022) 176 at 189. 52 Other legislative proposals pending are a new Fuel EU Maritime Regulation, revisions of the Energy Taxation Directive (ETD), of the alternative fuels infrastructure Regulation (AFIR) and of the Renewable Energy Directive (RED II). 53 European Commission, “Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757, 14.7.2021, COM (2021) 551 final, 2021/0211 (COD). The Council and the European Parliament reached a provisional political agreement on December 18th 2022 to implement the ETS for shipping from 2024. Both bodies had adopted and published their positions on the Commission’s proposal, with amendments focusing mainly on the emission reduction level and the timing of the progressive phase out (Amendments adopted by EP on 22.6.2022 and by the Council “Council ETS General Approach” on 30.6.2022). 54 Directive (EU) 2023/959 of 10.5.2023 amending Directive 2003/87/EC, OJ L 130, 16.5.2023, p. 134. 55 Art. 3ga para 1.

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professor lia i. athanassiou a port of third country; and (iv) half of the emissions from ships performing voyages departing from a port of a Member State and arriving at a port outside the jurisdiction of a Member State. The coverage of a share of the emissions from both incoming and outgoing voyages between EU and third countries safeguards the effectiveness of the EU ETS, by increasing the environmental impact of the measure.56 Besides, the risk of evasive port calls and delocalization of transshipment activities outside EU is also addressed and reduced by including in the scope the non-EU transshipment ports located less than 300 nautical miles from an EU port.57 To ensure a smooth integration of the maritime sector in the EU ETS, the surrendering of allowances by shipping companies will be gradually increased in accordance with their verified emissions for a time period determined as follows: 40% of the verified emissions reported for 2024, 70% of verified emissions for 2025 and 100% of verified emissions reported for 2026 and each year thereafter.58 There is no doubt that shipping operators have to prepare themselves quickly to adapt to the new challenges emerging and some major companies are moving to that direction.59 III. Private Law Implications Having set the scene of the new regime, the discussion focuses on its private law implications. The shipping industry operating nowadays in a regulators’ driven market, it develops its “self-regulatory” capacity, reactively and not proactively (as it used traditionally to do), in order to achieve a fair distribution of risks and a widely accepted balance of the interests involved through model clauses. A. Technical Modifications and Contract Performance i. The EEXI Model Clause Regarding the required technical modifications, the industry resorted to the self-regulatory creativeness by drafting model charterparty clauses which introduce a more balanced distribution of risks between the parties. The first one is the “2021 EEXI transition clause for time charterparties”: it provides for compliance with the EEXI regulations and allocates responsibility and costs for implementing Engine Power Limitation (EPL) and Shaft Power Limitation (SHAPOLI) modifications under a time charterparty which are expected to be the most usual modifications that will take place in order shipowners to meet the EEXI standards.60 The clause is expected to be progressively included in charterparties from 1 January 2023 56 Recital 20. 57 Art. 3ga para 2. 58 Art. 3gb. 59 Maersk is reported to have invested US$1 billion and engaged more than 50 engineers in innovation and fleet technology in order to promote the use of decarbonised equipment (A. Braakman, JIML 26 (2020) 102, 106). CMA CGM group has announced as well its objective to be carbon neutral by 2050 and it will implement measures to that end. CMA CGM, “The CMA CGM Group heads toward carbon neutrality by 2050” (Corporate Information, 3 June 2020) accessed 9 March 2023. 60 This is what BIMCO expects according to its note to the clause “For the majority of ships needing modifications, these will probably be in the form of either Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI)”. See also M. Smith, “IMO’s carbon reductions push power limits down” (NorthStandard, 16 September 2021) accessed 10 March 2023.

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operators’ obligations, liabilities under reduction strategy onwards – i.e. when the requirements for EEXI certification came into effect – and BIMCO suggests the model clause to be incorporated in both existing and future charterparties. Indeed, it might as well be used in cases of newly built vessels which may be EEDI compliant but that may still require technical modifications in order to achieve the targets set by EEXI. The clause provides for the responsibility of shipowners to complete the required technical modifications in order to comply with EEXI. Such a solution was more than expected and the justification lying behind that choice is twofold: shipowners are the ones who bear the burden of complying with MARPOL by virtue of their Flag State Rules. As the EEXI requirements have been introduced by amendments in MARPOL, it entails that shipowners are the ones responsible for effecting the necessary modifications. But apart from that, shipowners have the obligation to ensure the seaworthiness of the vessel, a far-reaching obligation which relates both to the physical state of the vessel as well as to her legal seaworthiness. Complying with EEXI falls within both aspects of seaworthiness61 and thus shipowners are obliged to proceed to the required modifications. Indeed, shipowners shall use their reasonable endeavours to effect such modifications without any loss of time for the charterers and they shall bear the cost of the procurement, purchase, payment, installation and any trials necessary for the equipment’s operation. If there is any time lost due to the installation and the trials of such modification this will be for the shipowners’ account. However, BIMCO experts guesstimate that it will be feasible in most cases the modification works to take place during the vessel’s service without noticeable loss of time. Nevertheless, there might be circumstances this is not possible to happen; in such cases the model clause affords an explicit right to the shipowners to take the ship out of service so as to proceed with the necessary works. In order to avoid as far as possible delays and loss of time, it is essential for the parties to cooperate closely and inform each other in a timely manner; the charterers shall inform shipowners in advance regarding their employment orders and the expected itinerary of the vessel, and shipowners shall notice promptly the charterers about the time and place of the modification works. Following the implementation of the technical modifications, the shipowners have a duty to inform the charterers for the estimated new maximum speed (laden/ballast) and corresponding consumption figures of the vessel. These are crucial elements, and they will affect the charterers’ commercial decisions and plans for the use of the vessel in the future. EEXI modifications which are either not related to EPL or SHAPOLI or are effected in addition to such requirements following the charterer’s prior agreement. It goes without saying by the clause, that following the technical modifications of the vessel, the charterers are obliged to provide fuel compliant with them. The cornerstone of the clause is the principle of cooperation and collaboration between the parties in order to attain compliance. Apart from the duty to inform each other promptly, it can be observed a quite balanced approach between the interests of both charterers and shipowners. Although shipowners bear the responsibility and the cost of performing the necessary modifications, the charterers have no say over the type of the modifications and they are not entitled to terminate the charterparty if, for example, the speed drops below a certain level or if the modification works last for longer period 61 The technical modifications relate to the physical state of the vessel; the compliance with the provisions of MARPOL relates to legal seaworthiness.

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professor lia i. athanassiou than estimated resulting in the being off-hire for a long time. It goes without saying that the possibility of negotiating a more tailored clause (i.e. split of the costs between both parties) is not precluded. ii. New Attributes for Seaworthiness There is no doubt that the new requirements constitute, at the same time, new attributes for the assessment of the ship’s seaworthiness. The provisions for new certificates (i.e. IEEC, SEEMP when part of the SMS) broaden the scope of the so-called legal seaworthiness; in most cases, the situation will be hybrid, in the grey zone between legal and physical unseaworthiness, as the lack or deficiencies of the certificates will reflect real deficiencies of the vessel. Noncompliance with the reporting obligations, international or European, would be a clear example of legal unseaworthiness (Document of Compliance, arts 17,18 MRV), if it results in delays or detention of the vessel in the context of port state control (art. 19para 2 MRV). A quick research on the Paris MoU statistics, for the period 2019–2022, shows that the concern is rather limited for the time being. From a total of 148,296 deficiencies, only 2,186 refer to MARPOL Annex VI violations; besides, such violations do not appear in the 20 top deficiencies. As far as the Annex VI deficiencies are concerned, 85 seem related to the IEEC certificate, 283 to the IAPP certificate 77 to the Ship Energy Efficiency Management Plan (SEEMP). The low figure should not be underestimated as it may be explained by the recent entry into force of the regulatory requirements. It is very probable that the number of detentions will be increased in the years to come. B. Operational Issues and Contract Performance i. CII Requirements and Shipowner’s Obligations: The Problem Operational changes in relation to CII requirements seem to be a much more difficult and complex exercise. It is reminded that the CII regulations, applicable as from 1 January 2023, prescribe the ship’s yearly carbon intensity62 not to exceed a certain predefined threshold; ships are subsequently rated A to E, in accordance with their yearly carbon intensity results. Thus, the Regulations’ main objective is the voyage optimisation so as to achieve lower fuel consumption; however, this may be hindered by obstacles of both practical and legal nature. More specifically: (a) Improvement of voyage planning is a challenging task which requires taking into account a series of internal and external to the vessel factors such as the regular engine maintenance, the cleaning of the underwater parts of the vessel’s hull and propeller in regular intervals so as to avoid bottom fouling, the routing optimisation in order to avoid excessive time to be wasted in ports, etc. (b) Moreover, the Regulations bind, through the Flag State, the shipowner, who is obliged to take a series of “corrective steps” in order to achieve the required attained operational CII. However, assuming in a hypothetical scenario that no model clause is in place or that no specific clause is agreed by the parties, such 62 Calculated annually and expressed in grams CO2 emitted per cargo-carrying capacity and nautical miles travelled.

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operators’ obligations, liabilities under reduction strategy action would probably be either beyond the control of the shipowner (the commercial activity and the employment of the vessel being determined by the charterers), or contrary to the agreed terms of the charterparty. (c) To better illustrate the preceding, a corrective measure “by definition” would be, for example, slow steaming. The shipowner, by reducing the vessel’s guaranteed speed, would reduce the fuel consumption required for the contemplated voyage and thus he would optimise the vessel’s efficiency. Another additional corrective measure might be the reduction of the cargo intake. The shipowner, by lightening the vessel, would reduce the time required to cover the voyage distance and reach the intended destination and hence he would limit the operational fuel costs maximising in that way the vessel’s energy efficiency. Moreover, the master of the vessel may decide to deviate from its pre-arranged voyage plan and follow an alternative route with better weather conditions (e.g. sea currents, winds, etc) than those already encountered in the original sea route. That deviation, even though it may result in the increase of the distance sailed, might end up being more advantageous for the shipowner in terms of fuel and energy efficiency because the weather conditions will enable the vessel to attain better performance. (d) Nevertheless, any “corrective” steps taken as necessary for voyage optimisation and for calculating the required attained operational CII, may place shipowners in breach of their charterparty obligations. The obligation to proceed with utmost dispatch to the final destination has been held to require the voyage to be performed by the shortest and quickest route63 and without sailing at reduced speed.64 Furthermore, the shipowner by reducing speed so as to attain the required energy efficiency levels, may find himself in breach of any speed and consumption warranties as well as of any cargo-capacity warranties that he agreed to when he fixed the charterparty. Other C/P clauses, although not directly conflictual with the CII requirements, may also limit the shipowner’s marge de maneuver, such as the slot clauses-ETAs, first come-first served clauses.65 (e) In order to avoid such problems and mitigate the exposure of shipowners to excessive risk, BIMCO issued in 2022 the “CII Operations Clause for Time Charter Parties 2022”, meant to be a commercially viable solution responding to the playing field set by the new rules, both in existing and new charterparties. ii. The CII Model Clause This clause is an attempt to navigate the uncharted waters of the CII regime in a more balanced way by a fair division of risks to both parties, taking into account that close cooperation will be needed in order to achieve carbon intensity reduction on a continuing 63 Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The Hill Harmony) [2001] 1 AC 638; 2001] 1 Lloyd’s Rep 147. 64 Bulk Ship Union SA v Clipper Bulk Shipping Ltd (The Pearl C) [2012] EWHC 2595 (Comm), [2012] 2 Lloyd’s Rep 533. 65 Cf E. Rosaeg, “Measures for the Sustainable Shipping of Goods” in E. Eftestol, S. Sankari and A. Bask (eds), Sustainable and Efficient Transport: Incentives for Promoting a Green Transport Market (Edward Elgar 2019) at 28.

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professor lia i. athanassiou basis.66 It is recalled that the CII requirements are applicable as from 1 January 2023. It ensures that, during the present year, ships will not be CII rated, as rating is based on the emissions calculated in the previous year (on a non-cumulative basis). Essentially from the commencement of any time charterparty the charterers shall operate and employ the vessel, including the planning of voyages and selection of fuel, in a manner which is in conformity with the new CII regulations. Two main measures will be critical: firstly, the Agreed CII which constitutes the yardstick against which the performance of the charterers’ obligations will be assessed; secondly, the C/P Attained CII67 aiming to indicate the vessel’s carbon intensity value in real time, based on fuel consumption and distance travelled, from the beginning of the year or the C/P to date, excluding the off-hire periods unless otherwise agreed.68 The latter will be compared against the benchmark of the Agreed CII. More specifically, the obligations and rights of the contracting parties are prescribed as follows: (a) Τhe main obligation of the charterers is to operate the vessel in a way which does not permit the C/P Attained CII to exceed the Agreed CII.69 This is crucial, as all the employment orders are expected to have a significant impact in the vessel’s carbon intensity. Therefore, it is very likely the charterers will be forced to issue renewed or alternative employment orders, speed orders, instructions or sailing directions if the original ones do not meet the goals set by the Agreed CII between the parties. Although existing warranties relating to dispatch, speed and consumption or to the vessel’s description remain valid and applicable, charterers cannot invoke their breach or rely on it, in order to avoid meeting their own obligations under the clause.70 BIMCO in its guidelines issued for this clause proposes to the parties when fixing the Agreed CII rate to include in their calculations a suitable margin in order to cover unpredicted events that may take place and affect the vessel’s energy efficiency such as unpredicted port stays and delays, off-hire incidents, adverse weather, etc. (b) As far as the owners are concerned, they have to exercise due diligence in order for the vessel to be operated in a manner minimising fuel consumption;71 this includes, inter alia, maintaining the vessel’s energy efficiency, proceeding by the most fuel-efficient route,72 making optimal use of navigation equipment or other available aids, monitoring and calculating the actual consumption on a daily basis. The preceding allow us to reconsider, to a certain extent, the role of traditional “seamanship”. In the era of automatisation and of rapid technological developments, the master’s navigational capacity might prove to be essential in terms of achieving energy efficiency through voyage optimisation. Also, weather-routing companies 66 See Guidance Notes on the clause, drafted by BIMCO. 67 The Projected Attained CII extrapolates the Attained CII over the remaining calendar year or charter period and is meant to provide a more objective standard of assessment. If there is no information about future voyages, Projected and Attained CII will normally coincide. 68 From this point of view, the contractual C/P Attained CII does not coincide with the Attained annual operational CII, as calculated under the MARPOL Regulations. 69 Subclause (c) (ii) (2). 70 They are entitled however to bring a separate claim against the owners for compensation. 71 Subclause (f). 72 Provided that it is safe (otherwise the master may deviate) (subclause (f)(4)).

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operators’ obligations, liabilities under reduction strategy are expected to play a significant role in assisting shipowners to enhance the operation of the vessel. Such companies undertake to find, through specific algorithms and software they implement, the best route for the vessel taking into account the existing weather forecasts, ocean currents, the vessel’s particulars and special cargo requirements. The aim is not to avoid adverse weather conditions at all but to indicate that voyage plan which serves the best balance between minimisation of transit time and fuel costs without at the same time putting the vessel at risk. (c) Interestingly, the clause’s efficiency explicitly relies on the constructive dialogue and cooperation of the parties,73 regarding both the data sharing and the operation of the vessel itself. Firstly, data must be provided by the owners, allowing charterers to carefully and continuously monitor the ship’s C/P Attained CII; to that end, a specific undertaking about the accuracy and completeness of the information provided, to the best knowledge of the owners, is stipulated in subclause (f) (ii). Cooperation is further required to establish workable solutions for the employment of the vessel. The latter exercise being far more difficult, a safeguard mechanism is designed under subclause (g), aiming at ensuring both flexibility and commercial realism, in the following successive steps : in case of failure to meet the CII obligations, the owners are entitled to give charterers a warning about this; if deviation of the C/P Attained CII continues, owners may ask for a written plan resetting the parameters of commercial exploitation; if modifications fail to meet obligations under the present clause and until parties reach an agreement, owners are entitled not to follow charterers’ instructions, without being in breach of the charterparty. (d) An express indemnity is also provided (under subclause (j)) against the consequences of following charterers’ orders. This provision is common and necessary and works in parallel with the earlier safeguard mechanism. However, its conditions are more difficult to be fulfilled, as the right of recovery of the owners depends, on one hand, on the substantiation of damages and losses, and on the other hand, on the existence of an unbroken causation chain between the alleged loss and the charterers’ employment of the vessel. Thus, using ex ante the earlier negotiating mechanism seems to be more appropriate to address failures in complying with CII regulations. C. Emissions Trading Issues i. Coordinating the Trading Mechanism With Commercial Practice Taking into account the recent extension of the EU ETS system to shipping, two regulatory elements will be critical from a contractual point of view: the definition of the “responsible party” and the allocation of allowances. From the regulator’s point of view, the responsible party should be the entity better serving the polluter-pays principle objectives (ensuring compliance with the environmental requirements, able to influence amount of emissions and responsible in case of failure). The preceding prerequisites would have been satisfied by a range of options including

73 Subclause (g).

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professor lia i. athanassiou the fuel supplier,74 the shipowner and the ship operator. The initial proposal had opted for the shipowner, in order to synchronise the choice with the definition used in the MRV regulation. The EP’s amendment aimed at broadening the definition by adding the time charterer (i.e. the entity responsible for paying the fuel and operating the ship). In similar terms, ECSA had put forward the idea to introduce a binding clause in commercial agreements ensuring that the entity responsible for the decisions affecting the CO2 emissions should bear the costs arising from the implementation of the Directive. The compromise achieved stands as follows: (a) According to the art. 3gb of the Directive, the person responsible for the compliance with the EU ETS remains the shipping company, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Safety Management Code (art. 3 point (w)). This definition, in line with the MRV and the global data collection system of IMO, obviously facilitates the monitoring duties of the Administrative Authority.75 Although it is further recognised that, without a pass-through of the carbon costs to the commercial operator (i.e. the entity determining the cargo carried and the route/speed of the ship), the incentives to implement fuel efficiency measures would be limited, no direct provision is introduced to that end; the issue is instead sent back to the national law. In other words, Member States should provide, in national law, a statutory entitlement for the shipowner to be reimbursed by the operator of the vessel for the costs arising from the surrender of the allowances and the corresponding access to justice to enforce that entitlement.76 However, no further obligation of ensuring or controlling the existence of such (charterparty) contracts is imposed upon national authorities (which would, in any case, unnecessarily increase the administrative costs). (b) Regarding the allowances’ mechanism, a short time transition is designed in art. 3gb. Shipping companies will have to surrender allowances for a portion of their verified emissions gradually, rising up to 100% over the next three years, based on the following readjusted scheme: for cargo and passenger ships over 5000gt,77 40% of emissions in 2024 to 70% in 2025 and 100% in 2026; for offshore ships over 5000gt from 2027. The ETS will initially cover CO2 emissions and will be widened to include methane and nitrous oxide from 2026. As already stated, all 100% of emissions within the EU/EEA area and 50% of emissions on voyages into or out of the EU/EEA are subject to 74 Not recommendable from a policy point of view, as it would decrease the effectiveness of the ETS; ship operators tend to bunker where fuel is cheaper and would thus bunker outside the scope of the system (see C. Urrutia, J. Graichen and A. Herold, “2030 Climate Target Plan: Extension of European Emission Trading System (ETS) to Transport Emissions” (ENVI Workshop Proceedings, June 2021) PE 662.927, p 17). 75 The Flag State Authorities or, regarding shipping companies of third states, the most frequently visited port state (the latter being updated every two years) (see art. 3gf). 76 Para 32 of the Preamble, art. 3gc of the Directive. 77 The Commission will present a report to the EP, no later than 31.1.2026, on the feasibility and impact of including emissions from ships below 5000 gt (para 19a of the Preamble).

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operators’ obligations, liabilities under reduction strategy the system; in order to limit the risk of circumvention, calls to transshipment container ports, outside the EU/EEA but less than 300 nm from a port covered by the Directive, will be included to the ETS for 50% of the emissions from the voyage to that port as well.78 Moreover, in 2024 the Union wide quantity of allowances shall be increased by 78.4 million allowances for maritime transport, with linear reduction factor 4.3% from 2024 to 2027 and 4.4% from 2028.79 The allocation itself of allowances to be auctioned by the Member States will not change, as a matter of principle, as a consequence of the inclusion of maritime transport. However, in order to take into account geographical specificities, pragmatic transitional measures (in the sense of surrendering fewer allowances) are provided until December 2030 for ice - class vessels, vessels performing voyages to small islands, outermost regions or assuring connection with MS without land borders;80 besides, certain Member States with a relatively high number of shipping companies will in addition receive 3.5% of the ceiling of the auctioned allowances to be distributed among them.81 ii. ETS Allowances Clause Although the European legislator seems to understand the role of contracting parties in a charterparty agreement, the distribution of ETS-related costs and risks between them is left to the freedom of contract. Thus, the regulatory and the contractual aspects of the situation, although interrelated, remain clearly distinct. From a regulatory point of view, the only responsible person is the “shipping company” (shipowner/manager/bareboat charterer), regardless of the existence or the identity of the charterer. The shipping company whose vessels are trading to or from ports in the EU/ EEA will be required to hold sufficient EUAs (European allowances) for the GHG emissions deriving from the ships under its control and surrender them to the Administrative Authority each year. In practical terms, that means that a shipping company must submit the MRV report covering all its ships, for the year 2024, the latest until 31 March 2025; it must then surrender the corresponding EUAs until 30 September 2025, the latest. The same company (and only that) will be subject to enforcement measures in case of non-compliance or insufficient compliance with Directive 2003/87/EC as amended.82 Penalties for non-compliance with the EU ETS scheme will normally take the form of fines83 or, in case of repetitive violation for two or more years, of an expulsion order; where a shipping company has failed to surrender allowances for two or more consecutive reporting periods, an expulsion order can be issued against ships which it is responsible for; an expulsion order can lead to ships being detained by the Flag (Member) State or denied entry into a port under the jurisdiction of any other Member State. Although mandatory obligations and liabilities cannot be delegated, parties are free to contractually (re)allocate costs and risks for obtaining, transferring and surrendering 78 79 80 81 82 83

Para 28 of the Preamble, art. 3g a para 2. New para 10 art. 9. Paras 23–26 of the Preamble and art. 10f amending art. 12. Art. 3ga (3). Paras 31, 32 of the Preamble. €100 per mt of CO2 for which non allowance was surrendered.

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professor lia i. athanassiou GHG emissions allowances. A model ETS allowances clause has been drafted by BIMCO, while ad hoc clauses appear already in various charterparties. The model ETS clause is based on the idea that the party providing and paying for the fuel (and generally taking operational decisions affecting the GHG emissions) should provide and pay for emissions allowances. Contractual obligations are shared as follows: The owners have to monitor and report the required emissions data and arrange for their verification.84 The charterers shall provide and pay for the allowances during the whole charter period, following notification by the owners and according to the time table agreed,85 while benefiting of a right to offset for any period of off-hire. If the charterers fail to fulfil their obligation, the owners are entitled, on a five-days’ notice, to suspend the performance of the charterparty, the vessel remaining on hire. Further claims from the owners’ side are not excluded.86 The effectiveness of the aforementioned clause is based on cooperation and proactiveness (preventing situations of conflict); the EU ETS solution is, in contrary, reactive and operates ex post (reimbursing the owners for the costs of allowances87 as opposed to transferring actual allowances). However, the importance of the latter should not be underestimated. It will work as an overriding indemnity provision, entitling the owners to be reimbursed for the costs arising from the surrender of the allowances, even in the absence of an agreed clause or in spite of a contrary clause in the charterparty. This mandatory entitlement, to be ensured by national law,88 shall be observed throughout the EU regarding the operation of vessels “accountable” under the ETS, in order to safeguard undistorted competition in the internal market, and may not be avoided or bypassed by an opposite contractual clause or a choice of law clause.89 IV. Conclusions The ETS’ extension to shipping will be tested as from 2024. Its success will determine whether it will be exported or not to IMO, preparing the field for a global market-based measure to reduce GHG emissions.90 The setting of the ETS price and the use of the revenues remain among the major challenges of the system. The price should not be too high not to result in avoidance of the system, but nevertheless high enough to incentivise fuel change. Will it be the case? In addition, a relevant part of the revenues should be recycled back into the maritime sector to finance investments facilitating the uptake of sustainable alternative marine fuels. However, it is not yet clear which fuel (or selection 84 Subclause (b). 85 Notification is provided to take place within the first seven days of each month and relates to the quantity of allowances for the previous month; within seven days from notification, the charterers must transfer the notified quantity into the owners’ nominated emission scheme account (subclause (c) (i)(iii)). 86 Subclause (d). 87 The value of EUAs is determined by the market demand for them. If the demand is high, the price will be higher and vice versa; the price can also be affected by external factors, such as the price of other fuels and the availability of alternative technologies. The value of an EUA on 1 December 2022 was €85.22 per CO2 mt. It was around €100 at the beginning of 2023 and fell below €98 per CO2 mt in March 2023. In the UK ETS – Greenhouse Gas Emission Trading Scheme Order 2020 (covering only internal voyages), the carbon price for the scheme year beginning on 1.1.2022 was £ 52.56. 88 Art. 3gc. 89 Para 32 of the Preamble. 90 Envisaged by art. 3gg.

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operators’ obligations, liabilities under reduction strategy of fuels) will be advisable or dominant in maritime transport in the future,91 due to a combination of uncertain factors (i.e. availability, price of the fuel, environmental impact, interests involved). For example, LNG, forecasted until recently to have to biggest intake, not only became unexpectedly expensive but is also considered responsible for methane (CH4) emissions, the latter shortly under control; ammonia receives an increasing interest, but there is a risk of emitting nitrous oxide (N2O), the latter to be also under EU control. In any case, fuel change presupposes globalisation, political consensus and adequate ports’ bunkering infrastructure, which remain to be seen. From a legal point of view, it may be asked whether the aforementioned market-based mechanism may be supplemented by the traditional tort liability regime (probably in the form of strict liability as in the case of product liability).92 Although the idea sounds appealing, as far as prevention is concerned, and consistent with the polluter’s pay principle, its implementation meets several obstacles, relating to the difficulties of identifying victims of the pollution, defining the damage sustained and establishing the causal connection (unless we opt for the introduction of assumptions). Finally, it is essential to keep in mind the emission reduction strategy is part of the wider “sustainability picture”, to which reference was made earlier. The new and widely used acronym ESG indicates the shift in emphasis from short-term maximisation as the primary objective of shipping undertakings towards a sustainable business model covering three areas: environmental (mainly decarbonisation, emission reduction, energy efficiency), social and governance. All three areas are expected to be on the top of the agenda for the years to come.

91 C. Urrutia, J. Graichen and A. Herold, “2030 Climate Target Plan: Extension of European Emission Trading System (ETS) to Transport Emissions” (ENVI Workshop Proceedings, June 2021) PE 662.927, at p 16. 92 Cf E. Rosaeg, “Measures for the Sustainable Shipping of Goods” in E. Eftestol, S. Sankari and A. Bask (eds), Sustainable and Efficient Transport: Incentives for Promoting a Green Transport Market (Edward Elgar 2019) at 25.

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C H A P T E R 13

Damages for Late Payment of Insurance Claims Peter MacDonald Eggers KC

I. Introduction Until May 2017, if an insurer paid a claim under an indemnity insurance policy unreasonably late to an assured, the assured had no remedy other than for statutory interest. This was because of the combination of two separate common law rules, namely the rule that a right to an indemnity under an indemnity insurance policy (and a marine policy is by definition an indemnity insurance policy)1 constitutes a right to unliquidated damages for breach of contract once the loss occurs, and the rule that no damages are recoverable for the late payment of damages. This state of affairs gave rise to considerable criticism over the years. In response to this criticism, and with the support of the Law Commission, Parliament enacted section 13A of the Insurance Act 2015 (which entered into force on 4 May 2017) whose intention was to allow assureds to recover damages from the insurers for the unreasonably late payment of insurance claims. This passage from the common law to statutory reform and the scope of the new entitlement to damages are worth considering because it helps to shape the development of the law by reference to the construction of section 13A, especially in circumstances where the drafting of section 13A is not ideal to achieve its purpose. II. Common Law Position In considering the common law applicable to the late payment of claims made under insurance contracts, it should be recalled that there are two major categories of insurance contract, namely contracts of indemnity insurance and contracts of contingency insurance.2 The insurance contract is one by which the insurer undertakes to provide a specified benefit to the assured in the event of an uncertain event occurring. The benefit may be an indemnity or a contingency payment: (i)

By a contract of indemnity insurance, the insurer undertakes to provide compensation for the loss suffered by the assured by reason of the specified event.3

1 Marine Insurance Act (MIA) 1906, s. 1. 2 As to the distinction between indemnity and contingency insurance, see Arag plc v Jones [2020] EWHC 3484 (Comm); [2020] Costs LR 1951, at [38]. 3 All contracts of marine insurance are contracts of indemnity; s. 1 of the MIA 1906.

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DOI: 10.4324/9781003376347-15

damages for late payment of insurance claims (ii) By a contract of contingency insurance, the insurer promises to pay the assured or his or her family, etc a specified sum in the event of the assured’s death or personal injury or upon attaining a specified age.4 The common law relating to the late payment of insurance claims is settled in respect of contracts of indemnity insurance, but it does not appear to have been settled in respect of contracts of contingency insurance. With respect to claims under contracts of indemnity insurance, at common law, if the insurer failed to pay a claim within a reasonable period of time or indeed in accordance with the express terms of the insurance contract, the assured’s remedy was limited to the indemnity promised by the insurer and interest. Accordingly, the assured would not be entitled to compensation if the insurer paid the claim outside the bounds of a reasonable period of time, assuming that there had been no fraud. The analysis adopted by the courts leading to this conclusion is as follows: (i)

A contract of indemnity insurance amounts to a promise by the insurer to indemnify the assured in respect of a loss proximately caused by an insured peril. (ii) The contract of indemnity has been variously described as a promise by the insurer to the assured to prevent such a loss, or a promise that such a loss will not occur, or to hold the assured harmless against such a loss (the hold harmless principle).5 Of these formulations, the last is perhaps the most accurate and less liable to be accorded the title of a “fiction”, namely that the insurer agrees to hold the assured harmless against any loss, in other words the insurer’s promise is to be responsible for the loss caused by the specified peril which loss would otherwise be borne by the assured. (iii) Upon the occurrence of such a loss, the insurer will be automatically and immediately in breach of the contract of indemnity and will be liable to the assured for such breach, and the assured’s remedy for such breach will be for unliquidated damages (that is, the indemnity).6 That is, the assured’s cause of action against the insurer arises upon the occurrence of the insured loss.7 This is so, even if the policy is a valued policy,8 and even if the loss has been adjusted.9 This is true for both property and liability insurance.10 The insurer’s liability is not one in debt.11

4 H. Beale, Chitty on Contracts, (34th edn, Sweet & Maxwell 2021), para 44–004. 5 The Fanti and Padre Island [1991] 2 AC 1, at 35; Insurance Corporation of the Channel Islands Ltd v McHugh [1997] LRLR 94, at 137. 6 Grant v Royal Exchange Assurance Company (1816) 5 M&S 439, at 442 (per Lord Ellenborough, CJ), at 442 (per Bayley, J); Swan and Cleland’s Graving Dock and Slipway Company v Maritime Insurance Company [1907] 1 KB 116, at 123–124; William Pickersgill & Sons v London and Provincial Marine and General Insurance Company [1912] 3 KB 614, at 622; Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd [2020] EWCA Civ 308; [2020] Lloyd’s Rep IR 397, at [35]. 7 Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2009] EWHC 2066 (TCC); [2010] Lloyd’s Rep IR 490, at [50–52]. 8 Castelli v Boddington (1852) 1 El & Bl 66, at 71. In Irving v Manning (1847) 1 HLC 287, at 307. Patteson J described the indemnity under a valued policy as liquidated damages. 9 Luckie v Bushby (1853) 13 CB 864, at 877–879 (Jervis CJ), 880 (per Creswell J). 10 Insurance Corporation of the Channel Islands Ltd v McHugh [1997] LRLR 94, at 137; Normhurst v Dornoch Ltd [2004] EWHC 567 (Comm), at [4–9]. Contra N. Campbell, “The Nature of an Insurer’s Obligation” [2000] LMCLQ 42. 11 Israelson v Dawson [1933] 1 KB 301, 304 (Scrutton LJ), at 306 (per Greer LJ); Forney v Dominion Insurance Co Ltd [1969] 1 WLR 928, at 936.

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peter macdonald eggers kc (iv) In the event that those damages (i.e., the indemnity) are not paid within a reasonable time or in accordance with the contractual terms, because damages are not payable for the non-payment or late payment of damages (this is the rule in The Lips),12 the assured will not be entitled to any damages over and above the indemnity.13 The damages will not exceed the measure of indemnity due under the insurance contract.14 (v) The assured will be entitled to statutory interest, either pursuant to section 35A of the Supreme Court Act 1981 or section 49 of the Arbitration Act 1996.15 The orthodox legal position was confirmed by the Court of Appeal in Starlight Shipping Company v Allianz Marine & Aviation Versicherungs AG (The Alexandros T),16 where Longmore LJ said in the opening paragraph of the judgment: As a matter of English law, an insurer commits no breach of contract or duty sounding in damages for failure promptly to pay an insurance claim. The law deems interest on sums due under a policy to be adequate compensation for late payment; this is so, even if an insurer deliberately withholds sums which he knows to be due under a policy, see Sprung v Royal Insurance [1999] Lloyd’s Rep IR 111 approving the decision in The Italia Express (No. 2) [1992] 2 Lloyd’s Rep 281. If parties agree that English law is to apply to a policy of insurance, this principle is part of what they have agreed. English law, moreover, gives no separate contractual remedy to an insured who complains that an insurer has misconducted himself before settling a claim. In either case the remedy of the insured is to sue the insurer and, if no settlement is forthcoming, proceed to judgment.

Although this analysis has been prominent with respect to claims under indemnity insurance contracts, the analysis applies not because the contract is an insurance contract, but because the contract is a contract of indemnity. Accordingly, any breach of any contract of indemnity, including the late payment of such indemnity, will not result in any monetary remedy over and beyond the claim for the indemnity itself (plus statutory interest).17 Dissatisfaction with this state of the law has led to reluctant holdings in the courts. In Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC,18 Mance LJ described this state of the law as having “an artificial and peculiarly domestic flavour about it”. In Mandrake Holdings Limited v Countrywide Assured Group plc,19 a case concerned with an ordinary, non-insurance contract of indemnity, Rix LJ said that “it seems to me

12 President of India v Lips Maritime Corporation [1988] 1 AC 395, at 424–425. 13 The Italia Express [1992] 2 Lloyd’s Rep 281; Callaghan v Dominion Insurance Company Ltd [1997] 2 Lloyd’s Rep 541; Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC); [2007] Lloyd’s Rep IR 283, at [34–38]; Turville Heath Inc v Chartis Insurance UK Ltd [2012] EWHC 3019 (TCC); (2012) 145 Con LR 163, at [36]. 14 In The Italia Express [1992] 2 Lloyd’s Rep 281, the Court held that, with respect to contracts of marine insurance, the law afforded no remedy beyond the measure of indemnity provided for in sect. 67 of the MIA 1906. 15 The House of Lords’ relaxation on the awarding of interest as damages for the late payment of a debt, in Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34; [2007] 3 WLR 354, at [16–18] (per Lord Hope), at [93–100] (per Lord Nicholls), at [165] (per Lord Walker), should not in theory affect the position for the late payment of damages and indemnity insurance. See M. Clarke, “Compensation for Failure to Pay Money Due: A ‘Blot on English Common Law Jurisprudence’ Partly Removed” [2008] JBL 291. 16 [2012] EWCA Civ 1714; [2013] 1 Lloyd’s Rep 217, at [1]. 17 Mandrake Holdings Limited v Countrywide Assured Group plc [2005] EWCA Civ 840, at [7–9], [25–26]. 18 [2001] EWCA Civ 68; [2001] 1 QB 825, at [42]. 19 [2005] EWCA Civ 840, at [25].

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damages for late payment of insurance claims that the controversial issues raised by the new claim may well interest their Lordships’ House, and, if it does, may well lead to some clarification and amendment of the law”. In one case,20 the Court of Appeal granted leave to appeal to the House of Lords on the issue, although that appeal was not pursued. The irrecoverability of damages for the late payment of indemnity insurance claims might have been tested by the Supreme Court in Teal Assurance Co Ltd v WR Berkley Insurance (Europe) Ltd,21 where Lord Mance said: Teal’s application for permission and written case also suggested that the case raises, or may raise, what Teal calls a legal fiction, that a claim under a liability insurance is for damages for the insurer’s failure to hold the insured harmless. It submits that a more appropriate analysis would be that insurers undertake to pay valid claims on the occurrence of particular events. This would have the potential effect that insurers could become liable in damages for non- or late payment, contrary to the rule presently established by cases such as Ventouris v Mountain (The Italia Express) (No 2) [1992] 2 Lloyd’s Rep 281 and Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111. It would also enter upon an area presently under consideration by the English and Scottish Law Commissions: see their “Issues Paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith” (2010) and their subsequent formal consultation paper “Insurance Contract Law: Post Contract Duties and Other Issues” (2012). However, as the submissions developed, it became apparent that it could make no difference to the outcome of this appeal how an insurer’s liability to indemnify is formulated. In particular, whether the insurer’s liability is by way of damages or in debt does not answer the question whether such liability is exhausted as and when a claim, insured and notified under the policy, gives rise to ascertained third party liability or expenses on BV’s part.

There were other attempts to circumvent the common law rule, but to no avail. In Insurance Corporation of the Channel Islands Ltd v McHugh,22 Mance J rejected the argument that there was an implied contractual term in the contract obliging the insurer to assess and pay an insurance claim with reasonable diligence and due expedition and/or a similar duty by reason of the insurance contract being of the utmost good faith, which was alleged as part of a claim for conspiracy to use unlawful means. The judge said as to the implied term argument: The law will not however imply a term unless it is necessary to give the contract business efficacy or represents the obvious, although unexpressed, intention of the parties. Mere reasonableness or convenience is not sufficient. The implied term suggested by Royal Hotel fails to satisfy the pre-requisites for an implied term. If any such term existed at all, it would, presumably, have to be mutual. In other words, there would be a duty on the insured to present and progress the claim with reasonable speed and efficiency. Just as insurers would be obliged not reasonably to refuse or delay indemnity, so, presumably, the insured would be under a duty not unreasonably to delay, misstate or overstate his case. The reasonableness of each party’s conduct would, if necessary, be susceptible of review at each point. I think both parties would have hesitated before agreeing any such mutual obligations, and that they are certainly not to be implied. The suggested implication also appears to me inconsistent with the particular scheme of the present contracts. . . . As a matter of general legal principle, unless the contract otherwise provides, insurance contracts (whether liability or property insurance) are treated in law as contracts to hold the insured harmless against the liability or loss insured against. Insurers

20 Pride Valley Foods Limited v Independent Insurance Company Ltd [1999] Lloyd’s Rep IR 120. 21 [2013] UKSC 57; [2014] Lloyd’s Rep IR 56, at [4]. 22 [1997] LRLR 94, at 136–138. Cf Diab v Regent Insurance Co Ltd (Belize) [2006] UKPC 29; [2007] 1 WLR 797, at [28].

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peter macdonald eggers kc are therefore, in the absence of contrary provision, in breach of contract as soon as the insured liability or loss occurs. A claim under an insurance contract is thus commonly for damages for the failure to hold the insured harmless against the relevant liability or loss. The implications of these principles were not explored before me in submissions. However, in the case of the present policies the pursuit of any cause of action must be suspended until compliance with condition 4 and, in circumstances where liability is admitted but quantum is in issue, must be further suspended until the making of any award. I doubt whether that changes the basic nature of insurers’ liability or means that their liability is no longer a liability in damages for having failed to hold the insured harmless against the relevant liability or loss. If that is right, insurers are, subject to the conditions precedent just mentioned, liable in damages, and the implied term for which Royal Hotel contends would constitute an implied contractual obligation to assess, negotiate and pay damages for which the insurers were, subject to the express condition precedent, liable already. This would be an unusual obligation – which would appear to be a further reason why it cannot be regarded as either necessary or obvious.

As to the argument based on the duty of utmost good faith and the unlawful means conspiracy, Mance J said: The nature of the unlawful means alleged requires mention. . . . The reliance on breaches of the duty of the utmost good faith carries the tort of conspiracy into a new field. It requires consideration of the scope of the duty of good faith in a claims context . . . [counsel] submits that the duty of good faith requires insurers to act conscientiously, fairly and reasonably when dealing with claims. If that were so, it would be the equivalent of the implied contractual duty which I have rejected, but without the sanction of damages. . . . Further, it would operate in the event of any unfairness or unreasonableness in the handling of the claim, whereas Courts have shown reluctance to apply the doctrine of good faith in a claims context other than in cases of deliberate falsehood. . . . If the duty to avoid deliberate falsehood were to be extended to oblige to refrain from conduct designed to improve their own financial position by thwarting a claim which insurers knew was good, its breach would still not be actionable in damages if committed by insurers acting [on] their own, but would [on the assured’s case] become actionable in conspiracy if [the assured] could show the necessary element of combination. . . . I find persuasive . . . [the] submission that the use of a combination to bring about a breach of a duty which, if broken simply by the insurer, gives rise only to a right to avoid should not be recognized as sufficient unlawful means to ground an action in conspiracy for any damages.

It is interesting that the implied term which Mance J rejected is precisely the solution which the Law Commission and Parliament adopted in section 13A of the Insurance Act 2015. This state of the common law – against the recovery of damages for the late payment of insurance claims – has been subjected to substantial and repeated criticism since the decision of Hirst J in The Italia Express,23 where the Court first married the juristic nature of a contract of indemnity with the newly minted rule that damages cannot be recovered for the late payment of damages (promulgated by Lord Brandon in President of India v Lips Maritime Corporation24) to produce the principle that damages are not recoverable for the late payment of an indemnity insurance claim. The criticism has focused on the fact that the insurer can mishandle a claim or delay in paying a claim with impunity (other than bearing a liability for interest). One of the reasons 23 [1992] 2 Lloyd’s Rep 281. 24 [1988] 1 AC 395, at 424–425.

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damages for late payment of insurance claims for this criticism is the apparent fiction associated with the current state of the law, namely that the insurer is in breach of contract once the assured suffers a loss caused by an insured peril.25 There is no fiction, however, if the indemnity contract is seen as no more than a promise by the insurer to compensate the assured for a specified type of loss. More substantively, emphasis has been placed on the fact that the insurer’s obligation is the same in character as that of a party who fails to pay money due under a contract.26 In fact, the difficulty with the common law is not the characterisation of a claim under an indemnity insurance contract, but the rule in The Lips (the rule that one cannot recover damages for the late payment of damages). There is a meaningful distinction between contracts of indemnity insurance and contracts of contingency insurance. By a promise of indemnity – a promise which may apply to both insurance and non-insurance contracts – the insurer agrees to be responsible for the losses sustained by the assured which have arisen in defined circumstances (for example losses caused by fire). In this way, the insurer often takes on such a responsibility in the same way that the assured would have to bear the loss where he or she had no insurance cover or where no other person could be held liable for the loss or in the same way that a party who has acted in breach of a legal duty owed to a claimant must bear the consequences of the loss flowing from the breach. The loss can be made good by a sum of money which represents the value or quantum of the loss or in certain circumstances could be made good by replacing the asset lost or damaged or discharging the liability to the third party. Accordingly, the claimant must be able to establish that an actual loss has been sustained and that the loss was caused by the relevant event. The obligation on the indemnity insurer is therefore an obligation to make good the loss suffered by the assured. The obligation does not have within it any assumption of responsibility to make good the loss within a certain timeframe; that requires a further agreement on the part of the assured and the insurer. As a matter of mere juristic analysis, there would appear to be nothing wrong with the view that the indemnity represents unliquidated damages for a breach of contract upon the occurrence of an insured loss and that nothing in excess of that indemnity is payable as consequential damages. It reflects the reality that the insurer has voluntarily accepted the responsibility of a specified risk, that is the risk of loss which was borne by the assured has, by reason of the insurance policy, been transferred to the insurer. In other words, by the insurance contract, the insurer is assuming responsibility for the secondary obligation to pay damages, even though there is no wrongdoing which might be said to constitute the breach of the primary obligation; hence, the need for the rule that the happening of the loss is itself the breach. It is at this point that the rule in The Lips comes into operation. On this analysis, the late or non-payment of compensation pursuant to the secondary obligation should be self-limiting, that is there would be no tertiary obligation to pay damages for the

25 See, e.g., N. Campbell, “The Nature of An Insurer’s Obligation” [2000] LMCLQ 42; Lowry and Rawlings, “Insurers, Claims and the Boundaries of Good Faith” (2005) 68 MLR 82, at 85–90; J. Davey, “Unpicking the Fraudulent Claims Jurisdiction in Insurance Contract Law: Sympathy for the Devil?” [2006] LMCLQ 223, at 236–238; M. Clarke, The Law of Insurance Contracts (Informa), para 30–9B1; M. Clarke, “Compensation for Failure to Pay Money Due: A ‘Blot on English Common Law Jurisprudence’ Partly Removed” [2008] JBL 291; The Rt Hon Lord Mance, “The 1906 Act, Common Law and Contract Clauses – All in Harmony?” [2011] LMCLQ 346. 26 Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, at 144.

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peter macdonald eggers kc late or non-payment of compensation pursuant to the secondary obligation.27 Otherwise, the late or non-payment of compensation pursuant to the tertiary obligation would give rise to a quaternary obligation, and so forth (subject always to the rules of remoteness). This can be tested by assuming that the day after the loss, the assured obtains a judgment against the insurer, thus merging the insurer’s contractual liability into the liability created by the judgment. If that judgment is not honoured by the insurer, the assured should not be entitled to recover consequential damages over and above the judgment sum (other than interest).28 By comparison, by a promise to pay a sum of money under a contract of contingency insurance, the insurer agrees to provide a financial benefit upon the occurrence of a specified event. The payment represents a contribution to improve the assured’s financial position, but it is not designed specifically to extinguish any loss or misfortune suffered by the assured (although it may have that effect in whole or in part). If an assured under a contract of contingency insurance were denied the prompt payment of the money promised by the insurer (which would presuppose that the insurer has agreed, expressly or impliedly, to pay the sum within a specified period of time or within a reasonable time), the natural remedy for the late payment would be compensatory damages which in most cases might amount to interest.29 It is possible that additional types of loss may be compensated by an award of damages for the late payment of money under a contract of a contingency insurance, provided that the losses claimed are not too remote. The question in each case will be whether or not the insurer has agreed to pay the promised benefit within a particular time.30 Whether the claim is made under a contract of indemnity or contingency insurance, the essential question at common law was not whether the insurer failed to make good the loss or failed to pay the relevant sum of money, but whether the insurer failed to provide the insurance benefit within an agreed period of time. The late payment of sums due under an insurance contract is concerned with this additional obligation.31 To re-classify the insurer’s obligation to one of merely paying money, and so render the insurer’s liability as one in debt, ignores the other limitations which such a classification would carry with it. In cases of debt, there is no need for the assured to prove that it has suffered a loss – a hallmark of indemnity insurance – and there is no obligation to mitigate,32 which one will find applicable in the case of insurance contracts, at least in respect of marine insurance contracts (the position in respect of non-marine insurance contracts is not satisfactorily clear).

27 Contra M. Clarke, “Compensation for Failure to Pay Money Due: A ‘Blot on English Common Law Jurisprudence’ Partly Removed” [2008] JBL 291, at 301. 28 This analysis can withstand altering the re-characterisation of the promise of indemnity from an obligation to hold the assured harmless to a promise to compensate the assured in the event of such a loss, which Professor Campbell has suggested should result in a re-evaluation of the law in this respect: N. Campbell, “The Nature of an Insurer’s Obligation” [2000] LMCLQ 42, at 48. 29 H. Beale, Chitty on Contracts, (34th edn, Sweet & Maxwell 2021), para 29–199. See Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34; [2007] 3 WLR 354. 30 Blackley v National Mutual Life Association Ltd (No. 2) [1973] NZLR 668. 31 The Rt Hon Lord Mance, “The 1906 Act, Common Law and Contract Clauses – All in Harmony?” [2011] LMCLQ 346, at 350–351; cf Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC); [2007] Lloyd’s Rep IR 283, at [34–38]. 32 H. Beale, Chitty on Contracts, (34th edn, Sweet & Maxwell 2021), para 24–037, 29–010.

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damages for late payment of insurance claims The solution, therefore, was not to interfere with characterisation of the claim under an indemnity insurance contract, but to consider the imposition of an independent obligation to pay whatever is due under an insurance contract within a particular timeframe. This was the solution recommended by the Law Commission and adopted in section 13A of the Insurance Act 2015. III. Law Reform In its Law Commission Consultation Paper no. 201 (December 2011), the Law Commission made the following proposals for the reform of business insurance law,33 aimed at allowing assureds to recover compensation or damages for the late payment of insurance claims, namely that (a) the insurer should be under a contractual obligation to pay valid claims within a reasonable time; (b) if the insurer fails to pay valid claims within a reasonable time, the insurer should be liable to pay damages for foreseeable losses; (c) the reasonable time referred to depends on (i) the assured making a claim, (ii) the assured providing the insurer with all the material information requested in respect of the claim, (iii) the insurer being permitted sufficient time in which to carry out a full investigation, including the time to seek information from third parties, (iv) the insurer being permitted sufficient time in which to assess the claim and arrive at and communicate its decision on the claim promptly, and (v) market practice, the type of insurance, and the size, location and complexity of the claim; (d) the insurer should be able to limit or exclude his liability to pay damages for late payment of claims through a term of the insurance contract, which term should apply only if the insurer has acted in good faith; (e) where the insurer seeks to rely on such a limitation or exclusion clause, the insurer should explain to the assured why the payment was delayed or rejected; and (f) the limitation period applicable to the assured’s claim against the insurer should commence only after an insurer has had a reasonable time to investigate and assess the claim. The difficulty with the Law Commission’s original proposal was not the imposition of a time obligation, but its substitution for the existing primary duty of the insurer,34 either to indemnify the assured or to provide a contingent benefit on the happening of an uncertain event. A pronounced difficulty with the Law Commission’s proposals was that it recognised that the assured’s cause of action for the breach of the insurer’s time obligation (which will be the primary obligation on the Law Commission’s approach) cannot arise before the assured has presented a claim and cannot arise until the insurer has had a reasonable time in which to investigate and assess the loss.35 In July 2014, the Law Commission published its report no. 353 and supported the case for reform, on the grounds that the common law rule denying damages for the late payment of insurance claims appeared to lack principle, the law was unfair and unexpected, and the law was increasingly out of step with other legal developments. The

33 Law Commission, Insurance Contract Law: Post Contract Duties and Other Issues (Law Com No 201 2011) Part 5. 34 Law Commission, Insurance Contract Law: Post Contract Duties and Other Issues (Law Com No 201 2011), para 5.7. 35 Law Commission, Insurance Contract Law: Post Contract Duties and Other Issues (Law Com No 201 2011), para 5.43.

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peter macdonald eggers kc Law Commission considered that there was a compelling case for reform.36 The Law Commission recommended that:37 (1) It should be an implied term of an insurance contract that insurers will pay sums due within a reasonable time. An assured who suffers loss as a result of breach of that term should be able to recover contractual damages from the insurer. (2) Insurers should have a defence to a claim for late payment where they incorrectly refuse to pay a claim but can show that they acted reasonably in doing so. This protects the ability of insurers to take a robust approach to decision making where they suspect fraud or non-compliance with policy terms or where the precise circumstances of the loss are not clear. (3) The hold harmless principle need not be repealed in England and Wales, as a fundamental change to the structure underpinning insurance contract law would unnecessarily complicate the objective to allow recovery of damages for late payment, which can be achieved in England and Wales without the removal of the hold harmless principle. The Law Commission’s proposals had the merit of being aimed at formulating and imposing an obligation on insurers to pay claims under an insurance contract – presumably the reforms are aimed at both indemnity and contingency insurance contracts – within a reasonable time. That is, the proposals were for the statutory imposition of a time obligation in addition to, rather than in substitution for, the obligation to indemnify the assured in respect of an insured loss. There are a number of advantages to this approach. First, the existing law need not be overhauled. As Lord Mance recognised,38 as a matter of common law, the supplementary time obligation, if breached, would probably sound in damages, thus achieving the Law Commission’s policy goal, although whether this would infringe Lord Brandon’s rule in The Lips that there is no obligation to pay damages for the late payment of damages is open to question. Any legislative provision imposing the time obligation and also making it clear that any breach will sound in damages will of course sweep aside any juristic objections. Second, the assured’s cause of action against the insurer for breach of the primary obligation will still arise on the happening of the loss, at least as far as indemnity insurance obligations are concerned. Once the time obligation is imposed, the question arises what period of time should be permitted to the insurer within which to discharge his primary obligation. The Law Commission sensibly suggested that a reasonable time should be allowed for the payment of the indemnity, thus allowing flexibility to meet the vicissitudes of the case. Indeed, the Law Commission suggested that a reasonable time should be measured by reference to the time required by the insurer to investigate and assess the claim as well as market practice. The Law Commission also sensibly suggested that damages 36 Para 26.27–26.52. 37 Para 27.2, 27.6 and 27.12. 38 The Rt Hon Lord Mance, “The 1906 Act, Common Law and Contract Clauses – All in Harmony?” [2011] LMCLQ 346, at 350–351; cf Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC); [2007] Lloyd’s Rep IR 283, at [34–38].

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damages for late payment of insurance claims should be recoverable in respect of foreseeable losses arising from the failure on the part of the insurer to pay the insurance indemnity. If the assured delays in bringing its claim for many years, it has the unfortunate consequence that the insurer must keep the claim on its books for a considerably long period of time, thus defeating the policy rationale of the law of limitation (hinting at the complexities which might arise, as arise with respect to the worst of long-tail liability insurance claims). If, however, the law were to recognise two separate obligations, first, the primary obligation to indemnify or to pay a contingent benefit and, secondly, to discharge the primary obligation within a reasonable time, the cause of action for the primary obligation will still accrue on the occurrence of the loss as regards indemnity insurance, thus securing the advantages of limitation, but the cause of action for the late payment of the insurance proceeds will be deferred until a reasonable time has elapsed. This would mean that if the assured fails to bring a claim within the limitation period for the primary obligation, no cause of action can be enforced for breach of the secondary obligation. When the Insurance Act 2015 was being considered by the House of Lords,39 only two judges attended to give evidence, Lord Mance and Longmore LJ, both of whom had been advocates for law reform to a greater or lesser extent. Of course, both judges had valuable evidence to give based on extensive experience and reflection. During evidence given to the House of Lords, when the Insurance Bill was considered in Committee, Longmore LJ said:40 I would say initially – and this is really only the personal view of someone who has been involved in insurance litigation for most of their professional life – that I am very supportive of the Law Commission’s proposals. The world has not stood still since 1906. It is a very long time since Parliament has taken commercial insurance into its purview. Two or three years ago it dealt with consumer insurance, but the terms of the Marine Insurance Act, which itself was a codification even in 1906, have become very creaky. In my view, the Law Commission has done sterling work over a number of years to try to bring the law into the modern age. I am very supportive of what it has done.

