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Ship Management : Tuesday 3rd October 11.00 - 11.30 Peter Martyr - Norton Rose |
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Ship Management - Your liabilities by Peter Martyr, Norton Rose, London There is not a great deal new to say about ship managers’ liabilities because we have not yet publicly seen a major ISM Code induced case. There are however a number of points worth mentioning in a general review of ship managers’ liabilities. There are three aspects of liability that I would like to discuss. The first concerns the effect of changing standard contract wording. The second concerns the effect of the ISM Code on the incidence of negligence. The third concerns recent and forthcoming changes in the regulatory and legislative framework. Changing standard contract wording My impression is that Shipman ’98 can look forward to a more popular future than did its predecessor. Ironically, it seems that the old form has had a new lease of life since the introduction of the new form, but it seems generally to be the case that approval of the standard form has increased. The increased use brings with it dangers, because, as in the case with standard form charterparties, the problems lie not so much in the printed text, but with amendments made to the standard text as a result of negotiation. These changes are generally made to the detriment of the manager’s legal protection. Commercial pressure to obtain new business often results in the legal prerequisites being ignored or their importance underestimated. It is worth remembering that Shipman is not a pro-manager form. It was negotiated by various parties interested in ship management, including owners. This means that even minor changes can make the contract unfavourable to managers. In my experience managers are often guilty of allowing optimism to triumph over experience and of course when the demands for new business are greater, that triumph is even more in evidence. Managers are happy to invest a considerable amount of time analysing the financial consequences of taking a vessel into management. They calculate the average running costs of the vessel; they use their experience to judge how much allowance should be made in the budget for dry-docking and for general maintenance; they calculate the benefits of using different nationality crews and calculate the costs against the level of fees and budget expected. But how many managers try to undertake a legal audit? Indeed what might be involved in a legal audit? Just as with a financial audit, a legal audit involves the analysis of series of interconnected factors and the application of experience. Any standard form contract has been carefully designed to work in accordance with, usually, one or perhaps two systems of law. They are designed to work in a carefully co-ordinated way and use the principles of the law designed to govern the contract. This may seem obvious, but it is surprising how often businessmen think they can change the law or jurisdiction of a draft contract as part of the negotiation process without giving rise to any serious problems. Even if a ship manager understands the need not to change the law governing the contract, some of the other clauses may be changed in a way which materially affects liability. The real value of a legal audit is not felt immediately but it most certainly can have an effect on the bottom line. Although it is very difficult to put a price on the amendment to or loss of a contractual right, it is possible to assess the risk in the light of other commercial factors with a certain amount of experience. I would like to look at a few of the more important provisions and consider the effect of making minor changes to them. The first and most obvious contractual change I have mentioned is amending the law and jurisdiction clause. Shipman is designed to be governed by English or New York law. The structure of the agreement setting out definitions and containing a clear statement of obligations and liabilities is typical of an Anglo-US agreement. Most important of all, there is a Responsibilities clause which sets out the circumstances in which the manager may be found liable for negligence. The negligence clause works in English (and I presume New York law), but you should not presume that it works in the manner intended under other laws. Some systems of law do not permit negligence to be limited in the way it is in Shipman. Simply changing the law of the agreement might result in the loss of an effective limitation of liability and perhaps also, as a consequence, a loss of professional indemnity insurance. You might be tempted to change just part of the clause, but changing the jurisdiction of the dispute mechanism alone can have a considerable effect on the operation of the agreement, for example English law and Chinese arbitration might be chosen as a compromise. The distinction between matters which are considered to be substantive law and those which are considered procedural law are not necessarily the same in each jurisdiction. The difference can have important consequences not least because, in the example I have given, Chinese arbitrators will be considering matters of English law. They cannot necessarily be expected to interpret English law as an English arbitrator might and this could have very serious consequences for the manager’s bottom line. That is perhaps a slightly unlikely example, but there are plenty of examples of mixed law and jurisdiction clauses in practice and they cause considerable difficulties, for example in relation to appeals or matters of arbitration procedure. Time limits are considered by some jurisdictions to be matters of substantive law, but others consider them procedural. The problems that could arise over the potential time barring of claims are obvious- which law applies if they are different? A further example of a change which can have catastrophic consequences is one to the responsibilities clause. Removing the word "solely" from the proviso to Article 18.2 of Shipman can make an enormous difference to the defence of claims for negligence. The proviso says " UNLESS same [damage delay or expense] is proved to have