Arresting ships
The power to arrest ships is a crucial, if extreme, weapon in the armoury of disputants seeking to protect their interests in maritime disputes. But the legal framework under which ships are arrested is by no means fully international. Law and practices vary around the world. We invited observations from the United States, South Africa and France.
Turning a bad situation to good advantage
By William J Honan III, a partner in the New York office of Haight Gardner Holland & Knight, a law office of Holland & Knight LLP.
In the United States, enforcing a maritime lien by arresting a shipowner's vessel is a simple, quick and effective remedy. The creditor's claim must be paid or, if the claim is contested, security must be posted. Many times, the shipowner is innocent of any wrongdoing, for it was the act of a now insolvent charterer that prompted the debt to arise and the lien to accrue.
Often, the shipowner is faced with the unhappy dilemma of fighting a losing battle or paying a heretofore unknown creditor. Faced with this predicament, the shipowner in the United States does have potential defences - some not so well known - which can be used to prompt a more favourable settlement or, in some circumstances, to defeat an otherwise valid claim. Those defences should serve as a checklist which a careful shipowner should review once the details of a creditor's claim become known:
(1) Was the good or service a ‘necessary’ to the vessel?
Section 46 USC § 31342 states that an entity that provides "necessaries to a vessel" has a maritime lien on the vessel. A respected commentator suggests that "[it is the present, apparent want of the vessel, not the character of the thing supplied, which makes it a necessary.". Hence, the District Court in JH Westerbeke Corp v Golden Fleece (1970 AMC 1740, 1741 [D Mass 1970]) held that a third generator, when only one was needed to operate the vessel, was not a ‘necessary’.
It is also a requirement that the vessel that was arrested must actually have received the goods or the service for which the lien is claimed. Consequently, the lessor of cargo containers was held not to be a lien holder where the containers were leased in bulk and were not earmarked for use on board specific vessels. (Silver Star Enterprises, Inc v Saramacca MV, 82 F 3d, 666, 669 [5th Cir 1996] ).
(2) Were the goods or service maritime in nature?
Contracts that one would assume intuitively were maritime in nature sometimes are not. A contract to construct a vessel is not a maritime contract and, hence, goods and services supplied under such a contract do not give rise to a maritime lien. As a result, the supplier of electronic navigational equipment installed on a vessel during its construction was held not to possess a maritime lien in Nilo Barge Line, Inc v M/V Bayou DuLarge (584 F 2d 841, 843 [8th Cir 1978] ).
The nature of the service is also a valid inquiry when an agent asserts a lien. In the agency context, a distinction is sometimes drawn between ‘preliminary contracts’ which cannot support a maritime lien and maritime contracts which can. The court in Venezuelan Container Line CA v Navitran Corp (1992 AMC 723 [SD Fla 1991] ), quoting from Benedict, described the test to determine a maritime contract as follows:
"In order 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, taking into account the needs of the shipping industry,...."
The distinction between a ‘preliminary service’ and a ‘necessary service’ is sometimes difficult to discern. In ES Binnings, Inc v M/V Saudi Riyadh (815 2d 660 [11th Cir 1987] ), the court held that agency contracts for the solicitation of freight and passengers were not maritime in nature. In SeaEscape Cruises Limited (1995 AMC 2363 [SD Fla 1995] ), the court held that providing airline tickets and concierge services to cruise line passengers was maritime in nature.
(3) Did the creditor rely on the vessel's credit (or waive its lien rights)?
There is a statutory presumption that an entity providing services or goods to a vessel is relying on the credit of the vessel. (46 USC § 31342(a)[3] ). That presumption, however, is rebuttable. The simplest way of proving non-reliance is showing that the supplier had actual notice that the entity ordering the supply did not have the authority to bind the shipowner or the vessel. If such notice cannot be shown, the shipowner can still succeed if it can show that the provider of services or goods relied upon the credit of the shipowner or another, whether by contract or by guarantee, rather than upon the credit of the vessel.
In Jones Tug & Barge Co v SS Liberty Manufacturer (1978 AMC 1183, 1197 [CD Cal 1976] ), the court held that the tug owner did not have a lien because it had relied on the promise of a P&I club to pay it for the services rendered. In SeaEscape Cruises (1995 AMC at 2377) the court, in denying the presence of a maritime lien, held that the claimant had supplied goods and services to the owner/operator of the group of vessels and not to individual vessels.
