Research Trends and Conclusions: Shipping & Maritime 2010
Jessica Harvey -
“Litigation is a driving force for almost every law firm in the UK today, because corporate work levels are nothing like they were before.” In a tough economic climate it is unsurprising that lawyers everywhere have experienced a consistent rise in disputes-related work. Shipping and maritime, as our source notes, is certainly no different. But this is only part of the picture: freight rates are still low, arbitration lists are lengthening and the number of piracy incidents continues to rise.
Tough Times
In an environment where over 80 per cent of international trade in goods is carried by sea, according to figures reported by the United Nations Conference on Trade and Development, the effects of the global economic crisis dealt a particularly crushing blow. A fall in the freight market caused severe difficulties across the board and a lack of liquidity at the banks made the financing of new projects almost impossible, delivering severe problems to the shipbuilding sector. Shipowners faced increasing woes with the potential for wrongful repudiation of charter parties, non-payment of freight and hire, and liability for charterers bad debt. Even the busiest of shipyards found buyers seeking to pull out of contracts wherever possible.
Any emerging optimism is tinged with caution. As Jonathan Lux at Ince & Co says, “the recession has demolished some good players, and whilst things have come back a bit, it is all rather fragile.” The majority of the lawyers that our researchers spoke to identified a global surge in shipbuilding disputes. In Hong Kong, Chris Howse of Richards Butler observes a pattern of “shipowners seeking to renegotiate prices with shipyards”. In Canada, Vincent Prager and Peter Cullen at Stikeman Elliott LLP describe acting on a multitude of cases for P&I clubs. It seems the atmosphere too, is showing the strain, as Vincent Prager accounts “people are becoming more and more aggressive and less collegial in the way they handle litigation”. Barry Oland at Oland & Co says: “Major carriers are extremely reluctant to pay out, even on proper claims. Whereas in previous situations they would have looked to resolve the matter out of court, they are now spending money on litigation, rather than commercial resolution.” The implementation of a marine monitoring system is providing additional work for Canadian shipping lawyers. With the establishment of a public database of infringements and a proactive approach to enforcement, clients are increasingly turning to lawyers to fight and avoid any “bad marks” on a record that could be searched by potential charter parties. With regulatory authorities likely to increase financial penalties for those that have been previously fined, many clients are entering into costly litigation in a bid to maintain a clean slate.
Goodbye to Rule B
For successful litigants, the enforcement of financial awards remains tricky. In New York and internationally, the abolition of rule B attachments to electronic funds transfers has met with a mixed reaction. Eaton & Van Winkle’s Alan Praag notes a “significant increase in enquiries relating to the enforcement of foreign money judgments”. His sentiments are echoed in London where Reed Smith LLP’s Andrew Taylor says parties need “to think of alternative methods of securing their claim or enforcing any judgment they obtain”. For some, the decision of the second circuit of the US Court of Appeals in Shipping Corporation of India v Jaldhi Overseas Pte that brought the change was a welcome one. Lawrence Rutkowski at Seward & Kissel LLP explains: “Rule B had a very wide impact on the industry. While it may have had some positive benefits, it came as a weapon when there was a lot of economic uncertainty, and did much to compound it.” Law firms that saw a dramatic rise in this line of work are now experiencing as dramatic a fall with rule B attachments returning to their more traditional measure of being attached to ships, cargo and bunkers.
The Rotterdam Rules
On entry into force, the Rotterdam Rules are likely to have a sweeping impact on shipowners from signatory and even non-signatory jurisdictions. The changes have ignited debate in academic circles, but practitioners will experience their effects at first hand. It is anticipated that the much discussed ‘general’ liability regime will create a surge in claims activity as the courts consider a number of test cases to clarify the rules’ parameters and guiding principles. Increased legal expenditure on cargo claims and waste management is also expected. Volume contracts are a particularly controversial innovation. With parties able to contract out of the aforementioned ‘general’ liability regime they present the strategic opportunity to agree to higher limits of liability, uncapped liability and even carrier responsibility of consequential loss. As a result, bespoke contracts are likely to be subjected to renewed vigour. Lawyers will be increasingly tasked with guiding clients through weighty tactical considerations in the formation of contracts as shipowners face balancing the commercial advantage of using volume contracts to negotiate lower freight rates against gaining a competitive upper hand by accepting in volume contracts uncapped liability and consequential loss, and arranging insurance cover to absorb the financial shortfall. Jurisdiction and arbitration clauses for liner transportation will also be affected. With both chapters operating on an “opt-in” basis, shipowners and their legal advisers will need to consider more closely the question of enforcement.
