Ship arrest: no undertaking in damages exigible from arresting party

The Court of Appeal declined yesterday to upset the ship arrest apple-cart. In The Alkyon [2018] EWCA Civ 2760 it upheld the decision of the Admiralty Judge, Teare J, noted here on this blog, that a bank could hold an arrest over a mortgaged ship without having to give any undertaking to pay damages for loss of use should it turn out that its claim was ill-founded. The owners of the MV Alkyon, a 36,000 dwt bulker, had argued that there was no default justifying her arrest in Newcastle; that they could not afford to bail her; that her immobilisation by arrest would cause them big losses; and that it was only fair that if the bank was indeed wrong, it should carry the can for those losses.

Despite the fact that there is theoretically no restriction on the court’s discretion to release an arrested vessel (see CPR 61.8(4)(b)), Teare J disagreed; and the Court of Appeal agreed with him. Although there was much in common between ship arrest and freezing orders, where an undertaking in damages was emphatically the rule, for the court to demand such an undertaking in arrest cases would  cut across the idea that arrest was available as of right, and also the established principle that liability for wrongful arrest could not be imposed unless the claimant proved bad faith or possibly gross negligence. This was not something for the judiciary — barring possibly the Supreme Court — to do.

In the view of this blog, the Court of Appeal was quite right not to draw the analogy with freezing orders. For one thing not all arresters are plutocratic banks: think crewmen seeking wages or damages for injury on board, or for that matter suppliers of canned food and water for those crewmen to eat and drink. For another, the right to arrest is there for a purpose, namely to assure people that they will be paid by the owners of peripatetic pieces of maritime machinery: to allow a threat to arrest to be met with a threat to claim damages would not further this end. For a third, damages for arrest may well bear no proportion to the amount of the claim: the losses caused by the arrest of a large bulker or reefer would be likely to dwarf a straightforward $100,000 bunkers debt. And lastly, it’s all very well saying a single arrester ought to carry the can for immobilisation losses: but what if cautions against release then pile on? Which of the undeserving claimants should have to pay how much? Nice work for lawyers, maybe: less good news for shipping claimants who want to get on with their commercial lives.

Ship arrest: no provision for compensation for losses if claim turns out unjustified

You can always expect a scholarly judgment from Teare J. Today he dealt with a long-standing issue in the English law of arrest of ships: the lack of any jurisdiction to demand from the arrester security  for, or payment of compensation for, the losses suffered by the owner if the arrest turns out unjustified. His Lordship confirmed the traditional position, holding that it was for Parliament, or possibly the Rules Committee, to deal with this. If we limited damages for wrongful arrest to cases of malice or gross negligence, he said, it would be inconsistent to give a remedy for arrest not fulfilling these criteria.

In Natwest Markets Plc v Stallion Eight Shipping Co. SA, (the ship MV ALKYON) [2018] EWHC 2033 (Admlty) a bank mortgagee arrested alleging a LTV default; the owner denied default. Unable to secure release by putting up further security, it sought release unless the bank put up security for any losses it suffered in case the bank was wrong. The arrest was, consistently with the above, maintained.

US 2nd Circuit: bunker arrests clarified

Bunkers are supplied through a complex chain of suppliers. If you order a stem the outfit you order from will almost certainly not deliver them. Instead it will arrange directly or at one or more removes for a third party to do so, the bunkers being bought in down the line.

Arrest for bunkers is big business in the US, since there you can arrest the ship for the debts of the time-charterer who bunkers her (which you can’t in England unless the owner is also personally liable, which is unlikely). But who can arrest? The person the bunkers were ordered from or the person who pumped them on board? It turns on who “supplied” the bunkers under the relevant section of CIMLA, the maritime lien legislation. In a decision a couple of days ago arising from the OW debacle, ING Bank v The MV Temara 16-3923(L), the Second Circuit Court of Appeals has straightened out who this is: it’s the entity the charterer or shipowner contracted with, not the physical supplier.

And quite right too. The physical supplier here had voluntarily given credit to the uncreditworthy (OW) and supplied the bunkers to its order; it deserved no proprietary claim against the ship. Whereas the person who contracted with the ship had supplied the bunkers to the orders of the charterer. The fact that it had done so through a third party was beside the point.

Thanks to our friends at the Maritime Advocate for the heads-up.

International insolvency outside the EU: contract under English law and we’ll see you right.

Before the twenty-first century there was a clear and undoubted rule in international insolvency known as the Gibbs rule (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399). Whatever recognition or other co-operation we might be prepared to grant foreign insolvency proceedings, if an obligation was governed by English law and otherwise valid, its validity could not be affected by any act of foreign courts or authorities proceeding under their own insolvency law.

