Dutch arrest law - making things better

A FEW years ago, the Dutch multinational Philips started a campaign under the slogan "Let's make things better". A similar idea must have occurred to Dutch lawmakers in respect of the complex area of the law generally described as Private International Law (PIL), which deals mainly with the conflict of laws and the question of which law or legal system should be applied in a given case.

For many years there have been attempts in the Netherlands to codify this part of the law, which was traditionally defined in the works of legal writers and in case law only. This codification is still in progress, and perhaps will be for a long time to come. Meanwhile, lawmakers thought it might be a good idea to regulate matters of PIL at least in one fairly separated area where related questions arise very often and which has considerable practical significance - maritime law.

Holland is a fairly good place to enforce claims against ships. Seagoing vessels are frequently sold in the Netherlands through a judicial auction following enforcement of a judgment, award or notarial deed. Such an action clears the vessel of all encumbrances and liens. This can be done in about eight weeks, which is considered fast in international terms.

Once a ship has been sold, questions will arise as to how the proceeds should be divided among the various creditors and, more particularly, which law should decide who gets what.

Why not just apply Dutch law if the auction has taken place in the Netherlands? This would be a very simple and clear approach, but it would encourage something that seems to be a great sin in the eyes of lawmakers - forum shopping.

I don't think forum shopping can ever be avoided altogether, and neither do I see why it should be such a terrible thing. The mere fact that any given country has an excellent legal system and procedure, the object of which is to avoid forum shopping, may in fact attract shoppers to that particular jurisdiction.

On the other hand, when one looks at the interests of the creditors of shipowners, and in particular financing banks, one can imagine that they would certainly have a preference for application of the law of the flag, which is after all something that can be steered by them before the problems arise. This gives clarity to the legal position in respect of various claims against the ship, wherever the ship goes, assuming of course that all countries internationally took the same approach.

Other creditors might have a preference for application of the law that governs their claim. Stevedores in the United States who have rendered services in connection with a vessel under instruction from its time charterers would, under US law, usually have the benefit of a lien allowing them to enforce their claim against the ship. Such a lien might not be granted by Dutch law, and could also conceivably be contrary to the law of the vessel's flag.

These are arguments against the simple lex fori approach. Turning back now to the lawmakers, their aim of making things better resulted from the need for clear rules which would enable the maritime legal world to predict clearly what would happen if legal steps were taken towards enforcement of a claim against a ship in the Netherlands.

An act was therefore drafted and made effective from May 1, 1993, dealing with a number of specific questions on PIL.

I will consider here only those issues related to enforcement issues, although other rules covered by the law include title to sue, the identity of the carrier under bills of lading, and guidance in collision cases.

The system devised in the act seemed initially to be fairly simple. If a foreign ship is auctioned in the Netherlands, Dutch law will not be of any relevance in respect of material issues unless (and then only to the extent that) it is the law governing one of the claims filed against the proceeds of the vessel. Questions of ranking and priority, with the exception of protecting mortgagees, will be governed by the law of the vessel's registration.

This system seems to make sense, and was quite clear - until the act became effective and was tested in practice.

Firstly, even though ships are often judicially sold in the Netherlands, it is far more often the case that a ship is simply arrested as security for a claim against its owner or connected with its operation, not in enforcement of a judgment or award but merely for security against some future judgment or award. Several hundred such arrests are made every year in the Netherlands, and the vast majority of them are lifted promptly against security.

What remained unclear was whether the PIL act system could also be applied if no judicial sale followed. This would much increase its practical significance. And the question has now been answered in the affirmative by the Supreme Court decision in the case of the Hanjin Oakland.

This gives rise to another question, not explicitly answered by Article 3 of the PIL act - which law governs the question of whether an arrest can be made in the first place? For instance, can US stevedores who have performed services pursuant to a contract with a time charterer arrest a ship simply because US law grants them a lien/right of enforcement against the ship, or would this depend on the law of the flag, which might entail that they do not rank in a division of sale proceeds?

This issue has led to much debate. More often than not, the law governing the claim, in contract or in tort, will be one other than that of the ship's flag. The two will frequently differ, particularly in cases where the contractual or tort claim is not against the registered owner of the ship but rather against some charterer or operator. For instance, a crew employed by a bareboat charterer will have a contractual claim against the bareboat charterer/employer only, but they would usually be entitled under most legal systems to enforce their claim by arresting the ship.