The implementation of a remedy for the late payment of damages was part of the objectives behind the reform to render the law less insurer friendly.41 There was however insufficient account taken of the pitfalls associated with the various legislative proposals. Those giving evidence before the House of Lords on behalf of the various interests (including the insurance industry) appeared to give overall support for the uncontroversial reforms being proposed, but there were numerous issues which did not invite unanimous agreement (as might be expected). The Insurance Act 2015 did not originally include a provision dealing with remedies for the insurer’s late payment of claims, because it was considered to be too controversial for passage under the special procedure for non-contentious Law Commission bills.42 39 Special Public Bill Committee Inquiry on the Insurance Bill, 2 December 2014, Q1: “The current law in this area is set out in the Marine Insurance Act 1906. Given that the Act is over 100 years-old, it is hardly surprising that it is rather outdated. Its main fault, from the modern perspective, is that it gives insurers many opportunities to refuse liability for claims, even when that seems completely out of proportion to any wrong done by the policyholder” (Lord Newby). 40 Special Public Bill Committee Inquiry on the Insurance Bill, 3 December 2014, Q23. 41 Law Commission Report No 353, para 1.25–1.26; Explanatory Notes, paras 5–10, 14–18. 42 House of Commons Committee, Hansard, 3 February 2015: Columns 148–149 (Andrea Leadsom, MP).

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peter macdonald eggers kc Yet, it was introduced – not in the Insurance Act 2015, but in the Enterprise Act 2016 – because the House of Lords considered that the provision was desirable.43 Lord Mance’s evidence on the desirability of this provision before the House of Lords Committee on the Insurance Bill was more nuanced:44 The Law Commission’s attitude and tentative proposals have changed with time, and the current proposal is simply for an obligation to pay any sums due within a reasonable time, which would include a reasonable time to investigate and assess the claim, and there would be no breach while a dispute was continuing if the insurer could show reasonable grounds for disputing the claim. But it is a fact that any breach would sound in damages, and I do have a feeling that this could change somewhat the nature of insurance, and in particular insurance disputes. It could become not uncommon to add a complaint that the insured had delayed or was delaying unreasonably. This would appear then to throw the onus on the insurer to disclose what was motivating it behind the scenes. Sometimes when insurers are investigating matters, it could even prejudice continuing investigations. Insurers often have suspicions that need careful handling and take time to explore, and there might be problems about waiver of privilege in some circumstances. How would the insurers demonstrate that they were disputing the matter reasonably without waiving privilege as to legal advice being received? More fundamentally, this risks the introduction into insurance claims – let us say a property insurance or a liability insurance claim – of what would effectively be a business interruption element. You would have a claim that was brought for damages. The damages would say, “Because of lack of funds, we were unable to run our business properly”. That sort of claim involves quite different experts and as is well known, quite complex considerations, where the people’s business really has been affected. There would be associated questions about foreseeability: at what stage do you measure whether the insurer had sufficient knowledge or anticipation of the suggested loss? Is it at the time of the insurance contract, which is the normal rule in contract claims where damages are later claimed, or would it exceptionally be at the date of the alleged breach? My feeling is that, at the moment, insurance contracts operate on the basis of assessment of risk – a defined amount of cover for a defined amount of premium. There is a risk that open-ended damages claims introduce unpredictable exposure. The general rule is that if you are kept out of money, interest is the compensation. I have no objection here to the idea that interest should also be compound – that might be a worthwhile suggestion – but while you have an outstanding claim, the general rule is that you are taken to be able to borrow on the market and interest is sufficient compensation. So, I question the introduction into this area. I certainly understand why a provision has not been introduced relating to late payment, even though it is in a more moderate form than the previous provisions and allows for the qualification of reasonable grounds for disputing the claim.

In answer to a question by Lord Lea, Lord Mance appeared to discourage extending a remedy for damages for the late payment of insurance claims. Nevertheless, this provision was included by way of the Enterprise Act 2016, without any meaningful debate on the desirability of such a provision or apparent consideration of Lord Mance’s concerns. This was a reform introduced against the cry for change perceiving an injustice to assureds whose claims are not paid in time, but without appropriate consideration for the negative consequences of the legislation.

43 Hansard, 12 October 2015: Column 13 (Baroness Neville-Rolfe), Column 44 (Lord Patten). 44 Special Public Bill Committee Inquiry on the Insurance Bill, 9 December 2014, Q31.

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damages for late payment of insurance claims IV. Insurance Act 2015 At common law, as explained above, if the insurer unreasonably failed to pay an insurance claim within a reasonable time, the assured had no remedy over and above the entitlement to an insurance indemnity and statutory interest.45 This was the result of a peculiarity of insurance law in that the claim for an indemnity is regarded as a claim for unliquidated damages for breach of contract by the insurer (the breach being constituted by the assured’s suffering an insured loss),46 and in that a contracting party is not entitled to recover damages for the late payment of damages (the rule in The Lips).47 In addition, the Court held that there was no implied term in the insurance contract obliging the insurer to assess and pay an insurance claim with reasonable diligence and due expedition.48 In order to address the perceived unfairness with this state of the law, sections 28–30 of the Enterprise Act 2016 were passed so as to amend the Insurance Act 2015 (by the addition of sections 13A and 16A). This legislation entered into force on 4 May 2017 and introduced into every insurance contract, both indemnity and contingency insurance contracts, an implied term that the insurer must pay insurance claims within a reasonable time (allowing for investigation and assessment of the claim). What constitutes a reasonable time depends on all of the circumstances of the case, including the type, size and complexity of the claim, compliance with statutory or regulatory rules or guidance and factors beyond the control of the insurer (section 13A (3)). Section 13A of the Insurance Act 2015 provides that: 13A Implied term about payment of claims (1) It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time. (2) A reasonable time includes a reasonable time to investigate and assess the claim. (3) What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account(a) The type of insurance, (b) The size and complexity of the claim, (c) Compliance with any relevant statutory or regulatory rules or guidance, (d) Factors outside the insurer’s control. (4) If the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable) – 45 The Italia Express [1992] 2 Lloyd’s Rep 281; Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541; Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC), [2007] Lloyd’s Rep IR 283, at [34–38]; Turville Heath Inc v Chartis Insurance UK Ltd [2012] EWHC 3019 (TCC), (2012) 145 Con LR 163, at [36]. 46 Grant v Royal Exchange Assurance Co (1816) 5 M & S 439, at 442; Swan and Cleland’s Graving Dock and Slipway Co v Maritime Insurance Co [1907] 1 KB 116, at 123–124; William Pickersgill & Sons Ltd v London and Provincial Marine & General Insurance Co Ltd [1912] 3 KB 614, at 622; Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2009] EWHC 2066 (TCC); [2010] Lloyd’s Rep IR 490, at [50–52]. 47 President of India v Lips Maritime Corp [1988] 1 AC 395, at 424–425. 48 Insurance Corp of the Channel Islands Ltd v McHugh [1997] LRLR 94, at 136–138.

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peter macdonald eggers kc (a) the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but (b) the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when. (5) Remedies (for example, damages) available for breach of the term implied in subsection (1) are in addition to and distinct from – (a) any right to enforce payment of the sums due, and (b) any right to interest on those sums (whether under the contract, another enactment, at the court’s discretion or otherwise). If there is a breach of this implied term, the assured will have remedies (e.g. damages) available at common law (and otherwise) in addition to the payment of the claim under the policy and statutory interest.49 This is so, even though at common law there were no damages recoverable even if there were an express, as opposed to an implied, term requiring payment of an insurance claim within a reasonable time, because of the rule in The Lips.50 This is because this is the obvious intention behind the passage of section 13A into law.51 By section 13A (4), if the insurer shows there are reasonable grounds for disputing the claim,52 there is no breach of the implied term while the dispute is continuing. Insofar as any term of the insurance contract puts the assured in a worse position as regards the implied term provided for in section 13A, such term is invalid as far as non-consumer insurance contracts are concerned, insofar as any breach of the implied term by the insurer is deliberate or reckless. Otherwise, such a term is valid if it satisfies the transparency requirements under sections 16–17 of the Insurance Act 2015.53 By amendment to section 5 of the Limitation Act 1980, introduced by section 30 of the Enterprise Act 2016, a claim for breach of the implied term may not be brought after the expiration of one year from the date on which the insurer has paid all the sums due under the insurance contract. V. Issues Arising in Respect of Section 13A of the Insurance Act 2015 The law has now changed so that an assured who has been denied payment of their insurance claim beyond a reasonable time as defined by the Insurance Act 2015 has a remedy in damages against the late-paying insurer. Yet there remain a number of concerns which require or may require consideration by the Court: 49 Explanatory Notes, para 264. See also sect. 13A(5) of the 2015 Act. 50 Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC); [2007] Lloyd’s Rep IR 283, para 34–38. See A. Tettenborn, “Late Payment of Claims; Better, but by No Means Perfect” in M. Clarke and B. Soyer (ed.), The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law, (Informa 2016), para 6.3.1. 51 Explanatory Notes accompanying Enterprise Act 2016, para 263–264. As to taking into account Explanatory Notes as an aid to statutory interpretation, see R v Luckhurst [2022] UKSC 23; [2022] 1 WLR 3818, at [23]. 52 Quadra Commodities SA v XL Insurance Company SE [2022] EWHC 431 (Comm), [2022] 2 All ER (Comm) 334, at [137], [140–147]. In respect of consumer insurances, ICOBS specifies what constitutes an unreasonable rejection of a claim under para 8.1.2 (in respect of contracts concluded before 1 August 2017) and para 8.1.2A-2B (in respect of contracts concluded on or after 1 August 2017). 53 Insurance Act 2015, sect. 16A.

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damages for late payment of insurance claims • What constitutes a reasonable time and how can an insurer and an assured prove what constitutes a reasonable time? • How can reasonable grounds for disputing a claim be established? • How will damages be assessed and how will principles of causation, mitigation and remoteness be applied? • What avenues of recourse will be available to an insurer who has acted in breach of this duty? What rights are there in subrogation or contribution? A. Reasonable Time The insurer is obliged to pay a valid insurance claim within a reasonable time. Section 13A makes it clear that such a reasonable time includes a reasonable time to undertake an investigation of the claim. One can approach this question entirely objectively from the perspective of a reasonable person in the position of the relevant insurer or from the perspective of the actual insurer facing any challenges relating to the insurance claim.54 There has been only one decision to date considering section 13A. In Quadra Commodities SA v XL Insurance Company SE,55 a claim was made by an assured in respect of goods held in a warehouse in Ukraine which were allegedly misappropriated by the warehouse operator, where in fact the warehouse operator had issued multiple warehouse receipts for the same goods by way of a pyramid fraud. The cargo insurers rejected the claim for an indemnity on the ground that no loss could be proved and that the assured had no insurable interest in the allegedly lost goods. The Court held that the assured was entitled to an indemnity for the lost goods, but also held that the claim for damages for the late payment of the insurance claim should be dismissed. The Court found that a reasonable time for the investigation and payment of the insurance claim was about one year, but also held that there were reasonable grounds for the insurers disputing the claim. Butcher J (whose judgment is worth quoting at length) said:56 [134] Quadra makes a claim for damages for breach of the term implied by s. 13A Insurance Act 2015. Section 13A was inserted into the Insurance Act 2015 by the Enterprise Act 2016. There was no dispute that the section was applicable in the present case, as the insurance was entered into after 4 May 2017. . . . [136] Quadra contended that the Defendants did not pay the sums due to it under the Policy within a reasonable time. In particular, Quadra contended that the Defendants’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow”. As a result, Quadra had suffered losses which were calculated by reference to the return on shareholders’ equity for the 2019 and 2020 years. The Defendants denied this case. They contended that a reasonable time to investigate this claim was “a considerable time”, “which should have extended beyond the time at which these proceedings were commenced”; and

54 A. Tettenborn, “Late Payment of Claims; Better, But by No Means Perfect” in M. Clarke and B. Soyer (ed.), The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law, (Informa 2016), para 6.3.2. 55 [2022] EWHC 431 (Comm); [2022] 2 All ER (Comm) 334. There was an appeal from this decision but it was not concerned with sect. 13A ([2023] EWCA Civ 432, at [49]). 56 Ibid at [134–143].

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peter macdonald eggers kc that, in any event, there were, for the purposes of s. 13A (4), reasonable grounds entitling them to dispute the claim. The Law Commissions’ Report and the Explanatory Notes [137] Section 13A was based on a recommendation by the Law Commissions (Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment, No. 353/238). That report included the following: 28.25 Clause 14(2) [of the proposed Bill, the equivalent of s. 13A (2)] makes it explicit that a reasonable time will always include a reasonable time for investigating and assessing a claim. 28.26 The long-term stability of the insurance market is dependent on insurers having strong incentives to investigate claims and root out fraudulent and invalid claims. This incentive would be weakened if insurers did not feel they had adequate time to do this . . . Analysis [140] The first issue is to consider what was a reasonable time within which the Defendants should have paid the sums due in respect of the claim. The onus of establishing that the payment was made only after that reasonable time must be on the party alleging a breach of the implied term, i.e., the assured. Although it may not be straightforward to separate them, this question is distinct from the question, on which insurers bear the burden of proof, of whether there were reasonable grounds for disputing the claim and that s. 13A(4) applies. [141] The issue of what was a reasonable time in which the present claim should have been paid, without yet considering the Defendants’ case that there were reasonable grounds for disputing the claim, is not an easy one to decide. No expert or detailed comparative evidence was adduced. The fact that, in some respects, the Defendants’ actual conduct of the claims handling can be said to have been too slow or lethargic, does not itself answer the question of what a reasonable time was. [142] Looking at the non-exhaustive list of factors referred to in s. 13A(3): (a) The type of insurance was marine cargo, and thus property insurance. As the Explanatory Notes themselves state, property claims usually take less time to value than, for example, business interruption claims. On the other hand, the cover applied to transport and storage operations of different types and involving or potentially involving many different countries and locations and claims under such a cover could involve very various factual patterns and differing difficulties of investigation. (b) The size of the claim was substantial, but not exceptional in the context of marine cargo insurance. As to complexity, this claim was certainly complicated by its location. The parties differed as to whether, otherwise, there was any complexity. Quadra contended, in effect, that once it had supplied the relevant contracts, Warehouse Receipts and inspection reports, and it was apparent that no or very few goods would be released to it from the Elevators, there was no complexity. The Defendants contended that that was based on an overly simplistic view of how the Policy worked, and that the claim had necessitated 188

damages for late payment of insurance claims a fuller investigation of what had transpired in relation to the Agroinvestgroup Fraud and at the Elevators. Clearly this dispute overlaps with what needs to be considered for the purposes of s. 13A (4). On any view, however, I consider that the origins of the claim in the Agroinvestgroup Fraud, the uncertainty as to what had happened at the Elevators, the destruction of documents, and the existence of legal proceedings and recovery efforts in Ukraine were significant complicating factors, as was the fact that Quadra elected during the course of the investigation to opt for English rather than French law. (c) It was not suggested that any statutory or regulatory rules or guidance were relevant. (d) There were a number of factors outside the insurers’ control which meant that this was a claim which would take some time to investigate. These, again, included the destruction and unavailability of evidence as to what had happened at the Elevators, and the fact that legal proceedings were commenced in Ukraine in 2019 and that it took some time to see what the results of these would be. [143] My conclusion, given the nature and complicating circumstances of this claim, as far as possible keeping separate the question of whether there were reasonable grounds for disputing the claim, is that a reasonable time was not more than about a year from the Notice of Loss. By this I mean that that would have been a reasonable time for insurers properly to have investigated and evaluated the claim and to have paid it, assuming that the investigation had indicated no reasonable grounds for disputing it or part of it. Therefore, the Court considered the objective elements of the claim, by reference to the considerations set out in section 13A (3), without regard to the particular challenges faced by the actual insurer, to be the relevant considerations in identifying the limits of a reasonable time: in this case, one year from the notice of loss. This potentially side-steps any difficulty associated with considering the particular issues arising in the insurer’s decision-making which might be privileged (an issue identified by Lord Mance in his evidence to the House of Lords). This judgment identifies the starting point for the period of a reasonable time as the notification to the insurer, even if that notification is not a claim. Of course, it would be difficult to allow a reasonable time to start to run beforehand. This suggests that there should be no damages recoverable because there is no breach of the implied term, prior to the commencement of a reasonable time; indeed, there is no breach until after the lapse of a reasonable time. The question might arise whether this should influence when statutory interest should be allowed. Section 13A(5)(b) provides that damages for breach of the implied term are a remedy in addition to interest recoverable on an insurance claim. Traditionally, an insurer would be permitted a reasonable period for investigating a total loss claim under a marine policy, even though it might have been a short, conventional period, before statutory interest was allowed.57 That said, in relation to indemnity insurance claims generally, it has been held that the existence of and need to investigate a genuine dispute as to liability is not 57 The Julia [2002] EWHC 1405 (QB); [2003] Lloyd’s Rep IR 365, at [13].

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peter macdonald eggers kc a material factor in postponing the running of interest.58 Of course, such statutory interest may be delayed where the claimant’s decision not to make a claim is the predominant cause of the claimant not receiving the insurance proceeds.59 On the other hand, statutory interest traditionally runs from the date on which the cause of action accrues, which in the case of indemnity insurance for a loss under an indemnity insurance policy, is the date of the loss. The difficulty created by section 13A is that there are two causes of action, one for the insurance indemnity and the other for the failure to pay that indemnity within a reasonable time. In Lee v IAG New Zealand Ltd,60 the New Zealand High Court considered these issues and concluded that: The discussion above demonstrates that there is no universal or even common principle which dictates that interest is payable from the date of the event which causes loss to the insured. These concluding observations are to summarise. (a)

(b)

(c)

(d)

(e)

(f)

Every case turns on the individual insurance contract and the facts. Insurance practice will be relevant but not decisive. This is so even though the insured’s claim, as here, has commonality with many others involving the same policy provisions. The conduct of the insured and the insurer will be relevant. Delay on the part of the insured in advising the insurer of the claim, or in providing information so it may be assessed, may influence the date from which interest runs. That delay may be adverse to the insurer when deciding how to respond to a claim. This element of discretion seems to fit with the justice of the case but not where the insured is unable to provide information through no fault of its own. Where an insurer wrongly declines cover, it is implicit that the court’s approach to interest will reflect that breach, which may otherwise result in damages distinct from interest. That does not fix the date at which the obligation to pay arises. Interest should not in my view be available only from the date proceedings are filed. As an encouragement to premature and imprecise litigation that would be a truly remarkable principle to apply. Interest may apply from a date prior to commencement of litigation. There is a well arguable case that a reasonable time to assess the claim must be allowed before it can be said the insured is wrongly without its money, and the insurer wrongly benefiting by the use of that money. This is problematical in cases where there has been widespread damage, as suffered in the Canterbury earthquakes, as it places an almost impossible burden on insurers to respond to each individual claim in a timely way, from the insured’s perspective. An indemnity payout based on loss or damage may be payable from the date of loss or damages as the property insured may point to that, for example destruction of an aircraft which the insured needs to replace in service. The loss or damage is immediate, and although it may take time to investigate and assess, the economic effect of loss or damage is immediate. That may influence an award of interest from that date.

58 Kuwait Airways Corporation v Kuwait Insurance Co SAK [2000] Lloyd’s Rep IR 678, at 688–689; Manchikalapati v Zurich Insurance plc [2019] EWCA Civ 2163; [2020] Lloyd’s Rep IR 77, at [221]. 59 The Julia [2002] EWHC 1405 (QB); [2003] Lloyd’s Rep IR 365, at [17–18]; Sawiris v Marwan [2010] EWHC 89 (Comm), at [59]; 2Entertain Ltd v Sony Dadc [2020] EWHC 1490 (TCC), at [15–18]. 60 [2017] NZHC 2626; [2018] Lloyd’s Rep IR 345, at [86].

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damages for late payment of insurance claims (g)

(h)

(i)

By contrast, where the “loss” is based on the plaintiffs’ economic interest in September 2010 and the cost of restoration “old for old” could only be calculated after reasonable adjustment and assessment, the immediacy of a payment under that indemnity may be less compelling than in the example immediately above. If delay in paying the indemnity sum affects the efficacy and “buying power” of that payment, in an inflationary setting, that may influence the date from when interest is applicable. The touchstone is that the date of loss or damage to the insured property is the starting point under an indemnity provision, but not necessarily the end point for assessing interest.

Nevertheless, the difficulty remains in that the entitlement to recover an indemnity and the time within which the indemnity is to be paid depend on the effects of two coexisting causes of action. B. Reasonable Grounds for Disputing a Claim Section 13A(4)(a) provides that If the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable) – (a) the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing.

This is an important and central consideration for determining whether there has been a late payment of an insurance claim. This provision explicitly provides that whatever period of time is identified as a reasonable period of time for the purposes of paying an insurance claim, there is a defence to any claim for late payment if the insurer has reasonable grounds for declining the claim. As discussed earlier, an inquiry into the reasons for the insurer’s grounds for refusing to pay a claim may infringe issues of privilege (as Lord Mance foreshadowed in his evidence to the House of Lords). There are also difficult issues about how an insurer and an assured each can establish whether or not there were reasonable grounds for disputing an insurance claim. In Quadra Commodities SA v XL Insurance Company SE,61 the Court referred to the Law Commission’s justification for this defence: A Reasonable but Wrong Refusal

28.46 There may be circumstances in which an insurer genuinely and for good reason considers that it is not liable to pay a claim. This might occur where, for example, there is some evidence that the claim is fraudulent, the insurer believes that there has been a non-disclosure or misrepresentation at placement which allows it to avoid the policy, or the insurer believes the damage to have been caused by an event which the policy does not cover.

61 [2022] EWHC 431 (Comm); [2022] 2 All ER (Comm) 334.

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peter macdonald eggers kc 28.47 Consultees were concerned that our proposals might never allow an insurer in these circumstances to dispute a claim all the way to court without becoming liable for consequential losses as a result. As we have already said, it is in the interest of the wider insurance market that insurers are in a position to challenge potentially invalid claims or to question the amount claimed by an insured. We accept that there may be an apparently legitimate reason for an insurer to question the validity or value of a claim that ultimately turns out to be payable, and we do not consider that late payment claims should be a regular occurrence in such cases. The oddity of the legislation is section 13A(4)(b) which provides that “If the insurer shows that there were reasonable grounds for disputing the claim . . . (b) the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when”. This does not make sense, given that sub-section (a) expressly provides that the insurer does not breach the implied term if there are reasonable grounds for disputing a claim, even if those grounds are not ultimately successful. In Quadra Commodities SA v XL Insurance Company SE,62 Butcher J held that if there have been reasonable grounds for disputing the claim, it was irrelevant that the insurers’ investigations into the claim were too slow or unnecessary: [144] The Defendants contend, however, that there were reasonable grounds for disputing the claim, and thus that s. 13A (4) was applicable. I consider that they are correct as to this; and the fact that I have found that those grounds were wrong does not indicate that they were not reasonable. Indeed, Quadra did not, as I understood it, contend that the bases on which the Defendants had defended the claim in the action were not reasonable grounds to do so. Nor is there any question here of unreasonable conduct or prolongation of the litigation by the Defendants, at least up to the present. [145] There remains, however, the question of whether the proviso in sub-section 13A(4)(b) is applicable and significant. Quadra contended that it is. On its case, the Defendants’ handling of the claim was unreasonable and too slow. Insofar as this was a contention that the Defendants carried out investigations which were unnecessary on a proper construction and application of the Policy, I do not consider that that was a “relevant factor” for the purposes of s. 13A(4)(b). This is because I do not consider that, in the present case, those investigations can be sensibly distinguished from the “reasonable grounds for disputing the claim”. Those grounds included the argument that a wider analysis of the factual position was relevant than Quadra contended to be necessary and that that wider analysis indicated that there was no cover. [146] Insofar as Quadra contended that the way in which the Defendants had in fact conducted their investigations was too slow, I considered that there was some force in this. In particular: DPS’s investigation appears to have been unduly protracted given the number of hours actually spent on it; there was an unnecessary delay in the DPS report being released to Quadra; Crawford could have been instructed sooner; and legal advice could and should have been taken before it was. I do not, 62 [2022] EWHC 431 (Comm); [2022] 2 All ER (Comm) 334, at [144–146].

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damages for late payment of insurance claims however, consider that these features of the Defendants’ handling of the claim mean that there was a breach of the s. 13A implied term. They occurred within what I consider having been a reasonable time for payment of the claim; and there were throughout reasonable grounds for disputing the claim. If the insurer has reasonable grounds for disputing a claim and deploys certain arguments to that effect, it seems that any additional arguments which are unsound will have no causative impact unless they individually increase the period during which the assured has been deprived of recovery of the insurance proceeds. C. The Measure of Loss: Causation, Remoteness, Mitigation Claims for damages for breaches of contract – and the claim for breach of the implied term imposed by section 13A is a claim for damages for breach of contract, as section 13A (5) makes clear – are subject to restrictions in that it must be established that the damages were caused by the breach of contract, and no damages will be recoverable if they are too remote or if they were reasonably avoidable by mitigation. Questions of causation are matters of fact. However, the loss claimed as damages by the assured for breach of the statutorily implied term must be tied to the failure on the part of the insurer to pay the claim within a reasonable time, not to the insured peril under the policy. Remoteness is determined by what was in the reasonable contemplation of the parties at the date of the contract, either having regard to what was reasonably foreseeable in the ordinary course of things or what was actually known to the parties at the date of the contract. There may also be an additional requirement that the defendant insurer has assumed responsibility for a particular type of loss.63 Apart from interest, there may be consequential losses arising from the assured not being able to replace an incomeproducing asset which has been insured and lost. However, the recovery of such losses may depend on whether the insurer was or reasonably ought to have been aware that the assured was not in a position to replace the insured asset without the insurance proceeds. The assured’s duty to mitigate any loss arising from the insurer’s failure to pay an insurance claim within a reasonable time is well established. Therefore, if a loss is reasonably avoidable, such loss cannot be recovered as damages. It also follows that if the assured incurs additional losses in the performance of this duty to mitigate, those losses are recoverable from the defendant insurer. However, this state of affairs sits uncomfortably with the Court’s apparent refusal to find that there is such a duty to mitigate an insured loss and to recover expenses incurred in the taking steps to mitigate under a non-marine insurance policy.64 By contrast, there is such a duty under marine policies, given section 78(4) of the MIA 1906, and there is an entitlement to recover costs incurred by way of mitigation (sue and labour expenses) if there is a sue and labour clause in the marine policy (section 78(1)); that said, there is a good case for the proposition that such mitigation expenses are recoverable from an insurer even absent such a sue and labour clause.65 63 H. Beale, Chitty on Contracts, (34th edn, Sweet & Maxwell 2021), para 29–124–29–135. 64 Yorkshire Water v Sun Alliance & London Insurance Ltd [1997] 1 Lloyd’s Rep 1, at [30–32]. 65 Either as particular charges defined by s. 64(2) of the MIA 1906 (Royal Boskalis Westminster NV v Mountain [1999] QB 674, at 717–718) or pursuant to an implied term or as mitigation damages (see Emperor

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peter macdonald eggers kc There is no general entitlement on the part of an assured to the recovery of mitigation damages for losses incurred in the performance of the duty to mitigate in respect of insurance contracts, in particular non-marine insurance contracts.66 This state of law is in an unsatisfactory state.67 D. The Insurer’s Recourse If the insurer is liable to the assured in damages for the late payment of an insurance claim, questions may arise about the recourse available to the insurer to diminish such loss. Such avenues of recourse may include (a) recovering an indemnity under a reinsurance contract, (b) claiming against a leading underwriter who had carriage of the defence of a claim on behalf of following underwriters or against a claims adjusting agent, (c) recovering an indemnity under the insurer’s own liability insurance contract, (d) the insurer’s claim for a contribution to any person who is liable to the assured for the losses recoverable from the insurer pursuant to the Civil Liability (Contribution) Act 1978, and (e) the insurer exercising a right of subrogation against wrongdoers responsible for the assured’s insured loss. These questions are yet to be tested. VI. Conclusion Section 13A of the Insurance Act 2015 represents a profound reform of English insurance law and reflects a compromise by creating two causes of action available to the assured, one for the insurance proceeds and the other for late payment of an insurance claim. This solution was implemented during a law reform process which did not consider all the consequences and difficulties associated with the solution which will have to be analysed and stress-tested before the courts.

Goldmining Co v Switzerland General Insurance Co [1964] 1 Lloyd’s Rep 348 (Sup Ct NSW); The Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB [1986] 2 Lloyd’s Rep 19, at 22–23). 66 King v Brandywine Reinsurance Co (UK) Ltd [2004] EWHC 1033 (Comm); [2004] 2 Lloyd’s Rep 670, at [143]; [2005] EWCA Civ 235; [2005] 1 Lloyd’s Rep 655; Astrazeneca Insurance Co v XL Insurance (Bermuda) Limited [2013] EWHC 349 (Comm); [2013] Lloyd’s Rep IR 290, at [137]; aff’d [2013] EWCA Civ 1660; [2014] Lloyd’s Rep IR 509. 67 P. MacDonald Eggers, “Sue and Labour and Beyond: The Assured’s Duty of Mitigation” [1998] LMCLQ 228.

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PART III

OTHER REMEDIES AND THIRD PARTIES

C H A P T E R 14

Specific Remedies in Shipping – Specific Performance, Specific Enforcement and the Interaction of “Negotiating Damages” Chris Kidd, with the assistance of Ben Moon, Waled Salih and Jack Maxted I. Introduction In this chapter, we examine some recent interesting developments in maritime cases, which have seen parties seeking, and being granted, specific remedies to enforce both positive and negative contractual promises. In parts II and III, we look at mandatory injunctions and specific performance and their application in recent cases to letters of indemnity. In the last four or five years there has been a significant number of reported cases in which the contractual promise to provide security to prevent a vessel from being arrested or to enable the release of an arrested vessel has been enforced by way of a mandatory injunction and/or specific performance order. The scrapping of a vessel has also been enforced through a prohibitory injunction enforcing a negative obligation not to trade the vessel or re-sell it other than for scrap. We consider that case in the context of negative injunctions in part IV of this chapter. That same case also examined the availability of “negotiating damages” for breach of the same restrictive covenant. We examine the implications of that decision and the Supreme Court authority behind it in a deeper dive in part V. II. Mandatory Injunctions/Specific Performance – a Summary A. Mandatory Injunctions Injunctions can be either prohibitory or mandatory. The former require the subject of the injunction not to do something, while the latter compels him to do something. In other words, it is prohibitory if an injunction can be complied with by doing nothing; if it requires some action to be taken by the person enjoined, it is mandatory. A mandatory injunction by itself, though, is not normally seen as the appropriate remedy for enforcement of a positive contractual obligation, which is the realm of specific performance. The mandatory injunction, like any injunction, is a discretionary remedy. As provided by section 37(1) of the Senior Courts Act 1981, the Court has a general power to grant an injunction where it is “just and convenient” to do so. Mandatory injunctions and specific performance orders can be final or interim. In granting an interim order, the main concern for the Court is to seek to minimise the risk of DOI: 10.4324/9781003376347-17

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chris kidd, with the assistance of ben moon injustice pending trial.1 It has long been held (and recently reaffirmed2) that the analysis of Lord Diplock and the test provided in the classic House of Lords case of American Cyanamid Co v Ethicon Ltd3 is appropriate to decide when a mandatory injunction should be granted. However, it should be noted that this is not a hard-and-fast test and should not be followed to the letter on every occasion as if it were the words of a statute.4 Condensed down to its simplest form, the American Cyanamid test, as it is known, takes on two stages. Firstly, is there a serious question to be tried? In other words, is there an issue for which there is some supporting material and an outcome which is uncertain?5 (This is often said to amount, in practice, to establishing a case that would survive the test for summary judgment under CPR 24.) Secondly, if there is a serious question to be tried, the court must consider the “balance of convenience”. B. American Cyanamid – “the Balance of Convenience” While Lord Diplock in American Cyanamid stated that, [it] would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them, the “balance of convenience” can be split down into three key stages, to facilitate the court finding the path that will cause the “least irremediable prejudice” to one party or the other.6

Firstly, the court inquires whether damages will be an adequate (though not necessarily perfect7) remedy for the applicant if he succeeds at trial. If they would (and the defendant would be in a financial position to pay them), then interim injunctive relief will not normally be granted.8 Secondly, assuming damages will not be an adequate remedy, the court then goes on to ask whether the claimant’s cross-undertaking in damages will provide adequate protection for the defendant if the court grants an injunction which, following trial, proves to have been wrongly granted. If not, the court will be hesitant to grant relief (but may nevertheless still do in the exercise of its discretion, having considered the third stage). Generally, if both the preceding questions are answered to the satisfaction of the court, the mandatory injunction will be granted. However, there is also a third stage – the assessment of the balance of convenience. Should there be doubt as to the adequacy of damages or the undertaking when the first and second tests are applied, the court should seek to establish whether the granting or withholding of the injunction would be more (or less) likely to cause the “irremediable prejudice” spoken of by Lord Hoffmann. Where factors are balanced, the court should 1 National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16; [2009] 1 WLR 1405 at [16]. 2 Trafigura Maritime Logistics v Clearlake Shipping, The Miracle Hope [2020] EWHC 726 (Comm); [2021] 1 Lloyd’s Rep 533 at [28]. 3 American Cyanamid Co v Ethicon Ltd [1975] AC 396. 4 R v Secretary of State for Transport, Ex p Factortame Ltd (No 2) [1991] AC 603, 670. 5 Cayne v Global Natural Resources plc [1984] 1 All ER 225. 6 National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16; [2009] 1 WLR 1405 at [17]. 7 Neurim Pharmaceuticals (1991) Ltd v Generics UK Ltd (t/a Mylan) [2020] EWCA Civ 793, [2021] RPC 7 at [16]. 8 Ibid at [16].

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specific remedies in shipping lean towards prudently preserving the status quo. As an interim mandatory order is more likely than not to require the taking positive actions or steps, the risk of injustice could be high.9 At the interim stage, it is also relevant to ask whether the court has a “high degree of assurance” that the claimant will succeed at trial: the higher the degree of assurance the less risk there is of injustice if the injunction is granted,10 although there may still be exceptional cases in which it is appropriate to grant an interim mandatory injunction even if the degree of assurance is not high, on the basis that the risk of injustice in refusing interim relief sufficiently outweighs the risk if it is granted. C. Specific Performance Interim and final mandatory injunctions are often used in connection with applications for orders for specific performance to enforce a positive contractual obligation. Specific performance is also an equitable, discretionary remedy and, like a mandatory injunction, may only be granted if damages are not an adequate remedy.11 Latterly, the test has variously been put as “whether it is just, in all the circumstances, that the claimant should be confined to his remedy in damages”12 or whether “the innocent party should have a legitimate interest extending beyond pecuniary compensation for the breach”.13 Additionally, the obligation being enforced must be part of an enforceable contract, of which the relevant terms are sufficiently certain. Notably, as we shall see, specific performance is not ordered where there is an unfulfilled condition precedent affecting the relevant obligation. In many cases, and many types of contract, specific performance is not appropriate, even if the aforementioned tests are met, particularly where the contract is for personal services, because it might involve requiring close cooperation between the parties or interfere with personal liberties, or where the order, if granted, may require ongoing supervision by the court. Specific performance will also be refused if it is impossible for the respondent to perform, since “the court does not compel a person to do what is impossible”.14 Further, specific performance and injunctions might still be refused if the grant of the injunction would be oppressive to the respondent; in such a case the court has the power to award damages in lieu under s.50 of the Senior Courts Act 1981. Although specific performance is normally a final remedy, interim mandatory injunctions are sometimes granted to in effect require specific performance of a positive obligation pending trial.15

9 Nottingham Building Society v Eurodynamics Systems Plc [1993] FSR 468, 474. 10 Ibid at 474. 11 Chitty on Contracts (34th edn, Sweet & Maxwell 2021), at para 30–018. Note, however, that damages are not necessarily inadequate merely because they are hard to quantify: Araci v Fallon [2011] EWCA Civ 668 at [42]. 12 Araci v Fallon [2011] EWCA Civ 668 at [42]. 13 Cavendish Square Holding BV v Makdessi [2015] UKSC 67; [2016] AC 1172 at [30]. 14 Forrer v Nash (1865) 35 Beav 167, 171. 15 Land Rover Group Ltd v UPF (UK) Ltd (in administrative receivership) [2002] EWHC 3183 (QB); [2003] 2 BCLC 222.

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chris kidd, with the assistance of ben moon III. Specific Performance and Mandatory Injunctions as Methods of Enforcing the Provision of Security Pursuant to a Letter of Indemnity A. Bills of Lading and Letters of Indemnity Interim mandatory injunctions coupled with claims for specific performance are increasingly being used to enforce the terms of letters of indemnity that are provided when the vessel is ordered to deliver cargo without production of original bills of lading. Bills of lading are often negotiable documents which can be traded or used to finance the purchase of the cargo. This may mean that they pass through various hands on the way to the ultimate receiver, leading to delays in their arriving at the discharge port. That can lead to delays in discharging cargo which in turn may give rise to significant claims for demurrage, or hire (if the vessel exceeds her redelivery date owing to detention in port). Traders therefore will often request that the cargo is delivered without production of the original bills of lading. As many will be aware, the original bill of lading is proof of title and entitles the holder of the bill to delivery of the cargo upon presentation of the original bill. The carrier’s duty is to deliver the cargo against production of the bills of lading but, generally, to go no further if the bills are produced. If, instead, the carrier delivers the cargo without the bills of lading he opens himself up to a claim for mis-delivery. The prudent carrier, therefore, will only agree to release the cargo without production of the bills of lading if he has the protection of a letter of indemnity (“LOI”). Commonly, however, the terms of a charterparty may oblige the carrier to deliver the cargo without production of the original bills of lading against an LOI. In such circumstances, it is common practice for an LOI to be agreed on the terms of one of the standard LOI wordings issued by the International Group of P&I Clubs, the terms of which include that the issuer of the LOI will: 1.1. Indemnify the owner/carrier against loss or damage resulting from complying with the request to deliver cargo without production of original bills of lading; and, 1.2. Provide on demand security to prevent the arrest of the carrier vessel or release it from arrest.

Cases over the last 15 years have confirmed that this obligation to provide security can be enforced by way of an interim and/or final mandatory injunction or specific performance. B. The Laemthong Glory16 Bills of lading were issued by the master on behalf of the shipowner as carrier. The bills were consigned “to order” but named the receivers as the notify party. Ahead of the vessel’s arrival at the discharge port the receivers requested that the cargo be delivered without production of the original bills. The charterparty between the owners and charterers contained a clause to enable this against the provision of an LOI. Clause 42 stated, inter alia, 16 Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No 2) [2004] EWHC 2738 (Comm); [2005] 1 Lloyd’s Rep 632.

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specific remedies in shipping In the event of the Original Bills of lading are not being available at discharge port on vessel’s arrival, if so required by Charterers, Owners/Master to release the cargo to Receivers on receipt of Faxed letter of Indemnity. Such letter of Indemnity to be issued on Charterers head paper, wording in accordance with the usual P&I Club wording and signed by Charterers only always without a bank countersignature.17

The receivers provided an LOI to the charterers and the charterers provided an LOI to the owners, together with a copy of the receivers’ LOI. The receivers’ LOI stated, inter alia: In consideration of your complying with our above request we hereby agree as follows: 1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability, loss, damage or expense of whatsoever nature which you may sustain by reason of delivering the cargo in accordance with our request. ... 3. If in connection with delivery of the cargo as aforesaid the ship or any other ship or property in the same or associated Ownership management or control should be arrested or detained or should the arrest or detention thereof be threatened or should there be any interference in the use or trading of the vessel . . . to provide on demand such bail or other security as may be required to prevent such arrest or detention or to secure the release of the ship or property, or to remove such interference and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest or detention or threatened arrest or detention.18

The receivers therefore agreed to indemnify the charterers against loss or damage in connection with the request to discharge the cargo without the original bills of lading and agreed to provide security to release the vessel if arrested. The owners instructed the master to deliver the cargo to the receivers without production of the original bills of lading. Following discharge, the vessel was arrested by a bank which asserted that it was in possession of the original bills. The owners sought orders against both the charterers and the receivers requiring each to provide security to enable release of the vessel. Cooke J held that the owners could not only enforce the charterers’ LOI, but also rely on and enforce the receivers’ LOI (even though it was addressed to the charterers alone) by virtue of the Contracts (Rights of Third Parties) Act 1999.19 As only the owners could deliver the cargo they were held to be the charterers’ agents for delivery and thus were an identifiable beneficiary under clause 1 of the receivers’ LOI.20 Clause 3 of the receivers’ LOI also conferred a benefit on the owners (even though it did not expressly mention agents) because it related to release of the vessel.21 Significantly, it was held that damages would not be an adequate remedy if an injunction were not granted to enforce the provision of security, precisely because the very purpose of the LOI was to avoid damages for detention accruing by ensuring the swift release of the vessel. That supplemented the secondary liability to pay damages with a primary obligation to ensure release of the vessel so that an action for damages would

17 18 19 20 21

Ibid at [7]. Ibid at [19]. Ibid at [45–46]. Ibid at [34–40]. Ibid at [41–44].

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chris kidd, with the assistance of ben moon be unnecessary.22 An order for specific performance was therefore granted to the owners and, in turn, to the charterers against the receivers. The charters and the receivers were thus both obliged to provide security as between them to enable the release of the vessel.23 The case now seems to be accepted as authority for the proposition that, in relation to failure to provide security under an LOI, generally damages will be an inadequate remedy. C. The Bremen Max24 The Bremen Max was chartered on a series of charterparties from the owners through COSCO, Farenco, Daebo, Norden to Deiulemar. As with The Laemthong Glory, the charterparties required each owner (under each charterparty) to release the cargo without production of original bills against an LOI. Once again, on arrival at the discharge port a request was made for delivery without production of the bills, and LOIs were provided by each charterer to each of their owners up the chain. The relevant wording of the LOI was similar to that in The Laemthong Glory, discussed earlier. The cargo was discharged, but the vessel was subsequently arrested by Stemcor who asserted that they were the holders of the bills. The head owners provided security to Stemcor. They then promptly obtained a Rule B attachment from the US courts for the same amount against the New York accounts of COSCO and requested that substitute security be provided to Stemcor. Fearing the impact of something similar, Farenco provided the substitute security to Stemcor. Farenco then obtained an order requiring Daebo/Norden to replace Farenco’s surety, and very shortly afterwards Norden obtained an order requiring Deiulemar to provide substitute security. Deiulemar argued that specific performance should not be ordered because the vessel had already been released by the head owners against provision of security to Stemcor and thus it was impossible for them to secure the release of a vessel no longer under arrest, and that Farenco’s provision of security had been to protect its assets and not to effect release of the already released vessel, leaving only a claim for damages for breach of the terms of the LOI. Those submissions were rejected by Teare J, who held that the purpose of the LOI was that charterers, not owners, should have to put up security. He further held that the provision of security by the head owners had not discharged the charterers’ obligation to do so, as a holding otherwise would frustrate the commercial purpose of the LOI which was to ensure that owners did not have to incur the cost of the provision of security.25 His Lordship further relied upon The Laemthong Glory to hold that specific performance was appropriate as a remedy for the charterers’ breach of the LOI (for the reasons outlined earlier), in particular the provision of substitute security for that of the head owners’

22 Ibid at [47]–[51]. 23 Ibid at [52]. 24 Farenco Shipping Co Ltd v Daebo Shipping Co Ltd v Dampskibsselskabet Norden A/S, Deiulemar Shipping SPA, The Bremen Max [2008] EWHC 2755 (Comm), [2009] 1 Lloyd’s Rep 81. 25 Ibid at [22].

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specific remedies in shipping security. Granting the order amounted neither to a requirement to do the impossible nor to ordering the defendants to do something they had not promised to do.26 However, he did add that the indemnity in the LOI was conditional upon the delivery of the cargo by owners to the entity named in the LOI (not merely to be released to charterers for them to deliver), such that the indemnity in the LOI did not arise if owners delivered the cargo to someone other than the specific named entity.27 D. The Harmony Innovation Shipping Case28 Like the preceding case, the Universal Bremen was chartered from its owners, Tulip, through a series of charterers Ausca, Harmony and Caravel Shipping to Caravel Carbons. LOIs were issued up the chain on back-to-back terms. The notify party in the bills was Kartik; the LOI requested delivery to Pangea (who had been nominated by Caravel Shipping as their agents at the discharge port) or to such party as believed to be or to represent Pangea . . . or to be acting on behalf of Pangea . . . at [discharge port].

Harmony appointed GAC as their agent, who in turn appointed Arnav; receivers also appointed a further agent, Shreeji. Arnav presented delivery orders and customs documents indicating that the cargo was to be delivered to Fortune Coal. One of the attending agents, one R, appeared to be representing both Pangea and Arnav. The cargo was discharged into barges. Many months later, a bank asserted that it was in possession of the original bills and arrested the vessel. Harmony obtained an interim injunction requiring Caravel Shipping to provide security to enable release of the vessel. Caravel Shipping applied to discharge the order on the basis that the cargo had not been delivered to the entity named in the LOI. The owners cross-applied for an order that Ausca provide security. In order for the injunction to be maintained, the court had to have a high degree of assurance that Harmony (and the owners) would succeed at trial.29 Following The Bremen Max, that necessarily meant that it had to be clear that the obligations in the LOI had to be triggered by delivery to the entity named in the LOI. Sir Ross Cranston, sitting as a Judge of the High Court, concluded that, even though Pangea would never have been receivers of the coal (as they were agents), they were involved in the delivery of the cargo, both through R and because of the absence of correspondence from Pangea indicating that the cargo had not reached its final destination (i.e. Fortune Coal, through Pangea as their agents).30 He also concluded that it was unlikely that Caravel could demonstrate that the master “did not believe that the cargo was being delivered to Pangea, its order or its

26 Ibid at [23]. 27 Ibid at [34]. 28 Harmony Innovation Shipping Pte Ltd v Caravel Shipping Inc, The Universal Bremen [2019] EWHC 1037 (Comm); [2020] 1 Lloyd’s Rep 206. 29 Ibid at [19]. 30 Ibid at [26].

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chris kidd, with the assistance of ben moon agents”. There was, therefore, in his view a high degree of assurance that those seeking (to maintain) the injunction would succeed at trial.31 As such, and following The Laemthong Glory, he went on to hold that the argument that damages were an adequate remedy was unsound and contrary to the case law, and would undermine the purpose of the LOI which was to enable the release of the vessel. E. The Miracle Hope Case32 The Miracle Hope was time-chartered by the owners to Trafigura, who in turn sub-chartered the vessel to Clearlake Chartering, subsequently amended to Clearlake Shipping (“Clearlake”). Clearlake sub-chartered the vessel to Petróleo for the carriage of a cargo of oil from Brazil to China. The two sub-charters were on materially back-to-back terms which contained deeming language such that an LOI was deemed to have been given if the charterers invoked the LOI provisions and if the owners agreed to discharge the cargo without the presentation of the original bills of lading. The LOI provisions were invoked, the cargo was discharged, but the vessel was subsequently arrested by a bank, again claiming to be the holders of the original bills. Trafigura requested Clearlake to provide security and defence funds and Clearlake turned to Petrobras for the same. When security was not provided, Trafigura applied for a mandatory injunction. i. The Interim Application33 At the interim stage, Henshaw J observed that case law supported the enforcement of the obligations in an LOI by mandatory injunction and suggested that damages were an inadequate remedy.34 He also relied on The Laemthong Glory as support for the proposition that head owners were to be regarded as the disponent owners’ agents in relation to delivery of cargo on behalf of the disponent owners.35 It was also accepted that specific performance would usually be granted in these circumstances.36 Clearlake objected, inter alia, on the basis that they were not a party to the charterparty with Trafigura, or at least not at the relevant time, and thus were not obliged under that charterparty to give an LOI; they also argued that the draft form of LOI had not been provided prior to the lifting of subjects at the start of the charterparty, such that a condition precedent had not been fulfilled, and in addition that the actual terms of the LOI were uncertain. Henshaw J held that Clearlake had been a party to the Trafigura charterparty at the time of Trafigura’s request for indemnification and thus Clearlake’s obligation to provide 31 Ibid [27]. 32 See Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd, The Miracle Hope [2020] EWHC 726 (Comm); [2021] 1 Lloyd’s Rep 533 and The Miracle Hope (No 3) [2020] EWHC 995 (Comm); [2021] 1 Lloyd’s Rep 552. 33 Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd, The Miracle Hope [2020] EWHC 726 (Comm), [2021] 1 Lloyd’s Rep 533. 34 Ibid at [31]. 35 Ibid at [32]. 36 Ibid at [54].

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specific remedies in shipping security had arisen then.37 Even though the LOI wording had not been not agreed prior to lifting of subjects, Clearlake had requested and had been provided with the wording ahead of invocation of the LOI provisions, with the result that it should be taken to have agreed to the LOI terms when it had proceeded subsequently to invoke the LOI provisions.38 Further, the provision of terms prior to lifting of subjects was not a “sine qua non” provided that the wording was available before discharge, and on the terms of the specific charterparty in this instance the indemnity in the charterparty operated without the need for a separate LOI to be issued.39 Clearlake also argued that the urgency was not so extreme as to warrant an injunction in support of a possible claim for specific performance. On the evidence, however, Henshaw J concluded that there was considerable urgency for security to be provided to release the vessel, because the market rate for chartering the vessel had increased significantly. It was unrealistic to provide evidence of actual lost opportunities whilst the vessel was under arrest.40 There was a high degree of assurance that Trafigura would succeed at trial, that damages would not be an adequate remedy and that the balance of justice came down in favour of granting the injunction because Clearlake would be protected by Trafigura’s cross-undertaking in damages.41 As to that, however, the Court refused to make fortification of the cross-undertaking a condition precedent to the operation of the injunction as that would undermine the purpose of the injunction which was promptly to secure the release of the vessel.42 Security was ordered to be provided “forthwith”.43 Jacobs J shortly thereafter granted Clearlake an injunction against Petrobras for similar reasons.44 ii. The Return Date Proceedings45 By the return date, Clearlake and Petrobras had been unable to reach agreement with the bank as to the terms of the security. Teare J held that “forthwith” in the order to provide it meant that security had to be provided in the shortest practicable time, the extent of which would depend on the circumstances.46 His Lordship also addressed what was meant by the order to provide “bail or other security as may be required . . . to secure the release of the vessel”.47 Trafigura contended that it meant that Clearlake had to provide security in whatever form was required by the bank, or that the English court had jurisdiction to determine what security was required. Clearlake asserted that the bank’s demands were unreasonable, and instead submitted that “as required” meant such as was required by the arresting court. 37 Ibid at [40]. 38 Ibid at [43]. 39 Ibid at [44]. 40 Ibid at [55(ii)]. 41 Ibid at [56]. 42 Ibid at [55(iii)]. 43 Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd, The Miracle Hope (No 3) [2020] EWHC 995 (Comm), [2021] 1 Lloyd’s Rep 552 at [7]. 44 Clearlake Chartering USA Inc v Petroleo Brasileiro SA, The Miracle Hope (No 2) [2020] EWHC 805 (Comm); [2021] 1 Lloyd’s Rep 543. 45 The Miracle Hope (No 3) [2021] 1 Lloyd’s Rep 552 [7]. 46 Ibid at [16]. 47 Emphasis added.

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chris kidd, with the assistance of ben moon Teare J agreed here with Clearlake. Clear words would be required to force a charterer to comply with an unreasonable demand as to the form of security,48 and there were no such words in the LOI; but in any event, it was for the arresting court to determine whether the form of security requested was reasonable because it was that court which had the power to release the vessel.49 Even though the English court had jurisdiction over disputes under the LOI, that extended only to determining what “as may be required” meant, and not as far as determining what form of security the arresting court should accept for release of the vessel.50 However, here Covid-19 related delays meant that the arresting court could not decide promptly the form of security. This difficulty, and the issue of the reasonableness of the bank’s request as to form of security, was overcome by Teare J ordering payment into the arresting court of the bail amount, to ensure that the injunction achieved its intended purpose.51 The purpose of the LOI was to ensure prompt release of the vessel and, whilst that was often done by way of a bank guarantee, the undertaking was not so limited such that security could be provided by other means if a bank guarantee could not be procured promptly.52 At a subsequent hearing53 to determine the form of order, his Lordship went on to hold that Clearlake owed independent obligations to Trafigura, meaning that Clearlake had to take steps to pay the sum into the arresting court at the same time as Petrobras, instead of only if Petrobras failed to do so. Despite the draconian nature of mandatory injunctions and specific performance, it seems that, in the maritime world, the English courts are now generally willing to enforce the positive contractual obligation in an LOI, provided that the requirement to provide security has been triggered. Indeed, it now seems to be policy both that damages for breach of that obligation are inadequate and that the very purpose of the obligation to provide security to secure release of the vessel is so that owners should not have to do so. IV. Enforcement of Negative Obligations But what about enforcement of negative contractual obligations? That issue came to the fore in the recent Priyanka case, a case of vital interest to the ship recycling community.54 A. Prohibitory Injunctions In the contractual world, prohibitory injunctions are usually used to restrain breaches of negative obligations. Since the effect of a prohibitory injunction is to require a contracting 48 49 50 51 52 53 54 461.

Ibid at [23]. Ibid at [24], [26]. Ibid at [28]. Ibid at [74]. Ibid at [68]. Trafigura Maritime Logistics PTE Ltd v Clearlake Shipping PTE Ltd [2020] EWHC 1073 (Comm). Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep

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specific remedies in shipping party not to do something, courts are in general more willing to grant a prohibitory injunction as a matter of course than a mandatory injunction.55 However, it is also clear that no distinction in principle exists between interim mandatory and prohibitory relief, and that each case depends on its own circumstances (indeed, often a mandatory injunction is required to maintain the status quo).56 Therefore, there should not be a presumption that prohibitory injunctions are inherently less likely to cause irremediable prejudice than mandatory injunctions. Although the court generally does not consider the balance of convenience in considering whether to grant an interim injunction to restrain breach of a negative obligation,57 nevertheless in the exercise of its discretion it may still refuse to grant a prohibitory injunction, for example where the grant of the injunction would be oppressive or cause extreme hardship to the respondent58 (though such cases are likely to be highly exceptional). Whether the adequacy of damages is a relevant consideration to the grant of a prohibitory injunction is discussed further later. B. The Priyanka Shipping Case59 McGregor60 calls this one of the most significant cases on the issue of “negotiating damages” since the leading decision in One Step (Support) Ltd v Morris-Garner.61 The case concerned the breach, and enforcement, of a negative covenant restricting the trading and further sale of the superannuated 2002-built Capesize bulk carrier CSK Glory for any purpose other than demolition. i. The Restrictive Covenant Glory Bulk sold this vessel to Priyanka; as is often the case, both parties were single ship owning companies. Clause 19 of the sale and purchase MOA stated: 19. The vessel is sold for the purpose of demolition only and the Buyers hereby guarantee that they will not trade the vessel further nor sell the vessel to a third party for any purpose other than demolition and will, on completion of demolition, furnish to the Sellers a certificate stating that the vessel has been totally demolished. ii. The Breach The MOA was concluded on 26 April 2019; the vessel was delivered on 14 May 2019. In the interim, the price of scrap fell but freight and charter rates for Capesize vessels rose dramatically. On 20 May Priyanka asked Glory Bulk to release it from the restriction on 55 Chitty on Contracts (34th edn, Sweet & Maxwell 2021); Araci v Fallon [2011] EWCA Civ 668 at [33]. 56 Trafigura Maritime Logistics Pte Ltd v Clearlake Shipping Pte Ltd, The Miracle Hope [2020] EWHC 726 (Comm); [2021] 1 Lloyd’s Rep 533 at [28]; National Commercial Bank of Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16; [2009] 1 WLR 1405 at [19]. 57 Doherty v Allman [1878] 3 App Cas 709, 720. 58 Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272, 276. 59 Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461. 60 McGregor on Damages (21st edn, Sweet & Maxwell 2020), para 14–036. 61 [2018] UKSC 20; [2019] AC 649.

