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Getting The Deal Through

in Hong Kong

An interview with Damien Laracy and Pansy Tsang

Hill Dickinson

Damien Laracy heads up the Hong Kong office of Hill Dickinson. He qualified as a lawyer in Auckland, New Zealand in 1990. He has practised law in Hong Kong since 1995 and his caseload involves litigation, arbitration, and advisory work in both the commercial and the maritime fields.

Damien has extensive experience acting for shipowners and banks in relation to ship mortgage enforcement and insolvency issues, as well as acting for shipowners, charterers and P&I underwriters in respect of P&I (including casualty, General Average and personal injury issues) and freight, demurrage and defence insurance claims. His team also acts for commodities traders and for commercial insurers in respect of cargo loss and damage claims, and in relation to claims concerning shipyards and ports and terminals.

Damien is a fellow of the Hong Kong Institute of Arbitrators, a fellow of the Chartered Institute of Arbitrators, a member of the panel of arbitrators of the Law Society of Hong Kong, and he is admitted to the Hong Kong International Arbitration Centre’s panel of arbitrators. He sits as an arbitrator and receives both institutional and party appointments.

Damien is an active member of the maritime law committee of the Inter Pacific Bar Association.

Pansy Tsang was admitted as a solicitor in Hong Kong in 2011. Prior to joining Hill Dickinson, Pansy was a partner in a local Hong Kong law firm.

Pansy has extensive personal injury and medical negligence experience representing insurers. She was one of the case handlers in the leading case Chan Pak Ting HCPI 235 of 2011, which changed the discount rate in quantification of damages in personal injury litigation in Hong Kong.

“Hong Kong shipowners are dealing – as are their counterparts globally – with the International Maritime Organization’s impending deadline regarding reduced sulphur emissions from heavy bunker fuel.”

GTDT: What is the current state of the shipping industry in your country?

Damien Laracy and Pansy Tsang: As was reported by the contributors to the Hong Kong chapter in this Market Intelligence last year, the global shipping industry has been facing severe macro-economic and regulatory challenges.

The macro-economic challenges have arisen due to the overzealous ordering of cargo ships up until 2011, coupled with a drop-off in Chinese demand for raw materials. According to a recent research note by Stansberry Churchouse, even with numerous new build order cancellations, an average of 400 new dry bulk cargo ships were delivered in to the market each year over the past five years. Even allowing for scrapping of vessels, global shipping capacity expanded by approximately 2.5 per cent each year. Research by the World Bank shows that at the same time global trade in goods and services steadily declined from 2011 to 2016, as commodity prices collapsed.

There is, however, room for optimism for Hong Kong traders, charterers and shipowners; the Baltic Dry Index (BDI) has risen approximately 58 per cent since April 2018. It has more than quadrupled from its record low in February 2016.

China is also now exhibiting a resurgent demand for commodities, which should continue to support the BDI.

Further, while the Greater Bay Development project in Southern China, and the Belt and Road Initiative (BRI), may not require involvement of Hong Kong as a transshipment port (due to competition from China’s own ports) there are grounds for optimism that demand for ancillary shipping services will be enhanced by these large infrastructure projects. That is to say, demand for brokering and chartering services, ship management and legal services, banking and finance services.

So, on balance the shipping industry in Hong Kong is in a much healthier and happier state that it was one year ago. That is good news for Hongkongers generally, given that it has been estimated by the Hong Kong government that the trade and logistics industries in Hong Kong account for approximately 20 per cent of its GDP and total employment.

Of course, the prospect of a trade war with the United States will continue to be a source of volatility. In a TradeWinds article on 3 July 2018, the Baltic and International Maritime Council was reported as likening the tariff ‘spat’ to a speeding train and saying that ‘the long-term’ effect provides uncertainty and could possibly derail current global growth if the measures are kept or further escalated’.

GTDT: What are the prevailing shipping market trends affecting your country?

DL: Aside from global macro-economic trends, Hong Kong shipowners are also dealing – as are their counterparts globally – with the International Maritime Organization’s (IMO) impending deadline regarding reduced sulphur emissions from heavy bunker fuel. These fuel restrictions are due to come into force on 1 January 2020 – less than 18 months away – and are directed at reducing airborne impurities generated from vessels burning heavy fuel oil.

