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Sun 1 Apr 2007 03:36 PM

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Lessons in law

The region's top maritime law specialists reveal the legal issues impacting the Middle East's booming shipping industry.

"It's been a bull market for sure, owners have never had it so good," enthuses Edward Newitt, partner, Holman Fenwick and Willan. "The market has been incredibly positive over the last three years for efficient owners."

I suggest that, as half of the region's most pre-eminent maritime law duo, he must have been rushed off his feet. "Actually the maritime law sector is also cyclical, almost counter to the industry. Quite often what happens is that when the market is doing very well, owners are less concerned about the bottom line, and more concerned with keeping their ships active and in service to make money," he explains.

A relatively quiet time then, one would think? Apparently not. When business is booming the number of legal disputes do fall, but the commercial aspect of what the industry's lawyers undertake rises. Owners tend to have a lot of liquidity, so ship financing, sales and purchases and expansion plans tend to increase - all of which can give rise to their own disputes and litigation.

Essentially in a booming market, owners take the commercial decision not to chase disputes which they would otherwise pursue, because they can make such funds up on the next voyage. Once the market turns, the number of shipping disputes will naturally rise again. "Cases may not be pursued to the fullest because when times are good these disputes can be settled on commercial terms. For example, two parties may agree to split the difference, so they can both move forward and do some more lucrative business," clarifies Richard Jowett, partner, Holman Fenwick and Willan.

Shipping law and the types of disputes that arise can be very high value - astronomical even. The entire outcome can turn on a sentence or two in a contract. "When the war risk exclusion zones rules changed - which was interesting in itself to see how events on the other side of the world (911) had such a substantial impact on the market here, I picked up a number of instructions," explains Jowett. Despite the fact that there was no actual change in the risk of ships trading in and out of the Gulf - not immediately at any event, the hikes in premiums faced by shipping companies were unexpected, and in some cases extremely costly.

"This change was costing a client who's vessel was travelling in the Northern Gulf $200,000 a week, just to keep the ship up there. That completely wiped out the profit they were making on the voyage." In such an instance it is not always clear where the liability for that increase falls, so contracts are scrutinised to determine how the risk had been allocated. In this situation it could be the charterer's risk or the owner's risk. "Quite a lot of litigation developed out of that situation. As you can imagine, a ship that was trading there for three weeks cost an additional $600,000 - exactly who that liability boiled down to was set in a few words in a contract," explains Jowett.

What this serves to illustrate, above and beyond the sheer sums of money involved, is that not only should each deal be clearly understood by each party, but that the right sort of advice is essential. "Shipping law really isn't something to be dabbled in," says Newitt, sternly.

One of the most potentially contentious areas of maritime law is jurisdiction. Deciding where, and in which court, a legal dispute is to be settled can make an enormous amount of difference to the nature of the proceedings, even though all of the facts will remain the same. A significant development for the Middle Eastern shipping community recently is the accession of the UAE to the international arbitration convention. The country is a relative newcomer to the United Nations 1958 New York Convention on Arbitration, having joined in July 2006.

As binding members to the agreement, the UAE has aligned itself with 138 other signatory countries. "This is a noteworthy development for the region," explains Jowett. "By joining the Convention it will be a more straightforward process to enforce a foreign arbitration here. It's yet to be properly tested, but if it is applied in the way it is intended to be, it will be possible for people to have their disputes referred to London arbitration, and to have them enforced in the UAE," he explains.

The advantages for international shipping firms are significant. One of the issues in the Middle East is that the legal systems have not developed at the same pace as the market, or lack the same tried and tested transparency as more established shipping centres. "Some of the difficulties firms can experience here is that it can take a long time for legal disputes to be settled, and the rules regarding the recovery of legal costs are restrictive," explains Newitt.

Cost awards in the UAE are usually negligible, and in the cases of some Emirate jurisdictions interest is either not applied, or applied below a realistic market rate to a pending case, so delaying a hearing or an arbitration is often in one party's interest to keep the financial element static.

"Dubai is a growing centre and it needs perhaps some more developed infrastructure in certain areas. This has been recognised and addressed in the financial and companies sector with the introduction of the Dubai International Financial Centre (DIFC), which has it's own rules and regulations that are distinct and separate from federal laws, but are nevertheless enforceable through the local courts," says Newitt.

As an inherently international business, by its very nature, shipping is subject to shocks and developments all around the world. There are constantly improvements and changes being brought about by the IMO, and a wealth of discussion topics under investigation to improve the industry. "Of course, major events tend to concentrate focus - such as the Prestige (an oil tanker which sank off the Spanish coast in 2002), which attracts attention, especially in the locality where they occur," explains Jowett.

