FD&D

No, this has nothing to do with Dungeons & Dragons. The picture is only an illustration of how badly things can go wrong in shipping. This casualty happened in Zakinthos, Greece in 2002 due to a "navigational error". That was the official cause. In actual fact the bridge crew were drunk at the time.

For readers of this blog outside of the shipping industry, FD&D is a class of marine insurance which stands for "Freight, Demurrage & Defence". The last 2 "D"s are probably interchangeable. It basically covers a ship-operator's legal costs in the event of a contractual (usually charterparties, but may also include construction) disputes.

It's currently the run-up to P&I renewals (one of the reasons why I'm in Singapore at the moment) which is why this particular FD&D issue came up. P&I is another class of marine insurance and the reason why these often go hand-in-hand is because they are insured by marine mutuals (P&I Clubs), all of whom, by tradition, renew on 19th February every year. Historically, the reason for the renewal date being 19th February is because that would be the date when the Baltic re-opens for trading.

For the last few monts, most, if not all ship-operators would been reviewing their loss records for the previous 5 years in preparation for the renewal. Once the records have been agreed, renewal negotiations with the P&I Clubs' underwriters can begin.

In this instance, a ship-operator I know (G) had an issue with its FD&D loss record. Different Clubs reflect the figures differently. Some Clubs show expenditure on legal costs as postive numbers (conversely, recoveries, if any, are shown as negative numbers) whereas some Clubs do the oppposite. In this case the Club in question reflected expenditure as a postive number.

The issue related to the legal costs in an arbitration in which G (the claimant) was successful. Since costs follow the event, the tribunal made a notional but not insubstantial costs award in G's favour, even though the proceedings had been handled entirely by the Club, rather than external solicitors (which is usually the case). The Club eventually recovered a 5-figure sum (USD) from the respondent and promptly paid these funds into the Club's general accounts. It then reflected G's loss records to show a nil balance.

G is unhappy with this because it is of the view that its loss record should show the full 5-figure sum recovered from the respondent. G has no objection to the Club keeping the money, though. The Club disagrees with how the loss record should reflect the recovery. The Club's position is that FD&D is only intended to cover G's legal costs and certain consequences flow from this premise.

If G was unsuccessful in the arbitration, it would have had to pay the P&P, as well as the S&C costs of both parties. In that instance, G's loss record would show a postive figure. However, since G was successful in the arbitration, it was the respondent who would be liable to pay the P&P and S&C costs of both parties and as such, the best result which G could hope for is that it pays nothing - in theory. In this case, costs were awarded on a standard basis and unless these were taxed/assessed, G would probably only recover 70% to 90% of the legal costs it incurred. Because the Club handled the matter in-house, no costs were incurred as such, merely the Club's time and resources. As such, the Club gave (in its view) G the benefit of the doubt and entered a nil balance on G's loss record, which would have been the best theoretical result (there may be an exception where interest on costs is awarded and in which case the best theoretical result could be a postive number greater than zero).

G disagrees that a nil balance is the best theoretical result on the basis that it has paid its calls (the in-word for "premiums") and these calls will have included the Club's claims-handling costs and associated overheads. As such, its loss record should reflect the full amount recovered from the respondents.

Both parties have a point but the question is who has the better point? I called my friends who work as claims-handlers for the various other P&I Clubs and all of them took the same view as G's P&I Club. However, they all also conceded that G had a valid point. However, in conversation with them, we came up with 2 possible compromises in the event that the Club insisted on keeping the nil balance.

Option 1
The Club could put the recovered money aside and then use it to pay off future or current FD&D claims. This isn't really a good idea as there are likely to be regulatory implications. The money put aside could be seen as a sort of "slush fund".

Option 2
Credit the recovered money to a related P&I claim so that G gets the benefit of the monies recovered. There are 2 problems with this. There may not be a related P&I claim, in which case, this solution is a non-starter. Even if there is a related P&I claim, this proposed solution is based on the assumption that a credit of $x as applied to G's P&I record is equivalent to the same being credited to its FD&D record. This assumption is wrong because P&I risks and FD&D risks are rated differently and crediting the P&I record may or may not improve it to the same extent that the FD&D record will have been improved by an identical credit.

Both options have their problems but this issue had been looked at by a total of 8 different lawyers (including myself), we couldn't really see what other alternatives there were.

This incident gives rise to some interesting questions, not least of which was why we (myself and my friends whom I consulted on this point) were all of the view the Club's view that the conceptual difficulties in reflecting a "credit" for a recovery of legal costs (stemming from the premises that FD&D is only intended to cover legal costs) was more persuasive. Purely from the perspective of the various P&I Clubs, that their claims-handlers all saw things from the same point of view was hardly surprising. This could be put down to institutional conditioning. Why it also appealed to me was more curious, given that I've not subject to the same institutional conditioning. It could be a jurisprudential issue insofar as my friends and I are all lawyers and received the same model of legal education, especially in relation to legal reasoning. Perhaps that's why the commercial view taken by G seemed to have rather less appeal to us.

Anyone with any ideas concerning more options by way of a compromise between G and its P&I Club as well as any thoughts concerning the jurisprudential issue, please don't hesitate to email me.