The capital cost of fitting purifying exhaust gas cleaning systems (known as ‘scrubbers’) on ships – whether on a new build or as a retro-fit to an existing vessel – has been cited in the maritime press as being anywhere between US$3 million and US$10 million per vessel. Such costs may be manageable for a shipowner with a new vessel on long-term charter to, say, a liner operator. But on any analysis an owner with an older dry bulk fleet trading on the spot market can be expected to baulk at this capital expenditure.

There are also still significant uncertainties regarding the alternatives to exhaust scrubbers.

These uncertainties relate to:

  • the integrity of the low sulphur marine gas oil (LSMGO) supply chain as a viable alternative to fitting scrubbers. The global availability of safe and compliant LSMGO, and its anticipated price, continue to be vexed issues; and
  • the economic calculus around owners installing power plants capable of burning liquid natural gas.

In April 2018, the shipping magazine Fairplay reported that these issues may mean that owners of older tonnage will choose to scrap vessels over the coming 18 or so months before the IMO’s January 2020 deadline.

Conversely, there are now reports in the maritime press that ships with scrubbers installed (and therefore still consuming cheaper heavy fuel oil) will have lower operating costs as compared to ships running on more expensive compliant low sulphur fuel oil, but without scrubbers. This may make ships fitted with scrubbers more attractive to both potential owners and charterers.

However, there has also been a school of thought reported to the effect that many owners simply will not fit scrubbers on the basis that sourcing and paying for fuel is simply a ‘charterers’ problem’.

To further complicate the calculus around sulphur emissions, the Chinese government has very recently announced (as reported by TradeWinds on 4 July 2018) restrictions on imports of older commercial vessels (effective as from 1 September 2018). These ‘Tier II’ restrictions are in line with the Chinese government’s general support for the IMO’s low sulphur emission regulations.

We at Hill Dickinson Hong Kong have seen a spike in ship sale and purchase activity recently, in part due to optimism that the industry is returning to better times, but also (in the case of the sale and purchase of older vessels) consistent with a hesitancy on the part of some owners to invest in scrubbers.

This hesitancy is driven by both cost concerns and by a fear that the IMO regulations may yet be revised or amended.

On the topic of maritime arbitration, Hong Kong continues to be an attractive place to arbitrate maritime disputes – in terms of physical location, experience of its lawyers and related service providers including the Hong Kong International Arbitration Centre (HKIAC), and reliable and impartial support from the courts when necessary.

The HKIAC has now been established for 33 years and is recognised as a first class institution globally. Since 2012, other world-recognised international arbitration institutions have also set up in Hong Kong; the China International Economic and Trade Arbitration Commission; the China Maritime Arbitration Commission; the International Chamber of Commerce.

Hong Kong is a party to the 1958 New York Convention and Hong Kong Arbitration Awards are regularly enforced in China (and vice versa) pursuant to a bespoke arrangement in place between Hong Kong and China.

The infrastructure and trading activity that will inevitably be created from the Greater Bay Development project and the BRI should mean further demand for Hong Kong legal services, including for arbitration and mediation services.

GTDT: Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?

DL: The Greater Bay Development project and the BRI should greatly enhance demand for ancillary maritime services in both Hong Kong and Southern China (including bunkering, chartering, finance, ship-management and legal services).

At a June ‘Belt And Road Summit’, Hong Kong’s chief executive, Carrie Lam was reported by the South China Morning Post as saying that Hong Kong is poised to ‘become part of a tech corridor of 11 cities in the Greater Bay Area’. As such, it will become a ‘powerful connection point’ to the larger BRI.

Asia Money magazine has described the Greater Bay Development project as having the potential to replicate Silicon Valley. It is home to more people than the United Kingdom and has an economy larger than Australia’s. Its combined GDP – including Hong Kong and Macau – has been estimated to triple to US$4.6 trillion by 2030, overtaking Germany, Asia Money reported.

Hong Kong’s maritime community is actively seeking to position itself to maximise benefit from these projects and established the Hong Kong Maritime and Port Board in 2016. The board promotes Hong Kong as an international maritime hub and a centre for high-quality added-value services.

On 4 December 2017, Hong Kong also adopted into local law – via an amendment to Schedule 2 of the Merchant Shipping (Limitation of Shipowners Liability) Ordinance (Cap. 434) – updated IMO liability limits for maritime collisions and incidents. Hong Kong now applies the 1996 Protocol limits to the 1976 Convention on Limitation of Liability for Maritime Claims (the London Convention). By adopting the 1996 Protocol, applicable limits were increased by approximately 50 per cent to more closely mirror the situation in the United Kingdom. This was a long-awaited development of significant importance to any potential claimants against a ship or its owners, as well as to the wider shipping community (including shipowners, charterers and their insurers).

