Given the unfortunate tag of ‘sunset industry’, the shipping and maritime area is undergoing change. But as ALB discovers, there are many who remain optimistic over its future.

Shipping and maritime law has dominated the headlines in 2002, and nowhere more so than Hong Kong.

Teams of lawyers have, if you’ll excuse the pun, jumped ship to other firms; a traditional heavyweight has dropped out of the market altogether, while a number of other firms have sought refuge in the arms of each other.

The severe downturn in the global shipping industry in the past few years has led to suggestions that it may be in permanent decline. The region’s flagship maritime event, Asia Pacific Maritime, has been postponed for a year – from March 2003 to March 2004, and the Maritime Strategies International (MSI), an independent consultancy based in the UK, says there is no clear indication of when a recovery might occur.

But shipping remains a key industry, the only viable way of moving certain goods around the world being by sea. And, say practitioners, in the current climate, that is an important fact to bear in mind.

Sunset industry
In January this year, Deacons took the decision to drop its maritime and aviation finance practice and assist with its subsequent transfer to rivals JSM. An annual review of Deacons’ practice strategy triggered the move and the team, led by Dean Young and including Harry Chan and Peter Lo, hooked up with Dan Bradshaw and Alastair MacAulay at JSM’s shipping project finance group.

“Deacons decided that shipping was not one of their core businesses anymore,” says Young. “The department was not big enough to have economies of scale and not profitable enough for them.”

And Deacons is not the only one to make that call.

Many maritime firms confirm that they are feeling the financial pinch, with stories circulating that some are being forced to lay off trainees.

Says Young: “All firms are suffering from the downturn of business in Hong Kong, but all of JSM’s trainees who wanted to remain in the department have been offered employment.”

The Deacons staff that moved to JSM handle areas such as shipping finance, ship registration, sale and purchase, management contracts, and crewing. No ship litigation personnel moved over.

Mark Roberts was the remaining member of Deacons’ shipping and aviation finance team but he relocated to Deacons’ litigation department as a senior partner.

Roberts confirms that Deacons has dropped ship finance work altogether, but continues to do a little ship litigation, “although not a significant amount because it is not particularly profitable”.

Roberts says: “We are reducing our shipping capabilities because shipping is not proving to be very profitable. Ship owners cannot afford to pay the sort of legal fees that we command from other clients. We weren’t prepared to reduce our rates because it was unprofitable to do so.”

He adds: “The ship industry has been going through a fairly difficult time. Ship owners, P&I Clubs, cargo underwriters … these areas are all under some cost cutting pressures. They want to look at firms that probably are willing to provide services at a reduced level.”

Maersk Sealand Hong Kong Ltd was established in 1975 to act as general agents for Maersk Line’s services, connecting Hong Kong and Macau with all major trade origins and destinations. The Hong Kong organization engages in a variety of transport-related services including trucking, warehousing, consolidation, container repairs and refurbishment, ship and engine repairs, offshore activities, ship brokerage, and the sale and purchase of ships.

Head of legal, Patrick Yu, confirms that Maersk Sealand is under cost cutting pressures, but adds that the firms themselves are unwilling to embrace low value work.

“What external counsel suggest,” he says, “is that if the case is on a 50/50 win/lose basis, then we should use the service of lawyers. But if the percentage of winning the case is quite low, they prefer us to settle the matter rather than fight against opponents.”

Yu says that although maritime firms have not increased their rates this year, they are still “incredibly high”.

“The partner rate is about HK$3,500 per hour,” he says, “and even for a lawyer below partner level they charge about HK$2,400 per hour. It is up to an unacceptable level.”

Wishing to keep its choice of firm confidential, Yu says Maersk Sealand outsources mainly cargo claims rather than corporate or finance matters. “We have instructions from head office and they suggest that we do not use the service so much,” he says.