Significant change is afoot in the form of cargo claims where, for the first time, port terminal operators will be directly in the firing line of individual cargo claimants. With systems and processes geared toward indemnifying claims brought by the carrier in accordance with the terminal handling agreement or local law, this potential influx of claimants is likely to further shake the industry: it is anticipated that the Rotterdam liability provisions will be largely more generous than the terminals’ current exposure to the shipping lines and the claims themselves more severe. There is likely to be a sting in the tail, however, with terminals looking toward passing on the cost of supporting larger claims to clients or seeking indemnities in respect of any extra liability.
Further development comes in the form of electronic waybills and bills of lading, and imposing a uniform regime for operational issues such as releasing goods at the discharge port. As just a part of the changes facing the industry, the rules are likely to have a broad-ranging impact on day-to-day activity. Lawyers will be increasingly called on to negotiate disputes and guide clients through the regulatory maze.
Looking East
The picture is not entirely bleak. For example, as a result of a growing economy and favourable legislation, the practice area is in good health in Singapore. Six international law firms have recently been granted licences to operate, and the country is opening its doors to future opportunities and signalling its desire to participate in the broader region. Activity is very noticeably shifting to the east with China in particular controlling play in the bulk, gas and container sectors. In Greece, Milto Papangelis notes: “China is being increasingly turned to for ship financing possibilities. The Chinese shipowning industry has seen tremendous growth.” This has had a direct impact on the type of work that lawyers in the region are undertaking as younger vessels, more shipbuilding contracts and more sale and purchase deals bring a decline in scrapping claims. The effect of Chinese activity on the industry as a whole is significant. At the time of writing, freight rates have risen to a two-month high, driven by a global scramble for grain imports and a resurgent demand from Chinese importers, and while analysts warn that this may be short-lived with supply set to surge, Chinese purchases of iron ore are seeing shipping queues rise again.
Firms
As clients look towards law firms that can demonstrate local expertise, international firms are increasingly looking to acquire it. The task of establishing and coordinating a multinational network is a significant and strategic one; consistency is a particular challenge, as Chris Hobbs at Norton Rose LLP explains: “Meeting the demands of different cultures is incredibly important. The trick is in maintaining a uniform standard. It is crucial that both lawyers and clients feel that, wherever the office is, it is part of a common entity and that the high quality of service remains the same throughout.” Partner relocations are likely to be complemented by a heavier presence of local lawyers with regional know-how. This results in a considerable administrative undertaking, relying heavily on a common training programme and strong lawyers on the ground managing offices to provide clients with an internationally seamless service. The ability to cross-sell expertise to clients becomes a fundamental consideration for the commercial viability of new offices. Firms are being increasingly required to adopt an integrated approach. Many shipping lawyers are working closely with energy, commodities, tax, environmental and regulatory teams in particular to provide clients with a cohesive service.
The fallout from the financial crisis has severely affected shipping practices across a wide range of larger firms. Owing to continuing fee pressure, shipping lawyers who cannot charge similar rates to their corporate counterparts are finding life increasingly uncomfortable. Several multinational firms have closed their shipping practices, others are decreasing their shipping presence internationally and some are under pressure to merge. In a price-driven market where smaller firms can prosper by offering lower fees, many shipping lawyers have broken away to form boutique practices. Diversification too, is very much in vogue. Even the strongest shipping firms are looking to move into other areas with oil and gas and aviation being two particular favourites. In such a testing environment, the balance is a difficult one to strike. On the one hand, firms that are able to offer a stable, broad expertise will be able to mitigate any shortfall with busier practice areas. On the other, highly specialised firms with favourable rates will find significant favour with clients. The difficulty lies for those caught in between. Here, flexibility on fees and individual expertise will become increasingly important.
Despite the gloomy backdrop, there are signs that the tide is starting to turn. With opportunistic players bringing new business as “smart money” enters the market in a bid to capitalise on underpriced assets, freight rates slowly recovering and a global upturn in litigation, opportunities are created for lawyers worldwide. Although New York and Singapore have been concentrating on luring arbitration, London’s prestige and firm hold on international shipping cases has stayed strong, with the majority of contracts, as several leading lawyers attest, including a London arbitration provision. For experienced practitioners, the troubles are all a matter of context, as Graham Harris at Thomas Cooper explains: “Just because things are dreadful compared to two years ago, they are not completely dire. There were owners badly caught out that bought at the boom, but you have to look at figures before the crisis to see the true extent of the damage. We have been through worse.”