As alluded to earlier, the ‘green credentials’ of the global shipping community is currently a regular topic of discussion in the maritime press. The Environmental Affairs Protection Department of Hong Kong has been cooperating with its Beijing and Guangdong counterparts to ensure that, as from 1 January 2019, vessels plying Chinese waters of the Pearl River Delta Domestic Emission Control Areas (DECA) run on low-sulphur fuel not exceeding a 0.5 per cent sulphur content. The Mainland’s Ministry of Transport reports that before December 2019 it will also evaluate whether to tighten the sulphur content to 0.1 per cent, extend the geographical scope of DECAs or introduce further control measures.

Similarly, the Hong Kong legislature has been working with the Environmental Affairs Protection Department on a proposal to enact new legislation regarding low sulphur fuel emissions (on marine vessels operating in Hong Kong waters) – possibly with effect from as early as 1 January 2019.

These aligned and coordinated efforts are directed towards reducing sulphur emissions in and around Hong Kong a full year before the IMO’s ‘parent’ regulations come into more widespread force on 1 January 2020.

GTDT: What are the key regulatory and compliance issues for your country’s shipping market?

DL & PT: International, regional and domestic sulphur emissions regulations have been mentioned by me already.

In relation to competition law issues, the most significant recent development remains the expiry of the grace period in relation to vessel discussion agreements (VDAs) on 8 February 2018.

In short, the Hong Kong Liner Shipping Association (HKLSA) in December 2015 applied for exemptions to two common types of agreements in the shipping industry – vessel sharing agreements (VSAs) and VDAs – in order to further enhance Hong Kong’s competitiveness. In August 2017, the Hong Kong Competition Commission (the Commission) allowed a conditional block exemption for VSAs for a five year period to avoid contravention of Hong Kong’s Competition Ordinance (Cap. 619). However, the position taken was far stricter in relation to VDAs, including due to the Commission’s view that, contrary to what had been suggested in the application, there was a lack of evidence to demonstrate the service stability flowing from VDAs. There was also a finding that rate transparency from guidelines pursuant to VDAs was questionable. The Commission also said that, even if there were increased efficiencies, this would have little to no impact on customers.

Despite the exclusion of VDAs from the Block Exemption Order (BEO), the Commission allowed a grace period for liner operators party to a VDA to make changes to commercial arrangements. That grace period expired on 8 February 2018.

The Commission has issued a Guidance Note for those in the liner shipping industry to better understand the application of the BEO and its parameters.

While some Hong Kong lawyers have expressed frustration over the Commission’s strict position on VDAs (they remain valid in China), it is one that appears to overlap with international trends; in India and Israel, VDAs are not exempted from competition laws. Similarly, VDA exemptions in the European Union were removed in 2008.

Finally, on this topic, Hong Kong is a party to the 2006 Maritime Labour Convention. It has also (as from January 2017) adopted the 2014 Amendments in relation to provision of financial security by owners of Hong Kong registered ships:

  • in respect of seafarers who have been abandoned; and
  • in respect of a shipowner’s liability for other compensation payable to a seafarer.

“Hong Kong has a very experienced and well-run register of ships, a highly regarded legal regime, and business-friendly approach.”

GTDT: What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?

DL: Given recent optimism in the industry following the uptick in the BDI, we are seeing more sale and purchase activity. Some of this is inevitably driven by private equity firms with a renewed interest in exploring the industry.

With interest rates being so low there is also an enthusiasm for existing shipowners to once again borrow funds, place orders and expand their fleets. Caution must be exercised, however, to ensure that this does not lead to a repeat of the oversupply issues that have recently plagued the market.

The ‘Bond Connect’ scheme implemented a year ago allows Hong Kong and foreign investors to buy Chinese corporate and government bonds – ie, debt. As the South China Morning Post reported on 3 July 2018, it is also hoped that the southbound leg of this arrangement – which will allow Chinese investors to buy Hong Kong-issued bonds – will be operational shortly.

This should further enhance the ability of Hong Kong shipowners to source funds from mainland investors.

Chinese leasing companies associated with large Chinese shipyards (and that operate as specialist lenders that also participate more actively than banks in the post-delivery life of a new build) and sale and leaseback arrangements continue to be very active. The maritime press has reported that some of these activities may have been assisted by subsidies from the Chinese government.