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chris kidd, with the assistance of ben moon trading in Clause 19. Glory Bulk refused, but Priyanka nevertheless began trading the vessel again, making a first fixture on 31 May and a second on 15 July. Glory Bulk on discovering this sought to restrain that trading; Priyanka sought a declaration that Glory Bulk was entitled to no more than nominal damages for any breach of contract. Ultimately Glory Bulk claimed as follows: (1) (2) (3) (4)

A final injunction to prevent further trading of the vessel; and/or Damages at common law for breach of the restrictive covenant; and/or Equitable damages up to the effective date of any injunction; and/or Alternatively, damages in lieu of an injunction.

A third fixture was concluded on 23 September, the day before the trial. Further, it turned out that the vessel was still sailing under her original logo, despite a requirement in the MOA to alter the markings. C. Priyanka: The Injunction David Edwards QC (sitting as Judge of the High Court) considered various authorities62 and concluded, inter alia, as follows: (i) (ii) (iii) (iv)

(v)

Negative covenants will ordinarily, although not invariably, be enforced by injunction; ... An injunction is nonetheless an equitable, and therefore a discretionary, remedy . . .; So far as the exercise of discretion is concerned, there may be cases where the circumstances are such that the grant of an injunction would be unconscionable . . . and in such circumstances an injunction should be refused. Whilst a mechanistic approach should not be followed, inconvenience or hardship to the defendant is, however, not enough; The burden lies on the party bound by the negative covenant to show why the ordinary rule should not apply, i.e., why the covenant should not be enforced by injunction.63

Notably, he drew specific attention to a very recent restatement of the basic principle that “contracting parties should ordinarily be held to their bargain”.64 This accorded with the commentary in Gee65 indicating a presumption that an injunction would be granted to enforce a negative covenant and highlighting the courts’ enthusiasm for principle of pacta sunt servanda.66 Gee indeed went on to say that the presence of an express negative covenant “makes the case for enforcement by injunction stronger” because the express covenant had been expressly agreed by the parties as their bargain.67 Indeed, in Doherty

62 Sharp v Harrison [1922] 1 Ch 502 (Ch); Warner Brothers Pictures, Inc v Nelson [1937] 1 KB 209 (KB); Attorney General v Barker [1990] 3 All ER 257 (CA); Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272 (QB); Araci v Fallon [2011] EWCA Civ 668; and Dyson Technology Ltd v Pellerey [2016] EWCA Civ 87. 63 [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [91]. 64 Dyson Technology Ltd v Pellerey [2016] EWCA Civ 87 at [70], referring back to Lord Cairns’ dictum in Doherty v Allman [1878] 3 App Cas 709 (HL) [720]; and see also the similar reference in Insurance Co v A Lloyds Syndicate [1995] 1 Lloyd’s Rep 272 (QB) at [277], where Colman J noted “equity’s perception that it is unconscionable for the defendant to ignore his bargain”. 65 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), para 2–005. 66 Ibid at para 2–005. 67 Ibid at para 2–010.

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specific remedies in shipping v Allman,68 Lord Cairns LC had famously said that the court had no choice but to enforce a negative covenant by way of an injunction. These days, though, that is considered to be an overstatement, in particular given that the grant of an injunction remains a discretionary power69 and that the court is constrained by statute to issue an injunction where it is just and convenient.70 Gee thus notes that “[t]here is a strong policy for enforcing bargains and this goes to the extent of enforcing a negative covenant. There is a strong presumption that the covenant will be enforced by injunction, albeit the matter remains discretionary”.71 Notably, in support of these propositions, Gee’s leading citation is now Priyanka itself. This is not necessarily revelatory, although the ability to grant an injunction to enforce a scrapping clause was of particular interest in the recycling community, especially given the similar wording in clause 16 of BIMCO’s Demolishcon (2001).72 There were, though, two factors which weighed upon the exercise of discretion in this case. The first was whether the adequacy of damages, or otherwise, was a relevant consideration. The second was whether, in this instance, the court could or should instead make an award of damages in lieu. Relevant to both issues were Priyanka’s submissions that Glory Bulk had no measurable financial interest of its own in restraining the trading of its erstwhile vessel, and hence was entitled to no more than nominal damages. In short, Priyanka argued that the injunction should be refused both because Glory Bulk stood to suffer no loss and also because in such circumstances it would be oppressive to grant an injunction when nominal damages could instead be awarded. i. The Adequacy of Damages The point here was whether Glory Bulk was entitled to an injunction if any damages it obtained would be nominal, on the basis of the well-known principle in London & Blackwall Ry Co v Cross73 that injunctions are not granted if damages are a proper remedy. Chitty suggests that because injunctions to restrain breach of negative obligations are normally granted as of course the adequacy of damages is not a relevant consideration.74 There are, however, cases which conflict on this point. In Araci v Fallon,75 Elias LJ stated that adequacy of damages was not generally a relevant consideration because an injunction merely enforced what the parties had agreed.76 However, he also thought that damages would be inadequate anyway, and in addition stated that an injunction might still be refused in exceptional circumstances if it would be oppressive to grant it.77 Jackson LJ in that case, however, appeared to consider that the 68 Doherty v Allman [1878] 3 App Cas 709, 719–720. 69 Dyson Technology Ltd v Pellerey [2016] EWCA Civ 87 and [71], and see too Gee on Commercial Injunctions, para 2–011 onwards. 70 Senior Courts Act 1981, s.37(1). 71 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), paras. 2–005–2–013. 72 This stipulates: “The vessel is sold for the purpose of demolition and recycling only and the Buyers undertake that they will neither trade the vessel for their own account nor sell the vessel to a third party for any purpose other than demolition and recycling”. 73 (1886) 31 Ch D 354, 369. 74 Chitty on Contracts (34th edn, Sweet & Maxwell 2021), para 30–075. 75 [2011] EWCA Civ 668. 76 Ibid at [70]. 77 Ibid at [70].

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chris kidd, with the assistance of ben moon adequacy of damages was a relevant consideration: his view that damages would be inadequate78 appears to have been a factor in his support for the grant of an injunction.79 In Warner Brothers Pictures, Inc. v Nelson80 the court considered whether damages were an adequate remedy. There, however, they were clearly not, since the injury suffered might have been out of all proportion to any monetary damages that could be proved or assessed. An interim injunction was also granted in Attorney General v Barker,81 but there too there was difficulty in calculating damages, which it seemed would not have been an adequate remedy anyway. In Insurance Co v Lloyd’s Syndicate,82 however, the court concluded that an injunction might be refused if damage could not be proved in circumstances where the grant of an injunction would cause substantial hardship to the defendant.83 Nevertheless, the court stated that the absence of damage was not in general a bar.84 Unhelpfully, at least insofar as providing firm guidance is concerned, David Edwards QC’s conclusion was that the adequacy of damages might be relevant in considering whether the grant of an injunction would be oppressive85 but that the primary position was that proving a right to more than nominal damages was not a precondition to the grant of an injunction.86 Even Gee is ambivalent as to whether the adequacy of damages is relevant in determining whether to grant a final injunction (as contrasted with an interim injunction), noting that “sometimes [it] . . . is an important consideration. In other cases it hardly appears as a factor”.87 Nevertheless, Gee does say that it is not necessary to prove that a loss will be suffered, nor show that damages would be an inadequate remedy, in order to seek an injunction to restrain breach of a negative covenant, “because the purpose is to enforce what has been promised”, now citing Priyanka as one of the authorities for the proposition that it is not necessary to prove that a loss will be suffered.88 Whether, in fact, damages in this instance were adequate or not is discussed further later. Nevertheless, David Edwards QC also noted that there was a strong policy in favour of enforcing contracts. ii. Damages in Lieu Priyanka’s position was that the court should exercise its discretion to refuse to grant an injunction but instead award damages in lieu, though at the same time, it maintained that such damages should be nominal only. 78 Ibid at [53]. 79 Ibid at [56], [64]. 80 Warner Brothers v Nelson [1937] 1 KB 209, 211]. 81 Attorney General v Barker [1990] 3 All ER 25. 82 Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272. 83 Ibid at [277]. 84 Ibid at [277]. 85 Priyanka Shipping Ltd v Glory Bulk Carriers Pte Ltd, The CSK Glory [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [97]. 86 Ibid at [91]. 87 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), para 2–050, citing Redland Bricks Ltd v Morris [1970] AC 652, 665–666 which seems to distinguish mandatory injunctions – where the adequacy of damages is a factor – from injunctions restraining breach of a negative covenant, where it does not appear to be a factor and the injunction in that latter case being said to be available “as of course”. 88 Ibid at para 2–013.

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specific remedies in shipping The court does have the discretionary power to award damages in lieu of (or, indeed, as well as) an injunction.89 The leading authorities on this are Shelfer v City of London Electric Lighting Co90 and Jaggard v Sawyer.91 The Court of Appeal in Shelfer had concluded that the jurisdiction to award damages in lieu of an injunction ought to be exercised only in very exceptional circumstances,92 such as where the applicant’s actions were vexatious or where the applicant wanted only money, his claim was small or it would be oppressive to grant an injunction:93 points all relied upon by Priyanka. Notably, however, the court had also remarked that even where those criteria were fulfilled, the respondent might yet have disentitled himself to damages in lieu,94 one such example (mentioned by AL Smith LJ) being where the respondent had acted fast with a view to pre-empting any injunction.95 Jaggard v Sawyer makes it clear that the test is about oppression and not mere inconvenience,96 the burden of which lies upon the respondent to establish.97 That burden is made more difficult, Gee asserts,98 by the presence of an express negative covenant because it is part of the bargain which the respondent expressly agreed. So, even where respondents could make out a case for oppression that would not help them if they had “acted in blatant and calculated disregard of the plaintiff’s rights of which they were aware”.99 David Edwards QC also made a further point, observing that “the authorities support the proposition that a defendant should not, by paying damages, be able to buy the privilege of infringing the claimant’s contractual rights”.100 In short, an applicant would ordinarily be entitled to an injunction, and resist an award of damages in lieu, unless the respondent could make out a strong case that the issue of an injunction would result in severe oppression such that it would not be just to grant it. In this instance, the deputy judge said, Priyanka had come nowhere near demonstrating that it would be oppressive to grant an injunction.101 In particular, he noted that Priyanka’s breaches had been deliberate,102 and that Priyanka had had only itself to blame for concluding the third fixture the day before, and in full knowledge of, the trial103 – an act which was “cynical”104 and which sought to avoid, or minimise the effect of, an injunction. It 89 Senior Courts Act 1981, s 50, embodying, more or less, the Chancery Amendment Act 1858, s 2 (otherwise known as Lord Cairns’ Act). 90 [1895] 1 Ch 287. 91 Jaggard v Sawyer [1995] 1 WLR 269. The approach in this case and Shelfer is supported by the later decision in HTC Corporation v Nokia Corporation [2013] EWHC 3778 (reversed on other grounds, [2013] EWCA Civ 1759). 92 [1895] 1 Ch 287 (CA) 311, 316. 93 Ibid at 322–323. 94 Ibid at 323. 95 Ibid at 323. 96 See [1995] 1 WLR 269, 283. 97 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), paras. 2–010, 2–012; see too Priyanka [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [126]. 98 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), para 2–010. 99 [1995] 1 WLR 269, 283. 100 See [2019] EWHC 2804 (Comm), [2020] 1 Lloyd’s Rep 461 at [95]. 101 Ibid at [121]. 102 Ibid at [122]. 103 Ibid at [131]. 104 Ibid at [122].

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chris kidd, with the assistance of ben moon would not be oppressive to issue an injunction merely because the scrap market had fallen105 – that was merely the consequence of a bad bargain and not a good reason to relieve Priyanka from what it had agreed,106 particularly in circumstances where it could have laid up the vessel at a relatively modest cost.107 He therefore granted an injunction restraining further trading (and re-sale for trading) of the vessel, and indeed specifically and expressly prohibited fulfilment of the third fixture. A further factor in whether damages might be awarded in lieu of an injunction is that the purpose of such damages is to compensate for the consequences of not obtaining an injunction.108 Compensation in this circumstance can though be awarded on the basis of a price hypothetically payable by the respondent to the applicant to release the respondent from future breaches of a negative covenant (i.e., what is now termed “negotiating damages”).109 Here, however, the injunction having been granted, the issue of damages for future breach largely fell away (save for the possibility that the buyer might continue to breach the restrictive covenant, despite the injunction, a possibility to which the judge was aware). V. Negotiating Damages The remaining question on the facts of Priyanka was whether “negotiating damages” were available to Glory Bulk in respect of Priyanka’s prior breaches of the negative covenant in respect of the first two fixtures. A. What Are “Negotiating Damages”? Variously “licence fee damages”, “user damages”, “hypothetical bargain damages”, formerly “Wrotham Park damages” or “restitutionary damages”, “negotiating damages” may apply where, as Lord Reed JSC put it in Morris-Garner v One Step (Support) Ltd,110 a party “takes something for nothing, for which the owner was entitled to require payment”,111 with “negotiating damages” to be assessed: By reference to a hypothetical negotiation between the parties, for such amount as might reasonably have been demanded by the claimant for releasing the defendants from their obligations.112

Normally, the key presumption when considering damages for a breach of contract is that they compensate for loss, not for any gain illegitimately made. The classic statement of the first half of this compensatory principle comes from Parke B in Robinson v Harman:113 105 Ibid at [123–124]. 106 Ibid at [124]. 107 Ibid at [125]. 108 Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), at paras. 2–058, 2–061. 109 Jaggard v Sawyer [1995] 1 WLR 269, 282–283, 289; Gee on Commercial Injunctions (7th edn, Sweet & Maxwell 2021), para 2–061. 110 [2018] UKSC 20, [2019] AC 649. 111 Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 at [30]. On negotiating damages generally, see also Wrotham Park Estate Co v Parkside Homes [1974] 1 WLR 798. 112 Ibid at [23]. 113 Robinson v Harman (1848) 1 Ex 850.

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specific remedies in shipping The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.114

In One Step, Lord Reed JSC emphasised that the principle was not about penalising a respondent: Damages for breach of contract are . . . a substitute for performance. That is why they are generally regarded as an adequate remedy. The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to enforcing either the primary obligation to perform, or the contract breaker’s secondary obligation to pay damages as a substitute for performance. . . . The damages awarded cannot therefore be affected by whether the breach was deliberate or self-interested.115

While this is the general rule, there may very well be situations where an applicant is not in a factually and measurably worse position owing to the respondent’s wrongful actions. The leap here and with “negotiating damages” is to consider the “loss” suffered by the claimant to be, instead of direct and measurable loss, the failure to obtain that which ought to be provided (i.e. the correction of the wrongful act). Thus, in certain circumstances, compensation or damages can be measured in terms of the rental or release value of property that the defendant has used in breach of contract (i.e., its “user value”). This is a legal answer to a more lay or moral outlook: where someone takes something intangible from someone else without properly paying for it, the person they have taken it from should be entitled to some kind of compensation for that, even if they have not suffered actual monetary loss themselves through that taking. B. Negotiating Damages and One Step The 2018 case of Morris-Garner and Another v One Step (Support) Ltd116 referred to earlier is, for now, the leading case on “negotiating damages”. The Supreme Court considered the authorities dealing with the circumstances in which damages for breach of contract could be assessed by reference to the sum that the claimant might hypothetically have received in return for releasing the defendant from the obligation which he failed to perform. It concluded that negotiating damages had the following characteristics: (1) They were compensatory (rather than restitutionary) in nature.117 (2) They compensated a claimant for loss of: (a) The opportunity to obtain the value of a proprietary right, where “. . . [t]he claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the asset

114 115 116 117

(1848) 1 Ex 850, 855. One Step [2018] UKSC 20; [2019] AC 649 at [35]. [2018] UKSC 20, [2019] AC 649. Ibid [66].

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chris kidd, with the assistance of ben moon in question. The defendant has taken something for nothing, for which the claimant was entitled to require payment”;118 or (b) the value of a proprietary right of which the claimant had been deprived of by the defendant’s breach, being available in this case where “the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset”.119 (3) They would usually be assessed at the date of the initial breach, although a different date might be used if required in order to give effect to the compensatory principle.120 Lord Reed JSC gave the leading judgment in One Step, providing the aforementioned headline confirmations and some further conclusions on the availability of negotiating damages.121 However, it should be noted that Lord Sumption JSC, while agreeing closely with the ultimate disposal of that particular case, disagreed significantly with some of the reasoning behind it. We shall explore some of Lord Sumption JSC’s reasoning later. C. The Priyanka Case and Negotiating Damages Returning to Glory Bulk v Priyanka, given the grant of the injunction, the claims for damages both at common law and under s.50 of the Senior Courts Act 1981 were advanced on the same basis, namely: The price which Sellers could reasonably have demanded from Buyers to release them from the restrictive covenant up until the date on which the injunction takes effect, estimated as a percentage of the gross profits of the first two fixtures. In short, this was a claim for “negotiating damages”.

Having considered Lord Reed JSC’s reasoning in One Step, David Edwards QC identified three elements that he considered were relevant to this case.122 These were the nature of so-called user damages, the proprietary status of the right being infringed and the purpose of awards of damages for breach of contract. i. The Nature of “User Damages” The deputy judge noted that the development of “negotiating damages” was influenced by “user damages”,123 under which a person who used someone else’s property124 could be liable to the true owner for the use value of that property if the use was unlawful, the right to control the use of that property was a valuable asset and, importantly, the owner of that property would be entitled to require payment for that use. These principles,

118 Ibid [92]. 119 Ibid at [95(10)]. 120 Ibid at [108], [159]. 121 See at [91]–[95], with the 12 key conclusions set out at [95]. 122 See Glory Bulk v Priyanka [2019] EWHC 2804 (Comm), [2020] 1 Lloyd’s Rep 461 [159], [160], [167]. 123 Ibid at [159]. 124 Thus, in Lord Reed JSC’s words, taking “something for nothing”: see One Step [2018] UKSC 20; [2019] AC 649 at [95].

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specific remedies in shipping however, he said did not apply in Priyanka. Priyanka, it was true, had used the vessel for trade in breach of the restrictive covenant; but, importantly, having sold the vessel to Priyanka, Glory Bulk had no longer owned it or had any proprietary right or ability to use it. It was thus not Glory Bulk’s right to use the vessel that was being infringed: from which, as David Edwards QC saw it, Priyanka’s breach of the restrictive covenant had not involved its taking or using a valuable asset in which Glory Bulk had an interest or for which it had been entitled to require payment.125 In doing so, David Edwards QC seems to have been focused on Lord Reed JSC’s apparent limitation of “negotiating damages” to proprietary rights. But, as we discuss later, although Glory Bulk no longer owned the vessel, it had had a limited right to control its use: more specifically, a right not to have the vessel traded by reason of the restrictive covenant, a very real right enforceable by injunction. ii. The Proprietary Nature of the Infringed Right A predecessor of One Step, Wrotham Park Estates Ltd v Parkside Homes Ltd,126 had involved building in breach of a restrictive covenant relating to land. There, in answer to a plea that the breach would result in nominal damages, Brightman J concluded that it would be just to award “. . . Such a sum of money as might reasonably have been demanded by the plaintiffs . . . as a quid pro quo for relaxing the covenant”.127 That, one might think, was analogous to Priyanka. Why should such an award not be made there too? In One Step, however, Lord Reed JSC pointed out that the right in issue in Wrotham Park related to the use of land,128 as had the rights in issue in the cases immediately following it.129 As we all know, the law of real property has sui generis rules in a way which does not apply to ordinary chattels. A restrictive covenant is enforceable between the original contracting parties but can be enforced against successors-in-title: as they say, it runs with the land and future owners are bound by it. Inevitably, Priyanka pointed out that the restrictive covenant in its contract was different: it created a right of Glory Bulk against it personally, not a right against the vessel itself. True, there had been some cases of negotiating damages which did not squarely fit with the infringement of rights over land,130 but the results in those cases had been justified by Lord Reed JSC in One Step on the basis that the infringement had affected proprietary rights (in information) that remained vested with the owner. David Edwards QC therefore concluded from Lord Reed JSC’s analysis that the power to award “negotiating damages” was not available for the breach of any contractual right but was limited to where the right infringed involved control or use of property in which the claimant had

125 Priyanka [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [196]. 126 [1974] 1 WLR 798. 127 Wrotham Park [1974] 1 WLR 798, 815. 128 One Step [2018] UKSC 20; [2019] AC 649 at [54]. 129 Ibid at [62]. 130 Notably Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch); [2010] Bus LR D141; Att Gen v Blake [2001] 1 AC 268 and Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; [2003] EMLR 25.

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chris kidd, with the assistance of ben moon an interest (or an analogous right over property owned by the claimant), distinct from the value of the contract itself.131 Further, David Edwards QC also noted that Lord Reed JSC had also drawn support from Bunge SA v NideraBV132 where Lord Sumption had distinguished the measure of damages for the price of goods and services which would have been delivered under a contract from the value of the contract in its own right (i.e. the value of the difference between performance and non-performance was not the same as the value of the right to performance).133 From that, it is apparent, he understood Lord Reed JSC to be saying that the relevant asset “is not as the contractual right itself” but something “created or protected by the right”.134 Critically, in this case, therefore, he went on to hold that the nature of Glory Bulk’s right in relation to the restrictive covenant was analogous to the non-compete obligation in One Step, not a proprietary right, and hence not apt to give rise to negotiating damages.135 iii. The Purpose of Awards of Damages David Edwards QC in Priyanka also focused on the principle that damages for breach of contract were compensatory, aimed at placing the innocent party in the same situation as if the contract had been performed.136 Crucially, of course, that principle was based upon the innocent party having suffered loss, and, relying on Lord Reed JSC’s judgment in One Step, David Edwards QC noted that proof of loss was required to obtain damages.137 Here it was not obvious how Priyanka’s breach had actually caused any loss to Glory Bulk, a one-ship company that owned no other vessels and was not therefore in competition for fixtures. Nor had the breach caused Glory Bulk to incur expenditure.138 It followed that there was no loss requiring compensation. True, that in a sense ignored the right inherent in the restrictive covenant but, as noted earlier, the value of that right did not give rise to “negotiating damages”.139 The conclusion was, therefore, that Glory Bulk was entitled only to nominal damages for Priyanka’s breach.140 iv. Priyanka: The Result There is a strong argument that the result in Priyanka was unsatisfactory, given the courts’ oft-quoted desire that a man should be held to his bargain. True, insofar as an injunction was granted it might be said that Priyanka was held to its bargain going forwards. (Shortly after the injunction was granted, it duly ran the vessel onto a beach at Chittagong in Bangladesh.) But this leaves the question of damages for the earlier breaches.

131 See Priyanka [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [182], [190]. 132 [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469. 133 [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469 at [21]; see Priyanka [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 [179]. 134 Priyanka [2019] EWHC 2804 (Comm); [2020] 1 Lloyd’s Rep 461 at [182], referencing One Step [2018] UKSC 20; [2019] AC 649 at [84]. 135 Ibid at [199]. 136 Ibid at [160–166], [187]. 137 Ibid at [162]. 138 Ibid at [188]. 139 Ibid at [169], [199]. 140 Ibid at [200].

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specific remedies in shipping Obviously, the deputy judge was bound by the Supreme Court’s ruling and analysis in One Step, but he was seemingly not entirely happy with this result. Notably, he granted Glory Bulk permission to appeal his decision regarding entitlement to substantive damages, from which it can be inferred that the potential appeal must have had a real prospect of success since that is one of the threshold criteria. In any event, the appeal was not pursued. D. The Covenant as a Valuable Asset: Should This Make a Difference? According to the majority in One Step, “negotiating damages” are not available at common law, as a measure of loss, if there is no infringement of a proprietary right. i. Proprietary Rights Two paragraphs in One Step are perhaps the most significant in relation to when, at common law, “negotiating damages” are, or are not, available for breach of a contractual right. Set out in full, these paragraphs state: (9) Where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages. (10) Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.141 If one follows Lord Reed JSC’s judgment, the availability of “negotiating damages” for breaches of proprietary rights seems to be largely constrained to rights over real property or intellectual property rights. Indeed, at one point142 he helpfully (or not, according to your view) gives some examples of types of contractual rights that, “can result in an identifiable loss equivalent to the economic value of the right, considered as an asset, even in the absence of any pecuniary losses which are measurable in the ordinary way”: namely, rights to control the use of land, intellectual property rights and confidential information. It is not necessarily a simple task to distinguish which side of the line a right falls on. For instance, (albeit both prior to One Step) in the (Privy Council) case of Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd143 “negotiating damages” were available for a breach of a confidentiality clause, while in the case of Marathon Asset Management LLP

141 One Step [2018] UKSC 20; [2019] AC 649 at [95(9)-(10)]. 142 See [2018] UKSC 20; [2019] AC 649 at [95(9)-(10)]. 143 Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2011] 1 WLR 2370.

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chris kidd, with the assistance of ben moon v Seddon144 “negotiating damages” were not available for a breach of a confidentiality clause. One has to look closely and obliquely to attempt to distinguish the right with a purely financial interest from Marathon from the right said to protect a non-financial interest in Pell Frischmann. As even Chitty on Contracts admits, “[i]t is, with respect, hard to see when a right that information be kept confidential will have an economic value, ‘considered as an asset’, and when not”.145 This also raises the question: what is the real difference between (i) a contractual right that protects only a financial interest or asset, such as goodwill, and (ii) a contractual right that protects a non-financial interest, such as copyright, the purpose of which can sometimes be almost entirely financial? Indeed, where on that scale does a contractual negative covenant sit? It is hard to understand quite why the benefit that it creates – such as the benefit of not having an ageing vessel continue trading – is not a valuable asset. It is harder still to fathom why a negative covenant in a sale of real property should be actually any different to that in any other commercial contract – at least as between the parties to that commercial contract (the inability to bind covenants to chattels upon future sales is not being questioned, although the practice used to be done in the literary world, viz “This book is sold subject to the condition that it shall not, by way of trade or otherwise, be . . . re-sold”, albeit there are statutory restrictions on some dealings with literary works, such as lending or renting).146 A restriction to real property could be more easily understood but for the extension to intellectual property rights. Once down that road, the distinction between contractual intellectual property rights and other intangible, but valuable, contractual rights becomes harder to justify. Proprietary rights aside, three other concepts bearing upon the value of contractual rights merit further attention. ii. The Restitutionary Principle The restitutionary principle that applies ordinarily to breaches of contract is that damages are compensatory, the aim being to place the innocent party in the position that he would have been in had the contract been performed, insofar as that is possible through damages. Damages are thus a substitute for performance. Taken at face value, the principle is about putting the innocent party back in the position he would have been in if there had been no breach. In the Priyanka case the position was restored through specific performance, enforcing the negative covenant and that might well be seen as the restitutionary principle in action, but it does not deal with the breaches that had occurred. Specific performance after the event is not restorative of the whole bargain. The party in breach has taken something for nothing, even though he is then restrained from continuing to do so. The problem seems to be with identifying, and to a limited extent proving, loss. In many cases losses can be demonstrated using conventional measures of loss, notwithstanding that some losses may be more difficult to prove. Lord Reed JSC in One

144 Marathon Asset Management LLP v Seddon [2017] EWHC 300 (Comm); [2017] FSR 36. 145 Chitty on Contracts (34th edn, Sweet & Maxwell 2021), para 24–057. 146 Copyright, Designs and Patents Act 1988, s 18A.

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specific remedies in shipping Step,147 relying on Chitty,148 indicated that the law might in some circumstances take a less than precise approach to the estimation of loss. In Bunge v Nidera,149 Lord Toulson (with whom the remaining members of the House of Lords agreed) observed: The fundamental compensatory principle makes it axiomatic that any method of assessment of damages must reflect the nature of the bargain which the innocent party has lost as a result of the repudiation.150

In the Priyanka case,151 however, David Edwards QC said that he could not see how Glory Bulk would suffer loss by Priyanka trading the CSK Glory in breach of the restrictive covenant, echoing Lord Reed JSC in One Step.152 On the basis that the injunction would not have been granted, Glory Bulk’s loss had been estimated at the difference between the ordinary second-hand sale price of the vessel and its price on a sold-for-scrap basis (i.e. between a vessel that could be freely traded and one which was not expected to be traded). In circumstances where the injunction was granted, such that Priyanka was not free to trade the vessel and Glory Bulk had not lost the continuing amenity of the restrictive covenant, that differential was no longer appropriate (because it represented the loss of losing the amenity of the restrictive covenant in its entirety), but it is unclear why damages for the breaches of the restrictive covenant preceding the effect of the injunction could not be estimated using the same basis with an estimated reduction for duration. Indeed, Lord Sumption in One Step considered that “negotiating damages” were not a different or an alternative measure of damages, contrasted with the compensatory principle, but rather were an evidential technique for estimating loss on the compensatory basis and which applied to ordinary breaches of contracts, not just those involving proprietary rights and not as a different principle or rule of law.153 In a different way, Lord Reed also indicated that a notional release fee might be used as evidence of loss, albeit not as a measure of loss, and possibly, in his example, limited to where there had been actual negotiations in relation to a release fee prior to breach.154 Lord Sumption though went further by saying that “negotiating damages” as a method of estimating loss could be available in breach of contract cases even where the injured party was not entitled to restitution because it represented the value of performance of the obligation that had been breached. Unlike Lord Reed, Lord Sumption regarded the intellectual property cases as different and distinct from the real property cases being instead breach of contract cases155 and also unlike Lord Reed, Lord Sumption regarded the right to performance as an asset in and of itself.156

147 148 149 150 151 152 153 154 155 156

[2018] UKSC 20; [2019] AC 649 at [38]. Chitty on Contracts (34th edn, Sweet & Maxwell 2021), paras. 29–019, 29–196, 29–198. [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469. [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469 at [85]. Priyanka [2019] EWHC 2804 (Comm), [2020] 1 Lloyd’s Rep 461 [163]. One Step [2018] UKSC 20; [2019] AC 649 at [35–36]. Ibid at [106]. Ibid at [94]. Ibid [118–123]. Ibid [115].

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chris kidd, with the assistance of ben moon iii. The Value of Contractual Performance In Bunge v Nidera157 Lord Sumption noted that the common law of damages was concerned with financial differences, not the value of the contract nor, as Lord Reed put it, the value of the contractual right to performance.158 Bunge though concerned a repudiated contract for the delivery of goods, for which statute (to which Lord Sumption referred) provides that the prima facie (but, importantly, not the only) measure of loss is by reference to an available market.159 Nevertheless, in that case the failure by the buyers to re-enter the market to mitigate their position meant that they had suffered no actual loss (a point which presumably Lord Reed was drawing upon). The buyers’ loss was that the cargo they sought to procure was not available when they wanted it. They had not suffered a loss by reference to a change in the price of the goods, but they had suffered a loss of opportunity because of their failure to mitigate (in effect the buyers exercised a choice not to buy and thus deprived themselves of the opportunity). In Priyanka, there was no failure of the contract as a whole. Goods had been bought and sold, but subject to ongoing conditions as between Glory Bulk and Priyanka. However, the right and the performance of the obligation may well have an inherent value which forms part of the negotiation of the bargain. In Priyanka, the valuable right was in having the vessel not traded. The restrictive covenant was put in place to prevent trading; if so, the value of the vessel must have been below that of the ordinary secondhand market price for a freely tradeable vessel. If a vessel cannot be traded it might have other values, but the inherent value is that of scrap, which was the basis upon which the CSK Glory was sold, and there was an identifiable difference in valuation between both bases and markets. The law does, however, put value on contractual performance and amenity. In One Step, Lord Reed JSC noted that the law recognised that a party might have an interest in performance even if it could not easily be quantified in a monetary amount.160 Lord Reed JSC even identified the Ruxley case161 as one where the court had awarded damages for loss of amenity. In that case, a swimming pool was constructed to depth shallower than agreed but which was otherwise in all respects fit for purpose. The House of Lords, nevertheless, agreed with the trial judge that the employer, the recipient of the pool, was entitled to (more than nominal) damages for loss of amenity (albeit not the cost of a complete rebuild, which was never going to take place). Indeed, the incomplete performance to the required specification would, as Lord Mustill remarked in Ruxley, “make a part of the promise illusory, and unbalance the bargain”.162 Notably, Lord Mustill also remarked, simply, “Pacta sunt servanda”. This seems to have underpinned the award of damages. Lord Mustill went on to say: where the contract is designed to fulfil a purely commercial purpose, the loss will very often consist only of the monetary detriment brought about by the breach of contract. But these remedies are not exhaustive, for the law must cater for those occasions where the value of the promise to the promisee exceeds the financial enhancement of his position which full 157 158 159 160 161 162

[2015] UKSC 43; [2015] 2 Lloyd’s Rep 469. One Step [2018] UKSC 20; [2019] AC 649 [76]. See Sale of Goods Act 1979, s.51. One Step [2018] UKSC 20; [2019] AC 649 at [39–40]. Ruxley Electronics Ltd v Forsyth [1996] AC 344. Ibid at 360.

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specific remedies in shipping performance will secure. This excess . . . is usually incapable of precise valuation in terms of money, exactly because it represents a personal, subjective and non-monetary gain. Nevertheless where it exists the law should recognise it and compensate the promisee if the misperformance takes it away.163

It seems odd, therefore, that a contractual restrictive covenant should not give rise to a loss of amenity (and therefore damages) if the restrictive covenant is not observed in full, regardless of whether future breaches are restrained by an injunction. How though is the loss of amenity to be measured in this scenario? It is not obvious that the loss can be measured other than by reference to the profits earned by a buyer (which the court in Att Gen v Blake164 said would be deployed only in exceptional cases) or by reference to a hypothetical negotiation of the price for being released from the restrictive covenant (or a temporary hypothetical release given that the injunction was thereafter granted). iv. The Scope of Jurisdiction Under Lord Cairns’ Act In Wrotham Park165 the court awarded what were subsequently called “Wrotham Park Damages” but which have become known as “negotiating damages” in lieu of an injunction. One Step also confirmed that such damages could be awarded in lieu of an injunction under s.50 of the Senior Courts Act 1981. Lord Reed in One Step also remarked that the purpose of an award of damages in lieu was “a monetary substitute for what is lost by the withholding of [the injunction]”.166 That power to award damages is, of course, a statutory power empowering the court to award damages in lieu of, and, importantly, in addition to, an injunction. The obvious question is: if “negotiating damages” can be awarded under the statutory power in lieu of an injunction why can they not equally be awarded under the same statutory power in addition to an injunction? If the power exists to award in lieu of an injunction on the “negotiating damages” basis where there is no appreciable loss, the power must also be available to award damages for breach in addition to an injunction. More pertinently, if an injunction is granted after breaches why can damages not be awarded under the same statutory power on the “negotiating damages” basis for breaches prior to the grant of the injunction? Chitty167 considers that Lord Reed’s aforementioned observation168 implies that “negotiating damages” are not available for past breaches where an injunction has been issued to restrain future breaches or enforce performance, unless those breaches involve a proprietary right. But it is not clear why that should be so. The obvious way to rationalise that, of course, is by reference to Johnson v Agnew,169 in which Lord Wilberforce said “I find in the Act no warrant for the court awarding damages differently from common law damages”.170 This leads Chitty to say that “the

163 164 165 166 167 168 169 170

Ibid at 360–361. Blake [2001] 1 AC 268 (HL). Wrotham Park [1974] 1 WLR 798 (Ch), [1974] 2 All ER 32 (Ch). One Step [2018] UKSC 20, [2019] AC 649 [95]. Chitty on Contracts (34th edn, Sweet & Maxwell 2021), para 29–052. See One Step [2018] UKSC 20, [2019] AC 649 at [95]. [1980] AC 367. Ibid at 400.

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chris kidd, with the assistance of ben moon assessment of damages was governed by the same principles whether the damages were awarded under the Act or at common law”.171 Several points, however, spring to mind. First, Lord Wilberforce’s words need to be read in the context of his entire judgment. Only a paragraph earlier he appears to carve out from the usual basis the assessment of damages for breach of a restrictive covenant.172 Second, Lord Reed also urged caution about taking Lord Wilberforce’s words out of context, expressly saying that they did not imply that damages under s.50 of the Senior Courts Act 1981 must be measured on the same basis as are recoverable at common law.173 This was said in the context of damages in substitution for an injunction but, we suggest, it is hard to see why the position in relation to the power to award damages under s.50 of the Senior Courts Act 1981 should be different as between damages in lieu of an injunction contrasted with damages in addition to an injunction. Third, Lord Reed JSC distinguished between the common law position174 and Lord Cairns’ Act.175 This is a distinction Chitty also acknowledges, noting that the Supreme Court in One Step held that “negotiating damages” were not available at common law for breaches that do not involve proprietary rights “as opposed to under Lord Cairns’ Act”176 (emphasis added). Fourth, Lord Reed made it clear that the power to award damages under Lord Cairns’ Act was discretionary, when he said it was up to the judge to decide what method of assessment of damages “will give a fair equivalent for what is lost by the refusal of the injunction”.177 There was no suggestion that this should be different in relation to the statutory power to award damages in addition to an injunction. Fifth, Lord Reed JSC noted that Lord Cairns’ Act enabled the court to award damages “in circumstances in which they could not be awarded at common law”,178 referencing Leeds Industrial Cooperative Society Ltd v Slack179 (albeit that the context was in respect of the power to award damages in lieu of an injunction which had not been available previously but the general principle was endorsed by Lord Wilberforce too in Johnson180 where different examples were given). Notably, in that case, Viscount Finlay said, “[i]f the damages are given in addition to the injunction they are to compensate for the injury which has been done and the injunction will prevent its continuance or repetition”.181 Sixth, subject to the commentary on it in One Step, Experience Hendrix LLC v PPX Enterprises Inc182 indicates the contrary – that “negotiating damages” for previous breaches are available precisely because s.50 of the Senior Courts Act 1981 empowers the court to award damages in addition to an injunction.

171 172 173 174 175 176 177 178 179 180 181 182

Chitty on Contracts (34th edn, Sweet & Maxwell 2021), paras. 29–049, 29–056. Johnson [1980] AC 367 at 400. One Step [2018] UKSC 20; [2019] AC 649 at [47]. Ibid at [95(6)-95(12)]. Ibid at [95(3)-95(5)]. Chitty on Contracts (34th edn, Sweet & Maxwell 2021), para 29–049. One Step [2018] UKSC 20; [2019] AC 649 at [95(5)]. Ibid [43]. [1924] AC 851. Johnson [1980] AC 367 at 400. Leeds Industrial Co-operative v Slack [1924] AC 851 at 857. Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; [2003] EMLR 25.

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specific remedies in shipping E. The Effect of the Hendrix Case In Priyanka, David Edwards QC did not agree that the Priyanka case was analogous to Experience Hendrix LLC v PPX Enterprises Inc.183 He concluded that the restrictive covenant was more analogous to the non-compete obligation in One Step. This though seems incongruous. Priyanka could not have been in competition with Glory Bulk because Glory Bulk had no other vessels. Insofar as there was competition that would have been with the ship operating company of which Glory Bulk was part of the group. But it seems to us, the Hendrix case is the real Achilles’ heel for One Step. The case concerned the late Jimi Hendrix and the use of his recordings after his death. Pursuant to a settlement agreement, PPX agreed to limit the use of recordings in which it owned the rights and to deliver up other recordings. PPX did not do as was intended, concealing some master recordings and then making use of them in breach of the agreement. Jimi Hendrix’s estate sued for damages (and an injunction) albeit there was no evidence that they had suffered any financial loss. More importantly, Mance LJ went on to say that damages could be awarded for breaches of a restrictive covenant prior to the grant of an injunction, in addition to the grant of that injunction, even if financial loss could not be proved.184 Very specifically, he also indicated that there should be no distinction under Lord Cairns’ Act between damages in lieu of an injunction and damages for breach prior to an injunction, saying, If compensation on this basis is available in respect of the permanent deprivation of a right because the law does not consider that injunctive relief is appropriate, there seems no justification for refusing it in respect of a temporary deprivation arising because the infringement has been committed too quickly for the law to be able to intervene. In either case, though for different reasons, the compensation awarded would be in substitution for an injunction185

and going on to describe the situation in which the grant of the injunction deprived the claimant of the ability to obtain damages (under Lord Cairns’ Act) for past breaches as “paradoxical”.186 Peter Gibson LJ also said that the grant of the injunction did not preclude the availability of damages under s.50 for past breaches because s.50 did permit the award of damages in addition to an injunction.187 Peter Gibson LJ in addition considered that “negotiating damages” could be available (at common law) where (i) there had been a deliberate breach by the defendant of its contractual obligations for its own reward; (ii) the claimant would have difficulty in establishing financial loss therefrom; and (iii) the claimant had a “legitimate interest” in preventing the defendant’s profit-making activity in breach of contract.188

183 184 185 186 187 188

Priyanka [2019] EWHC 2804 (Comm), [2020] 1 Lloyd’s Rep 461 [194–199]. Experience Hendrix [2003] EWCA Civ 323; [2003] EMLR 25 at [34]. Ibid at [34]. Ibid at [35]. Ibid at [56]. Ibid at [58].

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chris kidd, with the assistance of ben moon Lord Reed in One Step skipped lightly over Hendrix, reconciling the outcome against his proprietary analysis on the basis that the case also related to proprietary information (i.e. the intellectual property in the recordings). He, however, did acknowledge that it was not a happy fit.189 In one respect, Lord Reed’s reasoning seems as solid as a castle made of sand, given that the proprietary right in question was that of the party being enjoined (i.e. PPX) not the party seeking the injunction and damages (i.e. Hendrix’s estate). Lord Reed sought to justify that by saying that it was the Hendrix estate that had a valuable right to control PPX’s use of its own intellectual property. But all that really boils down to is that PPX was subject, de facto if not de jure, to a restrictive covenant. With that in mind it is very hard to see the difference between Hendrix and the Priyanka case, with, in the latter, the relevant right being the seller’s ability to partially control the use of the buyer’s property. VI. Final Thoughts Despite the widely held belief that it is more difficult to satisfy the required thresholds for the grant of mandatory injunctions and specific performance it seems that the courts are, perhaps increasingly, willing to grant such orders in the maritime world, at least to enforce a promise to provide security promptly. In particular, the order in The Miracle Hope was varied to require a payment into court to be made in circumstances where the terms of a bank guarantee could not be agreed promptly. Harmony Innovation Shipping and The Miracle Hope are only two of at least seven cases dealing with enforcement of LOIs in just the last four years alone, and those are just the reported cases. For now, in considering whether to grant a mandatory injunction or to order specific performance, it seems to be fairly settled that damages will not be an adequate remedy in the context of the obligation under an LOI to provide security to enable the release of or prevent the detention of a vessel. It is though hard to see that general principle being extended beyond the realm of LOIs given the fairly unique confluence of circumstances involved, namely, the high values of cargoes requiring security, the likelihood of significant damages for detention and the primary nature of the obligation under an LOI and its very purpose (i.e. to secure the unimpeded trading of the vessel). Whilst such factors may present themselves in breaches of commercial contracts on a case-by-case basis, it is hard to envisage a similar generally applicable set of circumstances where this principle might apply by analogy. That would probably require a similar commercial practice to provide surety on a regular, and general, basis. Returning to the maritime world, in enforcing the promise to provide security under an LOI, it would seem that the main battlegrounds will likely focus on two areas. The first is whether any condition precedent to the trigger of the obligation to provide security has been fulfilled, such as the delivery of cargo to, and only to, a specific entity named in the LOI, or whether owners have requested security from charterers/receivers. This might also require testing the degree of assurance the court has that the applicant will succeed at trial. The second is whether it is impossible for the charterers/receivers to comply with 189 One Step [2018] UKSC 20; [2019] AC 649 at [89–90].

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specific remedies in shipping an order. As to that, the onus is very much on the party asserting impossibility to produce sufficient and thorough evidence supporting such impossibility, with case law indicating a necessity to be full and frank, particularly if, in the context of providing security, the enjoined party’s financial position is the basis for the assertion of impossibility of compliance with an order requiring the provision of security. Priyanka also indicates that prohibitory injunctions will be issued readily, though perhaps not as a matter of, but subject to issues of oppression and hardship (which also have high thresholds for a respondent to meet). And this will have value to the ship recycling community (in enforcing scrapping and recycling obligations), particularly with the ever increasing ESG awareness and green watching by environmental groups. Here though, the adequacy of damages appears to be of less significance which is probably just as well given the austere approach of the Supreme Court in One Step being the current authority on “negotiating damages”. It seems to us though that the approach of the majority in the Supreme Court is unjustifiably restrictive. There seems to be no real good reason why “negotiating damages” should be restricted to proprietary and analogous rights. Hendrix would suggest a route by which the availability of “negotiating damages” can be extended at common law, at the least to an agreed contractual right to control the defendant’s use of its property. Both Lord Reed in One Step, and the court in Priyanka, had some trouble fitting Hendrix into the proprietary rights mould which suggests that the common law, as it stands, is not comfortable. Then, of course, there is Lord Sumption JSC’s less dogmatic approach. “Negotiating damages” are not an alternative measure but rather they are a way of assessing loss, something with which Lord Reed JSC almost seems to agree insofar as he says that evidence of negotiation of a potential release fee could be taken into account. It seems to us that it is but a short step to say the loss (being the loss of a valuable contractual right) can be evidenced in other ways. Why should the assessment of loss be limited to evidence of a negotiation? What if there is a simple offer from a defendant which is not negotiated further? Could that be taken into account, and from there it is hard to see why a claimant should lose out for simply standing by their rights? The weight of Supreme Court authority though is a significant hurdle. It would require the right case to see a challenge through to the Supreme Court, and require commercial determination (as it would in all likelihood be an expensive journey, the risks of adverse costs orders and even if damages are awarded they may be outweighed by the irrecoverable costs of appeal). In addition to whether it is a correct statement of the law that “negotiating damages” are restricted to proprietary and analogous rights, an important point of principle could include seeking to clarify whether the court has a discretion under s.50 of the Senior Courts Act 1981 to award damages in addition to an injunction differently than it does at common law or whether the court’s discretion is constrained by Johnson to award damages under the Act as it does at common law. For the right case though, the challenge might be irresistible.

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C H A P T E R 15

The Rebirth of the European “Anti-Suit Injunction” Issue Post-Brexit Dr Aygün Mammadzada I. Introduction An anti-suit injunction is an extremely useful, and at the same time quite a delicate, tool in the armoury of the court for the provision of judicial certainty and access to justice. Due to its distinctive nature and exceptional character, it has become a sensitive issue in judicial and arbitral practice, and also in legal theory. Traditionally the English courts have shown a considerable willingness to use their inherent power to grant anti-suit injunctions. Nonetheless, this practice has taken some time to establish. The complex underpinnings of this remedy can be tracked from the early 1800s to today. The development has not been smooth: until recently the rhetoric to be found in judicial rulings has observed radical fluctuations, while European private international and jurisdictional rules have for a time had a paramount influence on English law and broadly the UK legal services industry. This chapter examines the intrinsic aspects and practical challenges of granting an anti-suit injunction, with a particular emphasis on the rebirth of the issue in the postBrexit legal landscape. The UK’s withdrawal from the European Union has brought with it new horizons for judicial practice under the new dispensation with the removal of the bar on English courts granting anti-suit injunctions against proceedings in EU Member State courts. The ultimate point to be made is that the altered legal environment may well be a two-edged sword; in fact, the revival of such relief in England would most likely stimulate the European counterparts to develop the reverse practice by issuing anti-suit injunctions against the proceedings in England or grant injunctions against injunctions (as called “anti-anti-suit injunctions”). The chapter begins with a broad portrayal of the scenery and general principles behind such measures and underlines their contribution to the furthering of the party autonomy principle. Following on, it will deal with some traditional controversies existing in the field, where diverse positions in practice can be identified. These arise particularly in association with the public side of the matter – the comity doctrine. Indeed, the latter is followed up with reflections upon the divergent traditions in civil and common law countries, i.e., the European and English common law positions. In this context, the discourse scrutinises mutual trust as a ground amplifying the already-existing complexities. True, the altered legal environment post-Brexit has brought fresh vistas for anti-suit remedies in the practice of the English courts, no longer bound by European ideals and often enthusiastic to strengthen the foundations of party autonomy and safeguard the chosen forum be it a court or arbitration tribunal; nonetheless, the rebirth of the issue may bring with 226

DOI: 10.4324/9781003376347-18

rebirth of european “anti-suit injunction” issue post-brexit it a downside too. Needless to say, all this intricacy is likely to get further augmented by political factors and subjective circumstances. II. Key Considerations as Regards Anti-Suit Injunctions Commercial and trade relations between private parties rely upon the autonomy principle. While drafting their contracts, rational parties would usually contemplate potential disputes arising out of their commercial relations and achieving an efficient resolution. Among other contractual means, parties will often agree to exclusively refer already existing or potentially arising disputes to a neutral court or arbitrator. In fact, an exclusive jurisdiction agreement is at bottom a promise made between contracting parties, who are expected to keep holding their promises. In the case of a breach of the legal promise or any attempt to breach, the violating party should bear the consequences. If there is a violation of a choice of court agreement, remedies become more crucial than ever to restrain the other party from continuing the parallel proceedings. Together with a possible stay and damages, a party seeking an effective remedy may benefit from an anti-suit injunction for preserving their exclusive choices. Under English law, the strong prima facie rule is that proceedings brought in England in breach of an exclusive jurisdiction agreement should be stayed, and that for any breach damages should be granted to compensate for any loss suffered.1 An anti-suit injunction is an order granted by a court or an arbitral tribunal to stop ongoing court proceedings in, or to prevent a litigant from bringing claims to, a specific forum outside England. As reiterated by Lord Diplock, such injunctions aim at restraining a defendant from doing acts alleged to be in violation of the plaintiff’s legal rights which he could not be adequately compensated by the award of damages.2 A court based on its inherent jurisdiction can grant an anti-suit injunction to avoid injustice, “unreasonable or oppressive conduct by a plaintiff in a foreign jurisdiction” or tactical litigation that is without purpose, vexatious or oppressive.3 As a matter of principle, granting an anti-suit injunction is founded on the basis of the court’s equitable discretion, whether it is based on contractual or non-contractual grounds.4 However, as stated by the House of Lords, the question of discretion arises only if the court has jurisdiction.5 Unpacking the discretion of the court to grant such injunctions necessitates speculation upon key considerations and a good deal of delicacy. In the words of Toulson LJ, “an anti-suit injunction always requires caution because by definition it involves interference with the process or potential process of a foreign court”.6 Whether 1 Although in some cases it was held that there is a discretion of a court to permit such proceedings to continue. See The El Amria [1981] 2 Lloyd’s Rep 119; The Eleftheria [1969] 1 Lloyd’s Rep 237, 242; Donohue v Armco Inc [2002] 1 Lloyd’s Rep 425 [24]. 2 American Cyanamid Inc v Ethicon Ltd [1975] AC 396. 3 See Senior Courts Act 1981, s 37(1); Airbus Industrie GIE v Patel [1999] 1 AC 119, 133; Star Reefers Pool Inc v JFC Group Co Ltd [2012] EWCA Civ 14 at [40]; Clearlake Shipping Pte Ltd v Xiang Da Marine Pte Ltd [2019] EWHC 2284 (Comm). See also Richard Fentiman, “Anti-suit Injunctions” in J. Basedow, G. Rühl, F. Ferrari and P. A. de Miguel Asensio (eds), Encyclopedia of Private International Law (Edward Elgar Publishing 2017) 79–85. 4 Deutsche Bank AG v Highland Crusader Partners LP [2009] EWCA Civ 725. 5 Castanho v Brown & Root (UK) Ltd [1981] AC 557, 561. 6 Deutsche Bank AG v Highland Crusader Partners LP [2009] EWCA Civ 725 [50].

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dr aygün mammadzada there could be interference with the process of a foreign forum, potential disturbance of comity or discrepancies with sovereignty, the simple yet demanding logic is that there must be convincing reasons before granting such an injunction. While reaching a decision on whether to exercise such a power, the court must assess all the tools in its armoury and explore if justice is attainable otherwise, as by a stay of the foreign proceedings or a damages award. In forum non conveniens cases, there should be sufficient evidence identifying the court as the natural forum. Following an appeal from Parker J who had posited England as the natural forum in the absence of any satisfactory evidence, it was pointed out that “what it is legitimate for a party to seek must be considered in relation to the forum where he is seeking it”.7 Indeed, the discretion of the court brings another tint of peculiarity of anti-suit measures. As put by the court in The Tropaioforos,8 “it is a question of fact to be determined in the light of the particular circumstances whether a plaintiff suing abroad has rights justiciable in England which give him enough connection with England to justify the granting of an injunction to restrain him from proceeding with that action”.9 The historical underpinnings of anti-suit injunctions in England and Wales go back to the “common injunction” granted by the Court of Chancery to restrain parties from getting judgments in England contrary to equitable rights.10 As of now, the statutory framework of the court’s discretion emanates from Section 37(1) of the Senior Courts Act 1981, under which the High Court “may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so”. As explained by Lord Mance, this cannot be construed in an open-ended way: despite its width the court can intervene only (a) where one party can show that the other party has invaded, or threatens to invade, a legal or equitable right of the former for the enforcement of which the latter is amenable to the jurisdiction of the court, and (b) where one party to any action has behaved, or threatens to behave, in a manner which is unconscionable.11 The intent of this chapter is not to focus specifically on the jurisdiction to grant antisuit measures, something already long discussed in academia and practice. Instead, the spectrum of this discourse is about how the discretion of the court ought to be exercised assuming the jurisdiction exists. This involves asking questions such as whether England or Wales is a proper forum, whether there is any contractual basis for the injunction claim, e.g. an exclusive choice of court or an arbitration agreement, and if not whether there are any vexatious, oppressive or unconscionable foreign proceedings following the defendant’s voluntary submission to this jurisdiction.12 It also involves bearing in mind

7 Castanho v Brown & Root (UK) Ltd [1981] AC 557, 566. 8 [1962] 1 Lloyd’s Rep 410. 9 [1962] 1 Lloyd’s Rep 410, 418–419. 10 J. W. Willis, Pleadings in Equity, Illustrative of Lord Redesdale’s Treatise on the Pleadings in Suits, in the Court of Chancery, by English Bill (Gale 2010). See also T. Raphael, The Anti-Suit Injunction (Oxford University Press, 2008) 37–52. 11 AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35; [2013] 1 WLR 1889. See also South Carolina Insurance Co v Assurantie Maatschappij “De Zeven Provincien” NV [1987] AC 24 [40] (Lord Brandon). 12 Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] EWCA Civ 328; [2013] 1 CLC 596.

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rebirth of european “anti-suit injunction” issue post-brexit that the jurisdiction should be exercised “cautiously and sparingly”;13 that the necessity to grant such an injunction should always be rationalised on the grounds of serving the ends of justice;14 and that even though judges have occasionally avoided any limited interpretation of them, the ideas of vexation or oppression need to be properly defined, based on the circumstances in each specific case.15 In addition to this, it is worth noting that, especially where forum non conveniens is in issue, there is a close correlation between injunctions to prevent foreign proceedings, and cases when a court will order a stay of domestic ones. As Lord Goff has said, “the long line of English cases concerned with injunctions restraining foreign proceedings still provides useful guidance on the circumstances in which such injunctions may be granted”.16 Hence there is a similarity between the occasions on which a court would grant an injunction and those where it will grant a stay based on the Spiliada test,17 both relating to the vexation and oppression tests and the ultimate objective of restraining anticipated injustice. Just as for a stay the issue is whether there exists another forum to whose jurisdiction a defendant is amenable and where justice can be done between the parties at substantially less inconvenience or expense, and no legitimate personal or juridical advantage for a claimant in suing here,18 to get an anti-suit injunction a defendant should show that the English court is a forum to whose jurisdiction they are amenable in which justice can be done at substantially less inconvenience and expense, and that the injunction will not deprive the claimant of a legitimate personal or juridical advantage elsewhere.19 That is to say, an anti-suit measure cannot be founded on the presence of a more convenient jurisdiction alone, but instead must involve an element of unconscionability.20 III. Anti-Suit Injunctions and Comity The delicacy of the topic is demonstrated by the courts’ high degree of caution and even at times hostility associated with anti-suit injunctions. True, traditionally such injunctions were issued as standard equitable remedies; however, English courts in earlier times occasionally considered them “a dangerous case” owing to their potential reverse application by foreign courts against themselves. This approach remained in evidence until the legitimate powers of the courts to grant anti-suit remedies were reaffirmed in the later authorities and statutory provisions.21 Even today, however, to some extent the already ingrained hesitation rooted in the history of anti-suit measures may continue. In addition to the discretionary nature of the 13 Cohen v Rothfield [1919] 1 KB 410, 413 (Scrutton LJ). See also Castanho v Brown & Root (UK) Ltd [1981] AC 557, 573 (Lord Scarman). 14 Société Nationale Industrielle Aerospatiale (SNIA) v Lee Kui Jak [1987] AC 871, 878. See also Castanho v Brown & Root (UK) Ltd [1981] AC 557. 15 Société Nationale Industrielle Aerospatiale (SNIA) v Lee Kui Jak [1987] AC 871, 893. See also McHenry v Lewis (1882) 22 ChD 397, 407–408 (Bowen LJ). 16 Société Nationale Industrielle Aerospatiale (SNIA) v Lee Kui Jak [1987] AC 871 at 896 (Lord Goff of Chieveley). 17 Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460. 18 MacShannon v Rockware Glass Ltd [1978] AC 795, 812 (Lord Diplock). 19 Castanho v Brown & Root (UK) Ltd [1981] AC 557, 575 (Lord Scarman). 20 Midland Bank Plc v Laker Airways Ltd [1986] QB 689. 21 Per Lord Clarendon LC in Love v Baker, quoted in Raphael, supra note 10 [2.04].