resulted solely from the negligence….". Removal of that single word can obviously make a considerable difference and yet I have seen it negotiated out and a manager found liable subsequently in circumstances when it was not solely liable for a loss. That turned out to be an expensive word in the final analysis. With hindsight I suspect a greater monetary value would have been ascribed to it in the initial analysis. Another common change concerns the obligation to deliver the management services. Rather than using "best endeavours" some managers have agreed to delete the expression and agreed that they "will" provide the specified management services. The impact may not be immediately apparent, because best endeavours imposes quite a heavy obligation, but it is not an absolute duty. The word "will" creates an absolute requirement and creates an interesting conflict with the force majeure provision. Provisions relating to maintenance can have a very serious impact on the bottom line, because they can accidentally turn a contract from a provision of services contract into a maintenance contract. The cost consequences are considerable and probably not insured. The risk analysis that a manager undertakes before entering into a contract should therefore include not only the financial aspects of the deal, but also the legal ones. I am not suggesting that managers should never compromise on the terms of their contracts; that would be unrealistic. However they should try to employ some more logical means of assessing the relationship between financial, operational and legal issues. To put it at its simplest, if a poor quality ship is being taken into management, or should I say one with known maintenance deficiencies, it is important that the repair and maintenance obligations in the agreement are drawn as tightly as possible in favour of the manager and if the owner is one of uncertain financial standing it is important that the manager is not exposed to funding the vessel’s operation in any way. Clause 16.6 of Shipman ’98 protects the manager in this instance. From a purely commercial point of view if the manger is contracting with an owner of dubious financial standing and from a jurisdiction which is unfavourable, more importance should be attached to the terms of the contract and the enforceability of its terms. The manager’s ability to recover monies due (and there would be a heightened risk in this case) may be severely affected by amendments to the standard form. Indeed it might be prudent to strengthen the relevant contract provisions. To put it in simple terms, there is a relationship between the financial standing of the owner, the quality of the ship, the risk inherent in the particular trade and the likelihood of resorting to the contract for protection. That protection may be in the form of defence, limitation of liability for negligence, or provision a reasonable opportunity for recovering sums due. It is common sense that the manager of a poorly financed owner needs to take special care to avoid contracting as principal (as a matter of contract) or extending its own credit (as a matter of financial management), but sometimes the most obvious way of ensuring that exposure is limited is not reviewed until too late. It is perfectly possible to create a risk analysis matrix which connects the factors I have mentioned. If this is done properly legal issues will be given their due weight at the appropriate time. It is much cheaper to prevent a problem from occurring than losing a year’s worth of company profit because liability has not been adequately protected when it could have been. The ISM Code and manager’s negligence When it was first published a number of owners thought they saw the opportunity of avoiding the direct consequences of the ISM Code by putting their vessels out to third party management. In fact if the policing of the Code had been more consistent and effective I think more small owners would have given up the unequal effort and put their ships out to management. The implementation of the Code has definitely made it easier to demonstrate culpability on the part of the owner and therefore also of the manager standing in his shoes. But the manager is or should be better able to withstand the pressures of compliance. Fortunately very few cases on manager’s negligence have come to Court. Those that have come to Court are extreme on the facts and an analysis of the Code would have made no difference to the outcome. However given the previous strong distinction between shipboard negligence (for which the manager usually excludes liability) and manager’s negligence for which the manager is liable (subject to a contractual limitation in Shipman) there were usually good grounds on which to defend a manager. The ISM Code deliberately blurs that distinction. It is not so easy now to distinguish between shipboard negligence and manger’s negligence. Failure which may in the past have been put down to an engineer’s negligence may well now be considered in the light of obligations to train properly and possibly examined by reference to earlier failures of a similar nature. It has been suggested that the role of Designated Person does not of itself attract additional liability to the manager, but there is no doubt that a failure by the Designated Person to uphold the SMS will result in an increased risk of a manager being found negligent. Regulatory and legislative framework The continued failure to enforce the ISM Code in a uniform way presents and interesting dilemma for shipowners. Provided they keep their vessels away from ports and jurisdictions which treat the Code seriously they can afford to disregard its terms with relative impunity. The position is not so simple for third party ship mangers, because they are likely to manage at least some ships which are visiting to ports and jurisdictions where the Code is enforced. The operation of effective systems is not something that can be achieved on a selective basis. That is of course a good thing, but it does mean that a manger with a variable quality fleet might find that a lower quality of operation with some vessels causes problems for the management of the whole fleet. Evidence of poor