On the equity side, there have not been any recent initial public offerings (IPOs) of shipping companies in Hong Kong. However, according to a South China Morning Post article on 3 July 2018, in the first half of 2018, funds raised from IPOs rose by 78 per cent to a three-year high. Asia Money also reports that, in the decade ending in May 2018, only the New York Stock Exchange completed a greater volume of IPOs.

We would also endorse what last year’s contributors said: Hong Kong has a very experienced and well-run register of ships (ranking fourth globally in terms of gross tonnage entered), a highly regarded legal regime and business-friendly approach. Hong Kong is well known for low tax rates and ‘tax connectivity’ via double taxation arrangements. These characteristics continues to make it an attractive forum for shipowners to obtain ship finance (whether debt or equity) and to establish shipping operations and structures.

For some more granular detail:

  • Hong Kong is a jurisdiction with a predictable and stable tax and legal environment, enshrined in our ‘mini constitution’, the Basic Law;
  • according to Nicholas Tang, Hong Kong’s Secretary for Innovation and Technology (quoted in an article in Asia Money), approximately 80 of the world’s 100 largest banks operate in Hong Kong;
  • there is no value-added tax or goods or services tax, no withholding tax on interest payments to overseas lenders or dividends to shareholders;
  • Hong Kong is the fourth largest shipping register, or flag, state in the world with a total of approximately 117 million gross tonnage;
  • despite being the fifth busiest container port in the world, Hong Kong has a track record of being a good ‘global corporate citizen’ in terms of labour and environmental compliance;
  • McKinsey Global Institute predicts that the Greater Bay area will contain the world’s largest banking cluster by 2025, generating total annual revenues of US$185 billion, ahead at Beijing, Shanghai, Tokyo and São Paulo; and
  • high-speed light rail will cut travel time between Hong Kong and Guangzhou (where COSCO Bulk Shipping is now based) to one hour.

GTDT: Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?

DL: There have indeed been recent court decisions confirming and enhancing the procedural efficiency of Hong Kong’s Admiralty Court. For example, following the Hanjin collapse there were various Hanjin vessels arrested and sold in Hong Kong. International shipbrokers were instructed to confirm that the Hong Kong Admiralty Court’s reserve prices were correct and the aggregate of subsequent total sales values exceeded US$600 million.

Similarly, in Alas, our Admiralty Court broke new ground in confirming that a foreign arbitration award can – in appropriate circumstances – be enforced by way of an arrest of a vessel. That important case was handled by my firm.

There have been numerous other examples of our High Court enforcing foreign arbitration awards and judgments (whether by way of the New York Convention, statutory reciprocal enforcement arrangements or by way of Common Law). Hong Kong remains an extremely arbitration-friendly jurisdiction.

The Hong Kong courts take a strong view that arbitral awards should only be set aside for very compelling reasons. The exhaustive grounds in section 86 of the Arbitration Ordinance are to be narrowly construed. As was stated in the 2015 decision of K B v S and Others, enforcement of arbitral awards should be ‘almost a matter of administrative procedure’ and the courts should be ‘as mechanistic as possible’.

Endorsement of Hong Kong as a reliable and mature venue for resolution of shipping disputes has also come from the United Kingdom, including in the well known decision of Mr Justice Hamblen in Shagang v Daewoo Logistics: ‘Hong Kong . . . is also a well known and respected arbitration forum with a reputation for neutrality, not least because of its supervising courts.’

Giving emphatic empirical validity to that sentiment is the fact that, according to the HKIAC, the number of cases it handled involving parties from Belt and Road nations jumped 77 per cent, to 124, in 2017.

GTDT: What is the outlook for your country’s shipping market?

DL & PT: The outlook for the Hong Kong shipping market, and industry generally, appears very good. Conventional commercial shipping activities will benefit from a general improvement of global economic indicators as well as the regional impact of the BRI and the Greater Bay Development project.

The significant increase in interest shown by major international arbitration institutions setting up offices in Hong Kong indicates a great deal of optimism on their part. The presence of these arbitration institutions, alongside the highly regarded and already well established HKIAC, will only serve to further increase the already high level of competency found in the arbitration and legal communities in Hong Kong.

On a ‘travel and leisure’ note, it is also encouraging to see the surge in interest from cruise operators following the establishment of the new cruise terminal at the old Kai Tak Airport.

As reported by the Hong Kong Standard newspaper, major cruise lines such as Genting Cruise Lines have selected Hong Kong as the home port for vessels, reflecting the confidence international investors have in Hong Kong’s cruise industry.

