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DIPLOMA IN SHIP

SUPERINTENDENCY

MODULE 3
Maritime Law

Susan Hawker

Maritime and International Trade Law


Lecturer

CONTENTS
Learning Outcomes ....................................................................................................................... 6
1.

2.

AN INTRODUCTION TO MARITIME LAW ............................................................................ 7


1.1

Introduction ............................................................................................................... 7

1.2

How to Approach this Module ........................................................................................ 8

1.3

What is Maritime Law? ................................................................................................. 9

1.4

National or International Law? .................................................................................... 10

1.5

The Nature of International Law .................................................................................. 10

1.6

Is Maritime Law International? ................................................................................. 11

1.7

The International Scene Is an International Lex Mercatoria Emerging? .......................... 12

1.8

Is European Law International? ................................................................................... 13

COMMERCIAL LAW IN SHIPPING RELATIONSHIPS ......................................................... 17


2.1

What is Commercial Law? ........................................................................................... 17

2.2

Why English Law? ..................................................................................................... 17

2.3

Sources of English Commercial Law ............................................................................. 18

2.4
3.

2.3.1

The Common Law........................................................................................... 18

2.3.2

Historical Development ................................................................................... 19

2.3.3

Judge Made Law? ........................................................................................... 20

2.3.4

Equity ........................................................................................................... 21

2.3.5

Equitable Estoppel .......................................................................................... 22

2.3.6

The Maxims of Equity...................................................................................... 23

2.3.7

Trade Custom and Usage ................................................................................ 23

2.3.8

National Legislation ........................................................................................ 24

2.3.9

EU Law ......................................................................................................... 24

The Codification of English Commercial Law .................................................................. 25

THE EUROPEAN DIMENSION ........................................................................................... 28


3.1

Institutions of the European Union .............................................................................. 28


3.1.1

3.2

The European Commission .............................................................................. 29

The Council of the European Union .............................................................................. 29


3.2.1

The European Parliament ................................................................................ 29

3.2.2

The European Court of Justice (ECJ) ................................................................. 30


2

3.3

4.

Sources of European Law ........................................................................................... 30


3.3.1

Regulations and Directives and their Impact on English Law ................................ 31

3.3.2

The European Convention on Human Rights ...................................................... 32

3.3.3

The Human Rights Act 1998 ............................................................................ 32

THE BASICS OF CONTRACT LAW...................................................................................... 36


4.1

What is a Contract? ................................................................................................... 36

4.2

Requirements of a Binding Contract ............................................................................. 36

4.3

4.4

4.5

4.2.1

Offer ............................................................................................................. 36

4.2.2

Acceptance .................................................................................................... 36

4.2.3

Consideration ................................................................................................ 37

4.2.4

Capacity ........................................................................................................ 38

4.2.5

Intention to Create Legal Relations ................................................................... 39

The Terms of a Contract ............................................................................................. 39


4.3.1

Express and Implied Terms ............................................................................. 39

4.3.2

Conditions ..................................................................................................... 40

4.3.3

Warranties .................................................................................................... 40

4.3.4

Innominate Terms .......................................................................................... 40

4.3.5

Exclusion Clauses ........................................................................................... 41

4.3.6

Incorporation of Exclusion Clauses ................................................................... 41

4.3.7

Interpretation of Exclusion Clauses ................................................................... 41

4.3.8

Statutory Regulation of Exclusion Clauses ......................................................... 42

Vitiating Factors ........................................................................................................ 42


4.4.1

Pre-Contractual Misrepresentation .................................................................... 42

4.4.2

Mistake ......................................................................................................... 43

4.4.3

Duress .......................................................................................................... 43

4.4.4

Undue Influence ............................................................................................. 43

4.4.5

Illegality........................................................................................................ 44

Discharge of Contractual Obligations............................................................................ 44


4.5.1

Frustration .................................................................................................... 44

4.5.2

Force Majeure ................................................................................................ 48

4.5.3

Anticipatory Breach ........................................................................................ 49

4.5.4

Breach of Contract ......................................................................................... 49


3

4.6

5.

6.

4.6.1

Damages....................................................................................................... 50

4.6.2

Liquidated Damages ....................................................................................... 51

4.6.3

Equitable Remedies ........................................................................................ 51

4.7

Standard Form Contracts ........................................................................................... 52

4.8

English Contract Law and Good Faith ........................................................................... 53

4.9

Types of Contractual Liability ...................................................................................... 54

FUNDAMENTALS OF ENGLISH TORT LAW ........................................................................ 56


5.1

What is a Tort? ....................................................................................................... 56

5.2

The Tort of Negligence ............................................................................................... 56


5.2.1

Duty of Care .................................................................................................. 57

5.2.2

Breach of Duty ............................................................................................... 60

5.2.3

Causation ...................................................................................................... 61

5.2.4

Contributory Negligence .................................................................................. 61

5.2.5

Remoteness of Damage .................................................................................. 62

5.3

Vicarious Liability ...................................................................................................... 62

5.4

The Tort of Deceit ..................................................................................................... 63

5.5

Bailment .................................................................................................................. 63

THE BASICS OF MARINE INSURANCE .............................................................................. 67


6.1

Introduction ............................................................................................................. 67

6.2

Marine Insurance Markets .......................................................................................... 67

6.3

What is Marine Insurance? ......................................................................................... 68

6.4

The Marine Insurance Act 1906 ................................................................................... 68

6.5
7.

Remedies for Breach of Contract ................................................................................. 50

6.4.1

Making the Contract ....................................................................................... 69

6.4.2

Standard Form Clauses ................................................................................... 69

P&I Cover ................................................................................................................. 70

ADMIRALTY CLAIMS ........................................................................................................ 77


7.1

Introduction ............................................................................................................. 77

7.2

Litigation in the Courts ............................................................................................... 77

7.3

Alternative Dispute Resolution and Arbitration .............................................................. 78


7.3.1

Alternative Dispute Resolution (ADR) ................................................................ 78

7.3.2

Arbitration ..................................................................................................... 79
4

7.4

Mediation and Conciliation .......................................................................................... 80

7.5

Alternative Forms of ADR ........................................................................................... 81

7.6

7.7

7.5.1

Judicial Appraisal............................................................................................ 81

7.5.2

Adjudication .................................................................................................. 81

7.5.3

Expert Determination ...................................................................................... 81

7.5.4

Early Neutral Evaluation .................................................................................. 81

Liablity and Case Management .................................................................................... 81


7.6.1

Casualty Management ..................................................................................... 82

7.6.2

Preliminary Assessment of Liability ................................................................... 83

Case Management in the Post-ISM World ..................................................................... 83

Supplementary Reading and How to Study the Law ......................................................................... 85

PLEASE NOTE
Directed Learning questions have been provided at the end of each chapter. These
questions are designed to help you with your study. The questions are for your
personal study only. Do not send in your answers to these questions as they will not
be assessed.

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LEARNING OUTCOMES

On successfully completing this module, you will:

understand what maritime law means to ships superintendents;

have been introduced to the principal concepts of law relevant to ships


superintendents;

recognise the legal terminology relevant to ship and cargo liability; and

be familiar with the insurance issues relevant to the ship and its cargo.

1.

AN INTRODUCTION TO MARITIME LAW

1.1

Introduction

This module is designed to introduce you to and familiarise you with some basic ideas about the way that
law is used to regulate the obligations and liabilities which arise in the relationships encountered by ships
superintendents. You should bear in mind when studying this module that the law is much more than a
set of rules. The rules are what we see on the surface, but creating them and underpinning them is a
legal culture or way of thinking. You should try to develop this way of thinking when studying the law.
This will help you to understand how the law can often be applied in different ways to any given problem
and the answer to the problem lies not in any one definitive application of a legal principle.
Rather, especially under English law, the answer lies in the courts willingness to accept a persuasive
argument as to how the concept of law should be construed and applied. There are many factors which
may contribute to the court accepting an argument, which are referred to by lawyers as policy
considerations, which may be thought of as a reflection of the underlying philosophy of what is expected
of the law, i.e. as lawyers say, the underlying jurisprudence.
Whilst this module is not the place to deal with jurisprudence, it is important to understand that the
philosophy of the law plays a critical role in the development of any legal system. So, we might say, no
system of law exists independently from the society in which that law exists. We will see as we work
through the issues in this book that English law is largely derived from case decisions. When determining
a case, the court will have regard to the status quo of the law, previous relevant case law, and academic
and professional debate, all of which will in some way have considered the expectations of society of the
law.
All of these considerations are part of the culture, or philosophy/jurisprudence of the law, and will
influence a court in its coming to a decision. Thus, we can see in a case-law driven legal system, the
perception of judges as to the prevailing jurisprudence is fundamental. This is what leads many in the
shipping industry, coming to the law for the first time, to think that lawyers are always two-handed,
because they say, when asked for advice, well, on the one handbut on the other!
This approach can initially be quite daunting to students coming to the law for the first time. Do not
panic appreciation of how the law works does come with time, and it is all good fun and certainly
intellectually stimulating! Also, you should not think that the aim of this module is to turn you into a
lawyer far from it! The purpose of this module is to introduce you to the concepts of law that are
important for anyone involved in the work undertaken by a ships superintendent, and to give you a
better understanding of the problems that give rise to legal issues.
Hopefully, you will emerge from the module with a good sense of the legal way of thinking, and an
appreciation (or firmer appreciation!) of the circumstances in which you can negotiate your way around a
difficulty, and when assistance from a lawyer is necessary. The module will enable you to understand
what your lawyer is talking about, and why he/she will ask certain questions and/or think in a particular
direction.
I agree with FN Hopkins in his Business and law for the shipmaster (7th edition, 1989 Brown, Son &
Ferguson) ISBN 0 851 74 537 7 (sadly, this excellent book is currently out of print) when he says that
the temptation of every man to be his own lawyer is in his opinion a possible disastrous policy.
(Needless to say, I am not so sure that I agree with his next sentiment, which was that:

no sympathy for sea lawyers is to be implied. They are better left ashore!)

Having said that, I do very much agree with what my good friend Patricia Martin, of Field Martin
Solicitors, saysthat if you can cope with English International Trade and Maritime Law you can cope with
anything in life! So, let us proceed and take it slowly, and endeavour to enjoy the module.
Some of this module relies on materials written by me, or co-authored by me, for other courses offered
by Informa in collaboration with various academic institutions. I have at all times attributed work to a
co-author where appropriate. You might, then, at some points, see exactly the same as I say here in
some other module, because I will have written or contributed to the writing of that module. Over the
years of writing, teaching and advising on maritime law issues both the law and my view of the law have
changed. You might, then, in some earlier module see a somewhat different approach or view from that
taken here.

1.2

How to Approach this Module

The modules chapters introduce you to the underlying concepts of law relevant to the main relationships
you will be involved with during your professional lives. There is no one area of law for ships
superintendents, and so you should not expect the discussions to focus on ships superintendents cases
or statutory provisions, i.e. there is no ships supers law! So, we will look at the main contractual
principles which you will need, and the important tort which you may encounter, e.g. negligence, with
reference to other torts such as deceit, and the statutory torts of occupiers liability and product liability.
The module starts from the beginning, in order to allow you to build up your understanding of the
concepts important to your profession. To this end, then, the module starts with the underlying issues
which support those concepts.
Chapters 1 to 3 are that beginning, as they deal with the issues which underpin everything else, i.e.
those issues which form the breeze blocks in the wall of what we encounter when facing some sort of
legal liability. It is simply not possible to look at the individual areas of law in which you, as a ships
superintendent, will be interested, e.g. contract and tort, without understanding the basic concepts on
which those areas are founded, e.g. the sources of the law.
This will be the same whether one is dealing with English or some other law. This is a fact often not
initially appreciated by those coming to a discrete law module on an otherwise commercially orientated
courseyou simply cannot do any legal topics in isolation from the underpinning basic concepts of that
law. This is why Chapter 2 is so important to your study of this module, as it is the lynchpin of contract
and tort.
The case study at the end of each chapter brings together the issues raised in that chapter, and provides
guidance on how lawyers focus on those issues.
Chapters 2 and 4 deal with the most important legal issues which you are likely to face in your work as a
ships superintendent:

Chapter 2 introduces the main elements of English commercial law; and


Chapter 4 introduces contract law.

These two chapters are the longest.


Each chapter is intended to be able to stand alone and to introduce to a sensible working level the topic
it focuses on. So, you should be able to work through the module on a chapter-by-chapter basis, coming
out of each with an understanding of these issues therein. However, and this is critical, it is important
not to think of the individual chapters as being each in a vacuum; rather, the way of legal thinking you
will develop as you go through the chapters should be viewed as holistic. It is this which is the real skill
with which you should emerge from the entirety of the module.

To some extent, it does not really matter what law you study, as:

that law will over the years change; and


you may be working in a jurisdiction which does not rely on English law, or you may come across
contracts which have applied a foreign law.

This legal way of thinking is a transferable skill, and will equip you to understand the basics of legal
issues in any part of the world.
You will see many references to cases and academic comment throughout the module. This is because
English law lawyers refer to and rely on authority when making statements about what the law is, or
how it might be applied. The law is derived from cases and statutory instruments (those statutory
instruments being interpreted by case law). We do not say oh, well I think as that will elicit, from an
English judge, the response of but this court is not interested in what you think Ms Hawker!
Where there is no direct authority on the issue, or where we are hoping to persuade the court to take a
different or new approach to the application of the law to an issue, then we might rely on some wellregarded academic or professional commentary, to support our argument of how what law there is should
be developed to apply to the case at hand. This approach lies at the heart of our expectations of the law,
i.e. at the heart of our jurisprudence.
You may be surprised to see somewhat older cases cited, and you may be tempted to question whether
there are any more recent or more up to date cases which might have been used instead. The answer
to such question is, however, no, as the use of older authorities is quite usual when explaining and
discussing the law. Such cases become established as seminal authority, because they confirmed a
principle of law or way of thinking about the law and its development. Of course, where a more recent
case has redeveloped or redefined a legal issue, or called into question the veracity today of an
established principle or case, then we would refer to that new case.
Cases and statutes are the law and are referred to as primary law. Academic and other writings and
debate are referred to as secondary law.
Generally, we speak of English and not UK or British law. The UK does not have a single legal
system as it was created by the political union of previously independent counties. The UK has three
legal systems:

English law, which applies in England and Wales; and


Northern Ireland law (both English and Northern Ireland law are common law); and
Scottish civil (codified) law.

International conventions and EU law must then be incorporated to apply in all three legal systems of the
UK.

1.3

What is Maritime Law?

This first chapter is designed to familiarise you with some basic underlying concepts of law relevant to
maritime adventures and the liabilities which you may encounter during your professional life. You will
come to realise that the term maritime law is in fact an umbrella term, covering not one concept or
principle of law but in fact many different concepts.
Some of these concepts, such as the Collision Regulations 1972 (COLREGS), the Salvage Convention
1989, the Marine Insurance Act 1906, the Hague and Hague-Visby Rules, the Safety of Life at Sea
Convention 1974 (SOLAS), and the Maritime Labour Convention 2006, are peculiar to shipping. Others,
such as the obligations arising out of contractual relationships, or liability in the tort of negligence, are
general legal concepts relied upon in shipping situations.

Our study of maritime law will, therefore, involve a consideration of:

general concepts of law which form the basis of commercial law used in shipping;
shipping-related commercial law;
the way in which claims are initiated and the forums in which a claim is dealt with; and
the way in which governments use law to regulate shipping and trade activities.

1.4

National or International Law?

Given the very international nature of shipping, it is not surprising that students often come to such
modules as this and ask why we are looking at English and not international law. So, we will get this
issue out of the way, so to speak. It is important to recognise that true international law has only a
very limited effect on the domestic legal provisions of a nation-state. International law plays only a part
in the regulation of liabilities and obligations encountered by ships superintendents, and does not create
contractual or other between parties, e.g. tortious, liabilities.
Later in this module, we shall see that certain sets of common rules have been incorporated into the
national laws of a number of nations, in order to facilitate international trade. These rules, however, are
not to be regarded as international law. Where many nations have incorporated the same common
rules (e.g. the Hague-Visby Rules, the Collision Regulations 1972, the Salvage Convention 1989) into
their national law, it is not true to say that people in different nations relying on those rules are governed
by international law. The true position with respect to these common rules is that people in their
respective nations are governed each by their own national laws, but, because of the incorporation of the
rules in question, those national laws happen to be the same.
So, in the context of international trade and shipping contracts, and the services provided by ships
superintendents, there is no international law which floats about to govern these relationships: who
would make such law, where would it come from? The parties to such relationships will frequently
choose which nations laws are to govern their agreement. If they have not done this, it will fall to the
courts in the nation where the dispute is heard to decide which national laws govern the contract (this
process is often called the conflict of laws, i.e. the court is faced with a conflict of which national law to
apply to the dispute).
In either case, it will never be true to say that the contract is governed by international law (there
simply is no international law of contract) it will be governed by the laws of one country or another.
This law, that is relied upon to regulate the relationship between the parties to that contract, is private
law, i.e. it forms part of the machinery of law provided by the state which enables the parties to seek
redress between themselves should there be a breach of contract or other wrong. The law of torts, under
which claims for negligence and many other non-contractual liabilities are brought, is also part of private
law.
Public law is that machinery of law provided by the state to regulate the relationship of its members
with that state, e.g. criminal law is public law. For historical and commercial reasons, the parties to
international trade and shipping contracts frequently choose English law to govern their agreements. We
will consider why this might be so in the next chapter.

1.5

The Nature of International Law

Now that we have discovered what international law is not, it is possible to say something about what it
is.
International law consists of a set of fairly broad principles that are either contained in treaties, or have
developed because of long observance by very many countries in the world. Thus, for example, it can be
said that piracy on the high seas, waging war against another nation without just cause, or perpetrating
crimes against humanity are breaches of international law.

10

Lawyers sometimes refer to this sort of international law as public international law, to differentiate it
from the body of law known as conflict of laws or private international law. As mentioned above, this
is the law which comes into play where there is a dispute about which nations domestic laws should
govern an international transaction. This should never be confused with public international law, and, to
avoid confusion, should never be referred to simply as international law.
The term international law implies law which is common to, and binding upon, all nations, and is
enforceable only by or on behalf of a nation against another nation or an individual. Essentially, then,
international law regulates the conduct of one nation vis--vis another, rather than the conduct of
individuals or companies within nations. It is, then, up to each participating state to an international law
convention to ensure a mechanism for compliance is introduced into its national legal regime, e.g. the
Port State Control (PSC).
The issues in Module 4, which deals with Maritime Conventions, regulatory controls in shipping and the
ISM, ISPS and IMDG Codes, raise public international law issues. In Module 4, you will look at how law is
used to regulate shipping in an international sense, and how compliance with the law is monitored from
an international perspective. The SOLAS, COLREGS and MARPOL (International Convention for the
Prevention of Pollution from Ships) Conventions, considered in Module 4, are some of the most wellknown, forming part of what might be called international shipping law. The ILOs Maritime Labour
Convention 2006 (MLC 2006) is a recent addition to international shipping law, and aims to establish
minimum living and working standards for all seafarers working on ships flying the flags of ratifying
countries. It came into force on 20 August, 2012.

1.6

Is Maritime Law International?

We saw in Section 1.4 above that there is no autonomous body of internationally agreed law which
governs commercial liabilities, i.e. those claims brought against us and also those which we may bring,
e.g. for breach of contract or for some negligently prepared report. Commercial liabilities are governed
by private domestic law (as explained above, the machinery of law provided by a state for individuals to
put right a wrong e.g. by suing for breach of contract, or in tort etc). This means that all commercial
law must come from some national domestic source. We have also seen, however, that commercial law
has an international aspect.
This is created partly by the fact that many countries involved in international trade will have
incorporated the same international conventions into their domestic law, and partly by the fact that the
parties to international transactions may have agreed between themselves to incorporate certain
international trade customs into their contracts (for example by contracting on a standard form drafted
by one of the international trade associations). It should be remembered, however, that national courts
in different countries may adopt very different approaches when interpreting the provisions of an
international convention or the customs of international trade. This means that, in reality, international
conventions and trade customs may not go very far towards creating international uniformity in the law.
In Section 1.3 above, we learned that the question of which nations domestic law governs an
international trade contract is decided by national courts, under the process of the conflict of laws (also
known as the rules of private international law). This is the case in all national jurisdictions. In other
words, all national courts have their own rules by which they determine this question. We should note
here that there is no uniform international law which dictates when one countrys laws, as opposed to
anothers, will govern a contract. We should also note that the question:

which countrys law governs the dispute?

is in fact quite separate from the question:

which countrys court has jurisdiction to settle the dispute?

11

In other words, it is quite possible for, say, an English court to rule on a contract governed by French
law, or vice versa. (One should note, though, that a foreign law must be pleaded and proved as a fact,
i.e. the judges will need a lecture as to the substantive elements of the foreign law, and may well need
such lecture to be translated. This all adds to the cost of the dispute, and it may be cheaper to go for the
courts home law, so to speak.)
These two questions in themselves may lead to litigation, as:
(a) the parties to a contract may not have provided for this in their contract (and, of course, if the
dispute arises out of a non-contractual issue, then there may well have been no contract into which
any such clauses could be included!); or
(b) one of the parties may, in the light of the dispute, have a mind-change about which forum or law
best suits his claim.
Rules of procedure (i.e. how the case must be conducted) can make or break a claimthe rule is when
in Rome, litigate as the Romans meaning that one always has the procedure of the forum. So, for
example, if you litigate in the English High Court your case will always be regulated by English law
procedural rules, the Civil Procedural Rules 1999 (CPR). The procedural system in the English courts is
adversarial (the usual system in common law jurisdictions), i.e. the case is between two adversaries who
present (via their lawyers) their arguments to the judge. Some systems of procedural law, e.g. in
France, are inquisitorial (common in civil/codified jurisdictions), meaning that the judges are involved in
questioning the parties and examination of the evidence.
What witnesses can be brought in, how the procedural rules approach the examination and crossexamination of those witnesses, what evidence can be adduced, and what time-limits apply can all
militate towards the success, or lack thereof, of ones claim. The English courts approach to jurisdiction
conflicts has traditionally been very much policy orientated. For inter-European Union parties, however,
the position is now totally regulated by European law (the Brussels Regulation), and, as we will see in
Case Study 3 (dealing with the impact of the UKs membership of the European Union), this law takes a
very different approach to that of English law.
The question of what law applies to the dispute raises similar tensions. We should note that the correct
modern terminology to the what law issue is to ask what the applicable law of the contract is and
what the governing law of the tort/other wrong is. The UK is a party to the Rome Convention on the
Law Applicable to Contractual Obligations, given effect in the UK by the Contracts (Applicable Law) Act
1990. The purpose of the Rome Convention was to harmonise choice of law rules and approach to
conflicts, in order to prevent forum shopping. The Act applies to all contracts which do not fall within its
exclusions, e.g. arbitration agreements, obligations arising under bills of exchange and other negotiable
instruments, wills and succession and other matrimonial rights.
If one is suing in a foreign jurisdiction, it makes sense to engage a local lawyer who will know the
procedures and jurisprudence of that jurisdiction.

1.7

The International Scene Is an International Lex Mercatoria Emerging?

It has now become somewhat fashionable to talk of the existence of a transnational commercial law.
Sealy and Hooley (Sealy and Hooley: Commercial Law Text, Cases and Materials (4th edition, Oxford
University Press, ISBN 9 780100 200034) suggest that harmonisation of national commercial law has
taken place in the following ways:

First, international conventions, model laws, uniform rules etc have been developed through the work
of such bodies as the International Chamber of Commerce (ICC), the United Nations Commission on
Uniform Trade Law (UNCITRAL) and the Council of Europe.
Second, harmonisation has been achieved through identifying and applying international trade
customs.

12

There are limits, however, to the extent to which we can regard the latter as having legal force. It is
sometimes argued that international trade usage operates as an autonomous international set of
principles and rules which govern international transactions without the need for their incorporation into
individual contracts, or the support of national laws.
What this argument is really saying is that there is a tendency for national courts to borrow one
anothers rules based on trade usage (see below), to the extent that some rules become universally
applicable.
The plain fact remains, however, that unless a trade usage is directly applicable either because:

it is part of English law; or


it has been incorporated by the parties as a term of their contract, the English courts will not consider
themselves bound by it.

Sealy and Hooley do, however, make a number of points in favour of the recognition of a new
transnational lex mercatoria, and these have attracted considerable academic support.
The first is that there has been a conscious and unconscious borrowing of legal concepts from foreign law
by judges in different jurisdictions. Roy Goode (Commercial Law in the Next Millennium) has called this
practice judicial parallelism. He sees it as an increasingly important source of transnational commercial
law to the extent that parallelism makes all national laws the same, those laws can be thought of as
transnational. We will consider when we look at cases whether we can see a reflection of any lex
mercatoria in the judgments and decisions.
Also, it is suggested that the work of scholars has been influential in the development of transnational
law, especially the work of those who drew up the UNIDROIT Principles of International Commercial
Contracts (1994) and the Principles of European Contract Law (1995), prepared by the European
Commission. Both sets of principles take the form of statements (or restatements) which are similar to
those prepared by the American Law Institute in the United States.
Although neither set of principles is legally binding, each is available to contracting parties for
incorporation into their contracts, and each can be consulted by courts and tribunals in order to find an
appropriate solution to a dispute. Thus, the principles may be regarded as soft law. In so far as
English courts borrow foreign law, or refer to these principles, then, we can say that the relationship
between English law and foreign law is one of uniformity.
Finally on this point, in considering whether or not there is a new, or even long existing, transnational lex
mercatoria, one should not forget that many commercial disputes, especially in shipping, are resolved in
arbitration. There may be strength in the argument that arbitrators are at times inclined to rely on
internationally respected trade practice, and that some borrowing of legal approaches and concepts
encountered in foreign jurisdictions occurs.

1.8

Is European Law International?

It is appropriate to address the European dimension at the end of this chapter, as it is commonly thought
that European law is international law. Having read Section 1.3 above, you will now have some
appreciation of why it is not: European law does not derive from internationally agreed conventions which
then are adopted and come into force as between participating states.
Rather, European law is that law derived from the European law-making bodies and which applies to
member states of the European Union (EU). We will consider EU law in some depth in Chapter 3.

13

CASE STUDY 1
The Nicholas H [1996] AC 211
In this case, the (Japanese) class society, NKK, issued a certificate which indicated the
seaworthiness of The Nicholas H following repairs done to her hull, in San Juan, Puerto
Rico. The vessel was on route from South America to Italy and the USSR. The repairs
were inadequately done and the vessel subsequently sank with loss of all cargo. The
vessel was owned by a Cypriot company and the claimant cargo owner was Swiss (Marc
Rich). The claimant argued that the class society had been negligent in their survey of
the repairs, and that this had led to their cargo being lost.
What law applies?
At first sight there is nothing to connect this claim with either English law or the English
courts, and to the uninitiated, it seems more like international law will govern the
dispute as this really is an international case. But this way of thinking is not a lawyerly
one. Our first question is to look at what the dispute involves, i.e. what is actually being
complained about: here, it is that the cargo owner wants compensation for the lost cargo.
This is not an international law issue, as it is a claim between individuals and not between
nations. It may have been arguable that the vessel could not have been fully ISM
compliant and that PSC should not have allowed her to leave San Juan. We do not know
whether or not this was the case, and it is irrelevant to the issue here, as we are
concerned with a cargo claim.
A breach of the ISM Code will result in the liability of the vessel owner to the state, that
state hopefully taking relevant action against the vessel (i.e. national law enforcing
international law standards). But the claim here was a private law issue, i.e. between the
injured party and an alleged wrongdoer and, so, some national law must apply. In this
case, that private law was English law. Understanding this is our first step in learning to
focus on the legal issue to hand!
Is there a conflicts/private international law issue?
There does not seem to have been any argument between the claimant and defendant
about:
(a)
(b)

where to bring the claim, i.e. which court should have jurisdiction; or
what law should govern the wrong.

