• 2018 April 6

    Konstantin Krasnokutskiy: “P&I Clubs always cover the damages if they were determined with a reasonable degree of certainty”

    A hallmark case concerning collision of m/v Delta Pioneer with a berth in the port of Primorsk on November 20, 2016, ended in Russia. A lawyer of the Greek shipowner, Konstantin Krasnokutskiy of Lex Navicus Concordia, told Portnews about the difficulties that the parties to the case encountered during litigation.

    - Konstantin, the original sum of the claim was around 3 billion rubles. Under the settlement agreement the sum was cut in half. How did you manage to come to such a cut and do you think that this sum is fair?
    - Indeed, the Commercial court of St. Petersburg and the Leningrad region, the first instance court, adjuged over 3 billion rubles, basing the decision solely on a report prepared by Ernst&Young. The basis for that report was the price of construction and bookkeeping value of the property as of 2001, which was multiplied by various coefficients and indices (in total it was multiplied by about 8.2). Next, the percentage of damage was arbitrarily determined, e.g. if a berth was 1125 meters long and 135 meters was damaged, it would mean 12% damage. As a result of such multiplication, massive numbers that have nothing to do with reality were established.

    We have filed reviews and alternative calculations to the court. These were done both by Russian specialists, such as hydrotechnical engineers from the Moscow state construction university, and by foreign hydrotechnical engineers, Russian and foreign appraisers. The assessments made by our specialists varied between 400 million and 1.5 billion rubles. With such a massive difference between these numbers and the 3 billion asked for by claimants, we asked the court to set up an independent expert examination. However, judge Nina Korzh rejected all alternative calculations, refused to appoint an independent expert, and based her decision on the claimant’s calculation, i.e. the bookkeeping value multiplied by various coefficients and indices.

    To show why this method of calculation is incorrect, I can give the following example. Let’s take the price of construction of Krestovsky stadium (aka Zenit-Arena or Saint Petersburg Stadium), which is at around 50 billion rubles. Assume it gets damaged in 15 years, and we use the same calculation method: multiply 50 billion by 8.2 (the coefficient used by the claimants in their calculation) with the resulting sum being 410 billion rubeles, or over 7 billion dollars. Quite absurd, isn’t it? Once could build ten such stadiums for this kind of money.
    The turning point in the case was the decision by the Thirteenth commercial appellate court (the appellate level court) to set up an independent expert examination. This means that the first instance decision would not be upheld and the sum of damages would be determined based on the report of court-appointed experts. On top of that, this report and its conclusions would then be subject to possible review and dispute, and the court could have set up a repeated and/or collegial expert examination.

    We have managed to settle the dispute thanks to the efforts of brilliant lawyers and negotiators: Sergey Saveliev from Saveliev, Batanov and Partners (Moscow), and George Lambrou, a Greek and Russian-speaking lawyer from Thomas Cooper, a London-based firm. The settlement agreement is their success to a large degree.

    It’s hard to know whether the ultimate sum of $27 million is fair. We have a limited amount of port documentation. This is because most of the documents (construction and engineering documents, graphs, planes etc.) were subject to commercial secrecy, and Transneft – Port Primorsk asked the court to have the hearings conducted in camera. Transneft – Port Primorsk lawyers later added that all the documents relating to oil pipes (including those in port Primorsk) will become classified in 2018.

    The court never got to decide on the issue of in camera hearings. As soon as the issue was brought up before the court (and we insisted on keeping the hearing public), Transneft – Port Primorsk began to make concessions, allowing for the dispute to be settled.

    - Do you know of similar cases worldwide, and is the sum of compensation in line with such worldwide practice?

    - There are different ways to calculate damages, both in Russia and abroad. In my opinion, the most accurate way to calculate the damages would be a sum based on the project for repairs of the sections of the port that got damaged. In other words: how many piles would have to be replaced, how much concrete, how many people and machinery it would take etc. The most accurate way would be to first have the repairs done and then claim the actual expenses.

    In our case, the claimant has calculated its damages by taking the value of construction and bookkeeping value of the assets in 2001 by various coefficients and indices, resulting in over 3 billion rubles.

    Foreign engineers, who prepared an alternative calculation by our requests, pointed out that such calculation methods, i.e. with indices and formulas, are rarely used in the West. Calculations are done based on the specific amount of materials, labor, transportation costs etc. necessary for repairs.

    Historically, our jurisdiction really “likes” to use different methods, formulas, coefficients, indices etc. to calculate damages. This is how it works for oil spills, for example. The damage is calculated based on a formula approved by the Ministry of natural resources and ecology. The amount of damage depends on the amount of oil that got into the water.

    A theoretical method of calculating damage can, and it’s quite obvious, be very far away from the actual damage. Best international practice is not to use such methods. The International Convention on Civil Liability for Oil Pollution Damage (Russia is a party) is an example. The damage is limited to costs incurred for reasonable measures to reinstate the contaminated environment. No formulas. No theoretical models. Just a specific calculation: how much money was spent (or would have to be spent) to reinstate the environment. As a result, in Russia, where there is an oil spill from a marine vessel, the damage is calculated based on the Convention, and based on the Russian Ministry of Natural Resources formula for inland waterways. In our practice, we have encountered tenfold difference between such calculations.

    With respect to a port, there is no regulation on how to calculate the damage. Consequently, the claimants calculated it by multiplying its original value by indices, and we did the same by calculating the market value of the repairs of the damaged port constructions.

    Considering that the ultimate sum of compensation went down by about a half, and our opponent was a large state company, this is a very good result.