Obtaining security from the shipowner, or another, at the time that the services are rendered would be evidence of waiver of a claimant's lien. The only conclusive evidence of waiver, however, would be a written waiver from the supplier.
(4) Is the lienholder a "stranger" to the vessel?
In order to enforce a maritime lien, the creditor must be a ‘stranger’ to the vessel. Hence, an owner, part owner, or even a joint venturer cannot hold a maritime lien. (Sasportes v M/V Sol de Copacabana, 1980 AMC 791, 793 [5th Cir 1978] ). The court's rationale is that the creditor did not rely on the security of the ship, but rather it relied on the credit of the shipowner.
(5) Is it unfair to allow the claimant to assert a lien?
In cases where a party seeks to subrogate itself to the rights of a shipowner, that party must satisfy the court that allowing the enforcement of the lien would be equitable under all the circumstances. In Tramp Oil and Marine Ltd v M/V Mermaid I (1987 AMC 129 [DPR 1986] ), an English bunker broker failed to meet that test. The bunker broker had paid for the bunkers that were supplied to the shipowner's vessel, but had not been paid by an intermediate broker, now insolvent, who had been paid by the charterer. The court based its ruling on the inequity of forcing the charterer to pay twice when the bunker broker could have protected itself by refusing to extend credit to the intermediate broker.
(6) Is the lienholder guilty of laches?
If a shipowner can show that the lienholder delayed in the enforcement of its lien rights, had no valid excuse for that delay and, as the result of that delay, the shipowner suffered prejudice, the shipowner can avoid the otherwise valid lien. (Union Drydock Co v M/V Polar Viking, 1978 AMC 1477, 1484 [WD Wash] 1978). In some cases, the delay of only a matter of months can qualify.
(7) Is foreign law applicable and does it recognise a maritime lien?
If foreign law applies, whether by a choice of law in the contract or by the application of choice of law principles, and if the foreign law does not recognise the existence of a maritime lien for the goods or services provided, a court in the United States will not apply US principles of law to enforce a maritime lien. Hence, a Florida district court dismissed a ship repairer's and supplier's in rem action against the vessel because the relevant agreement incorporated English law and English law did recognise a maritime lien for repair and supply of a vessel. Trinidad Foundry and Fabricating, Ltd v M/V KAS Camilla, 776 F Supp 1558 [SD Fla 1991] , aff'd 966 F2d 613 [11th Cir 1992] ).
(8) Are there charter clauses which will allow the owner to recover damages?
It is normal to have a provision in the charter that requires the charterer to keep the vessel free of liens. That provision can serve as the basis for the shipowner's recovery for losses that it suffered due to the vessel's delay caused by the vessel's arrest. In Gabriele Wesch (1981 AMC 1324 [Arb NY 1981] ), the shipowner, based on charterer's contractual obligation to keep the vessel lien-free, recovered damages from the charterer when a lien was placed on the vessel by a cargo claimant, causing a very long delay to the vessel. The majority of the arbitrators was unmoved by charterer's argument that it had used its best efforts to obtain the vessel's release.
The foregoing checklist is not intended to be exhaustive. It is intended to show that the circumstances underlying the lien (or claim of lien) should be carefully considered before a decision is made to pay a creditor all or the bulk of its claim.
(Mr Honan thanks his partner, James H Hohenstein, who reviewed the text, for his "valuable insights and counsel".)
Arrest of associated ships under South African law
By John Herholdt and David Semark, Shepstone & Wylie (UK)
THE ability to arrest ships in order to procure the payment of a debt owed by an associated ship contained in the Admiralty Jurisdiction Regulation Act No 105 of 1983 (as amended) was hailed as a significant development in South African shipping law at its inception. Since then, the associated ship arrest provisions have been frequently invoked by persons who are not South African residents.
The definition of a maritime claim in the Admiralty Act covers substantially all causes of action relating to ships and the carriage of cargo. It also covers matters which are ancillary to shipping matters, and there is a catch-all in the definition of a maritime claim which covers, "Any other matter which by virtue of its nature or subject matter is a marine or maritime matter, the meaning of the expression ‘marine or maritime matter’ not being limited by these and other matters set forth in the preceding paragraphs."