Both parties appear to have settled on the jurisdiction of the English courts, and to have
English law applied to determine the claim.
What court are we in?
We are particularly interested in House of Lords/Supreme Court decisions (we say
decisions or opinions in the HL/SC, and judgments in the lower courts) as only a few
cases go up to this highest court. In order to proceed to the Supreme Court (as you will
see in Chapter 2 below, the House of Lords is now the Supreme Court) and leave, i.e.
permission, must be given for the appeal either by the Court of Appeal or the Supreme
Court. This will only be given where there is a serious issue of law and/or public policy to
be determined. So, we know if a case is in the Supreme Court that likely the issue of law
on appeal is the focus of critical attention.

14

Likewise, we are particularly interested in Court of Appeal cases, as this is where most
cases will end and, so, one could say that this is where most judicial law making occurs.
Whilst leave is needed to appeal from a High Court judgment (the court of first instance),
this is more easily obtained than leave to appeal to the Supreme Court. It is, however,
very expensive to proceed up through the appeal system, and this explains why there is
very little consumer law jurisprudence available.
Consumer-related cases tend to be below the 50,000 threshold which determines
whether one will start ones claim in the County Court or one of the divisions of the High
Court. Claims under 10,000 will generally be dealt with by what is known as the Small
Claims procedures, under which the costs are much lower. Any appeal, however, will be
heard by the Appeal Court, which is where the costs will increase. Generally speaking,
unless one has insurance for such claims, or is enormously wealthy, it is between
dangerous to highly risky to proceed to appeal. If you are suing a commercial giant,
who has the resources to pay for expensive City-type lawyers, then it might be better to
concede defeat if they appeal against a Small Claims or County Court judgment you have
obtained against them.
What year is the case?
We should never look at a case in a vacuum! When a case is decided is critical, as it will
be being judged against the backdrop of the expectations of society at that time, and also
against the prevailing judicial climate. So, a case in negligence decided in, say, 1932, or
1965, will be determined against a different way of thinking than exists, say, today. So,
when citing older cases as authority for our arguments today, it is critical to consider the
context in which that older case was decided in order to be able to argue and show why
the way in which the case was decided is still relevant, or should not be thought relevant,
today.
What cause of action arises, i.e. what was the wrong?
There must always be a cause of action, or recognised legal wrong. During this module,
we will look at various areas of law used in commercial claims, e.g. contracts, the law of
torts, marine insurance. Such areas of law give rise to rights and obligations, and these
form the basis of the claimants cause of action, i.e. the wrong which forms his claim. You
cannot sue someone just because they have upset you or caused you loss and damage;
that loss must be contained in a recognised legal wrong.
Further, the claimant must prove, on a balance of probability (i.e. more likely than
notthis is a lower standard than the prosecution must prove all the elements of the
offence in criminal cases, which is beyond reasonable doubt). In this case, the cause of
action relied on by the claimant was the tort of negligence. The elements of this tort are:

that the defendant owed the claimant a duty of care, i.e. that there is a judicially
recognised proximity between the claimant and the defendant; and
that the defendant breached this duty, i.e. was careless; and
that this carelessness caused the claimants loss and damage.

On a majority decision, their Lordships held that the defendant was not liable. Although
the defendants had been negligent, and the negligence had caused the loss (so, two of
three elements), the claimants could not persuade the majority of their Lordships that the
class society owed them a duty of care.

15

We will come back to this case later in the module (in Chapter 5) and consider whether, in
coming to their decision, their Lordships were influenced at all by an international
approach to the liabilities of class societies, i.e. whether we can say that there might be
some international lex mercartoria, or whether there were underlying policy reasons
affecting their decision.

Directed Learning:
(1)
(2)
(3)
(4)

What is maritime law?


Would you in any way consider maritime law to be international?
What do we mean when we ask what law applies to a claim which, say, might be
brought against a ships superintendent?
What do we mean when we talk of legally recognised claims?

16

2.

COMMERCIAL LAW IN SHIPPING RELATIONSHIPS

2.1

What is Commercial Law?

The term commercial law is incapable of precise definition. It is used to embrace many different areas
of law. As Professor Goode put it, in his 1997 Hamlyn Lecture:

commercial law represents the totality of the laws response to mercantile disputes. It encompasses all
those principles, rules and statutory provisions, of whatever kind and from whatever source, which bear
on the private law rights and obligations of parties to commercial transactions.

This chapter deals with the application of commercial law to shipping and international trade
relationships. It is important to keep in mind that commercial law may be applied quite differently in the
context of other types of commercial relationship (e.g. in contracts of agency, building contracts, and in
the financial markets). In these other contexts, the rules of commercial law are often derived heavily
from legislation, but this is not so common in relation to international trade. These other areas of
commercial law, therefore, have quite a different flavour.
Modern commercial law also covers a range of relationships which are not, in the fullest sense,
commercial those which arise between a consumer and a commercial concern. Relationships
involving consumers are heavily regulated by legislation, and they attract a very different judicial
approach from that taken towards relationships involving only commercial parties.

2.2

Why English Law?

Because there is no international law to govern commercial contracts, the contracting parties must be
governed by the domestic law of one country or another. In maritime contracts, they frequently specify
that English law will govern the contract. Why do they choose English law? In his article Contract law:
Fulfilling the Expectations of Honest Men [1997] LQR 433, Lord Steyn observed:

The commercial advantage of the English approach is that it promotes certainty and predictability in the
resolution of contractual disputes. And, as a matter of principle, it is not unfair to impute to contracting
parties the intention that in the event of a dispute a neutral judge should decide the case applying an
objective standard of reasonableness. That is then the context in which in English law one should
interpret the proposition that effect must be given to reasonable expectations of honest men.

Roy Goode (Roy Goode: Commercial Law in the Next Millennium (Sweet & Maxwell, 1998) ISBN 0 421
63650 5) continues this theme when he says that there is one feature above all that distinguishes English
commercial law from that of civil law jurisdictions namely the relative absence of mandatory law.
He points out that under English law the contracting parties are largely left to themselves to agree on
remedies such as the right of stoppage in transit in sales of goods contracts (sections 44 to 46 of the
Sale of Goods Act 1979), or the sellers right to retain title so as to reclaim goods that have not been paid
for (section 19 of the Sale of Goods Act 1979). These provisions can come into effect without the need to
have recourse to the courts.
Professor Goode points out that the ability of the parties to fashion security rights of their choice, to
decide on other rights and remedies, and to exercise them without the need to go to court is peculiar to
the common law. He suggests that a lawyer from a civil law jurisdiction might find truly astounding the
extent to which such out-of-court rights and remedies are so freely available in English law.

17

English commercial law, then, is undoubtedly held in high regard by the international shipping
community. But this very fact may at times produce the accusation that those responsible for its
development are somewhat chauvinistic in their approach. English laws rather piecemeal approach to
statutory regulation dictated by the fact that the law is an amalgam of statutory and common law rules
has created a complexity that sometimes causes confusion for foreign lawyers, who ask:

Where is your uniform commercial code?

For example, until the Arbitration Act 1996 was passed, the law on arbitration was contained in the
Arbitration Acts of 1950, 1975 and 1979. The 1996 Act was passed as a response to concerns that
London would cease to be a major international arbitration centre because English arbitration law was
seen as unwieldy and unattractive by foreign lawyers. Similarly, one might ask what prevents the United
Kingdom from ratifying the United Nations Convention on Contracts for the International Sale of Goods
1980 (the Vienna Sales Convention), which has proved to be one of the worlds most successful
commercial law conventions.
The Convention does not regulate all aspects of the international sale contract. It provides specific rules
on the formation of the contract, and on the rights and obligations of the seller. It can be argued that
our reluctance denies an international outlook, and suggests that we are not truly responsive to calls for
greater harmonisation of commercial law. It could also be argued that our reluctance to ratify
international conventions which heavily regulate private contractual relationships is because we are truly
responsive to what is perceived as the needs of those international parties who prefer to contract on less
regulated terms.

2.3

Sources of English Commercial Law

There are four important sources of English commercial law:

the common law;


trade custom and usage;
national legislation; and
EU law.

Each of these is considered in some depth below. It is important to understand the historical
development of the common law and its relationship with legislation in order to be able to grasp what are
often considered to be the vagaries of the common law. Having a sense of where the law has come from
enables one to appreciate better the tensions and underlying jurisprudence faced by a litigant hoping to
persuade the court to adopt his argued approach to how the law should be applied.

2.3.1

The Common Law

Because maritime law is concerned with rights and duties arising from shipping adventures, which are at
the heart of ships superintendents work, it is inevitably dominated by the common law rules of contract.
But international trade and shipping can give rise to disputes going beyond contract law which require the
application of the common law rules of tort, restitution and bailment.
The legal system in England and Wales is known as a common law system.
The distinguishing feature of a common law system is that it relies heavily on previous decisions of
judges to decide what the law is. This reliance is known as the doctrine of judicial precedent, under
which the Supreme Court binds the Court of Appeal, which in turn binds the lower courts. Generally, the
Supreme Court and Court of Appeal are bound by their own precedent, subject to limited circumstances
in which they can depart from such. (In reality, we will see that the courts are adept at distinguishing
the case to hand from a seemingly binding precedent.)

18

The common law system is very different from the systems used in other European countries such as
France or Germany, which have a civil law (otherwise known as codified law) system based on Roman
law. These countries derive their laws largely from civil codes (lengthy documents detailing the letter
of the law), and the decisions of judges do not have the same significance as they do in English law.
Moreover, these countries have written constitutions, set down at a specific point in their history.
England does not have a written constitution, and no one has ever attempted to write down all its laws in
one document. (It should be noted that when English law lawyers talk of English civil law they are
referring to private law, i.e. that law which governs our private relationships, and not some aspect of
codified law.)

2.3.2

Historical Development

The common law developed piecemeal over the centuries. As society developed, laws and courts
emerged to regulate its conduct. Gradually, a court system and a set of laws and constitutional principles
came into being. There was not a court system resembling the one we have today until the Industrial
Revolution, in the 19th century, centralised society in towns and cities. However, as early as 1154,
during the reign of Henry II, attempts were made to ensure that justice reached the furthest corners of
the land. The king sent travelling judges up and down the country to administer royal justice.
These judges accumulated experience as they travelled between towns and villages. The judges would
meet together in inns and hostelries and would share their stories and legal experiences. They borrowed
legal ideas and solutions from one another, and there soon developed a body of legal principles which
became known as the common law, i.e. the law which was common to all the people of England and
Wales. (For historical reasons, Scotland has a mixture of common law and Roman law.)
The words of the judges began to be written down and gathered together into a body of case law. Case
law is the collection of reported cases which embody the law. It is cited by judges, lawyers and writers to
establish what the law is. Eventually, certain principles of law contained in case law were incorporated
into Acts of Parliament (statutes). It is important to note that the translation of case law into statute
law did not really begin in earnest until well into the 19th century.
The 19th century also saw the first moves towards professional, independent, law reporting. The
Incorporated Council of Law Reporting began in 1865, and today it provides the most independent and
authoritative set of law reports. These reports are the Weekly Law Reports, and the more detailed official
reports, known simply as the Law Reports. These official reports include the Queens Bench Reports
(QBD), the Chancery Reports (Ch) and the Family Reports (Fam).
Together with the Appeal Cases Law Reports (AC), these official reports form the series of reports that
should be used in a court in preference to any others. Other reports, however, are sometimes used,
including the comprehensive All England Law Reports (All ER), published by Butterworths. There are
many other law reports on specific legal subjects, ranging from local government law to family law. Of
particular interest to students of maritime law, however, are Lloyds Law Reports (Lloyds Rep), which
deal with shipping and international trade cases.
Today, all cases are now also reported by what is known as the neutral citations, which are freely
available on line through the British and Irish Legal Information Institute (BAILII): e.g. [2014] UKSC 111
(UK Supreme Court, which is the highest court for appeals for both English and Scottish cases); [2014]
EWCA Civ 111 (England and Wales Court of Appeal Civil Divisions). The site has all House of
Lords/Supreme Court cases from November 1996 and some from before that.
All significant Court of Appeal Civil Division cases since August 1999, and all substantive Court of Appeal
Civil Division cases since 2003 are on the site. There are also links for other courts, including all divisions
of the High Court, and the Criminal Division of the Court of Appeal. Law Commission Reports and other
documents are also available.

19

The UK Supreme Court came into being as part of constitutional reforms initiated in June 2003, and given
effect under the Constitutional Reform Act 2005. Under the 2005 Act, the new Supreme Court of the UK
has taken over the appellate judicial role of the Law Lords and some powers of the Judicial Committee of
the Privy Council. The appellate jurisdiction of the House of Lords, together with the devolution of
jurisdiction of the Judicial Committee of the Privy Council, has been transferred to a separate Supreme
Court of the UK. This Supreme Court comprises 12 judges, known as Justices of the Supreme Court.
The jurisdiction of the Supreme Court is, in effect, the appellate jurisdiction of the House of Lords,
together with the devolved jurisdiction of the Judicial Committee of the Privy Council.
In modern times, statute law is increasingly replacing case law as the primary source of English law,
although the latter remains very important. Statutes are often passed to give effect to (or to overrule)
principles recently established by case law. (An example of this is the Misrepresentation Act 1967, which
came about as a direct result of the case of Hedley Byrne & Co v Heller & Partners [1964] AC 465
discussed in Chapter 4 below.) The impact of statute law is most noticeable in the area of criminal law,
where the overwhelming majority of offences are now set out in statutes. The most notable exception to
this is murder, which at the present time is still only a common law crime.
Parliament has felt less obligation to use statute law to regulate civil law matters such as contract and
tort. For example, when we examine the law of tort, later, in Chapter 5, we shall see that in the tort of
negligence there are a few relevant statutes and that the law is still largely based upon the words of Lord
Atkin in Donoghue v Stevenson [1932] AC 562, who enunciated the famous neighbour principle, giving
voice to the idea that if we act carelessly, so that someone may suffer as a result, we should be legally
responsible.
Similarly, when we look at the law of contract, we shall see that although there are nowadays some very
important statutes, the modern law is still to be found in reported cases. Much statutory law tends to be
drafted in very less definitive terms than it might be if drafted for a codified jurisdiction. Hence, it may
be easier to think in terms of English statutory law as being the skeleton upon which the court puts the
flesh, rather than being the entire legal answer. This may help to explain why, notwithstanding that all
modern law is, of course made by Parliament (and not the Monarch!) in the form of codes, we still
consider ourselves to be a common law jurisdiction.

2.3.3

Judge Made Law?

An issue which often attracts the attention of legal writers concerns the question of whether judges
make law, and whether they are entitled to do so. We shall see as we go through the module that
there may be the possibility of judges creating law, not just applying it. Clearly, this would be a breach
of the separation of powers, which lies at the heart of the British constitution. The separation of powers
requires that the legislature, the executive and the judiciary should be independent and separate from
each other, so that no one person or institution may exercise power in more than one area. The idea of
this is to ensure that there is a system of checks and balances, so that no one person or group can
attain absolute power and abuse it.
It must be remembered, however, that in legal disputes there is seldom such a thing as the letter of the
law while the law is embodied in words on a page, it is really a system of values. These values must
be interpreted and applied for the good of society and must remain responsive to changes in society. A
legal system without some scope for judicial creativity might become stale and out of touch with the
interests of the community it serves. The English Commercial Court is at pains to ensure that the letter
of the law does not conflict with the realities of modern commerce. Indeed, this is precisely the reason
that English law is so frequently chosen as the governing law by parties to international sale contracts.
The breach of the separation of powers which judicial law-making involves, therefore, can be seen as a
necessary price to pay for a legal system that is dynamic and current.
It is important to remember that the flexibility of the common law allows it to develop continually to meet
the needs of a developing society. Common law decisions are, therefore, at the cutting edge when it
comes to modernising and adapting commercial law.

20

So, we see, for example, in The Kos [2012] UKSC 17, Lord Sumption saying, of certain rights of an owner
under a time charter, The question must often have arisen in practice but, oddly enough, there is no
direct authority upon it. It is by critical analysis of existing law that their Lordships will come to their
decision, this approach leading to the accusation of judicial law making.

2.3.4

Equity

Lawyers draw a distinction between remedies awarded by the common law and remedies awarded in
equity. The common law remedy for a recognised wrong is damages, while the other remedies,
discussed below, are equitable (awarded in equity). In essence, equitable remedies are awarded at the
discretion of the court, while the common law remedy of damages is available as of right to a claimant
who successfully proves breach of contract.
The distinction between common law and equity requires some explanation.
It is a legacy from the days when the English court system was divided into, on the one hand, the
common law courts, and on the other hand, the Court of Chancery, presided over by the Lord Chancellor.
The Court of Chancery came into being because, at a certain stage in history, the common law developed
a set of rules that were very rigid and formal. The application of these rules would sometimes produce
injustice, and in such cases, the aggrieved party would petition the king for a remedy. The king soon
delegated the business of dispensing these remedies to his Lord Chancellor, who at that time was a
senior clergyman. The classic illustration of the birth of equity is this:
A might lend B a sum of money, and obtain from B some written evidence of the loan. B might later pay
back the money, but forget to ask to have the debt cancelled in writing. Under the common law, A could
still present the written evidence of the debt to a court, which would order B to pay the debt. Thus, B
would end up paying twice. So, B might then go to the Lord Chancellors court, and, confessing that he
had been foolish enough to repay a loan without getting it cancelled in writing, he would ask the Lord
Chancellor to do what was fair (equitable) and declare that he need not pay, because the creditor had
already received payment.
Over time, the Court of Chancery developed a whole set of remedies to supplement the remedies
available in the common law courts. In the 19th century, the old courts of common law and the Court of
Chancery were merged. So nowadays judges in all courts dispense both common law and equitable
remedies.
It is important to remember, however, that modern judges are not in quite the same position as the
mighty Lord Chancellor was when equity was in its infancy. Modern judges cannot invent novel remedies
as ways of doing justice in cases and claim they are acting in the name of equity! They are only free to
grant a number of certain well-defined equitable remedies or doctrines that have been firmly
established now for hundreds of years. The equitable remedies available to a court are discussed below.

Specific Performance
The court has discretion to make an order for specific performance. This is an order that a party in
breach of a certain obligation, which will usually be a contractual obligation, must actually perform
that obligation, rather than simply pay damages to the claimant. (Note that the court can only order
performance of an obligation that the party in breach agreed to perform under the contract; it cannot
order him to do anything else, no matter how fair this may seem in the circumstances.) Specific
performance will usually be awarded where damages are an insufficient remedy for example, in a
contract to sell a painting, or a 13th-century prayer book. In these situations, damages would clearly
be inadequate the claimant wants the actual thing, not a sum of money representing it. Specific
performance will not usually be granted where the contract involves an element of personal
performance (for example, a contract of employment) as, in practice, this might cause difficulty and
would be prejudicial to industrial relations.

21

Injunctions
An injunction is a discretionary remedy which orders the defendant to refrain from doing something (a
prohibitive injunction) or (much more rarely) orders him to do some positive act, for example
produce documents (a mandatory injunction). In breach of contract cases in the context of
international trade, an important remedy is the Freezing Order (formerly known as a Mareva
Injunction). This is an injunction sometimes applied for before a trial, which stops a defendant from
disposing of his assets. It is, therefore, a means by which the claimant can ensure that the defendant
is worth suing and will be able to pay any award of damages the court may eventually make.

Rectification
In certain cases there may be an error in a written contract which means that the document does not
accurately record the agreement between the parties. In this situation, the court can order that the
contract be amended or rectified to reflect the parties intentions. This remedy, however, will not be
granted where the terms of the re-written contract would prejudice people who are not parties to the
contract.

2.3.5

Equitable Estoppel

Equitable estoppel is a doctrine rather than a remedy. It is the name given to an equitable doctrine that
the courts will in their discretion raise as a defence to a defendant against whom the strict application of
the common law will produce an injustice. The modern starting point of the doctrine is generally
accepted to be the High Trees case (Central London Property Trust v High Trees House Ltd [1947] 1 KB
130), although the provenance of the doctrine appears from various cases from the 19th century. In
High Trees, the defendants leased a block of flats from the plaintiff in 1937 for 99 years at a rent of
2,500 per annum.
By 1940, because of the war, the defendants were unable to fully sub-let the block and the plaintiffs
agreed to reduce the rent to 1,250 until the war ended. The defendants did nothing in return for this
promise that would constitute consideration, i.e. the price for which English law requires that a
promise is bought. Denning J held that had the plaintiff sued for the balance of the rent in respect of the
period during the war, they would not have recovered. Although the common law did not recognise that
the original obligation to pay 2,500 had been revoked or varied, meaning that at common law the
defendants were liable for the balance, the promise to reduce the rent would act as a shield to prevent
the plaintiff from exercising his strict legal right. This is known as equitable promissory estoppel.
It is important to note that the doctrine only operates as a shield, i.e. as a defence for the defendant.
Thus, if you make me a promise for which I provide no consideration, I cannot sue you under the
estoppel doctrine. Thus, the operation of the doctrine is dependent upon the defendant (e.g. the
defendant tenants in High Trees, the person to whom the promise was made) being sued by the claimant
who seeks to enforce a legal right against the defendant. In The Vistafjord [1988] 2 Lloyds Rep 343, the
doctrine was raised by the Court of Appeal in favour of a shipbroker to allow him to keep commission in
respect of a time charter he had fixed. The charterer paid the hire to the broker, who kept what he had
reasonably thought was his commission when transferring the money to the shipowner. The shipowner
sued for the balance, which did, under English law, belong to the owner.
At that time, the doctrine of privity in English law would not recognise that brokers had any rights under
the contract they had fixed, notwithstanding that they might have been named in the charter commission
box. The Court of Appeal, however, held that the owner had represented that the broker would receive
the commission, and that the broker had had a reasonable assumption that he would be paid, based on
trade convention. Thus, the Court held that there was a shield of estoppel by representation, or estoppel
by convention. Of course, if the charterer had paid the freight directly to the owner, the broker could not
have sued him for the commission. The broker was not in a contract himself with the owner on which to
sue. In such a situation under English law the broker would have lost his commission. (This position
has now changed. The Contracts (Rights of Third Parties) Act 1999 will allow a broker to recover
commission expected for the fixing of a charter.)

22

2.3.6

The Maxims of Equity

We will now consider the rules, i.e. maxims, under which equity must be applied:
He who comes to equity must come with clean hands, i.e. He who seeks equity must have acted with
all good consciousness.
Equity only acts in personam, i.e. a claimant cannot seek equity under the in rem action, in which the
claimant arrests the vessel against which the claim is brought.
Equity supplements but cannot supplant the common law. So, e.g. in The Vistafjord, if the defendant
broker had not kept or received the hire (i.e. he did not have it in his hands, so to speak) which the
owner was suing to recover, then he would not have been able to use the estoppel to recover the
commission. The estoppel acts as a shield, i.e. a defence to the sword of the cause of action (here, the
owners action in debt), but cannot act as the sword. To use the estoppel as a sword would be to
supplant the common laws requirement that he who sues must have a recognised legal wrong. Today,
of course, under the Contracts (Rights of Third Parties) Act 1999, the broker would now have a common
law cause of action to use as a sword against an owner who kept monies paid under a charter which were
in reality expected to have formed the brokers commission.
This may be a difficult maxim to reconcile with reality at times, as there is a doctrine called the equitable
constructive trust, which the claimant beneficiary can use as a sword, i.e. cause of action. The
constructive trust arises where the court is prepared to recognise that the defendant holds the subject
matter of the claim as if a trust had been formerly created for the claimant as beneficiary. The claimant
will then get specific performance of that trust, i.e. the subject matter of the claim will be transferred to
the beneficiary. This is a very difficult doctrine to raise successfully, and does to some extent depend on
the prevailing judicial climate. It has not been successfully raised in the Commercial Court for quite
some time and the general legal view is that the Commercial Court does not like the doctrine and would
not recognise it in a shipping-related case.
Having said that, one should always be aware that the doctrine does exist, in order not to be caught
unaware by some worthy claimant. Only quite recently, the legal world was taken by some surprise
when the Supreme Court recognised that a divorced husband was the equitable beneficiary of a
constructive trust in respect of money and property held, quite legitimately, by his limited liability
companies. The husband was, then, the beneficial owner of the properties. On this analysis, the
husband could order the transfer of those properties and monies to the wife, in accordance with the
terms of the divorce settlement: Prest v Petrodel Resources Ltd [2013] UKSC 34. (This is a most
interesting case to read, and Lord Sumptions speech is a real treat!)
When equity and the common law conflict equity must prevail. The Vistafjord and Prest v Petrodel are
excellent examples of this maxim in operation.

2.3.7

Trade Custom and Usage

The customs and usages of merchants have an impact on the content and interpretation of their
contractual obligations. However, English law is reluctant to regard mercantile custom as being a binding
force upon a contract unless it has been expressly included by the parties, or it is shown as being
universally recognised in the trade. This is particularly the case when such custom or usage is unwritten,
because its meaning and content may be understood differently by different people.
In order to avoid variations in the interpretation of trade customs, many national and international trade
associations have drafted relevant customs into published codes or sets of rules. Such codes or rules
may be given effect by making adherence to them in ones contractual dealings a condition of
membership of the relevant association, or by the parties electing to incorporate them into their
individual contracts.

23

For example, some of you may have heard of Incoterms (the International Chamber of Commerces
rules relating to international sale contracts on shipment terms). Professor Goode (Roy Goode:
Commercial Law (4th edition, Penguin, 2010) ISBN 97 80141030227 paperback) refers to these rules as
being soft law, meaning that they are rules which are not imposed upon people by law, but which in
practice will normally be adhered to because of pressure within the trade, or because of a fear that more
stringent rules might be imposed by legislation if the trades self-imposed rules are not complied with. It
is important to note, however, that where the contract is governed by English law, Incoterms will not
form part of that contract unless expressly incorporated by the parties.
Another good example of trade custom is the shipping industrys Code of Practice Shipping and the
Environment, which is published by the International Chamber of Shipping. This Code requires
shipowners to address a wide variety of environmental concerns.
Such rules contribute to the international flavour of English commercial law because they are adhered to
by parties in many states.

2.3.8

National Legislation

Legislation plays an important role in modern commercial law. We will see this as we go through the
module. Modern commercial law has to a great extent been internationalised by the incorporation into
national systems of law of international conventions, such as the Hague-Visby Rules (incorporated into
English law by the Carriage of Goods by Sea Act 1971). The aim of such international conventions is to
harmonise in an internationally understood way commercial law. It should be remembered, however,
that international conventions only have the force of law in England if they have been incorporated into
our national law by legislation.

2.3.9

EU Law

We will consider in depth the impact on English law of the United Kingdoms entry into the European
Community in 1973 (today known as the European Union, the EU) in the next chapter. What we should
understand here is that EU law is today an important source of commercial law. In Shanning
International Ltd v Rasheed Bank [2001] UKHL 31, for example, the House of Lords was faced with
difficult questions concerning the interpretation of an EU Regulation.
The Regulation applied to claims likely to arise following the implementation of the UN Resolution lifting
the trade sanctions against Iraq, which had been imposed in 1990 by the United Nations Security Council
and the European Union. It prohibited anyone within the Community from satisfying any claim made in
connection with a transaction that had been affected by the sanctions. The gist of the case was that
Rasheed Bank suggested that there was nothing in the Regulation which amounted to a permanent
prohibition against payment, and that, in any event, the Regulation was invalid because it had been
adopted for foreign or security objectives, which were not legitimate objectives of the EU. The court
rejected these arguments, stating that it would have regard to the political considerations underlying the
sanctions, the European Unions common commercial policy, and to common sense.
One of the fundamental aims of the EU is to ensure that competition within the common market is not
distorted. The court heard evidence that the European banking sector, as well as international
contractors, had predicted that the lifting of the sanctions might give rise to an avalanche of claims for
payment. Without uniformity in the implementation of the lifting of sanctions, some operators would
have faced massive claims from Iraq, while others would not. The Regulation was intended to prevent
this distortion of competition. In these circumstances, the EU was not pursuing an objective outside the
scope of the Treaty of Rome, and the Regulation was, therefore, valid. The court held that political
events could well give rise to a legitimate need for EU action in the economic field, and concluded that it
had no doubt about the validity of the Regulation. Since, in the courts opinion, it had properly
interpreted the Regulation in accordance with its purpose, the court did not consider itself bound to seek
a ruling from the European Court of Justice.

