Charterers' Bulletin, August 2017

Market update: dry bulk rates

Titus Zheng
Market Analyst
Freight Investors Services Pte Ltd
T +65 6535 5189
Etitusz@freightinvestor.com

Will the Baltic Dry Index (BDI)¹ rebound or further decline? What issues do P&I clubs and their members need to consider in the event that the slowdown continues?

This article considers some of the issues.

Tracking the BDI

After a depressed period of almost eight years, some predicted the dry bulk market to recover, or to at least improve, in 2017 from its record low of 291 points in February 2016.² The BDI began this year promisingly near the 1,000-point mark and rose to 1,300 points by April 2017.³ However, there has since been a decline. At the end of July, it was hovering at around 960 points.

The long road to recovery

There are some signs of improvement. On the demand side, the dry bulk trade is predicted to grow about 2% this year. The key driver of this growth is the iron ore trade, which is estimated to grow by 4% in 2017.⁴

On the supply side, ship-scrapping activity has seen an overall increase in recent years. According to Clarksons, in the case of bulk carriers, around 28.8m deadweight tonnes were scrapped in 2016 alone.⁵

The average age of the bulkers scrapped has also decreased. The average age was 24 years in 2016, as compared to 26 in 2015, 30 in 2014 and 31 in 2013.⁶

With the increase in demand for bulkers following the stepping-up of the iron ore bulk trade and the reduction of the world’s bulker fleet pursuant to the overall increase in demolition of bulkers of recent years, one might reasonably expect a positive realignment in dry bulk freight rates in the not too distant future, all things being equal.

Recent changes in the Indian and Chinese economies have particularly had an impact on freight rates.

Slowdown in China’s economy

The demand for building materials in China has for some time significantly impacted freight rates in respect of capesizes, which trade in cargo related to steelmaking, such as iron ore and coking coal.

Traditionally, the BDI peaks during the spring and summer seasons when China’s construction activities peak. Steelmakers import many steelmaking products during the period ahead of the anticipated increase in construction activities.

Introduction

When the English Court of Appeal decided in early 2014 in the case of The Atlantik Confidence¹to permit a limitation fund under the Convention for Limitation of Liability for Maritime Claims 1976 (LLMC 1976) to be constituted by a P&I club letter of undertaking, many awaited with interest to see if the courts of any other jurisdiction applying the LLMC 1976 would take the same position. Now, some three years after that case, the Singapore Court has recently had the opportunity to consider this issue for the first time in Singapore in the case of The Hansa Brandenburg.

The Events

The Hansa Brandenburg had on board a consignment of calcium hypochlorite which was misdeclared by the shipper. This cargo was listed as a dangerous good under the International Maritime Dangerous Good (IMDG) Code, and should have been handled and stowed accordingly to avoid incident.

During the voyage, a fire occurred on board. The member, who was the time charterer and the named carrier pursuant to the bill of lading, received claims from numerous interests for miscellaneous losses as well as claims from cargo interests. The total aggregate of all cargo claims exceeded the amount of a limitation fund calculated under the LLMC 1976. In the circumstances, the member decided to obtain a decree of limitation under the LLMC 1976 and to constitute the limitation fund but without any admission of liability.

As the member is incorporated in Singapore and its bill of lading terms provide for Singapore law and jurisdiction, Singapore was the chosen jurisdiction for the limitation fund. The member as a party seeking the limitation decree was a plaintiff in the limitation action.

For more on the misdeclaration of dangerous goods, refer to the club’s special edition of Standard Cargo.

Article 11(2) LLMC 1976

Article 11(2)² permits the limitation fund to be constituted either by depositing the sum or by producing a guarantee acceptable under the legislation of the state party where the fund is constituted and considered to be adequate by the court or competent authority.

In order for a P&I club letter of undertaking to satisfy the requirements in Article 11(2), the guarantee must be acceptable under the legislation of the jurisdiction where the fund is constituted and considered adequate (in this case) by the court.

Acceptable under legislation

In Singapore, as is the case in England, there is no specific legislation enacted to clarify what would satisfy the provisions of Article 11(2). However, the English Court of Appeal in The Atlantik Confidence decided that the requirement does not require specific additional enabling legislation expressly defining what is acceptable. Given this, if a guarantee does not contravene any local legislation and is not regarded as unacceptable under any local legislation, it is compliant. The English Statute of Frauds is a piece of legislation which was considered in this context.

