Rule B Claims Flood Adds To Turmoil From Downturn
Their year ends in more confusion as the industry digests some recent decisions that look set to redraw the legal landscape.
Not only are there consequences for freight derivatives traders past and future obligations, but tribunal and court decisions are testing whether English law upholds the sanctity of maritime contracts in tumultuous economic times.
Most significantly, millions of dollars intercepted under Rule B maritime attachments claims in New York are being released after a ruling in early November retroactively outlawed the practice.
The implications are wide-ranging. More than 250 so-called Rule B claims flooded the New York Southern Federal District Court in the first four months of this year, as parties sought to freeze funds owed to them from defaulting owners, operators and charterers ahead of time-consuming legal battles.
"What happened almost immediately after [the November ruling] was that many of the district judges starting issuing orders directing that plaintiffs in those Rule B cases show cause why attachments should not be vacated," said New York-based Blank Rome partner Thomas Belknap.
"Furthermore, judges have been rejecting arguments that the attachments should remain until disputes are resolved via arbitration," he said.
The confusion was set in motion in October after the US Court of Appeals for the Second Circuit overturned the precedent-setting Winter Storm Shipping decision of 2002 in the case of Shipping Corporation of India Ltd vs Jaldhi Overseas Pte Ltd .
Winter Storm was the first to allow the interception of funds passing through US banks for prejudgment attachments under Rule B, and has been widely used since then.
On November 13, the Second Circuit further ruled in Hawknet Ltd vs Overseas Shipping Agencies that the Shipping Corp of India decision applied retroactively.
"I am not sure how much money has been released; there have been orders made releasing funds, which will happen in the next week or so," said Mr Belknap, in early December.
"I have not seen any receptiveness by the Second Circuit for applications for stays so far. Things are happening so quickly. Everybody has got their heads down—it has been quite a scramble. What happened is that all these judges issued all these orders all at once and so all the return dates came up at the same time, so it has been one last brief scramble to address all these issues."
The decision has rippled through to London's maritime lawyers, who are still settling a large number of global disputes for physical and paper contracts after counterparties walked away unwilling or unable to pay millions owed on contracts agreed at the height of the five-year shipping supercycle.
"You can still use Rule B if you can locate a defendant's assets, but it is much more difficult now, so it is less amenable. So a major, major change," said Brian Perrott, partner at London-based Holman, Fenwick Willan of the US court decision.
Mr Perrott said that if Rule B claims were set aside, many companies would lose their security, and this would be fatal to the progression of their claims before arbitration or the courts.
More broadly, in 2009, counterparties have quietly shared the pain to sort out cancelled contracts of affreightment, the early redelivery of chartered ships and defaulting over-the-counter freight derivatives contracts amid widespread insolvencies and bankruptcies.
"[Many] parties resolved their differences," said Mr Perrott of the "hundreds of millions" of paper and physical contract disputes outstanding one year ago.
"Netting has been significant. The assignment of debt has also been a major factor. People are assigning debt and are acquiring at a discount that debt to offset [exposure], so there is quite a market in that," he said.
Traditional settlement has also played a significant role. People realised that the numbers were very large and people concluded it was best to recover some [money], rather than drive the concerns into liquidation.
A recovery rate of 30% for a company that survives is better than participating in an insolvency that could take many years and could possibly be fruitless.
Arbitration appointment statistics for this year will not be published until the second quarter of 2010, but numbers are anticipated to "increase substantially", according to Simon Gault, one of the 35 full members of the London Maritime Arbitrators Association.
Several arbitrators are so busy they have declined new cases, while others are working weekends, Mr Gault said of the rapidly increasing workload.
In 2008, the volatile second-half conditions had already seen appointments rise by more than 1,000 on the previous year to hit nearly 5,600.
Although clients had complained of delays, Mr Gault said LMAA arbitrators had gone to great lengths to hold prompt hearings, aware of these unresolved disputes place on cash flows.
But with such a backlog of cases, the year ends dominated by the same issues that vexed owners and operators in 2008—shipbuilding disputes, unpaid hire and repudiatory breaches of time charter contracts. Only the forum has changed.
"Rule B Claims Flood Adds To Turmoil From Downturn" by Michelle Wiese Bockmann first appeared on Lloyd's List on December 22, 2009. www.lloydslist.com.
Reprinted with permission. All Rights Reserved.