Tsavliris Salvage v. Grain Board of Iraq

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Note: The Iraqi interests have obtained leave to appeal to the Court of Appeal, Editor, 22 July 2008

Tsavliris Salvage (International) Limited v. The Grain Board of Iraq
English High Court: Commercial Court: Gross J.: [2008] EWHC 612 Comm: 1 April 2008
Timothy Hill, instructed by Clyde & Co LLP, for Tsavliris
Mark Hoyle, instructed by Waterson Hicks, for The Grain Board of Iraq
The Ministry of Trade of the Republic of Iraq, together with the Grain Board of Iraq, applied to the Court under s.67 of the Arbitration Act 1996, to challenge an award for salvage under the Lloyd’s Open Form agreement, on the grounds of a) lack of jurisdiction, there being, so it was alleged, no valid arbitration agreement, and b) sovereign immunity, in that the Grain Board of Iraq was part of the Ministry of Transport and therefore immune from the arbitration proceedings. The application failed on both grounds.

DMC Category Rating: Confirmed

In the course of a voyage from Rostock to Umm Qasr in August 2006, the m.v Altair, laden with a cargo of wheat for Iraqi interests, grounded close to her destination in Kuwaiti waters. After various unsuccessful attempts had been made to refloat her with local tugs, her owners, through their managers in Greece, entered into a salvage agreement with Tsavliris under the Lloyd’s Standard Form of Salvage Agreement 2000 Edition ("LOF"). By this agreement, Tsavliris contracted to use their best endeavours to salve the vessel and her cargo, freight and bunkers. The salvage operation was successful and, on 9th September 2006, Tsavliris redelivered the ship to her owners at the port of destination, Umm Qasr.

Tsavliris were unable to obtain security from the cargo interests for their proportion of the salvage. They proceeded to arbitration as provided by the LOF but the cargo interests declined to take part in those proceedings. The salvage arbitrator concluded that The Grain Board of Iraq ("GBI") was the owner of the cargo at the time of the salvage services; that it was party to the LOF; that he had jurisdiction to determine whether it was liable to Tsavliris for salvage and, if so, in what amount and that it was a separate legal entity, distinct from the executive organs of the Government of Iraq and, accordingly, capable of suing and being sued. The arbitrator held the GBI liable in the amount of US$496,511, together with interest and costs.

The GBI appealed to the High Court on the grounds that it was not bound by the LOF and therefore not subject to the jurisdiction of the salvage arbitrator. Further, it was not an entity separate from the Iraqi Ministry of Transport, so that the Ministry, rather than it, was the owner of the cargo. But whether the owner of the cargo was the Ministry or the GBI, both were entitled to succeed in a claim for immunity under the State Immunity Act 1978.

The Status of the GBI
The judge held that the GBI was the owner of the cargo, principally for the following reasons. First, the GBI enjoyed separate legal personality from the Ministry of Transport and had therefore the legal capacity to enter into contracts in its own name. Second, its main function and purpose, as set out in its Certificate of Incorporation, was (in the words of Tsavliris’ expert witness adopted by the judge) "to purchase the grains (rice and flour) necessary for citizens after importing them from abroad or purchasing them from farmers inside Iraq…" Thirdly, the contractual documentation in the case, namely the FOB purchase contract, the bill of lading, the letter of indemnity (for delivery of the cargo) and the arrangements for the letter of credit were all "consistent with the GBI being the true purchaser of the cargo." As the owner of the cargo, GBI was therefore party to the LOF.

The judge held that GBI, as the owner of the cargo, was bound by the signature of LOF by the Owners’ managers – see Article 6.2 of the Salvage Convention 1989, incorporated into English law by s.224(1) of the Merchant Shipping Act 1995. That amounted to a submission to arbitration, serving to exclude state immunity, in accordance with s.9(1) of the State Immunity Act 1978. That section reads:

"Where a State has agreed in writing to submit a dispute… to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration."

The judge rejected the argument that the reference in s.9(1) of the State Immunity Act to an agreement in writing required something more specific than the signature of the LOF by others on cargo’s behalf, as happened in this case. In this regard, the judge had in mind the "broad and permissive view of the requirement that an arbitration agreement should be in writing", exemplified in s.5 of the Arbitration Act 1996.

State Immunity
His holding that the GBI had expressly submitted to arbitration - through the signing of the LOF - rendered it, strictly speaking, unnecessary for the judge to consider the further points raised in argument on the issue of immunity. Nevertheless, he did so.