Similarly, Section 6(b) of the Singapore Civil Law Act (Cap 43) requires a guarantee to be in writing and signed by the guarantor or some person lawfully authorised by him. In this matter, Section 6(b) needed to be and was easily complied with.

Considered adequate by the court

In The Atlantik Confidence, the English Court of Appeal decided that the requirement for the guarantee to be considered adequate by the court means that the court will need to be satisfied that the guarantee provides adequate security for the fund, having regard to the financial standing of the guarantor, the practicality of enforcement and the terms of the guarantee instrument itself. The guidance given there is:

“this is the type of question which judges of the Admiralty Court or the Commercial Court consider every day when deciding issues such as the adequacy of a cross-undertaking in damages…”³

The Singapore Court’s decision in The Arcadia Spirit⁴had previously established that a P&I club letter of undertaking can, in an appropriate case, be accepted as satisfying the concerns of practicality of enforcement and, as to this requirement, is therefore good security in lieu of arrest of a ship.

As regards constituting a limitation fund, the position is, arguably, no different. The Singapore Court was careful to consider at length any impact which the current shipping market conditions may have on this issue and the financial standing of the P&I club providing the letter of undertaking, and decided in favour of permitting a letter of undertaking by The Standard Club Asia Ltd to constitute the limitation fund.

Further interest

In addition to interest provided in the LLMC 1976 from the date of the occurrence giving rise to liability until the date of constitution of the fund, the Singapore Court ordered interest to continue thereafter at the rate of 5.33% per annum until payment (which is the prescribed rate pursuant to the Singapore Rules of Court).

Rules of Court

The existing Rules of Court were drawn up whilst Singapore was a signatory to the previous 1957 Convention for Limitation of Liability and not with the LLMC 1976 in mind. Hence, the Rules of Court may not have provided for some matters under the LLMC 1976. However, an application may be made to court for an order on all issues arising in the limitation action.

Conclusion

The club is pleased to be able to further support its members with this recent decision by the Singapore Court, permitting a letter of undertaking issued by The Standard Club Asia Ltd to constitute the limitation fund under the LLMC 1976. Given the current market conditions, the shipping community will also welcome this positive new development.

Augustine Liew and Eric Wong of Haridass Ho &Partners, Singapore, represented the member and the club in proceedings before the High Court of Singapore.

^{1 [2014] 1 Lloyd’s Rep 586}

^{2 Article 11(2) states: ‘A fund may be constituted, either by depositing the sum, or by producing a guarantee acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the Court or other competent authority.’}

^{3 [2014] 1 Lloyd’s Rep 589 at 594}

^{4 [1988] 1 SLR(R) 73}

NAABSA¹ clauses and safe ports

Ad valorem bills and references to letters of credit in bills of lading: a practical guide

The club has recently received a number of queries from members in respect of the potential impact a reference to a letter of credit (L/C) in a bill of lading might have on their liability towards a cargo interest and on their club cover. This article explores the issue and offers some practical tips for carriers and charterers.

The issue

Why do shippers ask for references to a letter of credit in a bill of lading?

Commonly, in the context of a sales contract transaction, the buyer (or one of the banks involved in financing the transaction) insists on the insertion of a reference to an L/C in the bill of lading.

The object is to ensure that the bill of lading issued matches and represents the same goods which form the subject of the credit facility. The buyer may also have an ulterior motive: to use the extra time needed for checking compliance with the requirement as a means to extend the period of time before the buyer must make the payment.

For the bill of lading carrier, this creates a potential problem: a reference to an L/C may render a bill of lading an ad valorem bill of lading, which in turn, by virtue of rule 3.13.3(12) of the club rules¹ , prejudices the member’s right to limit its liability for cargo loss or damage.

This article addresses the following questions:

• What is an ad valorem bill of lading?
• Why does a shipper ask for a reference to an L/C in a bill of lading?
• Does a reference to an L/C make a bill of lading an ad valorem bill of lading?
• How should a member react to a request by a shipper to insert a reference to an L/C in a bill of lading?

What is an ad valorem bill of lading?