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dr aygün mammadzada court’s power, the possible incompatibility of anti-suit remedies with comity and state sovereignty has stimulated discussion in both academia and practice at the global level; and further, their misalignment with the European mutual trust principle at the regional level until recently added to those critiques. Even though access to justice and party autonomy grounds are now increasingly considered to justify anti-suit relief, obtaining such remedies remains a troublesome experience. Lord Goff articulated typical controversies surrounding current practice as follows: There are simply these two weapons, a stay (or dismissal) of proceedings and an anti-suit injunction. Moreover, each of these has its limitations. The former depends on its voluntary adoption by the state in question, and the latter is inhibited by respect for comity. It follows that, although the availability of these two weapons should ensure that practical justice is achieved in most cases, this may not always be possible.22

As already noted, an anti-suit injunction is technically an in personam order addressed to a person (the litigant), and not to the foreign court. The earlier discussions have underlined that for the English court to restrain a party from litigating at a foreign court, it must have a sufficient interest in or connection with the case. This is because, whatever the theory, in issuing an anti-suit injunction based on its assessment of a foreign court’s jurisdiction, the English court does indirectly interfere with the comity doctrine and the foreign state’s sovereignty. To avoid any unnecessary such interference, there must be some satisfactory justification such as vexation, oppression or the ends of justice reasons, and in addition either England must be the natural forum or there must be a valid exclusive jurisdiction or an arbitration agreement. These rules have long been rationalised based on the analyses to be found in the Aérospatiale and Angelic Grace cases.23 These and other authorities provide reasonable guidance for the courts in determining whether to grant anti-suit injunctions upon contractual and non-contractual grounds and how to weigh up possible challenges in relation to the comity doctrine. In the leading Canadian Supreme Court judgment in Amchem Products Inc v British Columbia (Workers’ Compensation Board),24 Sopinka J expressed the matter as follows: Where there is a genuine disagreement between the courts of our country and another, the courts of this country should not arrogate to themselves the decision for both jurisdictions. In most cases it will appear from the decision of the foreign court whether it acted on principles similar to those that obtain here, but, if not, then the domestic court must consider whether the result is consistent with those principles. In a case in which the domestic court concludes that the foreign court assumed jurisdiction on a basis that is inconsistent with principles relating to forum non conveniens and that the foreign court’s conclusion could not reasonably have been reached had it applied those principles, it must go then to the second step of the [Aerospatiale] test (i.e., whether to grant an injunction on the ground that the ends of justice require it).25

22 Airbus Industrie GIE v Patel [1999] 1 AC 119, 133. 23 Société Nationale Industrielle Aerospatiale (SNIA) v Lee Kui Jak [1987] AC 871; The Angelic Grace [1995] 1 Lloyd’s Rep 87. 24 [1993] 1 SCR 897. 25 [1993] 1 SCR 897, 932.

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rebirth of european “anti-suit injunction” issue post-brexit In the same vein, in a very recent case, Foxton J followed Males LJ’s reasoning in AIG Europe,26 and reaffirmed that respect for comity was not a strong reason for the court not to give effect to a contractual choice of forum clause. Comity, indeed, required that where there was an agreement for a sole forum for the resolution of disputes under a contract, that agreement should be respected.27 It might be worth noting that at the global level, the comity doctrine and state sovereignty are beginning to fight back: the fashion for anti-anti-suit injunctions is itself becoming “a new normal” in judicial practice. The latter phenomenon has been observed in some recent European authorities and might be a subject matter for another discussion.28 IV. Anti-Suit Injunctions and Mutual Trust It has been said that “a truly European Area of Justice can only work if there is trust in each other’s justice systems . . . and the whole EU legal system . . . is based on mutual trust”.29 As opposed to the recklessness of the principle and its reflection of the ambitious spirit of the European Union, however, “trust” in this sense is a vague concept of a rather ambiguous nature. Presumably, trust – and in particular mutual trust – can become a reality but to some limited extent.30 As claimed, “the myth of mutual trust” has been demonstrated within the context of Articles 81 and 82 of the TFEU and the mutual recognition principle.31 Nevertheless, the idea has been revived recently. Acknowledging the deficiency of the present understanding and practical exercise of mutual trust, the EU Commission has made proposals on the codification of the private international law rules of the European Union for achieving “the enhancement of mutual trust as well as consistency and legal certainty”.32 Whether such a far-fetched codification is attainable above a superficial level is, however, doubtful. Clearly, this chapter is not concerned with the mutual trust principle in general, but rather with its relevance to anti-suit relief in the proceedings across the EU. So far, the issue of “anti-suit injunction” has been a matter of critical debate throughout the European arena; and some Member States have refused to issue such orders because of their perceived unconstitutional character and interference with the sovereignty of the states.33 Further, the fact that regulatory matters across the Union are stiffly aligned with mutual trust has exacerbated complexities. The European approach is that even though an order not to litigate is directed to the party, not the court, it still runs against the court’s authority to determine its own 26 AIG Europe SA v John Wood Group Plc [2021] EWHC 2567 (Comm) [8], [10]. 27 QBE Europe SA NV v Generali España de Seguros y Reaseguros [2022] EWHC 2062 (Comm), [11]. 28 See the German decision in Continental v Nokia, No 6 U 5042/19, available at accessed 14 February 2023; and the French one in IPCom v Lenovo, No RG 19/21426, available at accessed 14 February 2023. 29 T. Hartley, “The Brussels I Regulation and Arbitration” (2014) 63 ICLQ 843, 859. 30 M. Weller, “Mutual Trust: In Search of the Future of European Private International Law” (2015) 11 JPIL 64, 67. 31 Ibid. 32 European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – The EU Justice Agenda for 2020 – Strengthening Trust, Mobility and Growth within the Union [2014] COM 144 final [4.2] 7. 33 Y. Baatz, “Who Decides on Jurisdiction Clauses?” [2004] LMCLQ 25, 28.

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dr aygün mammadzada jurisdiction, and hence against mutual trust.34 The Kompetenz-Kompetenz principle, which justifies a court’s power to determine its jurisdiction, is the keystone in the European private international law regime,35 and no other court may question it.36 Accordingly, “in no case is a court of one Member State in a better position to determine whether the court of another Member State has jurisdiction”.37 A prohibition on anti-suit injunctions is thus based on trust that the Member States must accord to one another’s legal systems and judicial institutions;38 so even if such orders form part of national law, they may not impair the effectiveness of Union law.39 Furthermore, even if the main proceedings are not in the scope of the Brussels regime (for example, arbitration), such injunctions are still not permitted.40 Coupled with the mutual trust principle, the Brussels (and similarly the Lugano) regime has long been characterised by a dirigiste lis pendens rule functioning on the basis of “first come first served”.41 As reasserted by the CJEU in Erich Gasser GmbH v MISAT SRL (Case C-116/02),42 the court of any other Member State must stay the proceedings until the court first seized decides upon its jurisdiction, subject only to the exception under the Recast Regulation that this does not apply where there is an exclusive jurisdiction agreement in favour of the former court.43 Subject to this, in the case of parallel proceedings, the Brussels regime precludes anti-suit relief even where a party is acting in bad faith to frustrate existing proceedings. In other words, even though parallel proceedings are vexatious or oppressive, anti-suit injunctions are barred between Member State courts. The leading case is the famous and yet infamous West Tankers.44 While the judgment was decided against the background of the applicability of the arbitration exclusion,45 it widened the scope of the Regulation to encompass the matters concerning injunctions granted related to the proceeding’s ancillary to arbitration.46 A ship owned by West Tankers hit and damaged a jetty in Italy. The jetty owner, Erg, claimed against Allianz, its insurers, and having reached the limit of cover brought arbitration proceedings in London against West Tankers relying on the English arbitration agreement contained in a charterparty between them. Later Allianz sued West Tankers in Italy under 34 Case 185/07 Allianz v West Tankers [2009] ECR I-00663, paras. 28, 30; Case 159/02 Turner v Grovit [2004] ECR I-3565, paras. 27–28. See also H. Seriki, Injunctive Relief, and International Arbitration (Informa Law from Routledge, 2015) 50–61. 35 R. Fentiman, International Commercial Litigation (2nd edn, Oxford University Press 2015) 368. 36 Ibid at 295. 37 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663 para 29. 38 Case 159/02 Turner v Grovit [2004] ECR I-3565, para 24. 39 Case C-365/88 Kongress Agentur Hagen GmbH Zeehage BV [1990] ECR I-1845 para 20. 40 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663. 41 Regulation (EU) No 1215/2012 of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast), Art 29. 42 [2003] ECR I-14693. 43 Regulation (EU) No 1215/2012 of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast), Art 31(2). 44 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663. 45 Applying the decision in Case C-1980/89 Marc Rich & Co AG v Soc Italiana Impianti pA [1991] ECR I -3835, the CJEU took the view that, if the subject matter of the dispute and the nature of the rights and a claim for damages were within the scope of the Regulation, a preliminary question on the applicability of an arbitration agreement also came within its scope. Indeed, the principle of “infection” as described by Fentiman, became dominant in the Court’s reasoning. See Fentiman, supra note 35, 533. 46 Case 159/02 Turner v Grovit [2004] ECR I-3565.

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rebirth of european “anti-suit injunction” issue post-brexit Article 5(3) of the Brussels I Regulation, where the “harmful event” occurred, to recover the amount it had paid Erg. West Tankers contested the jurisdiction of the Italian court, relying on the fact that Allianz’s subrogated right to sue it was subject to the London arbitration agreement, and sought an anti-suit injunction restraining the Italian court proceedings. The High Court granted it: on Allianz’s appeal the House of Lords made a reference to the CJEU asking whether the prohibition on intra-EU anti-suit injunctions was applicable.47 The CJEU said it was. Hindering the Italian court from determining the validity of an arbitration agreement would unduly restrict the operation of the Regulation.48 Since an anti-suit injunction prevented a court of a Member State from exercising its jurisdiction, it would also undermine the effectiveness of the Regulation.49 The CJEU followed Advocate-General Kokott’s opinion, which had said: A unilateral anti-suit injunction is not, however, a suitable measure to rectify jurisdiction in two courts. In particular, if other Member States were to follow the English example, also introduce anti-suit injunctions, reciprocal injunctions would ensue. Ultimately, the jurisdiction which could impose higher penalties for failure to comply with the injunction would prevail.50

Another justification later provided for such reasoning was to prevent tactical strategies: “Given that the same game can be played by different players, the liberty to resort to anti-suit injunctions is a recipe for chaos”.51 Yet again, it was said that mutual trust in the administration of justice, rather than any comity between the Member States, stood for the individual’s right of access to justice in a reasonable time and manner.52 Thus, the decision was one to avoid any breach of the mutual trust principle and infringement of the Kompetenz-Kompetenz doctrine53 and the party’s right to have recourse to the Italian court to challenge the clause.54 As stated by the CJEU, the opposite result meant a party could be “barred from access to the court . . . and would therefore be deprived of a form of judicial protection to which it is entitled”,55 which is denying English courts the right to issue an anti-suit injunction.56 The other side of the coin was present in Turner v Grovit,57 where to a question referred by the House of Lords, the CJEU had stated that a measure issued by 47 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663. 48 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663 paras. 27–28. 49 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663 para 24. 50 Opinion of the Advocate General Kokott, delivered on 4 September 2008, Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663 para 72. 51 Radicati Di Brozolo, L.G., “Arbitration and the Draft Revised Brussels I Regulation: Seeds of Home Country Control and of Harmonisation?” [2011] 7 JPIL 423, 432. 52 Weller, supra note 30, 70. 53 Fentiman, supra note 35, 533. 54 Ibid 534. 55 Case 185/07 Allianz SpA v West Tankers Inc [2009] ECR I-00663. 56 On another note, the “decisive question” was not whether granting anti-suit injunctions was within the arbitration exclusion. The CJEU concluded that even though proceedings, where an injunction was granted, fell within the scope of the arbitration exception, and remained outside the Regulation, the prohibition still applied. The view of the Advocate-General on the exclusion of arbitration from the scope of the Regulation was agreed upon; however, it was stated that even if the issues fell outside the scope of the Regulation, they had consequences on its effectiveness and jurisdiction of the Italian court. Arguably, West Tankers might have narrowed the arbitration exception but broadened the scope of the Regulation. Further, vaguely, the mutual trust element takes precedence over the arbitration exception in the Regulation. For the relevant discussions see Y. Baatz, “A setback for arbitration”, (2009) 9(4) Shipping and Trade Law 1, 2. 57 Case 159/02 Turner v Grovit [2004] ECR I-3565.

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dr aygün mammadzada a Member State court to restrain another Member State court from hearing a case was not compatible with mutual trust even if such proceedings were vexatious or oppressive and brought in bad faith. On a side note, however, regardless of the controversy surrounding anti-suit measures, there was nothing to prevent Member State courts from granting damages even where the competing proceedings were within the Union.58 The CJEU further specified that any decision on costs was a matter for the national court. Further, it now appears that a party seeking an effective remedy may benefit from an anti-suit injunction issued by an arbitral tribunal that does not affect the effectiveness of the EU law or is not incompatible with the mutual trust principle.59 Arguably though, the EU courts might be reluctant to enforce arbitral awards containing such reliefs on the basis of arbitrability and public policy considerations. Moreover, the vagueness concerning the effectiveness of arbitral anti-suit injunctions remains a problem due to the lack of penalties for non-compliance. V. Brexit Implications: The Revival of Anti-Suit Injunctions A distaste for common law anti-suit relief was unavoidable from the moment of the United Kingdom’s accession to the Brussels Convention and its statutory implementation by the Civil Jurisdiction and Judgments Act 1982.60 Following the monumental 2016 UK referendum on EU membership, however, the UK from 1 February 2020 became a third country after 47 years. Regardless of the UK’s withdrawal, many European citizens still live or work in, or travel to, the UK and vice versa. Likewise, international companies and businesses from both sides continue their commercial relations. Civil and commercial disputes will continue, and parties will still negotiate jurisdiction agreements. Some have claimed that post-Brexit “parties will no longer be able to trust that choice of law and forum clauses will do their job and create legal certainty”.61 It is true that, inevitably, the legal landscape has gone through profound transformations which would have been naturally onerous to adjust. Yet, the flexibility and rational strengths of the common law doctrines have facilitated adaptation to new circumstances. In fact, there are few equally good alternatives to the London Commercial Court as a global leader in international dispute resolution, and the pervasiveness of the English choice of law and jurisdiction clauses is beyond a shadow of a doubt as the empirical grounds also evidence.62 Further, London arbitration is reputed 58 Hence, where a claimant brought proceedings in the US upon the German jurisdiction and German law clauses, the German Federal Supreme Court, based on the general principles of German national law, ruled that a breach of the contract gave rise to contractual claims for damages and the claimant had to reimburse legal costs and expenses against the counterparty. See Judgment of 17 October 2019 – III ZR 42/19. 59 Case C-536/13 Gazprom OAO v Republic of Lithuania [2015] 1 Lloyd’s Rep 610. 60 For a discussion of these matters see Raphael, supra note 10, 259–268. 61 G. Rühl, “Judicial Cooperation in Civil and Commercial Matters After Brexit: Which Way Forward?” [2018] 67 ICLQ 99, 117. 62 According to a 2018 survey, 29% of the respondents considered arbitration instead of litigation, 43% of whom favoured arbitration remained in England. See Thomson Reuters Practical Law Dispute Resolution, The Impact of Brexit on Dispute Resolution Clauses: Revised Survey (Thomas Reuters, 29 November 2018) accessed 14 February 2023. In Portland’s 2022 Annual Commercial Courts Report, London’s reputation as the world’s leading hub for foreign litigants continues to be sturdy, with the number of nationalities at 75 (the fourth

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rebirth of european “anti-suit injunction” issue post-brexit for the judicial expertise of world-class arbitrators, and parties might consider arbitration while reassessing their already existing dispute resolution clauses. Long before the UK’s withdrawal from the EU, English courts maintained the integrity of the common law rules and applied them autonomously. Indeed, the two systems of law operated hand in hand yet separately. As one might say, the two systems functioned and coexisted in one courtroom without getting mixed. Briggs metaphorically observed the latter in an analogy of chalk and cheese, or oil and water.63 It should not come as a surprise that, regardless of the unorthodoxy of anti-suit measures for civil law systems, English courts always continued to grant mandatory injunctions to restrain the proceedings outside the Union.64 Post-Brexit, Turner v Grovit and West Tankers no longer hold for English courts. In other words, the courts in England and Wales are now “as you were”, with no EU-oriented restraints to prevent exercising their inherent jurisdiction to grant anti-suit measures. In fact, a number of very recent landmark cases have opened something like a fresh chapter, especially given that their facts resemble those of the West Tankers and Turner v Grovit scenarios. In QBE Europe SA NV v Generali España de Seguros y Reaseguros,65 the Yacht Angara damaged an undersea power cable on 3 July 2016. She was insured against P&I risks by a QBE UK policy, later transferred to QBE Europe, containing London arbitration and English governing law clauses. In February 2022 Generali, underwriters of Red Eléctrica de España (REE) who owned the undersea cable, brought a direct action against QBE UK before the Court of First Instance of Madrid under Art. 465 of the Spanish Maritime Navigation Law 2014 and Art. 1902 of the Spanish Civil Code. In response QBE commenced English proceedings for restraining the Spanish proceedings as in breach of the London arbitration clause. They won. Foxton J relied upon “the derived rights” concept developed in English law66 and the principles enunciated in The Angelic Grace67 and Donohue v Armco Inc,68 under which the court would ordinarily exercise its discretion to restrain the pursuit of proceedings brought in breach of a forum clause unless the defendant showed strong reasons to refuse the relief. Here he decided that the ends of justice required such relief, and thus, an anti-suit injunction was granted to restrain the Spanish court proceedings.

consecutive year it has been above 70). The report further shows that there has been limited change in the proportion of EU-27 countries represented in the London Commercial Courts. The EU represented 12% of litigants this year versus 11.5% last year and there were 16 countries from the EU represented, compared to 15 last year. See Commercial Courts Report 2022, accessed 14 February 2023. 63 A. Briggs, “The Hidden Depths of the Law of Jurisdiction” [2016] LMCLQ 237. 64 See Axis Corporate Capital UK Ltd & Ors v Absa Group Ltd & Ors [2021] EWHC 225 (Comm), where Commercial Court granted an anti-suit injunction against the South African proceedings, which breached the English jurisdiction agreement. See also Catlin Syndicate Ltd and others v Amec Foster Wheeler USA Corp and another [2020] EWHC 2530 (Comm). 65 [2022] EWHC 2062 (Comm). 66 Through Transport Mutual Insurance Association (Eurasia) Ltd v New India Assurance Association Company Ltd [2003] EWHC 3158 (Comm); [2004] 1 Lloyd’s Rep 206; The Jay Bola [1997] 2 Lloyd’s Rep 279; and The Yusuf Cepnioglou [2016] EWCA Civ 386; [2016] 1 Lloyd’s Rep 641. 67 [1995] 1 Lloyd’s Rep 87. 68 [2001] UKHL 64; [2002] 1 All ER 749.

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dr aygün mammadzada The decision in QBE was a catalyst for further anti-suit development by English courts post-Brexit. There followed a similar judgment in Ebury Partners Belgium SA v Technical Touch BV.69 The dispute arose out of a relationship agreement between foreign currency dealers Ebury, their customer TT and TT’s director and guarantor B, which had been concluded electronically through Ebury’s website. A hyperlink attached to the box ticked by B led to a PDF file with terms and conditions including English governing law and exclusive jurisdiction clauses; similar terms appeared in a separate guarantee agreement signed by B. Upon TT’s failure to pay a margin call and further sums under the agreement, TT sued in Belgium for negative declaratory relief and challenged the validity of the two agreements under Belgian law. In response, Ebury brought an action in England and applied for a grant of an anti-suit injunction relying on breach of the exclusive jurisdiction clause. As observed by Jacobs J, the arguments brought by the parties – Ebury’s application for an anti-suit order, and the defendants’ applications challenging the court’s jurisdiction or inviting the court not to exercise it – were pretty much two sides of the same coin. Jacobs J emphasised that while anti-suit relief would have been impossible pre-Brexit, the principles applicable to such relief were already well-settled. In this context, he particularly underlined Foxton J’s reasoning in QBE. Section 37(1) of the Senior Courts Act 1981 gave power to grant an anti-suit injunction when required by the ends of justice; here the grant of relief was “just and convenient”, and furthermore, a “high degree of probability” about the existence of jurisdiction was established. He thus rejected the defendants’ challenge to the English court’s jurisdiction and confirmed that there was a good arguable case for service out, either on the basis of CPR 6.33(2B) (b), or pursuant to the 2005 Hague Choice of Court Convention (HCCCA), under which the English court had exclusive jurisdiction as per the agreements between the parties. It followed that there were no strong reasons for the English court to decline its jurisdiction: indeed, if the HCCCA applied, the court was bound to accept jurisdiction.70 These judgments stress the English courts’ newfound freedom to grant anti-suit injunctions against the proceedings at European Member State courts. Unsurprisingly, a substantial amount of discussion has followed, and curiosity surrounding their implications has been growing. Commentaries have principally underlined the novelty brought by the decisions after Brexit: but this chapter prefers to see them as a revival of existing practice: a “renaissance of anti-suit measures”. Simply put, granting anti-suit injunctions has long been the well-established practice of common law courts, and decisions like these should not come as a surprise in the post-Brexit legal era. English courts are thus now back to their routine and not restrained in the exercise of their inherent jurisdiction to protect jurisdiction and arbitration clauses where the ends of justice require it. On a side note, however, the judgments would presumably bring the effects of a double-edged sword. The issue is whether the European counterparts will take these developments easily. Arguably, the rebirth of the issue will stimulate them to embark on this challenge by granting their own anti-anti-suit injunctions, resorting 69 [2022] EWHC 2927 (Comm). 70 Even though it is far beyond the central theme of this chapter, this is a valuable judgment addressing the HCCCA whilst there is still an unreasonable lack of relevant authorities referring to this global convention. We can only hope for more case law and precedents on the HCCCA.

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rebirth of european “anti-suit injunction” issue post-brexit to comity instead of the expired mutual trust principle. Probably the status quo of the private international law and practice might be described by the interesting idiom: “He that steals honey should beware of the sting”. Last but not least, it is probably worth noting that the Hague Conventions (in particular the 2005 Hague Choice of Court (HCCCA) and 2019 Hague Judgments Convention) as the legal framework applicable to civil judicial cooperation post-Brexit do not contain mutual trust or any other similar constraints over anti-suit measures. While anti-suit injunctions run against the mutual trust principle in the European judicial area, there is no provision in either Hague Convention preventing the contracting states from granting such measures. For instance, the English High Court restrained “vexatious and oppressive” Singaporean court proceedings which breached the English jurisdiction agreement.71 Given the fact that both the UK and Singapore are the contracting states, if a similar case was brought under the auspices of the HCCCA, such measures would not have been forbidden. On the other hand, it should also be considered that according to Articles 4.1 and 7 of the HCCCA, interim measures do not qualify as judgments under the Convention; therefore, their enforcement depends on national laws, which might still be restrained in the EU States in truly European or regional cases. Additionally, though, since the HCCCA also has a status of European law, Member State courts might refer the question regarding the compatibility of anti-suit injunctions to the CJEU. Most likely, the Court would not overrule anti-suit or anti-anti-suit injunctions issued against non-EU proceedings; the latter might foster the reverse strategies against court proceedings in England and Wales which would no doubt also involve political and subjective factors.

71 Clearlake Shipping Pte Ltd and (2) Guvnor Singapore Pte Ltd v Xiang Da Marine Pte Ltd [2019] EWHC 2284 (Comm).

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C H A P T E R 16

Punitive Damages in Maritime Cases – A View From Across the Pond Professor Michael F. Sturley I. Introduction In the United States, maritime law is unique. The overwhelming majority of contract and tort cases are governed by state law, and questions regarding damages are accordingly resolved most often under the law of the relevant state. The breach of a contract governed by California law could result in a different damage award than an identical breach of an otherwise identical contract governed by Massachusetts law. But a maritime contract or a maritime tort is generally1 subject to maritime law. To be sure, results under maritime law are frequently the same as under state law. Judges deciding maritime cases are influenced by widely recognised common law principles that apply not only in most states but throughout the common law world.2 Moreover, maritime law has often been influential in the evolution of state law.3 But maritime law can and often does diverge from the state law that might otherwise govern a dispute. Punitive damages provide a prime example of an issue in which state law and maritime law are often different.4 One significant goal of maritime law is uniformity.5 A maritime case in California should be decided in the same way as a comparable maritime case in Massachusetts. Unfortunately, the practice does not always conform to the theory. Although maritime law is supposed to be uniform for the entire nation, different courts in different parts of the country sometimes interpret maritime law differently. For example, the United States 1 In some situations, state law is relevant even in a maritime case. See, e.g., Yamaha Motor Corp, USA v Calhoun 516 US 199, 1996 AMC 305 (1996) (holding that state wrongful-death law governed certain aspects of a maritime case); Wilburn Boat Co v Fireman’s Fund Insurance Co, 348 US 310, 1955 AMC 467 (1955) (holding that state law governs in a marine insurance case). 2 See, e.g., East River Steamship Corp v Transamerica Delaval, 476 US 858, 1986 AMC 2027 (1986) (looking to state law principles when developing a product-liability rule for maritime cases). 3 For example, maritime law rejected the contributory negligence rule long before most states did, but eventually almost every state followed the maritime law example. See generally, e.g., Pope & Talbot, Inc v Hawn, 346 US 406, 408–409, 1954 AMC 1 (1953) (contrasting maritime law with common law contributory negligence rules). 4 Compare, e.g., infra notes 52–54 and accompanying text (summarising the predominate rules in the states with respect to vicarious liability for punitive damages) with infra notes 64–75 and accompanying text (summarising the principal approaches under the general maritime law). In In re Exxon Valdez, 270 F 3d 1215, 1232–33 (9th Cir 2001), rev’d on other grounds sub nom. Exxon Shipping Co v Baker, 554 US 471, 2008 AMC 1521 (2008), the Ninth Circuit held that federal maritime law permitted punitive damages under a preponderance-of-the-evidence standard, even though that award would not have been permitted in any of the coastal states in the Ninth Circuit. Alaska, California, Hawaii and Oregon all require clear and convincing evidence, and Washington does not permit punitive damages except as expressly authorised by statute. 5 See generally, e.g., M. F. Sturley, “Uniformity in the Law Governing the Carriage of Goods by Sea” (1995) 26 J Mar L & Com 553.

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DOI: 10.4324/9781003376347-19

punitive damages in maritime cases – a view from across the pond Court of Appeals for the Ninth Circuit, which hears cases arising in states on the West Coast (including California), may answer a question of maritime law differently than the United States Court of Appeals for the First Circuit, which hears cases arising in four New England states (including Massachusetts).6 To further complicate the situation, state courts also have the power to decide questions of maritime law.7 All maritime decisions are subject to review by the United States Supreme Court, but that court has the capacity to decide only a very small percentage of the cases in which review is sought (and an infinitesimal percentage of the much larger number of cases that the lower courts decide). To say with any confidence that a particular proposition is true under US maritime law therefore requires a statute that is directly on point, a decision of the United States Supreme Court, or a sufficient consensus among the lower courts. As it happens, the Supreme Court has directly addressed maritime law damages on several occasions. In McDermott, Inc. v AmClyde,8 for example, the Court examined three possible rules for determining the amount of damages that could be recovered from a non-settling tort-feasor when other tort-feasors who were also liable for the harm had previously settled with the plaintiff. In Jones & Laughlin Steel Corp. v Pfeifer,9 the Court addressed the calculation of net present value and the effects of inflation when awarding future damages. The maritime damages issue that has dominated the Court’s attention in recent years has been punitive damages. In just over a decade, from 2008 to 2019, the Court decided three major cases addressing whether a defendant responsible for egregious10 misconduct could be liable for punitive damages under maritime law.11 I will focus here on those three cases, the principles they establish, and the questions they leave unanswered. II. The Exxon Valdez Litigation The Supreme Court’s first modern12 case to address punitive damages in the maritime context was Exxon Shipping Co. v Baker,13 which arose out of the infamous oil spill in 6 See, e.g., infra notes 67–69 and accompanying text (discussing rulings of the Ninth and First Circuits on vicarious liability for punitive damages). 7 See generally, e.g., Romero v International Terminal Operating Co, 358 US 354, 372, 1959 AMC 832 (1959) (discussing the significant “role of the States in the development of maritime law”). 8 511 US 202, 1994 AMC 1521 (1994). 9 462 US 523, 1983 AMC 1881 (1983). 10 The level of misconduct required to justify the imposition of punitive damages has been described in many ways. Some courts have permitted punitive damages based on “gross negligence”. Others have required “reckless” misconduct. Other pejorative adjectives include “wanton and willful”. The Supreme Court has not ruled on the proper standard for imposing punitive damages, and I will not address the question here. I will simply use the adjective “egregious” to describe whatever misconduct may be required. 11 Prior to 2008, the Supreme Court had addressed a string of punitive damages cases arising under state law that raised constitutional issues. See, e.g., Philip Morris, USA v Williams, 549 US 346 (2007); State Farm Mutual Automobile Insurance Co v Campbell, 538 US 408 (2003); Cooper Industries, Inc. v Leatherman Tool Corp., 532 US 424 (2001); BMW of North America, Inc. v Gore, 517 US 559 (1996); Honda Motor Co v Oberg, 512 US 415 (1994); TXO Production Corp v Alliance Resources Corp, 509 US 443 (1993); Pacific Mutual Life Insurance Co v Haslip, 499 US 1 (1991); Browning-Ferris Industries of Vermont, Inc v Kelco Disposal, Inc, 492 US 257 (1989). In those cases, the federal Supreme Court had no power to interpret the governing state law. Its role was only to determine what limits, if any, the federal constitution placed on the state’s ability to impose punitive damages. See infra note 26. 12 The Supreme Court discussed punitive damages in dicta in a maritime case over two centuries ago. See The Amiable Nancy, 16 US (3 Wheat) 546, 2000 AMC 2693 (1818). 13 554 US 471, 2008 AMC 1521 (2008).

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professor michael f. sturley Alaska’s Prince William Sound when the oil tanker Exxon Valdez hit Bligh Reef. Because the case arose under the general maritime law,14 the justices were free to diverge from state law. Indeed, in its petition for certiorari, Exxon15 noted that the award in question was “[u]nlike all the other punitive awards [the] Court ha[d] reviewed” because the previous awards had arisen “under state law”, whereas the Court could now review an “award [that] is purely the product of judge-made federal law”.16 The petition went on to explain that “federal judges have responsibility to declare and shape [maritime law] in the same manner that state courts declare and shape the common law of their states”.17 A. Limits on the Amount of Punitive Damages The principal focus of the Supreme Court’s opinion in Baker was the size of the punitive damages award. Exxon argued that the $5 billion jury award, even after the court of appeals reduced it to $2.5 billion, “exceed[ed] the bounds justified by the punitivedamages goal of deterring reckless (or worse) behavior and the consequently heightened threat of harm”.18 The Court agreed, ruling that punitive damages “in such maritime cases” should not exceed compensatory damages.19 Because the compensatory damages in Baker were deemed to be $507.5 million,20 the punitive damages award was reduced to $507.5 million. It is not clear how far the rule setting a 1:1 ratio between compensatory and punitive damages applies. In explaining what “such” a maritime case was, the Court highlighted the lack of “intentional or malicious conduct, and without behavior driven primarily by desire for gain”, the magnitude of the harm (and thus the amount of the compensatory damages), and the likelihood that the fault would be discovered.21 In Clausen v Icicle Seafoods, Inc.,22 the Supreme Court of the State of Washington easily distinguished Baker to uphold a $1.3 million punitive damages award for the wrongful withholding of maintenance and cure when the compensatory damages were only $37,420 – a ration of almost 35:1. The defendant in Clausen had acted intentionally and maliciously, its behaviour had been motivated by profit, and the compensatory damages were not substantial.23 Clausen was undoubtedly a very different case than Baker. Indeed, Baker was probably unique; at the very least, other “such” cases are rare indeed. Most obviously, few 14 The term “general maritime law” refers to judge-made maritime law as opposed to statutory maritime law. In the United States, it is often said (inaccurately) that there is no federal common law. The general maritime law is the most significant example of federal common law. 15 Two Exxon entities were defendants in the district court and petitioners in the Supreme Court: Exxon Shipping Co. (the ship-owning subsidiary; subsequently known as SeaRiver Marine, Inc.) and Exxon Mobil Corp. (the parent company). For convenience, I refer to both of them as “Exxon”. 16 Petition for a Writ of Certiorari at 1, Exxon Shipping Co v Baker, 554 US 471, 2008 AMC 1521 (2008) (No. 07–219) (filed 20 August 2007) (available at 2007 WL 2383784) [hereinafter Baker Petition]. 17 Ibid at 2. 18 554 US at 490. 19 Ibid at 513. 20 Ibid at 515. The damages awarded in the litigation were substantially lower, see ibid at 480–481, but the Court’s figure included amounts paid in settlements, voluntary payments before suits were filed and even some amounts paid by other parties to compensate for the damage caused by the oil spill. See In re Exxon Valdez, 236 F Supp 2d, 1043, 1058–60 (D Alaska 2002). 21 554 US at 514–515. 22 174 Wash 2d 70, 83–87, 2012 AMC 660 (2012). 23 Ibid at 85–87.

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punitive damages in maritime cases – a view from across the pond compensatory-damage awards are so substantial. But even in the BP oil spill litigation – in which compensatory damages were far more substantial – Baker was readily distinguishable because BP’s “reckless, willful, and wanton” conduct appeared to have been “driven primarily by desire for gain”.24 It is also unclear whether Baker added anything under the general maritime law that had not already been required as a matter of constitutional due process. In State Farm Mutual Automobile Insurance Co. v Campbell,25 the Court had declared that “[w]hen compensatory damages are substantial” (and the Baker compensatory damages were unquestionably considered “substantial”) then “perhaps” punitive damages could not exceed the level of compensatory damages without “reach[ing] the outermost limit of the due process guarantee”.26 In other words, the 1:1 ratio announced in Baker may well apply only in circumstances in which the constitutional limit would also require a 1:1 ratio. The Baker Court explicitly recognised that similarity and quoted the relevant passage from Campbell in support of its conclusion.27 Its bottom line was that “[i]n this case, then, the constitutional outer limit may well be 1:1”.28 In short, the Court may not have taken advantage of the increased freedom that it had under maritime law, and the “new” rule may not have added much to the existing limitations on punitive damages. B. Vicarious Liability for Punitive Damages The primary focus of Exxon’s petition for certiorari in Baker was the extent to which an employer could be held vicariously liable for punitive damages based on the egregious misconduct of an employee.29 The explanation for that focus is simple: The most common reason for the Supreme Court to exercise its discretionary jurisdiction30 to hear a case on the merits is the existence of a conflict in the lower courts on an issue of federal law.31 Because the First,32 Fifth,33 Sixth,34 and Ninth35 Circuits had announced different standards for imposing vicarious liability for punitive damages, Exxon’s focus on that issue improved the chances that the Court would agree to review the Ninth Circuit’s judgment. The vicarious liability issue arose in Baker because of the procedural posture of the case. Under the instructions given to the jury, the only egregious misconduct properly before the Court was the Exxon Valdez captain’s inexplicable decision to leave the bridge 24 In the BP oil spill litigation, no punitive damages were ultimately awarded because the employees who were found to have acted recklessly, wilfully, and wantonly were not senior enough to subject BP to punitive damages under the governing law in the Fifth Circuit. See In re Deepwater Horizon, 21 F Supp 3d 657, 749–751 (ED La 2014); see also infra notes 70–75 and accompanying text. 25 538 US 408 (2003). 26 Ibid at 425. Under the Due Process Clause of the 14th Amendment of the US Constitution, no state shall “deprive any person of life, liberty, or property, without due process of law”. 27 See 554 US at 515 (quoting Campbell, 538 US at 425). 28 Ibid at 513 n 28. 29 See Baker Petition, supra note 16, at i, 11–15. 30 In US practice, a litigant generally seeks Supreme Court review by filing a petition for writ of certiorari and the Court agrees to hear the case on the merits by granting that petition, which is often described as “granting cert”. Granting cert in the United States is analogous to the UK Supreme Court’s granting leave to appeal. 31 See, e.g., Supreme Court Rule 10(a). 32 See CEH, Inc v F/V Seafarer, 70 F 3d 694, 705, 1996 AMC 467 (1st Cir 1995). 33 See In re P & E Boat Rentals, Inc, 872 F 2d 642, 652, 1989 AMC 2447 (5th Cir 1989). 34 See United States Steel Corp v Fuhrman, 407 F 2d 1143, 1148, 1969 AMC 252 (6th Cir 1969). 35 See, e.g., Protectus Alpha Navigation Co v North Pacific Grain Growers, Inc, 767 F 2d 1379 (9th Cir 1985).

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professor michael f. sturley shortly before it was necessary to execute a delicate manoeuvre in the environmentally sensitive waters of Prince William Sound.36 Although Exxon admitted that it was vicariously liable to the injured plaintiffs for the resulting compensatory damages, it argued that it should not be liable for punitive damages absent a finding that the corporation itself was culpable. The relevant issue is essentially one of line-drawing. Most maritime employers today (or at least most employers against whom plaintiffs seek substantial punitive damages awards) are corporations that can act only through their agents. If a corporate board of directors passed a resolution directing its captains to abandon the bridge at key times, that resolution would be an act of the corporation for which otherwise appropriate sanctions (including punitive damages) could be imposed directly without considering vicarious liability. Most would agree that the misconduct does not need to rise to the level of a board resolution; at least some individual employees’ actions should be imputed to the corporation. If the president of the company had been on board the vessel at the fateful time, and in the course of her employment she had ordered the captain to leave the bridge, the president’s decision would presumably be imputed to the corporation.37 But how far down the corporate ladder should vicarious liability go? Suppose that the captain had radioed the vice-president responsible for overseeing the operations of the company’s fleet and had asked for permission to leave the bridge. If that permission had been recklessly granted, would it have been enough to make the corporation liable for punitive damages? Or is the captain’s reckless decision to leave the bridge by itself enough to impose liability on the employer? If the captain had been blameless but the third mate had acted recklessly in failing to follow his instructions, would that have been enough? If all of the officers had acted properly, but the helmsman had recklessly failed to execute their orders, would that have been enough? If everyone on the bridge had acted properly, but the lookout had recklessly failed to perform her duties, would that have been enough to impose liability on the corporate employer for punitive damages? As a theoretical matter, maritime law could establish a rule based on just about any point along the spectrum. As a practical matter, the three most likely break points are (1) the employee in question must be one who is responsible for setting company policy,38 36 Although the jury heard substantial testimony that would have supported the conclusion that Exxon had knowingly and recklessly permitted a relapsed alcoholic to take command of a supertanker, it also heard evidence that would have supported the conclusion that Exxon acted appropriately and, in any event, the captain was not intoxicated at the time of the accident. Under its instructions, however, the jury was entitled to impose punitive damages on Exxon if either (1) Exxon itself was guilty of sufficiently egregious misconduct or (2) a “managerial employee”, such as the ship’s captain, was guilty of sufficiently egregious misconduct. Because a reviewing court has no way of knowing the basis on which the jury imposed punitive damages on Exxon, the Supreme Court was bound to assume that it might have been on either ground. Exxon conceded that the ship’s captain was reckless in leaving the bridge at the relevant time. 37 If that hypothetical seems too improbable, perhaps we could imagine a new passenger liner sailing across the north Atlantic in April on her maiden voyage from Southampton to New York with the company president on board. Despite reports of icebergs in the area, the company president might recklessly instruct the captain to sail full speed ahead to reach New York in record time. Cf David Ritchie, Shipwrecks; An Encyclopedia of the World’s Worst Disasters at Sea (2nd edn, Checkmark Books 1999), 219–220 (noting that the Titanic was proceeding at an unsafe speed, “possibly in response to pressure to make a record crossing”, and explaining that the company’s president was “perceived as a villain in the aftermath of the sinking”). 38 This appears to be the majority rule under the general maritime law in the lower courts, which have generally rejected an employer’s punitive-damages liability for the wrongdoing of lower-level employees (including those who would be considered “managerial”). See infra notes 66–75 and accompanying text.

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punitive damages in maritime cases – a view from across the pond (2) the employee must be one who acts in a “managerial” capacity,39 or (3) the employee must be acting within the scope of his or her employment.40 Exxon argued that the Court should adopt the first alternative and that the court of appeals had erred in adopting the second. In support of its position, Exxon relied primarily on dicta in the Supreme Court’s 1818 decision in The Amiable Nancy41 and modern decisions of the lower courts that followed those dicta.42 Baker43 defended the court of appeals’ decision and argued for the second alternative. In support of that argument, Baker distinguished the cases that Exxon had cited, noted that courts had articulated a wide range of different standards and relied heavily on the position adopted by the Restatements44 and the majority rule in the states.45 The Amiable Nancy – the principal authority supporting Exxon’s position – involved an armed privateer’s plundering of a neutral vessel during the War of 1812. The Supreme Court affirmed the shipowner-employer’s responsibility to pay compensatory damages to the owners of the neutral vessel but expressly recognised the unfairness of holding the employer vicariously liable in punitive damages for the wrongful conduct of the employees aboard the ship. It reasoned that the employer was not liable for punitive damages when the employer did not direct, countenance or participate “in the slightest degree” in the wrong.46 As Justice Story, writing for a unanimous Court, explained: [T]his is a suit against the owners of the privateer. . . . They are innocent of the demerit of this transaction, having neither directed it, nor countenanced it, nor participated in it in the slightest degree. Under such circumstances, we are of opinion that they are bound to repair all the real injuries and personal wrongs sustained by the [plaintiffs], but they are not bound to the extent of vindictive [i.e., punitive] damages.47

Even though Justice Story’s dicta appear to be directly on point – and Supreme Court dicta are often highly persuasive – the authority of The Amiable Nancy is open to challenge. Not only were the relevant statements undoubtedly dicta,48 the case is readily distinguishable on its facts not only from Baker but also from any case that would arise

39 This is the position taken by the relevant Restatements. See infra notes 44 and 55–63 and accompanying text. It might also be the majority rule under state law. See infra note 54 and accompanying text, but see infra note 52 and accompanying text. 40 This may be the majority rule under state law. See infra note 52 and accompanying text, but see infra note 54 and accompanying text. 41 16 US (3 Wheat.) 546, 2000 AMC 2693 (1818). 42 Brief for Petitioners at 18–20, Exxon Shipping Co v Baker, 554 US 471, 2008 AMC 1521 (2008) (No 07–219) (filed 17 December 2007) (available at 2007 WL 4439454) [hereinafter Exxon Brief]. 43 Grant Baker was the first-named plaintiff of a group representing a mandatory punitive damages class certified by the district court. His name therefore appears in the caption of the case. For convenience, I will use his name, “Baker”, to refer to the entire class of plaintiffs. 44 See Restatement (Second) of Torts § 909(c) (1979); Restatement (Second) of Agency § 217C(c) (1958). 45 Brief for Respondents at 21–36, Exxon Shipping Co v Baker, 554 US 471, 2008 AMC 1521 (2008) (No 07–219) (filed 22 January 2008) (available at 2008 WL 194284) [hereinafter Baker Brief]. 46 16 US (3 Wheat) at 558–559. 47 Ibid at 558–559. 48 All the Amiable Nancy statements about punitive damages were dicta. The district court had not awarded punitive damages and the Supreme Court’s opinion explicitly declared that “the only inquiry will be, whether any of the items allowed by the district court were improperly rejected by the circuit court”. Ibid at 559. The issue of punitive damages was not before the Court.

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professor michael f. sturley today.49 In any event, the dicta were not necessarily inconsistent with the managerial-agent rule that the court of appeals applied, and Baker advocated. The vessel’s first lieutenant, who was (at least arguably) not a managerial agent,50 commanded the guilty boarding party that discovered that the target was a neutral vessel (and nevertheless plundered her).51 The captain, who remained on the vessel, was not involved in the raid. State law and the Restatements strongly supported Baker’s position that punitive damages are available at least for the egregious misconduct of a managerial agent. In many states, arguably a majority, the normal respondeat superior standard for tort liability also applies to the imposition of punitive damages,52 meaning that an employer can be liable in punitive damages for the egregious misconduct of any employee acting within the scope employment, regardless of what more senior officials may have done. As the Supreme Court of Oklahoma declared over 90 years ago, “the legal malice of the servant is the legal malice of the corporation”.53 In other states, perhaps even a majority, an employer is liable for punitive damages only for the egregious misconduct of a managerial agent.54 Combining those two groups, however, a clear majority permit punitive damages to be imposed based on the egregious misconduct of at least a managerial agent. 49 The Amiable Nancy Court appeared to put at least some weight on the privateering context in which the case arose – a context that has been irrelevant for almost two centuries. That emphasis appears particularly in one of the secondary rationales that Justice Story included to support the Court’s holding: While the government of the country shall choose to authorize the employment of privateers in its public wars, with the knowledge that such employment cannot be exempt from occasional irregularities and improper conduct, it cannot be the duty of courts of justice to defeat the policy of the government, by burthening the service with a responsibility beyond what justice requires, with a responsibility for unliquidated damages, resting in mere discretion, and intended to punish offenders. Ibid at 559. That secondary rationale may have been completely unnecessary – Justice Story’s effort to pound yet another nail into a coffin that was already tightly sealed. But if that rationale was a serious part of the Court’s motivation to adopt its position (even in dicta), then the argument against vicarious liability would be at least somewhat less compelling outside of the privateering context. 50 The phrase “managerial capacity” is ambiguous. See, e.g., Kolstad v American Dental Association, 527 US 526, 543 (1999) (“‘no good definition of what constitutes a “managerial capacity” has been found’”.) (quoting J.D. Ghiardi and J.J. Kircher, Punitive Damages: Law and Practice (Callaghan 1988) § 24.05, at 14). It is accordingly difficult to say how the first lieutenant should be characterised. He did have command of an armed boat and the boarding party, which reflects at least some level of “managerial” authority, albeit less than the captains. 51 16 U S (3 Wheat) at 547. 52 See J.J. Kircher and C.M. Wiseman, Punitive Damages: Law and Practice 2d § 24:1 (2022 edn, West Group) (“[A] majority of jurisdictions follows [an] approach [under which] vicarious liability is imposed on the principal merely because the agent was acting within the scope of his or her employment at the time of the harm”.); Restatement (Third) of Agency § 7.03 cmt e, at 158 (2006) (“A slight majority of states hold that punitive damages may be awarded against a principal that is vicariously liable on the basis that an employee-agent acted within the scope of employment when committing a tort, without requiring any additional showing of culpability on the part of the employer”.). The Supreme Court itself has (in dicta) described the respondent superior standard as the majority rule. See American Society of Mechanical Engineers, Inc v Hydrolevel Corp, 456 US 556, 575 n14 (1982) (“A majority of courts . . . have held corporations liable for punitive damages imposed because of the acts of their agents, in the absence of approval or ratification”.). But other sources declare that the managerial-agent approach, see infra notes 55–59 and accompanying text, is the majority rule. See infra note 54 and accompanying text. 53 Mayo Hotel Co v Danciger, 143 Okla 196, 200, 288 P 309, 313 (1930). Although the Mayo Hotel court declared that it was following the majority rule in the state courts, it recognised that “[m]any of the state courts and a majority of the federal courts expressly adhere to” the doctrine “that a corporation cannot be subjected to exemplary damages because of the malicious, fraudulent, or oppressive tortious acts of its agents and servants where such acts are not authorized or afterwards ratified by the corporation”. 143 Okla at 200, 288 P at 312. 54 See J. D. Ghiardi and J. J. Kircher, Punitive Damages: Law and Practice § 24.01 (Callaghan 1988) (“[T]he majority of jurisdictions follow some form of the Restatement [(Second) of Torts] rule”.); see also ibid (“[A] substantial minority of the jurisdictions” follow the respondent superior standard.).

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punitive damages in maritime cases – a view from across the pond The highly influential Restatement (Second) of Torts,55 incorporating equivalent provisions from the earlier Restatement (Second) of Agency,56 adopted the managerial-agent approach in section 909: Punitive damages can properly be awarded against a master or other principal because of an act by an agent, if, but only if, (a) the principal or a managerial agent authorized the doing and the manner of the act, or (b) the agent was unfit and the principal or a managerial agent was reckless in employing or retaining him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the principal or a managerial agent of the principal ratified or approved the act.57 The key provision for vicarious liability is section 909(c).58 It recognises that most employers today are corporations that can act only through their employees and that at least some employees’ actions should be imputed to the corporation. Rather than limiting the class of such employees to those responsible for setting policy, or expanding the class to include all those who act in the course of employment, section 909(c) takes the middle ground and defines the class as those “employed in a managerial capacity”.59 While the Exxon Valdez litigation was pending in the courts, the Restatement (Third) of Agency became somewhat more accepting of the respondeat superior approach.60 Section 7.03 states the general rule for vicarious liability without distinguishing between compensatory and punitive damages. Comment e addresses punitive damages directly, recognising that [a] slight majority of states hold that punitive damages may be awarded against a principal that is vicariously liable on the basis that an employee-agent acted within the scope of employment when committing a tort, without requiring any additional showing of culpability on the part of the employer.61

The next sentence then notes that “[a] substantial minority of states follow the approach outlined in Restatement Second, Torts § 909, which requires a showing that the tortious conduct was that of a managerial agent or that the principal was otherwise implicated in the conduct”.62 Although the comment seems to acquiesce in the application of the majority respondeat superior approach, it concludes the paragraph with the assertion that 55 Restatement (Second) of Torts 1977, § 909. 56 Restatement (Second) of Agency 1957, § 217C. 57 Restatement (Second) of Torts 1977, § 909. 58 Subsections (a) and (d) apply when an employer makes the offending employee’s act its own – either authorising it (§ 909(a)) or ratifying or approving it (§ 909(d)). Subsection (b) holds the employer responsible for its own reckless behaviour. Of course, subsections (a), (b) and (d) also impose liability on the basis of the acts of a managerial agent, thus implicitly incorporating the key element of subsection (c). 59 Restatement (Second) of Torts 1977, § 909(c). 60 See Restatement (Third) of Agency 2006, § 7.03 cmt. e, at 158. 61 Ibid. 62 Ibid.

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professor michael f. sturley “[t]he approach outlined in § 909 is preferable because it requires consideration of circumstances relevant to a principal’s culpability”.63 For the time being, at least, the issue remains uncertain as a matter of maritime law. The Baker Court did not resolve the issue because the justices were evenly divided. Justice Alito was recused,64 and the remaining eight justices split 4–4 on the question. Thus, the court of appeals’ decision applying the managerial-agent standard was affirmed by an equally divided Court but the decision was “not precedential” on the issue.65 In the absence of a precedential decision of the Supreme Court, the best evidence of the general maritime law is generally found in the decisions of the lower courts. Unfortunately, there is no consensus among the lower courts, and it is accordingly impossible to say with any confidence what US maritime law provides on this question. The Fifth and Sixth Circuits have followed the Amiable Nancy dicta.66 In the decision below in Baker, the Ninth Circuit (following prior circuit precedent on the question67) applied the managerial-agent rule of the Restatement (Second) of Torts.68 And the First Circuit has adopted a middle ground requiring “some level of culpability” on the part of the employer.69 The issue arose again in the high-profile context of the litigation over the 2010 BP oil spill in the Gulf of Mexico. In In re Deepwater Horizon,70 the district court found that the conduct of BP’s senior drilling engineer and well site leader was “reckless, willful, and wanton”.71 Moreover, the court found that “the conduct exhibited by BP’s employees would make an award of punitive damages appropriate”.72 But the court followed Fifth Circuit precedent to exonerate BP from punitive damages liability, explaining: [T]he maritime rule in the Fifth Circuit is that operational recklessness or willful disregard [on the part of a corporation’s agents and employees] is generally insufficient to visit punitive damages upon the [corporate] employer. Rather, the [reckless or willful] conduct must emanate from corporate policy or . . . a corporate official with policy-making authority [must have] participated in, approved of, or subsequently ratified the egregious conduct.73

The court went on to find that the engineer and the well site leader “were not policymaking officials, nor did the reckless conduct emanate from corporate policy”.74 It also noted that BP would have been held liable for punitive damages under the law of the 63 Ibid. 64 Presumably Justice Alito did not participate in the decision because he owns Exxon Mobil stock. 65 Baker, 554 US at 484. 66 See In re P & E Boat Rentals, Inc, 872 F 2d 642, 652, 1989 AMC 2447 (5th Cir 1989); United States Steel Corp v Fuhrman, 407 F 2d 1143, 1148, 1969 AMC 252 (6th Cir 1969). 67 See Protectus Alpha Navigation Co v North Pacific Grain Growers, Inc, 767 F 2d 1379, 1986 AMC 56 (9th Cir 1985). 68 See Baker, 554 US at 481 (describing the Ninth Circuit’s decision in an earlier phase of the litigation). 69 See CEH, Inc v F/V Seafarer, 70 F 3d 694, 705, 1996 AMC 467 (1st Cir 1995). The First Circuit feared “that strict adherence to the [Amiable Nancy-Lake Shore] complicity approach would shield a principal, who, though not guilty of direct participation, authorization or ratification in his agent’s egregious conduct, nevertheless shares blame for the wrongdoing”. Ibid at 705. But it stopped “short of wholesale adoption of the Restatement because section 909(c), read literally, could impose liability in circumstances that do not demonstrate any fault on the part of the principal”. Ibid at 705. 70 21 F Supp 3d 657 (ED La 2014). 71 Ibid at 749. 72 Ibid. 73 Ibid. 74 Ibid at 750.

