Ruling the waves

‘Everything that happens in the world has a knock-on effect on shipping – it’s very geopolitical,’ remarks Linda Jacques, partner at LA Marine, the marine law department of Lester Aldridge based on the south coast. In common with seemingly all marine lawyers, Jacques is extremely enthusiastic about her area of practice. ‘It’s a fascinating area to work in – it’s very international,’ she enthuses.

Take the latest events in Ukraine, for example. Jacques acts for shipowners contracted by the World Food Programme to collect grain from the Black Sea. In recent weeks, her clients have been watching the news hourly to monitor developments in Russia’s bombing of grain warehouses. She explains: ‘One client said to us, “Can I get out of the contract, do I have to go down there – I don’t want to put my crew at risk, I don’t want my ship at risk. Will the Russians bomb me?”. This area of law is right at the forefront of all of that. There are ships moving around the world having to deal with the scenarios that are unfolding on the news.’

Best of British

For lawyers qualified in England and Wales, maritime law is particularly appealing because virtually all shipping contracts are governed by English law – even where none of the parties involved are connected to the UK and the vessels in question will be going nowhere near British waters.

Historically, this stems from the dominance of England and Wales as a trading hub at the time when the law was evolving; solicitors who cast their minds back to law school may recall that many of the influential contract law cases relate to shipping. But these days, the continued use of the law of England and Wales in shipping has more to do with the established nature of the law, the expertise and reputation of UK lawyers, and the high regard in which the Admiralty Court and the London Maritime Arbitrators Association – the leading arbitration venue for maritime disputes – are held. London’s status as an insurance hub is also key – although since Brexit, a number of historically UK-based insurers have set up European subsidiaries.

So what do all these shipping contracts need to deal with? The issues are myriad. Contracting parties will include: shipowners; companies that rent or sub-rent space within ships; buyers and sellers of goods whose cargo is being transported; and insurers against damage to the ship itself, or against damage the ship might do to other vessels or anything else. Meanwhile, there is a long list of potential problems to consider: fire damage to the ship or the goods on board (a hazard that is now on the rise thanks to growing demand for dangerous cargoes, such as lithium batteries to power electric vehicles, and liquefied natural gas, which must be kept very cold); the effects of long delays at ports that remain understaffed since Covid; the cost of environmental measures; protection against pirate activity off Africa’s west coast; and the list goes on.

Steering through sanctions

One huge political development with major ramifications for shipping is the sanctions imposed in response to Russia’s invasion of Ukraine. Daniel Martin, lead sanctions partner at HFW, explains: ‘Our shipping clients are significantly affected by sanctions; more so than clients in other sectors because the sanctions are predominantly targeting international trade.

‘If we take Russia as an example, the way the sanctions apply leverage on Russia is to change behaviour by stopping its ability to trade with the rest of the world. But that trade is not conducted on a government-to-government basis; it’s commercial organisations that are doing the trade: for example, the ship owner being asked to carry Russian oil to India. So they are directly in the crosshairs.’

Such clients will have contractual obligations and getting out of them may not be straightforward. Martin says: ‘Clients need to understand the restrictions to make sure they’re not in breach of the law. And equally, they need to understand the precise extent of the restriction, because often they are not in a position to say to their contract counterparty, “It’s too difficult, I don’t know whether I’m allowed to do it or not, so I’m just not going to do it”. So they’ll come to us and say, for instance, “I’m a ship owner, I’ve been given orders to go to China to collect, say, bicycle parts [headed] for Russia – can I do it, or can I say no?”.’

Lawyers will look at whether a client can argue the contract is void due to illegality, frustration, or force majeure, for example.

Rebecca Armstrong, partner at Clyde & Co, says: ‘When the Russian sanctions kicked in, in February and March, lots of questions came up. Say a vessel was en route to Russia, was that port safe, was that Ukrainian port safe? Who’s responsible if it’s not, who’s responsible for the insurance? What if the vessel had got stuck for a long time? Then there were other questions arising out of Russian products. For example, is it a sanctions issue if the vessel is carrying, say, Russian-origin lubricant? Russia is one of the biggest manufacturers of things like lubricants.

‘Also, a lot of the crews on many vessels tended to be Russians or Ukrainians, so how do you pay those people? These were big questions at the time, for example if someone’s bank account was frozen. There were rules against making payments into Russia, or questions about which banks you could [pay into].’

Red flags

Another challenge for shipping clients is that the industry has been identified as a sector of concern by regulators. Martin says: ‘There are things that the industry has done for a long time that, if you don’t understand the industry, it’s easy to think of them as being suspicious activity; or activities of concern at least.’

One example is where you have a huge oil tanker that is too big to enter certain ports. This then requires the use of smaller shuttle tankers.

‘Say you’ve got oil going from a small port to another small port, and it’s going to cross the ocean in between,’ explains Martin. ‘You have a small tanker that comes out of port, will meet the big tanker, the oil is pumped from one to the other, it does the ocean leg, and then it comes off again. Those are called ship-to-ship, or STS, transfers.

‘The idea of huge quantities of oil being pumped from one boat to another on the high seas is understandably concerning. But there’s a complex process around it, it happens every day, and it’s carefully managed. But what it can mean is that when the large vessel gets to the [discharge] area, people say, well we don’t know where this oil came from.’

Another issue for regulators is that within the shipping industry it is customary for each vessel to be owned by one company. This makes sense, because each ship is its own profit centre and is chartered individually. It also means that if there is an adverse incident relating to one ship, the liability does not apply to the whole fleet. But is this a legitimate way of structuring things? ‘It’s as legitimate as English law’s acceptance of separate legal personalities’, insists Martin.