Such examples bring a serious matter to light. The criminalisation of the seafarer is an important issue in the Middle East. Offences that arise out of what essentially, is an accident, such as pollution events can invite a civil claim, but criminal proceedings may be brought against crew.

"It's not unique to the UAE by any means, but there is a tendency to criminalise accidents, and unfortunately for the person in charge of a ship that is involved in a genuine accident, they can find themselves subject to criminal proceedings which can be extremely distressing," explains Jowett. When civil or criminal proceedings are brought against a ships' Master, they will usually have to remain in the host country whilst the investigation is carried out.

There have been documented cases of people having to stay a year (not in custody, but not free to leave) whilst the cogs of justice turn.

Several years ago a master was found not guilty at first instance, of a criminal act where his vessel had caused damage to a third party, but the prosecution appealed, and the proceedings dragged on for several months. The Master in question had a heart attack weeks before the final trial. "The terrible irony of that situation was that although he was found guilty, he wasn't sentenced to prison, but fined just $280," says Jowett.

The important aspect of this, is that ultimately, seafarers are professionals trying to make the best decisions they can, often under stressful conditions, where elements out of their control make huge differences in outcome. Criminalising crews surely only serves to drive potential mariners away from an industry already suffering an acute recruitment crisis.

Prosecutions are often brought against crew in instances where accidents involving pollution occur. With over 20% of the world's oil supply passing through the Gulf the danger of spillage is concentrated hugely on the waters all around us. Between the Gulf Wars illegal shipping of oil reached unprecedented levels, often in unsafe, unfit vessels which led to a great deal of spillage. Since then, the maritime authorities, particularly those of the UAE, have stepped up the fight against irresponsible shippers. "The local authorities are to be commended highly on these issues, and can certainly take credit for the cleaning up of unlawful practice," explains Newitt. "Also the level of interest they take in an incident when it does occur is commendable and if there is a wrongdoing, then an appropriate fine is imposed on the polluters."

Unfortunately, even responsible ship owners have accidents. When oil is spilled, a number of factors come into play. This encompasses everything from legal issues, commercial issues, the overall reputation and public perception of the line, right through to keeping that shipping line's customers happy. "We have a crisis centre which can respond immediately to deal with such a situation. Dealing with PR companies and expressing the events correctly in terms of accuracy and terminology is vital - because the way such an event can be perceived is very important, even crucial to the future of the company," says Newitt.

The team at Homan Fenwick and Willan have been here in Dubai for over a decade, in which time they say they've witnessed a huge amount of change in the regional shipping industry. "The good shipping companies in the region really have moved upwards in almost every respect. We're dealing with major, first-class ship owners and many of them are based here in Dubai," explains Newitt. "For example, Vela and UASC have moved their operation centres to Dubai."

Despite the excellent setting for maritime business in Dubai, all quarters are being affected by the rising cost of doing business in what was once a low cost environment. "People have found that it really is a good place to do business from, although of course it is becoming increasingly expensive. I think the people who are suffering most are the chartering companies. The escalating costs are eating into their margins," observes Jowett. "They're usually the first shipping group to react, and already there are companies moving to other Emirates."

The accession to the New York Convention will no doubt encourage the more tentative international shipping companies into the UAE fold. Through Dubai, the industry is being praised from commercial and legal quarters for fostering an environment conducive to the success of the maritime sector. Rising costs are a somewhat inevitable part of success stories, and what the UAE offers as a trade off is an exciting and dynamic business environment. "It's exciting, and will be very interesting to see the maritime cluster concept at Dubai Maritime City, I think it will help people focus" concludes Newitt.

Info box: The New York Convention

The New York Convention is considered the most important multilateral treaty on international arbitration because it requires courts in contracting states to recognise arbitration agreements in writing, and to refuse to allow a dispute to be litigated before them when it is subject to an arbitration agreement.

The convention also requires courts in signatory countries to recognise and enforce foreign arbitral awards, which should give overseas shipping companies even more confidence to invest and work in the UAE.

The New York Convention is a treaty that promotes the mutual recognition and enforcement of foreign, rather than domestic, arbitration awards.

The fact that so many states have acceded to the convention shows that international businesses support arbitration and wish their governments to do likewise. Before the UAE was a signatory, arbitration awards made in the UAE could not be enforced abroad unless specific enforcement treaties between the countries existed, which led to frustration of arbitration proceedings.

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