Shippers’ Law: Freight derivative not a maritime contract

   In a recent decision, the U.S. District Court for the Southern District of New York (SDNY) found a Forward Freight Agreement (FFA) between two companies was not a maritime contract and that the court lacked jurisdiction to enforce a judgment handed down by an English court. The case (D’Amico Dry Limited v. Primera Maritime (Hellas) Ltd., et al. SDNY. No. 09-7840. Aug. 13) involved dry bulk vessel operator D’Amico and ship manager Primera.
   But this was not the first time the dispute came before the court.
   The SDNY in 2011 dismissed D’Amico’s enforcement action for lack of subject matter jurisdiction, holding that because “the English court was not sitting as an admiralty court when it rendered the English judgment, this court does not have jurisdiction over an action to enforce that judgment.”
   D’Amico moved for reconsideration, arguing that enforcement of the English judgment lies within a federal court’s admiralty jurisdiction because the claim on which the judgment was rendered would have come within federal admiralty jurisdiction if it had been brought in a U.S. court. But the SDNY rejected D’Amico’s argument that the classification of the claim under U.S. law determined whether the English judgment could be enforced in the U.S. federal courts.
   On appeal, the U.S. Court of Appeals for 2nd Circuit held U.S. law, rather than foreign law, should determine whether the claim underlying a foreign judgment is a maritime claim, and it held federal admiralty jurisdiction extends to a suit to enforce a foreign judgment, if the claim underlying the foreign judgment is a maritime claim under U.S. law. It then remanded the case to the SDNY.
   The Baltic Exchange in London publishes an index each day of the physical freight fixtures of various classes of vessels, and FFAs are paper swaps based on the underlying index. FFAs are traded in the unregulated over-the-counter market on a principal-to-principal basis, or can be cleared through a trading house. The court noted there is no requirement of security and no requirement of showing sufficient assets to cover an FFA.
   In its decision, SDNY said that post payment settlement, “it is not possible to tell the difference between an FFA that was entered into for the purpose of speculation and one that was entered into for the purpose of hedging,” adding that even for shipowners, an FFA is “an entirely separate contract from the employment or chartering of a vessel.”
   Through their FFA, “D’Amico and Primera were able to take an investment position about future market rates for Panamax vessels by making opposite bets about whether those rates on the future settlement dates would be higher or lower than the rate identified in the FFA,” the court said.
   The FFA they entered into “did not, on its face, operate as a hedge against either party’s shipping losses; it is a straightforward agreement for financial speculation on shipping rates,” the court added.
  The SDNY noted that the freight market collapse that followed the 2008 financial crisis caused the market for FFAs to crash as well. “Primera suffered financially in 2008 from the financial crisis and was faced with substantial defaults against it,” the court said. “Unable to collect amounts due to it and with amounts due to others that could not be settled, it commenced wind-up proceedings in March 2010.”
   Few FFAs are traded on a bilateral basis anymore, and most are traded through clearing houses. Container FFAs have had very limited success.
   The general manager of D’Amico testified that the company used the FFA not for simple financial speculations, but rather as a hedge against the possible underuse of its fleet and, thereby, to promote maritime commerce, testimony the court found to be “not credible.”
   “His testimony was conflicting and inconsistent and belied by the actual facts of D’Amico’s FFA transactions,” the court said. “There was, in short, no credible testimony that D’Amico used the D’Amico/Primera FFA for anything other than speculation on future freight rates and a means of obtaining a quick buck.”
   The court said D’Amico had the burden of demonstrating that subject matter jurisdiction existed and if the FFA between D’Amico and Primera was a maritime contract, the court would have subject matter jurisdiction.
   “Protection of maritime commerce is the fundamental interest giving rise to maritime jurisdiction,” it explained, and includes jurisdiction over all contracts which relate to the navigation, business, or commerce of the sea.
   “But the mere fact that the services to be performed under a contract relate to a ship or its business, does not, in and of itself, make the contract maritime,” it wrote.
   The court noted the text Benedict on Admiralty explains “to be considered maritime, there must be a direct and substantial link between the contract and the operation of the ship, its navigation, or its management afloat.”
   That has proved more easily stated than applied. For example, courts have found a contract to build a ship is not maritime, while a contract to repair a ship is.
   D’Amico argued that “FFAs in general, and this one in particular, are integral to the protection of maritime commerce by allowing parties to hedge against the unemployment or underemployment of their vessels.”
   But the court said, “The preponderance of the credible evidence shows that the D’Amico/Primera FFA at issue in this case did not have the furtherance of maritime commerce as its ‘principal objective’ because the FFA was not used for hedging and managing market risks relating to the employment of marine vessels but was, instead, used for speculative purposes.”