In favour

Adil K Patel of Bhatt & Saldanha looks at the impact of a recent case on the ship arrest procedure in India

THE question of whether a ship can be arrested in an action in rem by a party to a charter party, which has been terminated or come to an end without such party having a maritime lien, and without it being the bareboat charterer, was recently decided by the Bombay High Court in favour of the shipowner.

The plaintiff was a foreign company. The tug, flying a foreign flag, was sued in rem as the first defendant. The second defendants were the time charterers of the tug who had chartered it from the owners vide a time charterparty which was for an initial period of six months with two or three extensions at the time charterers’ option. The time charterers, in turn, chartered the tug to the plaintiffs on Supply Time 89 Standard Format. Neither the time charterparty nor the Supply Time 89 Standard Format created a demise in favour of the respective charterers.

As per the terms of the contract between the plaintiffs and the time charterers the tug was delivered to the plaintiffs. The first firm period of 90 days in accordance with the contract expired and a further extension of 60 days was granted. The plaintiffs had paid charter hire up to and inclusive of a date which was beyond the 90 days time period. The plaintiffs were thereafter advised that the tug had abandoned the tow and sailed to an unknown destination. The plaintiffs arrested the tug while it was in an Indian port on the ground of their having a maritime claim and maritime lien for breach of contract and that they could proceed against the owners of the tug in personam and the tug in rem.

The plaintiffs’ claims were towards plaintiffs’ bunkers on board the tug, costs in mobilising a substitute tug, port-related charges for the substitute tug, etc. The owners of the tug, also a foreign company, contested the arrest and strenuously argued that for a suit in rem to lie against the vessel there must be a cause of action against the owners in personam, which was not pleaded by the plaintiffs. The plaintiffs entire cause of action was against the time charterers and the tug could not be arrested as security for a claim against them.

The owners further argued that none of the plaintiffs’ claims amounted to a maritime lien and that the time charterparty did not create a demise in favour of the time charterers so as to make the tug liable in rem for the plaintiffs’ claims. The plaintiffs, on the other hand, contended, inter alia, that the suit was founded on the basis that the defendant tug had derived benefits (i.e. bunkers) and that it was the offending tug and was as such liable to be arrested in an action in rem irrespective and inconsequential of any relationship that may have existed between the plaintiffs and time charterers or between the plaintiffs and the owners. The plaintiffs also argued that since the tug was the offending vessel it could directly be proceeded against to recover the bunkers on board.

The question before the single judge therefore, was whether the plaintiffs were entitled to have the tug arrested by invoking the in rem admiralty jurisdiction of the Bombay High Court, particularly when the contract between the plaintiffs and the time charterer was no longer in force when the application for arrest was made.

The single judge of the Bombay High Court held that:

1. The documents produced before the court did not show that there was a demise in favour of the time charterers by owners of the tug. There was also no clause on record creating a demise between the plaintiffs and the time charterers.
2. A maritime lien can be said to exist in respect of (a) damage done by a ship, (b) salvage, (c) seaman and master’s wages, (d) master’s disbursement, and (e) bottomry, and only in such cases can a right in rem exist against the vessel. In all other cases, a right in personam exists for any claim that may arise out of a contract.
3. Therefore, none of the claims which the plaintiffs were pursuing constituted a maritime lien and therefore could not be attached to the ship for an admiralty court to exercise jurisdiction in rem.
4. Even in cases where there is a maritime lien, there is a further requirement that the plaintiff who approaches the court must show that there is a demise in favour of the time charterer. In the absence of such a demise, an in rem action would not be maintainable.
5. A plaintiff can therefore maintain an in rem action for a breach of contract claim against the vessel only if the charterer who he is proceeding against has a demise in his favour such as a bareboat charterer.
6. The Bombay High Court did not have jurisdiction to order for arrest of the tug and accordingly the tug was released from arrest.

The plaintiffs sought a stay of the order but the judge refused the same. The plaintiffs filed an appeal but it was dismissed. Therefore, the decision taken by the Bombay High Court is good law as a vessel can now be arrested as security for a breach of contract claim against the charterer only if that charterer has a demise in his favour. If the charterer does not have a demise in his favour, the arrest of the vessel by the claimants for breach of contract claims will be considered wrongful and could subject the claimants to pay damages for wrongful arrest.

Letter of the law

ACCORDING to Cape Town-based Bowman Gilfillan Findlay & Tait, the recent decision of Star Tankers AS v Methyl Company Limited is the first definitive judgment handed down by a South African court on the question of whether or not a P&I Club Letter of Undertaking constitutes sufficient security for the release of a vessel under arrest under South African law.

Following the arrest of the Bow Neptun on 25 May this year, the American Club tendered a P&I Club Letter of Undertaking to stand as security for the claim to secure the release of the vessel from arrest. The cargo claimants were not prepared to accept the wording of the letter and rejected it. Star Tankers and the American Club sought an urgent order from the court securing the release of the vessel against a club letter on the grounds that the South African Admiralty Jurisdiction Act (AJRA) permits a party to obtain the release of property from arrest or attachment subject to the giving of ‘security or an undertaking’.

Judge Kruger observed that while there have been many instances where South African courts have released arrested vessels upon the provision of security by way of a club letter, the question of whether or not such a letter constituted sufficient security in terms of the AJRA had not been definitively decided.

The judge referred to an earlier judgment of the Supreme Court of Appeal in the Merak S dealing with the bank guarantees tendered as security. Here the court found that a bank guarantee, despite being a private contractual undertaking given by a bank to the claimant in order to secure the claim against the shipowner, was nevertheless sufficient security within the ambit of AJRA. In that case Farlam JA recognised that the giving of a bank guarantee was “the almost universal practice”.

Given the decision in the Merak S, Judge Kruger concluded that he could find no reason why, from a practical point of view, the club letter should not likewise constitute adequate security within the ambit of the AJRA, since bank guarantees and club letters are cast in similar terms and both are private contractual undertakings given either by the bank or the club to secure the claim against an owner. Finally, any risk which may accompany the giving of a club letter was a risk akin to modern commercial practice.

Accordingly, the court was satisfied that the Letter of Undertaking furnished by the American Club constituted sufficient security in terms of the provisions of the AJRA.