24

The court had no doubt that the Regulation was of permanent effect the political considerations
underlying the sanctions dictated as a matter of common sense that no claims could ever be made for
the effects of the sanctions.

2.4

The Codification of English Commercial Law

The gradual development of commercial law, through its assimilation into the common law, led to a
complex mass of case law. In the 19th century there were calls for the law to be made more certain and
accessible by codification. To this end, certain individual areas of commercial law were put on a statutory
footing, thanks to the exceptional drafting skills of two men:

Sir Mackenzie Chalmers drafted the Bills of Exchange Act 1882, the Sale of Goods Act 1893 and the
Marine Insurance Act 1906 (all of which were approved by Parliament almost word-for-word); and
Sir Frederick Pollock drafted the Partnership Act 1890.

Apart from the Sale of Goods Act 1893, all of these statutes remain in force today. The Sale of Goods Act
1893 was re-enacted with minor amendments as the Sale of Goods Act 1979. The 1979 Act has in turn
been amended, in 1994 and 1995.
These first commercial statutes evidenced the laissez-faire attitude of Parliament towards commercial
transactions. For example, the Sale of Goods Act 1893 implied certain terms into contracts of sale, but
the parties were more or less free to exclude or restrict the application of these terms as they chose.
In many areas of English commercial law, this has now changed. With the development of the welfare
state, after the Second World War, there was a shift in political thinking, away from the philosophy of
freedom of contract. English law moved towards principles of the greater social responsibility, involving
the protection of the economically weaker against the economically stronger.
This change has been reflected in the gradual expansion of consumer protection legislation, of which the
following are notable current examples:

The
The
The
The
The
The
The
The
The

Misrepresentation Act 1967;


Trades Descriptions Acts of 1968 and 1972;
Supply of Goods (Implied Terms) Act 1973;
Consumer Credit Act 1974;
Unfair Contact Terms Act 1977;
Supply of Goods and Services Act 1982;
Consumer Protection Act 1987;
Competition Act 1988; and
Enterprise Act 2002.

There has also been a considerable amount of delegated legislation often to implement EU consumer
protection initiatives such as the Unfair Terms in Consumer Contracts Regulations 1999 (SI
1999/2083), the Consumer Protection (Distance Selling) Regulations 2000, the Sale and Supply of Goods
to Consumers Regulations 2002, and the General Product Safety Regulations 2005.
Whereas Englands domestic commercial law has been increasingly modified in the name of consumer
protection, the same cannot be said for the law relating to international commercial transactions, where
the doctrine of freedom of contract remains very much alive. International sale contracts and
international carriage contracts have largely escaped Parliamentary intervention.
However, developments in world trading practices have led to some increase in regulatory legislation (for
example the Electronic Communications Act 2000, which was enacted to facilitate the use of electronic
commerce in the UK), as have concerns for public safety and the environment (evidenced, for example,
in the Transportation of Dangerous Goods Act 1992).

25

CASE STUDY 2
Scruttons Ltd v Midland Silicones Ltd [1962] AC 446
In this case, stevedores were sued by the receivers of a drum containing chemicals. The
stevedores negligently dropped the drum when loading it from dock transit shed onto a
lorry, causing part of the drums contents to be lost. The stevedores were engaged by the
carriers of the drum, which had been carried from the US to London under a bill of lading
contract which had contained a clause limiting the carriers liability. The stevedores
argued that they also should be allowed to limit their liability under this limitation clause.
A majority of the House of Lords rejected this argument.
What was the wrong complained of, i.e. the claimants cause of action?
This is usually a good starting point to a consideration of whether or not a case will be
helpful to any argument one is trying to make. Generally, we are not looking to compare
stories, i.e. the facts of one case with another (although the facts of a case are one good
starting point when trawling through cases for supportive authority). Rather, we look to
cases with similar causes of action. The cause of action here was the same as in Case
Study 1, The Nicholas H: the tort of negligence. The governing law of the tort was, as
ever on this course, English law. This was not a contentious issue, and there was, then,
no conflicts issue.
What was the contentious issue which took this case to the House of Lords?
There will always be a contentious issue, i.e. that issue about which the parties cannot
agree, which forms the crux of the case. This is the focus of the case, and what is of
interest to us as students of law. The contentious issue is the element of the alleged
wrong which forms the basis of any appeal, from the court of first instance (for
commercial claims such as those involving ships superintendents this will be one of the
divisions of the High Court) to the Court of Appeal and, perhaps, on to the Supreme
Court. It is important to realise that it is only at first instance that we have a trial;
thereafter, as the case proceeds through the appellate system, we are concerned with an
analysis of how the law should be applied to the contentious issue. This, basically, is the
issue about which the parties cannot agree. Here, the contentious issue was whether the
defendants, who admitted their negligence, could rely on the limitation clause in the
contract between the claimant cargo owners and their carriers, a contract to which the
defendant stevedores were third parties.
The contentious issue in The Nicholas H was whether the defendant class societys
relationship with the cargo owners came within the elements of the tort of negligence
(which, likely for policy reasons we will consider in Chapter 5, the majority of their
Lordships held it did not). We can see, then, that we must focus: although the two claims
arose out of the same cause of action, they concerned entirely different contentious
issues, and the arguments and decisions in the one may very well be irrelevant in
advancing argument in the other.
What was the problem here, i.e. why was the issue contentious?
The problem here for the stevedores was that the principles of contract law were against
them. They were not what English law calls privy to the contract. The doctrine of
privity is that only parties who have given something to the contract may sue or be sued
on it, or rely on any clauses therein.

26

The majority of the House of Lords rejected the stevedores arguments that the existing
case law jurisprudence should be construed such that they could be recognised in some
way as having been part of the carriage contract. Lord Denning gave a powerful
dissenting speech, in which he advanced creative arguments allowing the stevedores to
limit, saying that not to allow them to do so would be to create a serious gap in our
commercial law. His Lordships speech is a good example of what might be called a step
towards judicial law-making. Subsequently, both the judicial (The Eurymedon [1974] 1
Lloyds Rep 387; The New York Star [19810] 2 Lloyds Rep 317) and legislative
(specifically to such clauses by the incorporation into English law of the Hague Visby
Rules: Article IV bis; and in general by the Contracts (Rights of Third Parties) Act 1999)
attitude to such clauses changed. Such clauses are, then, now effective.

Directed Learning:
(1)
(2)
(3)
(4)

What are the main sources of English law?


Why, when all modern law is made through statutory or regulatory provisions, do we
continue to say that English law is a common law jurisdiction?
What are the important features of equity?
What is the contentious issue in a claim?

27

3.

THE EUROPEAN DIMENSION

This section deals with the effect on English law of the UKs membership of the European Union (the EU).
As has already been said, EU law forms an important part of todays modern commercial law, and it
impacts on all professional relationships.
The United Kingdom became a member of the EU, formerly known as the European Economic
Community, by virtue of the European Communities Act 1972.
The founding treaty of the European Economic Community (the EEC) was the Treaty of Rome, also known
as the Treaty of the European Community (the TEC), or the EC Treaty. All subsequent European treaties
have been built upon or have amended the Treaty of Rome, and its provisions still form the majority of
EU treaty law. The European Community developed as certain European bodies, including the European
Coal and Steel Community (ECSC) and the European Atomic Energy Commission (Euratom) were
eventually merged into the EEC.
After the coming into force of the Treaty of Maastricht in 1992 (which represented a new stage in
European integration, creating the European Union), the EEC became known simply as the European
Community (EC). The Maastricht Treaty, also known as the Treaty on European Union (the TEU)
represented a new stage in European integration, as it opened the way to political integration. It created
a European Union consisting of three pillars:

the European Communities;


Common Foreign and Security Policy (CFSP); and
police and judicial co-operation in criminal matters (JHA).

The Treaty also introduced the concept of European citizenship, reinforced the powers of the European
Parliament, and launched economic and monetary union (EMU).
Following an Intergovernmental Conference in 2007, the Member States formally signed a new Treaty in
Lisbon on 13 December 2007 (the Lisbon Treaty), which has made some changes to the two existing core
Treaties (the Rome and the Maastricht Treaties). The Treaty of Rome was also renamed by the Lisbon
Treaty as the Treaty on the Functioning of the European Union (TFEU).
Note that although nowadays it is more up to date to talk of the European Union, there are still
references around to European Community law.
Articles referred to in this text are those of the Treaty of Rome (i.e. the EC Treaty, or TEC). Where an
original TEC Treaty article has been amended by the Lisbon Treaty, the new article is cited, but with
reference to the original article, e.g. ex ArticleTEC.
Where the newly-named Treaty of Rome (the TFEU), has been amended by the Lisbon Treaty, the new
Lisbon Treaty article is cited, but with reference to the amended article of the TFEU (e.g. ex Article
TFEU. Likewise, where the Lisbon Treaty amends articles in the Maastricht Treaty, that Treatys formed
article is referred to, e.g. ex ArticleTEU.

3.1

Institutions of the European Union

Under the Treaty of Rome 1957, as amended, the main bodies responsible for the operation of the EU
are:

The
The
The
The

European Commission.
Council of the European Union.
European Parliament.
European Court of Justice.

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3.1.1

The European Commission

The Commission may be said to be at the heart of the EU. It is concerned with all aspects of the
Communitys decision-making process. Members of the Commission hold office for a renewable period of
five years. The Commissioners are appointed by the member states and the appointment is on the
grounds of general competence.
The Commission is headed by a President who holds office for two years and is appointed by common
accord of the member states and the consent of the European Parliament. The Commissioners, one from
each EU country, are independent while in office they act in the interests of the Community and not in
the interests of their respective governments. Essentially, the Commission can be thought of as the
think tank of the EU its role is to formulate and develop law and policy. It also has a role to play in
enforcing breaches of Community law alleged breaches of EU law by member states can be reported to
the Commission, who may issue a reasoned opinion on the matter, or bring proceedings against the
member state in the European Court of Justice.

3.2

The Council of the European Union

This is the principal legislative body, and is known informally as the EU Council. It was previously known
as the Council of Ministers. This is where national ministers from each EU country meet to adopt laws
and co-ordinate policies. The EU Council performs the following functions:

passes EU laws;
co-ordinates the broad economic policies of EU member countries;
signs agreements between EU and other countries;
approves the annual EU budget;
develops the EUs foreign and defence policies; and
co-ordinates co-operation between courts and police forces of member countries.

The EU Council should not be confused with:


(a) the European Council, which is another EU institution where EU leaders meet about four times a year
to discuss the EUs political priorities; and
(b) the Council of Europe (the CoE), which is an advisory international organisation, promoting cooperation between all countries of Europe in the areas of legal standards, human rights, democratic
development, the rule of law and cultural co-operation.
It is an entirely separate body from the EU, although it shares the EUs flag and anthem. The bestknown bodies of the Council of Europe are the European Court of Human Rights, which enforces the
European Convention on Human Rights, and the European Pharmacopoeia Commission, which sets the
quality standards for pharmaceutical products in Europe.

3.2.1

The European Parliament

This began life as the European Assembly. Its members are now directly elected from member states.
They are elected for a period of five years. In contrast to national Parliaments, members do not divide
into government and opposition. Rather, they sit in international groupings which most closely relate
to their political affiliation. In the past, the main function of the European Parliament was simply to
discuss policy.
Nowadays, however, it is developing a legislative role. The Commission commonly consults the
Parliament when formulating and drafting its legislative proposals, and under certain of the EUs decisionmaking procedures the European Parliament has genuine legislative power. The EU Council (above) and
the European Parliament share the final say on new EU laws proposed by the Commission.

29

3.2.2

The European Court of Justice (ECJ)

The European Court of Justice (not to be confused with the European Court of Human Rights) consists of
one judge from each of the member states, assisted by (usually) eight Advocates-General. The judges
and the Advocates-General are appointed by common accord of their Governments for a period of six
years. They must be persons whose independence is beyond doubt and who possess the qualifications
needed for appointment to the highest judicial offices in their respective countries or who are
jurisconsults of recognised competence. The judges elect one of their number to be the president of the
Court for a period of three years.
The role of Advocate-General is one that is not found in the English legal system.
It is based upon the French idea of a Commissaire du Government in the Conseil dEtat, whose role can
be described roughly as the conscience of the court. Article 222 (ex Article 166 TEC) of the EC Treaty
provides:

It shall be the duty of the Advocates-General, acting with complete impartiality and independence, to
make in open court reasoned submissions on the cases brought before the Court of Justice in order to
assist the Court in the performance of the task assigned to it.

Every case, which is before the Court will have an Advocate-General assigned to it. The AdvocateGenerals submissions are particularly important, because the Court follows the continental system of
delivering only one (usually short) judgment. Unlike the position in English appeal courts, therefore,
there is no possibility of a dissenting judgment (a judgment delivered by a judge who disagrees with
the majority of the court). However, if the Court does not agree with or follow the reasoning of the
Advocate-General, his submissions may be regarded as similar to a dissenting judgment in English law
(i.e. carrying no weight as precedent, but indicating, sometimes very persuasively, a line of reasoning
which may be of use to judges in later cases who are looking for a way to avoid the precedent).
One very important point to remember about the European Court of Justice is that it only concerns itself
with alleged breaches or matters of interpretation of EU law. Where there is no relevant EU law on a
point, the Court has no jurisdiction. Although an individual can bring proceedings in the Court to
challenge a Community decision which affects him or her personally, the Court does not function as a
final court of appeal for litigants in member states.
Rather, it acts as a court of reference. Courts in member states will refer questions concerning the
interpretation of EU law to the Court. The Court will then give a ruling directed to the national court,
which, in turn, will apply its national law to the case in the light of this ruling. The objective of this
reference system is to ensure that national courts throughout the Community are applying EU law in a
consistent way.

3.3

Sources of European Law

The treaties are the primary source of European Union law. The provisions in the treaties are usually
framed in a broad way, and in order to take effect, they need detailed implementation. This
implementation can take several forms. Article 189 of the Treaty of Rome states:

In order to carry out their task and in accordance with the provisions of the Treaty, the European
Councilshall make regulations and issue directives, take decisions, make recommendations or deliver
opinions.

30

Regulations and directives can be properly described as sources of community law, while
recommendations and opinions cannot, because they lack legal force. Council decisions are sources of
law, but only in a sense, because they are binding only on those affected by the particular decision.

3.3.1

Regulations and Directives and their Impact on English Law

Regulations
These have general application. They are binding in their entirety and are directly applicable within
member states. Article 249 states that they must be given direct effect by national courts and that no
member state needs to pass any implementing measure to bring a Regulation into its legal system. Law
contained in a Regulation can be relied upon by individuals as well as states, but it is important to note
that breach of a Regulation will not per se give an individual a cause of action (right to start proceedings)
in a national court only a breach of national law will entitle a person to bring a case to court. Examples
of consumer-related Regulations were given in Chapter 2, Section 2.4, above.
An example of a recent shipping-related Regulation is the EU Ship Recycling Regulation No 1257/2013,
which came into force 30 December, 2013 (and which aims to facilitate the coming into force of the Hong
Kong Convention 2009: you will consider the issue of ship recycling and the Convention later in your
studies, in Module 7).
EU competition law is laid down by Articles 101 and 102 (formerly Articles 81 and 82 TEC), Article 106,
and Articles 107-109 of the TFEU. Articles 101 and 102 (dealing with, respectively, general prohibition
on anti-competitive arrangements, and absolute prohibition on abuse of dominance) are notable changes
to this area of law, introducing a decentralised and more economic approach, and are implemented into
national law under Council Regulation (EC) No 1/2003. The liner trade in shipping used to enjoy a block
exemption from Articles 81 and 82, introduced 1 July 1987 under Council Regulation (EEC) 4056/86. As
most of you, I am sure, will know this exemption has been removed. On 26 September 2006, the
Competitiveness Council, following a report issued by the European Parliament in July 2006, agreed to
repeal Regulation 4056/86. This repeal took effect under Council Regulation 1419/2006 from October
2008.
Directives
The effect of a Directive is different from that of a Regulation. A Directive is said to be binding:

as to the result to be achieved, upon each member state to which it is addressed, but shall leave to the
national authorities the choice of form and methods.

Thus, member states must pass national laws to implement the provisions of Directives before they can
have any legal effect. Directives are much more commonly used than Regulations and are the most
important method used by the EC to harmonise the laws of the member states. An example of English
legislation passed to implement a Directive is the Consumer Protection Act 1987 (incorporating the
Product Liability Directive (No 85/374/EEC)).
Examples of shipping-related directives include the control of sulphur emissions, initially under Directive
93/12/EC, which was repealed by Directive 1999/32/EC, which is due to be repealed by Directive
2012/33/EU which came into force 1 January 2015. Another ship orientated pollution Directive is
Directive 2005/35/EC, which infamously (at least in the shipping industry!), creates criminal liability for
ship-source pollution. Its validity was challenged in the European Court of Justice by a coalition from the
shipping industry in Case C-308/06. The basis of the (unsuccessful) claim was that the Directive is
inconsistent with and contrary to the internationally harmonised rules on the same issues contained in
the IMOs MARPOL 73/78 and UNCLOS 82.

31

3.3.2

The European Convention on Human Rights

The European Convention on the Protection of Human Rights and Fundamental Freedoms was drafted in
1950 and ratified by the UK in 1951. Its provisions have now become part of English domestic law by
virtue of the Human Rights Act 1998, which came into force in October 2000. The Convention was
designed to give effect to an idea formulated at the end of the Second World War, namely that there
should be a guarantee of certain basic rights and freedoms. It sought to protect human rights by
balancing the general needs of society with the needs of its individual members.
The rights set out in the Convention include:

The right to life (Article 2).


Freedom from torture or inhumane or degrading treatment or punishment (Article 3).
Freedom from slavery or forced or compulsory labour (Article 4).
The right to liberty and the security of the person, so that no person may be deprived of his liberty
except in accordance with the law (Article 5).
The right to a fair and public trial within a reasonable time (Article 6).
Freedom from retrospective criminal law, and from punishment without law (Article 7).
The right to respect for private and family life, home and correspondence (Article 8).
Freedom of thought, conscience and religion (Article 9).
Freedom of expression (Article 10).
The right to freedom of peaceful assembly and freedom of association (Article 11).
The right to marry and found a family (Article 12).
The right to freedom from discrimination on any ground such as sex, race, colour, language, religion,
political or other opinion, national or social origin, association with a national minority, property, birth
or other status (Article 14).

The Convention was an agreement between national governments. It imposed broad obligations under
international law but did not create rights, which were unenforceable in national courts. Until recently,
it was generally believed that English common law and legislation gave adequate protection to the
Convention rights, and that it was unnecessary to incorporate the Convention into domestic law.
However, opinion began to move in favour of incorporation for a number of reasons:

Although UK courts were not obliged to apply the Convention, it appeared from judgments that the
courts were increasingly referring to the Convention.
The UK was seen as out of step with other European countries, which had already incorporated the
Convention into their domestic law.
If a UK citizen believed that his human rights had been infringed, the only way he could get a remedy
was to go to the European Court of Human Rights in Strasbourg. He could only do this once he had
exhausted all remedies available under UK law. This was time-consuming and expensive.

3.3.3

The Human Rights Act 1998

The Governments aim in passing the Human Rights Act 1998 was to allow cases concerning Convention
rights to be brought in domestic UK courts. It was hoped that this would serve a wider cultural purpose
of fostering a society in which the rights and responsibilities of the individual were in balance. The Act
imposes certain duties on organs of the state, including local and national government and the courts. It
requires that the courts interpret all national legislation in accordance with Convention rights.
It also requires that any court or tribunal, in interpreting a Convention right, must take into account
decisions of the European Court of Human Rights. It should be noted, however, that these decisions are
not binding (in the same way that a decision of the House of Lords would be binding), but must only be
taken into account. Thus, while the decisions will be highly persuasive, a UK court could (in theory!)
choose to ignore them.

32

The most immediate impact of the Act has been felt by lawyers working in criminal law, and in such fields
as immigration. However, its impact may extend far more widely. It is too early to be certain what
effect the Act will have on commercial law, but a number of issues have been raised by commentators.
In particular, it has been suggested that one effect might be to restrict the use of some covertly obtained
video evidence in insurance claims, because the courts are now under a duty to enforce the right to
respect for private life (Article 8). (It has been argued, however, that Article 6 right to a fair trial
may counterbalance any infringement of Article 8.)
Some people have suggested that those who run privately-owned public utilities (electricity, water, rail
etc) might be regarded as organs of the state. If so, they would be required to observe the Convention
in dealing with employees and consumers. In the context of arbitration proceedings (which may be
regarded as proceedings before a tribunal), the Act may affect an arbitrators power to require the
disclosure of documents, or to require answers to questions, which could lead to self-incrimination, which
might be regarded as a breach of Article 6.

CASE STUDY 3
The Front Comor ECJ Case C-185/07
In this case, The Front Comor struck a jetty at Syracuse oil terminal whilst under charter
to Erg, also the owners of the jetty. The charter was governed by English law and
included an arbitration clause for London. Erg claimed on their insurance up to the limits
of the policy for collision damage, and then commenced arbitration against the shipowners
for the balance of the damage. Ergs insurers commenced proceedings against the
shipowners under Italian law before an Italian court to recover the payments made to Erg.
The shipowners applied to the English court for an anti-suit injunction to stop the Italian
proceedings. The shipowners did not dispute that the Italian court had jurisdiction under
the Brussels Regulation (the Regulation, which sets out the jurisdiction of the courts of
Member States). Rather, the shipowners argued that as the dispute arose out of
charterparty liabilities now subrogated to the insurers, those insurers were bound by its
arbitration clause, and, so, should be prevented from bringing proceedings against them
in the Italian court. The Regulation does not apply to arbitration, and from an English
perspective the shipowners action in the English court was to protect a right to have
disputes determined by arbitration, and so a right which did not come within the scope of
the Regulation.
What is an anti-suit injunction?
As its name suggests, this is an order by the court which prevents a party from suing
another. As it is an equitable remedy, it will be subject to the usual maxims of equity and
will only be available at the courts discretion. It is not the applicants right. In addition,
it is an interim remedy, i.e. it is not the substantive remedy sought, but in between
relief. As such, it is not an easy remedy to secure, as it does tend to deal with the
defendant before liability against him has been established. Having said that, in the
commercial cases the English courts have traditionally been most willing to restrain a
party from bringing foreign court proceedings which are in contravention of an agreed
jurisdiction or arbitration clause. The English courts view this ability as, per Lord
Hoffmann in The Front Comor, an important and valuable weapon in the hands of a court
exercising supervisory jurisdiction over the arbitration. His Lordship was firmly of the
view that the ability to grant the injunction would give effect to what the parties had
intended by having the arbitration agreement, i.e. that their dispute be determined, on
both substantive and procedural grounds, outside the procedures of any national court:
[2007] UKHL 4.

33

In addition, the English courts have taken the view that the ability to grant such
injunctions keeps them competitive with other seats of international arbitration, such as
New York, Bermuda and Singapore, in which the courts, unfettered by the Brussels
Regulation, are at liberty to grant anti-suit injunctions.
In Turner v Grovit [2001] UKHL 65, Lord Hobhouse made the important point that the
anti-suit injunction is not addressed to and intended to bind another court. It is not.
When an English court makes a restraining order, it is making an order which is
addressed only to a party which is before it The order binds only that party, in
personam, and is effective only insofar as that party is amenable to the jurisdiction of the
English courts so that the order can be enforced against him. One should not, however,
under-estimate the force of such an injunction, as where the party against whom it
applies disregards it, he is then in contempt of court under the Contempt of Court Act
1981, which creates criminal liability for disregard of court orders. One can see then that,
in international relationships, where the party against which the remedy is made is not
unlikely to be in England, and thus within the enforceable jurisdiction of the English
courts, the remedy is a powerful one.
The English courts will also grant an anti-suit injunction in non-commercial cases, even
where there may be no jurisdiction clause, as in Turner v Grovit, in which the claimant
employee brought an action in the Employment Tribunal in London for unfair and wrongful
dismissal. His employers, acting in bad faith, initiated court proceedings against him in
Spain. The High Court and Court of Appeal confirmed the anti-suit injunction. The
contentious issue before the House of Lords was whether English law in this point was
consistent with the Brussels Regulation. The ECJ held it was not: Case C-159/02 (2004).
What was the claim with which this case in The Front Comor was concerned?
We should be careful here and focus on what the party initiating the action wanted: not
substantive relief to the claim, i.e. the alleged wrong (between the owners and the
insurers, i.e. the subrogated losses arising out of the collision damage, liability which the
owners denied in arbitration). Neither was this application the substantive claim between
the parties. Rather, the cause of action before the Chancery Division of the High Court
was the application for the anti-suit injunction, which the Court granted. The case,
exceptionally, went straight to the House of Lords (by what is known as the leapfrogging procedure, which arises when both parties consent, and the issue is one of
public importance, and is in respect of the interpretation of statutory provisions). Likewise
in Turner, the claim was the application of the interim remedy, the anti-suit injunction,
which was not the substantive employment claim.
What was the contentious issue?
The issue before the House of Lords was whether it was consistent with the Regulation for
a court of a Member State to make an order restraining a person from commencing or
continuing proceedings in another Member State in breach of an arbitration agreement.
The House of Lords considered it their duty to refer the question to the EJC, as this issue
of EU law had not previously been determined by the ECJ, the issue in Turner being in
respect of foreign proceedings not concerned with an arbitration clause. The ECJ held that
the injunction could not be granted, as to do so would undermine EU law. It was for the
Italian court alone to rule on any objection to its jurisdiction and the validity of the
arbitration agreement. In his opinion, Advocate General Kokott said that the House of
Lords view that Turner did not apply to the application of an anti-suit injunction to
prevent foreign proceedings in contravention of an arbitration clause was surprising.

34

The ECJs approach in both the Turner and Front Comor cases illustrates nicely the
cultural differences between other EU and English law!

Directed Learning:
(1)
(2)
(3)
(4)

What do we mean by EU law?


To what extent would you agree that membership of the EU has diminished the UKs
sovereignty?
What is the difference between a Regulation and a Directive?
What tensions might arise between English and EU law?

35

4.

THE BASICS OF CONTRACT LAW

This chapter is designed to familiarise you with the fundamental principles of English contract law, so as
to provide a foundation for a consideration of the different commercial contracts and their performance.
This chapter is important, in that it evidences the approach that English law takes to upholding
contractual obligations, and also in that it sets aside the myth that an agreement must be in writing in
order for it to be a contract, i.e. binding. The general issues in this chapter will provide a sound basis
upon which contracts for the sale of goods or supply of services are made, and upon which businesses
are run and employees engaged.

4.1

What is a Contract?

In summary, a contract is simply a legally enforceable agreement between two or more parties. It
consists of a legally binding promise or promises between the parties. Breach of the promises may result
in the courts giving a remedy to the aggrieved party.

4.2

Requirements of a Binding Contract

Not all agreements are contracts. For a legally enforceable contract to exist, certain factors must be
present. These are:

an offer;
acceptance of the offer;
consideration;
an intention to create legal relations; and
capacity to enter the contract.