One lawyer who is able to keep his fees down is Jonathan Rostron. Formerly of (the now defunct) Sinclair Roche & Temperley, Rostron set up Jonathan Rostron Solicitors about a year ago to combat the problem in Hong Kong of high overheads that inevitably are passed on to clients.

Although he has since been joined in the partnership by former Sinclair Roche colleague Damien Laracy, Rostron plans to keep his operation small and says his firm is attracting correspondence and agency work.

JSM has a different strategy. Young says: “The current strategy is to let high value projects (such as LNG, structured finance and tax-driven deals) subsidize low value business, but at the same time build volume in that low value work by offering capped fees.”

He adds: “Ships are high value assets, requiring a certain level of seniority. Lawyers of 10 years or more experience require salaries commensurate with the years of training behind them, but the market has now gone the other way.”

Not for me
The nature of the work handled by shipping lawyers has changed in the past few years, due in no small part to changes in the industry itself. For example, cargo is now containerised and vessels are newer.

Partly as a result of safer ships and increasing containerisation, shipping firms in Hong Kong have been less busy covering collision and salvage work than they have been in the past. The major factor influencing the shrinkage in maritime-related litigation work has been the strict enforcement of regulations – from IMO (International Maritime Organization), insurers and port facility operators – regarding how ships should be operated. The standards of management and operational efficiency demanded of ship owners has risen tremendously, which has led to safer ships, which in turn has resulted in fewer collisions, damages, claims – and therefore, litigation.

In addition, P&I Clubs now house offices in most of the major centres of the world (rather than just London) with their own claims handlers and legal advisers. The result is that quite a lot of shipping work that law firms would have completed 10-15 years ago is being retained in house by the P&I Clubs.

While this has less of an affect on shipping clients such as Maersk Sealand – “It’s not a free service,” says Yu. “No matter if we employ the lawyers ourselves or employ them through the P&I Clubs, at the end of the day the fees will come to us,” – the law firms themselves have been hit hard.

So hard, in fact, that many have simply taken the Deacons option of dropping the practice area altogether. Clifford Chance and Simmons & Simmons are two such firms, while JSM is one of the few full service law firms left that provides shipping litigation on a wide scale.

The present downturn in global shipping work claimed its highest profile victim in May, when Sinclair Roche & Temperley ‘merged’ with Stephenson Harwood. The Hong Kong office of Sinclair Roche, which was a separate partnership to the rest of the firm, was eventually left outside of the merger, but Stephenson Harwood held high hopes of cherry picking leading lawyers from the practice. In the end, litigator Susan McNaughton was the only partner to make the move.

Although Stephenson Harwood made a decision some time ago to drop shipping law in Hong Kong, the acquisition of Rodryk White from Barlow Lyde & Gilbert suggests that the firm continues to monitor the area.

Just as ship owners are under pressure to grow and then consolidate, so too are those that service the industry. Many commentators agree that consolidation may be a good idea if two particular firms are trying to achieve economies of scale or have overlapping client bases. But there is also scepticism on how synergies can be achieved through firms merging in an industry already facing problems.

Over the past year, there has been a spate of unions – or union talks – all related to shipping. In addition to the much publicized Sinclair Roche / Stephenson Harwood tie, Clyde & Co’s Paris office teamed up with local firm Honig Preel Mettetal Buffat Coulon, while talks between Watson Farley & Williams and Simmons & Simmons only narrowly missed the boat.

JSM’s Young says: “Mergers can make a lot of sense but there is always some pain attached.”

Meanwhile the demise of Sinclair Roche & Temperley has incited a range of opinions.

Chris Howse, managing partner of Richards Butler, says: “Sinclair Roche & Temperley is a great name and I’m sad because it is a name that has been around for a long time.”

Others are less forgiving.

Deacons’ Roberts says: “It bears out what I’m saying doesn’t it. [Sinclair Roche] was a shipping firm and it obviously couldn’t find [shipping] profitable enough. And it is now no longer in existence. It was over-reliant on shipping.”