An ad valorem² bill of lading is one that expressly states the value of the subject cargo on the face of the bill of lading. The purpose is to sidestep the package/unit limitation set out in Article IV Rule 5(a) of the Hague or the Hague Visby Rules (the Rules), which limits the amount of damages recoverable by a cargo claimant ‘unless the nature and value of [the] goods have been declared by the shipper before shipment and inserted in the bill of lading’. In the event that cargo loss or damage is suffered, a cargo claimant which ships valuable goods will want to recover the maximum amount of damages recoverable at law and, to that end, the Rules allow him to break limitation by issuing an ad valorem bill of lading. As a result, an ad valorem bill of lading deprives the carrier of his valuable right to limitation of liability per package or unit.

However, the Rules are not entirely clear about what amounts to an ad valorem bill of lading. The Rules provide that the shipper needs to declare the value and the nature of the goods in the bill of lading before shipment.

This creates two additional points of potential difficulty:

• It is not always clear what constitutes the nature of the goods and what exactly needs to be declared for the shipper to fulfil this requirement.
• Bills of lading are often issued after shipment: this raises a question as to the status of a declaration of value and nature made after shipment, but before the bill of lading is issued.

Leaving to one side these additional areas of difficulty, the key point is that issuance of an ad valorem bill of lading deprives the carrier of its valuable right to limitation of liability per package or unit. Ad valorem bills of lading are therefore generally bad news for carriers.

It is with this in mind that the International Group Pooling Agreement excludes cover where the effect of an ad valorem declaration takes the value of the goods beyond the relatively modest figure of $2,500 per unit.³

A member may, therefore, find itself in a difficult position, faced with the conflicting expectations of its cargo interest counterparties and its P&I club. On the one hand, a shipper is insisting that a bill of lading be issued stating a specific value for the goods shipped, whilst on the other, the P&I cover is compromised if the resultant value of the cargo declared exceeds $2,500 per unit.

Why do shippers ask for references to a letter of credit in bills of lading?

The shipper’s request is likely to be rooted in the commercial demands of the cargo receiver or one of the banks involved in the sales contract transaction. The intention may be innocent enough: to ensure that the bill of lading that has been issued marries up with and represents the same goods for which the sum payable under the L/C is due. The effect of the requirement may, however, cause more trouble than was intended. Difficulties might potentially arise if the L/C number is incorrectly transposed onto one or more ancillary documents or an ancillary document does not carry the L/C number.

These are problems that a document checker may need time to deal with, checking with documentary supervisors what a particular bank’s policy is in such cases, or checking back with the buyer of the goods to see whether a waiver of the discrepancy can be obtained. This is where the intention of requiring such a reference may not, in fact, be as benign as one might think: the requirement might just be – and sometimes is – simply a ruse put in place by the buyer of goods in order to delay payment for the goods, possibly until after they are discharged at destination. The result is that it is now the shipper who is between a rock and a hard place: the bank will not pay unless the shipper presents a bill of lading referring to the L/C by number, but on the other hand, the carrier is reluctant to issue such a bill of lading, inspired no doubt by the cautionary advice given by its club against ad valorem bills of lading.

Does a reference to a letter of credit make a bill of lading an ad valorem bill of lading?

This brings us to the central question in this article. Money turns on this question because if the answer is yes, then the carrier loses its limitation under the Rules; and may lose its P&I cover. A carrier will therefore argue that the answer to this question is no, claiming that:

• an L/C number is not a declaration of the nature and value of the goods, as per the Rules formulation
•  the actual value of the goods will be found in the L/C itself, so this is not a value inserted in the bill of lading.

On this basis, a reference to an L/C in a bill of lading does not make a bill of lading ad valorem – and a carrier need therefore fear no loss of its limitation and that clubs need not deprive cover from carriers issuing such bills of lading. The difficulty is that, perhaps somewhat curiously, there is no decided case confirming such an approach. Carriers – and clubs – inevitably therefore have to ask themselves: what if this approach is not upheld by the courts when tested in an actual case?

