What ship-owners and/or vessel operators want
from a defence facility:

ALL, if not most of the P&I clubs have a freight, demurrage and defence class or, in the case of many clubs, a separate FD&D (defence) club.

The defence class or club covers ship-owner or charterer members’ legal costs in pursuing their claims, or defending claims against them, in disputes arising under contracts entered into in the course of their business, such as charter parties and other contracts for the employment of their ships, contracts for the supply of bunkers, services and equipment to their ships or for services by their ships and crew. But what do ship-owners actually expect from their defence clubs?

Sound legal advice and practical guidance

The cover provided by the P&I and defence classes are mutually exclusive. The P&I class covers the legal costs of defending claims against the member for risks which are covered by the rules of the P&I class, e.g., collisions, damage to fixed objects, crew and passenger death and injury claims, cargo claims and wreck removal.

As the title of the FD&D class suggests, the most common claim by a member supported by the class is for unpaid freight or hire or demurrage claimed under a charter party; and the most usual forum for the pursuit of such a claim is arbitration in London. Claims may also arise under a charter party for damage to the ship caused by a breach in contract, e.g., damage to the ship’s hull or bottom arising from grounding at an unsafe berth, anchorage or port or forcing ice.  

Since ships are also deemed to be insured by the usual form of Lloyd’s policy for hull and machinery, any ship-owner and/or vessel operators members’ legal costs in such a case will normally be covered, at least in part, by hull and machinery underwriters; and the defence facility will only cover that proportion of the operators’ costs which are not so covered. In addition, the FD&D facility will, on occasions, support an operator in pursuing claims against hull and machinery or loss of hire underwriters where the claims are disputed, or even against insurance brokers for some alleged breach of their agency. A majority of the litigation in which the defence facility is involved takes place in the High Court or at arbitration in London.

Operators can look to their defence underwriters for reimbursement of legal costs in pursuing or defending claims in trade disputes, but what else do they want and what else will they get? Firstly, they get the help and advice of the managers. They can call upon them both in and outside office hours for guidance and assistance on a whole range of legal, practical, and operational problems; and the managers will do their utmost to help. If the managers don’t know the answer to the problem, they should at least know someone who does, and can point the member in the right direction. The manager can also instruct a local correspondent or, if necessary, a lawyer or surveyor to attend.

The manager is in a position not unlike that of a medical general practitioner. Or, as a senior manager put it to me when I first joined my first defence facility many moons ago, the managers are the ship-owners’ and/or vessel operator’s wet nurses. At the very least, the manager should lend a sympathetic ear. Managers have an old and honourable tradition of service to the operator, which goes beyond the strict letter of the rulebook. Indeed, operators certainly expect their managers to be on their side and to give them the benefit of the doubt when the facts are unclear, or in difficult cases.

The managers have to exercise all their legal and practical knowledge and experience in critically analysing and appraising the salient facts and issues of the problem in order to give the operator immediate guidance. If the case merits deeper investigation and a legal opinion from a practising lawyer, then the managers would normally instruct a lawyer on the operator’s behalf. The lawyer will usually be instructed on behalf of the operator - although the managers will normal be responsible for the payment of costs until the time when it advises the lawyer that it is not supporting the case - so that if a conflict arises between the operator and the defence facility, the lawyer will normally be obliged to withdraw from the case, unless agreeing to continue to act for the operator’s account alone.

However, on most occasions, the manager instructs the lawyer and acts as an intermediary between lawyer and operator. The lawyer may regard the defence facility as a professional client and would normally expect to receive instructions from the managers, under the old principal of "he who pays the piper, calls the tune". But this role requires the managers to help in explaining the conduct of the case, the procedural stages, the evidential requirements and the legal issues and merits to the operator and to take an independent view as to whether settlement opportunities should be explored or the case fought up to trial or a final hearing.

In fact, very few cases are fought all the way to a hearing. Given common sense, objectivity and legal competence on both sides, the parties and their advisers can normally find a level at which to settle the case, which properly reflects the strengths and weaknesses of each side’s position.

The hardest job, which the managers often have to do, is explain to operators why they don’t have a strong case and why it should be settled. Without alienating operators, and losing their goodwill, managers have to satisfy operators that they know what they’re talking about, and that often requires a great deal of thought, energy, patience, perseverance and diplomacy on the manager’s part. The secret of success in FD&D - is how to say ‘No’ nicely; that is, to tell operators that they don’t have a good case, and that the defence facility is not supporting it, without offending them. Saying ‘No’ to the member is one of the hardest parts of the manager’s job, and it explains why defence facility often support a case up to trial, into the ‘killing fields’ of litigation when the case cries out for settlement. Too often when such a case is lost, managers then blame their lawyers for excessive legal costs. If the case is won, the legal costs always seem reasonable; if the case is lost, the costs always look excessive.