Diversification
If over reliance on shipping was at least partly responsible for the demise of Sinclair Roche, it spells little hope for the boutique practices that continue to concentrate on this area.

Maersk Sealand’s Yu says: “Nowadays, law firms are facing great competition among themselves. Maritime lawyers do not now just concentrate on maritime-type work. They cover a lot of other matters, such as corporate and finance. Simply on the maritime law, I don’t think they can survive.”

Although remaining buoyant about its survival as a practice area, many well known shipping firms are keen to promote the fact that they do not solely concentrate on shipping and maritime work. They describe their services as ‘diversified’, although shipping remains a core focus.

Dibb Lupton Alsop plans to venture into corporate and project finance in the next three years; Stephenson Harwood is involved in other financing services apart from shipping; and Watson Farley & Williams points to its corporate services in Singapore.

Well known for its shipping capability, the Clyde & Co team is active in a number of other areas including helping inward investors with acquisition programmes, in intellectual property work for Hong Kong-based entrepreneurs, and in finance deals as well as in aviation and insurance issues.

Qualified to practise local law, the firm nabbed corporate lawyer Tim Drew from Barlow Lyde & Gilbert in April. At the time of the move, Drew said he planned to “promote the corporate commercial expertise within the firm, with my existing clients and contacts in Hong Kong”.

All of these firms agree that now is not the optimum time to start out or continue as a boutique shipping operation although they are likely to continue to operate in this area, says Deacons’ Roberts, “to the extent that they still think it’s possible”.

Roberts adds: “The way to look at this is that we [Deacons] are investing in areas other than shipping. For example, we have a very significant insurance practice and construction litigation practice. These are all areas that are more profitable than shipping, so we are devoting more resources to them.”

Reasons to be cheerful
Although most practitioners interviewed could not, hand on heart, say that a turnaround in fortunes for the shipping industry would occur in the near future, many continue to be optimistic.

Singapore based Clyde & Co partner Julian Gray observes that the shipping industry is fairly cyclical. “Shipping seems to be more susceptible to dire downturns and upswings in the region and globally than other industries,” he says. “But I don’t necessarily believe that the industry is in decline. It changes. My own perception is that the industry is static.”

Having just added partners to his team, Richards Butler’s Chris Howse is bullish about the future of shipping-related work. He does not agree the nature of the industry is responsible for any decline. “I am not sure that this change in the pattern of work is due to a cycle,” says Howse. “Depressed trading conditions in Asia Pacific countries will result in less trade and this in turn could result in fewer maritime disputes. Conversely, in adverse trading conditions, owners and charterers are more likely to litigate.”

Although shipping is no longer a huge part of Richards Butler’s practice – down to 20-odd fee earners out of 115 – the firm has been the main benefactor of the fallout from Sinclair Roche. In June, it lured Lianjun Li, a PRC maritime litigator, and this was followed by the hires of Paul Apostolis and Katherine Wang, leading Howse to claim that Richards Butler housed “the biggest marine litigation department in Hong Kong”.

JSM’s Young says: “Richards Butler has benefited by cherry picking. Taking on well-trained staff without advertising costs, waiting for notice periods to expire, lead-in time and so on, can be justifiable whether or not the work currently exists.”

Howse says his firm merely plays to its strengths, keeping its eyes open for interesting business opportunities. “A case in point being the recent acquisitions from Sinclair Roche,” he says. “They were offered jobs elsewhere but chose to come to us.”

Growth opportunities
Consensus of opinion is that, with the fall of Sinclair Roche, there are now four major shipping firms in Hong Kong: Clyde & Co, Holman Fenwick & Willan, Ince & Co and Richards Butler.

Looking to join this elite group is Johnson Stokes & Master. Deacons’ Mark Roberts believes the addition of Dean Young and his team will be a major boost to the firm’s practice.

He says: “Dean is a very good lawyer and we were sorry to see him go but he was in an area that was in decline as far as we were concerned. At JSM, he will do a lot better because he has a very good client there in HSBC.