    - The incident with the collision happened while the vessel was towed by a Rosnefteflot-owned tug. Why were the shipowner and the operator of the tanker liable, and the tug owner merely a third party?
    - Russian law sees a vessel as a so-called heightened hazard source, or a source of increased danger (Civil code Article 1079), making the vessel liable regardless of its fault. The injured party, the port, only needs to prove causal link (the vessel hit the berth and the berth got damaged because of that) and the amount of damages. This regime is called “strict liability”.

    Russian law does not allow one to file a claim against a vessel, the claim must be made against the party whose behavior resulted in an injury – the shipowner, i.e. the entity actually using the vessel at the moment. This does not necessarily have to be the owner of the ship. It could the shipmanager, the charterer, or some other party. To ensure that they would not file the claim against the wrong party, the claimants filed their claim against two respondents: the shipowner and the operator of the ship. Russian law is dispositive in this regard and the claimant is free to decide for themselves who to claim against, even if there are no grounds for joint and several liability in Russian law. By finding them jointly and severally liable, the first instance court, in my view, was simply wrong as a matter of law.

    - Rosnefteflot objected to the settlement agreement. Why do you think they did, and what do you think of the chances to file a claim against Rosnefteflot?

    - By joining Rosnefteflot into the proceedings, the court took into account that they have an interest in its outcome. This interest is, indeed, substantial, because the investigation by Rostransnadzor (a Russian authority responsible for transport safety) established that one of the main reasons of the incident was an “unsanctioned inadvertent separation of the tow line” from RN POSEIDON, the tug that was holding the stern of the vessel away from the berth.

    The court planned to approve the settlement agreement back on March 20, 2018, but Rosnefteflot was strongly against it. They insisted that the settlement include provisions that establish exclusive fault of the tanker in the collision, and that the parties point out in the agreement that the tanker is to pay for all the damages, and that neither the shipowners nor Transneft – Port Primorsk will have any claims against Rosnefteflot.
    However, Rosnefteflot lawyers knew the wording of the settlement agreement (its copy was in the court files) and did not object until the day of its approval, probably hoping that the parties, unwilling to compromise their own agreement and in order to not have to reissue a $27 million bank guarantee, will concede and accept Rosnefteflot’s terms. Instead, the court just approved the settlement agreement three days later and rejected Rosnefteflot’s claims.

    As for the claims against Rosnefteflot, this is up to the Greek shipowner to decide, taking into account that the litigation would be against a subsidiary of a major state company in a Russian court. It is quite possible that they will decide to maintain the partnership instead.

    - Can you assess the damages borne by the shipowner and the operator because of her stay under the arrest?

    - Massive. The tanker was arrested for well over a year during the litigation and the settlement negotiations. However, we have agreed not to take these damages into account in the settlement agreement.

    We have originally managed to lift the arrest back in May 2017. The point of the arrest is to get financial security for the claim, which will not exceed the value of the vessel. The logic is simple: the arrested ship is replaced with a different form of security and keeps being used in the shipowner’s business. In maritime practice such a security usually comes in the form of a letter of undertaking by the insurer, or, and more commonly, a P&I club. P&I club letters of undertaking were accepted for release of vessels even back in the Soviet Union, since it was directly provided for by the corresponding regulation of the ministry of the marine fleet. We have also released ships against P&I club letters of undertaking, as well.

    The value of the vessel in May 2017 was between $16.9 and $17.25 million. We have submitted two letters of undertaking issued by West of England: one for $17.25 million for Transneft – Port Primorsk, and another one for $11 million (the entire claim by Primorsk Trade Port LLC, the stevedoring company who rented some of the damaged equipment). The court accepted the letters and removed the arrest, the ruling to that end was published in the evening on the court website and in a public online database of court decisions. Next morning we have obtained six court-certified copies of the ruling in the court itself. The ruling pointed out that the letter of undertaking was “sufficient” and “proper in form”, and West of England is a financially sound insurer with large reserves.

    However, in the afternoon the ruling disappeared from the court website and the database. In a few days a ruling to the opposite was published, not to accept the letters and to keep the arrest in place. Judge Olga Klinitskaya, who issued the two rulings, got sick and was replaced with judge Nina Korzh, her boss in the bureaucratic court system. Finally, the original rulings imposing the arrest have hand-written marks saying “approved” and someone’s signature near that of the judge.

    So we were left with several copies lifting the arrest, which, as the deputy chairman of the Commercial court of St. Petersburg and the Leningrad region told us, were “erroneously” issued and certified by a court seal. The tanker ended up arrested for 10 more months.
    - What money will the respondents will use to pay the compensation: their own, or those of the P&I club?

    - The settlement agreement sets out that a bank guarantee is to be issued by Raiffeisenbank for $27 million for Transneft – Port Primorsk and Primorsk Trade Port. The actual payment will be done by the claimants getting the money from Raiffeisenbank.

    The sums paid under the guarantee will only be partially borne by WoE.

    This is because 90% of the worldwide marine vessels are insured, or, rather, are members of P&I insurance clubs who are member of the International Group of P&I Clubs. The IG consists of the 13 largest P&I clubs, including West of England. The limitation of liability insured by the IG clubs is $3.1 billion. Obviously, no one will take such a massive risk without reinsurance.

    There is an intra-club agreement within the IG, under which the first $10 million are covered by the club whose member the vessel is, and the sums between $10 – 30 million are allocated between the 13 clubs based on the pool insurance system. The sums within $30 – 100 million range are reinsured by a captive reinsurer, Hydra, which was established by the clubs, and damages above $100 million are reinsured via more complex mechanisms including Hydra and other reinsurers.

    So, $10 million will be paid for by West of England on its own, and $17 million will be allocated between the 13 IG P&I clubs within the first step ($10 – 30 million) of pool insurance.

    P&I Clubs always cover the damages if they were determined with a reasonable degree of certainty.