To that end, at the International Group level, a further key exception to cover has been inserted in the Pooling Agreement.⁴

This exception to cover provides that if a reference to an L/C were to be considered as an agreement by the carrier to contract on terms less favourable than the limitation of liability allowed by the Rules under the law applicable to the contract of carriage, then any resulting liability is an excluded loss under the Rules and cover will only be available on a discretionary basis – so carrier beware!

The result of both exceptions (paras. 13(a) and 14(f) Appendix V, Pooling Agreement) when read together is, therefore, that if the bill of lading declares, whether in terms or through a reference to an L/C, a value of the goods at less than $2,500 per unit, then cover will not be compromised. If, however, the value of the cargo is higher than that figure, then it is likely that cover will be prejudiced and will only be available on a discretionary basis.

How should a member react to a request by a shipper to insert a reference to a letter of credit in a bill of lading?

The response of the member will depend on whether the member (either as owner or charterer) is the carrier under the bill of lading.

If the member is a carrier, it will be directly liable to cargo interests in respect of any cargo claims.

In this position:

1. A member should first notify its liability insurer in order to clarify whether, in the club’s view, on the basis of the circumstances as they have transpired, cover is at risk.
2. The carrier should resist and query the reason behind the request to include in the bill of lading a reference to an L/C. The carrier should also consider whether compliance with the request would delay the issue of the bill of lading and possibly payment. This allows the carrier some time to obtain advice regarding cover from its club – and may give the shipper pause for thought and reconsideration.
3. If the shipper persists, then the carrier may counter with a request for ad valorem freight, on the basis that if they must suffer complications, so must the shipper.

If the member is a charterer but is not a carrier under the bill of lading, it is unlikely to face claims from cargo interests directly. However, members in this position should be aware that their charterparties may include indemnity provisions in favour of their owner counterparties (eg express clauses or incorporation of the Inter-Club Agreement) for liabilities that have been incurred as the result of the member ordering insertion of a reference to an L/C into a bill of lading. The same provisos as to club cover detailed above would apply to a charterer member in these circumstances.

Conclusion

This is a somewhat unhappy area for carriers: increasing demands for references to L/Cs in bills of lading; uncertainty in the Rules as to what exactly amounts to an ad valorem bill of lading and, in particular, whether reference to an L/C makes a bill of lading ad valorem; and, finally, the risk of the loss of P&I cover if the member issues ad valorem bills. The bottom line is: take care, exercise caution and refer to your club, if in doubt.

^{1 ‘… goods carried under a document containing or evidencing the contract of carriage where the value per unit, piece or package has been stated to be in excess of $2,500, or the equivalent in any other currency, which may deprive the member of the right to rely on defences or rights of limitation which would otherwise have been available to him, to the extent that such liabilities exceed that sum’.}

^{2 Latin ad valorem: ‘to the value’}

^{3 Pooling Agreement 2016, Appendix V, para.14(f):}

^{‘…The following losses shall be Excluded Losses save only as they may be treated as sue and labour expenses or expenses incurred by direction of an Association…14. Cargo Claims…Liabilities, costs and expenses in respect of the carriage of cargo arising out of any of the following save insofar and to the extent that the Insured Owner satisfies Directors of an Association that it took such steps as appear to those Directors reasonable to avoid the event or circumstance giving rise to such liabilities, costs and expenses…}

^{(f) Carriage under an ad valorem bill of lading or other document of title, waybill or other contract of carriage in which a value of more than two thousand five hundred Dollars ($2,500) (or the equivalent in any other currency) is declared and/or inserted by reference to a unit, piece, package or otherwise, where the effect of such a declaration/ insertion is to deprive the carrier of any right or rights of limitation to which he would otherwise have been entitled and cause him to incur a greater liability than he would have done but for such declaration/insertion, to the extent that such liability thereby exceeds two thousand five hundred Dollars ($2,500) (or the equivalent in any other currency) in respect of any such unit, piece or package.’}

^{4 Pooling Agreement 2016, Appendix V, para. 13(a):}

^{‘The following losses shall be Excluded Losses save only as they may be treated as sue and labour expenses or expenses incurred by direction on an Association…’ ‘…Liabilities, costs and expenses in respect of the carriage of cargo arising out of the following (save insofar as an Association shall exercise a discretion under its Rules): (a) Contracts for carriage by sea on terms less favourable than those of the Hague or Hague Visby Rules, provided that insofar as concerns liabilities, costs and expenses arising out of any such contract for carriage, the reference to discretion in the preamble to this paragraph 13 shall be deemed to be a reference only to a discretion as to whether to accept the claims in respect of such liabilities, costs or expenses exercised after the occurrence of the event which gives rise to them…’}