The relevant provisions of the State Immunity Act were as follows:

"s.10(4) A State is not immune as respects –

(a) an action in rem against a cargo belonging to that State if both the cargo and the ship carrying it were, at the time when the cause of action arose, in use or intended for use for commercial purposes; or

(b) an action in personam for enforcing a claim in connection with such a cargo if the ship carrying it was then in use or intended for use as aforesaid

14. (1) The immunities and privileges conferred by this Part of this Act apply to any foreign or commonwealth State other than the United Kingdom; and references to a State include references to –

(b) the government of that State; and
(c) any department of that government,

but not to any entity (hereafter referred to as a ‘separate entity’) which is distinct from the executive organs of the government of the State and capable of suing or being sued.

(2) A separate entity is immune from the jurisdiction of the courts of the United Kingdom if, and only if –
(a) the proceedings relate to anything done by it in the exercise of sovereign authority; and
(b) the circumstances are such that a State ….would have been so immune."

As regards s.14(1) of the Act, the issue was whether the GBI was to be regarded as a department of the Ministry of Transport and, hence of the Iraqi government, or as a separate entity. After considering the authorities, particularly Czarnikow Ltd v Rolimpex [1979] AC 351, the academic sources, the evidence and the expert evidence, the judge concluded that the GBI was indeed a ‘separate entity’. It may have been established, owned and capitalised by the state of Iraq – and not required to make a profit - but it nevertheless had financial and administrative independence. Its relationship to the Ministry was closer to that of autonomous subsidiary and head office than to that of a branch office and head office, and was analogous to that of Rolimpex in the case mentioned above. In addition, it possessed separate legal personality.

Was, however, the GBI - as a separate entity under s.14(1) of the Act – nevertheless entitled to immunity under s.14(2) of the Act, in that the proceedings related to "anything done by it in the exercise of sovereign authority"? The relevant test here was the character, not the motive or purpose, of the relevant act, namely, the entry into the LOF agreement in the context of the acquisition and carriage of the cargo. In the judge’s view, the act of entry into the LOF "did not have the character of and was not a governmental act." (at para.80). As such, GBI was not entitled to rely on the immunity available under this sub-section.

In the light of his conclusions under s.14 of the Act, the judge dealt only briefly with the Respondent’s arguments under s.10(4)(b). Adopting the assumption most favourable to the Respondent, namely that the section applied only if both ship and cargo were "in use or intended for use for commercial purposes" (see Comment 2 below),  he concluded that both ship (which was not contested) and cargo were in such use. The cargo was not an "aid" cargo and, even if it was destined for some form of subsidised distribution in Iraq, the evidence did not establish that it was to be donated to Iraqi recipients free of charge. In any event, its intended distribution at some time in the future could not affect its status at the time of the salvage services. At that time, it was clearly a commercial cargo; it had been purchased and shipped commercially. It was, in the judge’s view, "hopeless to contend otherwise" (para.82(i)). State immunity accordingly, did not apply.

1.    The Respondent had argued that the effect of the interpretation of Art.6.2 of the Salvage Convention adopted by the judge in this case was "to ride roughshod over the principle of state immunity" (para.54). The judge’s reply to this point was as follows, at para.57:

"While it may be right to say that Art. 6.2 of the 1989 Convention is capable of producing far-reaching consequences, those consequences reflect the strong maritime policy interest in rewarding salvors. The 1989 convention is, after all, a well established and well known international convention. There is no unfairness in a state, having enjoyed the benefit of salvage services, becoming bound to pay for them (subject to any particular questions as to enforcement), a fortiori, pursuant to an arbitration agreement to which it is a party. Indeed to require a state in such circumstances to honour an arbitration award, seems to me, to involve, in Lord Wilberforce’s words "neither a threat to the dignity of that state, nor any interference with its sovereign functions": I Congreso [1983] AC 244, at p.262.

2.    On the question of interpretation of s.10(4)(b) of the State Immunity Act, namely, whether – in order to defeat immunity – both cargo and ship had to “be in use or intended for use in commercial purposes, the judge expressed the view obiter (by the way) that he preferred the argument presented by Mr Hill for the salvors. That was to the effect that the words “such a cargo in (b)” referred back simply to the words “a cargo belonging to that State” in (a) and did not include reference to the later words in (a) “in use or intended for use for commercial purposes”.  

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