It is also important that a contract is certain as to its terms, so that the parties know what they are
agreeing to. It is not necessary for a contract to be made in writing spoken words will suffice
although, of course, many contracts are embodied in a written document.

4.2.1

Offer

An offer is a statement of terms by which the party making the offer (the offeror) is prepared to be
contractually bound in the event of a valid acceptance of the offer. The offer must be certain, that is, it
must be clear, and to be effective it needs to be communicated to the other party. At the moment an
offer is accepted (provided the elements of consideration, intention to create legal relations and capacity
are present) a binding contract is formed. If the offeror wants to withdraw the offer, this must be
communicated to the other party before he accepts the offer. An offer can be confined to a limited period
of time. (For example, the offeror may stipulate that the offer will be open for seven days from the date
it is made.)
It is important to distinguish an offer from what is called an invitation to treat (an expression of
willingness to sell, designed to encourage other people to make offers). Thus, in Fisher v Bell [1961] 1
QB 394, a shopkeeper displaying the knife in his window was not making an offer but an invitation to
treat the display was designed to encourage prospective customers to make an offer, which the
shopkeeper would then be free to accept or reject.

4.2.2

Acceptance

Acceptance may be defined as the unconditional agreement by the offeree (the person to whom the
offer is made) to all the terms of the offer. If the offeree responds to the offer in such a way that he tries
to re-negotiate the terms of the offer, this is not acceptance (i.e. there can be no such thing as partial
acceptance). Rather, this response is termed a counter-offer. The effect of a counter-offer is that it
terminates the original offer.

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This means that a person who has made a counter-offer (e.g. Ill give you 38 instead of the 310 you
are asking) cannot subsequently accept the original offer (OK then, Ill give you the asking price)
unless the original offer is re-made (see Hyde v Wrench (1840) 3 Beav 334). Of course, negotiations do
often take the form described above, but the point to appreciate is that once a counter-offer has been
made, the person to whom it is made (the original offeror) is free to sell the goods to someone else he
does not have to wait in case his original offer is accepted, or communicate that he has withdrawn the
original offer. This can be important where the market rate for goods fluctuates from day to day and
they need to be sold in the market at the best price.
Acceptance must be communicated to the offeror (so silence normally cannot amount to acceptance) and
acceptance is not normally valid until the communication of acceptance reaches the offeror. An exception
to this is acceptance by post. The so-called postal acceptance rule states that, in cases where it is
reasonable to accept an offer by post, an acceptance will be binding on the offeror (i.e. will create a
contract) at the moment when the letter of acceptance is put into the postal system.

4.2.3

Consideration

Consideration may be thought of as the price for which a promise is bought. In other words, it is what
each party agrees to do for the other in return for that others promise. All contracts need consideration.
If a person promises to do something for nothing (e.g. Ill give you my car because I like you), that
promise, unless made using a deed (a special legal document) is not legally enforceable. Consideration
takes the form of conferring a benefit on the other party (e.g. paying money) and usually, this also
means that the party who confers the benefit suffers a detriment (e.g. loses that money) but this is not
always the case sometimes just conferring a benefit will suffice (see Williams v Roffey Bros [1990] 1 All
ER 512, discussed below). Some important points about consideration are explained below.
The courts will not look at the adequacy of the consideration, so long as it is something of value. In
other words, the courts will not examine the consideration to see whether it represents a good bargain.
They take the view that it is for the markets, not the courts, to set the prices for which things are bought
so long as the consideration has a value (however small), the courts will not normally interfere with a
bargain. Thus, for example, I could sell you my car for 35, if I were minded to do so. In novels, you
may have read that, in the past, landlords would sometimes let their property (for example to servants or
friends) at a peppercorn rent the peppercorn, payable annually, provided consideration which made
the lease enforceable, even though it had only a small value.
Generally speaking, it is important to ensure that the consideration put forward by one party to the
contract is not an act which that party was already under an obligation to do, or a sum of money he was
already required to pay. In the old case of Stilk v Myrick (1809) 2 Camp 317, sailors on a ship had
agreed, in return for their normal wages, to use every effort to sail the ship, even in conditions of
adversity. When some of the crew deserted, the captain promised the remaining crew extra wages if
they would bring the ship safely home. However, when the sailors tried to enforce this promise, the
court held that no fresh consideration had been provided for the extra money, so the promise was
unenforceable the sailors, in promising to bring home the ship, were not promising to do anything they
were not already obliged to in return for their normal wages. (Compare Hartley v Ponsonby (1857) 7
E&B 872, where the promise of extra wages was enforceable in circumstances where continuing to sail
the ship was so dangerous as to be beyond the call of duty.)
Nowadays, in the context of commercial agreements, the harsh approach taken in Stilk v Myrick is
seldom followed. Where, for example, a contractor agrees to perform certain tasks for a fixed price, and
then realises that he has underestimated the work involved, his employer may promise him extra money
to enable him to fulfil his existing obligations. The courts recognise that, in this context, having the
contract fulfilled by the existing contractor (rather than having to hire a new one) is of benefit to the
employer. They will enforce the promise by saying that there is sufficient consideration because the
contractor confers this benefit on the employer, even though the contractor does not suffer a detriment
in return for the extra money.

37

This is what happened in Williams v Roffey Bros [1990] 1 All ER 512. Of course, one could make the
suggestion that this is an example of judicial law making. In the context of modern commercial life,
however, the approach can be argued to be one which satisfies Lord Steyns view that the law must meet
the reasonable expectations of todays honest commercial men.
There is a rule which states that past consideration is not good consideration. What this means is that,
for consideration to be valid, it must be given in return for the promise or action it buys, and the
consideration and the promise or action must form part of the same transaction. In other words, the
consideration must be contemplated at the time the promise is made or the action performed. Where
one party does something, and later, the other party promises to pay for it, the promise to pay is said to
be past consideration.
The reality of the situation is that the promise has not been given in return for what has been done. For
example, if A repairs Bs car, and when B finds out about this, he promises to pay A 3,100, A cannot sue
B if he goes back on this promise (see Re McArdle [1951] 1 All ER 905). There are, however, certain
circumstances where past consideration will be valid, for example where the work was done at the
request of one party and there was always a presumption or an understanding that it would be paid for.

4.2.4

Capacity

There are rules about who is entitled to be a party to a legally binding agreement and in what
circumstances. These are discussed below.
Minors
Persons under the age of 18 are minors (Family Law Reform Act 1969). The Minors Contracts Act 1987
restricts the circumstances under which minors can be parties to contracts. As a general rule, a minor is
not bound by any contract he enters into while he is a minor, although the other party to the contract will
be bound. The minor can ratify the contract when he comes of age, at which time it will become binding
on him. There are, however, certain categories of contractual agreements which are binding on minors
despite their general lack of capacity:

Contracts for necessaries, defined in section 3(3) of the Sale of Goods Act 1979 as Goods suitable
to the condition in life of the minor and to his actual requirements at the time of sale and delivery. It
has been said that luxurious items of necessity can be necessaries but items of mere luxury cannot
(Chapple v Cooper (1844) 13 M&W 252). If the goods are deemed to be necessaries, then the minor
can be required to pay a reasonable price, but not necessarily the contract price.
Contracts of employment and apprenticeship: These can be binding on a minor, if they are for his
benefit, and are really just an extension of the class of necessaries a minor can legally agree to. The
contract must be for the benefit of the minor (D Francesco v Barnum (1890) 45 ChD 430).

Minors can also enter certain types of voidable contracts, which are binding on both parties unless and
until the minor repudiates (rejects) them. The repudiation must be before the minor attains majority or
within a reasonable time thereafter.
Mental Incapacity and Intoxication
A party who is declared a patient under Part VII of the Mental Health Act 1983 (as amended by the
Mental Health Act 2007) is absolutely incapable of entering into a legally binding agreement. Such
persons lack the capacity to contract, and any contract they purport to enter into is ineffective. If a party
is suffering from a mental disorder which falls short of that required to be declared a patient, or if a
party is intoxicated, he can enter a legally binding contract. This will be binding on him unless the
party can prove that, when he signed the contract, he did not know what he was doing, and that the
other party to the contract was aware that he was drunk or mentally disordered.

38

Limited Companies
A company has its own legal personality distinct from its shareholders and the officers of the company.
Under the old law, the capacity of a company to make contracts was governed by that companys
memorandum of association. The company could only enter into contracts consistent with the
memorandum. Contracts concerning matters which fell outside the objects for which the company was
formed were said to be ultra vires (beyond its powers) and, therefore, void. Nowadays, however, the
ultra vires doctrine no longer applies. Sections 31 and 39 of the Companies Act 2006 allow a company to
make contracts which formerly would have been ultra vires (although the doctrine can still apply to
charities).
Unincorporated Associations
Unincorporated associations (e.g. clubs) unlike companies, have no separate legal personality and,
therefore, no capacity to enter into contracts in their own name. Contracts can, however, be made by
individuals on behalf of the association, or by officers or trustees, representing the association. An
unincorporated association cannot be sued in its own name unless that is authorised by the rules of court
or a statute. Partners can enter into contracts on behalf of all the partners in a firm, but a partnership
has no legal personality distinct from the partners.

4.2.5

Intention to Create Legal Relations

A valid contract can only be formed where the parties have an intention to create legal relations. Such
an intention is usually presumed in commercial agreements (although it can be avoided if the parties very
clearly and specifically state this). Social arrangements or bargains (e.g. I will lend you my car if you
buy me a drink) do not normally create legal relations. Family arrangements are more problematic, and
the court will look at the facts in each case (see Jones v Padavatton [1969] 1 WLR 628).

4.3

The Terms of a Contract

Once we have established all the factors necessary for a valid contract, and that there are no vitiating
factors (see Section 4.4 below), it is important to look at the contract to see exactly what each party has
agreed to the obligations which the parties have undertaken. A contract consists of terms (as
opposed to paragraphs and sentences) which are divided into either:

express terms; or
implied terms (see below).

These are then further classified as either:

conditions;
warranties; or
innominate terms.

It is also essential to note that the parties, or one party to the contract, may have excluded or limited
liability for certain breaches of the contract.

4.3.1

Express and Implied Terms

Express Terms
Express terms are terms which the parties have given voice to in their contractual dealings. Here, the
court will look at what the parties have committed to writing, but it may also consider points which the
parties have discussed in negotiations. The court is very reluctant to vary the terms of a written contract
just because it does not reflect what a party says he really wanted.

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Implied Terms
Implied terms are terms put into the contract by the court as opposed to the parties themselves. Courts
are reluctant to vary the substance of agreements, because of the doctrine of freedom of contract,
which states that where the parties are commercial concerns, they should be free, more or less, to agree
what they like, no matter whether this turns out to be commercially disadvantageous to one of the
parties. There are, however, three situations in which a court may imply a term into a contract:

where the absence of a term in the contract has left an obvious gap in the contract which needs to be
filled, i.e. where it is a term that the parties would, without a second thought, have certainly included
if they had thought about it, or which is necessary to give the contract business efficacy, that is, to
make it workable;
where statute requires a certain term to be in a contract and the parties have omitted it;
where the term is one which, according to long-established custom, is invariably included in contracts
of a certain type.

4.3.2

Conditions

A condition is a fundamentally important term which is at the core of the contract. Breach of a
condition will allow the aggrieved party to treat the contract as at an end. For example, if you contract
with me for a quantity of bananas, and I supply you with a quantity of carrots, I have breached a
condition of the contract. This entitles you to reject the goods and get your money back. (Note that
you may not wish to exercise this right if the market price for carrots has risen since we made the
contract you could sell them on at a profit! but you will probably want to do so if the market price has
fallen, or if it would be difficult for you to get rid of the carrots.)

4.3.3

Warranties

A warranty is a term of lesser importance, breach of which does not fundamentally affect the substance
of the contractual bargain. Suppose that I contract to sell you a car with a 100 Watt sound system, but
I supply you with a car that has only a 75 Watt sound system. The term relating to the sound system
will be regarded as a warranty, because the fact that I have breached it does not mean that you have
been supplied with something fundamentally different from what you bargained for you have still got a
car with a powerful sound system. Breach of this warranty will not entitle you to reject the car and
have your money back. Rather, it will only entitle you to sue me for damages monetary compensation,
being the difference in value (if any) between the car you bargained for and the car I supplied.

4.3.4

Innominate Terms

Until 1962, it was thought that all terms could be classified as either conditions or warranties at the
time a contract was formed. In the Hong Kong Fir Shipping case [1962] 2 QB 26, however, it was
decided that a contract could sometimes contain terms which defied such classification. Such terms are
called innominate terms (terms with no name). In the Hong Kong Fir Shipping case, it was said that a
term in a contract relating to the seaworthiness of a ship was an innominate term, because it was
capable of being breached in a number of different ways some minor, some serious, i.e. it will go to the
root of the contract. A serious breach of an innominate term will entitle the aggrieved party to reject the
contract, whereas if the breach is only minor, he will have to carry on with the contract, but may sue for
compensation for the losses (if any) that the breach has caused him.
Whether or not a term will be construed as a condition (breach of which always allows the injured party
to repudiate the contract) or an innominate term depends to some extent on statutory provisions (e.g.
the implied terms as to quality in a contract for the sale of goods contract governed by the Sale of Goods
Act 1979 are always conditions when the seller is dealing with a consumer), and otherwise on the
decision of the courts.

40

As ships superintendents, you should be aware that the current judicial approach in commercial
contracts (i.e. where one party is not a consumer) is that unless a term has already been construed as a
condition (either by Parliament or by the courts) then it should be construed as an innominate term (per
Lord Mustill in The Gregos [1994] 1 WLR 1465, HL).

4.3.5

Exclusion Clauses

An exclusion clause is a term in a contract which purports to limit or completely exclude liability for
breach of that contract. Exclusion clauses are often found in the standard form contracts that are
commonly made between private individuals (consumers) and commercial concerns, and between
commercial concerns themselves. In consumer contracts, the relative lack of bargaining power
experienced by one party to the contract has led to some degree of protection being offered by the
courts, and by Parliament in the form of the Unfair Contract Terms Act 1977 and the Unfair Terms in
Consumer Contracts Regulations 1994.
In deciding whether a party can take advantage of an exclusion clause, the courts will apply what is, in
effect, a two-stage test:

First, they will look at whether the exclusion clause was part of the contract in the first place (whether
it was incorporated).
Second, they will decide whether it is legally enforceable.

4.3.6

Incorporation of Exclusion Clauses

The key question here is whether the party who is disadvantaged by the exclusion clause should be
regarded as having been aware of it at the time he entered into the contract. A party who signs a written
contract which contains an exclusion clause will usually be bound by it, even if he did not read the
contract or fully understand it.
However, in many contractual situations, the party bound will not be required to sign a document, for
example, where he goes to a cinema or a car park and is issued with a ticket. In many situations, the
ticket is regarded only as evidence of the contract, it having been issued after the contract has been
formed.
Here, the question for the court is whether the party knew about the exclusion clause before he entered
into the bargain. In some situations, previous dealings between the parties may lead the court to accept
that there was notice of the exclusion clause, but only if the previous dealings were on the same terms.
If the clause is unusually onerous, it must be specifically pointed out to the person against whom it will
apply. This is known as the Big Red Hand Rule, per Denning LJ in Spurling v Bradshaw [1956] 2 All ER
121. (This approach was approved of by Bingham LJ, in respect of a clause imposing an unusually high
level of damages for the late return of hired photographic transparencies: Interfoto Picture Library Ltd v
Stiletto Visual Programmes Ltd [1987] EWCA Civ 6.)

4.3.7

Interpretation of Exclusion Clauses

If the exclusion clause was indeed part of the contract, the court will then examine the contract to see
whether the clause in fact covers the breach which has occurred. Here, the court will observe the contra
proferentum rule, which states that any ambiguity in an exclusion clause will be construed against the
party seeking to rely upon it. Thus, in Alison Gordon Ltd v Wallsend Shipway and Engineering Co Ltd
(1927) 43 TLR 323, Scrutton LJ stated:

If a person is under a legal liability and wishes to get rid of it, he can only do so by using clear words.

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4.3.8

Statutory Regulation of Exclusion Clauses

The Unfair Contract Terms Act 1977, and the Unfair Terms in Consumer Contracts Regulations 1994,
restrict, and in some situations remove, the right of one party to a contract to avoid liability by using an
exclusion clause.
The Unfair Terms in Consumer Contracts Regulations 1994 are of no practical relevance in relation to
commercial contracts, but will apply where the commercial provider of a service or the seller of goods is
contracting with a consumer. They are, then, unlikely to apply to the sort of contacts entered into by
ships superintendents.
In summary, the 1977 Act provides that no commercial party (even when dealing with another
commercial party) may rely on a notice or contractual term to exclude liability for personal injury or
death. It also provides that, in contracts between commercial concerns and individual consumers, no
contractual term will be legally enforceable unless it satisfies the test of reasonableness laid down in
the Act.
The Unfair Contract Terms Act 1977 is of only very limited relevance in the context of commercial
contracts, but it does have some application where even commercial parties are contracting on written
standard terms: section 3. The Act does not require exclusion clauses in international sale and carriage
contracts to be reasonable within the Act (sections 21(2) and 26), but only not to these contracts. It is
all too easy within this shipping environment to think that the Act will not apply to other marine
relationships, which is not the case.

4.4

Vitiating Factors

A contract will fail if any of the following factors are present:

it
it
it
it

was entered into because of a misrepresentation;


is void for mistake;
was entered into because of duress or undue influence; and
is for an illegal purpose or its enforcement would be contrary to public policy.

4.4.1

Pre-Contractual Misrepresentation

Under the Misrepresentation Act 1967 (and under the common law) if A makes a false statement of fact
to B, and this statement induces B into forming a contract with A, B may have the contract rescinded (i.e.
the parties are put back into a pre-contractual position) by the courts and/or may be awarded
compensation. If a contract is entered into as a result of misrepresentation, that contract is valid and
operative until the aggrieved party takes steps to avoid it. Any attempt to exclude liability for a negligent
misrepresentation must be reasonable within the meaning of section 11 Unfair Contract Terms Act 1977,
and it is for those claiming that the term is reasonable to show that it is.
It is important not to confuse the law on misrepresentation with the law on negligent misstatement in
tort (discussed below in Chapter 5). In order to claim misrepresentation, it is essential that the false
statement in question should have led to the formation of a contract. It is also essential that the
statement should have been made by the person with whom its recipient subsequently contracts.
Thus, if X makes a false statement to B (e.g. As painting is a Picasso, you should buy it!) and B
subsequently enters into a contract with A on the strength of Xs statement, B cannot have the contract
set aside for misrepresentation. He could only do this if the false statement had been made by A himself
the party with whom he contracted. Depending on the circumstances, B may be able to sue X in tort
for the loss he has suffered by relying on Xs statement, but this is an entirely separate matter.
It should be noted that, in contract law, a party will not be able to claim misrepresentation if:

42

the party did not know of the misrepresentation;


the party knew that the representation was false, but entered into the contract anyway;
the party did not allow the representation to affect his judgment in deciding whether to enter into the
contract.

4.4.2

Mistake

A contract entered into as a result of mistake will be void ab initio (void from the beginning), which
means, in effect, that there never was a contract in the first place. Mistake may be of three types:

Common Mistake
Here, both parties make the same mistake, and that mistake is about a fundamental part of the
contract. For example, both parties think the goods they are talking about are bananas, when in fact
they are carrots.

Mutual Mistake
Here, the parties misunderstand each other because they are at cross purposes. For example, A
believes he is buying bananas, but B knows (and thinks A knows) that he is selling carrots.

Unilateral Mistake
Here, only one party is mistaken. For example, A sells a painting to B. A knows it is a copy, but
keeps quiet about this. B buys the painting believing it is an original.

The courts have been very reluctant to declare a contract void because of mistake, especially where there
has been a unilateral mistake about the nature of the goods. In deciding questions of mistake, the courts
will try to see whether there is still a workable contract, and if so, will hold that it is binding on the
parties. Occasionally, however, the courts have set aside contracts for unilateral mistake where the
conduct of one of the parties makes a positive contribution to the mistake (e.g. a misdescription in a
catalogue), or where parties contract for the sale of things that are no longer, or never have been, in
existence.

4.4.3

Duress

Where a party is put under threat, and forced or pressured into entering into a contract, that contract
may be set aside for duress. Economic threats or pressure will not usually amount to duress, unless
the court holds that there was an unfair use of bargaining power (see Atlas Express Ltd v Kafco
(Importers & Distributors) Ltd [1989] 1 All ER 641).
Where a party to a contract has entered that contract under duress, the contract can be avoided unless
that party affirms the contract by voluntarily acting in accordance with it. In Progress Bulk Carriers v
Tube City IMS LLC [2012] EWHC 273, the Court held that a partys lawful, but unethical, actions following
its own repudiatory breach, could constitute economic duress in certain circumstances. The judge, Cook
J, was, however, keen to stress that it will only be in very rare cases that lawful acts could constitute
economic duress.

4.4.4

Undue Influence

A contract may be set aside because of undue influence where one partys agreement has been
obtained as a result of the power or influence of another person, and it is that power or influence (rather
than his own free will) that has persuaded the party to enter into the contract.
Following the decision in Barclays Bank v OBrien [1983] 8 WLR 786, there are said to be two classes of
personal relationship that may give rise to undue influence:

Class 1; and
Class 2.

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Class 1
In Class 1 cases, the court is not prepared to presume undue influence, and will require the person
wishing to avoid the contract to prove that undue influence was exerted, resulting in the contract being
entered into.
Class 2
Class 2 relationships are of two types:

relationships such as doctor and patient, solicitor and client, parish priest and parishioner;
relationships which are not as straightforward as (a) above, but where the party wishing to avoid the
contract shows as a fact that he trusted the defendant, and there is no evidence to disprove undue
influence.

In Class 2 relationships, the courts will presume that there has been undue influence. This means that
the party seeking to avoid the contract need not prove that undue influence was actually used, only that
there existed a relationship where it might have been used. It is for the other party to the contract to
show that there was no undue influence, for example by showing that independent advice was obtained.
Barclays Bank was approved of and followed by the House of Lords in what is now the leading case on
the subject: RBS v Etridge (No 2) [2001] UKHL 44.

4.4.5

Illegality

A contract may be void because it is contrary to public policy or is for an illegal purpose. Thus, for
example, I cannot legally contract with you to commit a murder in return for payment. Contracts
contrary to public policy include, for example, contracts made in order to defraud the Revenue, contracts
to commit a tort or fraud, wagering contracts, and restrictive pricing agreements. Contracts in restraint
of trade may also be void as contrary to public policy.
A contract in restraint of trade is one where a party promises that, for a certain time in the future, he or
she will forbear from certain activities. Commonly, for example, an employee may be asked to sign a
contract prohibiting him from going to work for a rival business for a certain time after he has left his
current employer. Such contracts are not necessarily against the public interest, but are viewed
cautiously by the courts, because they purport to restrict a partys freedom. The courts will look at all
the circumstances of the case, including the length of time the restraining clause is intended to operate
for, and the geographical limits which it seeks to impose.

4.5

Discharge of Contractual Obligations

A persons obligations under a contract may be discharged because the contract has been completed to
the satisfaction of the parties involved. However, the parties contractual obligations may also come to
an end where one party fails to perform his side of the bargain. This might happen in three situations,
each discussed below.

4.5.1

Frustration

Frustration occurs where the performance of the contract becomes impossible because of something
beyond the control of the parties, for example, a change in the law. Generally speaking, where this
happens, the courts, so far as possible, will try to put the parties back into the position they were in
before they entered into the contract. In respect of certain contracts, the consequences of frustration are
governed by the Law Reform (Frustrated Contracts) Act 1943. (Note, however, that this Act does not
apply to carriage by sea contracts or charterparties.)

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Under the doctrine of frustration, a contract may be considered to be discharged if, after its formation,
events occur making its performance impossible or illegal, and in certain analogous situations. The
important feature of frustration is that if a contract is considered to be frustrated then neither party has
any further rights or liabilities. In other words, frustration terminates the contract automatically at the
time of the frustrating event. Frustration operates automatically, in the sense that its occurrence is not
dependent upon the opinions of the parties to the contract. The doctrine of frustration could be
perceived as mitigating the harshness of the strict liability nature of contract law, i.e. by providing that in
certain circumstances there will be no liability for failing to perform the contract.
Treitel (Treitel: The Law of Contract, 13th edition, Sweet & Maxwell, ISBN 978 1 84 7039217) makes the
point that there is much discussion to be found in the cases about the so-called theoretical or juristic
basis of the doctrine of frustration, saying that it is puzzling why judges have devoted so much attention
to this question. Treitel suggests that this may be because the courts still feel the need to justify in some
way a departure from the doctrine of strict liability in contract.
He suggests that there are two questions that have become intertwined:

why are contracts frustrated; and


when?

As a general starting point, we may consider the dictum of Lord Brandon in Wilson v Blumenthal [1983]
AC 854. His Lordship set out the circumstances in which frustration may occur:

There are two essential factors which must be present in order to frustrate a contract:

The first essential factor is that there must be some outside event or extraneous change of situation,
not foreseen or provided for by the parties at the time of contracting, which either makes it impossible
for the contract to be performed at all, or at least renders its performance something radically
different from what the parties contemplated when they entered into it.
The second essential factor is that the outside event or extraneous change of situation concerned, and
the consequences of either in relation to the performance of the contract, must have occurred without
either the fault or the default of either party to the contract.

Thus, the usual circumstances in which frustration will occur are when, through no fault of the parties,
performance of the contract has been rendered impossible by extraordinary circumstances that are
unforeseeable by the parties. The contract is then brought to an end automatically and the parties
liabilities are discharged. As noted above, this discharge is not dependent on the parties intentions.
The effects of frustration are now generally governed by the Law Reform (Frustrated Contracts) Act 1943.
This Act modified the approach taken by the common law, which was to say that at the moment of
frustration loss lies where it falls. This approach was somewhat harsh, and it could lead to unjust
results where, for example, buyers who had made a pre-payment could not recover this, leaving the
sellers unjustly enriched. The harshness of the common law survived until Fibrosa Spolka Akcjina v
Fairbairn Lawson Combe Barbour [1943] AC 32.
The contract in this case was for delivery of machinery CIF Gdynia, Poland. At the time of the contract,
July 1939, the buyers made an advance payment of 1,000. Before the sellers were able to manufacture
the machinery, however, the contract was frustrated as a result of the German invasion of Poland. The
buyers sued to recover the 1,000. The House of Lords held that they were entitled to succeed because
there had been a total failure of consideration. The total failure of consideration, however, meant that
the sellers could not recover expenses incurred in attempting to perform the contract (including any
manufacturing costs and expenses already incurred).

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The reasoning in this case, however, was somewhat inflexible recovery of money was dependent upon
a total failure of consideration, and there was no provision for any restitution of pre-frustration
expenditure by one of the parties. As a result, Parliament intervened with the 1943 Act, which remedied
these defects in the common law. The main provisions of the Act are as follows:
Section 1(2)
All sums paid or payable to any party in pursuance of the contract before the time when the parties were
so discharged (in this Act referred to as the time of discharge) shall, in the case of sums so paid, be
recoverable from him as money received by him for the use of the party by whom the sums were paid,
and, in the case of sums so payable, cease to be so payable.
Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time
of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it
just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may
be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the
expenses so incurred.
Section 1(3)
Where any party to the contract has, by reason of anything done by any other party thereto in, or for the
purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money
to which the last foregoing sub-section applies) before the time of discharge there shall be recoverable
from him by the said other party such sum (if any), not exceeding the value of the said benefit to the
party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in
particular:

the amount of any expenses incurred before the time of discharge by the benefited party in, or for the
purpose of, the performance of the contract, including any sums paid or payable by him to any other
party in pursuance of the contract and retained or recoverable by that party under the last foregoing
sub-section; and
the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the
contract.