Demystifying DTH cover

Niccole Lian
Senior Claims Executive
T +65 6506 2857
E niccole.lian@ctplc.com

Charterer’s liability for damage to hull (DTH) cover responds to a charterer’s liability to a shipowner for physical damage to the vessel during the period of charter due to responsibilities that have been assumed under the charterparty. Both time and slot charterers can benefit from this cover.

Scope of cover

The DTH clause in The Standard Club rules states that cover responds to a member’s liability, as charterer of a ship (other than as bareboat or demise charterer) for:

1. loss or damage to the ship
2. damages for detention or loss of use or hire or demurrage paid or due to the owner for a period during which the use of the ship is lost or the performance impaired as a result of physical damage to the ship
3.  salvage, salvage charges and/or General Average contributions in respect of charterers’ freight at risk and/or charterers’ bunkers and/or the ship, following loss of or damage to the ship
4. (as an extension) loss or damage to the bunkers on the chartered ship as a consequence of a casualty including fire, grounding, stranding, collision or total loss of the chartered ship.

A case study

A ship on a time charter suffers an explosion on board just after departing from the first load port. Unfortunately, the fire spreads rapidly despite the crew’s firefighting efforts. There is damage to the main engine and accommodation, and bunkers are partially lost to the fire. The crew on board quickly abandon ship unharmed and there is no pollution (both of which liabilities would be covered under a charterer’s regular P&I cover).

The master signs a salvage agreement and the shipowner declares General Average. During firefighting, the remaining bunkers are contaminated by salvors’ firefighting water.

Due to the severity of the damage, the H&M insurers declare the ship to be a constructive total loss. Investigations confirm that the cause of the explosion is misdeclared dangerous cargo provided by the charterer member.

The claims

The shipowner and its H&M insurers submit claims for breach of the charterparty terms, which include a provision excluding the carriage of dangerous cargo. These claims include:

a) loss of the ship

b) hire that would have been earned under the time charterparty

c) the shipowner’s liability under the salvage agreement in respect of salvage costs

d) various related expenses incurred by the shipowner as a result of this incident.

What is covered

DTH cover will respond to all of these claims raised by the shipowner. Further, while DTH cover does not ordinarily respond to the loss of a time charterer’s bunkers, cover can be extended to indemnify the member as charterer in respect of loss or damage to his bunkers on the chartered ship (as above). Accordingly, in this particular scenario, the value of charterer’s bunkers lost in the casualty will also fall within the scope of DTH cover.

Conclusion

Given that DTH covers a broad range of exposures, charterers should strongly consider adding this into their existing insurance programme if they have not already done so.

P&I cover provided to shipowners does not respond to physical damage to the insured vessel, this being the purview of the hull & machinery (H&M) insurers. Charterer’s cover also provides regular P&I insurance, but extends to include charterer’s liability for damage to hull (DTH).

Charterer’s DTH cover will also respond where a charterer fails to direct the ship to a safe port or berth so that the ship grounds or is stranded – see the article on page 7.

Cyber security risks for charterers

Cyber security has been a growing concern for the shipping industry in recent years. As the use of technology on board ships increases, so does the risk of cybercrime. This article focuses on the effect of cybercrime on charterparties.

What is cybercrime?

A cybercrime is the intentional infiltration of a technology system by a third party without consent. For charterers, the major risks are financial loss and data theft, which can lead to reputational damage, lawsuits, business interruption and regulatory action.

Diversion of payments

The fraudulent diversion of hire and freight is becoming increasingly common. Hackers infiltrate an email system to find out the details of business contacts. They then email the charterer impersonating the accounts department of a payee to redirect payment, either attaching an invoice with a specified bank account or specifically requesting hire to be paid into a different account than normal. Often the email address used by the hacker is almost identical to the email address of the true counterpart, with only a small variation which can easily go unnoticed.

