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2020 December 29

On the year's largest maritime dispute in Russia by a lawyer of the Dutch shipowners

The outgoing year 2020 was difficult for the maritime industry as well. In an interview to Information & Analytical Agency “PortNews” Konstantin Krasnokutsky spoke about the largest maritime dispute of 2020. Konstantin Krasnokutsky is a lawyer of the Dutch shipowners embroiled in the dispute, managing partner of NAVICUS.LAW firm and the member of the Russian Maritime Law Association RUMLA.org.

On 26 August 2020, during the unmooring - the departure of the tanker from the berth N4 of the seaport of Primorsk - the structure and technological equipment at the oil loading berths N3 and N4 of “PTP” LLC were damaged, and therefore their operation was limited. The tanker was detained by the master of the port of Primorsk for 72 hours, and subsequently arrested by the Commercial Court of St. Petersburg and the Leningrad Region.

Almost a month later, on 24 September 2020, “PTP” LLC applied to the Commercial Court of St. Petersburg with a claim for damages in the amount of 1.186 billion rubles.

And after another 2 months, on 1 December 2020 - the Commercial Court of St. Petersburg and the Leningrad Region approved the settlement agreement and released the tanker. The proceedings were terminated on 11 December 2020.

The owner of the tanker Nordindependence -  MT Nordindependence Shipping Management B.V. (Netherlands) and her commercial operator - N2 Tankers B.V. (Netherlands) were involved to the case as co-defendants. The technical operator of the tanker, Reederei Nord B.V (Netherlands) were involved as a third party in the case.

- The tanker Nordindependence was arrested. Was this a justified measure?

- Damage during the operation of a vessel gives rise to a maritime claim in accordance with the International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships, 1952. In addition, a claim for compensation for actual damage caused during the operation of a ship is a claim secured by a maritime lien in accordance with the International Convention on maritime liens and mortgages 1993. Russia is a party to both Conventions, and their provisions are implemented in the Merchant Shipping Code of the Russian Federation (MSC RF).

A person who has a maritime claim, including those secured by a maritime lien, may apply for arrest of the vessel.

In addition to the possibility of the judicial arrest, there is an accelerated measure of protection. In accordance with the Art. 81 of the MSC RF, the Harbour Master is entitled to detain a ship for 72 hours at a request of a person who has a claim arising from damage to port facilities. The practical meaning of such detention is to give that person who has the claim time to apply to the court for an arrest the vessel.

So, from the standpoint of the applicable law (the MSC RF and the 1952 Convention), there were grounds for the detention and arrest of m/v Nordindependence, and we can say that the court had all the grounds for the arrest.

Port of Primorsk

- That is, everything was correct and within the scope of the law?

- If to come right down to the details, it cannot be said that the arrest was absolutely legitimate. Within the context of the Commercial code of the Russian Federation an arrest is an interim measure. Prior to filing a claim, the court can impose “preliminary interim measures”, that is, a kind of a “preliminary arrest”. The difference is that preliminary interim measures can be imposed for a period not exceeding 15 business days for claims not subject to pre-action procedure. These include in particular, claims in tort for example, the allision of the tanker with the berth. This fifteen-day time limit is given to the plaintiff to file to court. Fifteen business days is an imperative rule of law. The court cannot provide for a longer term, only for a shorter one. Such rule is prescribed by Art. 99 of the Commercial Procedure Code of the Russian Federation, according to which “a period not exceeding fifteen days from the date of the ruling for filing a statement of claim connected to a demand which the court has secured to ensure property interests. The legislator's logic is clear and correct here. You can't just arrest a ship. The arrest of a vessel is a measure to secure enforcement of the future judgement on the merits of the a dispute. In some countries this period is even shorter, for example in Spain it is ten days.