There is no doubt that this is no longer the case for EU insolvencies: the EU Insolvency Regulations of 2000 and more recently 2015 have clearly put paid to any such exceptionalism. But what of non-EU insolvencies? Since 2006 there has been some question whether the simple Gibbs rule might have been affected by the UNCITRAL-based CBIR (Cross-Border Insolvency Rules), which now give the English courts considerable scope to replicate in England the effects of a foreign insolvency proceeding in a debtor’s own COMI (centre of main interests, essentially where its business was run from). Progressive and academic opinion (the latter as usual generally aping the former) consistently suggested that the answer ought to be Yes, on the basis that modified universalism in insolvency needed to become more global and less narrowly jurisdictional.

Today, however, Hildyard J, in a careful judgment in Bakhshiyeva v Sberbank of Russia & Ors [2018] EWHC 59 (Ch), a case on the dry subject of paper issued by a Baku bank, gave the answer No. The bank, OJSC, with connections to the Azeri state, was highly insolvent. It went into Chapter 11-style reconstruction in Azerbaijan, successfully applying to have the proceeding recognised in the UK under the CBIR. A vote of an overwhelming number of creditors, valid under Azeri law, agreed a complex debt-for-government-bonds-and-new-lower-debt arrangement under which OJSC would then continue trading. Two financial institutions, one English (Templeton) and one Russian (Sberbank), holding English-law-governed debt issued by OJSC, held out. They took no part in the vote, though as a matter of Azeri law they were bound by it.

The question was, could the English court prevent these two minority creditors bloody-mindedly enforcing their rights in full against the bank once the moratorium created by the Azeri proceedings was over? As stated above, the answer was No. Whatever one might think of the Gibbs rule, it was too solidly anchored to have been removed by the side-wind of the CBIR. Nor should it be bypassed by, for example, admitting that the debt still existed but then reducing it to something like the grin on the Cheshire cat by preventing its enforcement against the assets of the debtor.

There is much to be said for Hildyard J’s solution, both on grounds of legal certainty and also because Parliament has occasionally stepped in in other areas, but not this one, to prevent abuse of international creditors’ rights (notably, in enforcing statutory debt relief for poor countries against vulture funds and the like).

It may, moreover, be important not only for bondholders — who will obviously be opening discreet magnums of champagne this evening — but for other creditors, including maritime ones. Charter claimants and bunker suppliers whose rights are governed by English law will now, it seems, be able to watch smugly from the sidelines while shipping companies go into reconstruction, waiting for the proceedings to end before pouncing, catlike, on the very same companies, seizing their London accounts and arresting their vessels for the full amount of their claim as soon as they venture far from home. Commerce red in tooth and claw, you might say: but then that’s how it’s always been in shipping.

 

Varying the order of priorities between in rem claimants in Singapore.

In The Posidon [2017] SGHC 138 Singapore High Court has recently held that the order of priorities set out in the High Court (Admiralty Jurisdiction) Act (Cap 123, 2001 Rev Ed) (“HCAJA”) could be varied in exceptional circumstances where: (i) there was knowledge that the mortgagor was insolvent; (ii), the mortgagee had been been fully aware, in advance, of the nature and extent of the expenditure incurred by the competing claimant; (iii) any such expenditure had brought about some benefit to the mortgagee.

 
The dispute arose as to the order of priorities against proceeds paid into court following the judicial sale of two vessels. The bank claimed as second mortgagee and the bunker supplies claimed as necessariesmen. The bunker suppliers argued that the court should depart from the usual order of priorities in Singapore and give them priority over the bank. Belinda Ang Saw Ean J held that the facts of the case did not justify varying the order of priorities set out in the HCAJA, stating [87] “Injustice warranting an alteration to the order of priorities is only present when the mortgagee stands by and allows such bunker arrangements to take place despite knowing that the mortgagors were insolvent and that the mortgagee would somehow be benefitting from the supplies at the expense of the bunker supplier.”

 
The borrowers here had been operating at a loss and accumulating trade debts for some time prior to the bank’s decision to terminate the loan facility agreement and enforce the mortgages. That did not mean that the borrower was insolvent and at the time of the termination of the loan facility arrangement the bank had not considered the borrower to be at risk of becoming insolvent. There was also no evidence that the bank was fully aware in advance of the owners’ bunkering arrangements. Nor did the supply of bunkers to the vessels bring about any benefit to the bank. The bank’s security interest was not protected because the bunkers gave the vessels motive power.

Singapore arrest is for Singapore litigation.