A further consideration for regulators is that these one-ship companies will often be incorporated in places such as Panama, Liberia and the Marshall Islands, even though they have no connection to these jurisdictions; a concept termed ‘flags of convenience’. Indeed, almost 40% of the entire world’s fleet of merchant ships, in terms of how much the ships can carry, are registered in those three places. So why do so many ships register in these jurisdictions?

‘Historically, these are places where ships have been registered,’ explains Martin. ‘It’s often a question of cost; those are places where ship registries are presumably able to offer more competitive ship registry services than elsewhere. These are significant jurisdictions with a very high safety and compliance threshold. Panama, Liberia and the Marshall Islands in particular are top-tier registries.’

However, organisations such as the International Transport Workers’ Federation say there should be a ‘genuine link’ between the real owner of a vessel and the flag it flies. They argue that flags of convenience allow shipowners to take advantage of minimal regulation and can lead to low wages and poor conditions for workers on board.

Going green

Shipping is responsible for around 2.5% of global greenhouse gas emissions. Moves towards decarbonisation of the industry have been a significant issue for clients in the sector for some years. The pressure was ramped up in May when the European Union Emissions Trading System (EU ETS) expanded to encompass the maritime sector.

The EU ETS is a market-based trading system set up in 2005 to encourage industries to tackle emissions. It limits the total volume of emissions permitted for a sector as a whole, then issues allowances for these emissions, which can be traded on a carbon market. It means companies that successfully reduce their emissions can sell their surplus to others in the industry, creating a financial incentive to be greener.

The EU move means that for all shipping companies operating vessels of more than 5,000gt, all ships calling at EU ports will need to obtain allowances covering their emissions. The scheme is expected to be expanded to cover smaller vessels in future.

Meanwhile the International Maritime Organization (IMO) wants to reduce the carbon intensity of all ships by 40% by 2030, and 70% by 2050 (as against 2008 levels). Initiatives introduced to achieve this include ratings to measure the energy efficiency of ships and a ‘carbon intensity indicator’ to assess greenhouse gas emissions.

‘Decarbonisation is the hot topic in shipping at the moment, and rings through in a lot of things,’ says Armstrong. ‘For example, many vessels have had to be retrofitted with “scrubbers” or different equipment to lower emissions. This has led to much argument about who was responsible for these costs.’

While some ships are chartered for a single voyage, others are chartered on a time basis, which could be as long as 15 or 20 years. Underneath this will often sit further charters, for example for single voyages. All this makes the question of who should meet the cost of obligations under the EU ETS or IMO regulations somewhat difficult to answer.

‘There’s been a lot of debate about whether owners or charterers should ultimately be responsible for emissions,’ says Armstrong. ‘You can see the arguments cutting both ways, because it all depends where the charterer wants to take the vessel, but the owner is the person who ultimately owns this high-emitting asset. It has caused a lot of interesting questions from a legal perspective.’

For lawyers, there are now plenty of environment-related sticking points that need to be addressed in contracts. ‘There’s the issue of who is going to pay [for environment-related costs],’ notes Armstrong. ‘But as the law is constantly changing, it is also about who is going to be responsible for the consequences of the laws changing around emissions.

‘Then linked to emissions and also since Covid, there have been backlogs at ports and terminals. So there’s been debate around “slow steaming”, which is where whoever is chartering the vessel will run it really slowly into port, so that they don’t have to wait in a queue for as long, and their emissions are lower in getting there. But who is responsible for the cost of the longer voyage?’

On a positive note, the industry is making progress in using technology to reduce emissions. Jacques explains: ‘Shipping is way ahead of the aviation industry in developing different ways of using nitrogen and other types of fuel to keep ships going. There are many ships being converted to use different types of fuel now, which are not oil-based. A lot of clients are developing hydrogen.

‘And Britain is right at the forefront of some of this technology, which is absolutely brilliant. It’s got to the point where countries abroad are buying up British companies because of their technological advantages.’

Jacques adds that autonomous ships, controlled by computer and with no human on board, are another developing area. But she notes: ‘Masters of ships are incredibly brave really; they have to make quick decisions when looking at weather forecasts to keep the ship and its crew safe, and its cargo. I suspect ship owners would be a bit nervous about sending a ship on to the high seas just controlled by a computer.’

Growing in-house role

For shipping lawyers, a big shift has been the recent move towards much bigger in-house departments in shipping and logistics companies, as well as insurers. Whereas private practice lawyers might previously have been instructed by one individual, now the client may be a team of 10 people. These days, most routine contract-related work will be done by these in-house teams, but external lawyers are still called upon for more specialist advice.

'[Marine lawyers] tend to be at the coal face, rather than dealing with stuff that’s happened… It’s a very interesting area for that reason. It’s an incredible area of law'

Linda Jacques, LA Marine

‘There’s still a role for external lawyers working in traditional firms, but that role has changed,’ reflects Jacques. ‘You’re supplying expertise into quite a big legal department.

‘We deal with a lot of law in our area. Marine lawyers are always opening law books or going online to check the current law, because it changes so much. But much of our day-to-day support is about tactical considerations, based on the law.’

Broader political and geographical issues will often impact the supply of goods moving from A to B; and shipping lawyers are there to solve those problems.

‘We prefer to stay away from courts and arbitration if we can avoid it; our aim is to fix things,’ remarks Jacques. ‘We tend to be at the coal face, rather than dealing with stuff that’s [already] happened. It’s a very interesting area for that reason. It’s an incredible area of law, it really is.’

 

Rachel Rothwell is a freelance legal journalist and Gazette columnist