Where the Act does not apply, regard must be had to the common law rules. The Act does not apply to:

any charterparty, except a time charter or demise charter (section 2(5)(a));


any contract of carriage of goods by sea (section 2(5)(a));
any contract of insurance (section 2(5)(b)); and
any contract to which section 7 of the Sale of Goods Act 1979 applies, or any other contract for the
sale of specific goods where the frustrating event is the perishing of the goods (section 2(5)(c)).

Section 7 of the Sale of Goods Act 1979 provides:

Where there is an agreement to sell specific goods and subsequently the goods, without any fault on the
part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided.

It should be noted that specific goods are defined, under section 61(1) of the 1979 Act, as:

goods identified and agreed on at the time the contract of sale is made.

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One must be careful before concluding that goods are specific. In Re Wait [1927] 1 Ch 606, a sale of
5,000 tons of a cargo of 10,000 tons of wheat on a specific ship was not considered by the court to be a
sale of specific goods.
It is all very well to be able to define what a frustrating event is, but it is quite another matter to
persuade the court that the event in question is, in fact, a frustrating event. The English courts are
generally slow to allow parties to put aside their obligations to pay damages for their non-performance.
In recent times, Lord Roskill has said that the doctrine of frustration is:

not likely to be invoked to relieve contracting parties of the normal consequences of imprudent
commercial bargains (Pioneer Shipping v BTP Tioxide [1982] AC 724).

This appears to be the general judicial attitude towards the doctrine of frustration.
In Tsakiroglou and Co v Noblee Thorl GmbH [1961] 2 All ER 179, Viscount Simons had said that the
doctrine of frustration should be applied within very narrow limits. This was certainly the approach
adopted by the court in deciding the case. The sellers here agreed to sell Sudanese groundnuts to
Noblee. The nuts were to be shipped from Port Sudan to Hamburg, in November/December 1956. As a
result of the Suez crisis, the Suez Canal was closed from 2 November 1956 until April 1957.
The normal route was, of course, to go through the Suez Canal. The only other route was to go via the
Cape of Good Hope, considerably increasing the time and expense of the voyage. The seller failed to ship
the goods. The House of Lords held that the contract had not been frustrated since there was no express
term as to the specific route, notwithstanding that it was reasonable to assume that both the buyer and
the seller had contemplated a voyage through the canal.
The absence of such a term meant that, viewed objectively, the buyer was not concerned with the route.
The extra time required did not radically alter the commercial nature of the contract of sale and the
additional cost would have to be borne by the seller. His failure to perform was, therefore, a breach of
the contract, and the buyer was entitled to damages for a total failure of consideration. In this case,
their Lordships decided that whilst, in the ultimate analysis, whether a contract was frustrated was a
question of law, the question was almost completely determined by what is ascertained as to mercantile
usage and the understanding of mercantile men.
Even where it becomes impossible, in a general sense, for one party to perform because of subsequent
events, it is likely that the courts will find some justification for saying that there has been no frustrating
event. Where a party has entered into a number of contracts, supervening events may deprive him of
the power of performing them all, without depriving him of the power of performing some of them. He
may claim that one or more of the contracts is frustrated because the supervening event was one for
which he was not responsible, but it is unlikely that such a claim would succeed. In The Super Servant
Two [1990] 1 Lloyds Rep 1, a contract was made to carry the plaintiffs drilling rig in one of two ships,
either the Super Servant One or the Super Servant Two, at the carriers option.
The Super Servant Two was lost and the carrier claimed that the contract was frustrated by this event,
because by this time the other vessel was the subject of another fixture and hence now not available for
the purposes of performing the carriers contract with the plaintiffs. This argument was rejected on the
ground that the carriers decision to use the other vessel (the Super Servant One) for the purposes of the
other fixture amounted to an election by him.
This, therefore, precluded his reliance on the loss of the Super Servant Two as a ground of frustration,
even though that loss was in no way due to his fault. Bingham LJ thought that this was a case of selfinduced frustration.

47

Treitel (above) suggests that none of the arguments put forward by the Court of Appeal is wholly
convincing. The cases do seem to be decided on a somewhat piecemeal basis, and there is a definite
leaning towards findings that a frustrating event has not occurred. Ultimately, one could say, therefore,
that the doctrine of frustration is an unsatisfactory area of law. It is interesting to note that the current
trend in the United States is to abandon the words impossible and impossibility and to use instead the
terms impracticable and impracticability (see para 2-615 of the Uniform Commercial Code;
Restatement 2nd, Contracts, Article 261 Comment (d)). This change seems to be intended to widen the
scope of discharge by supervening events.

4.5.2

Force Majeure

Obviously, it is difficult to say in any particular case whether or not the court will find that an event raises
the doctrine of frustration. In addition, there is no doctrine of force majeure in English law. Commercial
parties, therefore, often introduce clauses into their agreement defining in advance their mutual rights
and duties if certain events beyond their control occur, whether or not such events result, in the eyes of
the law, in the frustration of the contract.
Such clauses are, in fact, frequently used in practice they are known as force majeure clauses and vary
considerably in ambit and effect. The rationale for using a force majeure clause is to specify what events
would bring the contract to an end and free the parties from performance, thereby overcoming the
general reluctance of the law to find impossibility of performance, as required by the doctrine of
frustration.
It is important to grasp that force majeure clauses are, in fact, different from exclusion clauses, in that
exclusion clauses are intended to protect a party who is in breach of his obligations, whereas force
majeure clauses apply when stipulated events occur, whether or not, as the consequence of those
events, there is a breach by one of the parties.
This distinction is important, in that a force majeure clause cannot relieve a party from liability for his
failure to perform the contract as a result of his own negligence or wilful default (Gyllenhammar &
Partners International Ltd v Sour B Industrija [1989] 2 Lloyds Rep 403). Likewise, a party who has not
taken reasonable steps to avoid a strike may not be able to rely on a force majeure clause which might
have covered him had he not been negligent in failing to avert the strike (B&S Contracts and Design v
Victor Green Publications [1984] ICR 419).
The English courts have treated these clauses with caution, especially where they are inserted by the
stronger bargaining party, leaving the weaker party with little choice as to the insertion of the clause. In
Channel Islands Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyds Rep 145, the Court of Appeal held that it is
for the party relying upon the force majeure clause to prove the facts giving rise to his plea within that
clause. Where the clause provides that the party is to be relieved of liability if he is prevented from
carrying out his obligations under the contract, he must prove that performance had become physically or
legally impossible, and not merely more difficult, inconvenient or unprofitable. He must further prove
that his failure to perform was not caused by his own fault or actions, that his non-performance was due
to circumstances beyond his control, and that he could not have taken any reasonable steps to avoid or
mitigate the supervening circumstances or events.
This approach attempts to prevent a party from avoiding the normal instances of strict contractual
performance when he could not plead frustration. To some extent, however, the approach seems to miss
the point that the parties have included a force majeure clause specifically with the aim of allowing for
relief from liability in circumstances where frustration would not arise!
Most standard form contracts contain force majeure clauses and, indeed, the International Chamber of
Commerce (ICC) specifically endorses their use as sound mercantile practice. The ICCs model force
majeure clause, however, reflects the English law approach to their construction.

48

In Fairclough Dodd & Jones Ltd v JH Vantol Ltd [1957] 1 WLR 136, the parties entered into a standard
form contract under the London Oil and Tallow Trades Association for the shipment of Egyptian
cottonseed oil from Alexandria to Rotterdam during December and January. The contract contained two
force majeure clauses. One was to the effect that in case of war or other specified events preventing
shipment the contract should be cancelled. The other provided that in the event of delayed shipment,
the period of shipment should be extended by two months.
The Egyptian government prohibited the exportation of the goods from 12 December to 3 January (during
which period the sellers, in fact, intended to ship) but shipment was possible on 31 January when the
shipment period expired. The sellers did not ship within the original shipment period, and the buyers
claimed damages. The sellers defence was that, by virtue of the second clause, the performance of the
contract was extended by two months. The House of Lords held, on the construction of the force
majeure clause, that the sellers contention was correct and that the clause became operative throughout
the period of delay although the delay was no longer in existence at the end of the shipment period.
The well-known soya bean meal cases involved the House of Lords in considering elaborate force
majeure and cancellation clauses in Grain & Feed Trade Association (GAFTA) standard form contracts. In
Bremer Handelsgesellschaft mbH v Vanden Avenne Izegem PVBA [1978] 2 Lloyds Rep 109, the buyers,
of Hamburg, sold a quantity of soya bean meal of American origin to Vanden Avenne, of Antwerp. The
contracts, which were dated 5 April 1973 and provided for monthly instalments deliveries CIF Rotterdam,
were made on a GAFTA form which contained detailed prohibition of exports clauses and force majeure
clauses.
Owing to the flooding of the Mississippi in the spring of 1973, the export of soya bean meal by American
shippers was greatly impeded, and the shortage caused the market price to rise sharply. On 27 June
1973 the United States government imposed an embargo on the export of soya bean meal, but after a
few days, on 2 July, it allowed exporters a quota by which they could export sufficient meal to fulfil 40%
of their contracted obligations.
The sellers claimed that by virtue of the prohibition and force majeure clauses in the GAFTA contract,
they were relieved of their obligation to ship the prohibited portion of the June 1973 instalment. The
House of Lords, interpreting the clauses, upheld that contention. Their Lordships further held that there
was no obligation on the sellers to purchase goods already afloat in order to fulfil their contractual
obligations, and decided in favour of the sellers. In this case, then, the clauses succeeded where
frustration would have failed. (It is unlikely that frustration could have arisen here consider the Suez
Canal cases!)

4.5.3

Anticipatory Breach

This occurs where the parties have entered into an agreement, but before the contract is performed, one
party states that he will not fulfil his obligations. Here, the injured party can either end the contract then
and there, or he can decide to stay with the contract and see what happens. If the party chooses the
latter course, he cannot claim damages until the contract is finally breached by the failure of the other
party to fulfil his contractual obligations (i.e. until the time for performance becomes due).

4.5.4

Breach of Contract

Breach of contract occurs where one party fails to perform his contractual obligations. Where the breach
is breach of a condition, or serious breach of an innominate term, the injured party may choose to treat
the contract as having come to an end, so that his own unperformed obligations become discharged.
This is an important issue: we say that the impact of a breach of a condition or serious breach of
innominate term is repudiatory (an unfortunate phase of using the terms rescission and repudiation
interchangeably has now ended rescission is an equitable remedy, and not an injured partys right to
terminate upon serious breach).

49

Where there is a repudiatory breach, it is common to talk of this breach as being fundamental. We
should not confuse this general use of language with the doctrine of fundamental breach, as this has now
been overruled by the House of Lords, in Photo Production v Securicor [1980] 1 All ER 556.
The doctrine of fundamental breach arose in an earlier judicial climate, and, crucially, before exclusion
clauses were subject to legislative control. In earlier times, the courts were reluctant to allow a party to
rely upon a clause to exclude liability for a particularly serious breach, e.g. in Hain v Tate & Lyle (1936)
155 LT 177, Lord Wright was of the view that no matter how insignificant an unjustifiable deviation was,
it would always be construed as so serious that it would put the carrier into a different relationship with
the cargo interest and prevent the carrier from relying on limitation or exclusion clauses. This approach
was achieved by saying that as a matter of substantive law, it was impossible to draft any clause that
would exclude liability for what was a fundamental breach.
Times and commercial expectations change, as do judicial cultures. In Suisse Atlantique [1966] 2 All ER
61, the House of Lords rejected the view that the doctrine was one of substantive law. Suisse Atlantique
was a consecutive voyage charter case, in which the owners claimed that due to the charterers
fundamental breach of delaying in loading and discharging, they, the owners, were entitled to terminate
the contract. The owners further argued that the fundamental breach by the charterers meant that the
demurrage clause did not apply, allowing them to claim full damages for delay (the freight rate, which
would have been the basis for damages, having increased between the charter being fixed and the
charterers breach). In rejecting this argument, their Lordships held that the doctrine was one of
construction of the contract only, and only if the wording of the contract clearly provided for the breach
to invalidate the complained of clause would the injured party be able to avoid it.
Suisse Atlantique was firmly approved of and upheld by the House of Lords in Photo Production v
Securicor [1980] 1 All ER 556. The impact of a repudiatory breach can only entitle the injured party to
abandon his unperformed obligations under the contract, i.e. future obligations. It has no impact on
existing obligations or exclusion and limitation clauses. That a party in one of the shipping-related
contracts should be able to limit his liability for breach has become part of the modern expectation of
international trade. Lord Wrights approach, then, can clearly be seen to be out of sync with the current
approach.
In The Dominique [1989] 1 Lloyds Rep 431, where freight under a voyage charter was to be paid on bills
of lading being presented, this obligation was not invalidated by the ship subsequently being arrested by
a third party during the voyage. That the breach went to the root of the contract did not invalidate the
freight clause, as bills of lading had been presented. The payment of freight was not a future or to be
performed obligation. It was an outstanding obligation, not invalidated by the owners breach. The
payment of freight is regarded as sacrosanct by the English judiciary (per Lord Brandon in this case),
and this decision should not, then, come as much surprise.

4.6

Remedies for Breach of Contract

The various remedies available for breach of contract are discussed below.

4.6.1

Damages

The most common remedy is damages (monetary compensation). The general principle in deciding the
sum awarded is that the claimant should be put in the position he would have been in had the contract
been performed in accordance with its terms. Where the contract is for the sale of goods, for example,
and the wrong type or quantity are supplied, damages are commonly assessed as the difference in
market value between the goods contracted for and the goods received. Contractual damages are
intended to compensate the injured party for his loss, not punish the party in breach. The amount of
damages awarded may reflect consequential losses resulting from the breach of contract (lost work, for
example, because of a failure to deliver a machine on time).

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Here, however, it is important to remember that the claimant has a duty to mitigate his loss (e.g. by
hiring another machine when the one he contracted for does not arrive) and can only claim for those
losses that he could not reasonably have avoided. In all cases, the losses must not be too remote.
That is to say, they must be the type of losses that ought reasonably to have been within the
contemplation of the parties, at the time that the contract was made, as likely to arise if the contract
were breached: Hadley v Baxendale (1854) 9 Ex 341. If the claimant wishes to recover any special
loss, he must have put the other party on notice that such would arise when entering into the contract:
Victoria Laundry v Newman [1949] 2 KB 538.
In difficult cases involving the assessment of damages, the court may have regard to well-established
trading patterns and the sophistication of the parties understanding of their relationship when
calculating damages: Addax v Arcadia [2000] 1 Lloyds Rep 493. The remoteness test appeared to have
been redefined by the House of Lords in The Achilleas [2008] UKHL 48, in a dispute about the level of
damages to be paid by the charterer for the late redelivery of a vessel under a time charter. Following
this case, it appeared that the claimant had to show both:

that the loss was not unlikely to arise and so within the reasonable contemplation of the parties (this
being the remoteness test under Hadley v Baxendale); and
that the defendant has assumed the risk of such loss.

This case has caused much debate in the legal and shipping world, which may well now calm down
following the High Courts clarifying of the position in Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd
[2010] UKHC 54. In this case, Hamblin held that there is no new generally applicable legal test of
remoteness of damages and that the orthodox approach of Hadley v Baxendale remains the test of
remoteness applicable in the great majority of cases.
His Lordship held that the facts of the case in Sylvia Shipping were not consistent with the exceptional
circumstances in The Achilleas, in which a departure from the established test for remoteness was
justified because there was a general understanding within the charter market that damages for delay
during a time charter are limited to the difference between the charter and market rates. Whilst the
chartering world still remains divided by and critical of this case, as far as a general consideration of
damages is concerned, in light of Sylvia Shipping we appear more or less to be back where we started!
In Sylvia Shipping, the vessel failed an inspection and was detained for repairs, resulting in the
cancellation of a sub-charter to a third party. The High Court agreed with the arbitration that the vessel
owners were liable to their charterers for the loss of profit on the sub-charter.

4.6.2

Liquidated Damages

The parties to a contract may make an assessment of the quantum of damages that are likely to arise
from eithers breach, and may include into the contract a stipulation that a stated sum of money is to be
paid by the party in breach. This is known as liquidated damages. In Philips Hong Kong Ltd v AG Hong
Kong [1993] 61 BLR 41 (15 February 1993 The Times), the Privy Council expressed the view that
liquidated penalty clauses should be incorporated into commercial contracts wherever possible, as such
clauses lead to certainty.
If, however, the clause is not a genuine assessment of losses, but is punitive in its aim, then it will be
construed as a penalty clause and will be void: Jobson v Jobson [1989] 1 WLR 1026. In deciding whether
or not the clause is in fact a penalty clause, the court will look at the construction of the clause and at the
contract, rather than what the clause is called.

4.6.3

Equitable Remedies

We have already discussed the main equitable remedies, in Chapter 2 above. Students should note that
the remedy of rescission of contract as referred to above, in Section 4.4.1, is also an equitable remedy
(which, as pointed out above, should not be confused with the doctrine of repudiation of contract for a
serious breach).
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4.7

Standard Form Contracts

Some mention should be made of standard form contracts, as many of the contracts with which you, as a
ships superintendent, become involved will likely be of this kind.
In complex contracts, such as many commercial contracts, the difficulty is often to determine exactly
what obligations the terms of the contract create. This difficulty is not usually apparent in negotiating the
contract, but becomes apparent when there is a dispute in which the parties argue that the terms in
question have different meanings. Merchant traders do not necessarily have fine legal semantics in mind
when negotiating their contracts. But they are, of course, subject to the niceties of the law in fixing their
rights and obligations. Standard form contracts have been developed in international trade practice with
the aim of clarifying and firmly setting out the parties respective liabilities.
Such contracts have the two-fold advantage of satisfying trade requirements of certainty as to potential
liability, and of avoiding subsequent legal analysis of what the parties must have intended. This latter
issue is particularly important because what the court may think the parties intended, on the basis of the
legal analysis, may in fact not reflect the ideas that the merchants had when conducting their
negotiations. The approach is objective rather than subjective. Mercantile contract terms present
particular difficulties because they are sometimes agreed by commercial parties without the benefit of
legal advice. Legal imperfections will, therefore, inevitably appear. Often, the court may have to
reconcile an imprecision in a contractual term using legal arguments with which the term was never
intended to be overlaid.
The standard form contracts developed during an age of freedom of contract, otherwise known as the
laissez-faire era. The laissez-faire attitude has remained central to the way that the law approaches
standard form contracts. Judicial and legislative tolerance of the standard form contract, however, is
dependent upon the parties to those contracts being on an equal bargaining level.
The main concern in Anglo-American jurisprudence in respect of standard form contracts is whether they
can be said to reflect sufficient negotiations to allow them to be treated as enforceable contracts. As Leff
argues, if a contract, by definition, requires a certain amount of dealing or haggling, a form offered on
a take-it-or-leave-it basis does not look very much like a contract: Arthur Allen Leff, Contract as a
Thing 19 American University Law Review at 131-157. Rakoff suggests that such a contract could be
construed as a contract of adhesion: Rakoff, Contracts of Adhesion: an essay in reconstruction 96
Harvard Law Review at 1176-1180.
This suggestion leads to the argument that the courts should scrutinise the reasonableness of contract
terms offered in standard forms. Kornhauser argues that, especially in todays mass economy, there is
nothing inherently virtuous about individualised bargaining and nothing inherently suspicious about
refusing to bargain: Lewis A Kornhauser, Unconscionability in Standard Forms California Law Review,
Vol 64, No 5 (September 1976) at 1152-1179. We can see, then, that there are tensions between the
freedom of contract paradigm and the situation of exploitation assumed by some to be created whenever
standard form contracts are used.
The classic view in English law on standard form contracts comes from the speech of Lord Diplock in
Schroeder v Macauley [1974] 1 WLR 1308.
His Lordship said that standard form contracts are of two kinds:

The first, of early origin, are widely used in commercial transactions, and are the result of extensive
prior negotiations by the parties, and are adopted because they facilitate the conduct of trade.
Examples of this type of standard contract are:
bills of lading;
charterparties;
insurance policies;

52

contracts of sale in the commodity markets; and


ship sale and purchase contracts (see Module 7).
Here, his Lordship said, there is a strong presumption that the terms of these contracts are fair and
reasonable, because they are used by parties whose bargaining power is fairly matched.

In relation to the second kind of standard form contracts essentially those used in consumer
transactions Lord Diplock thought that the same approach would not apply. These contracts were
said to be of comparatively modern origin and to be the result of the concentration of particular kinds
of business in relatively few hands.

The main internationally accepted standard form contracts can be regarded as accepted in English law
and as providing an almost autonomous law, created by the parties or their organisations. Indeed,
these standard contracts are considered to be one of the sources of modern international trade law: see
Stojan Cigoj, Accommodations of the Law of International Trade [1974] LMCLQ 309. Many of the risks
inherent in entering into an international trade contract can be avoided by selecting an appropriate
standard form contract that has been carefully drafted such a contract will, for instance, contain a
choice of law clause, which will ensure that disputes are settled according to a known set of legal rules,
and, typically, also provide for all disputes to be settled by arbitration. It is now also common to find a
mediation-escalation-arbitration clause in such contracts, requiring the parties to try to sort out any
dispute without proceeding to formal dispute resolution.

4.8

English Contract Law and Good Faith

The established jurisprudence is, outside contracts of insurance, that there is no doctrine of good faith in
English contract law. The justification for the English courts approach was given by Bingham LJ in
Interfoto Picture (above):

In many civil law systems, and perhaps in most legal systems outside the common law world, the law of
obligations recognises and enforces an overriding principle that in making and carrying out contracts the
parties should act in good faith. English law has, characteristically, committed itself to no such
overriding principle but has developed piecemeal solutions in response to demonstrated problems of
unfairness.

The world, however, moves on, and English law with it. Good faith is certainly now part of English
consumer contract law, a term being regarded under the Unfair Terms in Consumer Contracts
Regulations 1999 as being unfair if, contrary to the requirement of good faith, it causes a significant
imbalance in the parties rights and obligations under the contract to the detriment of the consumer.
Commercial law has traditionally been resistant to this approach. Recently, however, in Yam Seng Pte
Ltd v ITC [2013] EWHC 111 (QB), Leggatt was prepared to imply a term of good faith into the parties
contract, on the basis of the presumed intention of the parties, saying that the traditional English
hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still
persists, is misplaced. Almost immediately after Yam Seng, the Court of Appeal reiterated the
proposition that there is no general doctrine of good faith in English contract law: Mid Essex Hospital v
Compass Group [2013] EWCA Civ 200.
The Court of Appeal did, however, agree that such a duty could be implied as an incident in certain
contracts, citing Yam Seng as an example of such a contract. One of the distinguishing features, in the
Court of Appeals view, between Yam Seng and Compass was that in Compass the contract was a
detailed one which made specific provision for a number of particular eventualities, which had not at all
been the case in Yam Seng. Whilst it is still too early to make any definitive comment about the impact
of Yam Seng, and, of course, it may be considered on appeal, it seems safe to say that the judicial
culture may well be changing.

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4.9

Types of Contractual Liability

It is important to question what type of liability a contract will have. There are basically two main types
of liability in contract law:

Strict liability, i.e. no fault liability, e.g. sale of goods contracts: ship sale and purchase contracts are
sale of goods. SGA 1979. Under a sale of goods contract, the seller has strict liability to provide
conforming goods, and, in the case of international sale contract, to provide those goods on time
(Bunge Corp v Tradax Export SA [1981] 2 All ER 524, which is seen as providing the different
intention referred to in section 10 SGA, under which time stipulations are not of the essence unless a
different intention appears from the terms of the contract). The buyers obligation to pay for the
goods is one of strict liability. It is no defence, therefore, for either party to say that it was not their
fault that they did not perform, because it is, nonetheless, their liability.
Fault-based contracts, e.g. for services as provided by ships supers: Sale and Supply of Goods and
Services Act 1982. The Act is, broadly, divided into two parts:
Part I dealing with both the transfer of the property in goods and also the hire of goods; and
Part II dealing with the supply of services.
The suppliers liability for the quality of goods hired or in respect of which the property is transferred is
strict. Under Part II, however, the obligation in respect of the supply of services is a fault-based
liability. The suppliers obligation is to carry out the service with reasonable care and skill: section
13.

CASE STUDY 4
Photo Production v Securicor Transport Ltd [1980] 1 All ER 556
In this case, Securicor agreed to provide security services at Photo Productions factory.
The contract incorporated standard terms. There was a comprehensive exclusion clause
in the contract between the parties excluding Securicors liability for any injurious act or
default by their employees unless such act or default could have been foreseen and
avoided by the due diligence of Securicor as employer.
The Securicor employee on patrol in the factory started a fire which got out of control,
destroying the factory and all its stock. Photo Production sued for damages. Securicor
relied on the exclusion clause.
What was the cause of action?
The claimants, Photo Production, sued for breach of contract, that contract being for a
service. There was an implied duty on the part of Securicor to act with due diligence in
providing the service, e.g. in the selection of their employees, and to operate the service
with due and proper regard to the safety and security of the premises (today, this would
be a statutorily imposed duty under Part II of the Supply of Goods and Services Act
1982). It was the failure to discharge this latter duty which was Securicors breach of
contract, i.e. Photo Productions claim.
What was the contentious issue?
There were in fact two contentious issues before the House of Lords:

whether the doctrine of fundamental breach had brought the contract and its
exclusion clause to an end; and, alternatively
whether the exclusion clause applied to the event which had occurred.

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The House of Lords rejected the first issue, confirming that the doctrine of fundamental
breach had no further use in English law, and that the modern approach was to leave
commercial parties free to apportion the risks as they thought fit. Following the House of
Lords case of Suisse Atlantique [1966] 2 All ER 61, only the clearest words in the contract,
and not judicial construction, could render existing obligations and exclusion clauses
ineffective upon breach. Thus, the breach by Securicor did not prevent them from relying
upon the exclusion clause.
In respect of the second issue, their Lordships held that the wording of the clause were
clear. They were drafted in strong terms, Under no circumstancesany injurious act or
default by any employee, and there was no rule of judicial construction which prevented
the clause covering the deliberate acts of Securicors employees. It is clear, then, that the
effectiveness of an exclusion clause is assessed by its proper incorporation into the
contract, the clarity of its wording, and the equality of bargaining power between the
parties, and not by the severity of the breach. Securicor had, then, successfully and
effectively excluded liability for damages arising (here being 615,000) upon their breach.
What about the Unfair Contract Terms Act 1977 and its requirement of reasonable?
The Act applies to contracts made on or after 1 February 1978 (section 31(2)), and so did
not apply to the contract here, which had been made in 1968. It is quite clear, however,
from their Lordships speeches, that as between commercial parties contracting on an
equal bargaining level, a clearly worded clause such as the one in this contract would still
be effective under the Act.

Directed Learning:
(1) What are the essential elements of a contract?
(2) When will the courts imply a term into a contract?
(3) Why is it important to understand whether a term is a condition or an innominate
term?
(4) How do the courts decide whether an exclusion clause is effective?
(5) What is the impact of a repudiatory breach of contract?
(6) What is the difference between strict and fault-based liability?
(7) What remedies are available for breach of contract?

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5.

FUNDAMENTALS OF ENGLISH TORT LAW

5.1

What is a Tort?

This chapter gives a basic introduction to the fundamentals of tort law. In simple terms, a tort is the
name given in English law to a civil wrong that is not a breach of contract. Unlike a contract, for a tort to
be established there does not need to be any prior agreement between the people involved, but the
circumstances must be such that the law will recognise the defendants conduct as an actionable wrong.
A tort occurs where one party has caused another party harm as a result of something he has said or
done (or failed to do) in a situation where the law requires him to act (or refrain from acting) in a certain
way. The law of torts provides remedies for many wrongs, ranging from personal injury to damage to
property, and from harm to reputation (defamation) to interference with ones peace and quiet by a
neighbour who wants to play the piano at two oclock in the morning.
There are a number of different torts in English law, each having its own set of rules. The more
common torts are:

Negligence
This tort is by far the commonest and occupies centre-stage in the law of torts. It is, therefore, our
primary focus of study. Negligence is a case law concept, but there are certain areas of wrongdoing
regulated by statute (e.g. liability for dangerous premises and products) where the law imposes duties
in terms which borrow heavily from the common law of negligence.

