QCR Spring 2019: Cross-undertakings in damages for ship arrests

QCR Spring 2019: Cross-undertakings in damages for ship arrests

Stallion Eight Shipping Co SA v NatWest Markets plc (The “MV Alkyon”) [2018] EWCA 2760

Background

A mortgagee bank arrested the “MV Alkyon” in Newcastle on the basis of an alleged default under the loan agreement. The Bank notified the owner that the market value of the vessel was less than the VTL ratio of 125%, and required the owner to provide additional security to cure the shortfall. The owner disputed that valuation and failed to provide the additional security. The Bank issued an in rem claim form and obtained a warrant of arrest, after serving a Notice of Acceleration declaring the loan immediately due and payable. The shipowner sought an order from the Admiralty Court that the vessel should be released from arrest absent a cross-undertaking in damages from the Bank.

The court at first instance held that, the Bank, an in rem claimant, is not required to provide a cross-undertaking in damages for loss resulting from the arrest of a vessel, unlike a claimant seeking a freezing injunction. Owners appealed.

The Court of Appeal decision

The Court of Appeal stated that in an appropriate case, it was open to the Court, without the intervention of Parliament or the Rules Committee, to depart from the usual practice of not ordering release of a vessel from arrest absent provision of sufficient security, but a Court “would [have to] think long and hard before departing from the usual practice”.

The Court of Appeal has upheld the current position under English law, which is that no damage is recoverable for wrongful arrest unless the arresting party acts in bad faith or in gross negligence which implies malice (The Evangelismos (1858) 12 Moo PC 352, 14 ER 945). Acknowledging the concerns expressed as to the rule in The Evangelismos as being harsh on a shipowner in circumstances where it transpires that the arrest was unjustified but the shipowner is left without remedy for the loss (The Kommunar (No 3) [1997] 1 Lloyd’s Rep 22), the Court nonetheless dismissed the appeal, and upheld the judgment of the Admiralty Court Judge on the availability and utility of arrest in relation to obtaining security for subsequent claims on eight grounds.

  1. The availability of arrest provides the unique feature of the claim in rem. There is a need for caution before restricting or hindering access to an admiralty arrest.
  2. Should the appellants succeed, it is overwhelmingly likely that a cross-undertaking requirement would become routine, as there is nothing unusual about the present case. The costs of arresting would increase and this would deter the use or threatened use of the right of arrest, even in apparently meritorious cases.
  3. Resisting altering the status quo is not simply based on tradition. There is no real doubt as to the efficacy of arrest in compelling some other form of security, so much so that relatively few arrests are necessary.
  4. A ship arrest is asset-specific. It does not freeze or paralyse the entirety of the shipowner’s business in the way that a freezing order might do (with the exception of one-ship companies).
  5. The analogy between maritime arrests and interlocutory injunctions is neither exact nor compelling.
  6. An arrest has not been a requirement for establishing Admiralty jurisdiction since 1883. There has been ample time to reconsider the law and practice relating to maritime arrests, yet none has taken place.
  7. The powerful inference is that there is no, or no significant, pressure from the maritime industry for a change in the balance struck between shipowners and maritime claimants. There is no international consensus and it is noteworthy that the Arrest Convention 1999 has not been ratified by the UK or more widely internationally.
  8. So far as the maritime industry and the CPR are concerned, P&I Clubs and hull underwriters routinely give undertakings either to avoid arrest or to secure release from arrest. These systems should not be disturbed lightly.

The decision has also made it clear that shipowners seeking to argue impecuniosity will have to present extensive evidence of the resources available to them, including those of their direct and indirect shareholders.

Comment

As mentioned in our QCR Autumn 2018, the fairness of The Evangelismos rule has been called into question by commentators. Dr Aleka Sheppard, Chairman of the International Working Group conducted a survey of the applicable laws and legal tests internationally concerning Wrongful Arrest for the Comité Maritime International meeting on 9 November 2018. The question was whether counter-security is required to be provided by the arrestor when the application for the ship arrest is made, or thereafter, in the event of a potential wrongful arrest. 11 countries required the applicant-arrestor to provide counter-security; 13 did not, including Australia, Canada, Hong Kong, New Zealand, the UK and the USA; 13 gave their courts discretionary power in respect of ordering counter-security.

Although the civil justice system is in a time of change, certainty is of great importance in commercial law. English courts are seeking to strike the right balance between the certainty of long-standing, settled rules and the desirability of change and, in this regards, pay close attention to the views of the market and the position prevailing internationally, in aiming to do practical justice. The Alkyon decision is a good example of such practice. The Court of Appeal stated that the courts would need a clear understanding of the industry implication before reconsidering the position on cross-undertakings.

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