QCR Autumn 2018: Cross-undertakings in damages for ship arrests - Admiralty Court upheld current position under
NatWest Markets plc v Stallion Eight Shipping Co SA (The Alkyon)  EWHC 2033 (Admlty)
The claimant bank lent US$15,700,000 to the defendant owner of the MV Alkyon (the "shipowner"), pursuant to a long term loan agreement in January 2015. The loan was secured by a First Preferred Mortgage on the vessel in February 2015. On 22 March 2018, the bank notified the shipowner that the market value of the vessel was US$15,250,000, which was 112% of the aggregate value of the amount of the outstanding loan and less than the LTV ratio of 125%. The amount of additional security required was US$1,750,000. The shipowner disputed the valuation and provided the bank with higher valuations. The bank warned the shipowner that if the shortfall in security was not cured there would be an event of default.
On 25 April 2018, the bank notified the shipowner of an event of default and gave the shipowner further time to cure. On 15 June 2018, the bank sent the shipowner a Notice of Acceleration which declared the loan immediately due and payable. On 26 June 2018, the vessel was arrested by the Admiralty Marshal upon her arrival at the port of Tyne.
The shipowner denied that there was an event of default and contended that the bank did not exercise its powers in good faith or in pursuit of legitimate commercial aims. The shipowner claimed that, while under arrest, the vessel would lose gross hire of US$11,350 per day, a profit of US$3,500-4,000 per day. The shipowner stated that it could not obtain a P&I club LOU to secure the release of the vessel from arrest in the normal way because P&I cover does not extend to a disputed claim under a loan agreement. In addition, the shipowner stated that security in the form of a guarantee or a bond could not be provided because the owner's only asset was the vessel and that was mortgaged to the bank. The shipowner believed the bank was aware of the position the owner was placed in by the arrest and the bank was putting the owner under commercial pressure to agree to sell the vessel to repay the loan.
The shipowner sought an order to release the vessel from arrest unless the arresting mortgagee bank provides a cross-undertaking in damages in the form usually given in the context of freezing orders, to compensate the shipowner if the arrest was eventually found to be wrongful.
Teare J accepted that the Court has discretion to order the release of the vessel and/or to place conditions on its continued arrest; and, as part of this discretion, it was, in principle, open to the Court to make the order sought. However, he considered that such discretion "must be exercised in a principled manner".
The Court held that, to exercise the discretion and release the vessel would,
a) run counter to the entitlement to arrest as of right;
b) be inconsistent with the Admiralty Court's long-standing practice that such a cross-undertaking is not required; and
c) be contrary to the decision of the Court of Appeal in The Bazias 3 and 4  1 Lloyd's Rep 101, as well as to the dicta of Lord Clarke in Willers v Joyce  1 WLR 477.
Teare J dismissed the shipowner's application, stressing that the court is unable to accede to the application that the vessel be released in the event that the Bank fails to provide a cross-undertaking in damages. He concluded that it was not open to a first instance judge to grant the order sought, and that any change to the current practice was "a matter for either the legislature or the Rules Committee to consider" after a proper consultation. The Court also made clear that if a shipowner wishes to argue that it is unable to provide alternative security then the evidential burden lies upon it, not the arresting creditor, to prove its poverty and that in this case the shipowner had not satisfied that burden. More importantly, it indicated that the assets of any broader shipping group within the shipowner will be relevant to this consideration, and not just the assets of the shipowner itself.
In the judgement, Teare J noted that, when the Arrest Convention 1952 - which is the foundation of the domestic statute conferring jurisdiction in rem - was under consideration, the UK delegate opposed the proposal that arresting courts be empowered to order security and that proposal was defeated. The Arrest Convention 1999 does contain such a provision, but the UK has not ratified that Convention.
The shipowner was granted permission by the Admiralty Court to appeal to the Court of Appeal.
This judgement is the first direct consideration of the application of cross-undertakings to the arrest jurisdiction in over twenty years. The Admiralty Court reaffirmed the existing legal principles that a claimant in rem, as a matter of English law, could arrest a vessel without being required to provide a cross-undertaking in damages, which preserves the attractiveness of England as a jurisdiction for both ship arrest and ship mortgage enforcement.
The decision potentially leaves open the possibility that the court may be persuaded to order that a bank provides appropriate counter security in rare cases where an owner and its shareholders can genuinely satisfy the court of their poverty. However, the Court made it clear that any argument on this basis will need to be supported by clear evidence as to the financial circumstances of not just the shipowner but also of any broader shipping group of which it is a member.
Counsel on behalf of the shipowner had strongly submitted that the current practice of the English courts not to require a cross-undertaking in damages is untenable and anomalous when compared to the practice of the courts in relation to interim injunctions, including freezing orders and proprietary injunctions. It was further argued that justice requires that a party in the shipowners' position should be afforded the protection of a cross-undertaking in damages, that the party obtaining an arrest order provides a cross-undertaking.
There is strong support for the view that the current English Law position is unjust and Teare J's decision has been seen by some as a lost opportunity to put the law right. As noted above, leave to appeal was granted to the shipowner and the Appeal will be heard in November. The Court of Appeal's decision is awaited with interest.