Nuisance
This tort regulates disputes arising because of competing or conflicting uses of land. Broadly
speaking, it seeks to balance the interests of a person in using his land in a certain way with the rights
of his neighbour to enjoy his own land. Thus, claims in nuisance may be brought for incursions of
smoke, smell, noise, vibration etc which interfere with ones use of land.

Trespass
This is an ancient tort which gives a remedy for direct and intentional interference with ones land,
person, or goods.

Defamation
This tort, covering the wrongs of libel and slander, protects the interest a person has in his reputation.

There are a number of other torts, such as the tort of deceit (fraud), and the so-called economic torts
of passing-off, inducing a breach of contract, conspiracy, intimidation, and the tort of causing loss by
unlawful means. There are also today a number of statutory torts of which ships superintendents
should be aware, i.e. wrongs as enacted by Parliament, for example the Occupiers Liability Acts of
1957 and 1984, the Consumer Protection Act 1987 (the strict product liability tort), and the Protection
from Harassment Act 1997.

5.2

The Tort of Negligence

This is the most important tort under modern English law. The word negligence can sometimes apply
to a lack of care in the way a person performs his work, or behaves towards another person (e.g. it is a
way of committing other torts, such as nuisance). It can also refer to a specific tort, the essential
element of which is a failure to take care (i.e. it is a fault-based liability).
In order to establish the tort of negligence, all of the following elements need to be shown by the
claimant:

the defendant owes the claimant a duty of care;


the defendant has breached that duty;
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the breach of duty has caused the claimants loss; and


the loss in question is not too remote.

The tort of negligence, along with much of the law of tort, has developed piecemeal.
Although the basic principles of negligence had been present in the law for many centuries, it came to
prominence during the Industrial Revolution, when the introduction of new machinery and the
concentration of the population in towns and cities brought new dangers to which the law needed to
respond. In the beginning, there was no general principle of negligence. Rather, the tort was confined to
specific failings in specific situations (e.g. the carelessness of a vehicle driver who injured another roaduser).
It was not until 1932 that Lord Atkin, in the celebrated case of Donoghue v Stevenson [1932] AC 562,
formulated a general law of negligence based on what has become known as the neighbour principle:

You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be
likely to injure your neighbour. Who, then, is my neighbour? The answer seems to be persons who are
so closely and directly affected by my act that I ought reasonably to have them in contemplation as being
so affected when I am directing my mind to the acts or omissions which are called in question.

This principle has been refined and re-defined over the years, but is still the basic starting point for
establishing liability in negligence.

5.2.1

Duty of Care

The basic test for the existence of a duty of care is that laid down by Lord Atkin (above) in Donoghue v
Stevenson. In this case, a woman suffered illness when she drank from a bottle of ginger beer that
(allegedly) contained the decomposed remains of a dead snail. The House of Lords held that the
manufacturer of a product, which he supplies in such a form as to indicate that he intends it to reach the
consumer in the state in which it left the factory (with no opportunity for intermediate inspection by the
consumer) owes a duty to take care not to cause that consumer personal injury. This, then, was the
ratio decidendi of the case. Lord Atkins neighbour principle was only obiter dictum.
However, Lord Atkins principle was subsequently extended, in a line of cases beginning in the mid1960s, to cover very different factual scenarios, such as where a party suffered purely financial loss as a
result of relying on a statement made by another. As might be imagined, the broad extension of the
neighbour principle gave rise to some problems for the law. In particular, it became apparent that
there were important reasons of economic and social policy why the scope of the duty of care should not
be widened to cover all situations. The case law, therefore, sought to limit Lord Atkins principle in a
number of respects. So much so, that in Caparo Industries plc v Dickman [1990] 2 AC 605 Lord Roskill
stated:

It has now to be accepted that there is no simple formula or touchstone to which recourse can be had in
order to provide in every case a ready answer to the question whether, given certain facts, the law will or
will not impose liability for negligence Phrases such as foreseeability, proximity, neighbourhood, just
and reasonable, fairness, voluntary acceptance of risk, or voluntary assumption of responsibility will
be found used from time to time in the different cases. Butsuch phrases are not precise definitions. At
best they are but labels or phrases descriptive of the very different factual situations which can exist in
particular cases and which must be carefully examined in each case before it can be pragmatically
determined whether a duty of care exists and, if so, what is the scope and extent of that duty.

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In many circumstances (e.g. driving), the existence of a duty of care is so well-established that it goes
without saying. The real problem for the courts has been to decide whether Lord Atkins principle should
be extended by analogy to cover very different factual situations from that in Donoghue v Stevenson. In
Caparo v Dickman, the House of Lords put forward a three-part test to be used in determining whether a
duty of care exists in novel factual situations:

the claimants loss must be reasonably foreseeable;


there must be a relationship of sufficient proximity between the claimant and the defendant; and
the court must be satisfied that it would be fair, just and reasonable to impose a duty of care.

It should be noted that the courts take a very restrictive approach when considering whether a duty of
care exists to avoid causing purely financial loss (so-called economic loss) as opposed to personal injury
or damage to property. In a nutshell, this is because peoples financial interests in society are so closely
interrelated that causing financial loss to one person usually sets up a chain reaction which causes
financial loss to others. The courts have to draw the line, otherwise the defendant may be saddled with
indeterminate liability this would be both morally unfair and sometimes inefficient (because it would
place an insurance burden on parties who had very little control over the risk insured).
In 1964, however, it was established in Hedley Byrne v Heller [1964] AC 465 that there could be liability
for economic loss caused by negligent misstatement. Here, a bank carelessly provided an inaccurate
credit reference for a company, with the result that the claimants (who had underwritten the companys
liabilities) suffered financial loss. On the facts, the bank escaped liability, because the reference had
been accompanied by a disclaimer.
The House of Lords held, however, that in principle there could be liability for negligent misstatement
whenever a special relationship existed between the parties, and one party reasonably relied on the
expert advice of another. In cases involving careless actions (as opposed to statements), the courts
have been much more cautious about liability. They have been concerned with questions of economic
and social policy, which have led them to stem the flood of claims that arose in the 1970s and 1980s
against local authorities for negligent inspection of building works/approval of building plans (see Murphy
v Brentwood District Council [1991] 1 AC 398, which overruled Anns v Merton Borough Council [1978] AC
728).
We saw above, in Chapter 4, that the Misrepresentation Act 1967 provides an alternative cause of action
to Hedley Byrne where the maker of the statement induces the recipient into a contract with him, the
maker of the statement. The 1967 Act has no place in the Hedley Byrne situation, as in that case, the
makers of the negligent statement did not induce the recipient into a contract with them. Negligent
misstatement is, then, still an important area of tort.
In maritime and commercial cases, the courts have been unwilling to set precedents that would increase
the costs of trade by interfering with the way the parties have chosen to structure their liabilities in
contract law. They have applied a fundamental rule that a claimant cannot recover in respect of
damaged property unless he owns the property which has been damaged. This can appear to lead to
some unjust results in individual cases, but is regarded as being in the interests of the shipping and
insurance industries.
Thus, in Candlewood Navigation Corporation Ltd v Mitsui OSK Lines [1986] AC 1, the ship the Mineral
Transporter collided with another, the Ibaraki Maru, because of the negligence of the Mineral
Transporters crew. The first claimants the owners of the Ibaraki Maru had chartered it to the second
claimants. The second claimants had then re-chartered it back to the first claimants. When the first
claimants not in their capacity as owners but as charterers of the ships sued for economic loss
suffered while the ship was being repaired, the Privy Council held that they had no cause of action,
affirming the principle that a person cannot sue in respect of damage to property in which he or she has
only a contractual interest.

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In The Aliakmon [1986] AC 785, the claimants had contracted to buy a cargo of steel coils to be shipped
from Korea. For reasons which need not concern us, the seller of the coils reserved title to them. This
meant that the arrangements between the claimants and the sellers were such that, although the risk in
the cargo had passed to the claimants, the ownership of the cargo had not. When the coils were
damaged at sea by the defendant carriers negligence, the claimants (who had had to pay for damaged
goods) sought to recover their financial loss from the negligent carriers. The loss to the claimants was
clearly foreseeable by the carriers.
Nevertheless, the House of Lords denied the claimants a remedy, holding that because they had had only
a contractual interest in the coils at the time they were damaged (with their sellers), they were unable to
succeed. This resulted in the somewhat bizarre situation that the person who had suffered the loss had
no remedy, while the person who had a remedy (the owner of the coils) had suffered no loss (he had
been paid for the damaged goods).
Nevertheless, the decision reflected the way the parties had chosen to allocate risk. The House of Lords
declined to upset this arrangement, for fear that it might set a precedent which would lead to inefficiency
in international trade agreements. It is clear from the speech of Lord Brandon that their Lordships were
also concerned that the carriers could not limit their liability under the established provisions of the
Hague (or Hague-Visby) Rules if their relationship with the claimants fell outside the ambit of contract.
(It should be noted in passing that the Carriage of Goods by Sea Act 1992 introduced certain
amendments to the law which, on the facts of the case, would nowadays enable the claimants to recover.
These need not concern us at this stage in our studies.)
In The Nicholas H (Case Study 1, above), a majority of the House of Lords held that the class society did
not owe a duty of care to the claimant cargo owners on the basis that the class society could not limit its
liability. In Lord Steyns opinion, to impose a duty on class societies would be unfair, unjust and
unreasonable as against shipowners, who would ultimately have to bear the cost; and that such a duty
would be at variance with the international contractual structure between shipowners and cargo owners.
Accordingly, such a duty ought not to be imposed on the society. This approach had also, previously,
been taken by the High Court where a purchaser of a yacht had sued a class society (Lloyds Register) for
not detecting defects in the yacht during a pre-sale survey requested by the seller: The Morning Watch
[1990] 1 Lloyds Rep 547.
A consideration of such cases in other jurisdictions shows that there is no one approach to such cases,
and that it is difficult to find any consistent lex mercatoria dealing with class society liability. In the US
case of The Sundancer 7 F 3d 1077 (1994 AMC 1), in which the Court of Appeals (for the 2nd Circuit
Court) held that the disparity between ABSs fees (US $85,000) and the owners claim (US $200 million
in punitive damages) demonstrated that ABS had not assumed the risk of loss of the vessel.
Whilst this is a slightly different case, it being between the class society and owner and not, as in The
Nicholas H, between the class society and a third party, the Courts concerns here were in the same vein,
that the class society should not face what might be a crushing or trade-changing liability. There have,
however, been cases in the US where such concerns did not take precedence and class liability has been
allowed, e.g. Somarelf v ABS 720 F Supp 441 (DNJ 1989).
Interestingly, back on this side of the Atlantic, the Court of Appeal had no problem in distinguishing The
Nicholas H, in determining whether a class society owed a duty of care to a passenger in an aircraft which
crashed: Perrett v Collins (The Popular Flying Association) [1998] 2 Lloyds Rep 255. The Court of Appeal
found that both the class society and its inspector were liable in negligence, having certified an
experimental aircraft as fit to be flown, and the duty extended to any passenger who was carried in the
aircraft. The policy considerations were, of course, different in Perrett, as there the court was not dealing
with that international contractual structure between shipowners and cargo interests, nor was it faced
with liability which could not be limited of a party within the shipping matrix.

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That parties to that matrix should be able to take advantage of limitation provisions, arising either out of
contractual terms or by force of law (e.g. under the London Limitation Convention, incorporated into
English law under the Merchant Shipping Act 1995) appears to be a paramount consideration in the
shipping-related claims.
In The Nicholas H, the class society had not contract with the claimants, and thus no contractual
limitation clauses upon which to rely, and, further, having had no prior-claim dealings with the claimants
could not have put them on notice of any exclusion clause arising. The London Limitation Convention
allows shipowners (to mean shipowners, charterers, managers and operators: Article 1(2)), salvors and
insurers of liabilities subject to limitation under the Convention to limit their liability. The Convention
does not apply to class societies.

5.2.2

Breach of Duty

Once it is established that the defendant owes the claimant a duty of care in law, the court will proceed
to decide whether that duty has been breached. This involves answering two questions:

What standard of care is the defendant to be judged by?


Has the defendant, on the facts of the case, fallen below that standard?

In ordinary cases, the standard of care required is that of the reasonable man that is to say, the sort
of care that a hypothetical, ordinary, prudent person would have taken if he had been in the defendants
shoes. In cases of alleged professional negligence, the standard of care is that of a reasonably
competent professional who has the skills the defendant claims to possess.
The standard of care is said to be an objective standard, which means that it does not bend to
accommodate the particular weaknesses or characteristics of the individual defendant. Thus, a defendant
cannot escape liability by bringing evidence to show that he is unusually slow-witted or clumsy, and by
arguing that because of this, he should not be judged by the standard of the reasonable man but by
some lower standard. The use of an objective test provides some measure of certainty in the law. It
also means that in negligence cases legal fault does not always equate with moral blame.
The most striking example of this, perhaps, is the case of Nettleship v Weston [1971] 3 All ER 581, where
a learner driver, on her third driving lesson, was held liable when she crashed into a tree, injuring her
instructor. She was judged by the standard of a reasonably competent and experienced driver
although, of course, this was a standard it was impossible for her to attain in reality. The court thought
that a single, invariable, standard of care should be applied in road traffic cases this would enable the
parties to disputes to know where they stood in law, and would facilitate the settlement of cases out of
court.
Moreover, applying a variable standard might have lengthened (and increased the cost of) litigation
tremendously, because defendants would tie up the courts time with evidence aimed at demonstrating
their particular level of skill.
In deciding whether, in fact, the defendant has fallen below the standard of the reasonable man, the
courts will take into consideration a number of different factors, including the risk that harm will
materialise as a result of the activity in question, the likely magnitude of the harm if the risk does in fact
materialise, and the cost and practicality of taking precautions.
The court will often look at accepted practice in a profession or industry, to see whether the defendant
has failed to comply with this. However, the fact that a defendant has adhered to the common practice
of his profession does not mean he will necessarily escape liability the accepted practice itself may be
negligent.

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5.2.3

Causation

It must be shown that the defendants breach of the duty of care was the actual cause of the claimants
loss. A defendant will not be liable for losses caused by other people, or by extraneous circumstances
over which he had no control. In most cases, causation presents no difficulty for the courts the courts
will employ the so-called but for test. In other words, they will ask whether it can be said that but for
the defendants breach of duty, the loss would not have occurred. Another way of putting this is to ask
the question:

Would the loss have happened in any event, even in spite of the defendants breach of duty?

If the answer to this question is yes, the defendant will not be liable. To take a simple example, if I
drive when I am drunk at 40 miles per hour in a built-up area, the law will say that I have fallen below
the standard required of a reasonable driver (I am in breach of duty). This does not mean, however,
that if you run out into the road in front of my car without looking, and I hit you, I am necessarily liable
in negligence I might argue that you, rather than I, are the cause of your injuries. Because of your
recklessness, they would have occurred in any event, even if I had been driving sober at 25 mph. In
other words, my breach of duty did not cause your loss.
Most of the time, the but for test provides a workable solution to the problem of causation, but in
certain cases the courts face great difficulties. These difficulties are traditionally demonstrated by
considering the following hypothetical example:
A man with two enemies is about to set out on a journey across the desert. He has a lethal dose of
poison put into his water bottle by one of his enemies. Later, the bottle is emptied by a second enemy.
Ignorant of these events, he sets out on his journey during the course of which he dies of thirst. We
might absolve the second enemy by pointing to the fact that, if the water bottle had not been emptied,
the man would have died in any event from poison. But we could also absolve the poisoner by pointing
out that, if the water had not been poisoned, the man would still have died of thirst! Thus, applying the
but for test makes nobody liable.
When faced with such a conundrum, the courts employ a number of devices, not all of which are capable
of producing perfect justice. (They may, for example, say that the factual cause of the mans death is
clear he died of thirst and not of poison.) The difficult cases need not concern us here suffice it to
say that causation in law is not always as straightforward as it appears. On this note, a brief passing
comment could be made about a House of Lords case which has raised eyebrows on this issue: Chester v
Afshar [2004] UKHL 41.
In this case, Lord Steyn adopted his satisfying the reasonable expectations approach to lead the
majority of their Lordships into holding that a claim for medical negligence would succeed, despite the
claimant admitting a total lack of causation. It seems highly unlikely that this case will apply outside of
the medical negligence arena, and even less likely that it will apply in the commercial shipping-related
cases, which are underpinned with very different expectations and policy issues.

5.2.4

Contributory Negligence

Sometimes, the claimant will have contributed by his own carelessness to the loss he has suffered, so
that it can be said to have been partly caused by him and partly caused by the defendants breach of
duty. (This occurs, for example, where a person is hit by a careless driver but is injured more severely
than he otherwise would have been because of his own fault in not wearing a seat-belt.) In such cases,
the court may hold the defendant liable, but reduce the amount of damages he is required to pay. The
courts power to do this derives from the Law Reform (Contributory Negligence) Act 1945.

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5.2.5

Remoteness of Damage

At one time, it was thought that a defendant should be liable for all the losses that were the factual result
of his actions, no matter how remote or bizarre those losses or the means by which they occurred. The
position under the old law is illustrated by the decision of the Court of Appeal in Re Polemis and Furness,
Withy & Co [1921] 3 KB 560. Here, a ship had been loaded with a quantity of petrol, which, unbeknown
to any of the parties, had leaked, causing the hold of the ship to fill with vapour. A stevedore employed
by the defendants negligently allowed a wooden plank to drop into the hold, where it somehow caused a
spark that ignited the petrol vapour, causing the ship to be lost by fire.
The Court of Appeal held the defendant stevedore company liable. While the stevedore could not have
foreseen that the falling plank would cause a fire, he could have foreseen that it might cause some
damage to the ship (e.g. a scratch on the paint work). Given that this was so, the defendants would be
liable for all of the damage that was a direct factual consequence of the stevedores negligence.
Nowadays, however, the courts are guided by a different principle in broad terms, a defendant will only
be liable for the type of harm which was a reasonably foreseeable result of his carelessness. This
principle was established in the case of Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd
[1961] AC 338 (a case more commonly known as The Wagon Mound (No 1) because it is the first of two
cases involving a ship of that name).
In this case, the defendants negligently discharged bunkering oil while their ship was in Sydney Harbour.
The claimants were ship repairers. The oil was washed by the tide so that it fouled the claimants
slipways, causing them to stop work. However, having been assured that there was no chance of the oil
igniting, the claimants resumed their welding operations. It was not clear what happened next, but it
was assumed that some cotton waste, which was floating on the water, was ignited by a fragment of
molten metal from the welding operations. The cotton waste ignited the oil, and the claimants wharf and
equipment were extensively damaged in the ensuing fire.
The Privy Council held that the defendants were not liable for the fire. Declaring Re Polemis to have been
wrongly decided, their Lordships held that the proper test for remoteness of damage was whether the
defendant could have reasonably foreseen the kind of damage for which the claimants were suing. Their
Lordships thought that damage by fire should be regarded as a different kind of damage from
damage by fouling, and since damage by fire could not have been foreseen, the defendants were not
answerable for it. Viscount Simonds explained the basis for the decision, saying:

It does not seem consonant with current ideas of justice or morality that for an act of negligence,
however slight or venial, which results in some trivial foreseeable damage the actor should be liable for
all consequences, however unforeseeable and however grave.

5.3

Vicarious Liability

Vicarious liability is not a tort in its own right, but a rule of responsibility which renders the defendant
liability for the torts committed by another. The commonest example is that of an employer for the
wrongs of its employees committed whilst in the course of the employment: Rose v Plenty [1976] 1 WLR
141. An employer may be liable for acts committed which are incidental to the employment: Crook v
Derbyshire Stone Ltd [1956] 1 WLR 432.
If, however, the employees action is so outside the scope of employment that it was not something the
employee was hired to do, then the employer will not be liable. The modern approach of the courts is to
consider the closeness of the connection between the wrong committed and the nature of the
employment, and to determine whether it is just and reasonable in those circumstances to hold the
employer vicariously liable: Lister v Hesley Hall [2001] UKHL 22.

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5.4

The Tort of Deceit

The tort of deceit (fraud) imposes liability where the defendant has made a false statement of an existing
fact to the claimant in the knowledge that it is false and with the intention that the claimant should act on
the statement: Edgington v Fitzmaurice (1885) 29 Ch D 459. The tort of deceit also imposes liability
where the defendant is reckless as to the truth of the false statement: Derry v Peek (1889) 14 App Cas
337. The claimant can recover for all loss directly flowing from the fraudulent statement: Doyle v Olby
(Ironmongers) Ltd [1969] 2 QB 158.
It may be that fraud or deceit may appear in the context of a contractual relationship: in SCB v PNSC
[2002] UKHL 43. In that case the courts concern is that the requirement of honest commerce should
be stringently enforced by the English courts. This concern was also seen, above in Petrotrade v Smith
[2000] 1 Lloyds Rep 486, where, as was pointed out, the Commercial Court showed its unwillingness to
allow evasive behaviour committed in the spirit of fraud to escape liability. Liability for fraudulent
misstatement can also arise in the tort of deceit: Derry v Peek (1889) 5 TLR 625 HL.

5.5

Bailment

Although bailment is not in fact a tort, but an independent area of law, it is appropriate to consider it
here. Bailment is the name given to transactions under which goods are delivered by one party (the
bailor) to another party (the bailee) on terms which normally require the bailee to hold the goods for
a time and then to deliver them back to the bailor, or to another person specified by the bailor. Bailment
usually arises because the parties have agreed to it under a contract, but there does not have to be a
contract between the parties for one person to become the bailee of the others property (see The
Pioneer Container [1994] 2 AC 324, discussed below). For this reason, bailment is an important cause of
action in international trade.
Possession of the goods lies at the heart of bailment, but possession alone is not enough to create a
bailment two further conditions must also be present:

First, the bailor must retain a superior interest in the goods to that of the bailee. The bailee acquires
a limited possessory interest in the goods, which is subordinate to the bailors interest. At the end of
the bailment, when the bailees possessory interest has come to an end, the bailee must redeliver the
goods in accordance with the bailors instructions.
Second, the bailee must consent to take possession of the goods.

A further (and more difficult) question arises as to whether the bailor must consent to the bailee having
possession of the goods the traditional view is that bailment is a relationship of mutual consent. It
appears, however, that in certain cases it is only the bailees consent, and not the bailors, which matters.
This was the approach adopted by the Privy Council in The Pioneer Container.
Here, the appellants were the owners of goods loaded on board the respondents ship, the Pioneer
Container. The ship sank with the loss of all cargo after a collision off the coast of Taiwan. The goods
were originally consigned under bills of lading, issued by shipping lines, which gave the shipping lines
wide authority to sub-contract the whole or part of the carriage on any terms. The respondents had
received the goods as sub-contractors of the shipping lines, and had issued to the shipping lines their
own bills of lading known as feeder bills of lading.
Thus, under this series of transactions, there was no contractual relationship between the respondent
shipowners and the appellants, and the appellants had not expressly consented to their goods being
aboard the respondents ship. The Privy Council rejected the view that mutual consent was necessary for
a bailment to arise. By voluntarily receiving the goods into their custody from the shipping lines, with
notice that they were owned by other persons, the respondents had become the bailees of those goods.
As bailees for reward, they owed a duty to the owners of the goods to take reasonable care of the goods.

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To a large extent, bailment has been superseded in modern law by the tort of negligence. It remains,
however, an important area of law in shipping (see Simon Baughen: Bailments Continuing Role in Cargo
Claims [1999] LMCLQ 393).
Bailment has one important difference from negligence: in negligence, it is the claimant who must show
that the defendant was careless, i.e. the claimant must show breach of the duty of care, the negligence.
In bailment, however, where the claimant can establish that the defendant was the bailor, and that the
bailor damaged the goods whilst in possession of them, it is then for the bailor to show a lack of
negligence if he is to escape liability. Being able or not able to discharge the burden of proof can make
or break ones case, and this difference can be seen as critical, and may go quite some way to explaining
why bailment continues to be a relied on cause of action in shipping claims.

CASE STUDY 5
Howard Marine & Dredging Ltd v A Ogden & Son (Evacuations) Ltd [1978] QB
574
This is a difficult case as it spans the issues raised in both Chapters 4 and 5. It is, then, a
useful recap case for us at this stage in the module, as it serves to illustrate the need for
mental flexibility when approaching a legal dispute. The issues raised may not fit neatly
and cleanly into separate boxes of one area of law or another, but reach across several
areas.
The case also illustrates how the judges determining the case may take very different
analytical routes to come to the same decision, which should remind us that the
application of the law is as much dependent on judicial jurisprudence as definitive
principles. We should also remember the importance of a dissenting judgment in a case,
such as Lord Denning MRs here, as it warns us of a different view which may be of
influence in some later case. Little wonder then that lawyers perceive one of the most
important questions about litigation to be who will the judges be?.
The contract and the issues
Howard Marine (H) chartered two barges to Ogden (O), who wished to use the barges to
carry earth and dump it at sea. During the negotiations for the charterparties (which
included two telephone conversations) H quoted a price for the hire of the barges in a
letter which stated that the cubic capacity of each was 850 cubic metres, but made no
mention of carrying weight capacity. At a later meeting, Hs representative was asked
about the carrying capacity and replied that it was about 1,600 tonnes. The answer was
given honestly, but it was wrong. The figure was taken from Lloyds Register, which was
mistaken. Two charterparties were drawn up. No objection was made by O to the
exclusion clause which said that their acceptance of delivery of the barges was conclusive
evidence that they have examined the vessel and found her to bein all respects fit for
the intended and contemplated use
Although the charterparties were not signed, the barges were delivered to O who put
them straight to work. This work was delayed because of the limited carrying capacity,
and O refused to pay the hire. H withdrew the barges and claimed for outstanding hire.
O counterclaimed damages for misrepresentation under the Misrepresentation Act 1967,
and, alternatively negligent misstatement.
Ogdens contention was that there were no express contracts.

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This was rejected by the trial judge and not renewed on appeal. As Lord Denning MR
confirmed, when the barges were delivered and accepted, the contracts were concluded
on the charterparty terms, notwithstanding that the charterparties had not been signed:
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666.
Liability for the incorrect statement as to the barges carrying capacity:

Bridge LJ thought that there was liability, which was not excluded in the circumstances
by the exclusion clause. His Lordship took the approach that H had failed to show
under the Misrepresentation Act 1967 that their representative had had objectively
reasonable grounds for believing the statement to be correct. He then went on to
consider whether the exclusion clause excluded this liability. In the circumstances of
the case he was of the view that the exclusion clause was not fair and reasonable as
required by section 3 Misrepresentation Act 1967. Having come to the conclusion that
there was an actionable misrepresentation, his Lordship declined to make any
comment as to whether there was liability for common law misstatement.

Shaw LJ, however, thought that there was liability both under the 1967 Act and in
common law negligence under Hedley Byrne v Heller. In considering the exclusion
clause, his Lordship was of the view that this liability was not excluded by the
exclusion clause as it did not, in his Lordships view, purport to exclude liability for
negligence (although he made no comment on the impact of section 3 1967 Act on
the clause).

Lord Denning MR gave a dissenting judgment in which he held that there was no
liability under the 1967 Act. As his Lordship said, the Act imposed a new and serious
liability on anyone who makes a representation of fact in the course of negotiations for
a contract. If that representation turns out to be mistaken then, however innocent
he may be he is just as liable as if he made it fraudulently. Under the Act, he would
be liable unless he could prove that he had reasonable ground to believe, and in fact
did believe, the statement to be true. On his Lordships analysis of the law and
application to the facts, H had discharged that burden, and that H was not liable for
the misrepresentation.