The manager should play a vital role in ensuring that cases are resolved to the operators’ best advantage, whilst ensuring that the expenditure of legal costs is justified by the amount of the operators’ money at risk.
"Saying 'no' to the member is one of the hardest parts of the manager's job."
So what does the operator expect from his defence facility?

Prompt attention, a sympathetic ear, sound legal advice and practical guidance. Also, knowledge of the best lawyer, surveyor or expert to instruct, and continued interest in, and direction of, the case. It is the role of the defence facility to steer a case to the best possible conclusion for both operator and the defence facility. Whilst the sums at stake in cases covered by the defence facility may be small compared with the claims covered by a P&I club, members’ loyalty to a P&I facility can often be won or lost by the treatment they receive from their defence facility.

Because the moneys won or lost by the operator in a dispute covered by the defence facility are normally not insured, they come to, or go from, the operator’s own pocket. Operators therefore take a keen interest in the case and expect their defence facility to do the same. If the facility perform well, they can establish a close relationship of mutual trust, loyalty, respect and friendship with the operator, which can continue for a very long time.

Cost-effective legal expertise

THE Scandinavian facilities offer both P&I and defence cover within the same class. To fully understand how defence cover works, and thus what a ship-owner and/or vessel operator can expect from his defence facility, it is necessary to distinguish between the two main elements of the cover - the insurance element and the service element.

The service element

Whilst the insurance element of defence cover is beyond doubt the most important aspect of the cover in large and complicated cases where legal and other costs may amount to considerable sums of money, the service aspect of the cover is very important in the great majority of defence cases involving, for example, laytime and demurrage disputes, or collection of outstanding hire and freight. Such cases are normally handled directly by the facilities in-house legal expertise without involving external lawyers in most of the cases in order to save costs for the benefit of the operator and the defence facility.

The service element is, however, also important in respect of large and complicated matters where the defence facilities role is more as a manager of the case. Finally, the various defence facilities have built up a unique system of correspondent lawyers around the world who can assist when claims arise.

The cost-saving aspect of cases being handled by the manager’s own legal expertise is most relevant in relation to cases which do not involve substantial sums of money. The various defence facilities, comprises lawyers with a broad experience in international maritime law and with a basic knowledge in English law, which is the governing law in the majority of charter party disputes. Arbitration conducted under the London Maritime Arbitrators Association’s Small Claims Procedure should be, and in most cases run by the defence facility. Documents-only arbitrations based on written submissions should also be conducted in-house, where possible. Whether a case is to be dealt with by the facilities own staff as opposed to external lawyers depends both on the amount involved and the complexity of the factual and legal issues. If a case is too time-consuming, it is difficult to handle it in-house because the service to other operators may suffer. The defence facility should offer all operators an equal service.

In complicated cases involving large sums where external legal expertise is required, the defence facility plays an important role as manager of the case. The defence facility should be the link between the operators and external lawyers and should identify the issues where external legal or other expertise is required. Lawyers and experts instructed should preferably report directly to the defence facility, which in turn reports to and takes instructions from the operators. Thus, the defence facilities own staff, maintains an overview, which is necessary for the defence facility to fulfil its function as manager of the case. This is also cost- effective in as much as external expertise is sought only on issues where the club’s own lawyers are unable to give advice.

In contrast to lawyers in private practice, a defence facility lawyer has to handle cases involving a wide range of law and practice in various jurisdictions. This gives the defence facilities staff a unique expertise in international maritime law. An experienced defence facility lawyer may therefore supplement external advice with comments and recommendations based on the defence facilities own experience in that particular jurisdiction. This may be of importance when strategic decisions are to be taken with regard to, for example, where the claim should be pursued or attachment proceedings commenced.

The defence facilities correspondent lawyers around the world also play an important function in the defence facilities service to its assureds’. All defence facilities have appointed representatives in major ports and shipping centres around the world, which are either law firms or claims agencies with a close relationship with a first class law firm. This makes it possible to offer a very efficient service to an operator if urgent assistance is needed almost anywhere in the world.

The defence facility does not need to spend time in order to find a suitable lawyer. The operator can expect that the defence facility already as a correspondent lawyer who is ready to assist and who is experienced in maritime law. To be named in a defence facilities list of correspondents is regarded as a mark of quality.

Besides the comfort for the ship-owner and/or vessel operator of being insured against legal and other costs incurred in connection with certain categories of claims, the operator can also expect his defence facility to offer a legal service on a wide range for cases without the need for external legal expertise, which is cost-effective and at the same time enables the defence facility to build on its unique expertise in international maritime law.

