Do you have to provide an undertaking in damages when you arrest a ship?

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Introduction

It is well established in the United Kingdom as long ago as 1858 that, an arresting party is not liable to pay for any damage resulting from a wrongful ship arrest[1] unless it acts in bad faith or with gross negligence. Also, an arresting party can arrest the ship as of right. Under such circumstances, can a shipowner request the release of the vessel unless a cross-undertaking in damages is provided by the arresting party? A recent English case, NatWest Markets Plc (formerly Royal Bank of Scotland Plc) v Stallion Eight Shipping Co SA [2018] EWHC 2033, has decided on this point.

Fact

The Claimant is a bank, which has lent US$15,700,000 (“the Loan”) to the Defendant. The Defendant is the shipowner of M.V. Alkyon (“the Vessel”), which has provided a mortgage on the Vessel as security for the Loan. On 22 March 2018, the Claimant informed the Defendant that an additional security of US$1,750,000 was required for the Loan because the market value of the Vessel was reduced to US$15,250,000. The Defendant contended that the Claimant had undervalued the Vessel and provided the Claimant with higher valuations. On 25 April 2018, the Claimant informed the Defendant of an alleged event of default as the Defendant had failed to tender additional security of US$1,750,000. The Claimant issued a warrant of arrest against the Vessel on 21 June 2018 and successfully arrested the Vessel at the Port of Tyne.

The Defendant applied to the Court for an order to release the Vessel unless a cross-undertaking in damages for any loss arising out of the arrest is provided by the Claimant on the basis that it had insufficient financial resources. The Defendant claimed that it only had one asset, namely the Vessel. It could not obtain a P&I Club letter of undertaking to secure the release of the Vessel. It would suffer a huge loss and an injustice because of the ship arrest.

 

Court’s ruling

The Court rejected the Defendant’s application but confirmed that it had discretion to order the release of a vessel, and impose a condition on the ship arrest. The discretion “must be exercised in a principled manner”. In this case, the Court decides that a cross-undertaking in damages is not required based on the following three reasons:

  1. it will run counter to the principle that a claimant may arrest a ship as of right;
  2. it will be inconsistent with the English Court’s long-established practice;
  3. it will be contrary to the prior authorities, especially The Bazias 3 and 4 [1993] 1 Lloyd’s Reports 101, and Willers v Joyce [2016] 3 WLR 477.

First, the Court clarified that freezing order in an action in personam writ[2] is different from a ship arrest in an action in rem[3]. A notice will be given to the shipowner before the ship arrest whereas no notice will be given in the case of freezing order. Ship arrest does not result from any court order but from the arresting party causing a warrant of arrest to be issued. Therefore, as long as the arresting party complies with the requirements for issuing the warrant under English procedural rules, it may arrest a ship. An arresting party can issue the warrant of arrest as of right. Thus, a common practice of requiring a cross-undertaking in a freezing order shall not be imputed to ship arrest. If the Court orders the arresting party to provide a cross-undertaking, it will negate the principle that a claimant may arrest a ship as of right.

Secondly, ordering the arresting party to provide a cross-undertaking in damages is inconsistent with the long-established English practice, especially when there is no “unusual or exceptional” reason for the Court to make such an order. The Court is of the view that the inability of the Defendant to obtain another security and its insufficient financial resources are not one of the unusual or exceptional reasons. Shipowner should prove its poverty and inability to provide security by “calling on the resources of its shareholders, direct and indirect” and the resources of the shipping group that the shipowner is in. Ordering the Claimant to provide a cross-undertaking will significantly change the circumstances in which an arrest can be obtained in the United Kingdom and substantially affect the shipping industry. Such change should be a matter reserved for the Parliament instead of the Court.

Thirdly, if the Defendant’s application is allowed, it will contradict the previous case authorities. In The Bazias 3 and 4 [1993] 1 Lloyd’s Reports 101, the defendants instituted arbitration proceedings against the claimant, while the claimant issued in rem proceedings against the vessel and arrested the vessel. However, even though the defendant successfully sought a stay of the in rem proceedings, the court rejected the defendant’s application requesting the arresting party to provide a cross-undertaking in damages on the ground that “this has never been the practice in Admiralty actions and I do not regard this case as being one in which we can introduce so far-reaching a change in the practice for the first time.”

In Willers v Joyce [2016] 3 WLR 477, Lord Clarke commented that comparing a freezing order with ship arrest is not helpful since “a person who arrests a ship does not have to provide security to the defendant in respect of any loss which he might incur.” In view of the two prior authorities, the Court in this case concluded that it would not be appropriate for a first instance judge to say whether or not requiring a cross-undertaking in damages from the claimant is “anomalous and unjustifiable”.

Conclusion

This decision confirmed the long standing principle that the claimant is entitled to arrest a ship as of right. In the absence of unusual or exceptional circumstances, the Court may not request a cross-undertaking in damages from the arresting party as a condition for continuing the ship arrest.

It should be noted that a claim in respect of a mortgage on a ship is within the Admiralty jurisdiction and may be brought in rem against the ship according to section 20(2)(c) of the Senior Courts Act 1981 in the United Kingdom, which resembles section 12A(2)(c) High Court Ordinance In Hong Kong. It remains to be seen if Hong Kong Court will follow this ruling.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2018

 

[1]        Ship arrest is one of the key tools used by the claimant to enforce their shipping claims against the defendant and obtain a security for the shipping claim. If the ship is arrested, owner of the ship will have to provide security to get the ship released.

[2]        An action in personam is a proceeding that is against the defendant personally instead of a property, such as an action for breach of contract.

[3]        Action in rem means that the claimant can proceed against the property, such as a ship, in relation to which the claimant’s claim has arisen.