In considering if he be wrong so far, his Lordship considered whether liability for the
misrepresentation under the Act would be excluded by the exclusion clause. In his view it
would be, it being fair and reasonable within the meaning of section 3 of the Act. In his
Lordships view, this was just such a conflict which commercial men seek to avoid by
such a clause as this. I would do nothing to impair its efficacy. I would allow Howards to
rely on it!
In also considering whether H had liability in common law negligence, Lord Denning MR of
the view that the representations would only create a Hedley Byrne type duty of care
where the business or professional transactions nature made clear the gravity of the
inquiry and importance and influence attached to the answer.
And there is the rubtwo judges considering the same Hedley Byrne (and one specifically
not considering the case), and all three the same Misrepresentation Act 1967, but two, in
their analysis of the development of that law on the issues, coming to opposite decisions
from the third. If one of the other judges had been of the Denning mind in this case,
the entire judgment would have been different, and O would have lost their appeal and
been liable for the outstanding hire. Hopefully our consideration of this case has helped to
consolidate your understanding of the somewhat fluid or tenuous nature of English law.

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There are so often with English law no definitive answers, but, rather, a decision in any
one case which may, in the light of subsequent judicial analysis, lead to development
rather than precise application of the law in another. This is why English lawyers so often
say, well, on the one handbut on the other, and why in reality binding precedent
may be a dangerous concept on which to pin ones litigation hopes!

Directed Learning:
(1)
(2)
(3)
(4)
(5)
(6)

What do we mean by the saying, he who asserts must plead and prove the elements
of the wrong?
What are the elements of the tort of negligence?
What policy considerations may make negligence a difficult tort to plead successfully
in commercial disputes?
What is the difference between a statutory and a common law tort?
What is the difference between a misstatement and a misrepresentation?
To what extent might you agree that English common law is built on the doctrine of
binding precedent?

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6.

THE BASICS OF MARINE INSURANCE

6.1

Introduction

The legislation applicable as a matter of English law to contracts of marine insurance is the Marine
Insurance Act 1906 (the Act). The Act can be said to have codified the law relating to marine insurance
as part of English law. It contains in code form a distillation of principles previously emanating largely
from case law. The statute has only been slightly amended since its enactment. Case law preceding the
Act may be relevant for interpretative and historical reasons, and case law subsequent to it is also
relevant as a consequence of the rule of precedent applicable in English law.
Unless the contract otherwise provides, the Act applies as a matter of English law and is frequently made
applicable by an express provision in marine or similar insurance contracts such as, for example, for oil
rigs, or in Protection & Indemnity (P&I) Rule Books. It is also very important to realise, when looking at
marine insurance clauses that are governed by English law, that very few provide a complete picture in
the clauses of what is covered or excluded or in regard to claims and the like. This is because the
applicable provisions of the Act are not normally reproduced in the clauses in full, rather the reader must
look to the Act itself, as well as the clauses, to obtain a complete picture.
The Act has been used as a model for marine insurance statutes in other legal systems. English law,
including the Marine Insurance Act 1906, is also important from the point of view of United States law
where there has been no similar statute. Thus, in so far as federal law is concerned where the basic
marine insurance law is to be found the US Supreme Court has been of the opinion that US courts
should look to English law for applicable rules, and England was also referred to as the great centre of
marine insurance business.
However, the Supreme Court has also decided that where there are no controlling federal Admiralty law
principles to guide the resolution of a particular issue then the courts should apply state law. There is
commentary which indicates that state law relating to marine insurance law should also be interpreted
consistently with English law but clearly this is a much more diverse and inconsistent picture than the
federal law.
The marine insurance market, particularly cargo insurance, is a global market.
The importance of the Marine Insurance Act 1906 is, however, in part because within the global market
London is a major centre for the insuring of marine risks due in particular to the presence of Lloyds, a
large number of insurance companies and P&I Clubs.

6.2

Marine Insurance Markets

The insurance markets where ships and cargoes are insured are global and as far as high-value vessels
or cargoes are concerned the insurance will normally be written on a co-insurance basis that is where
the risk is insured by more than one insurer with each one separately agreeing to insure a percentage of
it. Furthermore, it is also frequently spread between two or more insurance markets.
The London market is very important internationally, not only in terms of size, but also innovation, and
may be divided into the Lloyds market and the companies market.
On the Lloyds market, marine business is underwritten by specialist syndicates, in the past these were
exclusively made up of names, but today the majority are backed by corporate capital providers with
some having all their capital provided by a single large insurance company. Thus, some insurance
companies are hiving off their marine insurance (or indeed other insurance or reinsurance) capacity into
Lloyds syndicates. Each syndicate writes its insurance business through an underwriting agent. The
affairs of each syndicate are looked after by a managing agent, which in the case of corporate capital
may be wholly owned by the capital provider such as a large insurance company; and names are
represented by a members agent.

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The companies market has shrunk in size as a result of companies going into the Lloyds market or
indeed giving up involvement in marine business but is, as might be expected, made up of companies
who underwrite marine business.
The two markets are not separate and independent. They write marine insurance on similar terms and
conditions. They often share substantial risks and follow each others decisions. They also participate in
joint market committees, such as the Joint Hull Committee and Joint Cargo Committee.

6.3

What is Marine Insurance?

As Chuah says (Jason Chuah: Law of International Trade: Cross-Border Commercial Transactions (5th
edition, Sweet & Maxwell, 2013) ISBN 978 0 41 4023253) insurance is about the traders aversion of
risk. It is customary to insure goods for export against the perils of the journey. The term marine
insurance may cause confusion as the insurance arrangements made may in fact cover not only the sea
voyage, but also the inland carriage of the goods from the seller to the buyer. Section 2 of the Act
provides that a contract of insurance may be expressly extended, or be extended by usage of trade, to
risks during land transit and so explains what is known as the warehouse-to-warehouse cover available
under the standard cargo clauses used in the London market (the Duration Clause).

6.4

The Marine Insurance Act 1906

As we have seen, English marine insurance law is codified in the Marine Insurance Act 1906 (the Act).
Contracts of insurance are contracts of indemnity.
Section 1 of the Act states:

A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in
manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to
marine adventure.

Thus, the undertaking is to indemnify the assured to the extent, but to that extent only, of his loss.
A contract of marine insurance must relate to marine losses, i.e. such loss as is incident to a marine
adventure. The assured must have an insurable interest in a marine adventure he must have an
interest in property that is lost, damaged or destroyed in a marine adventure: section 5(2) of the Act. A
marine adventure is defined by section 3(2) of the Act as being where:

any ship, goods or other moveables are exposed to maritime perils. Such property is in this Act
referred to as insurable property;
the earning or acquisition of any freight, passage money, commission, profit or other pecuniary
benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of
insurable property to maritime perils; and
any liability to a third party may be incurred by the owner of, or other person interested in or
responsible for, insurable property, by reason of maritime perils.

The Act is now over 100 years old, and in recent times has faced growing criticism, with many (but by no
means everyone!) thinking that the current regime is in need of modernisation to bring it into line with
global practice. Whatever the reality, the Act has been the focus of the Law Commissions, who have set
out proposals to modernise the law. The first stage of this modernisation is complete, which resulted in
the Consumer (Disclosure and Representations) Act 2012, which came into force on 6 April 2013. It only
applies to consumers, and so is outside the scope of this module. Nonetheless, it is important that you
are aware that there are changes under the 2012 Act, as not to appreciate that the jurisprudence on
insurance may be changing is dangerous.

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On 17 July 2014, the Insurance Bill (the Bill) was introduced into the UK Parliament as part of the second
phase of the joint review of insurance contract law by the Law Commissions. The Bill will introduce new
law, replacing the existing common law, and will also amend parts of the Act, in particular:

duties regarding disclosure and representations (Clause 9);


the current practice of converting of all representations into warranties (Clause 10); and
the insurers remedies for fraudulent claims (Clause 11).

It is expected that the Bill will receive Royal Assent at the end of March, 2015, and as a new Act will
enter into force in the first half of 2016.

6.4.1

Making the Contract

The intended assured and his agent will decide on the particulars of the proposed cover. The assureds
agent will prepare the slip, which sets out the details of the insurable property, the voyage or period of
time for which the insurance is required, and an indication of which policy form is to be used and any
standard clauses to be incorporated, such as the Institute War Clauses. The formal policy embodies the
insurance contract, although the actual contract itself may be formed when the required cover is reached,
i.e. before the policy is issued: section 22 of the Act. There is a standard form policy in the Schedule to
the Act, known as the Lloyds SG policy.
This has now been replaced (since 1 January 1982 following a report in 1978 published by the United
Nations on Trade and Development, which recognised the impact the English market had had on marine
insurance and on policy forms, clauses and legislation) by the Lloyds Marine Policy, and the Institute
Cargo Clauses (the most important of which are Clauses A, B and C). Although commonly one form,
marine policies are known by different names according to their manner of execution and the nature of
the risks covered, for example: voyage policies (in which the limits of the risk are determined by places
or termini) or time policies (which are designed to give cover for some specified time) etc.
Contracts of insurance (unlike most other commercial contracts governed by English law) are dependent
upon the presumption that both parties are acting in good faith the requirement of uberrimae fidei:
section 17 of the Act. In order that good faith is preserved throughout, the assured is required to
disclose all material facts: section 18.

6.4.2

Standard Form Clauses

Reference has been made in this chapter to the Institute Cargo Clauses, so called because they are
framed and sanctioned by the Technical and Clauses Committee of the Institute of London Underwriters.
When choosing to insure cargo, a prospective assured has the choice of a variety of different clauses.
Often these will be tailored to the type of cargo or commodity being covered.
Commodity trade association contracts will often specify one of these specialist sets of clauses as being
the insurance that must be provided. Thus, for example, in addition to the Institute Cargo Clauses (A),
(B) and (C) there are the:

Institute
Institute
Institute
Institute
Institute
Institute
Institute
Institute
Institute
Institute

Commodity Trade Clauses (A), (B) and (C);


Bulk Oil Clauses;
Container Clauses Time;
Coal Clauses;
Frozen Food and Frozen Meat Clauses;
Timber Trade Federation Clauses;
Time Clauses (Hulls);
Voyage Clauses (Hulls);
War Clauses (Cargo); and
Strike Clauses (Cargo).

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Many of these follow the Institute Cargo Clauses in format where the (B) and (C) Clauses provide
insurance coverage in respect of a number of named perils with the exclusion of others and the (A)
Clauses provide all risks coverage subject to a number of exceptions. Some cover additional risks. For
example, the Coal Clauses cover fire, explosion or heating, even when caused by spontaneous
combustion, inherent vice or nature of the subject-matter insured. The Timber Trade Federation Clauses
distinguish between named perils coverage for cargo stowed on deck and all risks coverage for cargo
stowed under deck.
The new International Hull Clauses 2003 were published November 2003.
Published by the Joint Hull Committee, along with consultation with shipowners, brokers and other
interested parties, their aim is to improve clarity and reduce uncertainty for both shipowners and
underwriters, and to bring the standard wordings up to date with current market practice. The basic
structure of the 2003 Clauses remains unaltered from the 2002 version, although specific changes include
a broadening of latent defect coverage, the removal of under-insurance for claims in general average and
extended bottom treatment cover.

6.5

P&I Cover

Cargo insurance is an insurance on property goods. It provides an indemnity when the goods (cargo)
are lost or damaged and in respect of that physical loss or damage. Hull insurance is likewise largely an
insurance on property, in this case the ship. Normally, some additional collision liability and expenses
cover is also given.
P&I cover is third party liability cover. It protects the shipowner (and, in some cases, time charterer)
against such liabilities, for example in respect of the carriage of cargo, and also provides an indemnity to
it. Traditionally, P&I clubs are mutual insurance organisations where shipowners come together to
provide each other, through the club, with insurance cover. In markets outside London, P&I risks are
often written as part of the hull policy with a limit of the insured value of the ship and are also sometimes
insured in England on a fixed premium basis, most notably by Lloyds syndicates and some insurance
companies. To complete this picture, it should also be noted that there are hull clubs which offer hull
insurance to their shipowner members and also that recently some of the large P&I clubs have entered
into joint ventures with large insurance companies whereby they offer hull insurance as well as P&I cover
to their members.
The majority of world tonnage is covered by P&I clubs. P&I cover is provided to vessels and shipowners
in respect of liabilities for claims by third parties. A P&I club is an association of shipowners who have
grouped together to insure each other for their third party liabilities on a mutual non-profit making basis,
as recognised by section 85 of the Marine Insurance Act 1906.
By mutual we mean that there is an equitable division or sharing of all of the potential risks and
liabilities of the owners and vessels (known as members and entered vessels respectively) by the
members of the association. As far as possible, all of the members are of equal status and should not
impose a greater burden on other members than any other member. It is an important feature of mutual
P&I insurance to ensure that one shipowner member neither subsidises the operations of another
shipowner member, nor is himself subsidised by those other shipowner members.
Although shipowners grouped together in the first place through hull clubs (which subsequently offered
P&I cover when the need for third party liability insurance arose from the English courts establishing
shipowners liability for cargo damage resulting from deviations etc), the reason why owners obtain cover
through P&I clubs and why the clubs are non-profit making is quite simple:

Why should shipowners pay insurance premiums to market underwriters whose business is to make
profit out of offering insurance when they could insure themselves?

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It would make no sense for the members of a club to make a profit out of themselves. The members
need only pay into the club sufficient funds to pay the claims experienced by the club as a whole, the cost
of any reinsurance facilities for large claims and the running and administrative costs of the club.
All clubs provide indemnity insurance, not liability insurance, and they have a pay-to-be-paid rule. This
rule provides that it is a condition precedent that a member settle any liability for claims himself in the
first instance and then present his claim for recovery against the association, although there are certain
exceptions to this rule and a discretion to waive compliance with it, as recognised in The Rena K [1978] 1
Lloyds Rep 545. The pay-to-be-paid principle has a number of benefits:

it means that there is no direct right of action against the club for a members liabilities in most
situations; and
it also ensures that members have an interest in taking steps to reduce liability as far as possible.

As stated above, cargo insurance is an insurance on property goods or other moveables. It provides an
indemnity when the cargo is lost or damaged. Similarly, hull and machinery insurance is largely an
insurance property on the ship.
However, in the case of hull insurance, there is an additional element of coverage, namely collision
liability coverage. Under Clause 8 of the Institute Time Clauses Hulls, an indemnity is provided for threefourths of any sum or sums that the assured shipowner becomes liable to pay by way of damages in
consequence of the insured ship coming into collision with any other vessel. There are limitations and
exclusions as to the types of damages covered.
Clearly, three-fourths collision liability coverage as provided under the Institute Time Clauses Hulls is not
sufficient to keep the shipowner protected against the liabilities that he may incur to his crew or to third
parties. It is, for example, obvious that even in cases of collision, cover will be needed for the one-fourth
of the liability not covered by the hull policy, for any liability in excess of the insured value on the hull
policy and for the liabilities which are excluded by the collision clause in the hull policy. These exclusions
are of sums for:

removal of obstructions, wrecks or cargoes or any other thing whatsoever;


any real or personal property or thing whatsoever except other vessels or property on other vessels;
the cargo or other property on, or the engagement of the insured vessel;
loss of life, personal injury or illness; and
pollution or contamination, or the threat thereof, of any real or personal property or thing whatsoever
other than the colliding vessel and property on board it.

In addition, there are many other types of liability which a shipowner may incur ranging, for example,
from injury and death of a seaman or other persons to pollution risks, fines, inquiry expenses and
expenses incidental to the operation of ships. In a typical cargo carriage situation the cargo interests will
have property insurance and the shipowner will have third party liability cover under his protection and
indemnity insurance. When cargo is lost or damaged, it is customary for the cargo interest to recover
from their property underwriter and for this cargo underwriter, under his rights of subrogation (see the
Marine Insurance Act 1906, section 79), to try and recoup the indemnity paid from the shipowner and his
third party liability underwriter. Such cargo claims against the shipowner are covered by protection and
indemnity insurance.
Traditionally, such third party liability cover is provided by Protection and Indemnity Associations or Clubs
(P&I Clubs) as they are colloquially known. Some such cover is given by fixed premium insurance market
underwriters and there are Institute Protection and Indemnity Clauses. In the case of war and strikes
protection and indemnity cover, this will be provided by market underwriters or in some cases war
associations or clubs which cover against war risks since P&I clubs exclude war and strikes risks from
their cover.

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P&I clubs produce rule books each year which set out the coverage that they provide and reference
should be made to these for details of that cover. It should be noted that, as indicated above, it
dovetails with the shipowners hull policy so that anything covered under the normal hull policy will be
excluded from the P&I club cover. Clubs do not provide cover for loss of or damage to the insured
vessel.
As we have seen, P&I clubs are mutual insurance organisations, of which shipowners and charterers are
the members and, therefore, in effect insure each other against each others losses although it is the club
itself which is the insurer as regards the coverage given and not the shipowners themselves.
The Marine Insurance Act 1906 does apply to P&I clubs. Section 85 provides:

(1)
(2)

(3)

(4)

Where two or more persons mutually agree to insure each other against marine losses there is said
to be a mutual insurance.
The provisions of this Act relating to the premium do not apply to mutual insurance, but a
guarantee, or such other arrangement as may be agreed upon, may be substituted for the
premium.
The provisions of this Act, in so far as they may be modified by the agreement of the parties, may
in the case of mutual insurance be modified by the terms of the policies issued by the association,
or by the rules and regulations of the association.
Subject to the exceptions mentioned in this section, the provisions of this Act apply to a mutual
insurance.

The policies offered by P&I clubs are accordingly marine policies and the Marine Insurance Act applies to
them. Thus, for example, they are time policies and section 39(5) applies in the case where a ship is
sent to sea in an unseaworthy state with privity of the member (see The Eurysthenes [1976] 2 Lloyds
Rep 171). Furthermore, express warranties may be agreed as a condition of entry of a ship into the P&I
club. If they are promissory warranties the relevant sections of the Act will apply to them.
As permitted by section 85(3) insurances are made subject to the articles of association of the particular
P&I club and its rules. A certificate of entry will be issued to the member which will refer to this. Entry is
in practice from noon on 20 February GMT or later, if entered after that time, until noon the following 20
February. These dates are a hangover from the days of Baltic trading when the Baltic was frozen and
trading could usually commence again about this time.
The rules of P&I clubs often provide that they shall not be liable to indemnify the member against any
liability unless the member has paid the third party claimant first. This is a condition precedent to
liability of the club and it has been held, in The Fanti and Padre Island [1990] 2 Lloyds Rep 191, that
such a condition is valid and bars a direct claim being brought against the club by the third party claimant
such as the cargo owner or underwriter under the Third Parties (Rights Against Insurers) Act 1930.
The provisions in the Marine Insurance Act 1906, as regards premium in section 85(2), are dealt with in
P&I clubs by the members paying calls. These are contributions to meet the general expenses of the club
and the claims costs and reserves and reinsurance premiums for each separate year of entry. At the
beginning of the year, an advance call is levied based on the estimate of what is required for the year.
Thereafter, supplementary calls are levied as necessary or possibly a return may be made. The position
can be compared with that of fixed premium market insurance under the Marine Insurance Act 1906,
section 53.
Although most P&I clubs are mutual insurance associations they reinsure themselves on the world
reinsurance markets. The larger clubs do this on a group basis whereby they reinsure each other and in
the market for the large claims.

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They also maintain solvency reserves as with any other insurance company. As a result, members tend
to be insulated from the larger claims by market reinsurers although clearly their calls reflect the cost of
such reinsurance. However, as has been seen in the cases where clubs have failed, non-payment by
reinsurers will not relieve the club of its obligation or its members of their liability to the third party that
would have been covered by the reinsurance had it paid. Such reinsurance does not affect the mutual
nature of the direct insurance given.

CASE STUDY 6
Bunga Melati Dua [2011] EWCA Civ 24
This is a very interesting case, which focuses on policy concerns faced by the judiciary
when determining shipping disputes. I have set this case out in some depth, so as to
illustrate the subtlety of arguments employed by parties in litigation. From a cynical point
of view, I might say that one of, if not the most important, facts here is that the market
price for the goods had dropped when the claimants eventually sold them. Any
commercial lawyer will tell you that one of the most compelling reasons for litigating, for a
party wishing to plead repudiatory breach and get out of the contract, is that the market
rate has fallen and the contract is no longer of commercial interest to him. This was the
driving force behind the judiciarys development and acceptance of the innominate term!
The claimant was Masefield AG (the insured) and the defendant was Amlin Corporate
Member Ltd (the insurers).
Bunga Melati Dua was carrying the claimants cargoes of biodiesel on a voyage between
Malaysia and Rotterdam when she was captured on 19 August 2008 in the Gulf of Aden by
Somali pirates and taken with her crew into Somali coastal waters. Sadly, one of her crew
members died during the capture. Negotiations for the payment of a ransom for the
release of the vessel, her crew and cargoes were almost immediately commenced by the
vessels owners, MISC, a Malaysian state-owned shipping company. The claimant was not
party to those negotiations. The claimant was still out of possession of its cargoes on 18
September 2008 when it served a notice of abandonment on its insurers, the defendants.
The notice was rejected, but proceedings were by agreement deemed to have been
commenced on that day. The vessel, her crew and cargoes were released some 11 days
later on payment of a ransom of US $2 million by MISC. The voyage to Rotterdam was
completed on 26 October 2008.
Bunga Melati Dua reached Rotterdam on 26 October 2008. The cargo had not
deteriorated during the delay, but it had missed its market in the meantime. The market
for biofuel is seasonal, and effectively closes after the end of September. The insureds
two parcels, therefore, had to be stored until the following year, when it was sold at a
price substantially less than its insured value. The insured gave credit for the recovery
made on re-sale, less expenses, and claimed the balance in the sum of $7,608,845.30.
The insured value had been $13,326,481.75 (including freight).
The claim
The claim was for the claimants Actual Total Loss (ATL), that being the 7,608.845.30
difference between the insured amount and reduced price on eventual sale.
The claimant did not dispute that there always existed a possibility, perhaps even a
likelihood, that MISC would successfully ransom the ship but submitted that the possibility
of an effective ransom payment should be ignored for the purposes of both section 57(1)
and section 60(1) of the Marine Insurance Act 1906.

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The insurance policy between the parties was an all risks policy albeit with a war exclusion
clause which read as follows:
6.
6.2

In no case shall this insurance cover loss, damage or expense caused by


capture, seizure, arrest restraint or detainment (piracy excepted), and the
consequences thereof or any attempt thereat.

It was accordingly common ground that both theft of cargo and the capture or seizure of
the cargo by pirates were insured risks under the policy.
The arguments
The claimant advanced two principles:

one, that capture by pirates created an immediate ATL, whatever the prospects of
recovery might be;
the other that, in any event, the law would not or could not take account of the
payment of a ransom as a relevant, legitimate, reason for calculating the possibilities
of recovery.

Therefore, since the cargo had not been recovered by the time proceedings were deemed
to have been commenced, the insured was entitled to succeed.
The defendants argued, on the other hand, that the statutory test for an ATL was
irretrievably deprived (section 57(1) of the Act) and that on the authorities this
connoted a physical or legal impossibility of recovery. The cargoes were not irretrievably
lost when there was a good chance of negotiations for payment of ransom bearing fruit.
Moreover, payment of a ransom was neither illegal nor against public policy and,
therefore, there was nothing to prevent the prospects of recovery by payment of a
ransom from being a relevant and legitimate factor to take into account for the purposes
of applying the test of irretrievable deprivation. The trial judge agreed with the defendant
insurers submissions and dismissed the claim.
The claimant accepted that there is no illegality under English law in the payment of
ransoms (accepting also that it is understood that there is no illegality in the payment of
ransoms under international law). It also accepted that there was no formal public policy
which would prevent an insured from recovering from his insurer a ransom payment.
Nevertheless, the claimant submitted that the payment of ransom, which amounted to
submission to extortion, was so undesirable from the point of view of the public interest
and universal principles of morality, that it could be no part of an insureds (i.e. its, the
claimants) duty, which arises under section 78(4) of the Act, to preserve his property
from loss by succumbing to a ransom demand: and that being the case, the property
concerned must be considered to have been irretrievably lost, physically and/or legally,
where the only means of recovering it was to do something which an insured could not
reasonably be expected or required to do. If payment of a ransom could not be required
as a duty of the insured, an underwriter/insurer could not say that an insured had not
suffered an ATL.
The contentious issue
The contentious issue was whether, when notice of abandonment was served on 18
September 2008, the claimant had been irretrievably deprived of the cargo and thus it
had been actually totally lost, albeit restored at a later date following payment of a
ransom by or on behalf of the shipowners.

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The trial judge held that an assured is not irretrievably deprived of property unless it is
physically and legally impossible to recover it, even if such recovery can only be achieved
by disproportionate effort and expense.
The claimant accepted that test in general, but submitted that piracy, like capture (or
theft, another insured peril), operates immediately as an ATL, unless there is recovery
(before the date of commencement of proceedings).
The Court of Appeals approach
Rix LJ referred to the seminal authority on marine insurance, Arnould: Law of Marine
Insurance and General Average (2013 Sweet & Maxwell ISBN 978 0414024281), which
says, of ALT:
The great principle, therefore, on which all the cases of actual total loss depend appears
to be this the impossibility, owing to the perils insured against, of ever procuring the
arrival of the thing insured.
If, by reason of those perils, the assured is permanently and irretrievably deprived not
only of all present possession and control over it, but of all hope or possibility of ever
ultimately recovering possession of, or further prosecuting the adventure upon it, that is a
case of actual total loss, independently of the election of the assured to treat it as such.
Notice of abandonment would in such case be a mere formality because nothing remains
to be abandoned
And
Capture is prima facie a case of total loss which gives the assured an immediate right to
give notice of abandonment. The loss cannot, as a rule, be said to be irretrievable at the
moment of capture, so as to entitle the assured to treat it as an actual (as distinct from a
constructive) total loss for there is no immediate loss of title. It has long been the
established rule that the property does not pass, after capture, to a vendee or recaptor,
so as to bar the original owner, until there has been a regular sentence of
condemnation
In the light of all this material, his Lordship was of the view that in the circumstances of
this case, where there was not only a chance, but a strong likelihood, that payment of a
ransom of a comparatively small sum, relative to the value of the vessel and her cargo,
would secure recovery of both, was not an actual total loss. It was not, then, an
irretrievable deprivation of property. It was a typical wait and see situation. His
Lordship said that there is no rule of law that capture or seizure is an ATL. The subjectmatter is not amenable to a rule of law at all: it is all ultimately a question of fact.
The typical case of capture, by a nations warship, subject to condemnation as a prize, is
not an ATL, although it may mature into one. Piratical seizure, in the absence of a policy
of ransom, may amount to an ATL, where the pirates escape with their prize for their own
use and there is no prospect whatever of finding or recovering vessel or cargo: but where
a chance of recapture remains even such a seizure will not give rise to an immediate ATL,
and in any event that this was very far from this case.
His Lordship agreed with the trial judge that the fact that the shipowners paid the ransom
inevitably defeated the claimants claim. Both other judges in the Court of Appeal agreed
with him. On the public policy issues, his Lordship said:

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In these morally muddied waters, there is no universally recognised principle of morality,


no clearly identified public policy, no substantially incontestable public interest, which
could lead the courts, as matters stand at present, to state that the payment of ransom
should be regarded as a matter which stands beyond the pale, without any legitimate
recognition.
There are only elements of conflicting public interests, which push and pull in different
directions, and have yet to be resolved in any legal enactments or international consensus
as to a solution, save that of wary watchfulness, the deployment of naval resources as a
form of law enforcement or policing operation and a regard for a comprehensive
approach, seeking to address political, economic and security aspects of the crisis in a
holistic way.

