The Court of Appeal has recently overturned the Court of First Instance’s decision in The Ruby Star (HCAJ 126/2013 and CACV 133/2014) on the question of whether the Court has jurisdiction in relation to an amount claimed under an action in rem (i.e. an action against the ship) notwithstanding that such amount was formulated by way of offsetting the Defendant’s credits against the Defendant’ debts (some of which are unrelated to the claim in rem) owed to the Plaintiff.

Background
In The Ruby Star, the ship manager commenced an action in rem against a vessel in relation to a claim in personam against its demise charterer for sums owing under a ship management agreement. The claim was opposed on the ground that it was in fact not an in rem claim.

The “running account”
The ship manager maintained a practice of offsetting the income of the vessel against debts owed by the demise charterer to the ship manager. Such debts include, among other things, crew salary and bunker which are in rem claims pursuant to s. 12B(4) and 12A(2) of the High Court Ordinance (Cap. 4).  However, such debts also include insurance, brokerage and port DA, general and management fees which cannot be included in a claim in rem against the vessel. In a pre-action letter, the ship manager referred the sums as “management costs & management fees”. In the Statement of Claim, the ship manager merely claimed two lump sums without attributing the claim to any particular item(s) of the debts in question. In fact, the ship manager never specified which parts of the debts were offset against the credits until after the action was commenced.  This has given rise to disputes on the nature of the claim amounts.

The first instance decision
The Court of First Instance held that first, the ship manager had not made any appropriation of the demise charterer’s credits to any particular item(s) of the debts and it was entitled to exercise its right of appropriation until the last moment. Second, from the summaries of accounts provided by the ship manager after the action was commenced, it stated that the claim amounts were in respect of “bunker costs” (being an in rem claim amount and the largest amount among all items of operating costs and management fees) because the credits were first used to pay off other operational/management expenses shown in the summaries of account. The trial judge held that at least the bulk of the ship manager’s claim amounts was within the Court’s in rem jurisdiction. Accordingly, the Court allowed the ship manager’s claim in rem to proceed. 

The appeal decision
The Court of Appeal however overturned the above decision. It was held that the evidence did not show the credits were used to defray other non-in rem expenses first leaving the balance to cover the in rem expenses and specifically in respect of the bunker claim. The claim amounts were simply debts and from which one cannot tell whether they constitute in rem claims. 

Even if the ship manager was entitled to decide which debts to appropriate the credits until the last moment, the Admiralty jurisdiction must exist at the time of the commencement of the action (i.e. issuance of the writ). In other words, the cause of action would not have accrued since the ship manager did not appropriate the credits when the writ was issued. 

The Court of Appeal decided that the Court has no jurisdiction in rem over the vessel in respect of the ship manager’s claim for more than USD 4 million under the ship management agreement. Since the ship manager’s application for leave to appeal to the Court of Final Appeal was dismissed, this case has been settled as an authority on ship arrest in Hong Kong.

Conclusion
Like a secured debt, an in rem claim generally has a better prospect of being recovered than an unsecured claim in personam. However, the in rem claim confines to very limited maritime claims listed in Section 12A of the High Court Ordinance and care must be taken to ensure that the claim falls within one of the maritime claims under Section 12A before proceeding with in rem action against the defendant’s vessel as there will be potential liability for wrongful arrest of the vessel. As a ship manager, it is entitled to appropriate the credits received against debts which are non-in rem expenses (e.g. insurance, management fees) first, leaving the debts which are in rem expenses (e.g. crew salary, bunker) as the outstanding balance which may entitle the ship manager to bring in rem action against the vessel to claim for the outstanding balance. However, in light of this case, it is advisable to appropriate the credits as soon as possible and keep proper accounting records to reflect the appropriation of the credits. It is also advisable to give notice of the appropriation of the credits to the defendant before commencing legal action to avoid any challenge by the defendant on the right to arrest the defendant’s vessel.

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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.