Reducing problems to manageable proportions

Say it quickly, and it doesn’t seem like much. "I handle FD&D matters for a defence facility". But this is the one answer which is guaranteed to produce a look of utter bewilderment on the face of unsuspecting dinner guests who unfortunately ask, "What do you do"? However, to those involved in shipping, Freight, Demurrage and Defence cover is a valuable part of the overall insurance package offered to operators.

FD&D cover is designed to provide the ship-owner or charterers with insurance cover for costs and expenses arising in non-P&I cases and for the provision of legal advice. It is not intended to, nor does it, provide insurance cover for the member's substantive claim. In that respect then, it differs fundamentally from P&I cover, since the defence facility and its assured are not the underwriters of the substantive claim. That risk rests with the individual claimant or defendant assureds.

Nevertheless, one should not be misled by its name. FD&D is not limited to disputes involving freight and demurrage, or even defending claims. Ninety per cent of claims arise from disputes under charter parties, contracts of affreightment or bills of lading. The remaining ten per cent stem from ship sale and purchase disputes, disputes under agency agreements, stevedore negligence claims etc. One is as likely to find an operator bringing a claim as defending one.

Set against this background, what can be said about the role of FD&D cover? To answer such a question, it is important to remember that FD&D disputes tend to be of a legal nature. Bearing in mind the sorts of problems which fall under an operators’ FD&D cover, it is right and proper for ship-owner or chartered assureds to expect their defence facility to have suitably qualified claims correspondents, usually lawyers, who can act as the port of first call for advice. Such advice may take the form of written opinions or more important, urgent advice, which needs opinions given over the telephone. But defence facilities are not law firms and nor should they attempt to be law firms.

FD&D advice should not be a recitation of the latest case law. It should weigh up both the commercial and legal realities of a case and should be expressed in a clearly understood manner. Because defence facilities have in-house expertise, part of the role of FD&D cover is to allow operators to utilise that expertise as and when required. Sometimes this is limited to ensuring that cases are handled properly when sent to outside lawyers. Alternatively, it encompasses handling claims in-house through the provision of advice and the taking of cases to arbitration on documents, particularly under the LMAA Small Claims Procedure.

But FD&D cover is not merely about litigation. Equally important, though sadly under-used, is the use which operators can make of their FD&D cover to have charter parties, bills of lading, MOAs and other contracts scrutinised and commented upon by the defence facilities in-house lawyers, with a view to pointing out possible difficulties prior to such contracts being entered into. Moreover, even when disputes arise, having FD&D cover does not licence an operator to pursue unmeritorious claims, or claims which, though strong on their merits, are ones, which are uneconomic to pursue.

FD&D cover has many facets. The principal one is to provide cover for costs. It also enables operators to take cases to arbitration or court in the knowledge that, if they have the defence facilities support, and should they not succeed, the other side’s recoverable costs will be met by their defence facility. Perhaps the service most valued by an operator is the opportunity to discuss problems at an early stage and be given informal advice on what options are available before any money is spent. Very often, a seemingly insoluble problem diminishes to manageable proportions following a friendly chat

The insurance element

Defence cover differs fundamentally from P&I cover. It reimburses only the costs of lawyers and other experts required by the owner to defend or establish a claim. The cover extends to an operators’ own costs of legal representation in an arbitration or court case and any liability to reimburse the opponent’s legal costs, either pursuant to an award, or judgment, or to a settlement agreement approved by the defence facility.

Defence cover is a so-called "named risk" insurance. Only legal and other costs incurred in establishing or resisting claims concerning the categories of claims or disputes named in the defence facilities rules are covered. Furthermore, any claims or disputes which shall be covered must have arisen: in direct connection with the operation of an entered ship or the acquisition or disposal of an entered ship; in respect of the owner’s interest in the ship; and out of an event occurring during the period of entry of the ship in the defence facility.

Under its rules, the defence facility normally has the right, if it so decides, to control and direct the conduct of a claim or legal or other proceedings involving costs and expenses in respect of which the owner is insured. The majority of defence cases are actually handled directly by the defence facilities own in-house lawyers.

Although the interests of the operator and the defence facility in the great majority of cases are identical, there may be cases when the operator and the defence facility have different views. The defence facility may sometimes apply a more objective test when considering whether the terms of a settlement are those, which a prudent owner should accept, whilst the owner may apply more subjective criteria in assessing the terms of a settlement. The defence facility will be entitled to refuse to cover further costs and expenses when the owner does not settle the case or otherwise dispose of the case as recommended by the defence facility. It is a general condition that there must be a reasonable relation between, on the one side, the prospects of having the claim enforced or liability averted and the amount in dispute and, and the other side, the costs that are likely to be incurred.