QLU Summer 2018: The sale of a cargo under a charter party lien

QLU Summer 2018: The sale of a cargo under a charter party lien

Dainford Navigation Inc v PDVSA Petroleo SA (The “Moscow Stars”) QBD (Comm Ct) (Males J) [2017] EWHC 2150 (Comm)

Facts

In October 2016 a cargo of crude oil was loaded on board the vessel at Puerto La Cruz, Venezuela. The vessel was ordered to proceed to Freeport in the Bahamas to discharge the cargo pursuant to a time charter between the claimant Owner and the defendant Charterer. There was an outstanding balance of hire due to the Owner in the amount of US$4.5 million.

As a result of the repeated failure by the Charterer to pay hire, the Owner gave notice of exercise of a lien over the cargo. Following this, the vessel later sailed to Bullen Bay, Curaçao in accordance with Charterers’ orders and remained there up to the time of the hearing. A further notice of exercise of a lien was served by the Owner. While the Charterer paid part of the hire to the Owner in December 2016 and January 2017, these were insufficient to clear the existing arrears. As a result, arbitration in London was commenced for hire due and other outstanding sums, either as sums due under the charter party or by way of damages, totalling US$7.7 million.

In December 2016 the Owner sought and obtained permission from the tribunal to apply to the court for an order for the sale of the cargo. The Owner also arrested the cargo with the leave of the Curacao court. At the date of the hearing the cargo had been arrested by the Owner and 11 other companies within the Owner’s group of companies in respect of their claims against the Charterer under a number of other charter parties.

On 5 May 2017, the Owner applied to the English High Court to obtain an order to sell the cargo on board the vessel under section 44(2)(d) of the Arbitration Act 1996.

The Owner argued that it was necessary to sell the cargo in order for the vessel to be redelivered with the Owner’s and the 11 other companies’ security rights over the cargo  transferring to the sale proceeds. The Charterer contested the sale on the basis that the cargo was not the subject of the proceedings as prescribed by section 44(2)(d) of the Arbitration Act and, any power to sell the cargo could only be exercised within the scope of s.25 of the Civil Procedure Rules which would not be satisfied given that the cargo was not perishable and there was seemingly no other valid reason for an expedited sale. 

Judgement

The Court rejected all of the Charterer’s arguments and ordered the sale of the cargo.

In relation to section 44(2) of the Arbitration Act 1996, the court said where a contractual lien is being exercised over a defendant’s goods as security for a claim which is being advanced in arbitration, there is a sufficient nexus between the cargo and the arbitral proceedings.

With regard to whether the court should exercise its discretion to make the order in this particular instance, while the court expressed a veiled criticism of the Owner’s delay in pursuing the application, it nevertheless decided that there was indeed good reason as to why it should grant the order to sell the cargo for the following reasons:

  1. The cargo had been on board for over nine months, and without an order for sale, would remain there for many months more;
  2. The Owner was not receiving hire, but having to pay the ongoing daily operating costs;
  3. The ship needed to be cargo free so that she could go to her scheduled dry dock;
  4. There would be little or no prejudice to the Charterer in selling the cargo. The cargo would be converted into money for the benefit of all parties; and
  5. There was no viable alternative, such as discharge into storage.

Comments

The MOSCOW STARS is the first contested cargo sale application to come before the Commercial Court. The judgment is of interest as it explicitly sets out when a cargo will be determined to be the “subject of the proceedings” under s.44 Arbitration Act 1996, when a charter party lien is being exercised. In order for the Court to make a free-standing order for sale as a form of independent relief, there has to be a sufficiently close nexus between the goods and arbitral proceedings. In this case, the Court held that this had been satisfied on the particular facts.

Another point of interest is that while a sale order may be granted by the Court in respect of a claim secured by a lien, in this judgment the Court also accepted that the eleven other companies’ foreign law cargo arrests should be preserved by transferring the arrests over the cargo to the sale proceeds.

Notwithstanding the above, it is paramount for claimants to ascertain who owns the cargo before exercising a contractual lien over it. The debtor’s property must be the subject of the lien in order for a sale order to be available under the right conditions.

As a final point, Members should also note that, in his judgment, Mr Justice Males made it clear that he was not addressing what the outcome would be where the cargo was owned by a third party, who was not a party to the arbitration, as that was not relevant to this particular case. It therefore remains unclear whether the Court would order a sale of cargo under those circumstances.

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