In our case, the court made a mistake and established preliminary interim measures (arrest) for a period of twenty days. As a result, the maximum period of fifteen days expired, and the ship remained unlawfully arrested, at least until the port brought an action on the nineteenth or twentieth day. The first instance and appellate courts turned a blind eye to this. We went to court with complaints with one single argument – the violation of the maximum imperative time limit of 15 days, whilst setting the time limit of 20 days is illegitimate. In response, the court elaborated on everything else that could have been written in connection with the arrest, but not about this simple arithmetic.

As for the detention for 72 hours, it also expired before the bailiffs arrested the tanker on the basis of a writ of execution. When 72 hours elapsed, the tanker could have left the port, but the harbour master referred to the safety of navigation and ordered a divers inspection of the tanker's hull. Although immediately after the incident, the tanker was examined by the specialists of the classification society and no restrictions were established. The seaworthiness of the vessel was not affected in any way, and the classification society confirmed the validity of the class. For objective reasons, a diving inspection by order of the Harbor Master was only possible on the following day. This did not allow the tanker to quickly leave the port upon the expiry of the 72-hour detention. Additional time allowed the claimant to obtain an arrest ruling and a writ of execution and have the vessel arrested in Primorsk by the bailiffs.

- The claim was brought against two companies at once, the court also brought a third party to participate in the case. Who should be responsible for damage to the port?

- Indeed, despite that one tanker Nordindependence is owned by one company and allided on one berth, the claim was brought against two defendants jointly and severally.

According to the general provisions of civil law, responsibility should be borne by the person who owns a source of increased danger (a seagoing vessel is considered to be a source of increased danger). In other words, the responsibility is borne by the disponent shipowner, and that depending on the situation, can be either the registered owner or the bareboat charterer, or the operator or the manager of the vessel.

Legislation does not establish grounds for joint liability in such cases. However in practice, plaintiffs often resort to the tactics of bringing a joint claim against the owner, manager, operator, charterer, etc., and in the course of legal proceedings they try to establish who was the owner of the vessel for the purpose of compensation for damage. The owner is determined based on the powers that he exercises over the vessel. With regard to the determination of the ship owner the Supreme Commercial Court back in 2004 worked out a position according to which a ship owner is a person who carried out technical operation and management of the ship. Subsequently in judicial practice, including that of the Supreme Court of the Russian Federation, a number of coherent criteria for determining the shipowner was developed. However, the technical operation and control over the vessel has always remained the key criterion.

So if a bareboat charterer is the employer of the crew and actually exercises control over the vessel, and the manager's powers are limited only, for example, to ship chandling, then the owner of a source of increased danger for the purposes of civil liability will be the bareboat charterer. If, for example, all powers in relation to the vessel (technical, commercial management, manning, etc.) are transferred to the manager, then the manager will be responsible as the owner of the source of increased danger, and not the registered owner of the vessel.

A vessel can be transferred by the owner through a chain of contracts with a change of flag state, for example, under a bareboat charter, and a bareboat charterer can, with all possible powers, transfer the vessel to a ship manager (de facto as to a trustee); such companies often do not have any significant assets against which a court judgement could be enforced. Meanwhile, there is a vessel that could be auctioned for the enforcement of the judgement.  

It is obvious that even having won the court proceedings against the owner of the source of increased danger (the manager or the charterer), the plaintiff may not enforce the judgement and be left with nothing. In order not to find himself in such a situation, the plaintiff may resort to the assistance of the International Convention on Maritime Liens and Mortgages of 1993, to which the Russian Federation is a party (or the corresponding provisions of MSC RF). The plaintiff can bring a claim within one year directly against the owner of the vessel in respect of which there is a claim secured by a maritime lien, regardless of who is the owner of the vessel or her possessor are (even if the owner or possessor have changed). This is a special remedy for the injured party. It is important not to confuse a claim secured by a maritime lien with a lien (pledge) under Russian civil law.