 

In The Eurohope  [2017] SGHC 218 the Singapore High Court has held that it is an abuse of process to arrest a vessel in Singapore for the purpose of obtaining security for legal proceedings in another jurisdiction, in this case the High Court in England. This reflects the position in English law prior to s.26 of the Civil Jurisdiction and Judgments Act 1982 which empowered the court to order that property arrested be retained for the satisfaction of a judgment given in foreign court proceedings. Singapore has not enacted any equivalent legislation, and only provides for the arrest of ships to be used as security for pending international arbitrations (s. 7(1) the International Arbitration Act 1995).

Accordingly, the court ordered the in rem writ to be struck out, the warrant of arrest to be set aside, and the letter of undertaking issued by the owners’ P&I Club to be returned to the owners or their solicitors for immediate cancellation. The Court declined to award damages for wrongful arrest or wrongful continuance of arrest of the vessel. Taken as a whole the plaintiff’s behaviour was reasonable and did not amount to bad faith or malice.

OW Bunkers (again). Interpleader and maritime liens in Canada.

 

The collapse of the OW Bunker group in late 2014 has led to a series of interpleader claims in different jurisdictions in which competing claims to the deposited funds have been made by the physical bunker suppliers and ING Bank, the assignee of OW. An interpleader claim has recently been heard by the Federal Court of Appeal in Canada in ING Bank NV and Others v Canpotex Shipping Services Ltd and Others 2017  FCA 47. It concerns the effect of funds deposited by the time charterer and the  potential liability of the vessel under a maritime lien.

In 2014 OW UK supplied bunkers in Vancouver to two vessels on charter to Canpotex. Following the collapse of the OW group, competing claims for payment for the bunkers supplied were made by the physical supplier, Petrobulk, and ING Bank as the assignee of OW UK’s receivables. Canpotex interpleaded and obtained an order that the of OW UK’s invoice be paid into the US trust account of its solicitors, which payment would be treated as a payment into court. The interpleader covered only Canpotex’s liability.

Canpotex subsequently added the shipowners as plaintiffs to its statement of claim and sought a judgment as to whether Petrobulk or ING was entitled to all or part of the trust fund and a declaration  that following payment out any and all liability of both Canpotex and the shipowners was extinguished. In July 2015 Russell J heard the claims against the trust funds, (2015 FC 1108). There was a dispute about which terms governed OW UK’s supply of the bunkers to the vessel: the OW Group standard terms; or Schedule 3 of the OW Fixed Price Agreement. Both terms provided for the variation of the contract where the physical supply of the fuel was undertaken by a third party, but were worded differently.

Russell J found that there had been an oral agreement to apply the latter terms and the consequence was that Canpotex became jointly and severally liable under the contracts made between OW UK and Petrobulk.  Upon payment of that purchase price to Petrobulk, Canpotex would come be under no obligation, contractual or otherwise, to pay any amount representing the purchase price for the marine bunkers to OW UK or the Receivers. He then ordered Petrobulk be paid out of the trust fund and that ING be paid the mark up due to OW UK and that Canpotex’s and the shipowners’ liability in regard to the bunker delivery should be extinguished, as well as any and all liens.

The Federal Court of Appeal has overruled the decision. Interpleader proceedings had to be conflicting claims over the same subject matter which were mutually exclusive. The contractual claims against Canpotex advanced by OW UK and by Petrobulk were such claims, but Petrobulk’s assertion of a maritime lien was not a conflicting claim, and was a claim against the shipowners, and not against Canpotex.  If OW UK was contractually entitled to payment of the trust funds, that would extinguish Canpotex’s contractual liability, but Petrobulk’s maritime lien claim would remain alive. The Judge had been wrong to extinguish the shipowner’s liability for that claim and had also wrongly admitted oral evidence as to the terms of the spot bunker purchases. The terms applicable were those found in the OW Group standard terms and the case was returned to the judge for reconsideration.

If the judge finds that OW UK is contractually entitled to payment of the trust funds, this raises the prospect of ING recovering in full under the OW UK invoices from the trust fund established by Canpotex, and of Petrobulk doing likewise through its maritime lien against the vessel, if the vessel can be arrested in Canada.

 

 

Claims against shipowners by physical bunker suppliers. News from Malaysia.

A familiar claim, this time in Malaysia, by Vitol, the physical bunker supplier, in respect of bunkers supplied to a vessel by OW Bunkers. Vitol sent the shipowners a notice stipulating that it had exercised a lien over the bunkers, and that it should pay the supplier and not OWB. The vessel was later arrested in Malaysia and in Vitol’s  application to amend its pleadings the Kuala Lumpur High Court in Vitol Asia PTE LTD v The Owners of the Ship or Vessel Malik Al Ashtar considered the following issues.

