Introduction

What can vessel owners do when there are cargoes remaining on board but the cargo owners fail to pay hire? The question is addressed in the Commercial Court in the recent case Dainford Navigation Inc v PDVSA Petroleo S.A. (The “Moscow Stars”) [2017] EWHC 2150 (Comm). Following the cargo owner’s repeated failure to pay hire, interim remedies were granted by the court by ordering sale of cargo. Although this is not the first time the court orders sale of cargo, there has not been any reasoned decision in the jurisdiction in the past. The present case provides clearer guidance as to the circumstances leading to the interim remedies of sale of cargo for failure to pay hire.  

Facts

Dainford Navigation Inc. (the “Claimant”), owner of the vessel “MOSCOW STARS” (the “Vessel”) time chartered the Vessel to PDVSA Petroleo S.A. (the “Defendant”), a Venezuelan state-owned oil and gas company, to carry about 50,000 gross metric tons of crude oil (the “Cargo”). The Defendant repeatedly failed to pay time charter hire since January 2016. The Cargo was loaded in October 2016.

Pursuant to the charter:

1.       The Claimant gave notices of exercise of a lien over the Cargo for the sums due; and

2.       Arbitration had been commenced in accordance with the London arbitration clause whereby the Claimant claimed outstanding hire and other outstanding sums.

In December 2016, the Claimant obtained leave from the arbitral tribunal to apply to the Commercial Court for an order for sale of the Cargo. At the time of application to the Court, there was an outstanding payment of about US$7.7 million. The Cargo had remained on the Vessel for over 9 months and the Claimant had been incurring expenses of operating the Vessel, including payment to the crew and supply of bunkers. Further, the Vessel was required to be cargo-free for an inspection scheduled in January 2018.

Issues

According to section 44(1) of the Arbitration Act 1996 (the “Act”), “…the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for purposes of and in relation to legal proceedings.” From section 44(2)(d) of the Act, the matters include “the sale of any goods the subject of the proceedings”.

Even it is ruled that the Court has power to order sale, such power is limited to making an order for sale of property “which is of perishable nature or which for any other good reason it is desirable to sell quickly” (Rule 25.1 of the Civil Procedure Rules).

Accordingly, the issues to be resolved were:

1.       Whether the Cargo was the subject of the arbitration proceedings so that the court has power to order sale; and

2.       Whether there were any good reasons to sell the Cargo quickly.

Decision

The Cargo was the “subject of the proceedings”

The Court rejected the Defendant’s argument that the “subject of the proceedings” should be as narrow as limiting the Court’s power to a case where there was a dispute about the goods due to the draconian nature of the order. The present case gave rise to a deadlock situation which made it necessary to invoke the assistance of the court. No one could say what should happen to the Cargo before the arbitral award was released – the Claimant would not be able to enforce its lien over the Cargo and the Cargo could not be discharged to the Defendant. It would be unsatisfactory and in nobody’s interest if the court had no power to order sale, when the Cargo was deteriorating significantly in condition and value.

The Court considered there to be sufficient nexus between the Cargo and the arbitral proceedings in the circumstances, where there was a contractual lien exercised over the Defendant’s goods as security for a claim for hire being advanced in the arbitration. The Cargo formed the subject matter (i.e. the lien) of the claims. Therefore, the Court has power to order sale of the Cargo pursuant to sections 44(1) and 44(2)(d) of the Act.

There were good reasons to sell the Cargo

The Act does not give the Court power to make a free-standing order for sale as a form of independence relief. As discussed, to exercise the power to order sale, the property at issue must be of a perishable nature or which for any other good reason it is desirable to sell quickly. Both parties acknowledged that crude oil is not perishable, and thus the remaining issue was whether there were good reasons to justify the court’s exercise of power of sale.

One obstacle that usually arises in an order for sale is that the order significantly deprives the property owner’s right of ownership. However, interestingly, the Defendant made an open offer one day prior to the hearing offering to undertake the sale of the Cargo itself and to pay the proceeds of sale into escrow. It contradicted the Defendant’s earlier claim that sale of the Cargo would prejudice it. The Court interpreted such move as recognition by the Defendant that the only viable option was to sell the Cargo, and accordingly, the draconian nature of an order for sale had little effect in the present case.

The Court considered there to be substantial risk that the situation would indefinitely drag on if no order of sale was to be made and the Cargo would remain on the Vessel for many more months. The situation prejudiced the Claimant, having to incur expenses of operating the Vessel while not receiving its hire, as well as having the Vessel occupied and unavailable for other employments.

On the other hand, the Defendant alleged the present situation was caused by the Claimant voluntarily, by permitting the loading of the Cargo instead of terminating the charter for non-payment of hire. It also pointed out there were 5 months of delay in making the present application. However, both arguments were given little weight by the court. First, the Claimant could not have contemplated the prolonged failure to pay hire by the Defendant or its right to pursue a claim in arbitration and to seek interim remedies. Second, the delay was substantially outweighed by other compelling factors in favour of an order for sale.

After considering the above factors, the Court ordered sale of the Cargo with a direction to the Defendant to sign any sale contract as the seller.

Conclusion

This decision is certainly appealing to vessel owners. It provides them with a viable option to get rid of prolonged situations of liened cargoes remaining on vessels. Nonetheless, the cargo owner in the current case (i.e. the Defendant) was a party to the arbitration. The position in which the cargo is owned by a third party instead of a party to the arbitral proceedings is not addressed and remains unclear.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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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.