“JSM has clients that still do shipping and finance work,” he adds, “whereas a number of our clients have stopped lending on shipping. So it’s a good move for Dean.”

Lewis says JSM concentrates on high-end trade disputes and mortgage enforcements, rather than wet work or general cargo claims. While he admits that in practice there is a surplus of capacity in some areas of shipping work in Hong Kong, both maritime litigation and finance are extremely busy areas for his firm, he says.

“Work flow has been heavier than expected,” says Lewis, “partly due to there being few other law firms prepared to offer this expertise, but also due to increased synergies resulting from client referrals, new ideas being exchanged, and economies of scale allowing marketing and pitches to be more focused.”

One growth area that maritime firms are targeting is arbitration. Hong Kong enjoys a sufficient concentration of skilled professionals, lawyers, surveyors, and other expert witnesses. And legislation follows UK-style arbitration rules.

To help achieve the status of a maritime arbitration centre in the region, Lewis says firms themselves have a role to play in attracting foreign clients to Hong Kong.

“Part of our job as lawyers,” he says, “is to reassure outsiders, particularly Americans, that arbitration in Hong Kong is fast, reliable, corruption-free and cheaper than the courts.”

The Maritime Law Association has also been making attempts to revive maritime arbitration in Hong Kong, although so far with limited success. It has been emphasizing case management, recommending ‘proactive judicial control of civil action’, and calling for the introduction of measures like the use of pre-action protocols where appropriate, early identification of issue, and tighter control on costs awarded.

However, more could be done. Lewis says: “There is a lack of understanding of the one country two systems process. A great many jurisdictions believe Hong Kong to be governed by PRC law, for example, whereas Hong Kong has its own law until 2047.

“Another misperception is the presumption that sooner or later there will be PRC interference, yet there has been no evidence of the Basic Law (Hong Kong’s constitution since 1997) being breached, or indications that it will be in the future.

Despite shipping disputes referred to the Hong Kong International Arbitration Centre falling from a high of 74 in 1992 to 11 in 2001, Hong Kong’s largest feather in its cap is the fact that China sees it as a reasonable place to arbitrate.

And China itself is also presenting firms with growth opportunities. For example, the sale and purchase market appears more active in Shanghai than Hong Kong – hence the growth in brokers’ offices – although this has not yet developed into legal work for non-PRC law firms.

Says Young: “Perhaps WTO work will spin off. The ship mortgage law also needs updating before the international banks will finance PRC flagships, but seminars on this will first have to reach the ears of the lawmakers. As a major shipping centre, perhaps this will lead to closer ties with Shanghai.”

Shipping still the beacon on horizon, says DLA

Much like a top-shelf poker player, Stewart Crowther likes to play his cards close to chest.

But deep down, the local managing partner of Dibb Lupton Alsop is a shipping lawyer at heart.

After all, that is where the veteran lawyer and long-term Hong Kong resident earned his stripes. He did his trade in the boiler room of shipping law, studied it at university, trained in the shipping department with his first firm, worked for a US oil company with a large shipping fleet, and then took up a post with owners of the then world’s largest private fleet, World Wide Shipping, in Hong Kong.

And that was when life really began to get interesting.

“It involved all sorts of work,” he says.

“From going on a ship to see if the master had committed suicide or been thrown overboard, to settling ship building disputes with Chinese and Korean ship building yards.

“There was an incident in the Persian Gulf, during the Iran/Iraq War, when one of our ships was hit by an Exocet missile, with great loss of life,” Crowther adds.

“I was working as in-house counsel, so it was more a question of coordination, appointing outside lawyers, handling press relations, those sorts of things.

“Piracy? Yes there was some of that to a degree … there was a spate of it more than seven years ago involving China maritime police, who demanded bribes and payoffs in very large brown paper bags to get the ships back.

