Research Trends and Conclusions: Shipping & Maritime 2009
"People think the stock market went down: in fact in the space of a week, freight rates fell off a cliff." That is how one source described the sudden end to a prolonged period of prosperity for the shipping industry, and the beginning of its misfortunes.
The downturn has touched everyone and its effects can be seen everywhere: shipyards have had cancellations, shipowners have gone insolvent, global demand is plummeting. For the insurance, commercial and disputes law specialists and their firms in this publication the market has changed, and they are being forced to change too.
Tough Times for Ship Finance
The shipping industry suffered its last major crisis in the 1980s. However, there is one very significant difference between the market malaise now and then, and that is the lack of bank liquidity. As a leading lawyer recalls, "In those days there was serious overcapacity in shipyards and insolvent shipowners, but at least we had banks that would lend money."
In the boom years, order books swelled at shipyards and export markets around the world kept growing. Shipping lawyers - particularly transactional and insurance specialists - were kept busy helping their clients prosper in a vibrant market. The credit squeeze was always going to be painful. As the sub prime crisis unravelled in 2007, it was clear that lending would be affected. However it took a while before the strain showed. In the first half of 2008, the backlog from the previous years meant there was still plenty of work, and even some high-value transactions. Exports from China and India remained reasonably buoyant and there were hopes that the shipping industry could ride out the storm. This all ended in September 2008. As belts were tightened, banks re-evaluated loan to security exposure, leaving ship owners to work that much harder for financing. In the meantime, shipping companies, desperately adapting to new circumstances, tried to defer deliveries or payments, or cancel them altogether. In some cases the clients who had kept shipping lawyers busy were passed on to insolvency specialists.
The present crisis also differs from past recessions owing to the introduction of freight futures. For many people, the value of shipping looked like it was only going one way. When prices collapsed, many shipping companies were left with worthless but expensive contracts. To cite a well-known example, the losses made on forward freight agreement contracts and bunker hedging contributed to the downfall of dry bulk operator Britannia Bulk.
Although commercial shipping is evidently suffering from the financial meltdown, some areas remain relatively active. Several practitioners we canvassed are focusing on yacht transactions and insurance which, although not immune to market forces, are less directly affected by issues such as freight rates. Unlike beleaguered commercial shipyards in Asia, the counterparts in Europe that focus on yachts are still relatively busy, although the number of individuals able to afford their upkeep is also being pared down.
Rule B or Not Rule B
Furthermore, the transactional side is in the doldrums, shipping litigation is busier. As conditions became more precarious and the value of shipping fluctuated wildly, disputes emerged as banks and ship owners tried to escape contracts. One of the greatest sources of work has been the Rule B attachment.
Rule B is a remedy, only available in maritime claims, that permits pre-trial seizure of a defendant's property on a unilateral basis. The mix of idle ships, unpaid charter hire and undelivered cargoes provides fertile ground for recriminations, and the temptation to freeze partial payments of contracts can be too much to resist.
According to standard industry practice, most shipping transactions are handled in US dollars, and all US-denominated payments must pass through the electronic funds transfer network in New York. Therefore claimants are able to capture funds belonging to defendants, as they pass through New York.
This has fuelled a glut of cases in New York, and high levels of activity for shipping litigators. However, there are clouds on the horizon. No one knows how long the Rule B honeymoon will last. One of the problems with this route of litigation is that Rule B attachments can only be brought against companies that cannot be ‘found' in New York. A recent ruling in the US Court of Appeals for the Second Circuit confirmed that foreign companies that are registered in New York no longer fall into this type of claim. However registering in New York is not necessarily ideal as it can be expensive and exposes the client to US law, as well as US taxes. That said, some see it as a potential way out of long and expensive litigation for embattled shipping companies.
There are also some signs of judicial impatience at the tide of cases in New York, and although nothing concrete has been enforced, it is possible that measures will be taken to curb the amount of Rule B litigation taking place.
It is also important to note that the growth in litigation is somewhat uneven. Although it is likely that contractual cases will rumble on for some time, the situation is not so clear for marine casualties. This area is not directly driven by the economy, although "the downturn may result in less tonnage on the seas and therefore potentially fewer claims," according to Charles De Leo at Fowler White Burnett PA in Florida. On the other hand, ships are getting bigger, particularly container ships, which presents logistical challenges to ports' infrastructure and puts a strain on the numbers and skills of crews. This increases the scope for human error and therefore casualties. This is particularly relevant when money is tight, and the temptation to save costs by shaving safety precautions is high.
London's Calling
The upturn in litigation is likely to benefit disputes lawyers in this sector worldwide, and particularly arbitration specialists. The prestige of London arbitration has enabled it to maintain a strong grip on international shipping cases, despite the efforts of other arbitration hubs, such as New York, Hamburg and Singapore.
However a recent decision in the European Court of Justice (ECJ) may pose a real threat to London's primacy. In the Front Comor case, the ECJ found that English courts could not grant anti-suit injunctions restraining proceedings in other EU states, even if the matter was in breach of an arbitration agreement. Instead the applicability of arbitration agreements is determined by the court in which the case was first filed. Jude Benny addresses these issues in further detail in the article that follows this piece, but only time will tell whether any jurisdiction will trump the English capital. Julian Clark at Holman Fenwick Willan LLP confirms that "most contracts that end up on my desk still include a London arbitration provision, so we will have to see".
Piracy
This year the shipping industry has had to combat the financial turbulence of the credit crunch, as well as the more tangible threat posed by pirates off the east coast of Africa. One of the most dangerous trouble spots is Somalia. In 2008, the International Maritime Organization reported 135 attacks on ships, 44 hijackings and more than 600 seafarers detained and held for ransom, off the coast of Somalia and the Gulf of Aden. Unfortunately this is one of the busiest shipping routes in the world.
Although it must be stressed that piracy is more of a political issue, it does also present some difficult legal issues. The legality of paying ransom depends on whether the incident constitutes an act of piracy or terrorism. As most of the incidents have a clear commercial bent, they tend to fall into the former category. In practice, a more pressing issue with regards to piracy is its effects on insurance. As shipping risks increase, shipowners may be subject to higher premiums.
With many crew members undergoing extended hijackings, issues have arisen concerning the liability of employers. The obligation to provide a safe and secure workplace is a key part of the Maritime Labour Convention, and the increased risk of litigation may make employers' liability an area of focus for shipowners.
The combined effects of a stronger military presence on the trading route and inclement weather have dramatically reduced the rate of piracy since its peak in the summer of 2008. Even so, there has been an unprecedented rise in piracy over the past twelve months. Despite the international pressure, it is still likely to be a thorn in the side of shipping companies for some time to come.
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It has been a challenging 12 months for the shipping industry and its legal representatives around the world. Although transactional lawyers have been at the sharp end of the financial crisis, some "dry" litigation lawyers have enjoyed an increase in recession-led disputes. Labour and employment considerations are forcing their way up the agenda, and bankruptcy and restructuring advice is ever more sought after. On the flip side, the slump in the shipping industry provides a unique opportunity for the shrewd investor, as there are plenty of bargains to be had. The uncertain economic climate makes for interesting times for clients and their counsel, as both look to adapt to their changing circumstances.