Natwest Markets v Stallion Eight Shipping Co - The Alkyon

DMC/SandT/19/04

England

NatWest Markets plc v Stallion Eight Shipping Co SA (The “Alkyon”)

English Commercial Court: Teare J: [2018] EWHC 2033 (Admlty): 31 July 2018

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Admlty/2018/2033.html

Robert Bright QC and Marcus Mander (instructed by Watson Farley & Williams LLP) for NatWest (Mortgagees/Financiers)

Tim Lord QC and Geoffrey Kuehne (instructed by Hill Dickinson LLP) for Stallion (Mortgagors/Owners)

SHIP ARREST: ADMIRALTY JURISDICTION: APPLICATION FOR RELEASE FROM ARREST UNDER CPR RULE 61.8(4)(B): WHETHER DEFENDANT ENTITLED TO CROSS-UNDERTAKING IN RESPECT OF POTENTIAL DAMAGES

Summary

The Admiralty Court, in dismissing Owners’ application for release of the ship from arrest, held that a defendant to a claim for the arrest of a ship is not entitled to a cross-undertaking in damages from a claimant in respect of the damage an arrest can cause. To grant such a cross-undertaking would be contrary to (1) the principle that a claimant in rem is entitled to arrest as of right, (2) the long-standing practice of the court not to require a cross-undertaking and (3) appeal court authority, which the court was bound to follow, unless or until Parliament or the CPR [Civil Procedure Rules] Rules Committee make provision to the contrary following proper public consultation.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member and International Contributor to DMC’s Case Notes

Background

Pursuant to a loan agreement, NatWest lent USD15,700,000 to Owners of “Alkyon” in 2015 secured by way of a first preferred mortgage on the ship.

NatWest informed Owners in early 2018 that the value to loan ratio (”VTL” ratio) based on the ship’s then market price had fallen below the required 125% ratio, and called on Owners to provide additional security of USD1,750,000.

Owners disputed the valuation. This led to NatWest giving notice to Owners of an event of default. When Owners did not cure the shortfall, NatWest gave notice of acceleration, which declared the entire loan immediately due and payable.

On the same day, NatWest issued a claim in rem and obtained a warrant of arrest, which was later served on the ship by the Admiralty Marshal when she arrived at the port of Tyne in England.

Owners considered NatWest’s valuation to be far off the market price, they were unable to generate income from the ship while she remained under arrest, and feared making substantial losses before the substance of the dispute was resolved, as they had no way to provide security for the ship’s release.

Accordingly, Owners applied for an order to release the ship from arrest unless NatWest provided a cross-undertaking in damages in the form usually given for freezing orders, namely, that if the court later finds that the warrant of arrest has caused loss to Owners and decides that they should be compensated for that loss, then NatWest will comply with any order the court may make.

NatWest considered that requiring an undertaking in the context of an Admiralty arrest or to order the release of the ship from arrest save on terms that security is given in place of the arrest, would be contrary to the court’s practice.

Judgment

Having considered the background authorities, the judge noted that the court has a discretion to release a ship from arrest. But that discretion must be exercised in a principled manner, and the discretion to release a ship is usually only exercised if security in the usual form is provided first (fn.1).

The judge noted that one of the principles in this area of the law is that a claimant in rem may obtain the issue of a warrant of arrest as of right (that is, without providing a cross-undertaking in damages). So, to require a cross-undertaking appeared, to the judge, to be an unprincipled exercise of discretion.

That would, said the judge, create overnight a very substantial change to the circumstances in which an arrest could be obtained and maintained. Claimants would be put in a position where in many cases the making of a cross-undertaking order would be equally appropriate. That would nullify issuance of a warrant of arrest in accordance with the CPR rules and practice direction.

While Owners considered a cross-undertaking to be fair and what justice required in this case, the judge noted that this was derived from an assumption that freezing orders and arrests were comparable. The judge considered that this was not something which could be accepted by a first instance judge, particularly when the Court of Appeal itself considered such a change was too “far reaching” for even themselves to make (fn.1).

Despite this, the judge acknowledged that he should consider the particular circumstances of this case. Owners would suffer loss if the ship remained under arrest, as she would be unable to trade. If the bank were to fail to prove its claim then Owners may never recover that loss. But those circumstances did not make the present case unusual or exceptional.

The judge did not consider there to be anything in the circumstances of the present case to justify a departure from the court’s usual practice. Owners had not failed to make any payment of interest and principal due under the loan agreement. However, Owners had, said the bank, committed an event of default by failing to cure what the bank maintained was a breach of the required VTL ratio by not making the payment required.

The possibility of discretion being exercised if the arrest would be unjust could not be ruled out as a matter of principle. But the judge was not satisfied that Owners had adequately particularised their evidence concerning their alleged inability to provide security. While P&I Clubs may not put up security for a non-P&I dispute of the present nature, the judge considered Owners had not exhausted the possibility of obtaining security from elsewhere.

Owners were understood to be a one-ship company. But the company was understood to be part of a larger shipping group. As such, the judge was not satisfied (as the burden of proof was on Owners) that the possibility of Owners calling on the resources of shareholders, direct and indirect, had been ruled out.

In view of the size of the bank's claim there was, notwithstanding that an inability to provide security had not been established, the potential for injustice in this case. The requested cross-undertaking in damages would serve to avoid that injustice, reduce the pressure on Owners, and put the parties on an equal footing. But there was, the judge noted, much to be said for the view that the requested change in practice is so far-reaching in its consequences that Parliament (if a change in primary legislation is required or desirable) or the Rules Committee (if all that is required is a change in the rules of court) would have to consult with the Admiralty and Commercial Court Users' Committee and the shipping and marine insurance industry before making any change.

Accordingly, the judge decided that he was unable to accept the application.

Comment

The judgment confirms the present position in maintaining the potency of an in rem ship arrest under English law as an often decisive remedy for those with maritime claims.

The decisive effect achieved is that just making an arrest is often sufficient to get full payment of the maritime claim made quickly to minimise delay to the ship.

The obligation to give a cross-undertaking or to lodge counter-security in some jurisdictions is a notable deterrent to pursuit of arrest as an effective remedy for the claimant.

The remedy for an owner aggrieved by the arrest of his ship is to pursue a wrongful arrest action usually after security has been given. To succeed in an action for wrongful arrest, the owner must prove that the arrest was either grossly negligent or malicious.

However, establishing that behaviour is grossly negligent (acting recklessly without care as to whether or not the arrest is justified) or malicious (acting intentionally to cause harm by making the arrest out of spite) is difficult to prove.

So, while it can be said that a wrongful arrest action is an inadequate remedy, achieving a better remedy would require legislative changes.


Footnote 1: The “Bazias 3” and “Bazias 4” [1993] 1 Lloyd's Rep. 101 (CA)