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punitive damages in maritime cases – a view from across the pond First and Ninth Circuits.75 With those findings, the case could well have provided an appropriate vehicle for the Supreme Court to resolve the issue that it could not decide in Baker, but no one petitioned for certiorari on the question. US maritime law accordingly remains uncertain. Although the Supreme Court has not decided whether or the extent to which the general maritime law recognises vicarious liability for punitive damages, it is still possible to speculate on what the Court would likely decide if the issue came back before it now. Based on their views in prior cases involving punitive damages, it seems likely that Chief Justice Roberts and Justices Alito, Gorsuch and Kavanaugh would support the Amiable Nancy rule while Justice Sotomayor would be likely to prefer the managerial-agent rule (or even the respondeat superior standard). The other four justices are harder to predict. Justice Thomas supported punitive damages in Townsend,76 but he retreated from that position in Batterton.77 Justice Kagan is generally considered more moderate than most of her colleagues, but she joined Justice Alito’s opinion in Batterton,78 which was extremely hostile to punitive damages. Justice Barrett is generally considered to be a member of the Court’s conservative bloc, but as a circuit judge her only opinion addressing punitive damages upheld an award (in a non-maritime case).79 Justice Jackson has almost no record as an appellate judge, but most observers predict that she will also line up to the left of most of her colleagues. With the Court’s current membership, therefore, it would not be surprising to see a 7–2 vote in favour of the Amiable Nancy rule. A more plaintifffriendly rule would likely require all four of the hard-to-predict justices to join Justice Sotomayor in rejecting the Amiable Nancy dicta. Stranger things have happened when a case reaches the Supreme Court, but at the moment it does not look very promising for plaintiffs seeking punitive damages. C. Statutory Displacement of Punitive Damages Exxon also made a long-shot argument to eliminate its liability for punitive damages entirely.80 In Miles v Apex Marine Corp.,81 the Supreme Court held that it would not permit loss-of-society damages when it recognised a new cause of action for wrongful death based on the unseaworthiness of a vessel. The Court reasoned that Congress had not authorised loss-of-society damages under the comparable Jones Act82 (which created a cause of action for wrongful death based on an employer’s negligence) and it would be inconsistent with the Court’s place in the constitutional scheme to create a new judicial

75 Ibid at 751. 76 See infra notes 120–138 and accompanying text. 77 See infra notes 206–207 and accompanying text. 78 See infra notes 206 and accompanying text. 79 See Green v Howser, 942 F 3d 772, 781–782 (7th Cir 2019) (upholding on particularly egregious facts awards of punitive damages that were each roughly half the amount of the compensatory damages). 80 If the Supreme Court had adopted the Amiable Nancy rule, Exxon would have avoided punitive damages only temporarily. The case would need to have been remanded to allow a jury to decide if Exxon itself had acted egregiously (as Baker had consistently argued). 81 498 US 19, 32, 1991 AMC 1, 10 (1990). 82 46 USC § 30104.

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professor michael f. sturley remedy that permitted a plaintiff to recover greater remedies than Congress had authorised under similar circumstances.83 Prior to Baker, a number of lower courts had adopted an expansive reading of Miles that essentially held that no plaintiff could recover more under a general maritime law cause of action (regardless of when it had been recognised) than Congress had allowed under a comparable statutory cause of action (even when that statute by its terms did not apply).84 Seizing on that broad reading, Exxon argued that the penalties for water pollution under the Clean Water Act85 do not include punitive damages, and therefore Baker should not be permitted to recover punitive damages under the general maritime law for water pollution.86 Exxon argued that the Clean Water Act displaced87 the general maritime law of punitive damages in water pollution cases. The Court unanimously rejected Exxon’s argument. It was “too hard to conclude that a statute expressly geared to protecting ‘water’, ‘shorelines’, and ‘natural resources’ was intended to eliminate sub silentio oil companies’ common law duties to refrain from injuring the bodies and livelihoods of private individuals”.88 III. Townsend Soon after Baker, the Supreme Court had another opportunity to address punitive damages in the maritime context in Atlantic Sounding Co. v Townsend,89 an interlocutory appeal addressing the availability of punitive damages for the “willful and wanton” failure to pay maintenance and cure to an injured seaman.90 The courts of appeals had split on the question. The Fifth91 and Ninth92 Circuits had ruled that punitive damages are categorically unavailable in maintenance-and-cure cases. At least93 the First94 and Eleventh95 Circuits permitted punitive damages when the defendant’s conduct in withholding maintenance and cure was sufficiently egregious.

83 498 US at 32–33. 84 See, e.g., Wahlstrom v Kawasaki Heavy Industries, 4 F 3d 1084, 1994 AMC 13 (2d Cir 1993). 85 33 USC § 1321. 86 See Exxon Brief, supra note 42, at 27–30. 87 The term “displacement” applies when a federal statute applies in place of federal common law (including the general maritime law). When a federal law applies in place of a state law, the term is “preemption”. See, e.g., D. W. Robertson, S. F. Friedell and M. F. Sturley, Admiralty and Maritime Law in the United States (4th edn, Carolina Academic Pr 2020) 110. 88 Baker, 554 US at 488–489. 89 557 US 404, 2009 AMC 1521 (2009). 90 Under the general maritime law, an employer is required to pay maintenance (room and board) and cure (medical expenses) to an injured member of a vessel’s crew without regard to fault. See generally, e.g., Warren v United States, 340 US 523, 1951 AMC 416 (1951). 91 See Guevara v Maritime Overseas Corp, 59 F 3d 1496, 1995 AMC 2409 (5th Cir 1995) (en banc), cert denied, 516 US 1046, 1996 AMC 2999 (1996), overruled by Townsend, 557 US 404, 2009 AMC 1521 (2009). 92 See Glynn v Roy Al Boat Management Corp, 57 F 3d 1496, 1995 AMC 2022 (9th Cir 1995), cert denied, 516 US 1046, 1996 AMC 2998 (1996), overruled by Townsend, 557 US 404, 2009 AMC 1521 (2009). 93 The Fifth Circuit suggested that other courts of appeals might also have permitted punitive damages in maintenance-and-cure cases. See Guevara, 59 F 3d at 1509–10. 94 See Robinson v Pocahontas, Inc, 477 F 2d 1048, 1050–51 (1st Cir 1973). 95 See, e.g., Hines v JA LaPorte, Inc, 820 F 2d 1187, 1988 AMC 1721 (11th Cir. 1987).

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punitive damages in maritime cases – a view from across the pond On one side of the conflict, the en banc Fifth Circuit had ruled in Guevara v Maritime Overseas Corp.96 that punitive damages were categorically unavailable in maintenanceand-cure cases.97 That court had reached its conclusion through the following five steps: (1) The Federal Employers’ Liability Act (FELA)98 gave injured railroad workers an expanded statutory cause of action against their employers for negligence.99 Under the Supreme Court’s 1913 decision in Michigan Central Railroad Co. v Vreeland,100 however, FELA authorised only “pecuniary”101 damages.102 (In this first step of its analysis, the Guevara court closely followed the Supreme Court’s 1990 reasoning in Miles v Apex Marine Corp.,103 which held that loss-of-society damages are not recoverable for wrongful death in an unseaworthiness action.104) (2) When Congress passed the Jones Act105 in 1920, seven years after Vreeland, it incorporated FELA (including the Vreeland judicial gloss) by reference.106 Injured seamen suing for negligence under the Jones Act can therefore recover only what railroad workers can recover under FELA – pecuniary damages.107 (In this second step of the Guevara analysis, the Fifth Circuit once again followed the Supreme Court’s earlier reasoning in Miles.108) (3) Because punitive damages are non-pecuniary,109 injured seamen cannot recover punitive damages under the Jones Act.110 (On this point, the Guevara court went

96 59 F 3d 1496, 1995 AMC 2409 (5th Cir 1995) (en banc), cert. denied, 516 US 1046, 1996 AMC 2999 (1996), overruled by Townsend, 557 US 404, 2009 AMC 1521 (2009). 97 See also, e.g., Glynn v Roy Al Boat Management Corp, 57 F 3d 1496, 1995 AMC 2022 (9th Cir 1995), cert. denied, 516 US 1046, 1996 AMC 2998 (1996), overruled by Townsend, 557 US 404, 2009 AMC 1521 (2009). 98 45 USC §§ 51–60. Congress enacted FELA in 1908, ch 149, 35 Stat 65, after an earlier attempt had been held unconstitutional. The Act has since been amended a few times. 99 At common law, railroad workers – unlike seamen, see The Osceola, 189 US 158, 175, 2000 AMC 1207, 1215 (1903) – could sue their employers for negligence. Those suits often failed because of the “unholy trinity” of affirmative defences: assumption of risk, contributory negligence, and fellow servant. FELA gave railroad workers greater rights to recover for negligence than they had at common law, primarily by eliminating those three defences, but also by creating a federal wrongful-death remedy. 100 227 US 59 (1913). 101 It is unclear what is meant by “pecuniary” in this context. See infra note 109. 102 See Guevara, 59 F 3d at 1505 & n 6. 103 498 US 19, 32, 1991 AMC 1, 10 (1990). 104 See also supra notes 81–84 and accompanying text. 105 46 USC § 30104. The Jones Act gave injured seamen a statutory cause of action against their employers for negligence, thus partially overruling The Osceola, 189 US at 175, 2000 AMC at 1215. 106 See Panama Railroad Co v Johnson, 264 US 375 (1924). 107 See Guevara, 59 F 3d at 1505. 108 498 US at 32, 1991 AMC at 10–11. 109 The assertion that punitive damages are “non-pecuniary” is at best controversial. See, e.g., D.W. Robertson, “Punitive Damages in US Maritime Law: Miles, Baker, and Townsend” (2010) 70 La L Rev 463, 473–475 (arguing that punitive damages are better characterised as “pecuniary” than “non-pecuniary”, not only now but also at the times that Miles and Vreeland were decided); D.W. Robertson, “Punitive Damages in American Maritime Law” (1997) 28 J Mar L & Com 73, 80–82 (suggesting that “pecuniary” and “non-pecuniary” are categories of compensatory damages, and the punitive damages are completely different); R. Force, “The Curse of Miles v Apex Marine Corp.: The Mischief of Seeking ‘Uniformity’ and ‘Legislative Intent’ in Maritime Personal Injury Cases” (1995) 55 La L Rev 745, 777 (criticising courts that have relied on a distinction between “pecuniary” and “non-pecuniary” damages “without much analysis”). 110 See Guevara, 59 F 3d at 1506 & n 7.

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professor michael f. sturley beyond anything that the Supreme Court had held or said in Miles,111 but several lower courts had previously extended Miles in the same fashion.112) (4) Under a broad reading of Miles, an injured seaman cannot recover more under the general maritime law than could be recovered under the Jones Act under comparable circumstances.113 (Once again, the Guevara court on this point went beyond what the Supreme Court had held or said in Miles.114) (5) Punitive damages are therefore unavailable in maintenance-and-cure actions under the general maritime law.115 In reaching its conclusion, the Fifth Circuit also overruled prior decisions116 to hold that punitive damages are equally unavailable in unseaworthiness actions on the ground that unseaworthiness and maintenance-and-cure actions, both of which arise under the general maritime law, are indistinguishable for purposes of the Miles analysis.117 When the Eleventh Circuit adhered to pre-Miles decisions118 that recognised an injured seaman’s right to seek punitive damages for the wilful and wanton failure to pay maintenance and cure,119 the Supreme Court granted certiorari to resolve the conflict. Justice Thomas wrote the majority opinion for a 5–4 Court in Townsend that affirmed the Eleventh Circuit. His reasoning process was completely different than the Fifth Circuit’s Guevara approach.120 The analysis began by documenting how “[p]unitive damages have long been an available remedy at common law for wanton, willful, or outrageous conduct”.121 That general common law rule “extended to claims arising under federal maritime law.122 “Although punitive damages awards were rarely upheld on judicial review, . . . that fact does not draw into question the basic understanding that punitive damages were considered an available maritime remedy”.123 And “[n]othing in maritime law undermines the applicability of this general rule in the maintenance and cure context”.124 The only plausible statutory basis for departing from the common law rule would be the Jones

111 The Miles Court said nothing about punitive damages except when describing the proceedings below. See 498 US at 22, 1991 AMC at 2. 112 See, e.g., Horsley v Mobil Oil Corp., 15 F.3d 200, 203, 1994 AMC 1372, 1377 (1st Cir. 1994); Wahlstrom v Kawasaki Heavy Industries, 4 F.3d 1084, 1094, 1994 AMC 13, 28–30 (2d Cir. 1993); Miller v American President Lines, Ltd., 989 F.2d 1450, 1454–59 (6th Cir. 1993). 113 See Guevara, 59 F 3d at 1504–07. 114 The Miles Court had focused on the extent to which it felt that Congressional action constrained it in defining the available remedies when it created a new cause of action. See 498 US at 24–27, 31–33, 1991 AMC at 4–7, 10–11. It said nothing about whether pre-existing remedies would continue to be available when Congress passed legislation in analogous areas. 115 See Guevara, 59 F 3d at 1510–13. 116 See, e.g., In re: Merry Shipping, Inc, 650 F 2d 622, 1981 AMC 2839 (5th Cir Unit B July 1981). 117 See Guevara, 59 F 3d at 1504 (“[E]ven though Merry Shipping dealt with punitive damages in an unseaworthiness context, the analysis . . . was wholly applicable to maintenance and cure cases as well”.), ibid at 1507 n 10 (explaining why the result in a maintenance-and-cure case should be the same as in an unseaworthiness case). 118 See, e.g., Hines v JA LaPorte, Inc, 820 F 2d 1187, 1988 AMC 1721 (11th Cir 1987). 119 See Atlantic Sounding Co v Townsend, 496 F 3d 1282, 2007 AMC 2009 (11th Cir 2007), aff’d, 557 US 404, 2009 AMC 1521 (2009). 120 See supra notes 96–117 and accompanying text. 121 Townsend, 557 US at 409. 122 Ibid at 411. 123 Ibid at 412 n 2. 124 Ibid at 412.

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punitive damages in maritime cases – a view from across the pond Act, “but it did not eliminate pre-existing remedies available to seamen for the separate common-law cause of action based on a seaman’s right to maintenance and cure”.125 The defendant employer in Townsend relied heavily on the Fifth Circuit’s Guevara decision to argue that Miles limited the availability of punitive damages under the general maritime law, including in maintenance-and-cure cases. The Court rejected that argument. That “reading of Miles [wa]s far too broad”.126 The Miles Court did not address maintenance and cure or punitive damages; it focused on “whether general maritime law should provide a cause of action for wrongful death based on unseaworthiness”,127 which the general maritime law had not recognised prior to the Jones Act.128 Miles recognised the wrongful-death cause of action in the unseaworthiness context, but in deciding what remedies should be available for this new cause of action the Court looked to the remedies that Congress had provided by statute in comparable circumstances. In that respect, “[t]he reasoning of Miles remain[ed] sound”.129 But Miles did not apply in Townsend because “both the general maritime cause of action (maintenance and cure) and the remedy (punitive damages) were well established before the passage of the Jones Act”.130 “The laudable quest for uniformity in admiralty does not require the narrowing of available damages to the lowest common denominator approved by Congress for distinct causes of action”.131 The Townsend Court’s analysis relied heavily on the availability of punitive damages at common law132 and “the basic understanding that punitive damages were considered an available maritime remedy”, even if they “were rarely upheld on judicial review”,133 but it did not place much weight on any history of actual awards of punitive damages in maintenance-and-cure cases. The most the Court could say was that “the failure of a vessel owner to provide proper medical care for seamen has provided the impetus for damages awards that appear to contain at least some punitive element”.134 In support, it cited two district court decisions – The City of Carlisle135 and The Troop.136 The Court admitted that those early cases “do not definitively resolve the question of punitive damages availability in such cases”, but it treated them as illustrations confirming the general rule permitting punitive damages in maritime cases.137 Because nothing in Miles or the Jones Act would preclude the availability of punitive damages for the withholding of maintenance-and-cure payments, the Townsend Court did not address the argument that punitive damages are unavailable under the Jones Act.138 125 Ibid at 415–416. 126 Ibid at 419. 127 Ibid. 128 See The Harrisburg, 119 US 199 (1886). The Supreme Court finally recognised a wrongful-death cause of action under the general maritime law (and overruled The Harrisburg) in Moragne v States Marine Lines, Inc, 398 US 375, 1970 AMC 967 (1970). Prior to 1920, the only causes of action for wrongful death in the maritime context were under state law. See, e.g., Old Dominion SS Co v Gilmore (The Hamilton), 207 US 398 (1907). 129 Townsend, 557 US at 420. 130 Ibid. 131 Ibid at 424. 132 Ibid at 409–410; see supra note 121 and accompanying text. 133 557 US at 412 n 2; see supra notes 122–123 and accompanying text. 134 557 US at 414. 135 39 F 807, 809, 810–812, 817 (D Ore 1889). 136 118 F 769, 770–771, 773 (D Wash 1902). 137 557 US at 414 n 4. 138 Ibid at 424 n 12.

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professor michael f. sturley The general maritime law permitted punitive damages for the withholding of maintenanceand-cure payments regardless of their status under the Jones Act. Justice Alito, joined by Chief Justice Roberts, Justice Scalia and Justice Kennedy, dissented. He recognised the power of the Court “to continue the development of maritime law ‘in the manner of a common law court’”.139 But in exercising that power, he argued that the Court should follow the broad reading of Miles that the Fifth Circuit had adopted in Guevara. Because a maintenance-and-cure claim justifying punitive damages would necessarily involve the employer’s serious fault, the seaman could bring the claim under the general maritime law or the Jones Act.140 “The Miles uniformity principle therefore weighs strongly in favor of a rule that applies uniformly under general maritime law and the Jones Act”.141 Because Justice Alito would not permit the general maritime law to award more than the Jones Act, he needed to address the question (which the majority had avoided142) whether punitive damages are available under that statute. Relying primarily on dicta in two Supreme Court FELA cases and one Jones Act case addressing compensatory damages, he concluded that it was “reasonable to assume that only compensatory damages may be recovered under the Jones Act”.143 Justice Alito challenged the majority’s reasoning in two other respects. He recognised that “the Jones Act was not meant to preclude general maritime claims or remedies”, but he argued that the Jones Act still permitted “the development of general maritime law by the courts”.144 And the courts should be guided by Congress in that development. Because Congress, in his view, did not permit punitive damages under the Jones Act, the courts should follow that example to deny punitive damages under the general maritime law.145 Justice Alito challenged the majority’s discussion of the history, too. He did not find two “obscure” cases to be sufficient evidence that punitive damages were available for the withholding of maintenance and cure prior to the Jones Act, and he did not agree that the two cases on which the majority relied necessarily included an award of punitive damages.146 Other cases cited by the plaintiff and a supporting amicus – cases on which the majority chose not to rely – were even weaker.147 “In sum, the search for maintenance and cure cases in which punitive damages were awarded yields strikingly slim results. The

139 557 US at 425 (Alito J, dissenting) (quoting Baker, 554 US at 489–490). 140 Ibid at 426–427. 141 Ibid at 427. 142 See 557 US at 424 n 12; see also supra note 138 and accompanying text. 143 557 US at 428 (Alito J, dissenting) (citing Vreeland, 227 US at 65; St Louis, IM & SR Co v Craft, 237 US 648, 658 (1915); Pacific S Co v Peterson, 278 US 130, 136–139 (1928)). Justice Alito also cited a court of appeals decision. See ibid (citing Miller v American President Lines, Ltd., 989 F 2d 1450, 1457 (6th Cir 1993)). 144 557 US at 429 (Alito J, dissenting). 145 Ibid. 146 Ibid at 429–431. Even the Townsend majority seemed unsure whether the two cited cases actually included an award of punitive damages. It conceded that “these cases do not refer to ‘punitive’ or ‘exemplary’ damages”, but relied on the fact that “scholars have characterized the awards authorized by these decisions as such”. 557 US at 414 n 3 (citing D. W. Robertson, “Punitive Damages in American Maritime Law” (1997) 28 J Mar L & Com 73, 103–105; P. Edelman “Guevara v. Maritime Overseas Corp: Opposing the Decision” (1996) 20 Tul Mar LJ 349, 351 & n 22. The majority claimed only that the two cases “appear to contain at least some punitive element”. 557 US at 414; see also supra notes 134–137 and accompanying text. 147 557 US at 431 (Alito J, dissenting).

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punitive damages in maritime cases – a view from across the pond cases found are insufficient in number, clarity, and prominence to justify departure from the Miles uniformity principle”.148 IV. Batterton The Supreme Court’s most recent decision addressing punitive damages in the maritime context is Dutra Group v Batterton,149 which retreated from Townsend on several key points and held that punitive damages are categorically unavailable in unseaworthiness cases. Dutra employed Christopher Batterton on its vessel, the SCOW 3, in waters off the California coast. When a hatch cover blew open as a result of pressurised air that had been allowed to build up in the compartment below, it crushed his left hand, leaving him permanently disabled and in need of ongoing medical care. He sued Dutra in federal district court, alleging negligence under the Jones Act, breach of the duty to provide maintenance and cure, and breach of the duty to provide a seaworthy vessel. On the unseaworthiness count, he alleged that Dutra “willfully, wantonly and callously breached the warranty of seaworthiness” and requested punitive damages.150 Relying on Miles, Dutra moved to strike or dismiss the request for punitive damages on the unseaworthiness claim. The district court, denying that motion, followed the Ninth Circuit’s binding decision in Evich v Morris,151 which explicitly held that “punitive damages are available in unseaworthiness claims under general maritime law”.152 The district court then certified the issue for immediate appeal,153 and the court of appeals agreed to hear the interlocutory appeal. The Ninth Circuit affirmed.154 It explained that it was bound by its prior decision in Evich.155 Rejecting Dutra’s argument that Miles had overruled Evich, the court reasoned that limitations on recoveries by family members for wrongful death, which the Miles Court addressed, have no application to general maritime law claims by living seamen for injuries to themselves.156 In addition, the court questioned Dutra’s premise that rejecting recovery of non-pecuniary damages should necessarily preclude punitive damages. “[I]t is not apparent”, the court stated, “why barring damages for loss of society” – a form of compensatory damages – “should also bar punitive damages”.157 “That a widow may not recover damages for loss of the companionship and society of her husband has nothing to do with whether a ship or its owners and operators deserve punishment for callously disregarding the safety of seamen”.158 The Ninth Circuit also held that, under 148 Ibid. 149 139 S Ct 2275, 2019 AMC 1521 (2019). 150 Batterton did not seek punitive damages on the Jones Act count. The Ninth Circuit had previously held that punitive damages are unavailable under the Jones Act, see Kopczynski, 742 F 2d at 560–561, and he chose not to challenge circuit precedent. 151 819 F 2d 256, 1988 AMC 74 (9th Cir 1987). 152 Ibid at 258. 153 See 28 USC § 1292(b). 154 Batterton v Dutra Group, 880 F 3d 1089, 2018 AMC 1 (9th Cir 2018), rev’d, 139 S. Ct. 2275, 2019 AMC 1521 (2019). 155 Batterton, 880 F 3d at 1091. 156 Ibid at 1096. 157 Ibid at 1094. 158 Ibid.

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professor michael f. sturley Townsend, it would reach the same conclusion even if Evich were not binding. The court of appeals repeatedly cited and quoted the Townsend Court’s recognition that, “‘[h]istorically, punitive damages have been available and awarded in general maritime actions’”159 and that “‘nothing in Miles or the Jones Act eliminates that availability’”.160 Because “[u]nseaworthiness is a general maritime action long predating the Jones Act”,161 the court saw “no persuasive reason to distinguish maintenance and cure actions” addressed in Townsend “from unseaworthiness actions with respect to the damages awardable”.162 In light of Townsend, the Ninth Circuit perceived no inconsistency between permitting punitive damages for unseaworthiness claims and denying them for Jones Act claims. The Supreme Court reversed the Ninth Circuit and ruled 6–3 that punitive damages are categorically unavailable in an unseaworthiness case.163 Writing for the majority, Justice Alito noted that, as this was an admiralty case, the Court was required to “proceed ‘in the manner of a common law court’”.164 When “Congress has not prescribed specific rules”, he explained, the federal courts must develop the general maritime law to govern the situation. But in deciding how to develop the general maritime law, the courts should look to Congress “‘for policy guidance’”.165 He characterised Townsend as a departure from Congress’s policies justified by “centuries of relevant case law”.166 A different result was required in Batterton “because there is no historical basis for allowing punitive damages in unseaworthiness actions”.167 The opinion began with a long discussion of the historical background in which the Batterton Court minimised the historical significance of the unseaworthiness doctrine,168 implicitly suggesting that the entire doctrine was a mistake as applied to personal injuries.169 The primary purpose of the background discussion was apparently to stress that “unseaworthiness . . . grew out of causes of action unrelated to personal injury”,170 and it was not until “the late 1940s” that “the Court transformed the old claim of unseaworthiness . . . into a strict-liability claim”.171 The opinion continued with a short summary of the facts and procedural history.172 The Court finally began its analysis with the declaration that its resolution of the question was governed by Miles and Townsend. To decide how those cases applied, the Court addressed three considerations: (1) “whether punitive damages have traditionally been 159 Ibid at 1091, 1095, 1096 n.78 (each time quoting Townsend, 557 US at 407). 160 Ibid at 1095, 1096 n.78 (each time quoting Townsend, 557 US at 407). 161 Ibid at 1095. 162 Ibid at 1096. 163 Dutra Group v Batterton, 139 S Ct 2275, 2019 AMC 1521 (2019). 164 Ibid at 2278 (quoting Baker, 554 US at 489–490). 165 Ibid (quoting Miles, 498 US at 27). 166 Ibid. 167 Ibid. 168 See ibid at 2278–82. 169 See, e.g., ibid at 2280 & n 3 (declaring that “most” of the cases that “allowed recovery for personal injury” were decided “in ‘erroneous reliance’ on certain passages in Dixon v The Cyrus, 7 F Cas 755 (No 3,930) (Pa 1789)”.) (quoting F. L. Tetreault, “Seaman, Seaworthiness, and the Rights of Harbor Workers” (1954) 39 Cornell LQ 381, 390); ibid (describing unseaworthiness as “a suspect basis for personal injury claims until 1903”); ibid at 2281 (criticising the Court’s expansion of the doctrine in Mahnich) (citing Tetreault, supra, 39 Cornell LQ at 397–398). 170 Ibid at 2279. 171 Ibid at 2281. 172 See ibid at 2282–83.

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punitive damages in maritime cases – a view from across the pond awarded for claims of unseaworthiness”,173 (2) whether conformity with parallel statutory schemes would require such damages”,174 and (3) whether “policy grounds” supported “punitive damages for unseaworthiness claims”.175 On the first consideration, the Court concluded that “the overwhelming historical evidence” did not support punitive damages.176 The majority was not persuaded that any of the early cases on which the injured seaman relied actually involved an award of punitive damages for unseaworthiness.177 Based on the plaintiff’s inability to persuade the Court that punitive damages had been awarded in an early unseaworthiness case, the Court “conclude[d] that, unlike maintenance and cure, unseaworthiness did not traditionally allow recovery of punitive damages”.178 On the second consideration, the Court followed essentially the same analysis that the Fifth Circuit had adopted in Guevara when extending the Miles reasoning to prohibit punitive damages both for the wrongful failure to pay maintenance and cure and for unseaworthiness.179 “The Jones Act adopts the remedial provisions of FELA”,180 and FELA plaintiffs could recover only for their actual pecuniary loss.181 Lower federal courts “have unanimously held that punitive damages are not available under FELA”182 and “have uniformly held that punitive damages are not available under the Jones Act”.183 Although Batterton argued that the lower courts had misconstrued FELA and the Jones Act, “because of the absence of historical evidence to support punitive damages”, the Court would “not reopen this question of statutory interpretation”.184 It instead followed “Miles’s command that federal courts should seek to promote a ‘uniform rule applicable to all actions’ for the same injury, whether under the Jones Act or the general maritime law”.185 To justify its decision to follow Miles when the Townsend Court had decided that the Miles analysis did not justify denying punitive damages in the maintenance-and-cure context, the Batterton Court worked hard to distinguish the earlier case. Indeed, the theme that unseaworthiness claims are entirely different from maintenance-and-cure

173 Ibid at 2283. 174 Ibid. 175 Ibid. 176 Ibid at 2283–84. 177 The Court found The Rolph, 293 F 269, 271 (ND Cal 1923), and 299 F 52, 54 (9th Cir 1924), unpersuasive because neither the district court nor the court of appeals spoke “in terms of an exemplary or punitive award”. 139 S Ct at 2283. And to the extent that The Rolph “involve[d] a sub silentio punitive award”, the Court dismissed it as “‘one dust-covered case’”. 139 S Ct at 2283 n.6 (quoting McBride v Estis Well Service, LLC, 768 F 3d 382, 397 (2014) (Clement J, concurring)). The Court found The Noddleburn, 28 F 855, 857–858 (D Ore 1886), aff’d, 30 F 142 (CCD Or 1887); The City of Carlisle, 39 F 807 (D Ore 1889); and The Troop, 118 F 769 (D Wash 1902), aff’d, 128 F 856 (9th Cir 1904), unpersuasive because it concluded that any award of punitive damages in any of those cases was based on the failure to provide maintenance and cure, not on unseaworthiness. 139 S Ct at 2284. 178 139 S Ct at 2284. 179 See supra notes 96–117 and accompanying text. 180 139 S Ct at 2284. 181 Ibid at 2284–85. 182 Ibid at 2285. 183 Ibid. 184 Ibid. 185 Ibid (quoting Miles, 498 US at 33).

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professor michael f. sturley claims pervades the opinion, starting with the introductory paragraphs,186 accelerating in the background discussion187 and continuing through the analysis.188 On the third consideration, the Court raised a hodgepodge of different arguments, some of which overlapped with the first two considerations. The first paragraph of the policy discussion, for example, reiterated the Miles argument, paraphrasing Miles to reject “more expansive liabilities on a claim governed by strict liability than Congress has imposed for comparable claims based in negligence”.189 The analysis concluded with three specific policy arguments. (1) Vessel owners already have adequate incentives to ensure that their vessels are seaworthy.190 (2) “Allowing punitive damages on unseaworthiness claims would . . . create bizarre disparities in the law”.191 More specifically, the Court asserted that punitive damages would be available for personal-injury claims but not for wrongful-death claims. And it believed that punitive damages would be available against a vessel owner but not against the vessel operator, who in fact has more control over the condition of the vessel. (3) If punitive damages were available in the United States but not in civil-law countries, it “would place American shippers [sic; Justice Alito presumably intended “shipowners” or “carriers”] at a significant competitive disadvantage and would discourage foreign-owned vessels from employing American seamen”.192 Justice Ginsburg, joined by Justices Breyer and Sotomayor, dissented. She carefully analysed the Court’s prior decisions in Miles and Townsend, explained why nothing in Miles precluded punitive damages for unseaworthiness,193 and applied the framework in Townsend to conclude that punitive damages should be available in an unseaworthiness action.194 Although she did not address whether punitive damages are available under the Jones Act,195 she argued that nothing in the Jones Act precludes an award of punitive damages in an unseaworthiness case.196 Finally, she disagreed with the majority’s policy arguments. She saw no evidence that punitive damages would interfere with maritime commerce, and she did not consider the majority’s asserted “disparities” to be “bizarre”.197 If there is any “bizarre disparit[y]”, it is the one the Court today creates: Punitive damages are available for willful and wanton breach of the duty to provide maintenance and cure, but not for similarly culpable breaches of the duty to provide a seaworthy vessel.198

Batterton undoubtedly represents a retreat from the Court’s decision in Townsend. While the Batterton majority adhered to the narrow holding in Townsend – punitive 186 Ibid at 2278. 187 Ibid at 2278–82. See supra notes 168–171 and accompanying text. 188 139 S Ct at 2286. 189 Ibid (citing Miles, 498 US at 36). 190 Ibid at 2286–87. 191 Ibid at 2287. 192 Ibid. 193 139 S Ct at 2289–90 (Ginsburg J, dissenting). 194 Ibid at 2290–93 (Ginsburg J, dissenting). 195 In a footnote, Justice Ginsburg suggested that the availability of punitive damages under the Jones Act was still an open question. See ibid at 2291 n 5 (Ginsburg J, dissenting). 196 Ibid at 2291–93 (Ginsburg J, dissenting). 197 Ibid at 2293 (Ginsburg J, dissenting). 198 Ibid (Ginsburg J, dissenting).

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punitive damages in maritime cases – a view from across the pond damages are still available in the maintenance-and-cure context – important aspects of the Townsend reasoning are now questionable. Most significantly, the Townsend Court put the burden on the party seeking to deny a traditional common law remedy (the defendant) to show that the remedy was unavailable in the particular context.199 The Batterton Court instead put the burden on the party asserting the traditional remedy (the plaintiff) to show that it had previously been awarded in that precise context.200 That shift in the burden was dispositive.201 Dutra offered no evidence to support its assertion that punitive damages were not available in unseaworthiness actions,202 and the Court did not cite any pre-Jones Act decisions holding (or any other evidence suggesting) that punitive damages were categorically unavailable in unseaworthiness actions (or even a pre-Jones Act decision denying punitive damages in an unseaworthiness case). If the Court had faithfully applied the Townsend burden, it would have reached the opposite conclusion. Batterton similarly rejected Townsend’s narrow reading of Miles. The Townsend Court had explicitly rejected the defendant’s broad reading (which had tracked the Fifth Circuit’s Guevara approach), and instead limited Miles to cases in which the Court was deciding which remedies would be available for a new cause of action.203 It declared that “[t]he laudable quest for uniformity in admiralty does not require the narrowing of available damages to the lowest common denominator approved by Congress for distinct causes of action”.204 Batterton gave Miles an expansive reading, using it to limit previously available remedies for an established cause of action. The Batterton majority seemed perfectly comfortable with a lowest-common-denominator approach. It is no surprise that Justice Alito would be willing to jettison the Townsend framework in favour of a more defendant-friendly approach. He wrote a vigorous dissent in Townsend and would probably have been happy to overrule that decision entirely.205 Maybe Chief Justice Roberts, who joined the Townsend dissent, and Justices Gorsuch and Kavanaugh, who were not on the Supreme Court when Townsend was decided, would also have been willing to overrule Townsend. But Justice Thomas’s vote was most likely needed to form the majority,206 and he was presumably unwilling to overrule a decision in which he had 199 See 557 US at 414–415 (“there is no evidence that claims for maintenance and cure were excluded from this general admiralty rule”), 418 (“[Defendants] do not . . . identify any cases establishing that [punitive] damages were historically unavailable for breach of the duty of maintenance and cure”.). 200 See 139 S Ct at 2283–84 (discussing and rejecting plaintiff’s arguments that punitive damages were available before 1920 in unseaworthiness cases and rejecting as irrelevant evidence that punitive damages were available before 1920 in closely analogous general maritime law cases, without addressing any evidence that punitive damages were not available). 201 Cf ibid at 2284 (“The lack of punitive damages in traditional maritime law cases is practically dispositive”.). 202 At oral argument, counsel for Dutra conceded that he had been unable to find a single pre-Jones Act decision holding that punitive damages were unavailable for unseaworthiness. Transcript of Oral Argument at 17, Batterton (25 March 2019) (No 18–266). 203 Townsend, 557 US at 419; see supra note 126 and accompanying text. 204 557 US at 424. 205 Developments since Batterton have vividly (and very publicly) demonstrated Justice Alito’s willingness to overrule well-established precedents with which he disagrees. See, e.g., Dobbs v Jackson Women’s Health Organization, 142 S Ct 2228 (2022) (overruling Roe v Wade, 410 US 113 (1973), Planned Parenthood of Southeastern Pennsylvania v Casey, 505 US 833 (1992), and other cases). 206 Like Justices Gorsuch and Kavanaugh, Justice Kagan joined Justice Alito’s majority opinion in Batterton and was not on the Supreme Court when Townsend was decided. (She was then the Solicitor General.) In view of

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professor michael f. sturley written the majority opinion. The great mystery is why he was willing to largely abandon his originalist approach and join an opinion that implicitly rejected the framework that he established in Townsend. One explanation for Justice Thomas’s change of position may be that Justice Alito’s Batterton opinion does not fully correspond to the reasoning that actually produced the decision. Broadly speaking, the Court had two plausible routes that it might have followed to reverse the Ninth Circuit. As the ultimate arbiter of maritime law, acting “in the manner of a common law court”,207 the Supreme Court could simply have adopted its own policy preferences and held that punitive damages are unavailable in unseaworthiness actions because it has the power to decide how the general maritime law should develop. Alternatively, it could have followed the Fifth Circuit’s Miles-based reasoning and held that it was constrained by Congress’s decision in an analogous area. Although the Miles constraint is one of the Court’s own making, that alternative approach has at least the appearance of shifting some of the responsibility for the decision to Congress. The Batterton opinion appears to rely heavily on the Miles approach, but it shows signs of each approach. And there is ample reason to think that the policy approach may have been the more important. It is understandable why Justice Alito might have preferred to write the opinion largely as an application of Miles. Most obviously, the Court is often sensitive to the criticism that its decisions are based on the justices’ own policy preferences rather than on “the law”. That criticism should be irrelevant in the context of the general maritime law, a field in which the Court is charged with deciding what “the law” should be, “subject to the authority of Congress to legislate otherwise if it disagrees with the judicial result”.208 But it is understandable that the justices might prefer not to hear the criticism at all.209 With the Miles approach, the Court could claim to be following established law (and giving effect to the policy established by Congress). Despite the preference for the Miles approach, in Batterton it could well have been merely the ostensible rationale for the decision, and not the actual driving force behind the decision. The Miles-based reasoning was particularly weak; the Court did not even make a serious effort to justify the essential steps of the Miles reasoning.210 The entire basis for the Miles reasoning is that punitive damages are unavailable under FELA and her strong respect for stare decisis, see, e.g., Knick v Township of Scott, Pennsylvania, 139 S. Ct. 2162, 2189–90 (2019) (Kagan J, dissenting); Janus v American Federation of State, County, and Municipal Employees, Council 31, 138 S Ct 2448, 2497–2501 (2018) (Kagan J, dissenting), it seems highly unlikely that she would have been willing to overrule Townsend. Indeed, it seems unlikely that she would have joined Justice Alito’s majority opinion in Batterton if Justice Thomas – the author of Townsend – had argued that Townsend required the Court to affirm the Ninth Circuit. 207 Baker, 554 US at 489–490; see also supra notes 14–17 and accompanying text. 208 554 US at 490. 209 Justice Alito, in particular, appears to be unusually sensitive to any criticism whatsoever. See, e.g., A. Serwer, “By attacking me, Justice Alito proved my point” (The Atlantic, 12 October 2021) (discussing Justice Alito’s response to a journalist’s criticism). 210 In addition to the fundamental problem discussed in the text, another weakness going to an essential step of the Miles reasoning was the Batterton Court’s unsupported assertion that “our holding in Miles . . . limited recovery to compensatory damages in wrongful-death actions”. 139 S Ct at 2287. Although a broad reading of Miles could arguably provide some support to that conclusion, it was certainly not the Court’s holding. Indeed, the relevant portion of the Miles opinion held that the plaintiff could not recover a particular category of compensatory damages – loss-of-society damages.

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punitive damages in maritime cases – a view from across the pond thus under the Jones Act. But the Court forthrightly admitted that “because of the absence of historical evidence to support punitive damages” in the unseaworthiness context it would not examine “this question of statutory interpretation”.211 Instead the Court simply asserted, on the basis of conclusory lower-court decisions and secondary authority,212 that punitive damages are unavailable under the Jones Act. It is not generally the Supreme Court’s practice to defer to the lower courts when interpreting the law.213 More importantly, it is questionable whether that assertion comports with Congress’s likely intent when enacting FELA. In the post-Townsend context of the case, the Miles-based reasoning is even weaker. In order to apply Miles in the unseaworthiness context while adhering to Townsend’s holding that Miles does not apply in the maintenance-and-cure context, the Batterton majority had to explain how those two general maritime law causes of action are different in some relevant way. The principal distinction for the Court was the “centuries of relevant case law” supporting punitive damages in the maintenance-and-cure context214 and the complete lack of “historical basis for allowing punitive damages in unseaworthiness actions”.215 A decade before, however, Justice Alito had argued strenuously that history provided virtually no support for the availability of punitive damages in the maintenance-and-cure context.216 Even the Townsend majority had placed very little weight on actual awards of punitive damages in maintenance-and-cure cases.217 Under the circumstances, it is difficult to see what “established history of awarding punitive damages for . . . maintenance and cure”218 the Batterton Court considered relevant, let alone where the “centuries of relevant case law”219 were reported. The Batterton majority also relied heavily on the assertion (advocated by Dutra) that claims for unseaworthiness and negligence are substantially the same while the maintenance-and-cure claim at issue in Townsend was substantially different. The relevant suit in Townsend, however, was not to recover maintenance and cure for an injury (which might not fully overlap with a Jones Act claim) but rather to recover damages for the wilful and wanton failure to pay maintenance and cure (which does fully overlap with a 211 139 S Ct at 2285. 212 The Batterton majority cited some language discussing compensatory damages in Supreme Court cases in which punitive damages were not at issue. See ibid at 2284–85 (citing American Railroad Co of Porto Rico v Didricksen, 227 US 145, 149 (1913); Gulf, Colorado & Santa Fe Railway Co v McGinnis, 228 US 173, 175 (1913); Vreeland, 227 US at 68; Seaboard Air Line Railway v Koennecke, 239 US 352, 354 (1915); Pacific SS Co v Peterson, 278 US 130, 134, 1928 AMC 1932 (1928); Miles, 498 US at 32). 213 See, e.g., Vimar Seguros y Reaseguros, SA v M/V Sky Reefer, 515 US 528, 1995 AMC 1817 (1995) (rejecting a unanimous line of lower-court decisions endorsed by the most respected scholars in the field). When Chief Justice Roberts in an earlier case disagreed with a plaintiff-friendly result that the Court’s majority had reached in partial reliance on lower-court precedent, he quipped that it was not the Supreme Court’s normal practice to follow the courts of appeals: “The Court is correct that the federal courts of appeals have read Rogers v Missouri Pacific Railroad Co, 352 US 500 (1957) to support the adoption of instructions like the one given here. But we do not resolve questions such as the one before us by a show of hands”. CSX Transp, Inc v McBride, 564 US 685, 715 (2011) (Roberts, CJ, dissenting). Justice Alito joined that opinion. 214 139 S Ct at 2278. 215 Ibid. 216 See Townsend, 557 US at 430–431 (Alito J, dissenting); see also supra notes 146–148 and accompanying text. 217 See supra notes 132–137 and accompanying text. 218 139 S Ct at 2282. 219 Ibid at 2278.

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professor michael f. sturley Jones Act claim). In Cortes v Baltimore Insular Line, Inc.,220 which the Batterton majority ignored, the Court addressed the issue directly, holding that a suit for the negligent withholding of maintenance and cure could be maintained under the Jones Act. In other words, the overlap between the Townsend cause of action and the Jones Act is 100%. As Justice Alito himself explained a decade earlier, an action for the wrongful withholding of maintenance and cure can always be filed under the Jones Act.221 Although unseaworthiness claims often overlap with the Jones Act, the overlap is less than in Townsend’s maintenance-and-cure context. While a Townsend claim could always be raised under the Jones Act, only in some cases could an unseaworthiness claim also be filed as a negligence claim under the Jones Act. In many common situations, an unseaworthiness claim could not be pursued under the Jones Act at all, or at least could not be pursued in the same way or against the same defendant. Most obviously, a Jones Act negligence claim requires an injured seaman to prove negligence222 while an unseaworthiness claim does not.223 More significantly, at least for present purposes, under the Jones Act injured seamen bring their negligence actions against their employers224 while the defendant in an unseaworthiness action is the owner or operator of the unseaworthy vessel.225 In many cases, including Batterton, the vessel owner both operated the ship and employed the injured seaman, thus permitting a Jones Act claim and an unseaworthiness claim (often along with a maintenance-and-cure claim) to be filed together in a single suit.226 But in many cases the injured seaman’s employer does not own or operate the vessel. In the modern world, even the classic members of a vessel’s crew are increasingly likely to be employed by a third party, such as a manning agency.227 Many maritime personal injuries today occur in the offshore energy industry where a vessel may be crewed by employees of multiple

220 287 US 367 (1932). A decade before, Justice Alito had certainly been aware of Cortes. See Townsend, 557 US at 427 (Alito J, dissenting) (citing Cortes). 221 See Townsend, 557 US at 427 (Alito J, dissenting) (“[A]ny personal injury maintenance and cure claim in which punitive damages might be awarded could be brought equally under either general maritime law or the Jones Act”.). 222 Although the Jones Act itself does not mention “negligence”, see 46 USC § 30104, it incorporates FELA by reference. FELA applies only to injuries caused by the employer’s negligence. See 45 USC § 51. 223 This distinction is not particularly relevant in the punitive damages context. For an unseaworthiness claim to justify punitive damages, the vessel owner must be at fault – indeed, egregiously at fault. Cf infra notes 248–249 and accompanying text. 224 See 46 USC § 30104 (“A seaman . . . may elect to bring a civil action . . . against the employer”.) (Emphasis added). 225 See, e.g., T. J. Schoenbaum, Admiralty and Maritime Law (6th edn, Practitioner Treatise Series 2018), § 6:25, at 562–563 & nn 41–44. 226 See, e.g., Fitzgerald v United States Lines Co,374 US 16, 18 (1963) (confirming that seamen may “join in one complaint their Jones Act, unseaworthiness, and maintenance and cure claims when all the claims . . . grow out of a single transaction or accident”.). 227 See, e.g., Meaux v Cooper Consolidated, LLC, 477 F Supp 3d 515, 520 (ED La 2020) (explaining that a seaman was “hired by . . . a company that supplies workers to marine companies” to work on vessel owner’s barge). In some cases, depending on the facts and the application of a number of ambiguous factors, the vessel owner may be liable under the Jones Act to a third party’s employee if it is found to be a “borrowing employer” of a “borrowed employee”. See, e.g., Meaux, 477 F Supp 3d at 529–531 (holding that vessel owner was borrowing employer of seaman hired and paid by manning agency); but see, e.g., Maine Maritime Academy v Fitch, 411 F Supp 3d 76, 84–89, 2019 AMC 2139 (D Me 2019) (holding that vessel owner was not borrowing employer of seaman hired and paid by third party).

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punitive damages in maritime cases – a view from across the pond employers (in addition to the shipowner). The crew of the Deepwater Horizon,228 for example, included not only employees of Transocean (the vessel owner and operator) but also of BP and several other contractors.229 But drill ships are by no means unique. On a cruise ship, many members of the crew will be employed by independent contractors, and that has been a common practice for decades.230 Sieracki seamen,231 who may assert an unseaworthiness action against a vessel’s owner or operator, are almost inevitably employed by someone else232 or by no one at all.233 Those workers who were not employed by the vessel owner would have no Jones Act claim against the vessel owner. Four more examples illustrate other important differences that distinguish an unseaworthiness claim from a negligence claim under the Jones Act: (1) A seaman asserting an unseaworthiness claim can bring an in rem action against the unseaworthy vessel.234 A Jones Act claim must be brought in personam because in rem actions are not permitted under the Jones Act.235 As a result of that distinction, a Jones Act claim could be worthless when an employer is insolvent or not subject to suit in the United States while an in rem claim for unseaworthiness based on the same facts could result in full compensation if a valuable ship can be arrested. (2) The warranty of seaworthiness protects a seaman only from defects of the ship and closely related items; it does not follow the seaman off the ship.236 The Jones Act, in contrast, protects the seaman from employer negligence wherever the seaman is working in the service of the ship.237 (3) The burdens of proof are different for the two causes of action. In particular, the causation standard under the Jones Act is often described as “featherweight”. A seaman need not prove that the employer’s negligence was the “proximate” cause of the injury. It is enough “that employer negligence played 228 Under the Supreme Court’s jurisprudence on “seaman” status, the crew of a drill ship includes not only the navigational crew but all those with a sufficient connection to the vessel who contribute to its mission. See, e.g., Chandris Inc v Latsis, 515 US 347, 1995 AMC 1840 (1995); McDermott Int’l, Inc v Wilander, 498 US 337, 1991 AMC 913 (1991). 229 See, e.g., US Independent Agencies and Commissions, Macondo: The Gulf Oil Disaster: Chief Counsel’s Report, United States National Commission on the BP Deepwater Horizon Oil Spill And Offshore Drilling (National Defense University Press, US 2011) (noting that only 79 of the 126 people on the rig at the time of the blowout were Transocean employees; BP had two well site leaders and five other employees on the rig; Halliburton had two technicians on board; MI-SWAPO had five mud engineers; Sperry Drilling had two mudloggers; Weatherford had four technicians; and other companies had another two dozen employees on board). 230 See, e.g., Mahramas v American Export Isbrandtsen Lines, Inc, 475 F 2d 165, 1973 AMC 587 (2d Cir 1973) (recognising that a hairdresser on a passenger ship employed by an independent contractor could assert an unseaworthiness action against the shipowner but could assert a negligence action under the Jones Act only against her employer, the independent contractor). 231 “Sieracki seamen” are not members of the crew but are on board the vessel doing the work of seamen. See Seas Shipping Co v Sieracki, 328 US 85, 1946 AMC 698 (1946). 232 See, e.g., Aparicio v Swan Lake, 643 F 2d 1109 (5th Cir Unit A, 1981) (permitting linehandlers employed by the Panama Canal Co. to bring unseaworthiness actions against vessel owners as a Sieracki seamen). 233 See, e.g., Rivera v Kirby Offshore Marine, LLC, 983 F 3d 811 (5th Cir 2020) (permitting self-employed harbour pilot to bring unseaworthiness action against vessel owner). 234 See, e.g., Reed v The Yaka, 373 US 410, 1963 AMC 1373 (1963) (upholding an in rem action on an unseaworthiness claim). 235 See, e.g., Plamals v SS Pinar Del Rio, 277 US 151, 156 (1928) (Under the Jones Act, “no lien exists to secure claims arising under [it] and, of course, no right to proceed in rem”.). 236 See, e.g., Victory Carriers, Inc v Law, 404 US 202, 1972 AMC 1 (1971) (holding that an unseaworthiness claim for injury on a dock fails). 237 See, e.g., Hopson v Texaco, Inc, 383 US 262, 1966 AMC 281 (1966) (per curiam) (permitting a Jones Act claim for injuries suffered in an automobile accident during a 38-mile journey from the port); O’Donnell v Great Lakes Dredge & Dock Co, 318 US 36, 41–43 (1943) (permitting a Jones Act claim for injuries suffered on land).

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professor michael f. sturley any part, even the slightest, in producing the injury”.238 In an unseaworthiness action, the plaintiff must prove causation under the common law proximate-cause standard.239 (4) Just as an unseaworthy condition may arise without negligence,240 so a negligent action does not always cause an unseaworthy condition. If a seaman is injured by an isolated act of negligence for which the employer is responsible, but that act does not create an unsafe condition,241 then the seaman’s remedy is under the Jones Act (or for maintenance and cure) but not for unseaworthiness.242 Prior to Batterton, the Supreme Court consistently recognised that, although negligence, unseaworthiness, and maintenance and cure are all closely related,243 they are nevertheless distinct. In Usner v Luckenbach Overseas Corp., for example, the Court explained: [T]he cause of action for unseaworthiness . . . is a remedy separate from, independent of, and additional to other claims against the shipowner, whether created by statute or under general maritime law. More specifically, the Court has repeatedly taken pains to point out that liability based upon unseaworthiness is wholly distinct from liability based upon negligence.244

In sum, the Batterton Court’s attempt to distinguish Townsend by asserting that a seaman’s unseaworthiness remedy is substantially the same as the Jones Act remedy ignores previously well-established principles of maritime law that the Supreme Court has consistently recognised. In addition to arguing that unseaworthiness and negligence claims are substantially the same, the Court also sought to distinguish Townsend by arguing that maintenance-and-cure claims are substantially different than unseaworthiness (and Jones Act) claims. Although unseaworthiness undoubtedly differs from the failure to pay maintenance and cure,245 much 238 Rogers v Missouri Pacific Railroad Co, 352 US 500, 506 (1957). The Court reaffirmed the featherweight standard in CSX Transportation, Inc v McBride, 564 US 685, 2011 AMC 1521 (2011). Although Rogers and McBride were FELA cases, the standard is the same under the Jones Act. See, e.g.,Ferguson v Moore-McCormack Lines, Inc, 352 US 521, 523–524, 1957 AMC 647 (1957) (noting that “the standard of liability under the Jones Act is that established by Congress under the Federal Employers’ Liability Act”, and applying the Rogers featherweight standard in a Jones Act case); see also D.W. Robertson, “Causation Issues in FELA and Jones Act Cases in the Wake of McBride” (2012) 36 Tul Mar LJ 397. 239 See, e.g., Fitzgerald v United States Lines Co, 374 US 16, 18 (1963). 240 See supra note 221 and accompanying text. 241 Some hypotheticals may help to illustrate the difference between negligence (the basis for an action under the Jones Act) and unseaworthiness: A ship is not unseaworthy because it has glass in a window which might be broken. [That is a condition, but not a defective one.] The injuries of a seaman who negligently breaks such a glass are not the result of unseaworthiness, nor are the injuries of a seaman who is cut by the falling glass. But injury incurred in stepping on the broken glass does result from unseaworthiness. Puddu v Royal Netherlands Steamship Co, 303 F 2d 752, 757, 1962 AMC 1194 (2d Cir 1962) (Hays J, concurring). 242 See, e.g., Usner v Luckenbach Overseas Corp, 400 US 494, 1971 AMC 277 (1971). 243 Fitzgerald v United States Lines Co, 374 US 16, 18, 1963 AMC 1093 (1963). 244 400 US 494, 498, 1971 AMC 277 (1971) (footnotes omitted). 245 One obvious difference is that an unseaworthiness claim necessarily arises from a defective condition on the ship (or something closely related to the ship), but the warranty of seaworthiness does not follow a worker off the ship. See, e.g., Victory Carriers, Inc v Law, 404 US 202, 1972 AMC 1 (1971) (holding that an unseaworthiness claim for injury on dock fails). In contrast, a seaman can recover maintenance and cure for injuries sustained while on shore leave. See, e.g., Warren v United States, 340 US 523, 1951 AMC 416 (1951) (seaman recovers maintenance and cure for injury suffered in a dance hall). Presumably the Batterton Court would not have wished to highlight this difference because it would also highlight one of the ways in which the Jones Act is similar to maintenance and cure (but different from unseaworthiness). See supra note 236 and accompanying text. Indeed,

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punitive damages in maritime cases – a view from across the pond of that argument was also illogical. For example, the Court asserted that it was not until “the late 1940s” that “the Court transformed the old claim of unseaworthiness . . . into a strict-liability claim”.246 It is debatable whether that factual assertion is even correct.247 Regardless of when vessel owners became strictly liable for unseaworthiness, however, it is beyond dispute that prior to 1920 seamen could claim damages for personal injuries caused by unseaworthiness at least when the vessel owner was at fault.248 A post-1920 “transform[ation] . . . of unseaworthiness . . . into a strict-liability claim” is accordingly irrelevant in the present context. As Justice Alito himself explained a decade earlier, “the prevailing rule in American courts does not permit punitive damages without a showing of fault”.249 Thus any unseaworthiness claim in which punitive damages might possibly be awarded would be one in which the defendant was at fault (indeed, seriously at fault).250 Punitive damages could never be awarded when a defendant was liable for unseaworthiness solely on a strict-liability/no-fault basis. In other words, any unseaworthiness claim in which punitive damages might be awarded would necessarily involve a cause of action that was available prior to 1920. Perhaps the Court was trying to distinguish unseaworthiness from maintenance and cure by stressing the fact that the unseaworthiness doctrine has evolved over the years. The background discussion of the unseaworthiness doctrine certainly focuses on both its nineteenth251 and the twentieth century evolution,252 while highlighting the “medieval and renaissance” roots of the maintenance-and-cure doctrine.253 But it is hard to see how any of this could be relevant, given that the decisive issue under Townsend is whether the cause of action existed prior to the Jones Act.254 In any event, the maintenance-and-cure doctrine has also evolved since medieval and renaissance times.255

the Court in O’Donnell v Great Lakes Dredge & Dock Co, 318 US 36, 41–43 (1943), justified the application of the Jones Act to injuries on land in part because an injured seaman could recover maintenance and cure for injuries on land, and “the Jones Act, in extending a right of recovery to the seaman injured while in the service of his vessel by negligence, has done no more than supplement the remedy of maintenance and cure”, ibid at 43. 246 139 S Ct at 2281. 247 In a case arising before the passage of the Jones Act, the Supreme Court declared that a vessel owner was liable for personal injuries caused by unseaworthiness “without regard to negligence”. Carlisle Packing Co v Sandanger, 259 US 255, 259, 2009 AMC 1803 (1922). In Mitchell v Trawler Racer, Inc, 362 US 539, 1960 AMC 1503 (1960), all three opinions – majority and dissenting – treated Sandanger as establishing the principle of absolute liability for unseaworthiness. See, e.g., ibid at 547 (majority opinion); ibid at 552 (Frankfurter J, dissenting); ibid at 571 (Harlan J, dissenting). 248 See, e.g., The Osceola, 189 US at 175, 2000 AMC at 1215. The law review article on which Justice Alito heavily relied to criticise the unseaworthiness doctrine, see supra note 169 and accompanying text, documented at some length that seamen in the late nineteenth century could recover damages for personal injuries caused by unseaworthiness when the vessel owner was at fault. See Tetreault, supra note 169, 39 Cornell LQ at 391–393. 249 Townsend, 557 US at 427 (Alito J, dissenting). 250 Cf ibid (Alito J, dissenting) (making essentially the same point in the maintenance-and-cure context). 251 139 S Ct at 2279–80. 252 Ibid at 2280–82. 253 Ibid at 2279. 254 See Townsend, 557 US at 420. 255 See, e.g., Warren v United States, 340 US 523, 1951 AMC 416 (1951) (extending the right to maintenance and cure to cover injuries sustained while on shore leave); see also V. A. McDaniel, “Recognizing Modern Maintenance and Cure as an Admiralty Right” (1991) 14 Fordham Int’l LJ 669, 675 (“[T]he US Supreme Court has consistently expanded maintenance and cure rights”.).