Directed Learning:
(1)
(2)

What risks can a contract of marine insurance cover?


What is meant by P&I insurance?

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7.

ADMIRALTY CLAIMS

7.1

Introduction

This is the final chapter in what, I am sure, has been a long module for you! I hope, though, that you
have at least to some extent enjoyed it, and that you are emerging with an understanding of the nature
of English law, and why it is so important to call in your lawyers when thinking of dispute management.
To my mind a little knowledge is a dangerous thing. I myself would always seek legal advice for issues
outside my own ambit of professional expertise.
I am more than aware that I have no knowledge at all of the culture of, say, an employment tribunal or
other non-shipping dispute forum. That I am a lawyer enables me to follow what my lawyer might say,
and to appreciate that no advice can be set in stone or guarantee an outcome. So, I am prepared for
the suck it and see nature of the law!
We are about there in our consideration of legal issues which you will come across in your professional
lives, and are ending with a short chapter on the basics of litigation, i.e. the procedural aspects of
litigation. There is no case study for this chapter.

7.2

Litigation in the Courts

Since 26 April 1999, there has been an ongoing reform of civil procedure in England and Wales. This has
changed the language used in civil procedure and the way in which a civil action is conducted. The main
body of rules is contained in the Civil Procedure Rules (CPR). For example, the term writ has been
replaced with claim form. The CPR provides the basic framework for conducting a civil case, but the
process of reform is not yet complete to help the system bed down, minor changes are from time to
time introduced by means of Practice Directions issued by the courts.
Litigation may be commenced in personam, i.e. against the person who would be liable, or, in shipping
claims, in rem, i.e. against the wrongdoing vessel. Where a claim is brought in personam, the claimant
may come before either the High Court or the County Court.
The Civil Procedure Rules apply to both the High Court and the County Court, but there is still some
choice about whether an action is started in the High Court or the County Court. County Courts now
have unlimited jurisdiction in contract and tort cases. If the value of the case is below 15,000 then the
case must be begun in the County Court. Personal injury cases must be begun in the County Court
unless the value of the case is above 50,000. In other types of case, if the value is above 15,000,
then there is a choice of beginning the case in the High Court or County Court. Where this choice exists,
guidance is given by Part 2.4 of the Practice Direction to Part 7 of the CPR. This states that a claim
should be started in the High Court if by reason of:

the
the
the
the

financial value of the claim and the amount in dispute; and/or


complexity of the facts, legal issues, remedies or procedures involved; and/or
importance of the outcome of the claim to the public in general;
claimant believes that the claim ought to be dealt with by a High Court judge.

In rem claims only arise in English procedure in respect of disputes arising out of the use of or damage
caused by ships or aircraft. In rem claims are brought before the Admiralty Court which is part of the
Queens Bench Division of the High Court of Justice. The business of the Court is conducted out of the
Admiralty and Commercial Registry in the Royal Courts of Justice in the Strand. It has an appointed
puisne judge who, unlike other judges of the Queens Bench, does not go on circuit.
The Admiralty judge is assisted by the Admiralty Registrar who fulfils the same function as the Queens
Bench master, and an Admiralty Marshal who attends to the arrest of ships and their appraisement and
sale in appropriate cases. In rem actions are an important issue in shipping, because of the knock-on
effect that the arrest of the vessel will have on all of the parties commercially involved in its use.

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Commercial claims arising out of shipping adventures will generally be brought in either the Commercial
Court or the Admiralty Court (certainly in rem claims). The latest version of the Admiralty and
Commercial Court Guide (CCG) was produced in 2011, and has been updated three times, in:

October 2011;
March 2012; and
March 2013.

Parts 58 (Commercial Court), 61 (Admiralty Claims) and 62 (Arbitration Claims) of the Civil Procedural
Rules (CPR) and, together with the Practice Directions issued under the relevant rules, provide the
procedural framework for the conduct of commercial litigation. Part 61 states that in rem actions must
be brought within the Admiralty Court.

7.3

Alternative Dispute Resolution and Arbitration

7.3.1

Alternative Dispute Resolution (ADR)

In the 1995 report on civil reform, Access to Justice, Lord Woolf says:

ADR [Alternative Dispute Resolution] has the obvious advantages of saving scarce judicial and other
resources. More significantlyit offers a variety of benefits to litigants. ADR is usually cheaper than
litigation, and often produces quicker results. In some cases parties will want to avoid the publicity
associated with court proceedings. It may also be beneficial for them to choose a form of dispute
resolution which will enable them to work out a mutually acceptable solution.

Most commentators agree that there is no one exclusive type or method of ADR.
Indeed, sometimes tribunals (such as rent tribunals or social security tribunals) are labelled as forms of
ADR, because (usually) they satisfy the requirement of a quicker solution than litigation and in theory are
more user-friendly to members of the public than the courts. Some commentators clearly think of ADR
as involving either arbitration (common in maritime and international trade disputes) or a process of
mediation/conciliation; we can see this in Amrapali Choudhurys article What the User Wants and Needs
out of ADR (based on a paper delivered to the Conference on Trend Spotting in European Dispute
Resolution, held by the European Branch of the Chartered Institute of Arbitrators at Trinity Hall,
Cambridge, 6 to 8 July 2001): (2001) Arbitration 317.
The author deals with the issue of GAFTAs (the Grain and Feed Trade Association) arbitration services,
saying that all GAFTA sale contracts have a GAFTA arbitration clause, which stipulates that in the event of
a dispute the matter will be referred to by resorting either to GAFTA arbitration under Rules 125 or under
the Simple Dispute Rules 126. These arbitration services are referred to as being part of GAFTAs
alternative dispute resolution services.
However, the author goes on to point out that in addition to arbitration services, GAFTA also provides
mediation, under the Mediation Rules 128, which came into effect in 2001. (If the mediation is
unsuccessful and the parties cannot agree to a settlement, the claimant my then revert to GAFTA
Arbitration 125.) It is quite clear that the author views both the arbitration and mediation services as
being ADR.
Nonetheless, it is more usual to think of arbitration and ADR as being different processes; Roy Goode has
certainly taken this approach in Commercial Law in the Next Millennium (Sweet & Maxwell, 1998) ISBN 0
421 63650 5. He appears to draw a distinction between arbitration and ADR when he makes the
suggestion that:

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much commercial arbitration has become almost indistinguishable from litigation

And that:

there is so much dissatisfaction with arbitration and a growing trend towards alternative dispute
resolution methods, such as mediation and the mini-trial.

7.3.2

Arbitration

In recent years, arbitration has been the subject of comprehensive reform. The law on arbitration is now
contained in the Arbitration Act 1996. This came into force on 31 January 1997. The opportunity was
taken to draw together many sources of arbitration law and the Act brings together previous legislation
on arbitration and principles which have been established in recent cases. The Act is intended to increase
the effectiveness and thus the attractiveness of arbitration as a method of settling disputes without
recourse to the courts. The Act follows the spirit of the UNCITRAL Model Law on International
Commercial Arbitration (as adopted by the United Nations Commission on International Law on 21 June
1985).
What is Arbitration?
Section 6 of the Arbitration Act 1996 states:

In this Part Arbitration Agreement means an agreement to submit to arbitration present or future
disputes (whether they are contractual or not).

The word disputes is, therefore, given a very wide meaning. Disputes might involve claims in contract,
tort, breach of statutory duty, or even claims based upon fraud. The general principles of the Act, and
the direction an arbitration hearing is likely to take, can be found in section 1 of the Act. In summary,
this makes three key points:

the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without
unnecessary delay and expense;
parties should be free to agree how their disputes are resolved, subject only to such safeguards as are
necessary in the public interest; and
in disputes to which the Arbitration Act applies, the courts should not intervene, except as provided by
the Act.

Arbitration Procedure
An arbitration hearing will be conducted in a manner suited to the particular nature of the dispute. The
procedure can be based upon that adopted in the court room, but this is not essential. The overriding
requirement is that the procedure should be fair. In deciding how to conduct the proceedings, the
arbitrator will consider all the facts of the dispute, including the value of the claims involved.
Duties of Parties Agreeing to Arbitration
In keeping with the idea of fairness, and the objective of dealing with disputes as swiftly and
economically as possible, section 40 of the Act requires the parties involved in an arbitration to do:

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everything necessary for the proper and expeditious conduct of the proceedings.

Who Can Act as an Arbitrator?


An arbitration hearing may be chaired (or judged) either by a single arbitrator or a tribunal. The
parties involved can agree upon who is to act as arbitrator, or who is to make up a tribunal. Sections 14,
15 and 16 of the Arbitration Act deal with the selection and appointment of arbitrators. Generally, the
selection of arbitrator will be based upon their knowledge, experience and expertise in a certain field (e.g.
international trade or maritime collisions).
What are the Powers of an Arbitrator?
Under section 34 of the Act, the arbitrator or tribunal hearing the arbitration has the power to make
decisions relating to procedural and evidential matters if the parties themselves cannot reach agreement
on these matters. This can include the location and date of the arbitration, and what language/s it shall
be conducted in (which allows for a hearing to be conducted outside the UK if appropriate). Decisions on
matters of evidence and procedure might include whether to apply the strict rules of evidence used in a
court, the form that any evidence will take (oral, written deposition) and the degree to which witnesses
may be cross-examined.
A more radical aspect of arbitration is that the arbitrator or tribunal can take it upon themselves to decide
the extent to which they will take the initiative in ascertaining facts and law thus, the proceedings may
be inquisitorial, in contrast to the adversarial nature of proceedings in an English court. (The full
range of powers available to arbitrators/tribunals can be found in sections 38 to 44 of the Arbitration
Act.)
Types of Arbitration Rules and the Curial Law
The parties may have adopted an international code of arbitration, such as the UNCITRAL Arbitration
Rules, or the Rules of Arbitration of the International Chamber of Commerce (ICC). They may have
contracted on standard form contract, which will provide for arbitration under a particular procedure, for
example a trade associations rules. The parties may, however, simply have agreed that any dispute
shall be determined by arbitration. In such a case, reference must be made to the national legal system
applicable to the arbitration procedure. In English law this will be the Arbitration Act 1996.
The law applicable to the arbitration procedure (sometimes referred to as the curial law) may be different
from the law governing the contract. For example, in Whitworth Street Estates (Manchester) Ltd v James
Miller & Partners Ltd [1970] AC 583, in which the law governing the contract was English law, the parties
held their arbitration in Scotland in accordance with the Scots law applicable to arbitration. The House of
Lords held that Scots law regulated the arbitration procedure, whilst the arbitrator had to apply English
law as the law governing the contract itself.

7.4

Mediation and Conciliation

The main difference between arbitration and ADR or mediation is that ADR and mediation are processes
by which the parties, with the help of an independent third party, find their own solution to their dispute.
The ADR/mediation procedure does not result in a judgment or decision from the third party in the form
of a judge or arbitrator. Rather, the parties agree between themselves what the outcome will be. This
may not be the outcome one party had hoped for, but it is the outcome that he will settle for in order to
avoid the time and expense of a court hearing or an arbitration.

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While the emphasis is on the parties themselves reaching agreement, a professional mediator can play a
vital role in helping the parties to compromise. A successful mediation will produce a happy outcome in
the sense that neither party should feel that they have lost, notwithstanding that neither party will go
away with everything they had initially wanted. Mediation is much more about having ones say than is
afforded in the litigation process, and can thus provide a degree of satisfaction not always found in the
court process. Mediation has become an important means of dispute resolution in shipping-related
matters.
The Maritime Solicitors Mediation Service (MSMS) has become pre-eminent in the context of shipping
claims.

7.5

Alternative Forms of ADR

7.5.1

Judicial Appraisal

The agreed case or the parties submissions are put to a judge (often retired), who provides an indication
as to the likely result if the case went to court.

7.5.2

Adjudication

This may be found in P& I rules, and will involve a determination of the dispute prior to commencement
of proceedings. Some club rules now call for mediation, or a mediation escalation clause (requiring the
parties to start any action by way of mediation before proceeding to arbitration) in members contracts
with third parties.

7.5.3

Expert Determination

A discrete question of fact, law or financial assessment may be put to a selected expert.

7.5.4

Early Neutral Evaluation

The issues may be put to senior counsel of a retired judge to assess the likely outcome of a dispute. The
parties may agree that the evaluation be binding upon them, but even if they do not, the opinion may
assist the parties in their negotiations and may help to bring an end to a potential dispute.

7.6

Liablity and Case Management

In terms of private liabilities, the primary aim of any investigation should be to come to some settlement
as quickly as possible. It is often said in the legal world that the best lawyer is one who keeps his client
out of court. This may not, of course, be possible in the context of a potential criminal offence, as it is
not possible to settle with the state in the same way as one does with ones opponent in a private
matter. Nonetheless, whether one is facing potential private or criminal liability (or both), time and
speed are of the essence in setting up the investigation team after a maritime incident.
From our consideration of the law in the previous chapter, in which we saw how the liabilities arise, we
now go on to examine the extent to which a well-conducted investigation may minimise such liabilities.
We should at all times when reading through this chapter, as our lawyers will do in real life, be looking
to manage the casualty from the perspective of facing the potential underlying liabilities.
We should, then, always be thinking in terms of substantive law and its causes of action, elements of the
liabilities, and what evidence may be adduced to prove a wrong or support a defence. The vernacular
message that takes us from the previous chapter into this one then, is think cause of action, think
evidence, think liability.

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7.6.1

Casualty Management

The key message that comes from our consideration of casualty management must be that one should
develop good habits.
Setting up the Team
The casualty investigator should be appointed immediately following the incident:

He is usually a master mariner and may also be a qualified lawyer. The advantage of appointing such
a person is that not only will he be able to understand and assess the incident from a practical
perspective, he will also understand the legal ramifications of proper collection of the evidence and
interviews of witnesses.
His primary role is to interview the witnesses and to preserve documentary and other evidence.
He needs to be aware of what might usefully be said to the other side at this stage and, critically,
what should not be disclosed.
He should start to collect and index invoices and disbursements from the moment that he starts his
journey out to the vessel.
He needs to get on board as quickly as possible, and so should be ready to travel at short notice.
He should ensure that the ship is not detained for any longer than necessary.
He should work with lawyers appointed by all interested parties to deal with any local problems, such
as investigations by authorities, detentions or arrest of the master, crew, following pollution-causing
accidents.
He should monitor who is on board, identify all visitors and prevent anyone from any other ship from
boarding unless by arrangement and with express permission of the owners.
He should instruct all crew not to speak to anyone about the incident without permission from the
master/owners/casualty investigator/legal team. The wrong thing said to the wrong person can
come back to haunt ones claim in court or impede the chances of a successful settlement.

The Legal Team


The legal advisors are essential at this early stage. They should be able to:

Make an early assessment of the situation and potential problems.


Deal with issues such as jurisdiction, investigations by local or flag state authorities, damage
surveyors (for ship and cargo), pollution clear-up operations, salvage, loss of life or personal injury
and so on. These issues are in fact better dealt with by the legal team in the office rather than the
casualty investigator, who should be more focused on actually dealing with the investigation.
Appoint a local lawyer to deal with local authorities and other local issues.
They should liaise closely with all involved parties, including experts and surveyors, average adjusters.

The Witnesses
One of the main purposes of the investigation is to interview the witnesses, in order to establish the
cause of the incident. It is important that the witnesses explain truthfully and as precisely as possible
what happened:

Start as soon as possible as time is likely to be restricted and peoples memories alter with passing
time.
Discuss what language will be used and remember that an interpreter may be necessary.
Interview technique is important, and it should be remembered that all crew interviewed will be
anxious for their jobs.
All relevant involved persons should be interviewed, including, the master, engineers, other crew
members, the look-out, any on-board pilot, those on the bridge at the time of any collision.

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Evidence
There is usually a large amount of evidence in the form of both documentary and other types.

7.6.2

Preliminary Assessment of Liability

The evidence should be carefully analysed in order to build up as complete a picture as possible of the
events leading up to the incident. It should be remembered that the evidence is only one version of the
events, and that any form of witness/human evidence may come across differently to one person than
another. It may be, then, that a tribunal or arbitrator or judge may interpret or see the evidence quite
differently from how the party seeking to rely upon it might wish. This is especially true of Crown Court
jury trials (criminal cases), where members of the jury are unlikely to come from the shipping industry
and understand the dynamics of what actually happens on board ship.
It is essential to be able to report to the client and set out the events, any breaches of obligations,
relevant case law, opinion on apportionment of liability, and any liability-facing recommendations. Good
contemporaneous evidence may prevent the costly process of litigation/arbitration from occurring, and it
will be invaluable in the face of criminal prosecution.
Where a court or a tribunal is faced with conflicting versions of events, they will be looking for that
evidence which best supports each parties submissions and recollection. Poor or weak evidence, then,
can defeat a genuine claim.

7.7

Case Management in the Post-ISM World

The introduction of the International Safety Management Code has had a major evidential impact on
seaworthiness disputes, generating a realisation amongst shipowners and their lawyers of the need to
tailor case management techniques to the post-ISM world. Post-incident auditing, a concept that has
evolved from quality assurance, has become recognised as an invaluable tool when used at the early
stage in the case management process.
Ian MacLean, master mariner and partner with solicitors Hill Dickenson, is of the view that an early audit
of the manuals and the records required to be kept by the system will both assist in making timely
decisions about the strengths and weaknesses of a vessel owners case, and will permit the timely
development of strategies to address any ISM-related deficiencies.
MacLean is an experienced quality assurance and ISM auditor, who has assisted companies in Europe,
Japan and South America to introduce ISM to their fleets. He was lead auditor for a major ship
management company. In comparing the role of the lawyer during the investigation stage to the auditor
following an audit trail, he said that both functions involve establishing precisely what occurred, and
comparing their findings with what should have occurred, identifying the deviations and the reasons for
those deviations (Lloyds List, 25 May 2005).
Whilst the post-incident audit may not be appropriate for all case management situations (it may, for
example, be disproportionate to the incident), it is clear that much useful information can be gathered
during the audit that will impact on future management cases. This information assists case handlers to
identify weaknesses in the system at an early stage so that strategies may be developed to address such
weaknesses and to determine the prospects of success should the matter come to court. Thus, in the
context of a high value dispute, a post-incident audit may position the case handler to achieve significant
savings in the long term.
MacLean stresses that it is essential to review the sections of the manual that relate to the dispute prior
to disclosure, warning that it is important to appreciate that the external audit which led to the award of
the Document of Compliance for the company, or the Safety Management Certificate for the vessel, took
a relatively short period of time, and used a sampling process to determine compliance.

83

It is clear, then, that the external audit process should not be viewed as exhaustive. Once opponents
obtain access to the relevant sections of the manuals following disclosure, there will be an unparalleled
scrutiny of the contents for compliance with the ISM Code and other statutory requirements. It is
essential, therefore, that should there be major deficiencies contained in the manuals (for which there
may be perfectly innocent explanations), these be identified and explained well in advance of disclosure.
With regard to preparation for witness statement-taking, the post-incident audit provides the ideal
opportunity for structuring the witness interviews. The ISM Code requires that the manuals detail the
authorities, responsibilities and reporting lines of personnel. The Code also requires that the manuals
detail procedures to be followed and that in turn, records are kept to evidence that those procedures
have indeed been followed. By understanding fully the functions, duties, procedures and record-keeping
requirements that were supposed to have been followed by the witnesses who are to be interviewed, it is
possible to identify if and where the witnesses recollection deviates from what was supposed to have
happened.
As MacLean points out, there may be a legitimate reason for such a deviation:

in which case it can be addressed at the time of taking the statement rather than at a later stage where
re-interviewing witnesses may prove problematic.

It should also be kept in mind that, where such a deviation or inconsistency is not identified but then
later raised by opponents (or, arguably worse, by the prosecution) during the trial, there is a great
potential for irreparable damage to ones claim or defence.

Directed Learning:
(1)
(2)
(3)
(4)
(5)
(6)
(7)

What are the main distinctions between litigation and arbitration?


When might it be sensible for the parties to agree to determine their dispute by
mediation?
Might there be circumstances when it would not be appropriate to mediate?
How does the in rem action assist a claimant?
What are the main issues to consider when setting up a casualty management team?
To what extent is it an advantage to have a lawyer act as the casualty investigator?
What impact has the ISM had on the management of casualty management?

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SUPPLEMENTARY READING AND HOW TO STUDY THE LAW

Supplementary Reading
A Note of Caution about Buying Books
Law books are notorious for going out of date fairly quickly, and for being either expensive or very
expensive. You are strongly advised, therefore, not to go mad in your purchases, and really only buy
a range of books if you are especially interested in the law. Additionally, you should be wary about
buying second-hand books; these may well be out of date, and will not serve you well.
The suggested edition of a book in this module is the most up-to-date but it may well be superseded
by a new edition in the not too distant future, and this list is for now only. It is possible to ascertain
the most recent editions and new publications on the internet, and should you in the future be buying
law books, this is what I would strongly advise you to do.
The difficulty in suggesting supplementary books for this module is that its contents cover a wider
range of issues than is found in just one book. To my mind, what we have said here in terms of
procedure and the court system is more than enough for students at this stage. For those of you
especially interested in criminal law, there are plenty of excellent books on the market, but you should
realise that they will not deal with shipping issues. Criminal law books deal with the basic elements of
criminal offences and the mainstream offences.
I very much doubt, in reality, that a criminal law book will help on this courseshould you find
yourselves immersed with what looks like criminal prosecution, the best advice that anyone could give
you is to contact a lawyer. A little knowledge is a dangerous thing, and not least so with the law. For
this reason I have not suggested any reading on civil or criminal procedure.
I have, however, suggested two books below on basic substantive maritime law. Both are excellent
and I would wish you happy reading with either:

Southampton on Maritime Law, the Institute of Maritime Law (Informa Law from Routledge, 2014)
ISBN 978 1 13 8802339
This is not a teaching textbook, but an excellent selection of essays on topical issues, written by
members of Southampton Universitys Institute of Maritime Law. Critical, contentious, pertinent
and all in all a jolly good book for those wanting more!

Roy M Goode: Commercial Law (4th edition, Penguin, 2010) ISBN 978 0 14 1030227
This is the nearest that you will come to an overall approach to English common law and the
development of commercial law. It is an excellent book and, whilst it is not an easy read, it is
both clear and critical. It covers the nature and sources of commercial law, and deals with the
main concepts of contract law and commercial sales, and international trade dispute resolution. It
is wider in ambit than your course, in that it deals in quite some depth with international trade
relationships, but for those interested in commercial law generally, it really is the book to buy.

Initial Background Formative Reading


You may wish to indulge in some general background law reading. What books you do in fact buy
very much depends upon how much you want from this section. Not everyone wants to become
immersed in the law, and I am sensitive to this fact! You may have decided to contain your law
studies to the ambit of the teaching, and may, therefore, only buy the one text book recommended
above.

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I have, however, some suggestions of supplementary books for those who want them:

James A Holland & Julian section Webb: Learning Legal Rules (8th edition, Oxford University Press,
2013) ISBN 978 0 19 9657490
This is an excellent book, and is particularly good for anyone coming to the study of law for the
first time. It is not an international trade law book, but a consideration of how we study the law
and the theory and structure and practice of legal reasoning. Those of you who are new to the
study of law should understand that in order to grasp the specialist issues of maritime and
international trade law, it is essential that we have an understanding of the basic building blocks
of the law and how it works.
Those of you who come from codified jurisdictions, are likely to be quite shocked by the fact that
common law provides us with arguments rather than answers. This book will introduce you to
the initial building blocks of how the law works, and the conceptual way in which we think when
developing our arguments to persuade a court to apply the law to suit our purposes (usually the
clients needs!). Even if you are not new to law, you are likely to find this book useful, both as an
insight into the law before we start our studies, and throughout our sessions, and at any time you
are thinking about the law.

The Study Of Law


Introduction
If this is the first time you have taken a law module, it may be a shock to learn that as lawyers we are
not looking for the right answer, but an analytical assessment of the legal (and not commercial!)
issues raised by the question, together with a reasonably arguable conclusion. You should think about
this as you go through the section, both in your thinking about the substantive discussion and as you
work through the self-study questions. The aim of this section is more to introduce you to what the
study of law requires than to teach you the law. Indeed, it could be argued that one cannot teach
others to learn the law, but only how to guide them along the path of understanding. So, the aim of
this section of the module is to help you to develop the appropriate skills in order to do well with the
law.
To succeed in the study of the law, you will need:

Good substantive materials as your starting point (the core discussion in this module!).
Discipline and sustained attentionthere really is no gentle way to raise this requirement. The
study of any system of law requires comprehensive reading and thinking about the law.
An enquiring mindyou will soon discover that there are often no right answers to contentious
problems.

This is why we should not aim to teach you the law. A good law course will introduce the student to
the way in which lawyers think about legal principles in any one area of law (those principles forming
the basis of the substantive teaching material), and how the law is applied in any one situation. As
you go through the materials and immerse yourselves in case reading, you will see that the issue
before the court is generally one to which there is no immediately applicable law, i.e. no exact
match, so to speak.
So, each side must argue in a persuasive a manner as possible that the law should be applied to suit
his client. This module aims to introduce you to and engender proficiency in this skill! You will not
succeed if you come to the law with a black and white mind which seeks a definitive answer. You
must come to this section with intellectual agility and an open mind as to how what you want (e.g. a
certain remedy, a way to stop someone doing something) might be achieved in court by analysis and
critical argument.

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No Trade Practice!
It is particularly important that those of you who come from the shipping world understand that there
is a firm distinction between a discussion of legal issues and a discussion of trade practice. This is
often the hardest hurdle for students coming from a commercial world to overcome. In day-to-day
operational situations, the commercial approaches adopted to resolving disputes are not the same as
the application of legal principles to resolve those disputes. What we are looking at on a law course is
the choices that face the parties in a shipping dispute when negotiations and commercial solutions
have failed.
Negotiations take place against the background of the legal rules, even if, in practice, a commercial
solution is found. It is axiomatic, therefore, that in all of this module our discussion must focus on
legal (rather than commercial) issues, and on the applicable law. You should endeavour, then, to
train yourself as you go through this module to keep a firm distinction between your understanding of
trade realities and your own commercial tactics and the way in which the law will approach a
dispute.
Students often say to me, at the beginning of a course, that ohthis is what happens in reality. My
somewhat flippant response is to say ahbut this is where reality has let you down and all you have
left is the law. This is not, though, such a frivolous comment as it might at first blush appear.
Business is often conducted with scant regard to the ramifications of the relationship going wrong.
This less legalistic approach reflects a trade preference towards a less fettered business environment.
Devlin has suggested that it is this preference for such trade drafting that keeps commercial law in
tune with the ideas of business men, and that in pursuing their way undeterred in the drafting of
their own contracts commercial men have ensured that the ideas of the lawyers are ultimately
controlled by the laymen.
The corollary of this is that the trade is prevented from becoming stifled by regulation in which the
law, rather than commercial expectation, could emerge as the dominate driving force of international
sales. Certainly this would support the view that trade contracts engender a less fettered commercial
experience, in which, it might be argued, business can be done. This was the view of a witness before
Devlin, who, on being asked why he had not written to the other side so as to reach some agreement
upon which conditions should prevail, answered, We should never get any business done if we did
that sort of thing, adding, besides we havent got time for it (Devlin: Relation Between Commercial
Law and Commercial Practice [1951] MLR 249, at 253).
The point about your legal studies is that you move on from this commercial way of thinking to a more
lawyerly approach of an analysis of how the law might deal with the gaps left by such a relationship
which has now ended in dispute. This is a skill which is developed through the reading of cases and
consideration of:

what is the relationship between the parties (a combination of legal analysis, e.g. do they have a
contract, and trade practice appreciation);
what is the dispute between the parties (i.e. what do they wantbearing in mind that as we are
talking about a legal dispute the issue is contentious and both want something, and something
quite different); and
how does the law approach this issue?

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