management in general is likely to be used to a claimant to support a specific claim The next issue I wanted to mention is an old favourite of mine, but it is indirectly connected to the ISM Code. Managers’ income is directly connected to the quality of the vessel managed but more importantly to the earning capabilities of the vessel. Heavy competition forces prices down and there is questionable premium attached to quality management. I would like to say something about the matter of remuneration, looking at it from a regulatory position. The ISM Code is yet further regulatory control imposed on owners and managers; it has a serious cost attached to it. The regulation of ship owners continues in one direction - greater stringency. However there will be no real reward for improved safety and tighter regulation until cargo and chartering interests are themselves compelled to take some responsibility for the maritime adventure. The Equasis project is a step in the right direction and the ERIKA disaster seems to have provoked a greater interest in spreading the word on responsibility for safety in shipping. I think it is in the interests of all managers and ship owners to maintain political pressure for change whilst the interest is still there. Not until regulations apply to each side of the business do I believe there will be a real premium placed on quality. The final legislative issue I would like to discuss is that of corporate manslaughter. Over the last two decades, there have been several fatal disasters as a result of which unsuccessful prosecutions under the current law of manslaughter have been brought against blameworthy companies. As a result, the Government has been under pressure to change the law in order to make it easier to hold corporate bodies responsible for deaths arising out of fatal accidents. It is widely acknowledged that blame within a company often lies with the system in place to control the risk, and rarely with an individual. The Government has therefore proposed a new offence of "corporate killing". A corporation will be guilty of corporate killing if a "management failure" by the corporation is the cause or one of the causes of a person’s death and "that failure constitutes conduct falling far below what can reasonably be expected of the corporation in the circumstances." It is not yet clear what "far below" means but it is likely only to cover very serious management failures. A corporation found guilty of the new offence will be liable to an unlimited fine and may be made subject to specific remedial orders. The offence will apply to any British company and to foreign companies which do business in the UK and if injuries resulting in death occur in the UK, within British territorial waters or on a British vessel. The proposals are at the early consultation stage and are unlikely to come into force for several years. New offences are also proposed in relation to individual manslaughter and to "substantially contributing" to the corporate offence. Company officers could in theory find themselves exposed to these offences. The Government has made it clear that company group structures should not be used as a mechanism to evade a potential charge of corporate killing. They have therefore proposed that proceedings should be brought against parent or other group companies if it can be shown that their own management failures contributed to the death. The current proposals mean that any company which does business in the UK, would be potentially exposed to a charge of corporate killing, but the potential exists for liability to be transferred to other parts of the organisation which assume responsibility for health and safety management and which are found to have been at fault. Under the current proposals company officers may be affected in three ways. First, any company officer could be charged with one of the new individual manslaughter offences if there was sufficient evidence whether or not proceedings had been brought against the company itself for the corporate killing offence. Second, a company officer could be convicted of the suggested, but as yet undrafted, offence of "substantially contributing" to the company’s corporate offence which caused a death. Third, any company officer who can be shown to have had some influence over, or responsibility for, the circumstances in which a serious management failure caused a person’s death will be liable to disqualification from acting in any management role in the UK. The European Convention on Extradition 1957 and can operate to bring a non-UK resident director to the UK to stand trial (provided the relevant State is a signatory to the Convention). The Convention states that each country has an obligation to surrender individuals against whom the "requesting" country wishes to proceed for an "extraditable offence". Generally, an "extraditable offence" must be one that is punishable under the laws of both the requesting and requested country by imprisonment for at least one year. An extradition request by the UK is more likely to succeed in relation to the individual manslaughter offences, as they are more likely to be "extraditable offences" in both the ceding State and the UK. Proceedings in respect of disqualification or of the offence of "substantially contributing" may be more difficult to establish as such. The Convention also states that any country wishing to refuse extradition for certain offences has to submit them in a list to the authorities and it is hoped that in future this will clarify whether or not the proposed new offences will be "extraditable offences". Some States have also reserved the right to refuse extradition in certain circumstances, for example, where the authorities consider that the proceedings are ill-founded, or where extradition would be unjust in view of the health of the individual concerned. Again there is a strong connection to the ISM Code in this proposed legislation. Managers will need to review procedures afresh to minimise their exposure to the proposed new offences. A manager should make sure that:
However, as I have said, the greatest risk will arise to the manager, and its responsible persons, from failure to act on known problems. |