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professor michael f. sturley Although the Batterton opinion is very weak on the Miles approach, it also shows signs of a stronger policy approach, which could be adequate by itself to justify the holding. In the first ten lines of the opinion, Justice Alito wrote: By granting federal courts jurisdiction over maritime and admiralty cases, the Constitution implicitly directs federal courts sitting in admiralty to proceed “in the manner of a common law court”. Exxon Shipping Co. v Baker, 554 U.S. 471, 489–490 (2008). Thus, where Congress has not prescribed specific rules, federal courts must develop the “amalgam of traditional common-law rules, modifications of those rules, and newly created rules” that forms the general maritime law. East River S. S. Corp. v Transamerica Delaval Inc., 476 U. S. 858, 864–865 (1986).256

In other words, the majority explicitly recognised that the Court has broad authority to define the general maritime law in any way it wishes (so long as five justices agreed with the result). Because Congress has said nothing relevant about punitive damages in unseaworthiness actions, the majority was free either (1) to follow the traditional common law and general maritime law rule that recognises the availability of punitive damages in tort cases when the defendant’s conduct is sufficiently egregious or (2) to develop a new rule denying their availability. The majority took the latter course. In the last few pages of the opinion, Justice Alito gave a better idea of what probably motivated the decision: the Court’s view that denying punitive damages is the better policy. Dutra based a large portion of its argument on the assertion that punitive damages are bad for the economy, bad for the environment, and bad for national security.257 A host of top-side amicus briefs reinforced those arguments.258 And the majority apparently found them persuasive. In three key paragraphs, the majority accepted the defence bar’s arguments, specifically relying on three policy arguments for rejecting punitive damages.259 Some of the policy arguments on which the Court relied are “hard to take seriously”.260 For example, the Court declared that because unseaworthiness claims run against the owner of the vessel, the ship’s owner could be liable for punitive damages while the master or operator of the ship – who has more control over onboard conditions and is best positioned to minimize potential risks – would not be liable for such damages under the Jones Act”.261

Leaving aside the fact that the Court’s argument depends on the unexamined262 assertion that punitive damages are unavailable under the Jones Act, the argument betrays the Court’s serious misunderstanding of the unseaworthiness doctrine. As Professor Schoenbaum concisely explained, “[t]he appropriate defendant in an unseaworthiness case is the person who has operational control of the ship at the time the [unseaworthy] condition 256 139 S Ct at 2278. 257 See Brief for Petitioner 34–40, Batterton (filed 22 January 2019) (available at 2019 WL 354580) (No 18–266). 258 Amicus briefs in support of the petitioner were filed by Dredging Contractors of America et al; the Inland River Harbor and Fleeting Coalition; At-Sea Processors Association, et al; Fishing Vessels’ Reserve, et al; American Maritime Association, Inc.; the International Association of Drilling Contractors; the Greater New Orleans Barge Fleeting Association, et al; Waterways Council, Inc; and the American Waterways Operators. 259 139 S Ct at 2286–87. See supra notes 190–192 and accompanying text. 260 Andrus v Texas, 140 S Ct 1875, 1887 (2020) (Alito J, dissenting). 261 139 S Ct at 2287. 262 See supra notes 183–184 and accompanying text.

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punitive damages in maritime cases – a view from across the pond was created or the accident occurred”.263 That could be the owner or the operator of the vessel, depending on the facts.264 In Reed v The Yaka, for example, the Supreme Court held that a “bareboat charterer [wa]s personally liable for the unseaworthiness of [the] chartered vessel” because it “was operating the [vessel]”.265 The Court’s argument that punitive damages for unseaworthiness “would discourage foreign-owned vessels from employing American seamen”266 is also ludicrous. It is true that foreign-owned vessels rarely employ US seamen and have not done so for decades, but no one with any knowledge of the shipping industry would think that the availability of punitive damages for unseaworthiness was a relevant factor in the hiring decisions. Wages for US seamen are so much higher than for many foreign seamen that any allowance for the infinitesimal risk of paying punitive damages – if employers even considered such an unlikely possibility – would pale in comparison.267 Counterarguments are readily available for all of the Court’s policy arguments (and the dissent raises some of them268), but at the end of the day they are empirical, economic, or other policy arguments – not legal arguments. For better or worse, the Supreme Court undoubtedly has the power (in the absence of Congressional action to the contrary) to make those policy choices for the general maritime law. Whether or not denying punitive damages to seamen injured by an unseaworthy vessel is good policy, the policy approach is at least defensible as a matter of legal analysis. And it could also explain why Justice Thomas came to a different result in Batterton than he did in Townsend. He could well have believed that denying medical care to an injured seaman (as in Townsend) is more often likely to be an egregious action. The employer has a no-fault obligation to pay, and very few reasons can justify the failure to do so.269 Moreover, deciding not to pay maintenance and cure would almost inevitably be an act of land-based management after an opportunity for at least some reflection (and consultation 263 T. J. Schoenbaum, Admiralty and Maritime Law (6th edn, Practitioner Treatise Series 2018), § 6:25, at 562. 264 It would be highly unusual for the master to be the defendant in either an unseaworthiness or a Jones Act case unless the master also owned the vessel. That might well happen if a recreational vessel were involved. 265 373 US 410, 412–413, 1963 AMC 1373 (1963). 266 139 S Ct at 2287. 267 In Pysarenko v Carnival Corp, 575 US 1037 (2015), for example, a Ukrainian seaman earned less than $5.00 per hour – $49.10 per day for a ten-hour day, seven days a week. See Petition for Certiorari at 5, Pysarenko (No. 14–1004) (filed 10 February 2015) (available at 2015 WL 722484). As a practical matter, it would be impossible to hire US seamen on those terms. 268 For example, Justice Ginsburg rejected the majority’s assertion that permitting punitive damages for unseaworthiness would create bizarre disparities. See supra notes 197–198 and accompanying text. She argued that it was more bizarre to permit punitive damages “for willful and wanton breach of the duty to provide maintenance and cure, but not for similarly culpable breaches of the duty to provide a seaworthy vessel”. 139 S Ct at 2293 (Ginsburg J, dissenting). Perhaps an even more bizarre disparity is that punitive damages are available under Exxon Shipping Co v Baker for property damage caused by gross negligence but under Batterton they are not available for wilful, wanton and callous physical injuries to a human being. 269 Perhaps the most plausible excuse for refusing to pay maintenance and cure would be that the claimant does not qualify as a seaman. Despite frequent attempts, the Supreme Court has not provided very clear guidance on who is a “seaman”. See, e.g., Harbor Tug & Barge Co v Papai, 520 US 548, 1997 AMC 1817 (1997); Chandris Inc v Latsis, 515 US 347, 1995 AMC 1840 (1995); Southwest Marine, Inc v Gizoni, 502 US 81, 1992 AMC 305 (1991); McDermott Int’l, Inc v Wilander, 498 US 337, 1991 AMC 913 (1991). A few other excuses are also possible. For example, employers often raise an “intentional concealment” defence. See, e.g., McCorpen v Central Gulf SS Corp, 396 F 2d 547, 548–549, 1968 AMC 1147 (5th Cir 1968). But see, e.g., D. W. Robertson, M. F. Sturley and M. H. Ammerman, “Recent Developments in Admiralty and Maritime Law at the National Level and in the Fifth and Eleventh Circuits” (2018) 42 Tul Mar LJ 373, 466–471.

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professor michael f. sturley with lawyers), not an error of a lower-level employee at sea. Most unseaworthiness, in contrast, arises as the result of simple negligence. Sometimes a vessel may be unseaworthy despite the owner’s complete lack of negligence.270 Of course, an injured seaman would have no plausible claim to recover punitive damages in those cases, and the fact that unseaworthiness usually arises in simple negligence cases does not mean that it can never arise in cases of wilful and wanton misconduct.271 But Justice Thomas may have believed that punitive damages were less important in unseaworthiness cases because the facts of most cases would not justify them. He may also have been influenced by the factual weakness of Batterton’s claim for punitive damages, even though Dutra was arguing much more broadly for their categorical unavailability. Once Justice Thomas agreed to reverse the Ninth Circuit, it would have been normal for him to accord considerable deference to the justice assigned to write the opinion. He could have noted his disagreement if the majority opinion had said something with which he fundamentally disagreed,272 but apparently he did not feel that committed to the Townsend framework. As long as Justice Alito preserved the holding of Townsend, Justice Thomas was apparently willing to acquiesce in aspects of the opinion with which he may not have fully agreed.273 Although this is necessarily speculation, it better explains the result than the Miles approach – which would require Justice Thomas to have been persuaded by an analytical framework that he had expressly rejected in one of his earlier opinions.274 Does it make any difference whether the Batterton Court followed the Miles approach or the policy approach? Whatever the true rationale, an injured seaman can claim punitive damages for an employer’s wilful and wanton failure to pay maintenance and cure but may not claim punitive damages in an unseaworthiness case no matter how egregious the vessel owner’s fault. And that result follows regardless of the rationale for the Batterton decision. In at least one respect, however, the choice of approach could make a significant difference. If the Court’s decision was based on its authority to determine the general maritime law, then it remains open for a future court to consider whether punitive damages are available under FELA or the Jones Act – both questions that should turn on the intent of Congress rather than the policy preferences of a majority of the justices. Although the Batterton Court asserted that punitive damages are unavailable under FELA and the 270 See, e.g., Mitchell v Trawler Racer, Inc, 362 US 539, 1960 AMC 1503 (1960). 271 The case for punitive damages was much stronger in McBride v Estis Well Service, LLC, 768 F 3d 382, 2014 AMC 2409 (5th Cir 2014) (en banc). 272 See, e.g., Johnson v Guzman Chavez, 141 S Ct 2271, 2292 (2021) (Thomas J, concurring except for footnote 4 and concurring in the judgment) (“I join [the Court’s opinion] except for footnote four”.). In Johnson, footnote 4 declared that the Court “ha[d] jurisdiction to review the decision below”, 141 S Ct at 2284 n 4, a proposition with which Justice Thomas disagreed so strongly that he would not join that part of the opinion. 273 Justice Thomas may not have been the only one holding his nose when he joined the Batterton majority. In Air & Liquid Systems Corp v DeVries, 139 S Ct 986, 2019 AMC 631 (2019), decided about three months before Batterton, Justice Kavanaugh wrote the majority opinion. One of his principal arguments was that “[m]aritime law has always recognized a ‘special solicitude for the welfare’ of those who undertake to ‘venture upon hazardous and unpredictable sea voyages’”. 139 S Ct at 995 (quoting American Export Lines, Inc. v Alvez, 446 US 274, 285 (1980)) (internal quotation marks omitted by DeVries Court). The Batterton opinion, in contrast, dismisses the special solicitude doctrine as one with its “roots in the paternalistic approach taken toward mariners by 19th century courts”. Because sailors today are better protected than they were in the nineteenth century, according to Justice Alito, “the special solicitude to sailors has only a small role to play in contemporary maritime law”. 139 S Ct at 2287. 274 See Townsend, 557 US at 424; supra note 131 and accompanying text.

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punitive damages in maritime cases – a view from across the pond Jones Act, the relevant authority supporting that assertion was a handful of conclusory lower-court decisions and secondary sources.275 The Court offered no analysis whatsoever of anything that Congress said or did. That was not an oversight. The majority explained that it was unnecessary to discuss what Congress actually intended “because of the absence of historical evidence to support punitive damages” in the unseaworthiness context.276 Whether nineteenth- and early-twentieth-century courts awarded punitive damages in unseaworthiness actions could not plausibly have any bearing on whether Congress intended railroad workers to be able to claim punitive damages in negligence actions. What the Batterton Court appears to be saying, therefore, is that “the absence of historical evidence to support punitive damages” in the unseaworthiness context precludes their current availability in that context regardless of what Congress intended when it enacted the two arguably relevant statutes. Even if punitive damages are properly available under FELA, and thus under the Jones Act, the Court will not permit them in an unseaworthiness action. In other words, the so-called Miles uniformity principle – which requires the same result under the general maritime law as under the Jones Act – was ultimately irrelevant to the Court’s conclusion. More importantly, when a court considers the availability of punitive damages in a context in which the “historical evidence to support punitive damages” is substantial, it would be appropriate to examine “this question of statutory interpretation”.277 Thus if a railroad worker is injured as a result of the wilful and wanton misconduct of her employer, and she brings a FELA negligence action, it would be appropriate to ask whether Congress intended to allow injured railroad workers to seek the punitive damages remedy that has long been available in negligence actions. A full analysis of the availability of punitive damages under a proper interpretation of FELA (and thus of the Jones Act) would be beyond the scope of this chapter, but it is worth noting that in the years before FELA’s enactment punitive damages were available in common law negligence actions,278 were available in actions against railroads279 and were in fact awarded in actions against railroads280 (including in negligence actions for injuries to railroad employees281). In short, there is ample “historical evidence to support punitive damages” in the context of railroad workers’ negligence actions for personal injuries. In a FELA case, there would be no excuse for “not reopen[ing] this question of statutory interpretation”.282

275 See supra note 212 and accompanying text. 276 139 S Ct at 2285. 277 Ibid. 278 See, e.g., Milwaukee & St Paul Railway Co v Arms, 91 US 489, 493 (1876) (punitive damages are available in “suits for personal injuries received through the negligence of others”). 279 See, e.g., Arms, 91 US at 492 (“well settled . . . that exemplary damages may in certain cases be assessed”); Philadelphia, Wilmington & Baltimore Railroad Co v Quigley, 62 US (21 How) 202, 214 (1859) (“Whenever the injury complained of has been inflicted maliciously or wantonly . . . the jury are not limited to the ascertainment of a simple compensation for the wrong”.). 280 See, e.g., Denver & Rio Grande Railway Co v Harris, 122 US 597, 609–610 (1887); Fell v Northern Pacific Railway Co, 44 F 248, 252–253 (CCDND 1890); Brown v Memphis & Charleston Railroad Co, 7 F 51, 63–64 (CCWD Tenn 1881). 281 See, e.g., St. Louis, Iron Mountain & Southern Railway Co v Stamps, 84 Ark 241, 104 SW 1114 (1907); Brickman v Southern Railway, 74 SC 306, 54 SE 553, 557 (1906); Turner v Norfolk & Western Railroad Co, 40 W Va 675, 22 SE 83, 87 (1895). 282 Batterton, 139 S Ct at 2285.

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professor michael f. sturley V. Conclusion Categories of cases often seem to hit the Supreme Court in waves, even in maritime law. Having heard one case on a subject, the justices seem to become intrigued, and relatively soon thereafter they agree to hear two or three more. For decades, the Court showed no interest in clarifying the definition of “seaman”; then it heard four cases in six years.283 Maybe the Court will soon agree to hear a fourth maritime punitive damages case to resolve the issue left open in Baker.284 In the meantime the Court has provided a few clear rules: the Clean Water Act does not displace the general maritime law on punitive damages; punitive damages are available in an appropriate case for the “willful and wanton” failure to pay maintenance and cure to an injured seaman; and punitive damages are not available under any circumstances for a breach of the warranty of seaworthiness. The Court has also provided at least one ambiguous rule: in some circumstances (not clearly defined), punitive damages may not exceed the compensatory damages in a case. And the Court has avoided answering some questions entirely: the Court was unable to agree on the standard for imposing vicarious liability for punitive damages. Because the lower courts disagree, the general maritime law has different rules for vicarious liability in different parts of the country. Batterton may also be evidence of a trend. For decades, when the Supreme Court granted certiorari in a punitive damages case – first in the constitutional context and then in the maritime context – observers predicted that it intended to protect defendants from awards that were thought to be unjustified. In some cases, including Baker, the Court held that punitive damages awards were excessive and must be reduced (but not eliminated).285 In others, the Court defied predictions and upheld the awards286 or addressed only procedural issues that left open the possibility of substantial awards on remand.287 The decision in Batterton is striking for its complete elimination of an entire category of punitive damages. Many political commentators have noted the Supreme Court’s shift to the right, particularly with the appointment of three new justices during the Trump administration. That shift is playing out in many areas of law.288 Batterton suggests that the law of punitive damages in maritime law might need to be included on the list.

283 See Harbor Tug & Barge Co v Papai, 520 US 548, 1997 AMC 1817 (1997); Chandris Inc v Latsis, 515 US 347, 1995 AMC 1840 (1995); Southwest Marine, Inc v Gizoni, 502 US 81, 1992 AMC 305 (1991); McDermott Int’l, Inc v Wilander, 498 US 337, 1991 AMC 913 (1991). 284 Perhaps In re Deepwater Horizon, 21 F Supp 3d 657 (ED La 2014), would have been that case if it had been appealed. See supra notes 70–75 and accompanying text. 285 See, e.g., State Farm Mutual Automobile Insurance Co v Campbell, 538 US 408 (2003); BMW of North America, Inc v Gore, 517 US 559 (1996). 286 See, e.g., TXO Production Corp. v Alliance Resources Corp, 509 US 443 (1993); Pacific Mutual Life Insurance Co v Haslip, 499 US 1 (1991); Browning-Ferris Industries of Vermont, Inc v Kelco Disposal, Inc, 492 US 257 (1989). 287 See, e.g., Philip Morris, USA v Williams, 549 US 346 (2007); Cooper Industries, Inc v Leatherman Tool Corp, 532 US 424 (2001); Honda Motor Co v Oberg, 512 US 415 (1994). 288 See, e.g., Dobbs v Jackson Women’s Health Organization, 142 S Ct 2228 (2022) (overruling Roe v Wade, 410 US 113 (1973)).

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C H A P T E R 17

Limitation of Liability – New Trends Frank Stevens

I. Introduction Even with all of the technological progress that has ever been made, shipping still presents risks. The Ever Given grounding in the Suez Canal in March 2021 was a clear illustration. In law, risks translate into liability and compensation. Generally, even if entrepreneurs and business owners are willing to accept a certain degree of risk, they are not prepared to stake everything on the successful outcome of their adventures. There are all sorts of risk-limiting mechanisms, in many areas of the law (for instance limited liability companies, statutory limitations, etc). Maritime law has a specific mechanism of its own in the “global” or “tonnage” limitation, currently embodied in the 1976/1996 LLMC Convention. The original 1976 Convention at present1 has 55 contracting states, representing almost 52% of world tonnage. The Convention as modified by the 1996 Protocol has been ratified by 63 states, representing 69% of the world tonnage. Even if the LLMC is a relatively successful convention, which by now has been in existence for almost 50 years, there are still novel issues coming up, and also known issues being revisited. This chapter gives an overview of some of the recent cases and developments in six areas: conduct barring limitation, the timing of limitation proceedings, the combination of limitation funds, the place of constitution of the limitation fund, contracting out of the right to limit and salvage and wreck removal. II. Conduct Barring Limitation A. Generally A party loses the right to limit if it acted either with the intent to cause the loss, or recklessly and with knowledge that such loss would probably result (Art. 4 LLMC). As limitation can substantially reduce the amount of compensation received, it is hardly surprising that creditors try to prove recklessness or even intent – albeit often without success. One thing is clear: it is for the claimant to take the initiative and prove that the party invoking limitation acted recklessly or with intent. In its Accroch’coeur decision,2 the

1 As at 14 June 2022. 2 Cass fr. (Ch com), 26.6.2019, Pourvoi N° 18–12.249 & 18–12.250, Navire Accroch’coeur, DMF 2020, N° 830, 1041, note C. Peignon.

DOI: 10.4324/9781003376347-20

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frank stevens French Supreme Court confirmed that it was not for the court seized to analyse ex officio whether the fault or negligence of a party liable had amounted to the necessary recklessness. i. Case Law – France The French courts have had to deal with a number of recklessness cases in recent years. In the Caliente/Makira case,3 a pleasure yacht, the Caliente, had been left connected to the shore power supply for several weeks in the absence of its owner, even though the port’s regulations explicitly forbade this. Eventually she caught fire; the fire then spread to other yachts in the port (including the Makira). The subsequent investigations revealed that the fire had started in the yacht’s electrical switchboard but could not determine whether this was because of defects in the switchboard (or other on-board electrics) of the yacht or defects in the shore connection. The owner and insurers of the Makira challenged the limitation fund constituted by the owner of the Caliente, arguing that the latter had acted recklessly. The court of appeal of Aix-en-Provence however held that the owner of the Caliente had simply been negligent, but not reckless; an appeal to the Supreme Court was dismissed. In the Cala Rossa case,4 a passenger was sitting on the bow of a small craft, which was out at sea looking for dolphins. Having spotted a school of dolphins, the skipper increased speed. The accelerating craft hit a wave, and the passenger was lifted into the air and fell back down heavily, suffering injuries. The skipper had informed the passengers that he would be accelerating and had asked them to grab hold of something (the victim could have held on to the handrail where he was sitting). The court of appeal of Aix-en-Provence held the skipper liable for 70%, with 30% contributory negligence, but also found that the skipper’s actions had not been reckless.5 Here also, the appeal to the Supreme Court was unsuccessful.6 In the Motus case,7 a crew member on an ocean-going sailing yacht crossing the Atlantic was seriously injured when, moving aft to replace the helmsman, he lost his balance and fell. The crew, having been assembled with some haste, was neither well-prepared nor team-spirited, and the victim was not an experienced sailor. Also, it was claimed that the performance of the skipper in commanding the yacht had been below par. Nevertheless, the expert concluded that the exact cause of the accident could not be determined: it might have been a sudden movement due to the strong swell at the time, a steering error by the helmsman or even the victim himself inadvertently grabbing and turning the helm while moving around. In those circumstances, the court of appeal of Bordeaux held that recklessness of the skipper had not been proved, a decision upheld by the Supreme Court. Finally, in another case, a yacht that had been improperly anchored drifted and collided with another yacht, which as a result also went adrift, ran aground on a reef and was lost. The court of appeal of Aix-en-Provence held that the owner of the first yacht had not acted recklessly, and this decision was again left untouched by the Supreme Court.8 3 Cass fr. (Ch com), 29.4.2014, Pourvoi N° 12–25.901, Navires Caliente et Makira, DMF 2014 N° 763, 878, note S. Miribel. 4 Cass fr. (Ch civ), 8.11.2017, Pourvoi N° 16–24.656, ECLI:FR: CCASS:2017:C101158, DMF 2018, 39, note P. Bonassies. 5 CA Aix-en-Provence, 10ème Ch, 21 July 2016, N° 14/24049. 6 Cass fr. (Ch civ), 8.11.2017, Pourvoi N° 16–24.656, ECLI:FR: CCASS:2017:C101158, DMF 2018, 39, note P. Bonassies. 7 Cass fr. (Ch com), 8.3.2017, Pourvoi N° 15–23.220, Voilier Motus, DMF 2017 N°793, 596, note S. Miribel. 8 Cass fr. (Ch com), 19.9.2018, Pourvoi N° 17–16.679, ECLI:FR: CCASS:2018:CO00709.

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limitation of liability – new trends The French legislature has essentially adopted the LLMC standard for breaking limitation for domestic law also. The general chapter on carriers in the commercial code, which applies9 to road carriers, inland waterway carriers and air carriers, provides in Art. L.133–8: Only the inexcusable fault of the actual carrier or of the person taking responsibility for carriage is equivalent to intent. An inexcusable fault is a deliberate fault that implies knowledge of the probability of damage and the reckless acceptance of the risk, without good reason. Any clause providing otherwise is null and void.10

In two factually similar cases concerning truckers, road carriers had driven their loads into a bridge. In both cases, the courts held that the driver had not acted recklessly. In the first,11 the French Supreme Court confirmed a decision of the court of appeal of Poitiers, which had considered that the contractual carrier had not forwarded the exact dimensions of the load (which he himself had received from the shipper) to the actual carrier, and that the passing height of the bridge was not indicated on the bridge itself. In the second case,12 the Versailles court of appeal held that, even if – in abstracto – a truck driver must know that damage is likely if he tries to pass under a bridge that is too low, recklessness by the driver had not been proved in this specific instance. The court pointed out that no information on the accident was available. It was unknown whether the driver had checked the height of his load (and if so whether he had been negligent), nor whether the headroom had been indicated on the bridge, whether correctly or otherwise. The court added that, even if the driver had been negligent, it was in any case not proved (as it had to be) that he had recklessly accepted the risk of damage to his load. ii. Case Law – Netherlands In the Netherlands, the capsizing of a split barge led to a 2018 decision of the Supreme Court.13 (The barge was an inland vessel, but in the Netherlands, the LLMC Convention has also been made applicable to inland vessels.) She had capsized previously in June 1993, when being loaded with wet sand. After that, she was used to carry other cargoes for some time. The next time she was used to carry wet sand, in July 1994, she capsized again on entering a lock.14 The question was whether the owner of the barge had acted recklessly by using her again, knowing full well that she had already capsized once before. The concept of “conscious recklessness” had already been defined by the Dutch Supreme Court in two seminal decisions of 5 January 2001. These decisions were handed down in 9 Without prejudice to more specific provisions in the transport code. 10 “Seule est équipollente au dol la faute inexcusable du voiturier ou du commissionnaire de transport. Est inexcusable la faute délibérée qui implique la conscience de la probabilité du dommage et son acceptation téméraire sans raison valable. Toute clause contraire est réputée non écrite”. 11 Cass fr. (Ch com), 11.4. 2018, Pourvoi N° 17–12.975. 12 CA Versailles, 12ème Ch, 21.1.2021, N° 19–02.675, DMF 2021, N° 834, 336, note Ph Delebecque. 13 Dutch Supreme Court (Hoge Raad), 22.6.2018, ECLI:NL:HR:2018:981, S&S 2018, 48 (Arcturus & VW VI; Coby & Horn IV). This decision was not given in the actual limitation proceedings, but in liability proceedings against the law firm that had represented the shipowner who had sought to limit. The latter had instructed his lawyers to file an appeal to the Supreme Court in the limitation proceedings, but unfortunately, the law firm had overlooked the fact that in limitation matters, there is a specific, shorter period of prescription. The shipowner then sued his own lawyers, and in those proceedings, the Supreme Court had to decide what the outcome would have been if the appeal in the limitation proceedings had been filed in time. 14 In capsizing, the tug/barge combination fouled another tug/barge combination in the lock, which as a result also capsized.

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frank stevens CMR cases, but since the Supreme Court there held that “default such as, in accordance with the law of the court or tribunal seized of the case, is considered as equivalent to wilful misconduct” under Art. 29.1 CMR is under Dutch law acting recklessly and with knowledge, the standard applied was the same as under Art. 4 LLMC. For there to be conscious recklessness, the actor must know the risk created by his actions, realise that the chance of loss or damage occurring is substantially greater than that of it not occurring, and run the risk nevertheless. It is not sufficient that the actor should have known these things; actual awareness is required. Thus, a person acts recklessly if he goes through with his planned actions, even though he fully realises that these actions will probably cause a certain type of loss or damage. The facts of the two cases clearly illustrate these principles. In the first case,15 a container of merchandise attractive to thieves had to be carried from the port of Rotterdam and delivered to a consignee in another Dutch town on Monday. For his own convenience, the carrier picked up the container on Friday afternoon and parked it for the weekend in an all-but-abandoned industrial area, from which it was stolen. The appeal court had held that the carrier had acted recklessly in needlessly collecting the container on Friday and then leaving it for the weekend in an unguarded area. But that decision was subsequently overturned by the Supreme Court, because it had not been proved that the carrier had consciously appreciated the fact that the possibility of theft over the weekend was substantially greater than bigger than that of non-theft. In the second case,16 two trucks loaded with cigarettes stopped on a highway parking lot in Italy, so that the drivers could get dinner. The parking lot was unguarded, but it was lit and well-frequented and did not have an unsafe reputation; further, they had parked their trucks in such a way that they were blocked in by other trucks and had locked the doors. They did not, however, have their trucks in view from the restaurant. Both trucks were stolen. Here also, the appeal court initially held that the drivers had acted recklessly, since (a) they had known that truck and cargo thefts occurred regularly in Italy and that it would not be possible to reach their final destination that day, (b) their trucks were not equipped with anti-theft devices, and (c) they had been instructed never to leave them unattended. The Supreme Court also overturned this decision, holding that even though the drivers had known of the risk of theft, they had thought that they had taken sufficient measures to eliminate it, and thus had not consciously appreciated that the possibility of theft was substantially larger than the contrary. Applying this standard, the Supreme Court in the barge case found no conscious recklessness. True, the owner had known that the barge had previously capsized, but had believed that this had happened owing to overloading which it had taken steps not to repeat. It was only after the second incident that it was established that the barge, owing to its design, had insufficient stability. In the light of these circumstances and the 2001 decisions, it is hardly surprising that the Supreme Court concluded that there had been no recklessness. It was not shown that in July 1994 the barge owner had again accepted a cargo of wet sand, knowing and accepting that the probability that the barge would capsize was substantially larger than the probability that it would not. 15 Dutch Supreme Court (Hoge Raad), 5.1.2001, ECLI:NL:HR:2001: AA9308, NJ 2001/391 (Overbeek/ Cigna). 16 Dutch Supreme Court (Hoge Raad) 5.1.2001, ECLI:NL:HR:2001: AA9309, NJ 2001/392 (Van der Graaf/ Philip Morris).

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limitation of liability – new trends iii. Case Law – Germany In Germany, the international standard for breaking limitation (intent or conscious recklessness) has been incorporated into § 435 of the German commercial code (Handelsgesetzbuch, or HGB), and thus it also applies in German domestic transport law, for all modes of transport.17 As a result, German courts, including the German Supreme Court, have had several occasions to analyse and apply the concept of conscious recklessness. Overall, the German approach seems to be stricter for the party seeking to invoke limitation. The Supreme Court has confirmed that there are two separate, cumulative requirements: recklessness on the one hand, and on the other knowledge that the loss would probably result.18 Recklessness (Leichtfertigkeit) is defined as a very serious breach of duty, by which the party invoking limitation blatantly ignores the safety expectations of its contract partner, by not taking elementary protective measures.19 The second branch, knowledge, is seen as a subjective requirement. The Supreme Court has however held that the required knowledge can be inferred from the reckless act or omission, if the nature of this act or omission and the circumstances in which it took place can support the inference.20 The required knowledge also exists if a party turns a blind eye to a heightened possibility of damage or loss.21 Furthermore, German case law also establishes that in order for the loss to be “probable”, it is not required that the probability be greater than 50%.22 It is sufficient that the risk of loss is obvious23 or that there is a statistically relevant possibility of loss or damage.24 In a parcel distribution case where a parcel had gone missing in an intermediate warehouse,25 the Supreme Court confirmed the appellate court’s decision that the carrier had acted recklessly and with knowledge. The court pointed out that losses were particularly likely in such warehouses where the parcels were transhipped and that the carrier (in order to save on costs) had only operated a limited loss prevention system, unable to detect disappearances of parcels quickly and accurately. A more effective loss prevention system, which the court considered an “elementary” precaution to take, had not been put in place. From these elements, the court concluded that the carrier must have had the knowledge that loss of

17 Like the Dutch Supreme Court, the German Supreme Court has also held that the CMR concept of “default considered as equivalent to wilful misconduct” (Art 29.1 CMR) now refers to acting recklessly and with knowledge. See for instance BGH 6.6.2007, I ZR 121/04, TranspR 2007, 423, para 19. See also OLG München 27.7.2001, 23 U 3096/01, TranspR 2002, 161. 18 BGH 25.3.2004, I ZR 205/01, TranspR 2004, 309, paras. 27–28. See also OLG Düsseldorf 2.11.2005, I-15 U 23/05, TranspR 2005, 468, para 48. 19 BGH 25.6.2004, I ZR 205/01, TranspR 2004, 309, para 28; BGH 17.6.2004, I ZR 263/01, TranspR 2004, 399, para 27; BGH 6.6.2007, I ZR 121/04, TranspR 2007, 423, para 21. See also OLG Stuttgart 1.7.2009, 3 U 248/08, TranspR 2009, 309; OLG Stuttgart 20.8.2010, 3 U 60/10, VersR 2011, 1074, para 76; OLG Nürnberg 30.3.2017, 9 U 243/14, TranspR 2017, 263, para 8. 20 BGH 25.3.2004, I ZR 205/01, TranspR 2004, 309, para 28; BGH 17.6.2004, case I ZR 263/01, TranspR 2004, 399, para 28; BGH 6.6.2007, I ZR 121/04, TranspR 2007, 423, para 21. 21 OLG München 27.7.2001, 23 U 3096/01, TranspR 2002, 161. 22 OLG München 27.7.2001, 23 U 3096/01, TranspR 2002, 161; OLG Stuttgart 1.7.2009, 3 U 248/08, TranspR 2009, 309; OLG Nürnberg 30.3.2017, 9 U 243/14, TranspR 2017, 263, para 9. 23 OLG Oldenburg 23.5.2001, 2 U 77/01, TranspR 2001, 367. 24 OLG Stuttgart 1.7.2009, 3 U 248/08, TranspR 2009, 309; OLG Stuttgart 20.8.2010, 3 U 60/10, VersR 2011, 1074, para 77; OLG Nürnberg 30.3.2017, 9 U 243/14, TranspR 2017, 263, para 9. 25 BGH 25.3.2004, I ZR 205/01, TranspR 2004, 309.

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frank stevens parcels would probably occur.26 In a later road carriage case,27 however, the Supreme Court set aside an appellate decision that had held the carrier liable without limitation for the theft of a consignment of hard disks. The court held that since the driver had only known that he was carrying computer parts, without further specification or indication of value, the use of a curtain trailer and spending the night at an unguarded highway parking lot did not amount to recklessness. In an inland waterways case, several containers from the top layer were lost overboard owing to the insufficient stability of the barge carrying them.28 Limitation of liability was refused because neither the carrier nor the barge’s master had performed the required stability calculations. The fact that the shipper had misdeclared the weight of the containers was considered irrelevant, as the barge’s stability would have been negative even if the calculation had been performed using the (incorrect) declared weights. Furthermore, the barge in its loaded condition had had a clear list to starboard, test manoeuvres at the beginning of the voyage had showed that she heeled considerably on hard rudder, and the master had been warned both by the mate and by oncoming traffic that something appeared to be wrong. In those circumstances, the appeal court (Oberlandesgericht) held that the master must have realised the probability of loss or damage, or at least turned a blind eye to its the possibility. In another inland waterway decision,29 the crane on a barge, having been deployed to transfer the barge master’s car onto the quay, hit a high pressure gas line under a bridge. The line ruptured and the escaping gas ignited, causing a fire that severely damaged the bridge. The barge owner invoked the tonnage limitation, but without success. The court in Nürnberg held that he had acted recklessly and with knowledge that damage would probably result. He had believed that he could safely pass below the bridge, the passing height of which (8.14m) was indicated, but failed to check whether that was really the case. He had been aware that his wheelhouse had less than 6m of air draft because he had passed a 6m bridge the day before; however, that had been the limit of his preparedness. He had not known what his vessel’s freeboard was, nor yet how far the top of the crane extended above the roof of the wheelhouse. Further, he had only visually estimated, from a distance, whether the top of the crane would clear the bridge, without making any of the checks or determinations that could be expected from him as elementary precautions against damage. iv. Case Law – Belgium In Belgium, the Antwerp appeal court had to deal with the consequences of a collision between the inland vessel Verdi30 and the Belgian navy’s mine hunter Aster, the latter suffering substantial damage as a result of the incident.31 The navy argued in opposition 26 BGH 25.3.2004, I ZR 205/01, TranspR 2004, 309. See also BGH 17.6.2004, I ZR 263/01, TranspR 2004, 399, where a valuable fur coat was lost during carriage and limitation was also refused for similar reasons and BGH 11.11.2004, I ZR 10/02, TranspR 2006, 161 (multiple parcel losses). 27 BGH 6.6.2007, I ZR 121/04, TranspR 2007, 423. See also OLG Düsseldorf 2.11.2005, TranspR 2005, 468 (theft of a complete trailer from a fenced and guarded parking lot during the weekend, conscious recklessness not accepted). 28 OLG Stuttgart 1.7.2009, 3 U 248/08, TranspR 2009, 309. 29 OLG Nürnberg 30.3.2017, 9 U 243/14, TranspR 2017, 263 (MS Sento). 30 The Belgian legislature has extended the application of the LLMC Convention to inland vessels (be it with reduced limitation amounts). 31 CA Anvers, 4ème Section, 18.11.2013, N° 2010/AR/3051, TBH 2014/1, 111.

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limitation of liability – new trends to limitation that the owner of the Verdi had acted recklessly by allowing the vessel to operate with an insufficiently qualified crew. The court held, however, that even if certain manning requirements had not been complied with it was not proved that the owner had recklessly disregarded them.32 v. Case Law – Canada The Canadian courts also had to deal with two interesting cases on breaking limitation. In Peracomo v TELUS,33 V, who through his company was the owner of a crab fishing boat which he personally operated, deliberately cut an underwater cable that had snagged one of his anchors. V did this believing (incorrectly) that this was an abandoned cable no longer in use, a belief based on a handwritten note on a map that he thought he had glimpsed some time earlier in a museum. He was unable to provide any further details as to this map and had not made any further enquiries to discover whether the cable was indeed abandoned or not. The federal Court of Appeal had held that because V had intentionally cut the cable, thus causing the loss for which he was sued, or at least knew that cutting the cable would probably cause loss or damage, he was barred from limiting liability. The Supreme Court, however, disagreed. It observed that – no matter how negligently or irresponsibly – V had genuinely believed that he was cutting an abandoned, worthless cable, and thus had never intended to cause the loss that ultimately resulted. It followed that he had not known that his actions would probably result in such loss, and thus did not act recklessly within the meaning of Art. 4 LLMC. Interestingly, the Supreme Court also held that wilful misconduct – which was excluded from V’s insurance coverage – was a different, lower standard than conscious recklessness. Wilful misconduct included “reckless indifference”: the person involved knows that his actions might create a risk of loss or damage but carries on nevertheless, without investigating how real the risk is, how serious the loss or damage would be, etc. Such reckless indifference suffices for the insurers to refuse cover under the policy but does not amount to conscious recklessness within the meaning of Art. 4 LLMC. In J.D. Irving v Siemens,34 Siemens had obtained a contract to refurbish and upgrade the Point Lepreau Nuclear Generating Station. As part of this project, two low pressure rotors (approximately 115 tonnes each) had to be shipped from the port of Saint John to Point Lepreau, a task that Siemens entrusted to Irving. In order to do so, Irving bareboat chartered the barge SPM 125 from its owner. The first rotor was driven onto the barge without issues, but when the second rotor was driven on, first the transporter and then the barge itself tilted to starboard, ultimately resulting in the loss overboard of the second transporter and its rotor and of the first rotor (the first transporter tipped over but remained on the barge). When Irving invoked limitation, Siemens argued that it had acted recklessly, in knowingly selecting a barge that was too small for the intended operation, in continuing the loading operation when it became clear that the ballasting plan was based on incorrect information and thus could not be followed, and in failing to keep the load exactly on the centreline of the barge.

32 CA Anvers, 4ème Section, 18.11.2013, N° 2010/AR/3051, TBH 2014/1, 111. 33 2014 SCC 29; [2014] 1 S.C.R. 621. 34 2016 FC 69 (2016).

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frank stevens The Federal Court however found that, even if Irving would have preferred to use a larger barge if one had been available, it had accepted the SPM 125 based on stability calculations by a specialised firm which concluded that she was suitable for the job. In preparation for the operation, a detailed ballasting plan had been prepared, but this assumed, falsely, that the fore and aft ballast tanks of the barge were divided, which in fact they were not. The court found that the Irving personnel thereupon discussed this issue and reasonably concluded that they could adapt the ballasting plan on the spot. Finally, the Court found that even though the centre line had not been marked with chalk or paint or similar, the Irving personnel had had other means to ensure that the transporters stayed on it. There was, therefore, no conscious recklessness within the meaning of Art. 4 LLMC, as the Irving personnel had not known that their actions in loading the barge would probably result in the loss overboard of the rotors. vi. Case Law – UK With The Saint Jacques II,35 the UK already had one of the few cases in which breaking the limitation based on conscious recklessness was considered a real possibility. The Saint Jacques II, a fishing vessel, was en route from Boulogne to the Falls Bank fishing grounds, with her owner on board and acting as skipper, when she collided with another vessel. In flagrant violation of COLREGS, the Saint Jacques II was crossing the Southwest Traffic Lane against the flow of traffic in order to reach the fishing grounds before other fishing vessels, as she had done on several occasions before. The Admiralty Court confirmed the Registrar’s decision to dismiss her owner’s application for summary judgment on limitation, holding that there was a real prospect that the other ship would be able to prove conscious recklessness at trial. With The Atlantik Confidence,36 the UK also had another first. In that case, Teare J dismissed the owner’s claim for a limitation decree, finding that the owner (acting through the master and the Chief Engineer) had deliberately scuttled the vessel, thus acting with the actual intent to cause the loss. B. Proving Recklessness As is apparent from Art. 4 LLMC and from the case law cited earlier, recklessness is a state of mind. The reckless actor knows that what he is about to do will probably cause loss or damage but goes through with his intended actions anyhow. The problem is, however, that there is no objective tool or yardstick to ascertain a state of mind. Unless the actor admits to having acted recklessly, his state of mind will have to be deduced from external (objective) elements. In Van der Graaf/AIG,37 the Dutch Supreme Court confirmed that the trial court could point to the facts of the case to explain and support a finding that the actor had actually realised that his actions would probably cause loss or damage. In that case, a truck driver tasked with delivering cargo in Moscow had actually handed over both it and the customs documents to a person whose identity he had not ascertained, in a village close to Moscow, where the goods had been transferred to another truck. 35 [2002] EWHC 2452 (Admlty); [2003] 1 Lloyd’s Rep 203. 36 [2016] EWHC 2412 (Admlty); [2016] 2 Lloyd’s Rep 525. 37 Dutch Supreme Court (Hoge Raad), 29.5.2009, ECLI:NL:HR:2009:BH4041, NJ 2009/245, S&S 2009, 97 (Van der Graaf/AIG).

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limitation of liability – new trends The more obvious and specific a risk is, the easier it becomes for a court to find that the actor must have known that his actions would probably cause loss or damage. If, for example, cartons of cargo clearly marked as being susceptible to water damage are left out when a thunderstorm is forecast, the court can infer that the person leaving them out must have known that his actions would probably result in damage to them.38 It is not permissible, on the other hand, to infer reckless from a finding that in light of the circumstances of the case, the actor should have realised that what he was doing might cause damage.39 This point was also discussed at length in J.D. Irving v Siemens.40 Siemens acknowledged that, as a claimant seeking to break limitation, it had the burden of proving recklessness and knowledge, but argued that knowledge could and should be inferred from circumstantial evidence, notably the notes of interviews of Irving’s personnel immediately after the incident, and the additional fact that an internal investigation had been halted before it came to conclusions.41 The Court however found that the available evidence did not support the suggested inferences. Siemens also argued that, since the evidence regarding the operation and the incident was in the possession or control of Irving, the latter had the burden of proving what exactly had happened and what caused the loss, and absent such proof the court was entitled to infer that someone within the organisation must have acted recklessly and with knowledge of probable loss. In the earlier Canadian decision in Connaught Laboratories Ltd v British Airways,42 such an inference had indeed been drawn, though in rather different circumstances. In that case, four cartons of vaccines were temporarily stored in a warehouse rather than in a refrigeration unit, even though clearly marked with a warning that their contents were perishable and needed to be stored between 2° and 8° C. The cargo interests immediately gave notice of a claim, but British Airways took no steps to investigate the matter or to preserve evidence. When two years later the case went to court, it was no longer possible to find out why or how the cartons had been stored unrefrigerated. In those circumstances, the court felt entitled to infer that the (unknown) person handling the cartons must have realised that, by not putting them in a refrigeration unit, the contents of the cartons would probably be damaged. The Federal Court in J.D. Irving v Siemens had little difficulty distinguishing this case. Irving had put forward a wealth of evidence, in the form of witnesses, expert witnesses and documents, which had allowed Siemens and their experts to fully investigate the incident. The fact that there were some loose ends and that the experts did not agree on everything does not mean that there was an unavailability of evidence that precluded Siemens from establishing that limitation should be broken.

38 SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288. 39 See also Saba v Compagnie Nationale Air France, 78 F.3d 664 (1996), a US cargo case in which the majority said: “Intent can, of course, always be proved through circumstantial evidence. That is by no means the same thing as saying the defendant should have known about the danger”. 40 See 2016 FC 69, para 273–323. 41 2016 FC 69, para 274–291. Even if the Court had drawn the inference that Irving’s personnel had known that the barge was too small, however, that would still have fallen short of the mark. The burden of proof under Art 4 LLMC was not simply that that J.D. Irving had known that the barge was too small, but that it had been aware that the barge being too small would probably result in the loss that occurred (loss of the rotors). 42 Connaught Laboratories Ltd v British Airways, (2002) 61 OR (3d) 204.

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frank stevens C. The Unified Interpretations At the 32nd session of the IMO’s Assembly, the State Parties to the LLMC Convention adopted a statement setting out a number of interpretation rules or guidelines for Art. 4 LLMC. The document is (only) three pages long, with the majority of those pages taken up by recitals. There is only one substantial provision, which reads as follows, stating that the parties 1.

AFFIRM that the test for breaking the right to limit liability as contained in article 4 of the 1976 LLMC Convention is to be interpreted: (a) as virtually unbreakable in nature, i.e., breakable only in very limited circumstances and based on the principle of unbreakability; (b) to mean a level of culpability analogous to wilful misconduct, namely: (i) a level higher than the concept of gross negligence, since that concept was rejected by the 1976 International Conference on Limitation of Liability for Maritime Claims; (ii) a level that would deprive the shipowner of the right to be indemnified under their marine insurance policy; and (iii) a level that provides that the loss of entitlement to limit liability should begin where the level of culpability is such that insurability ends; (c) that the term “recklessly” is to be accompanied by “knowledge” that such pollution damage, damage or loss would probably result, and that the two terms establish a level of culpability that must be met in their combined totality and should not be considered in isolation of each other; and (d) that the conduct of parties other than the shipowner, for example the master, crew or servants of the shipowner, is irrelevant and should not be taken into account when seeking to establish whether the test has been met.

Although this statement has been published as an IMO Resolution,43 it is not a formal pronouncement of the IMO as such. It is instead a joint statement of the states party to the LLMC Convention, acting in that capacity. If it had been the former, it would only have been an opinion on how to interpret Art. 4 – an opinion of an international, well-known and well-respected body, but a mere opinion nevertheless. By making it a statement of the states party, the intention was to bring it into the scope of Art. 31.3(a) of the Vienna Convention on the Law of Treaties, which provides that “any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions” shall be considered when interpreting the Convention. By taking this route, it was hoped to give these Unified Interpretations binding force. Whether this will work in practice remains to be seen, however. A first obstacle is that the states party to the LLMC Convention are not necessarily also contracting states of the Vienna Convention. This does not have to be a fatal obstacle, though, as the Vienna Convention is widely seen as a codification of accepted customs and practices, such that even a state not party to it might still consider itself bound by the 43 A.1163(32).

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limitation of liability – new trends principles enshrined in it. A more substantial objection is that Art. 31.3 of the Vienna Convention does not provide that agreements regarding interpretation are binding on any court seized; it states only that a court shall “take into account” such agreements. In fact, the recitals to the Unified Interpretations explicitly accept that the courts in states party are the final arbiters on interpretation of the LLMC Convention. A court that explicitly considers the Unified Interpretations, but refuses to apply them (e.g., because it considers them irrelevant to the case at hand, incorrect in principle, etc) has nevertheless taken them into account and thus satisfied the Vienna requirements. As far as the substance of the interpretation principles goes, principle (a) is not problematic. It confirms that limitation of liability should be seen as virtually unbreakable in nature – unbreakability is the rule, breaking limitation is the exception which should only apply in very limited circumstances. This principle is repeatedly stated in the published travaux préparatoires44 and has been confirmed by commentators45 and in the case law.46 In other words, interpretation principle (a) simply confirms what was already known and widely accepted before. The introductory sentence of interpretation principle (b) provides that Art. 4 LLMC should be interpreted to mean a level of culpability analogous to wilful misconduct. If, however, one considers the concepts of intent or conscious recklessness to be vague or insufficiently defined – it is submitted that, in light of the case law that has developed, the concept of conscious recklessness is actually quite well defined – it is permitted to wonder whether providing that this “vague” concept is “analogous” to another, equally vague (or even vaguer) concept is really helpful. The concept of “wilful misconduct” is 44 See, for example, p 22: “[The Netherlands delegation] also strongly favoured a system providing for unbreakable limits, as that would do away with much litigation regarding the term ‘actual fault and privity’”. P 25: “Mr Vogel (German Democratic Republic): . . . There was a need to think about raising the limit of liability, which should, as far as possible, be unbreakable”. P 25: “Lord Diplock (United Kingdom): . . . In that regard, his delegation had assumed that the Convention would apply to all claims with the exception of those arising from pollution, and that maximum liability limits would be unbreakable”. P 27: “Mr Nair (India): . . . The right to the limitation of liability should be as far as possible unbreakable”. P 123: “Some delegations expressed the view that, in principle, the limitation should be ‘unbreakable’ and questioned whether Article 4 of the draft did not go too far in allowing exceptions”. P 128: “Mr Chatin (France): . . . Such a further qualification of the fault of the owner resulted in strengthening the right of limitation and made it practically unbreakable in court”. P 128: “Mr Lyon (Canada): . . . The new test of conduct barring limitation in Article 4 rendered the limits virtually unbreakable”. P 131: “Mr Iturralde (Argentina): His delegation could accept an unbreakable limit if the amounts were fixed at a reasonable level”. P 169: “Mr Hedborg (Sweden) said that the figures in document LEG/CONF.5/C/WP.35 were based on the assumption that the limitations under Article 4 would be unbreakable”. P 181: “The Chairman noted that the Committee had now reached tentative preliminary conclusions on several questions. . . . Following a discussion on the content of Article 4, the majority had been in favour of the principle of unbreakability”. P 207: “Mr Perrakis (Greece): . . . His delegation supported the principle of unbreakable limits because of the variety of interpretations given by different countries, making it impossible for underwriters or owners to forecast whether or not the limitation would be applied”. 45 Griggs, P. and R. Williams, Limitation of Liability for Maritime Claims (Lloyd’s of London Press, 1998) 3. 46 Canadian Pacific Railway v The Sheena M [2000] 4 FC 159; Daina Shipping Co v Te Runanga O Ngati Awa [2013] 2 NZLR 799; The Bowbelle [1990] 1WLR 1330; MSC Mediterranean Shipping Co SA v Delumar BVBA [2000] 2 All ER (Comm) 458 at 460, [2000] 2 Lloyd’s Rep 399 at 401; The Leerort [2001] EWCA Civ 1055; [2001] 2 Lloyd’s Rep 291 at [9]; The Saint Jacques II [2002] EWHC 2452 (Admlty); [2003] 1 Lloyd’s Rep 203.

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frank stevens indeed itself not clearly defined,47 and neither is the concept of one term being “analogous” to another in the area of interpretation. Analogous means similar or comparable in certain respects – and thus, by definition, not in other respects. Which aspects of intent or conscious recklessness are similar to wilful misconduct and which are not? It is worth mentioning in this respect that in Peracomo v TELUS,48 the majority of the Canadian Supreme Court held that intent or conscious recklessness (Art. 4 LLMC) is a different, more stringent standard than wilful misconduct (under the Marine Insurance Act). In his dissenting opinion, Wagner J argued that both concepts should be understood and applied in the same way. Furthermore, the principle introduces the concept of “culpability”, which again is not a precisely defined term and is not a term or a requirement that is mentioned in Art. 4 LLMC. It is submitted that this interpretation principle adds confusion and complication rather than improve matters. Interpretation principle (b) (i) provides that the level of culpability required for Art. 4 LLMC to apply should be higher than the concept of gross negligence, since that concept was rejected by the 1976 International Conference on Limitation of Liability for Maritime Claims. It is indeed true that during the drafting of the LLMC Convention, it was proposed, unsuccessfully, to explicitly add to Art. 4 LLMC a statement that the benefit of limitation would also be lost if the loss or damage resulted from the limiting party’s gross negligence.49 The point is, however, that “gross negligence” is a very ill-defined term. The common law has traditionally rejected the concept of “gross” negligence, once famously describing it as simply negligence with the addition of a vituperative epithet.50 Even in civil law countries, where the term “gross negligence” is used, it does not have a precise or generally accepted meaning. In Belgian law, for example, “gross negligence” does not exist in tort and contract law. A party either was negligent or was not negligent; whether he was “slightly” negligent, “ordinarily” negligent or “grossly” negligent is irrelevant. Gross negligence only exists in insurance law, and there, some definitions of “gross negligence” are actually very similar to conscious recklessness.51 Thus, depending on the definition of “gross negligence” one uses, there might actually be very little difference between the levels of culpability required for there to be intent or conscious recklessness on the one hand or gross negligence on the other hand. Interpretation principle (b) (ii) provides that the level of culpability required for Art. 4 LLMC to apply should be a level that would deprive the shipowner of the right to be indemnified under a marine insurance policy. The Commentary to the Hamburg draft of what was to become the LLMC Convention indeed refers to insurance cover:52 47 See, for a recent overview of the different definitions of this concept in the CMR context; Knapfield v CARS Holdings Ltd [2022] EWHC 1437 (Comm) at [95] et seq; also D. Damar, Wilful Misconduct in International Transport Law (Springer Verlag 2011) at p 269 et seq; P. Rosher, “The Notion of ‘Wilful Misconduct’ and Its Impact on the Scope of Limitation of Liability Clauses”, (2018) 6 IBLJ 529, at pp 530–532. 48 2014 SCC 29; [2014] 1 SCR 621. 49 Travaux préparatoires, p 125–126. After the 28th session of the IMCO Legal Committee, the following draft article was proposed: “A person shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result [or from his own gross negligence]”. 50 In Wilson v Brett (1843) 11 M & W 113. 51 J. Velaers, Het begrip “ZWARE FOUT” in bet aansprakelijkheidsrecht en in het verzekeringsrecht Jura Falc. 1980–81, 61. 52 Travaux préparatoires, p 122.

