Recovery of damages caused by illegal detention of ships in Ukrainian seaports: review of the court practice

01 07 2019

Why it matters

Every year, tens of ships and vessels entering Ukrainian seaports get detained and stuck there. It happens for various reasons, including alleged pollution of Ukrainian seawaters (for more details see: Detention of Ships in Ports of Ukraine for Reasons of Polluting Ukrainian Internal Waters by the Release of Ballast Waters: a few remarks on the new direction of the State Ecological Inspection activity), violation of environmental rules concerning cargo relocation or grain handling or even illegal entry of the closed seaports of occupied Crimea (Price of the Crimean voyage: detention, arrest, and confiscation of vessels for illegal entry to occupied ports of Crimea). While such detention can last for several days, even weeks and months, everyday cost of delay for average ship starts from $5,000 and can reach $50,000. Frequently, it leads to the situation when the cost of one-week demurrage equals to the commercial benefit of the whole ship voyage. As such, a shipowner/shipmaster does everything in their capacity to rescue the ship from the detention and to quit a port as soon as possible, preferring to bear the costs on their own rather than trying to obtain compensation. However, rare cases exist, where shipowners brought the matter before Ukrainian courts and claimed for the redress of damages.

What can be recovered

Ukrainian law recognizes two kinds of damages: direct loss and loss of profit and both can be claimed for in disputes against the seaport authorities. Direct loss consists of the expenditures incurred by a shipowner to maintain the normal functioning of a ship. Normally, it includes costs of technical maintenance of the ship, fuel, remuneration of the crew, nutrition, etc. Plus, it entails various port services fees and fees for freight forwarder services which are due to be paid regardless of the reasons for staying in the port. First and foremost – all expenses claimed as direct loss shall have a causal link with the detention of a ship and thus with the actions of the port authorities meaning that they shall be related to the period of the detention. Notably, a shipowner shall present primary documents of the expenses incurred (receipts, bills, invoices, etc). In terms of the loss of profit, its calculation shall reflect only those sums that can be really and indisputably gained and a real possibility to acquire the profit shall be testified by appropriate documents.

Judicial remedy: which courts to address

With regard to the litigation itself, Ukrainian legislation affords two options. Firstly, you can petition the administrative court to recognize the authorities’ actions or decisions unlawful and to claim for the compensation as a result. Alternatively, you can bring the matter before the commercial court and claim directly for damages. In both cases, you will need to establish wrongfulness of the authorities’ actions. There are two possible grounds of the claim: 1) absence of legal basis to act in a certain way; 2) breach of procedural requirements. For example, an examination performed by the State Ecological Inspection may be recognized unlawful if the Inspection did not have sufficient basis for it or the procedure of examination was flagrantly violated. In this regard, the administrative lawsuit is appropriate when the ship is still detained in the port and the shipowner needs the court to clearly establish its unlawfulness and to quit the port on the basis of the court decision. On the other hand, commercial courts consider the authorities’ conduct as a part of the three-fold test (the other two parts are the damage itself and the causal links between unlawful actions and the damage). Plus, the statute of limitations constitutes three years in the commercial litigation, while it is limited to six months for the administrative proceedings. Finally, some shipowner decides to firstly address the administrative court and establish the unlawfulness of the authorities’ actions and then to claim for the compensation in the commercial proceeding. While this option takes more time, it was frequently used. Before, commercial courts declined the claims for compensation in most cases, where the shipowner had not applied to the administrative court before. In one case, the commercial court decision was reviewed and reversed after the annulment of the administrative court ruling on which the commercial court decision was initially based. Now, the situation is to be changed since the Grand Chamber of Supreme Court has recently concluded that the finding of an administrative court is not necessary to apply to a commercial court for recovery of damages.

Let’s now look at two real court cases where shipowners dared to seek justice in the court.

OMEGA-G case

This is a happy-end story. The ship got stuck in Yalta seaport and was held there for three months by a port master decision based on alleged debt for wharfage fees. At first, the shipowner applied to the administrative court and proved the unlawfulness of the ship’s detention. Then it brought the matter before the commercial court claiming for the compensation of $19k of direct loss and of almost $70k of loss of profit. The latter sum was explained by the fact that the shipowner planned to sell the ship for scrap and had concluded a contract with the buyer. However, the ship got trapped in the port and the shipowner failed to deliver the ship to the buyer and the contract was resigned. When the ship was ultimately released and the shipowner found new buyer, the global price of scrap declined, and the shipowner lost $63k of the contract price. The court awarded the shipowner this sum as the loss of profit since the initial contract was real and the decline of the price was confirmed by a certificate. Notably, in this case, the commercial court acknowledged the conclusions of the administrative court regarding the wrongfulness of the seaport master decision.

Zoya case

In this case, the port master refused to release the ship from the port based on his own interpretation of a court order allegedly prohibiting the ship to leave the port. Only three weeks later the ship was granted permission to leave the port. Initially, the shipowner addressed the matter to the administrative court and established the unlawfulness of the detention. Then, the shipowner applied to the commercial court and claimed for $94k of direct loss and $777k of loss of profit. The first-instance court completely granted the claim. However, the appellate court reversed this decision and dismissed the claim. Firstly, it refused to accept the conclusion of the administrative court regarding the unlawfulness of the port master decision and stated that only the facts and not the legal assessment thereof established by the administrative court have binding force upon the court in the commercial litigation. Secondly, the appellate court refused to accept an expert opinion regarding the fuel expenses because of the lack of primary evidence and the absence of a link between the expert’s observations and the ship at stake. Also, the court refused to recover the loss of profit because of the fictitious character of a charter agreement by which the shipowner attempted to prove the loss of profit.
However, the story has not come to the end yet and the case is under review in the Supreme Court.

To wrap-up

In principle, Ukrainian law affords remedies for shipowners whose ships have been unlawfully detained by seaport authorities. At first, the claimant shall prove the port master wrong and then claim for compensation, either in the same administrative proceeding or by filing a separate lawsuit in the commercial court. Notably, the shipowner can be compensated both for direct loss and loss of profits. However, despite the existence of the mechanism in Ukrainian law, there are very few cases where shipowners had recourse to Ukrainian court which is why the court practice on the matter is considerably underdeveloped. Usually, shipowners prefer to get their ships released and quit the port as soon as possible without trying to seek justice and get due compensation, while the damages can amount to hundreds of thousands of US dollars. Once shipowners decide to sue the authorities, they shall remember that their chances of succeeding hugely rely on solid documentary evidence and ability to demonstrate a strong causal link between damages (expenses) and unlawful detention. Even if there is no other way but to resort to the expert opinion, an expert must have highly relevant experience in the field. In terms of loss of profits, the claimants shall prove it by real contracts with third parties and, preferably, factual evidence that certain actions were carried out to execute it.

Published: Lexology, 01 July 2019

Authors: Oleg KachmarYevhenii Konovalov