Shipping & Aviation Bulletin Spring 2010

French ship-owners have begun to use a new fund offered by the government, designed to protect them from the introduction by banks of “loan to value” clauses for the finance of newbuildings. There will be €15million made available to each ship owning company. The scheme is aimed at preventing banks from demanding cash to account for the difference between mortgage payments and the market value of ships, which has of course plummeted during the recession. French owners have until the end of 2010 to use the fund.

Two German banks, HSH Nordbank and Deutsche Schiffsbank have endorsed a new method of valuing ships, known as the “Hamburg Ship Evaluation Standard”. Valuations are based according to the vessel’s likely future earnings, rather than their market value and is argued to give a fairer picture than traditional assessments based on the prices obtained on the open market by similar ships. However, it has been heavily criticised by bankers and brokers for inflating ships values well above market rates.

The European Commission has published a Progress Report outlining the achievements of the EU’s Integrated Maritime Policy (IMP) over the past two years. The Commission has also tabled proposals on two major IMP issues – the integration across sectors and countries of maritime surveillance and the international dimension of Europe’s maritime policy.

To view the report, click on the link:

A €100m extension scheme for Dublin’s port has gone before the planning appeals board, indicating a more positive outlook for the Irish shipping industry. There is also a new ro-ro route from Dublin to Lagos in Nigeria by RMR Shipping. It has been reported that the larger shipping companies in Ireland are bucking the downward trend, while smaller companies continue to provide cause for concern.

Rainy Sky (the Buyer) contracted to buy a vessel from a shipbuilding company (the Builder) and agreed to pay for the vessel in instalments before delivery. The Builder arranged for its Bank to issue an advanced payment bond (the Bond) to the Buyer so that the Buyer was entitled upon cancellation or rescission of the contract or on rejection or total loss of the vessel, to repayment of the pre delivery instalments. On demand by the Buyer, the Bank was obliged to pay all such sums due under the contract provided the Buyer specified how the Builder had failed to comply with its obligations under the contract. Similar terms were contained in the shipbuilding contract with the Builder obliged to repay the instalments if it experienced specified financial problems. The Builder did experience financial problems but refused the Buyer’s demand for payment and the Bank also refused to pay up in accordance with the terms of the Bond.

The court had to determine whether (i) the Bond covered sums which the Buyer claimed to be entitled to under the shipbuilding contract relating to the Builder’s financial difficulty; (ii) the Buyer was entitled to payment under the Bond irrespective of whether repayment of the instalments was due under the shipbuilding contract.

The Bank claimed (i) the Bond only covered repayments in respect of cancellation or rescission of the contract or on rejection or total loss of the vessel and NOT in respect of the financial difficulty of the Builder and (jj) the Buyer had not set out the specific details of the breach of the shipbuilding contract required in order for the Buyer to rely on the Bond (The Bank also disputed whether in fact the Builder had actually breached the shipbuilding contract).

The court held that (i) the definitions and terms used in the Bond had the same meaning in the shipbuilding contract and “all such sums due under the contract” was clear and unqualified and was intended to apply to the pre-delivery instalments. The Bank’s construction would have meant that the Buyer was unable to rely on the Bond when it was most likely to require the security of the Bank; and (ii) the requirement of a statement in respect of the Builder’s failure was thought to be satisfied in the Buyer’s demand for repayment of the instalments. It was not for the Bank to take a view on the underlying merits. The Bond provided for prompt payment on receipt of demand and the Bank’s interpretation was inconsistent with this, as well as being contrary to legal principle.

Dolphin Tankers, (the Buyer) applied to court to oblige China Shipbuilding Trading Co (the Builder) to allow it to carry out testing of welds on a ship under construction. The Buyer had asked the Builder if they could perform the tests but the Builder had refused. In its application to the court, the Buyer relied on the shipbuilding contract, which provided that materials and workmanship were subject to the Buyer’s approval, inspections and tests in accordance with the rules of the relevant Classification Society. The Builder argued that the Buyer had no right to reject the ship on completion of Sea Trials for poor workmanship in relation to welding, as the contract contained full provisions on the Buyer’s remedies after delivery had taken place.

The court held that: (1) the Buyer did have a right under the contract to require defects to be remedied before the vessel was accepted and before the vessel was delivered; (2) the court required a high degree of assurance that the Buyer had the right to carry out the tests under the contract or by an adhoc agreement; (3) on considering the terms of the contract, the court did not have a high degree of assurance as the wording of the shipbuilding contract was ambiguous; and (4) the court did not feel a high degree of assurance that an ad hoc agreement had been made to allow for testing of the welds.

Therefore, although the Buyer did have a right to require defects to be remedied before accepting delivery of the vessel, in terms of this contract, it was not permitted to carry out testing on welds while the vessel was under construction.

This Directive obliges Member States to provide in their national legislation for criminal penalties in respect of discharges of polluting substances to which this Directive applies. The Directive enters into force on November 16, 2009, and must be implemented by the Member States by November 16, 2010.