At large in maritime law some words have completely different meanings to those that ordinary people or even lawyers are used to. For example, in the term “general average”, the word “average” does not at all mean “median” sum. Average is used in the meaning of “loss”. That is, a general average is a general loss. Also claims secured by a maritime lien are privileged claims against the owner of the vessel, which persist for one year, regardless of the change of ownership, and not are not a lien (pledge) in the meaning of the Russian civil law. A pledge towards sea vessel is a “mortgage”. The 1993 Convention directly distinguishes between liens and hypothèques, establishing different priorities for satisfying these requirements and a different legal regime.

- The tanker was under arrest for several months. Was it possible to remove the arrest earlier?

- In the practice of merchant shipping,  in lieu of the arrest, it is customary to provide a letter of undertaking from a P&I Club (or a liability insurer). This is the so-called LOU (Letter of Undertaking). In some cases if a LOU is unacceptable, a bank guarantee or cash deposit may be provided. In our case, such instruments would not have worked due to European and American sanctions and the ship appeared to serve as security. It was both cheaper and less risky in terms of sanctions risks for the shipowner himself, and for Primorsky port, although a crude oil tanker is not an attractive asset from a liquidity point of view as a bank guarantee would be. I think this among other things, significantly influenced the sum of the settlement agreement. We managed to get a big discount. As a result we paid the Primorsky port only about 45% of the damage claimed.

- You mentioned sanctions. Was this an obstacle to resolving the dispute?

- “Primorsky Trade Port” is the “granddaughter” of Transneft. Transneft PJSC is under US and European sanctions. Transneft PJSC is a shareholder of Novorossiysk Trade Sea Port (NTSP), and NTSP in turn, owns 100% of Primorsky Port. The existing sanctions significantly limit the possibility of payments to Transneft and its subsidiaries. It is problematic or almost impossible to provide financial instruments, such as an independent guarantee of a bank or insurer, without appropriate “sanction” clauses (which makes the guarantee not irrevocable), and significantly limits the validity period of such a guarantee. We found a payment mechanism that worked for both parties.

- How did you manage to bypass the sanctions and pay the Primorsky port?

- I would not like to use the word "bypass", because we acted strictly within the legal framework. In the published court ruling on the approval of the settlement agreement, you can see the details of the ruble account of the Primorsky port. I can only say that the payment was made in according to provisions approved by the court, that is, to the ruble account of the Primorsky port. This significantly shortened the payment terms and reduced the risks of freezing payments due to sanctions restrictions.

- In what currency was the payment and from which country or from which bank?

- I would not like to answer this question. These are very “intimate” details, but I can say that these were not dollars or euros and that the payment was from abroad.

The sanctions were only one of the risks for the ship owner, considering that we had bargained to pay 45% of the claims of Primorsky port. The ship owner was cautious of claims from affiliated companies (subsidiaries of Transneft or Novorossiysk port). In this regard, we have resorted to the institutions of representations and indemnities that have been introduced into Russian civil by the legislative reform. As you can see from the text of the settlement agreement (Editor's note - the text of the settlement agreement is available in the file of commercial cases (kad.arbitr.ru) Primorsky port gave representations about the circumstances that they did not receive insurance compensation, that the rights were not transferred by way of subrogation, were not assigned in any part to third parties, as well as that the affiliated persons had no claims against the shipowners. Also, the Primorsky port assumed an indemnity and the obligation to compensate the shipowner for losses in the event of a claim against him by any of the affiliated persons.

It sounds like a novelty of Russian civil law, but in the shipping business they have long been known from English law, these are warranties & representations and indemnity, which are widely used in practice. Shipowners under certain circumstances, for example, in the execution of contracts of carriage, receive LOI (Letters of Indemnity) from cargo owners, according to which the cargo owners are obliged to reimburse the losses of shipowners in the event of claims against them by third parties. Standard LOI forms are subject to English law and are not entirely suitable for use by Russian shipowners. At present Russian Maritime Law Association RUMLA.org is developing LOI proformas for use in Russian jurisdiction, taking into account the specifics of Russian legislation on agreements on compensation for losses. These forms will be published in the Journal of Maritime Law published by the RUMLA Maritime Law Association. An October-December 2020 issue is currently being prepared, where you can read more about this dispute.