Dutch national law has a very specific - internationally unusual -system whereby claimants under a bill of lading have been granted special rights of enforcement against the ship, even if the contractual carrier under the bill of lading is not the owner, or indeed charterer, of the ship

The protection of crew members is internationally recognised and seldom leads to conflict where their right to enforce against the vessel is concerned. But the situation is quite different when it concerns the protection of, for instance, cargo interests/holders of bills of lading, cargo underwriters and the like. In that area, there are wide differences between the legal systems of the maritime nations.

It is against this background that the dispute in the Dutch courts between the UK P&I Club and the owners of the Hanjin Oakland must be viewed.

Dutch national law has a very specific - internationally unusual - system whereby claimants under a bill of lading have been granted special rights of enforcement against the ship, even if the contractual carrier under the bill of lading is not the owner, or indeed charterer, of the ship.

Parties with an interest in cargo damaged on a voyage on board the Hanjin Oakland from Kaohsiung to Rotterdam claimed under a bill of lading issued by the time charterers of the ship and obtained a default judgement against that time charterer. As security, they threatened to arrest the vessel in Holland, and a club guarantee was granted for the avoidance of such arrest. The club and the owners then demanded the return of that guarantee on the ground that South Korean law, which governed the registration of the vessel, does not permit arrest of a ship in security of a claim against time charterers.

The Rotterdam district court found that the question of whether a claim can be enforced against a ship is a matter of Private International Law which is governed by the PIL act, and that such enforcement is only permissible if the enforcement against the ship is allowed both by the law of the country where the ship is registered and by the law governing the claim itself. In this case, South Korean law, as the law of the vessel's registration, did not permit enforcement of a claim against a time charterer by an arrest of the vessel. The court ruled that no arrest should therefore have been possible, and ordered the cancellation of the guarantee.

The message was, "If one wants to arrest a foreign ship in Holland, for a claim against someone other than its owner, which is governed by a foreign law, one must pass two tests in that one must show that both the law of the contract (or tort) and the law of the flag would allow such an arrest"

The Court of Appeal of The Hague disagreed. It held that only questions of priority/ranking were to be decided by the law of the flag, but that the right to arrest was a matter of the lex causae, in this case deemed to be Dutch law, which allowed the arrest. The court reversed the Rotterdam decision and ordered that the guarantee remain in place.

The appeal judges, in respect of arrest issues, merely looked at the law governing the claim, reducing the significance of the law of the registration to questions of priority/ranking after a judicial sale only.

The Supreme Court, however, found that the Rotterdam court had been right and that the Court of Appeal was wrong. The "cumulative test" was found to be the right approach.

The Supreme Court applied Article 3 of the PIL act even in the early stage of a "conservatory" arrest made for security only or, in other words, even if there is no judicial sale with subsequent division of proceeds, and no reason to expect that one will ever follow.

The cumulative test must be applied irrespective of whether the arrest is on a pre-judgment basis or on an executionary basis. In the interests of uniformity and maximum certainty, the lex registrationis must be decisive for the issue not only of priority/ranking but also enforceability against the ship.

The Supreme Court judges felt there could be no priority without the right to enforce. This supports the finding of the Rotterdam court that no arrest can be made if this is not permissible under the law of the flag. In addition, the Supreme Court found it "undesirable" that a ship should be arrested for a claim if no such arrest was deemed permissible under the law governing that claim. In other words, if the lex causae does not allow creditors to enforce their claims against the ship, they should not be entitled to arrest even if this is allowed under the law of the flag.

In the vast majority of Dutch arrest cases either the lex registrationis or the lex causae are foreign, and the protection of cargo receivers under bills of lading envisaged by Dutch maritime law has now been considerably narrowed.

In practice, arrests might still be made and guarantees given in order to procure a quick release, but any guarantee thus given can subsequently be claimed back in court on the basis that the arrest should not have been allowed in the first place.

Even if the lawmakers have made things better, they have probably done so in a different way than they intended. The lawyers and the courts will still be faced with appalling puzzles, and the act has yet to be drafted which could manage to avoid this.