Each provincial or local division of the High Court of South Africa has jurisdiction to hear and determine particular maritime claims, irrespective of the place where the claim arose, the place of registration of the ship, or the residence, domicile or nationality of its owner. The Act provides that any maritime claim may be enforced either by an action in personam (against the shipowner), or by an action in rem (against the vessel itself). An action in rem may be brought by the arrest of an associated ship instead of the ship in respect of which the maritime claim arose. The substantive maritime law of South Africa applied by the South African Courts generally accords with English Law. By affording power to order the arrest of an associated ship, the South African legislature enabled the courts to pierce the corporate veil of one-company ships. In many other jurisdictions, the one ship - one company structure enables shipowners to avoid the arrest of a vessel where one of the ships in a group has incurred debts, because the claimant can only look to the company owning the ship in question or the ship itself for redress, or to a sistership, i.e., a vessel in the same ownership.
The Act defines an associated ship as a ship "other than the ship in respect of which the maritime claim arose:
- owned, at the time when the action is commenced, by the person who was the owner of the ship concerned at the time when the maritime claim arose; or
- owned, at the time the action is commenced, by a person who controlled the company which owned the ship concerned when the maritime claim arose; or
- owned, at the time the action is commenced, by a company which is controlled by a person who owned the ship concerned, or controlled the company which owned the ship concerned, when the maritime claim arose."
Charterers of ships are not immune from the operation of the Act, which provides:
"If at any time a ship was the subject of a charter-party, the charterer or subcharterer, as the case may be, shall ..... be deemed to be the owner of the ship concerned in respect of any relevant maritime claim for which the charterer or the subcharterer, and not the owner, is alleged to be liable."
Establishing common ownership or control of the company or companies is crucial for a successful arrest. Ownership of two vessels is deemed when a majority of shares in each of the ships is owned by the same person/s. Furthermore, a person is deemed to control a company if he has power to control the company. This latter provision has not been fully judicially tested, resulting in considerable speculation as to its scope. In its narrow sense, it would be restricted to common beneficial ownership of the shares of the company concerned but, in a broad sense, control of a company could obviously extend to common directors or possibly even managers.
Proving common ownership or control can be difficult. To facilitate this, the Act allows admiralty courts a discretion to receive hearsay evidence. Circumstantial evidence of details of cross-mortgages between the vessels, or proof that a particular person has been the signatory consistently to documents relevant to the control of the affairs of a company, and evidence of the common addresses, shareholders, directors in respect of the two one-ship-owning companies which may point towards common control, can also be useful. The South African courts decide such matters on a balance of probabilities.
Of particular use to maritime lawyers based outside South Africa are arrests to provide security for arbitration or litigation in respect of a maritime claim pending or proceeding in London or elsewhere. It is open to them to arrest property in South Africa owned by their adversary’s clients in order to obtain security for the claim, whether or not the substantive proceedings are subject to the law of South Africa. Clearly, however, the person seeking the security must have a claim enforceable by an action in personam against the owner of the property concerned or an action in rem against the property, and must inter alia be able to demonstrate the need for such security.
A point to note is that, by bringing a security arrest, the claimant does not submit to South African jurisdiction. For every security arrest, a substantive application must be made to the court supported by an affidavit which sets out the background facts, the necessary allegations to establish the course of action and the relief sought. In practice, South African attorneys briefed from abroad will often put up their own affidavit in support of a security arrest for attachment.
Despite the fact that the associated ship provisions ameliorate the sacred company law principle that to form a separate company is to limit liability, the desirability of the provisions is accepted in South Africa because ships, by their very nature, represent a fast and elusive target which may be deliberately kept out of the jurisdiction of the claimant. The possibility of arresting vessels associated with the guilty vessel in South Africa is therefore a powerful weapon in any maritime lawyer’s armoury.
France set to retain unusual status on ship arrests
By Bertrand Courtois, partner Clyde & Co (Europe)
FRANCE is an unusual jurisdiction with regard to ship arrest. It is often regarded as an ‘easy’ country for arresting parties. This may be explained by the fact that two separate legal regimes coexist and that it is still possible to arrest associate vessels.
Two separate legal regimes
Two distinct legal regimes can apply to ship arrest in France: - the 1952 Brussels Arrest Convention regime, and the French domestic one. France is a contracting state to the convention. Therefore, the convention applies to any arrests inasmuch as the vessel to be arrested flies the flag of a contracting state of the convention.
