"Fortress Europe"

Bringing claims across the Atlantic is not for the faint of heart.

“You goin’ to court this morning?”

When posed by young Jem Finch in Harper Lee’s classic, To Kill a Mockingbird, the question is straightforward enough. As crowds gather for the town of Maycomb’s headline-grabbing trial of Tom Robinson, all of the characters involved are U.S. citizens and probably even Maycomb residents. They know that Jem means the court in Maycomb. The crowd knows where it’s going.

            In shipping, on the other hand, a more nuanced response to Jem Finch’s question would be “Which court?” And a more likely response would be “Why would I go to court in the first place?”

A Parallel Universe

The in-your-face obviousness of recourse to the legal system, specifically to government courts, is relatively new in history. And it’s true that government courts are now an integral part of our industrialized, rationalized and bureaucratized existence – except in shipping.

            After all, shipping supports many non-governmental organizations that are custom-tailored to its special requirements. From arbitration groups like the London Maritime Arbitrators Association to international treaties like the 1958 New York Convention, which allows easy enforcement of awards, cases are funneled voluntarily away from government courts into private dispute resolution.

            Add to this the fragmentation of government courts – especially in the E.U., still with 28 Member States – and the occasional lack of industry knowledge on the part of certain government court judges, and it is easy to grasp why the incentives are aligned as we know them.

            Part of what has driven modern legal reform forward was the perception that the law was opaque, unfair and irrational – which is to say, cases were not won or lost on their merits. While Tom Robinson and Atticus Finch had to direct their efforts toward fixing rules and procedures in their local area, shipping successfully built up its own globalized parallel universe.

            When people opt out of this parallel universe – i.e., when they selectively seek recourse with a specific government court – they are simultaneously saying “no” to the commercial customs, traditions, case law and dispute resolution mechanisms that have been nurtured since the 1950s and earlier. This should generally be considered a red flag, except in cases where the two parties are seasoned merchants who know exactly what they are doing.

            Here’s a quick sampling of liner companies that stand out when it comes to manipulating law and forum choice: Hapag-Lloyd, Hamburg Süd, now-bankrupt Hanjin, COSCO, APL and UASC. These companies stipulate that any litigation occur at their principal places of business which are, respectively, Hamburg (German law), Hamburg (German law), Seoul (South Korean law), Shanghai (People’s Republic of China law), Singapore (Singapore law) and Kuwait (English law). In many cases, the suspicion is not far off that politics is what drives these choices of forum and law, e.g., Hapag-Lloyd is 20 percent-owned by the Free and Hanseatic City of Hamburg.

            Two exceptions are Danish carrier Maersk and Swiss-Italian carrier MSC, both of which submit all disputes to the English High Court of Justice in London, a neutral English-language jurisdiction. This is common practice in Europe – to select a neutral third-party jurisdiction and to use English law. But as one can see, it is not the practice of some of the aforementioned companies.

Upfront Costs

For consignors, consignees and insurers working the Atlantic trade, it matters very much which side of the pond you’re on. Europeans shipping to the U.S. need to deal with just one system whereas Americans shipping to Europe need to deal with potentially dozens. While U.S. federal courts assert jurisdiction over oceangoing cargo, the European Court of Justice lacks a comparable framework, and such disputes go to the individual Member States.

            It’s all the more frustrating when the claimant not only has to cross a meaningful language barrier but also provide procedural security deposits and upfront court costs amounting to tens of thousands of euros. To then be confronted with a potentially hostile judge, who may be biased in favor of the defendant or at least in favor of local interests and enjoys the home field advantage, is precisely why arbitration has grown to such prominence in shipping.

            For example, here’s the estimated upfront money needed for a hypothetical $250,000 damaged cargo claim against Hapag-Lloyd at the Superior Court of Hamburg – in my view one of the more objective jurisdictions with comparatively low costs and staffed by well-informed and experienced maritime judges:

• plaintiff court filing fee, 1st instance:                                € 5,775
• foreign plaintiff security deposit, 1st and 2nd instances:  €21,200
• costs for translations:                                                       €  2,000                                                                                                                        Total: €28,975?

            There are quirks and details in the German Civil Procedure Code, of course, that help the plaintiff in the event of a mutual settlement or a win. And since the loser pays jurisdiction, the defendant could be on the hook for the plaintiff’s full costs, offering the prospect of being made whole, which is not the case in the U.S. judiciary system. And the German system requires mandatory disclosures from the carrier (cargo manifests, temperature records, etc.), which can be cheaper than U.S.-style discovery.

            Nonetheless, the claimant having to sequester such a large sum of money just to find out whether its claim has merit puts the defense in a comfortable position.

            In some cases, this “barrier to entry” leads to bad habits on the part of the carrier, discouraging amicable settlement in favor of provoking the claimant into filing under disadvantageous circumstances. Or the defense will delay and stonewall with procedural arguments in order to avoid addressing the meat of the claim. These tactics are used in the hope that at least some claimants will simply give up, thereby saving money over a system that encourages fair and plain dealing outside of court. As annoying as this is for cargo interests, it’s hard to fault the defense for such calculating behavior.

Choosing a Jurisdiction

Naturally, some of this cantankerousness is due to low freight rates, but “Fortress Europe” is a more recent phenomenon. It was not until the U.S. Supreme Court changed its case law in 2013 to be more accommodating to foreign forum selection clauses that U.S. consignors, consignees and insurers had to look abroad for a forum that would hear their case. Prior to that, U.S. federal courts would hear such cases and ignore the forum clauses in the relevant bills of lading, providing a much more comfortable setting for U.S. plaintiffs than going to the carrier’s home jurisdiction. 

            When principals from different backgrounds and geographies come together to do business, it’s of course best if they have a good contract that accounts for every eventuality so they can settle their differences amicably. Failing that, if it does come to litigation or arbitration, choosing a jurisdiction in which one of the principals is not at a disadvantage – whether in terms of language, access to the court, or bias of the judge or arbitrator – is essential to ensure fairness.

            But what happens when fairness isn’t possible? After all, the ideal is subject to commercial reality.

            For consignors and consignees and their respective insurers, the problem is – as opposed to the usual situation in shipping – there is hardly any leeway to negotiate terms. Each commercial liner company has its own house bill of lading with fixed clauses that must be accepted if that company is to carry your goods. At best, then, the cargo side will have a choice of different carriers offering different terms.

            But if a route is only served by one carrier, or only one carrier’s schedule works out, then the choice is more restricted. And, of course, sometimes one carrier is significantly cheaper than another – justifying the higher risk.

Keeping Good Records

In such situations, all the shipper can do to protect itself against an unaccommodating carrier is to thoroughly document the cargo at all stages of transport, inasmuch as possible, and apply best practices like hiring a reputable surveyor when there is a suspicion of an issue. Appropriate language should be included in the bill of lading, even going so far as to state specifics about the type of packaging used (as deficiency in packaging is, by far, the most common carrier defense).

            Outside of the bill of lading, pictures and protocols regarding the cargo and packaging are always helpful, especially if they can be spread out to cover each leg of the voyage. If climate-sensitive cargo is being sent, temperature records can be invaluable to contest the carrier’s proprietary readings.

            Each judge is different, of course, but if these records are kept in English there’s a good chance that translation expenses can be reduced as many government courts in Europe have dedicated commercial chambers that will be sufficiently familiar with English documents. A welcome side-effect of such diligence is that, even if no litigation is intended against the carrier, these are also the materials that the major cargo insurers will ask to see before paying out on an asserted cargo loss.

            So if you find yourself in the unenviable position of having to assail “Fortress Europe,” at least you’ll have the right equipment. – MarEx