It is not always apparent that a charterer has fallen victim to cybercrime until the owner complains that hire is unpaid. Generally, hire is only considered paid when the funds have been received in the owner’s designated bank account. Therefore, if the charterer makes a payment which does not reach that account within the payment date, the charterer will be in breach of the charterparty. The owner may then be entitled to withdraw the vessel from service if the charterer does not pay again pursuant to the terms of any anti-technicality clause. This can result in the charterer paying twice.

Protecting your position

Whilst members cannot always prevent a cyber-attack from occurring, members can seek independent legal advice to protect their position contractually, for example, by:

• making ‘Cyber Event’ a defined term
• including a clause allowing more time to pay in the event of a Cyber Event
• including ‘Cyber Event’ as an offhire event in the off-hire clause
• excepting ‘Cyber Event’ from laytime and demurrage.

A 2016 PWC Global Economic Crime Survey recorded cybercrime as ‘the fastest growing global economic crime’, with Forbes projecting the cost of cybercrime to reach $2 trillion by 2019.

Spotting cybercrime

Members should remain alert to the risk of cybercrime at all times.

• Always check email addresses carefully, especially when discussing payment details.
• Be aware. Treat any changes in the communication style or form with suspicion.
• Cross-check any bank account provided in the email against the bank account details contained in the charterparty.
• If you have any suspicions, do not respond by email as it may be intercepted.
• Always telephone the payee to verify the bank details.

BIMCO has published guidelines aimed at preventing cyber security breaches. Though the guidelines focus on shipboard risks, they nonetheless highlight the need for senior management to co-ordinate risk assessments and develop contingency plans. The guidelines can be found on the BIMCO website.

Club cover

Costs incurred in respect of a charterparty dispute relating to cybercrime can be covered under the club’s Defence cover, subject to the war risks exclusion found in P&I rule 4.3.

Where charterers incur a P&I liability arising from cybercrime, poolable P&I cover can respond, subject to the paperless trading and war risks exclusions.

For further information on cyber risks and implications on club cover, please refer to the club’s Standard Bulletin March 2017 edition.

Award-winning global maritime cyber security awareness campaign, Be Cyber Aware at Sea, has collaborated with Fidra Films to launch a new film which aims to highlight the vital and increasing importance of cyber security across the maritime industry. The project has been supported by The Standard Club, along with NSSLGlobal, a global maritime satellite communications provider, Oil Companies International Marine Forum (OCIMF) and Teekay.

The film uses real-life case studies to highlight how easy it is for cybercriminals to target individual employees, who are often the weakest link in the security chain. Lots of people still fail to spot the signs of simple phishing emails, and accidentally give away secure information to hackers via email or social media. Even something as simple as charging a phone using the ECDIS¹ could allow hackers to gain access to the ship’s navigation system. The video therefore focuses on tips to avoid being a target for cyber criminals.

This release is particularly timely given the recent reports of a widespread cyber attack affecting companies around the world, including Maersk.

The video is freely available on youtube. Members are encouraged to distribute it to their fleets and reinforce its messages.

Members requiring further information on this topic should direct their enquiries to either their usual contact at the club or to the authors of this article.

^{1 Electronic chart display and information system.}

Mumbai seminar

As part of the club’s ongoing commitment to the Indian market, on 4 May 2017, The Standard Club held a seminar for its members at The Taj Mahal Palace Hotel in Mumbai.

The focus of the event was charterers’ liabilities – highlighting the main risks and the insurance solutions that are available in the market. The talk drew participants’ attention to the fact that charterers have a very real exposure to claims which the charterers’ liability cover is tailored to meet, even as those needs evolve. Although losses are lower in frequency than owners’ claims, they can be significant in value.

The presentations examined the main risks faced by charterers and the cover solutions available from the club, which remains committed to meeting the evolving needs of our charterer members. These are outlined in more detail in this special edition bulletin. The presentations raised many relevant issues for all participants and sparked an engaging question and answer session, with conversations on the subject continuing over drinks during the reception that followed the seminar.

The information and commentary herein are not intended to amount to legal or technical advice to any person in general or about a specific case. Every effort is made to make them accurate and up to date. However, no responsibility is assumed for their accuracy nor for the views or opinions expressed, nor for any consequence of or reliance on them. You are advised to seek specific legal or technical advice from your usual advisers about any specific matter.