In such a case, the arresting party needs, in order to be allowed to arrest, to be able to allege against the owners a ‘maritime claim’ as listed in article one of the convention.
The maritime claims which may give rise to the arrest of a vessel flying the flag of a contracting state include, but are not limited to, claims arising out of collision, salvage, general average, construction or repair of a ship, any agreement relating to the use or hire of a ship including by charter party or relating to the carriage of goods in any ship, loss of life or personal injury caused by a ship etc.
A number of claims are not categorised as maritime claims under the convention, although they are very closely related to the shipping industry and as a result cannot give rise, under the convention, to the right to arrest a ship. For example,the convention has no remedy for claims for breach of contract arising out of the sale of the ship or for unpaid premiums, including premiums relating to the hull.
French domestic law applies when the vessel to be arrested does not fly the flag of a contracting state to the convention and this includes flags such as Panama, Liberia, Malta or Cyprus.
When this is the case, the convention is not exclusive and the arrest can be authorised by the court either by virtue of a claim which is categorised as a maritime claim or by reference to any other claims which, as a matter of French domestic law, may provide grounds for an arrest. These are any claims which seem to be founded in principle; they are in French any "creance fondee dans son principe".
General requirements
A mere allegation of a maritime claim suffices to arrest in France a vessel which flies the flag of a contracting state to the convention. The court would not require much evidence regarding the merits of the claim. It would just be tough on the qualification or nature of the claim which has to be categorised as a maritime claim.
The requirements are different under French domestic law. Here, the arrest is possible whatever the qualification or nature if the claim. However, the court would examine with great attention whether the claim is founded or not. A mere allegation would not suffice; the French jurisprudence would require here some evidence establishing that the claim, maritime or not, is a prima facie claim and that its merits are reasonably
good to permit the arrest.
From a practical point of view, arresting a ship in France is fairly easy, provided that the above requirements are satisfied. It takes no more than a few hours to arrest a vessel, and the challenge in court of the arrest by the owners would last three or five days, depending on whether the owners were able to justify some urgency.
Power of attorney and counter-security are not required to arrest in France. In the meantime, bad faith is required from the arresting party for the shipowner or the disponent owner to obtain punitive damages for wrongful arrest. This is very exceptional. A bank guarantee is usually required by the arresting party before the release of the vessel, but certain P&I club letters of undertaking are of course accepted in practice.
Effect on jurisdiction
Validation proceedings are not required, However, legal proceedings in respect of the merits of the disputes have to be started before the competent court of jurisdiction within a one-month period following the arrest, failing which the arrest and its effects become null and void.
Jurisdiction agreed by the parties is not affected by ship arrest in France. However, when jurisdiction is not agreed by the parties, French courts may be deemed competent, following the arrest, if the claimant has its habitual residence or principal place of business in France, if the claim concerns the voyage of the ship during which the arrest was made, if the claim arose out of a collision, or if the claim is for salvage.
Associated ship arrest
France used to be a favourable jurisdiction for associated ship arrests. Until recently, it was sufficient to arrest an associated ship (a vessel which is not strictly speaking in the ownership of a debtor) to establish that there were close connections or links between the vessels or companies concerned, and those connections could relate to or involve the shareholders, the directors, the flag of the vessels or their managers and of course the addresses and details of the single-ship companies.
French case law tends to change in that aspect and French courts are now tougher in respect of the requirements which would permit the arrest of an associated ship.
Following a decision by the French Cour de Cassation on March 19, 1996 ( the Alexandra III), supported by another decision rendered by the same court on January 21, 1997 (the Cast Husky), it seems that it is now required, before arresting an associated ship, to establish in some detail that the companies concerned are not only closely connected but are more or less fictitious as separate entities and represent one and the same interest.
One could conclude that the French system is now less unusual than before and is becoming more like other current systems in the world. It would be premature to reach such a conclusion, however, considering that a number of courts of appeal in France tend to resist the recent decisions by the Cour de Cassation and continue to hold that some strong association between ships or companies of the same group or an absence of a lack of autonomy of the company(ies) concerned should suffice to permit the arrest of an associated ship. This in fact is what the court of appeal of Aix-en-Provence held in a decision rendered on May 22, 1997 (the Mediterranea).
The French system of ship arrest, then, looks set to retain its unusual character.