The cruise business in Hong Kong has been growing strongly in recent years. According to statistics released by Tourism Hong Kong, the Kai Tak Cruise Terminal’s capacity for customs and immigration and health and quarantine operations can serve 3,000 passengers per hour. It processed over 760,000 passengers in 2017, a 96 per cent surge from the previous year. Evidenced by its HK$42 million allocation to the cruise industry (reported in the Hong Kong government’s 2018–2019 Strategic Plan and Initiative), it is clear that the Hong Kong government is committed to developing Hong Kong into a cruise hub.

There has also been an increase in demand for pre-owned luxury yachts in Hong Kong. This interest has been met by a corresponding increase in the number of specialist yacht service providers in Hong Kong, ranging from sale and purchase and chartering brokers, to specialist managers, lawyers, bankers and insurance brokers.

  • Campers & Nicholson, an international brokerage, set up in Hong Kong in 2017 with sale and purchase, chartering and management functions. Campers & Nicholson sits alongside other established brokers in Hong Kong such as Simpson Marine and Burgess that offer similar sale and purchase and management functions.
  • Anglo-Eastern, a reputable manager of commercial ships, also recently introduced a new division for yacht management services.
  • Expat Marine, a set of homegrown insurance brokers, continues to remain active in the market in arranging insurance for these expensive toys.
  • Southern China has also seen a large increase in the number of yacht builders in recent years.

Neighbouring cities to Hong Kong in mainland China have ramped up production of pleasure craft, which can be custom-built to individual tastes in competition with traditional European yacht builders. With this active market, it is unsurprising that the Hong Kong Boating Industry Association – of which Hill Dickinson was a founding member – was established in 2017 to service and be a part of this growth.

Events to look out for include the Hong Kong International Boat Show, the Hainan Rendez-Vous and the China Macau International Yacht Import & Export Fair. Enthusiasts continue to hold out hope that there will be an increase in the number of berthing spaces for yachts that could – for some people – also offer an alternative to the high-rise living spaces of Hong Kong.

The Inside Track

What are the particular skills that clients are looking for in an effective shipping lawyer?

Clients value availability and promptness of attention to their instructions and queries, which itself demands a degree of skill from the lawyer in regard to time management and prioritisation. While these attributes may seem applicable to all lawyers, with shipping lawyers there is regularly a time-sensitive fact pattern evolving in real time that often creates genuine urgency not found in other areas of legal practice.

It is assumed that lawyers in established firms have the necessary technical skills, so clients therefore look for an efficient deployment of personnel on their matters. A further vital skill is the ability to be disciplined about achieving a commercial outcome with proportionate legal fees. It is very rare that a client these days provides an open chequebook , so balancing the substantive merits of a matter with the client’s appetite for risk and expense is a vital commercial skill.

What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?

There are two main types of vessel finance, in the form of traditional securities-backed loans and more commonly now the sale and leaseback transactions from leasing companies. Common considerations of owners and banks and leasing companies tend to focus on commercial issues such as loan tenure, repayment schedule, interest rates, repayment methods (including index-linked charter-hire and repayments), securities (mortgages, charter-hire, assignment of earnings and insurances, and currency swaps under the ISDA Master Agreement) and potential for restructuring of loans. The identity of counterparties plus perceived experience in the market and creditworthiness remain important considerations for banks owners and charterers, in what has been a difficult shipping market fraught with defaults and insolvencies.

What are the most interesting and challenging cases you have dealt with in the past year?

We are currently acting for a large European company that has been the victim of a multimillion euro internet fraud. We have frozen funds in Hong Kong banks and are now in the process of extracting them. I am happy to report that we have already been successful in extracting significant sums.

We were involved in two casualty matters following the super typhoon ‘Hato’ that hit Hong Kong in August 2017. In one case the crew of a tug boat that had been sheltering in Hong Kong waters was shipwrecked on a neighbouring Chinese island after they chased their barge, which had been dragging its anchor. During the chase the tugboat lost power in very heavy exposed seas and ran onto rocks. The crew were airlifted from the Chinese island to Hong Kong by the Hong Kong coastguard and we then took witness statements on behalf of the hull and machinery underwriter. Dealing with the language issues was extremely challenging (Indonesian and Myanmese crew) as well as liaising with the immigration authorities.

Damien Laracy and Pansy Tsang
Hill Dickinson
Hong Kong

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