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The European Commission has proposed measures to protect independent travellers from financial loss if their airline collapses. Current rules provide tourists who book package holidays with protection covering brochure information, rights to cancel without penalty and airline or tour operator insolvency. However, 23% of travellers in the EU now book independently.

Boeing has reported that over the next two decades the Asia-Pacific region will account for 40% of the world’s airline traffic, making it the largest aviation market in the world. It is predicted that the region will require 8,960 new commercial jets in the next 20 years.

DVB and NBAD are setting up a new $1 billion fund to lease aircraft and engines. NBAD and DVB will manage the fund and also invest in it, along with investors mainly from UAE and GCC countries.

The Order is a large piece of secondary legislation which consolidates the existing amendments to the Air Navigation Order 2005 and introduces a number of additional provisions. The Order implements safety standards, regulates air navigation and covers aircraft (i.e. airworthiness, certification, and operation), air traffic services, aerodromes, air crew and passengers.

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The Order relates to the Carriage by Air Act 1961 and certifies the revised limits of liability established under the Montreal Convention 1999. The limits are revised under Article 24 of the Convention every 5 years, having reference to an inflation factor which corresponds to the accumulated rate of inflation since the date of entry into force of the Convention.

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The Civil Aviation Authority released a consultation paper on 27 November 2009 in relation to CAP 168, proposing changes to the requirements for licensed aerodromes. The CAA has asked for comments to be sent to them by 20 February 2010.

To view the consultation paper, click on the link:

Celestial Aviation (the Lessor) leased three aircraft to Paramount Airways, an Indian airline (the Lessee). The Lessor applied to the court, claiming for sums due under the leases and for delivery up of the aircraft. The Lessee had paid a deposit by way of a letter of credit but had failed to pay rent and supplemental rent under the leases. The Lessor gave notice of events of default and then served a Notice of Termination, claiming delivery up.

The Lessee argued that: (1) its liability for rent could be set off against its entitlement to a reduction in the deposit; (2) failure to pay rent was due to an engine fault in one of the aircraft and the Lessor being in breach of contract; and (3) the letter of credit could be used to discharge the debts.

The court held that: (1) the supplemental rent under the leases was due and therefore the Lessee could not establish that all of the conditions required for a return of part of the deposit were satisfied; (2) there was no evidence that the Lessor had interfered with the Lessee’s relations with the engine supplier, and therefore was not in breach of contract; (3) the Lessor was not obliged to apply the deposit to the discharge of any particular obligation; (4) the Lessor’s application for delivery up was refused on the basis that the Lessee had a realistic prospect of establishing at trial that the court had discretion to grant relief against forfeiture. Therefore, the Lessor was only entitled to the sums claimed and not delivery up of the aircraft.

Tandrin (the Seller) applied to the court for a judgement against Aero Toy Store (the Purchaser). The Seller had agreed to sell an executive jet to the Purchaser for $31.75 million. The Purchaser had paid $3 million as a deposit to an Escrow Agent and the deposit and balance of the purchase price would be paid to the Seller on delivery of the Aircraft. However, the Purchaser failed to take delivery and, as a result, the Seller exercised its contractual right to terminate the agreement, claiming that it was entitled to the full deposit by way of liquidated damages. When the Purchaser refused to pay the liquidated damages the Seller raised an action against it.

The Purchaser in its defence claimed:- (1) the clause of the sale agreement which allowed the Seller to retain the deposit in the event of failure by the Purchaser to take delivery amounted to a penalty clause; (2) although governed by English law, the sale agreement contained a non-exclusive jurisdiction clause in it and England was an inappropriate jurisdiction for the Seller to seek specific performance, as proceedings had already been established between the two parties in Oklahoma and Florida and fresh proceedings would have to be brought about in Oklahoma or Florida to enforce any judgement made by the English court; and (3) the Purchaser was entitled to rely on the force majeure clause in the sale agreement because of the “unanticipated, unforeseeable and cataclysmic downwards spiral of the worlds financial markets”.

The court rejected the Purchaser’s arguments and found in favour of the Seller on the following grounds:- (1) the penalty argument could not be relied upon, as such deposit/liquidated damages clauses are common in aircraft sale agreements. The deposit itself was not unusually high and was a reasonable estimate of the Seller’s possible loss. In fact, the Seller’s actual loss was approximately $7.75 million; (2) the challenge to the jurisdiction was rejected on the basis that if the Seller applied for relief in the existing proceedings in Oklahoma, such an application would be likely to be fortified by a “reasonable, final and conclusive” judgement from the English court. Also, the Escrow Agent was likely to release the deposit to the Seller on an order being made by the English court to that effect, without the need for proceedings to be brought about in the US; and (3) the Purchaser could not rely upon force majeure, as it was well established under English law that market circumstances affecting the profitability of a contract was not force majeure. The Purchaser’s reference to the words “any other cause beyond the Seller’s reasonable control” within the force majeure clause in the contract could not be relied upon by the Purchaser as only the Seller could rely upon this.