“We (DLA) were involved here in a case about four years ago where a ship had disappeared completely before it was found, empty of course, in a port in Vietnam.

“But all this is the bread and butter work of a shipping lawyer.”

Crowther has moved on to bigger and better things now, of course. As local managing partner, his primary focus is on building the business of DLA – including opening the firm’s first office in Shanghai on October 17.

And while he will not admit to any sea salt coursing the veins, he is still a keen observer of the global shipping and maritime industry.

“In Hong Kong, within DLA today, the shipping department is running at about 35% of the total operation and while the aim is to bring that more into line with the UK figure of 15%, there is no intention of reducing the department – we are still recruiting and expanding it.

“It is more about the size of the total pie: we are building our banking, property, commercial and corporate finance departments.

“We have to mirror here what we do globally, and we could not do that if we were a boutique shipping firm. So shipping is now a less dominant component of the total business DLA does in Hong Kong. At one point, it was all we did.

“We are still one of the leading maritime law practices in this region and we also have our specialization in freight forwarding and mid-stream operations.

“Where we broaden the envelope is to work on letter of credit disputes, marine insurance coverage disputes, and sale of goods disputes, which offers us a wider catchment area.”

Crowther says two factors have heavily impacted on the shipping industry – and the amount of legal work flowing out as a result.

“There has been a chronic overcapacity of tonnage in both oil and bulk. This has driven down the average of charter rates to levels that do not justify the increasing costs of running a shipping fleet.

“So the profits in shipping, and for ship owners, just are not there.

“The second factor allied to that is the chronic overcapacity in the insurance industry, which drives down insurance premiums where insurers cannot make a sufficient profit underwriting marine business.

“The two people who feed shipping lawyers are insurers and shipowners and there is simply not enough fat left for them to afford legal fees – so the result is less work coming into the legal marketplace and great pressure on fee levels.”

While he believes the situation is incapable of quick resolution, there is light on the horizon.

“There are still possibilities for clever shipowners in the right niche to make money.

“And we are still growing our shipping department. We have just taken on a keen young lawyer from a local firm and are in the market at the moment looking for more. As the smaller firms suffer, decline or close we can pick up more good lawyers and more good work.”

DLA’s marine and shipping practice advises ship owners, charterers, hull insurers, P&I clubs, cargo owners and underwriters, composite insurers, traders, freight forwarders, shipyards and port authorities on all aspects of shipping, trade, transport and marine insurance law, both contentious and non-contentious on a pan Asia-Pacific and worldwide basis.

It advises on all industry issues including arbitration, arrest, bills of lading, cargo claims and recoveries, charterparties, carriage of goods and passengers by road, sea and air, casualty management, contract conditions, general average, hull and cargo insurance, liens, P&I, personal injuries, pollution, reinsurance, including policy wording advice, claims and coverage issues, salvage, shipbuilding, ship conversion and repair, ship sale and purchase, and the use and operation of ships.

Specific issues it handles relate to maritime and international trade law including advising on insurance issues and international arbitrations involving matters arising out of international contracts of sale. As well as insurance and reinsurance matters including advising on all aspects of marine and non-marine, property and liability insurance, as well as credit risks, bankers bonds, political risks and defending policy claims.

DLA’s Hong Kong office is the largest of its Asian offices, linking with and providing support when needed for its other Asian offices located in Singapore and Shanghai.

DLA in Asia is a full service law firm with over 50 fee earners including 14 partners. The firm’s balance of Chinese and non-Chinese staff gives it an excellent understanding of the legal market from both a local and international perspective.

The firm’s practitioners offer expert advice across most major disciplines including: aviation; banking and finance; China business practice; conveyancing; corporate and commercial; corporate finance; eCommerce; employment / human resources / immigration; information technology / telecommunications; insurance and reinsurance; intellectual property; international trade, transport and insurance; litigation and arbitration; marine and shipping; personal injury and employee’s compensation; private equity and venture capital; trust / probate / wills.