  1. Was OWB contracting on behalf of the owners when it entered into the contract with the Vitol for the sale of the bunkers? The court found that there was no no document conferring actual authority on OWB to contract on behalf of the defendants, nor were there any representations by the shipowners that OWB had actual or apparent authority to enter into any agreements on its behalf.
  1. Were the shipowners liable in conversion? No. The court adopted the views of Males J in The Res Cogitans [2015] EWHC 2022  that despite a clause such as cl. 11.2, there would be no claim for conversion against the shipowner as the physical supplier had consented to the use of the bunkers by the vessel. Here, Vitol knew that OWB was a trader and not an end user and that it would sub-contract with shipowners to whom the bunkers would be delivered.
  1. Was there a claim in unjust enrichment? No, Vitol’s sales order confirmation and tax invoice evidenced its intention to contract directly with OWB only, and it should look solely to OWB for payment under its contract with it.
  1. Was there a direct contract whereby the shipowners would be jointly liable pursuant to Clause L4 of OWB’s general trading terms? No. There was no evidence that the shipowners had agreed to be bound by Vitol’s terms when they entered into a direct contract for supply of the bunkers with OWB. Nor had they agreed or authorised OWB to be bound by the Vitol’s terms when OWB contracted with Vitol for the supply of those bunkers. The Canadian decision in Canpotex Shipping Services Ltd v Marine Petrobulk [2015] FC 1108 on which Vitol relied did not reflect the English position and was not binding on the Malaysian courts.
  1. Was there a lien over the vessel or the bunkers? No. There was no contract between Vitol and the shipowners so no contractual lien could arise. If there were such a lien, it would give no right to payment as against the shipowner but would only give a right to retain possession of the bunkers until payment by OWB. There was no maritime lien in respect of the supply of bunkers under either English or Malaysian law.

Halcyon times for shipowners – not so good for physical bunker suppliers.

 

 

A victory for owners in the latest round of arrests by physical bunker suppliers left unpaid by their contracting party, the time charterers. In The Sam Hawk [2016] FCAFC 26 the Full Court of the Federal Court of Appeal of Australia has just held that a claim by bunker suppliers, which would not constitute a maritime lien under Australian law, did not constitute a “proceeding on a maritime lien” under s15(1) of the Admiralty Act 1988 (Cth) (Act). A foreign maritime lien would be recognised, but only if it was analogous to the four categories of lien set out in s15(2) – salvage, damage done by a ship; wages of the master, or of a member of the crew, of a ship; master’s disbursements.

 

The claim arose out of a supply of bunkers to the vessel in Istanbul by a Canadian bunker supplier. Its contract with the time charterer expressly provided that the “laws of the United States and the State of Florida” applied “with respect to the existence of a maritime lien”. The bunker supplier argued that this contractual provision showed that the lex causae was that of the US, which recognises claims by suppliers of necessaries to vessels as a maritime lien.

 

The Court of Appeal unanimously rejected this argument as there was no privity of contract between the bunker supplier and the vessel. For this reason the arrest did not fall under s.17 of the Admiralty Act which covers statutory liens, as the shipowner was not the ‘relevant person’ a “relevant person” who would be liable on the claim in a proceeding commenced as an action in personam. The claim was non-contractual and could be subject to Turkish law as the place of supply, or to the law of Hong Kong where the vessel was flagged. No evidence had been led as to the law on maritime liens in Turkey or Hong Kong and the Court of Appeal dealt with the matter on the assumption that the law of the forum, Australia, applied – under which a claim for necessaries supplied to a vessel did not constitute a maritime lien.

 

The Court of Appeal then went on to consider the position had the bunker suppliers made out their allegation that the lex causae was that of the US. Four of the five Justices, Rares J dissenting, were of the view that the claim would still not fall within s. 15(1) of the Admiralty Act as it did not constitute a maritime lien under the law of Australia, the lex fori, a position previously adopted by the Privy Council in The Halcyon Isle [1981] AC 221.

Arrest of ships and insolvency – Canadian courts apparently confirm orthodoxy

Last Friday Sigurdson J in the British Columbia Supreme Court recognised the Korean Hanjin bankruptcy proceedings under the UNCITRAL Model Law and banned further arrests of Hanjin vessels should they visit Vancouver or other BC ports. Importantly, however, he left existing arrests in place. We have not seen the text of his decision (though it is referred to here and here (£)): but it seems to reflect orthodoxy. Assuming an in rem claim against a vessel does not arise out of a maritime lien, under the orthodox rules of Admiralty in England and Canada it survives insolvency if brought before the inception of insolvency but not if brought afterwards (see Re Aro Co Ltd [1980] Ch 196 and The Oriental Baltic [2011] 1 SLR 487). Where the bankruptcy is foreign the relevant time is that of its recognition. Hence there seems nothing surprising about this determination.