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limitation of liability – new trends The words “recklessly and with knowledge that such loss would probably occur” come very near to the English legal term “wilful misconduct”, which normally is the degree of blame required if the insurance cover shall be forfeited (Marine Insurance Act (1906) Sect. 55 (2) a). The proposed text, therefore, implies that there will be right of limitation where the insurance cover is intact. Making the limitation unbreakable to this extent should make possible a significant raise of the limits of liability.

There was, clearly, no point in raising the limits (as compared to the levels of the 1957 Convention) to amounts that the shipowners could not get insured. Many shipowners do not have the financial resources to pay compensation for which they have no insurance coverage. Raising the Convention limits to uninsurable levels would only lead to a theoretical increase, which would in most cases be unenforceable in practice. In that sense, there is a clear link between limitation levels and (commercial) insurability. That said, it is submitted that it is clearly incorrect to link breaking limitation to losing cover under one’s insurance policy. It is perfectly possible that insurance cover is lost before the right to limit is lost, and conversely (at least in theory) that the right to limit is lost before insurance cover is lost. Suppose, for example, that a policy only excludes loss or damage that has been intentionally caused by the assured. In such a case (admittedly unlikely), recklessness of the assured would prevent him from limiting his liability but would not cause him to lose cover under the policy. In practice, of course, if a claimant succeeds in proving intent or conscious recklessness in the limitation proceedings, that will often be sufficient to also meet the requirements for the exclusion in the insurance policy. In practice, again, creditors have to carefully consider whether trying to break limitation is a good strategy. If successful, chances are real that they have then provided the insurers with enough ammunition to refuse cover under the policy. The inverse scenario – the assured already losing cover under the policy before losing the right to limit – is much more likely and has indeed already happened. In the Canadian decision in Peracomo v TELUS already referred to, a fisherman whose anchor had repeatedly snagged on an underwater cable had finally lost patience with this pesky cable and had simply cut it, believing – on very flimsy grounds – that it was inactive. In reality, the cable was indeed an active one and cutting it caused substantial damage to the communications company owning it. The 4-to-1 majority of the Supreme Court held that the fisherman was not guilty of conscious recklessness, since he honestly (albeit very negligently) believed that the cable was disused and so did not appreciate that there was a high probability that his actions would cause loss or damage. He was, however, considered guilty of wilful misconduct, which the majority saw as a less stringent standard. He should have realised that the cable might still have been active and should have obtained information on whether this was actually the case or not, but failed to do so, with reckless indifference to the consequences of his actions. As a result, the fisherman lost cover under his insurance policy, but remained entitled to limit his liability.53 Such situations could easily arise in other circumstances too. In the Netherlands, for example, Art. 7:952 of the civil code provides that insurance does not cover loss or damage caused intentionally or by recklessness. This is not a mandatory provision, however. The 53 Wagner J, dissenting, argued that conscious recklessness under the LLMC Convention and wilful misconduct under the Marine Insurance Act were, in fact, the same standard, and that the fisherman should have retained both the right to limit and cover under his insurance policy.

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frank stevens parties are allowed to agree differently, and in practice, insurance policies often provide that cover is lost in case of “marked negligence” (merkelijke schuld) of the assured. “Marked negligence” is generally accepted to be more than “ordinary” negligence but less than gross negligence/recklessness. The concept is interpreted objectively: it also applies when the insured should have realised (but did not actually realise) that there was a substantial risk that his actions would cause loss or damage. If the insurance policy excludes loss or damaged caused by “marked negligence” of the assured, the latter will lose his insurance cover before he loses the right to limit pursuant to Art. 4 LLMC. Interpretation principle (b) (iii) provides that the loss of entitlement to limit liability should begin where the level of culpability is such that insurability ends. Principles b (ii) and (iii) both deal with the relation between limitation of liability and insurance, but principle b (ii) refers to coverage under a marine insurance policy, whereas principle b (iii) refers to the (much more abstract) principle of “insurability”. Principle b (iii) is very similar to a statement made by Lord Diplock from the UK delegation during the Eighth Meeting of the Committee of the Whole:54 With regard to breakability, his delegation believed that the limits should be made as unbreakable as possible on the principle that breakability should begin where insurability ended.

The concept of “insurability” came up several times during the meetings, particularly with regard to what the new limits should be. In that context, however, insurability refers to commercial insurability, i.e., the question whether there is sufficient capacity in the insurance market to cover certain risks at commercially reasonable premiums. Here, “insurability” clearly refers to something else. What seems to be meant is that the right to limit is lost if the party concerned exhibits behaviour that the average insurer would not be prepared to cover – in other words, behaviour that is “uninsurable”. How is that to be determined, though? If, in the Dutch insurance market, insurers generally lower the statutory bar of intent or recklessness to “marked negligence” (merkelijke schuld), does that then mean that for Dutch insurers, “marked negligence” is uninsurable and Dutch courts should refuse shipowners the right to limit as soon as they are guilty of “marked negligence”? That clearly would sit difficultly with the text of Art. 4 LLMC. And what if some insurers lower the statutory bar, but others don’t? Where lies the boundary of “insurability” then? It is also possible that Lord Diplock was referring to the point where insurability ends under the UK Marine Insurance Act 1906, s.55(2)(a) of which provides that the insurer is not liable for any loss attributable to the wilful misconduct of the assured. In other words, insurability ends – and breakability begins – when there is wilful misconduct of the assured. If this is what is meant with “insurability”, however, principle b (iii) is a repetition of the introductory sentence of principle b. Also, “wilful misconduct” is typical English legal language terminology, which is difficult to translate into other languages and other legal systems. For that reason, Art. 4 LLMC does not use the term “wilful misconduct” but requires either intent or conscious recklessness. Where the drafters of the convention chose not to use the term “wilful misconduct”, smuggling this concept back in under the guise of “insurability” is less than helpful, it would seem.

54 Travaux préparatoires, CMI Edition, p 127.

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limitation of liability – new trends Interpretation principle (c) calls attention to the fact that Art. 4 LLMC requires both recklessness and knowledge, which two elements constitute a combined criterion. Recklessness always requires knowledge. A person can only be reckless if he realises that his actions could cause damage. A novice builder, for example, who genuinely believes that all roofs are sturdy enough to support a person’s weight, is not “reckless” when he steps out onto a flimsy roof – he simply does not know that his actions are dangerous and could result in injury or death. In general, however, recklessness can also refer to knowing that there might be a risk or possibility of damage, but then turning a blind eye and continuing anyway, without looking into the risk further (reckless indifference).55 A more experienced builder will know that not all roofs are equally sturdy, but could still step out onto a roof without additional protection, because he is in a hurry, because he had other things on his mind, etc. Under Art. 4 LLMC, however, “mere” recklessness – the mere knowledge of a possibility of loss or damage – is not sufficient. Art. 4 LLMC, per its express words, requires in addition, or even primarily, the actual knowledge of the actor that his actions will probably result in the loss or damage that afterwards occurred. This means that a builder, who has looked at the roof beams, the covering, etc and concluded that this particular roof is sturdy enough to carry his weight also is not reckless within the meaning of Art. 4 LLMC, even if afterwards his judgment turns out to be wrong and he does crash through. Only a builder who realises that this is a flimsy roof, which is most likely not strong enough, but ventures out onto it anyway – e.g., because he thinks that if he runs fast enough, he can make it to the other side before the roof collapses, or because he thinks that even if he crashes through, he’ll get a viral YouTube video out of it, etc – acts recklessly. The point was also made by the Canadian Supreme Court in Peracomo v TELUS. In that case, a fisherman had cut an underwater cable that his anchor had snagged on. The act of cutting the cable, as such, was of course a deliberate, intentional act, but the Supreme Court held that the fisherman had not intended to cause the resulting loss (damage to a valuable cable that had to be repaired). He also didn’t act recklessly, because he believed – incorrectly and very foolishly, but still believed – that the cable was not in use anymore and thus cutting it would cause no detrimental consequences. It should also be stressed that the knowledge requirement under Art. 4 LLMC is a subjective requirement56: what is required is real, actual knowledge of the probability of loss or damage. What the actor should have known, or whether a normal, careful person in the same circumstances would have realised that there would probably be damage is irrelevant. Principle (c) and Peracomo v TELUS thus both stress the fact that there is only conduct barring limitation under Art. 4 LLMC if the person acting actually realised that his actions would probably result in the loss or damage that afterwards occurred but went ahead anyway. Anything less than that is not sufficient to break limitation. Interpretation principle (d) provides that the conduct of parties other than the shipowner (in particular the master, crew or other servants of the owner) is irrelevant. Art. 4 LLMC indeed provides that a personal act or omission of the liable person is required. If it is the shipowner that is held liable and invokes limitation of liability, limitation can only be set aside if it is the shipowner as such (generally a company) that has acted intentionally

55 J.D. Irving v Siemens 2016 FC 69, at [264]–[265]. 56 J.D. Irving v Siemens 2016 FC 69, at [267]–[269].

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frank stevens or recklessly. Principle (d) only mentions the shipowner, but the same of course applies to salvors, who are also entitled to limit their liability (Art. 1 (1) and (3) LLMC). If, under the applicable law, servants of the shipowner – e.g., the master – can be sued in person, these servants themselves are also entitled to invoke limitation of liability (Art. 1 (4) LLMC). In such case, if it is the master that is personally being held liable and invoking limitation, principle (d) of course does not apply, and it are indeed the personal acts or omissions of the master himself that are relevant under Art. 4 LLMC. III. Timing: When Can Limitation Be Invoked? The LLMC Convention does not explicitly provide when limitation should be invoked. It is generally accepted, however, that there is in fact no time limit and that the liable party can wait until the very last moment, i.e., right until the moment a judgment is enforced against it. In the Dutch Harns proceedings,57 one of the creditors argued that, even if the convention did not prescribe a time limit, limitation had to be invoked “as soon as possible” after the incident. The court however rejected this argument, saying that there was nothing in the convention itself or in the travaux préparatoires to support such an obligation. Even more remarkably, this creditor also argued that, pursuant to Art. 11.1 LLMC, limitation could only be invoked as long as a party was “alleged” to be liable – which, he contended, had to be understood as meaning that, once a party had been found to be actually liable, it was no longer possible to invoke limitation. The court also rejected this argument. As appears from the travaux préparatoires, the original draft of the LLMC Convention referred to “any person liable”. That was later changed to “any person alleged to be liable” to make it clear that that limitation could be invoked immediately, even if liability had not been established by then. If anything, the “alleged to be liable” wording thus was meant to extend the time frame during which limitation could be invoked rather than to restrict it. If one accepts that the liable party can wait until the very last moment to invoke limitation, there is of course the possibility that the limitation amounts (or the rules themselves) have changed by that time. The question then becomes one of which amounts or rules apply: those in force at the time of the incident, or those in force when the liable party formally invokes limitation? In a French case, a student taking part in a sailing course was very seriously injured during a crash gybe. The accident occurred in August 2005, but the limitation fund was only constituted in August 2012. In 2005, France was a party to the original 1976 LLMC Convention, but in 2012, it adopted the 1996 Protocol, with its substantially higher limits. For the victim, this meant the difference between an insufficient 166.500 SDR personal injury fund (France’s limit for less than 300-ton vessels under the 1976 convention) and a largely sufficient 1.000.000 SDR fund under the Protocol. The Paris appeal court had initially held that the law in force at the time of constitution of the fund was governing,58 but that decision was then set aside by the French Supreme Court,59 which confirmed that it was the law in force at the time of the incident that prevailed. In this case – a conflict between the 1976 Convention and the 57 RB Rotterdam, 6.9.2017, ECLI:NL: RBROT:2017:7912, S&S 2018/28 (Harns). 58 CA Paris 7.9.2015 [unpublished]. 59 Comm. fr. (Ch Comm), 14.6.2017, Pourvoi N° 16–12.904, ECLI:FR: CCASS:2017:CO00896.

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limitation of liability – new trends 1996 Protocol – this outcome could be directly linked to the wording of the Protocol, which in Art. 9.3 provides that the modified convention only applies to occurrences taking place after the entry into force of the Protocol. A Rotterdam court has similarly held that the 1996 Protocol only applies to occurrences taking place after the Protocol entered into force in the Netherlands.60 The issue however is not limited to conflicts between the convention and a later Protocol. The 1996 Protocol introduced a specific procedure to amend the limits, which at the time of writing has already been used once and will in all likelihood be used again in the future. When the limits are amended, there may again be cases where the limitation amounts at the time limitation proceedings are commenced or the fund is constituted are different than the amounts that applied at the time of the incident. In such case, the textual argument based on Art. 9.3 of the 1996 Protocol cannot be used. The Rotterdam Court also pointed out that the shipowner was entitled to (and did) base his legal strategy on the rules in force at the time of the incident, and that applying the Protocol could result in a different treatment of incidents occurring at (about) the same time, depending on when the parties involved decide to invoke limitation. These arguments are not entirely beyond criticism. Limitation rules and amounts do not change unexpectedly overnight; changes are announced a long time in advance. Also, limitation of liability is a possibility, an option: a party entitled to limit is not obliged to actually invoke limitation, and if it decides to do so, it is generally quite free to choose when to commence limitation proceedings. The latter is, however, not always the case. In a currently pending Belgian case, the liable shipowner for a long time believed that there was only one creditor and thus only invoked limitation as a defence in the proceedings brought by that creditor. Years later, however, additional creditors came forward and also filed claims, forcing the shipowner to constitute a fund. At that time, though, the higher 2012 limitation amounts had come into force. IV. The Effect of the Combination of Funds The LLMC Convention provides for three different funds that may have to be constituted: two general ones (Art. 6) and a specific passenger fund (Art. 7). The general funds are those for personal injury or loss of life claims on the one hand (Art. 6.1.a) and for any other claims on the other hand (Art. 6.1(b)). Art. 6.2 further provides that if the personal injury/loss of life fund is not sufficient to fully pay the claims against this fund, the balance of those claims can be entered with the “other claims” fund and ranks rateably with the damage claims against that fund. The question, however, is what happens if there are only personal injury or loss of life claims, but no damage claims. If the personal injury fund is insufficient to pay all claims, are the victims then limited to only the personal injury fund, or is there a way to add the amount of the damage fund? It has been suggested that this issue could be circumvented by simply adding a damage claim.61 Chances are, for example, that the victim of an accident will have (blood)stains on his clothing, and thus a damage claim to clean or replace this clothing could be added. It is doubtful, however, whether this 60 RB Rotterdam 6.9.2017, ECLI:NL: RBROT:2017:7912, S&S 2018/28 (Harns). 61 See, for example, C. Peignon, note to Cass fr, (Ch com) 26.6.2019, Pourvoi N° 18–12.249 & 18–12.250, Navire Accroch’coeur, DMF 2020, N° 830, (1041), 1050.

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frank stevens stratagem would actually work. Invoking limitation and constituting a fund is an option for the liable party, never an obligation. Since such “added” claims would likely be of limited financial importance, the liable party could simply pay those claims, thus removing the need to constitute the additional damage fund. This issue has come up in two French pleasure sailing cases, both of which went up to the French Supreme Court. In the Accroch’coeur case,62 a racing catamaran capsized when returning to port after a regatta, resulting in four crew members losing their lives. The claims of the relatives of the deceased crew members exceeded the amount of the personal injury fund applicable at the time of the incident (166,500 SDR). In the Pido case,63 a participant in a sailing course was grievously injured during a crash gybe. The only claims filed against the sailing school were the personal injury claims of the victim and his family; there were no other damage claims. Here also, the personal injury claims (almost 260.000 EUR) exceeded the amount of the personal injury fund. In both cases, the appellate courts had limited the victim’s compensation to the amount of the personal injury fund, only to have their decisions in this respect set aside by the French Supreme Court. The Supreme Court held that if the personal injury/loss of life fund is not sufficient to pay the claims against it in full, the amount of the damage fund also becomes available to the claimants. The French and English versions (both equally authentic) of Art. 6.3 LLMC are slightly different. The English version reads “Where the amount calculated in accordance with paragraph 1(a) is insufficient . . ., the amount calculated in accordance with paragraph 1(b) shall be available for payment of the unpaid balance of claims”. The French version on the other hand reads: “Lorsque le montant calculé conformément à l’alinéa a du paragraphe 1 est insuffisant . . ., le montant calculé conformément à l’alinéa b du paragraphe 1 peut être utilisé pour régler le solde impayé des créances”. The French version (translatable as “can be used”) thus seems less forceful and more of a suggestion than the English version.64 The travaux préparatoires however make it quite clear that the availability of the property fund was understood to be automatic and not dependent on whether or not there are actual property damage claims.65 Remarkably, the French domestic incorporation of Art. 6.3 LLMC in Art. L.5121–10 of the Code des Transports is also more stringently worded than the authentic French text of the convention (“. . . l’excédent vient en concurrence avec les créances autres . . .” – the surplus competes with the other claims).66 In any case, the French Supreme Court has now twice repeated its position, which is fully in line with the intention of the drafters of the LLMC Convention. 62 Cass fr, (Ch com) 26.6.2019, Pourvoi N° 18–12.249 & 18–12.250, Navire Accroch’coeur, DMF 2020, N° 830, 1041, note C. Peignon. 63 Cass fr, Ch com, 24.3.2021, Pourvoi N° 19–13.325, Voilier Pido, DMF 2021, N° 837, 634, note S. Miribel. 64 The Spanish version (“. . . se podrá disponer . . .”) also rather suggests a possibility than an obligation. 65 Travaux préparatoires, pp 198–199: “The Chairman explained that the Japanese proposal was to provide that claims for personal injury which had not been met completely from the fund established for such claims would be met from the fund for damage to property, even if there were no property claims’. P 199: “Lord Diplock (United Kingdom) . . . When claims for personal injury exceeded the amount specified in sub-paragraph (a), they could be satisfied to the extent of the amount mentioned in subparagraph (b), whether there were claims for damage to property or not. The application of the provision did not depend on the establishment of a property fund. It merely established the limit to which the carry-over could be satisfied”. 66 S. Miribel, case note to Cass fr, Ch com, 24 March 2021, Pourvoi N° 19–13.325, Voilier Pido, DMF 2021, N° 837, (634), 638.

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limitation of liability – new trends V. Where to Constitute a Fund? In a perfect world, if all countries were party to the same limitation convention and interpreted and applied this convention in the same way, it would not matter greatly where a limitation fund was constituted. The reality, of course, is different. Even though the 1996 version of the LLMC Convention has been quite successful, some countries have not (yet) ratified the 1996 Protocol but stay with the original 1976 LLMC, and some countries are still party to the 1957 Limitation Convention, and so on. In practice, therefore, the place where a limitation fund can or must be constituted can have very important (financial) consequences. The traditional view was that the LLMC Convention did not allow pre-emptive actions by a person entitled to limit his liability.67 Such a person had to wait until at least one claimant had instituted legal proceedings against him; he could then constitute a fund in the country where that claimant had sued. Only if different creditors commenced legal proceedings in different countries would he have a choice of forum. In the UK, however, that position was abandoned in The Western Regent,68 where the Court of Appeal allowed the shipowner to invoke limitation in a competent jurisdiction pursuant to Art. 10 LLMC, notwithstanding the fact that no legal proceedings as meant in Art. 11 LLMC had been instituted against him there. In 2013, the French Supreme Court followed suit, although in a very brief decision, with hardly more than an assertion that the correct interpretation of Art. 11.1 LLMC was that any person alleged to be liable could start limitation proceedings without having to wait for legal proceedings by another party.69 Why this was the case, and how this sat with the argument that the drafters of the LLMC Convention did not want to allow forum selection by the shipowner, was not explained. Other jurisdictions like Belgium and the Netherlands still maintain the orthodox view that the shipowner must wait for his creditors to move first. In such case, however, there is a further issue. Is it sufficient that a creditor has commenced legal proceedings in a State Party (e.g., the Netherlands), such that the courts of that state then automatically have jurisdiction with regard to the constitution of a limitation fund? Or are legal proceedings and Art. 11 LLMC only the first step, with the shipowner then bound in addition to identify a domestic jurisdiction provision that allows him to seize the courts of that state with a limitation request? In the Stolt Commitment case,70 the Dutch Supreme Court held the second option to be correct. The court pointed out that the LLMC Convention left all questions of procedure to the law of the state in which the limitation proceedings were brought (Art. 10.3 and Art. 14 LLMC), and that it was not apparent from the travaux préparatoires that the drafters of the LLMC intended Art. 11 LLMC to be a provision that founded jurisdiction. True, as in most conventions “questions of procedure” are referred to the domestic law of the state involved, but that does not necessarily include issues of jurisdiction, and even 67 See, for example, R. Cleton, De beperkte aansprakelijkheid van de scheepseigenaar, 1990, at p 44; R. Shaw, Practice and Procedure, in The Limitation of Shipowners’ Liability: The New Law, 1986, at p 113 et seq, p 119–121; H.-J. Puttfarken, Beschränkte Reederhaftung – Das anwendbare Recht, 1981, at p 116, 125 and 127. 68 Seismic Shipping Inc v Total E&P UK Plc (The Western Regent) [2005] EWCA Civ 985; [2005] 2 Lloyd’s Rep 359. 69 French Supreme Court (Cour de Cassation), 9.7.2013, DMF 2013, 795. 70 Dutch Supreme Court (Hoge Raad), 29.5.2020, ECLI:NL:HR:2020:956.

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frank stevens if the travaux préparatoires do not show a clear intention of the drafters to make Art. 11 into a jurisdictional provision, they do not show a clear intention not to do so either. In any case, this decision of the Dutch Supreme Court has made it more complicated for shipowners to limit, and opens up the possibility (maybe largely theoretical, but still there) of a claim subject to limitation being filed against a shipowner in the Netherlands, without the shipowner being able to constitute a limitation fund there. Pursuant to Art. 11.3 LLMC, a fund constituted by one of the persons of a “group” shall be deemed constituted by all of the persons of that group. A fund constituted by the registered shipowner, for example, can be invoked by the charterer of the vessel. The appeal court of The Hague has held that a person who wants to invoke a fund that has already been constituted by another person does not have to wait until legal proceedings have been instituted against him (whether in the fund country itself or elsewhere).71 VI. Contracting Out of the Right to Limit Limitation of liability is a right for the shipowner, not an obligation. When an incident has occurred, he may decide not to invoke limitation, e.g., for commercial or reputational reasons. If that is possible, it should also be possible for him to agree in advance that he will not invoke limitation of liability. In The Cape Bari,72 the Privy Council has confirmed that there is indeed no objection in principle to a shipowner contracting out of or waiving his statutory right of limitation. Such an agreement, however, needs to be proved beyond doubt, all the more so since parties generally are not inclined to give up benefits or advantages. In the Cape Bari, the clause which was claimed to exclude limitation was contained in the Conditions of Use of a damaged sea berth. Similarly, the Rules of Navigation of the Suez Canal at the time of the Ever Given grounding contained a clause purporting to exclude the possibility of limitation of liability (see Clause 4(3)). Two possible issues may arise in this context: firstly, were the relevant terms and conditions validly agreed upon, and secondly, do they on a proper interpretation really exclude the shipowner’s right to limit? In the Cape Bari, the relevant clause provided generally that the shipowner would hold the owner of the berth harmless from and indemnified against all and any loss, damages, costs and expenses. The Privy Council held that this clause, on its true construction, did not mean that the shipowner would make good the full amount of any loss or damage, without invoking limitation of liability. The clause in the Cape Bari did not explicitly refer to limitation of liability or the LLMC Convention. The provision in the Rules of Navigation of the Suez Canal, by contrast, does. It states: “The principals of vessels or floating units are responsible without option to release themselves from responsibility by ‘Limited Liability’”. It is thus much clearer in its intention to make it impossible for the shipowner to invoke limitation. In any case, as the Privy Council pointed out, for such a clause to be effective it must be clear from the language of the clause construed in its context that the parties intended to exclude the right to limit.73 71 CA Den Haag 28.8.2014, ECLI:NL: GHDHA:2014:2926, S&S 2014/133 (Clary, Tricolor). 72 [2016] UKPC 20. See also S. Allison, “Navigating Between Freedom of Contract and LLMC 1976: The Cape Bari” [2016] LMCLQ 495. 73 The Cape Bari, at [40].

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limitation of liability – new trends In the Accroch’coeur decision, the French Supreme Court held that the fact that the insurance policy provided for a policy limit that was, in that case, higher than the limitation amount did not mean that the insurer had (implicitly) given up the right to invoke limitation of liability.74 The policy was a general liability policy, which could also apply in cases where there was no possibility to limit liability. VII. Salvage vs Wreck Removal In 2018, the Dutch Supreme Court had to decide two factually similar cases, raising issues of limitation for wreck removal claims. In Riad/Wisdom,75 the seagoing vessel Wisdom ran into and sank the inland vessel Riad. The wreck of the Riad was later removed by a specialised company on the orders of the Dutch authorities. The vessel itself was a total loss and was scrapped, but her cargo of ferrochrome still had a considerable value. In order to recover it, the cargo owners had to put up a guarantee which was later called on by the Dutch authorities to cover the removal costs. The cargo owners then sued the owner of the Wisdom for reimbursement of this amount. In Margreta/Sichem Anne,76 the seagoing vessel Sichem Anne collided with the inland vessel Margreta. To prevent her sinking, the Margreta was beached and her cargo of containers transhipped into barges. Then, following emergency in-situ repairs, the Margreta was able to proceed to Dordrecht under her own steam. Her owner then sued the owner of the Sichem Anne to recover the salvage costs. The owners of the Wisdom and of the Sichem Anne argued that these claims should be filed against the general LLMC fund, whereas the claimants in both cases argued that these were claims for salvage and thus excepted from limitation under Art. 3(a) of the LLMC. That Convention does indeed except claims for salvage from limitation, but does, at least in principle,77 allow claims for wreck or cargo removal under Arts. 2.1(d) and (e). The difficulty is that the activities described in the latter Articles can, depending on the circumstances, also constitute or be part of salvage operations. Article 1.3 does provide that “salvage operations” include wreck or cargo removal activities, but this is a one-way provision. When a salvor, in situations that legally qualify as salvage, performs operations as described in Article 2.1.(d) or (e) LLMC, those operations count – for that salvor – as salvage operations. That does not mean, however, that wreck or cargo removal operations are always and by definition salvage operations within the meaning of Article 3(a). The question remains, therefore, how to distinguish between salvage operations (excepted from limitation) and wreck or cargo removal operations (in principle subject to it). The LLMC Convention does not define the concept of salvage. It might be possible to use the definition of Article 1(a) of the Salvage Convention 1989: “any act or activity undertaken to assist a vessel or any other property in danger in navigable waters or in any other waters whatsoever”. But this creates anomalies. When a ship or its cargo has lost all value as a result of the incident, the answer is easy: they cannot be said to be 74 Cass fr., Ch com, 26 June 2019, Navire Accroch’coeur, Pourvoi N° 18–12.249 & 18–12.450, note C. Peignon. 75 Dutch Supreme Court (Hoge Raad), 2.2.2018, ECLI:NL:HR:2018:140, S&S 2018/62 (Riad/Wisdom). 76 Dutch Supreme Court (Hoge Raad), 2.2.2018, ECLI:NL:HR:2018:142, S&S 2018/61 (Margreta/Sichem Anne). 77 State Parties may exclude the application of these provisions (Art 18.1 LLMC).

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frank stevens “in danger”, being already lost, and therefore salvage operations, in the legal sense of the term, are not possible (even though the remains may still need to be removed, for example for the safety of shipping or the protection of the environment). It is also possible, however, that a wreck or its cargo still has some value, if only for scrap. In such case, the remains are “in danger” – since if no action is taken, their remaining (scrap) value will disappear – and thus they can be salved. Materially identical operations thus can be either salvage or not salvage, depending on the circumstances of the case. The Dutch Supreme Court therefore preferred a different criterion: salvage claims within the meaning of Art. 3(a) LLMC were only those claims made by the salvor himself. Salvage claims were excepted from limitation to encourage salvage and to protect and improve the legal position of salvors: but this ratio legis only applied when the claim was made by the salvor, and not to claims for reimbursement by third parties who had paid the salvor. This decision is in line with The Breydon Merchant78 in England and with a 2013 decision of the French Supreme Court,79 and is also supported by a number of authors.80 For claims subject to limitation, it is irrelevant if they are brought by way of recourse or for indemnity under a contract or otherwise (Art. 2.2 LLMC). For claims excepted from limitation, however, the nature of the claim is relevant: a recourse claim to recover a salvage award is not a “salvage claim” within the meaning of Art. 3(a) LLMC. Holding that salvage recourse claims are not excepted from limitation does not solve all problems, though. Is such a claim a claim for wreck or cargo removal costs within the scope of Art. 2.1(d) or (e) of the LLMC, or is it a claim for consequential loss resulting from loss of or damage to property within the scope of Art. 2.1(a)? In countries that have not excluded the application of Article 2.1.(d) and (e), the question is of academic interest only. Many countries however do not allow wreck removal costs to be limited at all,81 or only allow such costs to be limited to separate or higher amounts.82 In those countries, it is very relevant whether a salvage recourse claim comes under Art. 2.1(a) and thus has to share in the general property fund with all other claimants, or comes under Art. 2.1.(d) or (e) and thus enjoys a separate, dedicated limitation fund or even unlimited liability. The decision cannot be made on linguistic grounds or on the basis of the nature of the operations. The costs that the owners of the Riad and of the Margreta had to pay to the salvors were clearly removal costs, but as clearly also consequences of the collision, which itself constitutes loss of or damage to property occurring on board or in direct connection with the operation of the ship. Both classifications are defensible. The Supreme Court, however, decided that claims related to wreck or cargo removal, even if brought by way of recourse action, still qualified as claims within the meaning of Art. 2.1(d) or (e). Art. 2 explicitly provided that the legal basis for a claim and the way in which it is brought were irrelevant. What was 78 [1992] 1 Lloyd’s Rep 373. 79 Cass com 9 July 2013, n° 12.18504, DMF N° 751, p 795, Bull. 2013, IV, n° 116. 80 A. Mandaraka-Sheppard, Modern maritime law and risk management (2nd edn, Informa 2009), at p 884–885; P. Delebecque, Droit maritime (13th edn, Dalloz 2014), n° 855 at p 624. 81 For instance, the UK and France. 82 In the past, Belgium and the Netherlands required a separate limitation fund for wreck removal costs. In both countries, limitation for wreck removal costs has now been abolished. Germany still has a separate limitation fund for wreck removal costs (§ 612 HGB).

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limitation of liability – new trends important is the subject matter of the claim. Furthermore, the Supreme Court considered the provisions on wreck and cargo removal costs as a lex specialis, which took precedence over the more general provision of Art. 2.1(a), particularly in those countries that had made a reservation under Article 18.1 and created a specific regime for removal costs. The argument that this reservation could only apply to claims by public authorities but not to claims by shipowners or other private entities was rejected by the Supreme Court. There was nothing in either the LLMC Convention itself or its travaux préparatoires that supported such a distinction. In the end, therefore, the owners of the sea-going vessels were able to limit liability but were required to constitute a separate wreck removal fund. It should be noted, however, that this separate regime has since been abolished in the Netherlands. Today, therefore, the owners of the liable vessels would be obliged to fully reimburse the claimants in full for the salvage awards they had paid to the salvors.

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C H A P T E R 18

Am I My Brother’s Keeper? Liability in Tort for the Acts of Third Parties Professor Simon Baughen “And the LORD said unto Cain, Where is Abel thy brother? And he said, I know not: Am I my brother’s keeper?”1

Generally, in UK tort law a person is not responsible for the acts of other parties, outside vicarious liability for the acts of servants and agents, and special circumstances such as for the use of sub-contractors of extra-hazardous activities. This chapter will examine developments in tort law over the last ten years whereby A may owe a duty of care in respect of the acts of B in two particular contexts. One concerns the obligations owed by a parent company in respect of the activities of its subsidiaries: the other, possible duties of care of a company in respect of separate persons in its value chain, both upstream (its suppliers) and downstream (its customers and users of its products). I. Parent Companies and a Direct Duty of Care to Persons Affected by the Acts of Their Subsidiaries In a transnational group of companies, a parent company and its subsidiaries are separate legal persons. For a parent company to be held liable in tort in respect of the activities of its foreign subsidiary the claimant will need to establish a link between the subsidiary and the parent that will enable acts of the subsidiary to be attributed to the parent. This link can be established in two ways. The first is to make the parent liable for the defaults of its subsidiary by piercing the corporate veil of the subsidiary or by finding that the subsidiary was acting as the parent’s agent. The second is to find the parent primarily liable for a breach of a personal duty of care owed by it towards the claimants. A. Vicarious Liability. “Piercing the Veil” Since Salomon v Salomon & Co Ltd2 the English courts have upheld the principle that a company is a legal entity distinct from that of its shareholders. Shareholder liability is limited to the amount of unpaid share capital. The principle applies equally to corporate 1 Genesis 4.9. 2 [1897] AC 22.

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DOI: 10.4324/9781003376347-21

liability in tort for the acts of third parties groups where a parent company holds the majority, or even the totality, of shares in a subsidiary. This is the case notwithstanding that the principle was established before the emergence of corporate groups.3 There are, however, limited situations in which the courts will ignore this artificial personality and trace back to the underlying economic reality as far as justice requires. This process of “piercing the corporate veil” is used by the courts only in exceptional circumstances and to date there have been no decisions in which an English court has used it in a tort case.4 A parent company may also be found liable for the acts of its subsidiary where the latter has acted as its agent. However, under English law, absent clear evidence of a fraudulent use of the corporate form, the courts will continue to respect the separate legal identities of corporate defendants. Moreover, the category of fraud is very narrowly defined. It is limited to the use of corporate personality to avoid existing contractual obligations5 and does not apply where the corporate form is used to minimise the incidence of future liabilities.6 In the maritime sphere Salomon has applied as much at sea as on dry land, at least in England. A sister-ship arrest was denied in The Evpo Agnic,7 where the shareholders and directors of the company owning the ship giving rise to the claim, The Skipper I, were identical to those in the case of the company owning her putative sister-ship the Evpo Agnic.8 However, as the company owning the Evpo Agnic was a separate legal person, the sister-ship procedure could not be used to allow an admiralty action in rem to be brought against The Skipper 1. The position may be different in other jurisdictions.9

3 P. Blumberg, The Multinational Challenge to Corporation Law (Oxford University Press, 1993). 4 For a more general discussion of this topic see L. Gallagher and P. Ziegler, “Lifting the Corporate Veil in the Pursuit of Justice” [1990] JBL 292. In DHN Estates v Tower Hamlets LBC [1976] 1 WLR 852, the Court of Appeal gave as one of their reasons for allowing a loss suffered by the parent to be included when assessing compensation due to its landowner subsidiary, the fact that the companies formed a “single economic unit”. The decision was subsequently distinguished on the grounds that it involved a wholly owned subsidiary, in Woolfson v Strathclyde Regional Council (1978) 38 P&CR 521, and was again distinguished, almost to vanishing point, in Adams v Cape Industries Plc [1990] Ch 433, on the grounds that it involved the wording of a specific statute and set down no general principle of law. 5 E.g., Jones v Lipman [1962] 1 WLR 832, where a vendor sought to avoid an agreed sale of his house to the plaintiff by transferring it to a company incorporated for the purpose of purchasing the house from him. 6 Adams v Cape Industries Plc [1990] Ch 433 CA. The position regarding veil piercing was confirmed by the Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 2 AC 4, where at [15] Lord Sumption, with whom Lord Mance and Lord Clarke agreed, stated that under English law there existed limited circumstances in which the law treated the use of a company as a means of evading the law as dishonest. The court might be justified in piercing the corporate veil if a company’s separate legal personality was being abused for the purpose of some relevant wrongdoing; however, it was not an abuse to cause a legal liability to be incurred by the company in the first place, nor to rely on the fact that a liability was not the controller’s but the company’s. 7 [1988] 1 WLR 1090; [1988] 2 Lloyd’s Rep 411. 8 [1988] 1 WLR 1090; [1988] 2 Lloyd’s Rep 411. 9 For instance, in the US in The Amoco Cadiz [1984] 2 Lloyd’s Rep 304, at 338 and 343–346 (affd 954 F 2d 2179 (7th Cir 1992)), Judge McGarr held that Standard Oil was responsible for the tortious acts of two of its wholly owned subsidiaries which had resulted in an oil spill from a tanker, and also personally liable because it had initially been involved in and controlled the designing, construction, operation and management of the vessel which it had treated as its own. In France in The Erika, Cass crim 25.09.2012, 10–82.938, Total SA, parent of the subsidiary company Total Transport Corporation (TTC) which had been the voyage charterer of the vessel that caused the massive oil spill, was found criminally liable and civilly liable to the claimant as partie civile, without benefit of limitation under the channelling provisions of the CLC. In South Africa an arrest may be made against an associated ship, one which is owned by a company which is controlled directly or indirectly by the same person who controlled the company which owned the “guilty ship” (the ship concerned) at the time the cause of action arose.

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professor simon baughen B. Direct Duty of Care by the Parent The second potentially relevant situation is where the parent company is found to owe a direct duty of care towards those affected by the operations of its subsidiaries. This is the basis on which London solicitors Leigh Day have brought such claims since the early 1990s.10 In 1999 the House of Lords in Lubbe v Cape Plc (No 2)11 declined to stay proceedings in claim brought in negligence in England against an English parent company by employees of a South African subsidiary and those living close to the factory where asbestos was being produced. Lord Bingham identified the main issue as regards the potential liability of the English parent in tort, as follows: Whether a parent company which is proved to exercise de facto control over the operations of a (foreign) subsidiary and knew, through its directors, that those operations involved risks to the health of workers employed by the subsidiary and/or persons in the vicinity of the factory . . . owes a duty of care to those workers and/or other persons in relation to the control it exercises over and the advice it gives to the subsidiary company?12

The House of Lords found that the claims in England should not be dismissed on grounds of forum non conveniens. The appropriate test was whether the defendant could show that there clearly was a more appropriate forum, though the stay would still not be granted if there was a real risk that substantial justice might not be achieved in that forum.13 That was the case there: although South Africa was a clearly more appropriate forum, there was a substantial risk of injustice to the claimants if required to sue there, as it was highly likely that legal representation would be unavailable, and there was also a lack of procedures in South Africa to accommodate multi-party actions. Shortly after the decision the case settled, and the issue of when a parent company might owe a duty of care in respect of the activities of its subsidiary never came to be decided. The first decision to find a direct duty of care by a parent in respect of its subsidiary’s activities came in 2012 in Chandler v Cape Plc.14 This was a claim by a subsidiary company’s employees in relation to injury caused through handling of asbestos. A duty of care by a parent company to the employees was found, based on the parent company’s “state of knowledge” about the factory, and “its superior knowledge about the nature and management of asbestos risks”. Arden LJ listed four factors which pointed to the parent company owing a duty of care to employees affected by the subsidiary’s activities. First, the businesses of the parent and subsidiary were in a relevant respect the same. Second, the parent had, or ought to have had, superior knowledge on some relevant aspect of health and safety in the particular industry. Third, the subsidiary’s system of work was unsafe as the parent company knew, or ought to have known. Fourth, the parent knew or ought to have foreseen that the subsidiary or its employees would rely on the parent using that superior knowledge for the employees’ protection. It was not necessary to show that the parent had been in the practice of intervening in the subsidiary’s health and safety 10 See, e.g., Ngcobo & Others v Thor Chemicals Holdings Ltd [1995] WL 1082070; also, Connelly v RTZ Corporation Plc [1997] UKHL 30; [1998] AC 954. 11 [2000] 1 WLR 1545. 12 At p1551A. 13 The test was originally set out by the House of Lords in Spiliada Maritime Corp v Cansulex Ltd [1986] UKHL 10; [1987] AC 460. 14 [2012] EWCA Civ 525; [2012] 1 WLR 3111.

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liability in tort for the acts of third parties policies. The court would look at the relationship between the companies more widely and may find the fourth element is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues. The decision was shortly followed by another case against a parent company, in Thompson v Renwick Group Ltd15 where employees of subsidiary companies sued the parent holding company, as their employer companies were not viable and had no insurance. At first instance it was held that the parent holding company owed the claimant a duty of care, but this was reversed by the Court of Appeal which found that the parent company there, which was simply a holding company, did not as such owe a duty of care to the employee of a subsidiary. II. Three “Anchor Defendant” Cases Since then, there have been three cases involving transnational torts in which the question of a parent company’s potential duty of care in respect of the activities of its subsidiary has come up in the context of claims to serve a subsidiary company out of the jurisdiction as a necessary and proper party to claims already established against an English parent company. These are Lungowe v Vedanta Resources Plc, Okpabi v Royal Dutch Shell Plc and AAA v Unilever Plc. The claims in the English High Court against the UK parent company were all based on its domicile in the jurisdiction, on the basis that under Art. 4 of the Brussels Judgments Regulation (recast) 2012 the English court had mandatory jurisdiction. In Owusu v Jackson16 the ECJ in considering the then Art. 2 of the Brussels Judgments Regulation 2001 had found that jurisdiction based on domicile was mandatory and the courts of the defendant’s place of domicile were not entitled to stay proceedings on the ground of forum non conveniens, even if the alternative jurisdiction was outside the EU. However, after 1 January 2021, with the demise of the Brussels regime in the UK at the end of the implementation period, the UK domiciled defendant can, once more, seek a stay on grounds of forum non conveniens. Being transnational claims where the damage complained of occurred in another jurisdiction, a further issue is that of choice of law. This is to be decided under the Rome II Regulation (which after Brexit remains as part of UK domestic law as retained EU law under the 2018 Withdrawal Act17). Art. 4(1) provides the general rule: “The law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur”. But this may lead back to English law if the damage occurs in a jurisdiction whose tort law effectively mirrors English tort law. This has been the case in the three “anchor defendant” cases that have come before the 15 [2014] EWCA Civ 635; [2015] BCC 855. 16 [2005] ECR I-1383; [2005] QB 801. 17 This may change in 2023 due to the effect of the Retained EU Law (Revocation and Reform) Bill introduced into Parliament in September 2022. On 31 December 2023, all retained EU law will expire, unless otherwise preserved. Any retained EU law that remains in force after this date will be assimilated in the domestic statute book, by the removal of the special EU law features previously attached to it. The Bill provides a second sunset date by including an extension mechanism for delaying the expiry of specified pieces of retained EU law until 2026.

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professor simon baughen English courts involving Nigeria, Zambia and Kenya; and also, with a tort claim involving Nigeria that was brought against a Dutch parent company in the Netherlands. The three “anchor defendant” cases, two of which reached the Supreme Court in 2019 and 2021, arise out of applications under CPR 6.37 for permission to serve the foreign subsidiary out of the jurisdiction as a necessary and proper party to proceedings already on foot in the UK against its parent company. Para 3.1(3) of CPR PD6B sets out what the claimant under this gateway must show: “(a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim”. This involves an initial issue of determining whether as between the claimant and the first defendant, who has been served in England where it is domiciled, there is a real issue which it is reasonable for the court to try. Is there an arguable case that the parent company could be liable to the claimant? If so, is the other person a necessary and proper party to that claim? If the claimant gets through the initial gateway, there is then the issue of the court’s discretion as to whether to allow service out of the jurisdiction. CPR 6.37 provides “(3) The court will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim”. This involves a forum non conveniens analysis, but the burden of proof will be on the claimant rather than on the defendant. The combined effect of these requirements is that it is for the claimant to show: (i) That the claims against the anchor defendant involve a real issue to be tried; (ii) If so, that it is reasonable for the court to try that issue; (iii) That the foreign defendant is a necessary or proper party to the claims against the anchor defendant; (iv) That the claims against the foreign defendant have a real prospect of success; (v) That, either England is the proper place in which to bring the combined claims or that there is a real risk that the claimants will not obtain substantial justice in the alternative foreign jurisdiction, even if it would otherwise have been the proper place, or the convenient or natural forum.18 A. Lungowe v Vedanta Zambian citizens claimed against a UK defendant, Vedanta Resources Plc, alleging personal injury, damage to property and loss of income, amenity and enjoyment of land, due to alleged pollution and environmental damage caused by discharges from the Nchanga copper mine since 2005. Konkola Copper Mines (“KCM”), a Zambian company, owned and operated the mine. Vedanta, a UK company, was a holding company for various metal and mining companies, of which KCM was one. The claim was served on Vedanta by virtue of its domicile in the UK and permission was granted for the claim form and particulars of claim to be served out of the jurisdiction on KCM. Vedanta and KCM both applied for declarations that the High Court had no jurisdiction to hear the claims. In June 2016 Coulson J dismissed the challenges. The Court of Appeal upheld the dismissal.19 18 Lungowe v Vedanta Resources Plc [2019] UKSC 20; [2020] AC 1045 at [20] (Lord Briggs). 19 [2017] EWCA Civ 1528; [2018] 1 WLR 3575.

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liability in tort for the acts of third parties Under Art. 4 of the Recast Brussels Judgments Regulation 2012 the claimants were entitled to sue Vedanta in the UK by virtue of its domicile. The Court of Appeal held that following the ECJ’s decision in Owusu v Jackson, it was clear that there was no scope for staying proceedings on the grounds of forum non conveniens where jurisdiction was established on the grounds of the defendant’s domicile under Art. 4. Although in principle it might be possible to argue that invoking the rules in the Recast Regulation amounted to an abuse of EU law, there would have to be sufficient evidence to show that the claimant had conducted itself so as to distort the purpose of that rule of jurisdiction. The present case did not meet the high threshold for an abuse argument to succeed. An important issue in the jurisdictional analysis under Para 3.1(3) of CPR PD6B was whether there was a real issue between the claimants and Vedanta. This raised the question of whether a parent company could owe a duty of care to those affected by the operations of a subsidiary. Following the Court of Appeal’s decision in Chandler v Cape such a duty towards the employee of a subsidiary could arise where the parent company (a) had taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controlled the operations which gave rise to the claim. The parent had to be well placed, because of its knowledge and expertise to protect the employees of the subsidiary. If both parent and subsidiary had similar knowledge and expertise and jointly took decisions about mine safety, which the subsidiary implemented, both might (depending on the circumstances) owe a duty of care to those affected by those decisions. This type of duty might also be owed in analogous situations, not only to employees of the subsidiary but also to others affected by its operations. The judge decided on the basis of the pleaded case that it was arguable that Vedanta did owe such a duty of care to those affected by KCM’s operations. He did so primarily by reference to several things: a report entitled “Embedding Sustainability” which, he said, stressed that the oversight of all Vedanta’s subsidiaries rested with the board of Vedanta itself, made particular reference to problems with discharges into water and to the particular problems arising at the Mine; the management services agreement between Vedanta and KCM; a decision of the Irish High Court about the group;20 and the witness statement of a middle manager of KCM who gave evidence about changes in the mode of management of the mine after KCM became part of the Vedanta Group. The Court of Appeal concluded that the judge had been entitled to reach that conclusion. There was a serious question to be tried which could not be disposed of summarily, and KCM was a necessary and proper party to the Vedanta claim because the claims against the two defendants were based on the same facts and relied on similar legal principles; the judge had therefore been entitled to conclude that Vedanta and KCM could be regarded as broadly equivalent defendants. As to whether England and Wales was the proper place in which to bring the claim, the Court of Appeal again upheld the judge’s finding that it was. Although, absent the claim against Vedanta, it would be clear that England would not be the appropriate forum – that would be Zambia – the position changed once the claim against Vedanta was considered. It would be inappropriate for the litigation to be conducted in parallel proceedings involving identical or virtually identical facts, witnesses

20 Elmes v Vedanta Lisheen Mining Ltd [2014] IEHC 73.

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professor simon baughen and documents, in circumstances where the claim against Vedanta would in any event continue in England. In April 2019 the Supreme Court on appeal held that there was a triable issue on the existence of a duty of care on the parent company.21 There was no need to apply the threefold test in Caparo Industries PIc v Dickman22 because there was nothing particularly novel about the basis of such a duty. The relevant principles as to when A could be liable to C in respect of the acts of B could be traced back as far as the decision of the House of Lords in Dorset Yacht Co Ltd v Home Office,23 in which the negligent discharge by the Home Office of its responsibility to supervise Borstal boys working on Brownsea Island in Poole Harbour led to seven of them escaping and causing serious damage to moored yachts in the vicinity. The essence of the claim here was that Vedanta had exercised a sufficiently high level of supervision and control of the activities at the mine, with sufficient knowledge of the propensity of those activities to cause toxic escapes into surrounding watercourses, as to incur a duty of care to the claimants. Lord Briggs identified a number of ways in which a parent company could be exposed to a direct duty of care in negligence, such as: where group-wide policies or guidelines contained systemic errors that cause harm to third parties when applied by the subsidiary;24 where the parent actively ensured the implementation of group-wide policies by providing training and supervising and enforcing their implementation;25 if the parent held itself out publicly as supervising or having control of its subsidiaries when it did not in fact do so.26 The crux of the arguable duty of care was this:27 But I regard the published materials in which Vedanta may fairly be said to have asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely to have laid down but also implemented those standards by training, monitoring and enforcement, as sufficient on their own to show that it is well arguable that a sufficient level of intervention by Vedanta in the conduct of operations at the Mine may be demonstrable at trial, after full disclosure of the relevant internal documents of Vedanta and KCM, and of communications passing between them. (emphasis added).

The reference to a sufficient level of intervention by Vedanta in the conduct of operations at the mine shows that the risk of a duty of care being incurred by the parent is greater the more closely involved it is with its subsidiary. Again, the argument that suing the parent in the UK was an abuse of EU law was rejected. The Supreme Court differed, however, in its analysis as to whether England and Wales were the proper place in which to bring the claim, although it came to the same ultimate conclusion as the lower courts. The risk of parallel proceedings and inconsistent judgments had ceased to be a trump card once Vedanta offered to submit to any proceedings in Zambia against its subsidiary. Despite the very strong connections with Zambia, there would be the risk of substantial injustice if the claimants were to proceed there. 21 22 23 24 25 26 27

[2019] UKSC 20; [2020] AC 1045. [1990] 2 AC 605. [1970] AC 1004. [2019] UKSC 20; [2020] AC 1045 at [52]. [2019] UKSC 20; [2020] AC 1045 at [55]. [2019] UKSC 20; [2020] AC 1045 at [51]. [2019] UKSC 20; [2020] AC 1045 at [61].

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liability in tort for the acts of third parties This was due to two factors: first the practicable impossibility of funding such group claims where the claimants were all in extreme poverty; and second, the absence within Zambia of sufficiently substantial and suitably experienced legal teams to enable litigation of this size and complexity to be prosecuted effectively, in particular against a defendant (KCM) with a track record which suggested that it would prove an obdurate opponent. In December 2020, without admission of liability, Vedanta and KCM agreed the settlement of these claims. B. Okpabi v Royal Dutch Shell Plc The claim arose in respect of oil pollution in the Niger Delta due to leaks from pipelines. The claimants alleged a systemic failure to prevent spills by Royal Dutch Shell’s Nigerian subsidiary, Shell Petroleum Development Company of Nigeria Ltd (“SPDC”) including its failure to protect its oil infrastructure against the risk of damage caused by the criminal acts of third parties through illegal “bunkering”.28 The claimants wanted to sue Shell’s Nigerian subsidiary SPDC, who operated the pipelines, in the English courts rather than in Nigeria. Relying heavily on the Court of Appeal’s decision in Chandler v Cape,29 they argued that Royal Dutch Shell (RDS) had owed a direct duty of care to them as a parent company. They alleged that Shell had failed to ensure that repeated oil leaks from SPDC’s infrastructure were expeditiously and effectively cleaned up so as to minimise the risk to the claimants’ health, land and livelihoods and, further, had failed to take appropriate measures to address well-known systemic problems of its operations in Nigeria which had led to repeated oil spills. At first instance30 Fraser J found that there was no arguable duty of care owed by the parent company Royal Dutch Shell Plc to those affected by the operations of its subsidiary in Nigeria.31 With the disappearance of the anchor defendant the claims against SPDC could not proceed in England. Fraser J applied the threefold Caparo test for finding a duty of care in novel cases, which required that: the damage should be foreseeable; there should exist between the party owing the duty and the party to whom it is owed a relationship of proximity or neighbourhood; the situation should be one in which it is “fair, just and reasonable” to impose a duty of a given scope upon the one party for the benefit of the other. In his view the second and third of these limbs were problematic for the claimants. SPDC’s evidence was to the effect that it, rather than RDS, took all operational decisions in Nigeria, and RDS performed nothing by way of supervisory direction, specialist activities or knowledge that would put it in any different position from that expected of any ultimate parent company. It was thus SPDC that had the specialist knowledge and experience – as well as the necessary Nigerian licence – to perform the relevant activities in Nigeria.

28 That is, stealing oil by tapping into the pipe. 29 [2012] EWCA Civ 525; [2012] 1 WLR 3111. 30 [2017] EWHC 89 (TCC); [2017] Bus LR 1335. 31 The governing law was technically Nigerian, but the parties were agreed that the law of Nigeria would follow, or at least include as an essential component, the law of England in this respect.

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professor simon baughen Nor could a duty of care be said to arise from public statements made both by the Shell Group and by RDS about the Group’s commitment to environmental issues and the organisation of the Shell Group, such statements being a function of the listing regulations of the London Stock Exchange. As regards Chandler v Cape, a duty of care was more likely to be found in respect of employees, a defined class of persons, rather than others not employed who are affected by the acts or omissions of the subsidiary. In the present case none of the four factors identified by Arden LJ in Chandler as leading to a duty of care on the parent company was present: RDS had not been operating the same business as SPDC, did not have superior or specialist knowledge compared to SPDC, could have only a superficial knowledge or overview of the systems of work of SPDC, and could not be said to have known that SPDC was relying upon it to protect the claimants. The Court of Appeal upheld the decision by a 2–1 majority, again applying the three stage Caparo Industries v Dickman test.32 The duty of care argued for by the claimants foundered on the proximity requirement. The claimants had based their case on the duty of care owed by RDS to them on the fact that|: [RDS] exerts significant control and oversights over [SPDC’s] compliance with its environmental and regulatory obligations and has assumed responsibility for ensuring observance of proper environmental standards by [SPDC] in Nigeria. [RDS] carefully monitors and directs the activities of [SPDC] and has the power and authority to intervene if [SPDC] fails to comply with the Shell Group’s global standards and/or Nigerian law.

However, having reviewed the claimants’ evidence Simon LJ concluded that there had not been a sufficient degree of control by RDS of SPDC’s operations in Nigeria so as to establish the necessary degree of proximity. There was an important distinction between a parent company which controls, or shares control of, the material operations on the one hand, and one that merely issued mandatory policies and standards intended to apply throughout a group in order to ensure conformity with particular standards. A similar point was made by Sir Geoffrey Vos. The issued mandatory policies, standards and manuals were of a high level nature and left control with SPDC which was responsible for its own operations. There would have had to be evidence that RDS took upon itself the enforcement of the standards, which it plainly had not. RDS had merely expected SPDC to apply the standards it set. Sales LJ dissented, stating: However, the claimants have a good arguable case that in some respects, at least, RDS does have superior knowledge and expertise than SDPC, since via ExCo RDS recruits its expertise from across the whole Shell group and via group-wide instructions (combined in the case of SPDC with monitoring and enforcement) disseminates that expertise to group companies, including SPDC. The claimants also have a good arguable claim that RDS assumed a material degree of responsibility in relation to the management of the pipeline and facilities according to the criteria in Chandler v Cape Plc and Lungowe v Vedanta Resources.

As a sidenote, in similar proceedings brought against SPDC in the Netherlands, using RDS as an “anchor defendant”, the Dutch Court of Appeal in December 2015 concluded that the claims against RDS were not bound to fail. They reasoned.

32 See [2018] EWCA Civ 191; [2018] BCC 668.

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liability in tort for the acts of third parties Considering the foreseeable serious consequences of oil spills to the local environment from a potential spill source, it cannot be ruled out from the outset that the parent company may be expected in such a case to take an interest in preventing spills (or in other words, that there is a duty of care in accordance with the criteria set out in Caparo v Dickman . . ., the more so if it has made the prevention of environmental damage by the activities of group companies a spearhead and is, to a certain degree, actively involved in and managing the business operations of such companies, which is not to say that without this attention and involvement a violation of the duty of care is unthinkable and that culpable negligence with regard to the said interests can never result in liability.33

Okpabi then came before the Supreme Court which in February 2021 overruled the decision of the Court of Appeal.34 The Supreme Court decision came within weeks of the substantive decision of the Dutch Court of Appeal in parallel proceedings involving oil spills in other parts of Nigeria with claims against Shell’s Dutch parent and its Nigerian subsidiary.35 The Supreme Court found that the question of parent company liability was not a novel legal issue so there was no need to undertake the Caparo threefold analysis. Based on Vedanta the appellants had identified four routes to establishing a prima facie duty of care on RDS: (1) Taking over the management or joint management of the relevant activity of SPDC; (2) Providing defective advice and/or promulgating defective group-wide safety/ environmental policies which were implemented as of course by SPDC; (3) Promulgating group-wide safety/environmental policies and taking active steps to ensure their implementation by SPDC; and (4) Holding out itself as exercising a particular degree of supervision and control of SPDC. The Supreme Court found that the Court of Appeal’s view that the promulgation by a parent company of group-wide policies or standards could never in itself give rise to a duty of care was inconsistent with Vedanta. Furthermore, it criticised the Court of Appeal for having essentially conducted a mini-trial of the issue of duty of care. The majority there had, it was suggested, focused inappropriately on the issue of control, but it was possible for a duty of care to arise regardless of the exercise of control, for example on the basis that (as Lord Briggs put it):36

33 Oguru/Efanga v Shell, The Hague Court of Appeal (18 December 2015) ECLI:NL: GHDHA:2015:3588. 34 Okpabi v Royal Dutch Shell Plc [2021] UKSC 3; [2021] 1 WLR 1294. 35 In Oguru v Royal Dutch Shell ECLI:NL: GHDHA: 2021:1825., the Dutch Court of Appeal found both RDS and its Nigerian subsidiary (SPDC) liable in liable in negligence for failing to install a leak detection system on their oil pipelines ordered them to equip the pipelines with an LDS within one year of service of the ruling. The evidence showed that RDS, at any rate from 2010, had become involved, concretely, and fairly intensively, in the question of whether pipelines in Nigeria an LDS should have installed. The Court ordered both RDS and SPDC to equip the relevant pipelines with a LDS within one year of service of the ruling, and to ensure the LDS continued to be installed for as long as these pipes were used as a main or spare pipe within one year from service of the ruling. On 24 December 2022 Shell, on a no admission of liability basis, agreed to settle the claims for €15 million. See accessed 4 January 2023. 36 [See 2021] UKSC 3; [2021] 1 WLR 1294 at [53].

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professor simon baughen the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.

Having identified these errors, the Supreme Court decided that the case set out in the pleadings, fortified by the points made in reliance upon the RDS Control Framework and the HSSE Control Framework, established that there was a real issue to be tried under Vedanta routes (1) and (3). It was not necessary to make any ruling in relation to Vedanta routes (2) and (4). In addition, as Sales LJ had observed in his dissenting judgment in the Court of Appeal, it was significant that the Shell group had been organised along business and functional lines rather than simply according to corporate status, in a vertical structure involving significant delegation. The Control Framework showed that RDS and its CEO and the RDS ExCo had a wide range of responsibilities, including “the safe condition and environmentally responsible operation of Shell’s facilities and assets”. The position of RDS was thus comparable to Lord Briggs’ example in Vedanta of a group businesses which “are, in management terms, carried on as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant”.37 The precise organisational structure was in dispute, but the pleaded case clearly raised triable issues. The issue of whether England was the proper place for hearing the case was not raised in the appeals, but in April 2021 RDS accepted the jurisdiction of the English courts. In December 2021 the claimants sought a group litigation order but in May 2022 the High Court held this to be premature.38 C. AAA v Unilever The claimants here were workers on a tea plantation in Kenya who had suffered from criminal acts following tribal violence consequent on the 2007 elections. The issue was whether the parent company and the subsidiary owed them a duty of care to protect them from unlawful violence.39 Elizabeth Laing J admitted the possibility of a duty of care being owed by the parent company but dismissed the claim on the issue of foreseeability of the type of harm suffered. The Court of Appeal dismissed the claimant’s appeal but did so on the grounds that there was no arguable case that the parent company had owed a duty of care to the claimants in the first place. Sales LJ, giving the judgment of the Court, held that a parent company could owe a direct duty of care to those affected by the activities of its subsidiary in only two situations: (i) where the parent had in substance taken over the management of the relevant activity of the subsidiary in place of, or jointly with, the subsidiary’s own

37 [2019] UKSC 20; [2020] AC 1045 at [51]. 38 See Alame v Royal Dutch Shell Plc [2022] EWHC 989 (TCC). Each individual claimant in the class action was still required to provide details of the particular spill for which they sought compensation and where and when the damage was suffered. 39 The claimants conceded that Kenyan law applied, but it was accepted that Kenyan law would follow English law on the imposition of a duty of care on the parent company.

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liability in tort for the acts of third parties management; or (ii) where the parent had given relevant advice to the subsidiary about how it should manage a particular risk. The appellants accepted that they could not bring their claim within the first category as the management of the affairs of Unilever’s Kenyan subsidiary, UTKL, was conducted by the management of UTKL. Instead, they sought to bring their claim within the second category, relying on advice allegedly given by Unilever to UTKL on management of risk in respect of political unrest and violence in Kenya. However, the evidence showed that UTKL had received no such advice from Unilever and instead had taken responsibility for devising its own risk management policy and for handling the severe crisis which arose in late 2007. The claimants applied to the Supreme Court for permission to appeal, but this was denied. III. Liability for Contractors A duty of care may also arise in relation to the acts of third parties with whom the business is in contractual relations. True, outside vicarious liability for the acts of servants or agents, a person will not generally owe a duty of care in relation to the acts of a third party. There are however limited exceptions, such as where there is an assumption of responsibility in relation to the conduct of the third party (as in Dorset Yacht, mentioned earlier), where a sub-contractor is engaged to perform extra-hazardous work or where the defendant can be treated as joint tortfeasor with the third party. In recent years there have been a number of cases in which claims have been generated in relation to the acts of third parties both upstream and downstream in the defendant’s value chain. At the end of 2022 it was reported by the Guardian that London solicitors Leigh Day were bringing a claim against Tesco by 130 Burmese employees at the VK Garment Factory in Mae Sot, Thailand which had made F&F clothes for the Thai branch of Tesco’s fashion business from 2017 to 2020.40 The claims were for alleged negligence and unjust enrichment on the grounds that the claimants had been trapped in “effective forced labour”, including 99-hour weeks, for illegally low pay under allegedly dire conditions. A previous Leigh Day case, Begum v Maran,41 raised the possibility of a duty of care arising downstream in the value chain against a ship seller in relation to the acts of a third party. The Court of Appeal held that a negligence claim against a shipbroker in respect of its sale of an end-of-life vessel to a demolition cash buyer should not be struck out as fanciful. The claim was brought by the widow of a worker who had died helping break up the vessel at the Zuma yard in Bangladesh. The claim was based on the existence of a duty of care arising out of the shipowner’s autonomous control of the sale of the vessel and alleged knowledge (arising from the high price paid and the amount of fuel left on board) that, as a result of that sale, the vessel would be broken up in Bangladesh in highly dangerous working conditions. It was argued that the danger of harm would 40 E. Dugan, “Workers in Thailand who made F&F Jeans for Tesco ‘trapped in effective forced labour’” (The Guardian, 18 December 2022) < www.theguardian.com/business/2022/dec/18/workers-in-thailand-whomade-ff-jeans-for-tesco-trapped-in-effective-forced-labour#:~:text=Tesco%20faces%20a%20landmark%20 lawsuit,business%20between%202017%20and%202020> accessed 13 February 2023. 41 [2021] EWCA Civ 326; [2021] 1 CLC 514. Here the appellant, a UK company, was not a seller but had agreed to provide agency and shipbroking services to a shipowner in the same group in respect of a vessel and 28 other ships including the vessel sold for eventual demolition.

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professor simon baughen not otherwise have existed if Maran had sold the vessel elsewhere by insisting on a sale to a so-called “green” yard, with proper working practices, a number of which existed. The sale contract contained such a provision obliging the buyer to sell only to a yard that would perform the demolition “in accordance with good health and safety working practices”, but both Maran and the buyer had known that such clauses would be entirely ignored. It was argued that they could have stipulated provisions linking the inter-party payments to the delivery of the vessel to an approved yard. The claim has since been discontinued with no order as to costs,42 presumably having been settled.43 In Josiya v British American Tobacco Plc,44 claims in tort and unjust enrichment were said to arise from the “unlawful, exploitative and dangerous conditions in which the claimants produced tobacco leaves” on tobacco farms in Malawi. It was alleged that the defendants had facilitated, assisted and/or encouraged such unlawful, exploitative and dangerous conditions in order to acquire tobacco leaves at the lowest possible cost and to maximise their profits, and that in this case they had owed the claimants a duty of care. The strike-out application did not challenge the way the potential duty of care had been put but rather argued that the claimants had not shown that the defendants had purchased tobacco originating from the farms worked on by the claimants. Their tobacco had been sold to a US multinational, Alliance One, who had then processed it and sold it on to tobacco companies. Based on figures provided by the defendants, the claimants asserted that there was a 98% chance that any claimant who farmed for Alliance One in each of the relevant seasons would have grown tobacco for the defendants. Martin Spencer J refused a strike-out, saying: The issue is whether the claimants have a firm belief in the truth of the nexus allegation and whether there is sufficient justification for that belief. On the basis of the material and information before me, I consider that it is appropriate to accept Mr Day’s assertions to this effect.

Nearly all the cases discussed earlier involved interlocutory proceedings. One case that did go to trial was Kalma v African Minerals Ltd45 which involved an alleged contribution of parent and subsidiary companies to human rights abuses committed by a third party. It arose out of the actions of the Sierra Leone police in suppressing protests in 2010 and 2012 by a local community against a mine created and operated by the defendant, African Minerals Ltd (“AML”), a UK company, and its two Sierra Leonean subsidiaries. The claimants argued seven grounds of liability, of which the first five (vicarious liability, non-employee vicarious liability, joint wrongdoing, procurement of a wrong and malicious prosecution) failed on the facts. Their sixth ground was a duty of care in negligence. Turner J46 found that no duty of care arose on the pleaded grounds that the companies had assumed responsibility to those affected by the subsidiary’s operations.

42 C. Kershaw, “ESG disputes – understanding the credit and indirect litigation risk to lenders” (TLT, 10 May 2022) accessed 6 February 2023. 43 G. van Calster, “Begum v Maran. A hopeful Court of Appeal finding on duty of care; however open issues on its engagement with Rome II’s environmental heading” (Gavclaw, 10 May 2022) accessed 6 February 2023. 44 [2021] EWHC 1743 (QB). 45 [2020] EWCA Civ 144. 46 See Kalma v African Minerals Ltd [2018] EWHC 3506 (QB).

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liability in tort for the acts of third parties Nor was there a free-standing duty of care under Caparo. Though there was certainly foreseeability, there was no proximity, since the claimants were not a determined or clearly identifiable class or group and there was the prospect of an indeterminate liability to an indeterminate class of people; further, it was not fair, just or reasonable to impose the alleged duty of care here. Seventhly, the claimants alleged a non-delegable duty for extra-hazardous activities carried out by the SLP as sub-contractors of the companies,47 for which they needed to prove (i) that the police officers who caused them injury, loss and damage had been acting as independent contractors for the defendant and (ii) that the activities they were undertaking had been exceptionally dangerous whatever precautions were taken. They failed on the facts on both elements. The police had not been acting at any time as independent contractors of the defendant. The payments made to the police did not provide the defendant, either in form or substance, with any degree of significant control over what the police did or in what numbers. Nor did the provision of vehicles, food and water on an ad hoc basis create any corresponding contractual obligation on the part of the police to carry out its duties in a particular way which departed from those which they owed to the public at large to maintain the peace. Second, although what many officers did was dangerous in both 2010 and 2012 the task in hand was not inherently and exceptionally dangerous if proper precautions had been taken. Liability arose only where the work was extra-hazardous in itself, not where the contractor’s performance made it so. The Court of Appeal48 upheld the decision of Turner J and rejected a new case raised based on “inferred intention”. The appellants argued that the respondents could foresee that the SLP might use excessive force and that, by providing them with money, vehicles and accommodation, they intended that the protests should be quashed, if need be, by the use of unlawful force. The case was unsustainable and went against the judge’s express findings that there was no actual intent on the part of the respondents. The new case was also based on foreseeability but on its own this was never enough to create a legal liability for common design. There needed to be something more than the foreseeability that, in certain circumstances, a tort might be committed by a third party. As regards the creation of a duty of care by AML, this was a case where the underlying complaint was an omission: that the respondents had failed to protect the claimants from the harm caused by the police. Here the conclusion had to be that the respondents had not been carrying out any relevant activity, and the damage had not been caused by anything which the respondents did. The case did not fall within the creation of danger exception, since the respondents could not be said to have created a danger or assumed any liability simply by calling in the police. Nor had their provision of money, vehicles and accommodation to the police created a danger. The position was not changed by reference to the respondents’ subscribing to the UN Voluntary Principles on Security and Human Rights. These were general in nature and primarily concerned with the need for liaison with the local community and the like. Coulson LJ concluded: 47 See Honeywill & Stein Ltd v Larkin Bros (London’s Commercial Photographers) Ltd [1934] 1 KB 191. The scope of this liability was severely restricted by the Court of Appeal in Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH [2008] EWCA Civ 1257; [2009] QB 725. 48 Kalma v African Minerals Ltd [2020] EWCA Civ 144.

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professor simon baughen More significantly, there is nothing in the Voluntary Principles which make companies operating abroad generally liable for the unlawful acts of the police forces of the host countries in which they are operating: on the contrary, the Voluntary Principles are drafted on the basis that, whilst companies operating abroad may properly help to facilitate the law and order expected to be provided by host countries, it is the governments of those countries (and not the companies) who have “the primary responsibility to promote and protect human rights.49

Another decision, in another common law jurisdiction, Canada, Das v George Weston,50 shows the difficulty of finding a liability in tort for the conduct of sub-contractors down the supply chain. Claims were made against a Canadian garment retailer, Loblaws, whose sub-suppliers, New Wave, had occupied premises in the Rana Plaza Building in Bangladesh at the time of its collapse in April 2013. The claim was also brought against Bureau Veritas who had been employed to audit the corporate social responsibility code that Loblaws had inserted into its contracts with its suppliers and sub-suppliers. Claims were brought in 2015, shortly before the second anniversary of the collapse, on behalf of workers killed or injured in the collapse and their relatives, and others who had been in Rana Plaza at the time of the accident. In 2017 Perell J dismissed the action.51 The claims for death and personal injury were time-barred, save for claimants born after 22 April 1996, under the law of Bangladesh, which was the governing law. There was no plausible case for liability in tort on either party under either the law of Bangladesh (effectively English tort law) or that of Ontario. At the end of 2018 the Court of Appeal in Ontario upheld the decision.52 With respect to Loblaws’ liability, the Court found that it was plain and obvious that a negligence claim against Loblaws would fail under Bangladeshi law. The facts did not amount to the type of relationship or control over New Wave’s operations by Loblaws that has been found in English law to be sufficient to establish proximity or assumption of responsibility, and to thereby impose a duty of care to protect against harm by third parties. Loblaws had not been directly involved in the management of New Wave, nor in the process of manufacturing the products. Loblaws had not had control over where the manufacturing operation took place. Loblaws’ only means of controlling New Wave had been through possible cancellation of its product orders from Pearl Global for non-compliance with the CSR Standards, and even here there had not been any pleaded history of Loblaws using that lever to enforce any change in New Wave’s operations. The social audits required by Loblaws had been limited social audits and had not been intended to cover any structural issues in the New Wave factories. There was therefore no basis for any reliance on Loblaws or Bureau Veritas with respect to the structure of the Rana Plaza premises. The exceptional circumstances in which an enterprise could be vicariously liable for the misdeeds of independent contractors were, it was said, not present here. Loblaws was a retailer not a garment manufacturer and was not an enterprise engaged in a hazardous or inherently dangerous industry. It had had no control over how its supplier and the subsupplier carried on their manufacturing business or treated their employees. Similarly, the

49 50 51 52

[2020] EWCA Civ 144. [2018] ONCA 1053; 43 ETR (4th) 173. [2017] ONSC 4129. [2018] ONCA 1053; 43 ETR (4th) 173.

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liability in tort for the acts of third parties Court held that the judge had been correct in deciding that the appellants’ pleaded claim in negligence against Bureau Veritas would fail under Bangladeshi law. IV. Climate Change and Third Parties A novel type of tort claim that has emerged in the last few years is that against an energy major in respect of the harm caused in respect of carbon emissions emanating from not only its own direct emissions but also upstream indirect emissions from its energy suppliers, and downstream indirect emissions from end-users of its products. In the Netherlands, in Vereniging Milieudefensie et al. v Royal Dutch Shell PLC,53 the first instance court at the Hague, in an action brought by various NGOs, on behalf of inhabitants of the Wadden islands between the Netherlands and Denmark, ordered Royal Dutch Shell (RDS) to reduce the Shell group’s CO2 emissions so that in 2030 they would be net 45% lower relative to 2019 levels. The judgment covered: Scope 1 – direct emissions; Scope 2 – indirect emissions from third party sources from which the organisation had purchased or acquired electricity, steam or heating for its operations; and Scope 3 – indirect emissions from the end-users of the products produced and traded by the Shell group, which amounted to 85% of Shell Group emissions. The court held that Dutch law applied, under art. 7 of the Rome II Regulation.54 RDS’s reduction obligation derived from the unwritten standard of care laid down in the Netherlands Civil Code.55 The court followed the UN Guiding Principles in its interpretation of the unwritten standard of care and deduced that it was universally endorsed that companies must respect human rights, including those enshrined in the ECHR and the International Covenant on Civil and Political Rights (ICCPR). In particular, there were the rights to life and the right to respect for private and family life enshrined in art 2 and 8 of the ECHR and articles 16 and 17 of the ICCPR. The Court found that these rights offered protection against the consequences of dangerous climate change due to CO2 emissions induced global warming and factored in these human rights and the values they embodied in its interpretation of the unwritten standard of care. RDS has entered an appeal against the decision. The case can be contrasted with the New Zealand case of Smith v Fonterra Co-Operative Group Ltd and Ors56 which hinted at the recognition of a possible new tort in connection with causing harm through emission of greenhouse gases. A claim was brought against various defendants who were either involved in an industry which released greenhouse gases into the atmosphere, or who supplied products which released greenhouse gases when 53 ECLI:NL:RBDHA:2021:5339o n 26 May 2021. 54 This covers claims for environmental damage or damage sustained by persons or property as a result of such damage. Article 7 gives the person bringing the claim the option of basing it on the law of the country in which the event giving rise to the damage occurred. 55 See Burgerlijk Wetboek, Book 6, para 162, which translates as: “A violation of someone else’s right (entitlement) and an act or omission in violation of a duty imposed by law or of what according to unwritten law has to be regarded as proper social conduct, always as far as there was no justification for this behaviour, is regarded as a wrongful act”. 56 [2020] NZHC 419; [2020] 2 NZLR 394.

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professor simon baughen they were burned. The plaintiff claimed customary interests in lands and other resources situated in or around Mahinepua in Northland. The statement of claim raised three causes of action, all in tort – public nuisance, negligence and breach of an inchoate duty. The plaintiff did not claim damages but sought declarations that each of the defendants had unlawfully caused or contributed to the public nuisance alleged, or breached duties said to be owed to him. He also sought injunctions requiring each defendant to produce, or cause, zero net emissions from its activities by 2030. The defendants applied to strike out the claims. Wylie J struck out the public nuisance claim and the negligence claim. However, he was reluctant to conclude that the recognition of a new tortious duty which made corporations responsible to the public for their emissions was untenable, and he was not prepared to strike out the third cause of action and foreclose on the possibility of the law of tort recognising a new duty which might assist the plaintiff. The Court of Appeal upheld the dismissal of the public nuisance and negligence claims and found that there would be no recognition of a novel duty of care in respect of harm caused by the defendant’s contribution to climate change through its emissions.57 The claimants obtained leave to appeal to the Supreme Court which heard the case in August 2022, although it has not yet released its judgment. The reported comments from the justices do not augur well for the overturning of the Court of Appeal’s decision.58 V. Conclusion The two “anchor defendant” decisions of the Supreme Court in Vedanta and Okpabi have given parent companies plenty to think about with respect to potential liabilities in respect of the operations of their subsidiaries. So too has the decision of the Court of Appeal in Begum v Maran in refusing to strike out the tort claims against the UK shipbroker that negotiated the sale for demolition on which work on a beach in Bangladesh the claimant’s husband met his death. However, in considering the impact of these cases, one must remember that there is a difference in the threshold for finding a plausible duty of care and a finding at trial that there was one, and that there was a breach leading to the harm complained of in the action. One feature of the result in the two “anchor defendant” cases decided by the Supreme Court is that they may result in the subsidiary being haled before the English proceedings and being subject to a judgment at trial even if it is found at trial that there is not a duty of care on the part of the parent company. Nonetheless, both Okpabi and Vedanta are significant in giving indications as to when a parent company may be found to owe a duty of care in respect of its subsidiary’s activities. It is not so much control – after all parents have control of their subsidiaries through their shareholding in them – but rather their involvement in those activities which forms the basis of the claim/s against them. The crux of the arguable duty of care is to be found in Lord Briggs’ statement in Vedanta:59

57 Smith v Fonterra Co-operative Group Ltd [2021] NZCA 552. 58 The Chief Justice, Helen Winkelmann, remarked to the room that everyone was an emitter. Another member of the Supreme Court, Justice Stephen Kós, pointed out that he drove a high-emissions car. He said, “Well, I’ve got a Land Rover. Sue me! Why don’t you sue me?” accessed 2 December 2022. 59 [2019] UKSC 20; [2020] AC 1045 at [61]. (Emphasis added.)

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liability in tort for the acts of third parties But I regard the published materials in which Vedanta may fairly be said to have asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely to have laid down but also implemented those standards by training, monitoring and enforcement, as sufficient on their own to show that it is well arguable that a sufficient level of intervention by Vedanta in the conduct of operations at the Mine may be demonstrable at trial, after full disclosure of the relevant internal documents of Vedanta and KCM, and of communications passing between them. (emphasis added)

There is also the spectre of “Vedanta 4” – liability arising from a holding out by the parent that it supervises particular activities of its subsidiary’s activities, even if it does not in fact do so. The irony is that many companies may find that their desire to be good corporate citizens, through subscribing to this voluntary code of conduct, comes back to bite them in the form of a potential tort liability. This may encourage some to take a hands-off approach to their subsidiaries. A similar difference between the threshold at interlocutory stage for a possible duty of care and a finding at trial that the parent did owe a duty of care can be seen in the result in Kalma, which did go to trial and in which the parent and its subsidiary were held to owe no duty of care in relation to the conduct of the Sierra Leone police they had called in to protect their mine, compared with that in Guerrero v Monterrico Metals Ltd60 where a freezing order was granted in a claim against a parent on similar pleaded facts – police violence against local people protesting outside the mine in Peru operated by the subsidiary. The two recent Supreme Court decisions are likely to be of some concern to multinational groups of companies in the energy and mining sectors. In the maritime sphere, there is generally no great need to lift the corporate veil or to assert claims against a parent company in respect of the activities of its subsidiary. Maritime claims can be secured by arrest and sister-ship arrest, and the provision of a letter of indemnity will mitigate the risks of having a claim against a one-ship company. However, claims by shipowners may sometimes result in a need to go against a contractual counterparty’s parent company. For example, imagine a shipper providing a cargo with undisclosed dangerous characteristics that explodes and causes catastrophic loss, as with the MSC Flaminia incident in 2012.61 The shipper, or charterer, will not be able to limit claims against them by the shipowner. If they lack the resources to satisfy any judgment, the possibility of claiming against a parent company becomes more interesting. Looking into the future, the advent of autonomous vessels will result in a network of shorebased controllers which are unlikely to be employees of any shipowner, but rather will be acting as subcontractors. The parent company of such controllers may find itself as a target in the event of a collision or allision arising as a result of negligence on the part of employees of a subsidiary company operating the vessel remotely in a shore-based control centre. After Begum v Maran we may expect further tort claims in respect of the acts of sub-contractors and third parties. Although cases such as Das v George Weston are not encouraging, the nature of the assumption of responsibility which forms the basis of such a claim may lead to different results. For instance, had the audit mandated in the defendant’s CSR policies in that case extended to an audit of the state of the premises in which the ultimate contractor manufactured its clothing, the defendant might well have 60 [2010] EWHC 160 (QB). 61 MSC Mediterranean Shipping Company SA v Stolt Tank Containers BV & Ors [2022] EWHC 2746 (Admlty) (02 November 2022).

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professor simon baughen been found to owe a duty of care in respect of the integrity of the Rana Plaza building. Further, where the case involves a company calling in the local police to suppress disturbances at their operations, it is not hard to see the difficulties in making them liable in tort when the police behave violently in the course of dealing with the disturbance, as was the case in Kalma. However, there is no blanket immunity from liability for a company that is trying to protect its operations in a conflict zone. This is something French company Lafarge is finding out to its cost. It managed to carry on operating its cement factory in Syria through its subsidiary in 2013 and 2014 by making a substantial payment to ISIS. Criminal proceedings were brought in France against the parent company; arguments that only the Syrian subsidiary should be prosecuted were of no avail. On 18 May 2022, the Paris Court of Appeal confirmed that Lafarge Holcim SA could be indicted for complicity in crimes against humanity committed by ISIS.62 Lafarge has also been hit hard in proceedings in the USA. On 18 October 2022, it pleaded guilty before a federal court to conspiring to provide material support to foreign terrorist organisations and agreed to pay $778 million in fines and forfeitures.63 With the return of forum non conveniens post-Brexit on 1 January 2021 in the UK, parent companies might feel that they will now be able to see off claims in the UK against them which arise out of a direct duty of care towards those affected by the operations of their subsidiaries in foreign jurisdictions. However, although it is likely that the foreign jurisdiction will count as an alternative forum in which the claim should be heard, a stay of the UK proceedings will not be issued if to do so creates a risk of substantial injustice to the claimants. This is likely to be the case with mass tort litigation involving events in developing world nations, and can be seen in the refusal of dismissal of English proceedings in Cape v Lubbe where the alternative jurisdiction was South Africa, and in Vedanta where the difficulties of proceeding in Zambia were determinative in allowing the claimants to serve the Zambian subsidiary as a necessary and proper party to the litigation on foot in England against the English parent company. Recently, in Município de Mariana v BHP Group Plc (formerly BHP Billiton Plc)64 claims were brought in England in respect of damage caused by the Fundão Dam collapse in Brazil in 2015. The claims were brought against the English parent of the Brazilian subsidiary that operated the dam, and also against the Australian parent, served in the jurisdiction by reason of its branch office in the UK. The Court of Appeal reversed the first instance decision that the claims should be dismissed on grounds that such claims were unmanageable, and also denied a stay on the ground that there would be a risk of substantial injustice to require the claim against the Australian company to be brought in Brazil where mass claims were afoot against the subsidiary Samarco but which had not involved most of the claimants in the UK proceedings. 62 A. Clooney, “Paris Court of Appeal confirms charges against French multinational Lafarge for complicity in crimes against humanity committed by ISIS” (Doughty Street Chamber, 23 May 2022) accessed 17 January 2023. Lafarge has lodged an appeal to the Cour de Cassation. 63 “Lafarge pleads guilty to conspiring to provide material support to foreign terrorist organizations” (Justice News, 18 October 2022) accessed 17 January 2023. 64 [2022] EWCA Civ 951; [2022] 1 WLR 4691 (reversing [2020] EWHC 2930 (TCC)).

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liability in tort for the acts of third parties Coming over the horizon in the EU is a proposed corporate sustainability and due diligence directive. This was introduced by the Parliament in 2021 and amended by the Commission on 23 February 2022, with further amendments being proposed on 30 November 2022, when the Council of the European Union adopted its negotiating position on the Draft Directive. What is proposed is the imposition of mandatory human rights and environmental due diligence on large companies within the EU, throughout their chain of activities. The due diligence obligations would also apply to non-EU companies operating in the EU with a large annual turnover in the EU. Non-compliance would attract various sanctions and in addition Member States would be required to provide for civil liability. The Directive would be phased in from three to five years after its entry into force, depending on the size of the in-scope companies. The draft Directive now goes back to the European Parliament for review following which it will vote and determine its initial negotiating position, and then engage in negotiations with the Council with the aim of reaching a final and agreed text of the Directive. Human rights and environmental claims are now coming into the mainstream, and it does not matter that they involve events in far off countries of which we know nothing. In response to Cain’s question to God, his lawyer might well advise him “sometimes you are your brother’s keeper”.

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C H A P T E R 19

Third Party Loss in Carriage of Goods by Sea Dr Melis Özdel

I. Introduction Carriage of goods by sea is a risky business. It is not easy to predict all risks prior to the commencement of a voyage, nor is it possible to avoid or minimise all risks during carriage. This risky business has been performed over centuries, during which the law has developed to give more precise answers to the questions of risk allocation between the commercial parties involved. However, despite the existence of standard form contracts, international conventions and domestic legislation in this field, some seemingly basic questions remain difficult to answer. This chapter discusses a question that has recently stirred up discussion. Following Baker J’s decision in Sevylor Shipping & Trading Corp v Atfadul Co for Foods, Fruits & Livestock,1 should a contractual carrier’s liability towards a cargo interest be reduced or even defeated in cases where the cargo interests have partially or totally recovered their loss under their sale contract in respect of the relevant cargo loss or damage? Alternatively, to put it more generally, are parties to a contract prevented from recovering contractual damages in full against those in breach where they have not themselves suffered any loss or where they have actually suffered less than they claimed? This is a deceptively simple question, which, from the outset, would appear to deserve a positive answer. In The Albazero,2 Lord Diplock certainly appears to have given an affirmative answer to it, when his Lordship said that in general parties to a contract could not recover more than nominal damages in cases where they had not themselves suffered any loss.3 However, this rule has not always been followed by the courts. In The Albazero, Lord Diplock also recognised that this rule had its exceptions,4 one of which was the bailee’s right of suit.5 In a long line of English cases, a party to a contract was allowed to recover a third party’s loss.6 In these cases, where A entered into a contract with B for the benefit of C, A was allowed to sue B for damages arising from the defective performance of B.7

1 [2018] EWHC 629 (Comm); [2018] 2 Lloyd’s Rep 33. 2 [1977] AC 774. 3 Ibid at 842. 4 Ibid at 842 5 This is discussed later in section III. 6 G. H. Treitel, “Damages in Respect of a Third Party’s Loss” (1998) 114 LQR 527, 534. In the context of carriage of goods by sea, see the decision in Dunlop v Lambert (1839) 6 Cl & F 600, where the shipper was allowed damages in respect of the losses suffered by the consignee. 7 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.

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DOI: 10.4324/9781003376347-22

third party loss in carriage of goods by sea As a result, the limits of a person’s ability to recover a third party’s loss are, to this day, far from certain, and the law is still unclear on the question of whether or not B’s right to recovery is limited to C’s actual loss.8 It is against this complex background that the question arises as to the extent to which a third party loss can be recovered in the context of carriage of goods by sea. The decision in Sevylor Shipping shows that the ability of cargo interests to recover from their contractual carrier may not be dependent upon recoverability from them of that loss under a contract of sale to which they are also party. This is not the first case on the recoverability of a third party loss in this context. In The Sanix Ace9 and R & W Paul Ltd v National Steamship Co Ltd,10 the courts discussed this subject and held that recovery of such a loss was not dependent upon how direct or indirect financial losses arising from the cargo loss or damage had been shared under a chain of sale contracts. The decision in Sevylor Shipping complements these views, while also providing some guidance on the operation of ss.2(1) and (4) of the Carriage of Goods by Sea Act (COGSA) 1992. This chapter concludes that the approach taken in Sevylor Shipping is in line with not just the law as it stands, but also what it should be. In this context, it argues that recoverability of a third party’s loss in this context has its roots in the law on the bailee’s right of suit, whereby the right of suit was held to be inseparable from the right to recover the full value of the goods or the full value of the cargo damage. The bailee’s right also comes with an obligation to account to the bailor, which it is argued can be seen as a restitutionary approach to prevent any potential unjust enrichment.11 Alternatively, it is suggested that this right can be considered as an exception to the compensatory principle.12 II. Sevylor Shipping This case involved a web of contracts, including a voyage charterparty, a contract of carriage contained in bills of lading and a sale contract on CIF terms. The charterparty was entered into between the CIF sellers and the shipowner for the carriage of a cargo of bananas. The CIF buyer, Atfadul, was the lawful holder of the bill of lading, and SIAT (the cargo insurer) was the assignee of Atfadul’s contractual claims under the bill of lading. On arrival of the cargo in damaged condition at the discharge port, Atfadul obtained a credit from the CIF seller by way of settlement of the dispute under the sale contract, the amount of which was the same as the cargo insurance proceeds. Thereafter, arbitration proceedings were commenced by SIAT as assignee against the shipowner, the contractual carrier under the bill of lading, for the cargo damage. The arbitral tribunal held SIAT entitled to recover the full amount of damages. In support of

8 See, for an example, the Supreme Court decision a few years ago in Swynson v Lowick Rose LLP [2017] UKSC 32; [2018] AC 313. 9 Obestain Inc v National Mineral Development Corporation Ltd (The Sanix Ace) [1987] 1 Lloyd’s Rep 465. 10 (1937) 59 Ll L Rep 28. 11 On this topic, see G. McMeel, “Complex Entitlements: The Albazero Principle and Restitution” (1999) 7 RLR 21. 12 See The Ocean Victory [2007] UKHL 12; [2007] 2 AC 353, followed in Bunge SA v Nidera BV [2015] UKSC 43; [2015] 2 Lloyd’s Rep 469.

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dr melis özdel this, the tribunal took the view that Atfadul had the right to recover the loss, even though it had been passed on to the CIF sellers because of the credit given to Atfadul. On appeal, the shipowners challenged the award on two grounds. Firstly, they argued that s.2(4) of COGSA 1992 would only operate in cases where the rights of suit were previously vested in the party suffering loss (pursuant to s.2(1) of the Act). Secondly, they contended, s.2(4) did not allow the bill of lading holder to claim losses actually suffered by a charterer (in whose hand the bill of lading was only a receipt). In response to these points, Atfadul submitted that they were in any case entitled to the full amount of damages pursuant to the principles of the common law, regardless of any previous recovery from the seller. The shipowner’s first ground of appeal was rejected for the reasons explained later. However, Baker J agreed with the second ground. For the operation of s.2(4), it was essential to pose the question whether the charterers would have had the right of suit pursuant to s.2(1) of COGSA 1992. In that case, the answer was “No”. The CIF sellers already had a contract of carriage with the shipowner under the charterparty. Consequently, no right of suit could have been vested in them by virtue of the operation of s.(2)(1). Nonetheless, having held there was no claim under COGSA 1992, Baker J then applied the rules of common law in order to uphold the award. In doing so he followed two key decisions on the topic. One was R&W Paul, where a cargo receiver was held entitled to recover the full value of the cargo damage caused by the carrier’s breach of contract irrespective of an earlier recovery; the other was The Sanix Ace, where charterers were entitled to recover the full value of cargo damage as they had owned the cargo when it was damaged due to the carrier’s breach, even though the ultimate loss had been felt elsewhere. A. Bailee’s Right of Suit At the outset, the decision in Sevylor appears to run counter to the compensatory principle by allowing the cargo interest to recover in full despite any earlier recovery. However, a potent explanation for the approach taken lies in the early English decision in The Winkfield,13 where Collins MR said:14 The law is that, in an action against a stranger [X] for loss of goods caused by his negligence the bailee in possession [RH] can recover the value of the goods although he would have had a good answer to an action by the bailor [TP] for damages for loss of the thing bailed.

The quoted part of the judgment makes it clear that the bailee’s right to claim for damages in full exists even in cases where the bailee would, if sued by the bailor, have a defence to the fault-based claim.15 Consequently, it also appears that the bailee’s right is not subject to any duty to mitigate damages. The root of this right appears to lie in the early English cases, where the right of suit was held to be inseparable from the right to recover the full value of the goods or the 13 [1902] P 42. 14 Ibid at 54 (initials in square brackets added). 15 For a similar view, see G. McMeel, Complex Entitlements: The Albazero Principle and Restitution (1999) 7 RLR 21, 27.

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third party loss in carriage of goods by sea amount of damage to them.16 The reason for this was probably because the contract of carriage in these cases involved a bailment.17 Consequently, in the case of a cargo loss or damage, if the cargo owner did not bring any claim, the bailee was entitled to recover from the carrier substantial damages, which could be more than their personal loss.18 In such instances, the bailee, who recovered damages in full, was required to hold the surplus on trust for the third party.19 On this matter, Collins MR in The Winkfield further said:20 The chattel that has been converted or damaged is deemed to be chattel of the possessor [RH] and of no other, and therefore its loss or deterioration is his loss, and to him, if he demands it, it must be recouped. His obligation to account to the bailor [TP] is really not ad rem in the discussion. It only comes in after he has carried his legal position to its logical consequence against a wrongdoer [X], and serves to soothe a mind disconcerted by the notion that a person who is not himself the complete owner should be entitled to receive back the full value of the chattel converted or destroyed. . . . There is no inconsistency between the two positions; the one is the complement of the other. As between bailee [RH] and stranger [X] possession gives title – that is, not a limited interest, but absolute and complete ownership, and he is entitled to receive back a complete equivalent for the whole loss or deterioration of the thing itself. As between bailor [TP] and bailee [RH] the real interests of each must be inquired into, and, as the bailee has to account for the thing bailed, so he must account for that which has become its equivalent and now represents it. What he has received above his own interest he has received to the use of his bailee. The wrongdoer [X], having once paid full damages to the bailee [RH], has an answer to any action by the bailor [TP].

A similar line of thought was also followed by the courts in the case of a claim in tort for loss caused due to cargo loss or damage. In The Sanix Ace, the court rejected the shipowner’s argument that the charterers had not themselves suffered any loss because they had received the price of the goods from their buyers. In rejecting this argument, Hobhouse J said:21 As soon as the goods are damaged the owner of the goods suffers loss. Formerly he was the owner of goods of full value and subsequently he is the owner of goods with only a reduced value. He has suffered a loss. Whether or not he may be able to recoup his loss from others is a separate question.

In The Sanix Ace, the charterers’ claim for substantial damages succeeded as their title to the goods was not “a bare proprietary one”, and it included “a right to possession of the goods”.22 In R & W Paul, the cargo claimants under the bill of lading also acquired property in the goods, but they did not own the goods when they suffered damage. The question of whether they owned the cargo was also relevant for the purposes of establishing whether they had a contractual title to sue under the bill of lading pursuant to the Bills of Lading Act 1855.

16 See The Albazero, at 841, per Lord Diplock. 17 Ibid. 18 See also the decision in The Winkfield [1902] P 42, which discusses the right of a bailee to recover substantial damages on behalf of his bailor. Regarding the categories of loss recoverable, see Palmer on Bailment (3rd edn, Sweet & Maxwell 2009), para 4–099. 19 Palmer in English Private Law (3rd edn, OUP 2013), para 16.26. 20 [1902] P 42, 60–61. 21 See The Sanix Ace [1987] 1 Lloyd’s Rep 465, 468. 22 Ibid at 468.

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dr melis özdel Following the enactment of COGSA 1992, cargo ownership is no longer relevant to the question of contractual title to sue under bills of lading. There is also no need to establish a bailment relationship in cargo claims governed by the Act. However, for a claimant to obtain substantial damages in the absence of a personal loss, should they still prove either ownership or bailment? On this matter, Baker J in Sevylor Shipping said: There was consideration in R & W Paul of when and how the plaintiff acquired property in the cargo, because that was part of establishing title to sue in contract as bill of lading indorsee under the 1855 Act. That is not an enquiry required by COGSA 1992 as part of proving title to sue. But there was no consideration of whether that meant the plaintiff owned the cargo when it suffered damage. The basis of the decision in R & W Paul as to full damages is not that the plaintiff owned the cargo when it suffered damage. It is, rather, that the plaintiff came to own, and took from the ship, damaged cargo, because of the defendant shipowner’s breach of the bill of lading contract, and that was sufficient in law for full damages. Exactly as Mr Thomas QC put it, the plaintiff bill of lading holder suing on the bill of lading in contract was entitled to full damages despite an earlier recovery from an intermediate seller.23

In view of the preceding, it can be concluded that full recovery can be made either (a) by a cargo owner who owned the goods when they were damaged owing to the carrier’s breach of contract or (b) by a cargo recipient (i.e. an end purchaser) who receives damaged goods due to the carrier’s breach of contract. In both of these cases, the right to recover full damages appears to be somewhat linked to property or possession. Consequently, it is submitted that not every person who has acquired rights of suit pursuant to s.2(1) should be able to recover full damages. B. Should There Not Be a Symmetry Between the Common Law Cases and Those Arising Under COGSA 1992? In the previous section, it was stated that a mere right of suit under COGSA 1992 did not give rise to the entitlement to recover damages in full. Some support for this conclusion can be drawn from the Law Commission Report that led to COGSA 1992.24 On this matter, the report stated: Our policy is to give rights of action to holders of bills of lading. Since these may include those who have not suffered loss, it follows that such people would be able to sue. It is conceptually more satisfactory to allow this, since the question of the ultimate destination of damages is strictly res inter alios acta. Indeed, it may be unclear whether in the particular circumstances a person has suffered a loss. We do not think it satisfactory that a sea carrier should be able to question the entitlement to sue of the consignee or indorsee by raising a technical point that the loss may ultimately fall on someone else.25

If taken literally, the words in this passage can only mean that the holder has “title to sue” irrespective of an earlier recovery from an intermediate seller or end user. It does 23 See [2018] EWHC 629 (Comm); [2018] 2 Lloyd’s Rep 33 at [28]. This also appears not to have been changed substantially by the Torts (Interference with Goods) Act 1977. For a similar view, see G. McMeel, “Complex Entitlements: The Albazero Principle and Restitution” (1999) 7 RLR 21, 28 24 Law Commission Report, “Rights of Suit in Respect of Carriage of Goods by Sea” (Law Com No 196 of March 1991). 25 Law Commission Report, para 2.25.

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third party loss in carriage of goods by sea not expressly mention the right to recover substantial damages, which is a matter separate from “title to sue”. However, the passage that follows goes on to acknowledge that there are exceptions to the rule that one person cannot recover another person’s loss, referring inter alia to cases involving a bailment.26 The report further stated:27 Problems of double recovery (i.e. by a person entitled in contract and another in tort) are theoretically present under the present law. The rights we propose to give to bills of lading holders would be “in addition to any other rights” (emphasis added) such as those belonging to the owner of the goods at the time of the loss or damage. The owner who has been paid the price would only hold any damages he recovered on account for the buyer. Thus in The Sanix Ace, the charterer, who owned the goods was able to recover substantial damages against the shipowner, even though the risk was ultimately borne by a buyer to whom the charterer had sold the goods.

Taken as a whole, these passages do not appear to discuss solely the question of title to sue. They also state the extent to which a cargo interest can recover from a carrier despite an early recovery from the intermediate seller or end user. However, both passages appear to just state this common law right established by cases, including The Sanix Ace and R & W Paul. There is nothing in the report to support the conclusion that those with only contractual claims under bills of lading can also benefit from the right to recover damages in full. Indeed, it appears that a mere contractual right to sue by virtue of the operation of s.2(1) of COGSA 1992 does not give such a right. C. How Does the Claimant Hold the Money? Once it is accepted that cargo interests are, in certain cases, allowed to recover damages in full, a question arises as to whether they are expected to hand over the damages to the third party suffering loss. As mentioned earlier, in the case of contracts of carriage involving a bailment, any surplus should be held on trust.28 However, the courts usually speak of the need to “account” to the third party. The difference between these two approaches is important, especially in cases where the party holding the surplus becomes insolvent. If the damages are held on trust, proprietary protection will be available to the third party against the other creditors. In the absence of the trust mechanism, then no such protection will be available. In The Sanix Ace, Hobhouse J said that the damages were to be held for the “account” of the person who actually had to bear the ultimate economic loss.29 Nonetheless, it is submitted that the damages should be held on trust. As has been explained later, the entitlement to claim substantial damages is linked to property (or possession). Consequently, the proprietary approach is justified.30

26 27 28 29 30

Ibid at para 2.26. Ibid at para 2.28. See The Albazero [1977] AC 774, 845–846. The Sanix Ace [1987] 1 Lloyd’s Rep 465, 470. R. Goode, “Ownership and Obligation in Commercial Transactions” (1987) LQR 433, 456–458.

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dr melis özdel D. The Operation of Section 2(4) of COGSA 1992 As stated earlier, in Sevylor Shipping, the owners argued that s.2(4) only operated in cases where the rights of suit were previously vested in the party suffering loss. Baker J held that there was nothing in that section to suggest that narrow approach. In particular, he said: [T]he touchstone for section 2(4) to operate is simply that someone other than the loss sustainer is the person with title to sue under section 2(1), and the target of the provision, without limitation or further specificity, is the case where there is a dislocation between the incidence of loss and the incidence of the right to sue.31

In rejecting the owner’s argument, Baker J held that the section does not require the party suffering loss to be a previous lawful holder. This would seem to be a correct approach. The wording of the section does not mention such a requirement but instead speaks of “a person with any interest or right in or in relation to goods to which the document relates” (emphasis added). Under English law as it stands, there is not much guidance about what should be understood by “any interest or right in or in relation to goods”. What interest or right would be sufficient for the operation of the section? In its new edition, Carver suggests that the party suffering loss must in general have “either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred or when the cause of action in respect of it accrued”.32 Carver further suggests that a person to whom the goods have been appropriated under a sale contract has sufficient interest or right for the operation of section 2(4)(a) of COGSA 1992.33 However, it expresses doubts about the position of a person who only has a contractual right to delivery, or who only bears the risk of goods lost or damaged. In support of this, Carver states that the section does not just mention suffering loss but it also speaks of “right or interest”.34 Consequently, it is argued that with the operation of the rules on passing of risk, a person may suffer a loss but this is not of itself sufficient to establish “right or interest” as required by the section.35 In view of the preceding, if Carver’s view is followed, the operation of s.(4)(2)(a) will be very limited, such that those who can only prove that they bear the risk of goods lost or damaged are left outside the scope of the section. Presumably, this includes sellers who have entered into a sale contract on an out-turn quantity or quality basis. As has been stated by Professor Baughen, this view gives the section a very limited scope for recovery.36 E. Conclusion The issues addressed in the decision in Sevylor Shipping are of great importance to cargo interests and those involved in a chain of sale contracts. The entitlement to recover 31 See Sevylor Shipping & Trading Corp v Atfadul Co for Foods, Fruits & Livestock [2018] EWHC 629 (Comm); [2018] 2 Lloyd’s Rep 33, 44. 32 Carver on Bills of Lading (5th edn, Sweet & Maxwell 2022), para 5–085. 33 Ibid. 34 Ibid. 35 Ibid. 36 See S. Baughen, “Title to Sue and COGSA 1992: Is There a Legal Black Hole for Cargo Claimants?” (2019) 25 JIML, 463, at 474.

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third party loss in carriage of goods by sea damages in full irrespective of an earlier recovery comes from early English cases. These cases involved contracts of carriage with a cargo interest who owned or came to own the damaged goods. Given the close proprietary link between cargo interests and their goods, earlier recovery of losses under sales contract was considered to be “too remote”. The case law on this matter can be criticised on the grounds that it attaches too much significance to possession and ownership, both of which have been quite problematic concepts to deal with under English law, particularly in the context of international sale of goods. Nonetheless, Baker J’s approach appears to be correct, given the long line of early cases on the bailee’s right to recover damages in full. However, the map of the law is still not clear. Where there is no proprietary link between the cargo claimant and the carrier, should the claimant be still allowed to recover in full although they have previously recovered their losses from their sellers? There appears to be no reason in principle why the claimant’s previous recovery of the loss should not be taken into account. Nonetheless, it is also difficult to argue that such recovery should always limit the claimant’s ability to get damages in full, especially in cases where it is simply the product of contractual arrangements shaped by the bargaining power of the parties in the sale contract. Given the existence of disparate cases on third party loss, these questions do not have an easy answer. Further judicial clarification is therefore needed to establish the boundaries of the claimant’s right to recover in full despite an earlier recovery from someone else.

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INDEX

“anchor defendant” cases 295–303 anti-suit injunction 226–227; Brexit and 234–237; comity and 229–231; key considerations 227–229; mutual trust and 231–234 APIs 132–134 arbitration 88–89 balance of convenience 198–199 banking: technology-driven innovation in 126–129; see also digital banking bills of lading 200 Bitcoin 78–79; arbitration and other jurisdictions 88–89; defined 79–82; foreign currency payments, as 86–88; international enforcement 91; judgments following proprietary claims 83–84; judgments in foreign currency 84–86; normal business currency, as 89–91 breach of charterparty 26–34; see also repudiatory breach Brexit 226–227, 234–237; comity and 229–231; key considerations 227–229; mutual trust and 231–234 buyer: dismantling of vessel 65–77 carriage of goods by sea 312–313 causation 9–10, 193–194 charterer’s interests 57–58 charterparty see breach of charterparty COGSA 1992 316–318 comity: anti-suit injunctions and 229–231 commercial insurance 113–124 commercial practices: emissions trading and 169–171 compensatory principle: damages and 4–5 conduct barring limitation: generally 269–276; proving recklessness 276–277 consequential losses 8–9 contract: measure of loss in 6–9 contractors: liability for 303–308

contractual damages 3–4, 15–16; damages and the compensatory principle 4–5; establishing net values 9–15; measure of loss in contract 6–9; net losses 5–6 control centres 139–154 cooperation 160 cooperation qualification 47–50 CO2 emissions: regulation 157–159; see also emissions creativity, judicial 113–124 CII 166–169 cybersecurity 115–116 damages 26–34, 35–42; adequacy of 209–210; common law position 174–181; compensatory principle and 4–5; deductions 6, 9–16; law reform 181–184; limitations to and deductions from 9–15; negotiating 212–225; see also contractual damages; “negotiating damages”; punitive damages damages in lieu 210–212 data collection 116–118, 144–146, 159, 161–162 data processing 121–124; granular 129–134 data standardisation 131–132 data transmission 118–120 delay 35–42 demolition 73–76 digital banking 125–126; granular data processing 129–134; liability regimes in digital banking 134–138; technologydriven innovation in banking services 126–129 dispute resolution 110–112 duty of care 292–295 early redelivery 43–47; cooperation qualification 47–50; legitimate interest question 50–60; suggestions to shipowners 60–64 EEXI model clause 164–166

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INDEX

emission reduction 155–156, 172–173; private law implications 164–172; regulatory roadmap 156–164 emissions trading 162–164, 169–172 enforcement 91, 200–206, 224–225; mandatory injunctions 197–198, 200–206; negative obligations 206–212; negotiating damages 212–224; specific performance 199, 200–206 ESG litigation 76 EU Emissions Trading System (EU ETS) 162–164; allowances clause 171–172 European Union (EU): emissions reduction 160–164 expectation losses 7 external factors 12–14 Exxon Valdez litigation 239–248 foreign currency: Bitcoin payments as 86–88; judgments in 84–86 funds 285–288 governmental agency: control centre and 147 granular data processing 129–134 greenhouse gas (GHG) emissions: regulation 156–157; see also emissions groups 20–21 independent contractor: control centre and 147, 153 indirect shareholding 23–24 injunctions 21–23 innovation see technology-driven innovation insurance claims: common law position 174–181; law reform 181–184 insurance sector: Internet of Things and 114–115; see also commercial insurance; insurance claims Internet of Things (IoT) 113–124 joint ventures: special purpose vehicles and 19–20 knock-for-knock agreements 20–21 land, control centre situated on 148 late payment: common law position 174–181; law reform 181–184 legitimate interest 50–60 letter of indemnity 200–206 liability 125–126; contractors, for 303–308; control centre, of 149–153; granular data processing 129–134; liability regimes in digital banking 134–138; technology-driven

innovation in banking services 126–129; vicarious liability for punitive damages 241–247; see also liability in tort; limitation of liability liability in tort 308–311; “anchor defendant” cases 295–303; climate change and third parties 307–308; contractors 303–307; parent companies and a direct duty of care 292–295 limitation of liability 154; conduct barring limitation 269–284; contracting out of the right to limit 288–289; effect of combination of funds 285–296; recklessness 276–277; salvage 289–291; timing 284–285; where to constitute a fund 287–288 losses: assessment of loss for damages for repudiatory breach 28–34; measure of loss in contract 6–9; see also net losses; reflective loss; third party loss mandatory injunctions 197–198, 200–206 measure of loss 6–9, 193–194 mitigation 11–12, 26–34, 193–194 money: Bitcoin as 81–82 monitoring 143 mutual trust: anti-suit injunctions and 231–234 navigation 143–144 negative obligations: enforcement of 206–212 “negotiating damages” 212–224; negative obligations 206–212 net losses 5–6 net values 9–15 newbuilding vessels 157–158 open banking 132–134 operators see ship operators parent companies 292–295 personnel: control centres, employed in 147–149 private law 164–172 prohibitory injunctions 206–207 property: Bitcoin as 80–81 proprietary claims: judgments in Bitcoin 83–84 punitive damages 238–239, 268; Batterton 253–267; Exxon Valdez 239–248; Townsend 248–253 reasonable time 187–191 recklessness 276–277 recourse 194 rectification 96–106 redelivery see early redelivery

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INDEX

reflective loss 17–25 regulation 113–124; emissions 156–164 reliance losses 7–8 remedies 95–96, 224–225; dispute resolution mechanisms 110–112; mandatory injunctions 197–198, 200–206; negative obligations 206–212; negotiating damages 212–224; rectification 96–106; rescission 106–110; specific performance 199, 200–206 remoteness 10–11, 193–194 repudiatory breach: assessment of loss for damages for 28–34 rescission 106–110 restrictive covenant 207 right to limit 154; contracting out of 288–289 salvage 289–291 seaworthiness: new attributes for 166 security, provision of 200–206 shareholding see indirect shareholding ship: control centred situated on board 148–149; definition of 139–140 shipowner: control centre and 146, 152–153; obligations 166–167; right to refuse early redelivery 43–64 ship operators 155–156, 172–173; private law implications 164–172; regulatory roadmap 156–164

smart contracts 95–96; dispute resolution mechanisms 110–112; rectification 96–106; rescission 106–110 special purpose vehicles: joint ventures and 19–20 specific performance 199, 200–206 subsidiaries 20–21 sulphur: regulatory action 156–157 tax 14–15 technology-driven innovation: banking services 126–129 third parties, acts of 308–311; “anchor defendant” cases 295–303; climate change and 307–308; liability for contractors 303–307; parent companies and a direct duty of care 292–295 third party loss 312–313 timing 284–285 tort see liability in tort unmanned ship, definition of 140 unmanned ship operations 139–154 vicarious liability 292–293; punitive damages, for 241–247 wreck removal 289–291

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