When an owner or charterer defaults on his obligations there is an understandable desire for instant decisive action in the form of arresting a ship. This is often, but not always, a prudent step.
A number of issues will dictate whether the ship should be arrested. Although international conventions do promote an element of uniformity, laws differ according to the jurisdiction where the arrest will take place. Local requirements need to be considered on a case by case basis. A major issue is the identity of the debtor. Different considerations will apply if you are pursuing debts incurred by a charterer. Ship arrest is not totally excluded if the debt was incurred by the charterer but the remedy is much more restricted. We will start by looking at owner’s debts.
When the Club threatens the arrest of a ship, the owner will quite often pay up without further action as he knows it is possible to arrest the ship as long as the Member has a maritime claim in the country where it is arrested. However, it may not be possible to arrest for the type of debt the Member is pursuing. A common example is shipbrokers’ commission, although the position may be changing. [see later article].
In many situations, when an arrest is actually carried out, the owner will pay up immediately or put up security in order not to have his ship detained in port for a long period of time. The security is usually in the form of a bank guarantee, bond or P&I Club letter of indemnity. Some countries, such as Spain, will also require the arresting party to furnish counter-security. Many Far Eastern jurisdictions also have this requirement. When security is in place, the Club will arrange for legal action to be commenced against the owner. One of the issues that may influence the decision whether to arrest a ship in a particular country is if the subsequent proceedings have to be commenced in that jurisdiction. It is a mistake to commit oneself to an unfavourable jurisdiction. In practice the Club has only been involved with a few cases where the claim has ultimately resulted in a trial. Normally an out of court settlement is reached.
Arresting a ship may not however provide security for a claim. The worst financial situation that can arise is that the Member arrests the ship, only for the mortgagee bank to step in and claim priority. The priorities accorded by local law to various types of claim are therefore very important. In most jurisdictions the mortgagee bank and crew have priority over shipbroking and ship agency claims. However, there are a small number of countries which give priority to the ship agent’s claim for “necessaries” over the rights of the mortgagee bank. This is often done to protect local interests and will apply when the agent is located in the same country as the ship is arrested in and the bank is foreign. The USA and France are examples of jurisdictions offering this type of protection. Regretfully such jurisdictions are rare and the majority give priority to the mortgagees. There are no jurisdictions to our knowledge which hold that a shipbroker’s claim for commission has priority over the mortgagee bank or the crew’s claim.
Just because you have a right to arrest does not mean that it is always prudent to exercise it. In some circumstances, it is best not to upset the apple cart but to allow the ship to continue trading. As long as the ship is trading, she is earning freight which can be attached, or assigned to the creditor. Once the ship is arrested other creditors will join in. This in turn will cause the bank to take action and it is very likely that you will receive nothing. Effective debt collection often involves considering the commercial risks of action or inaction.
We are often asked about sister ship arrests. These occur where the owning company of Ship A, is the same as that of Ship B. It is possible in some circumstances to arrest Ship B for the debts incurred by Ship A but the availability of the remedy is declining. It was useful when pursuing debts from the successors of the large Eastern European fleets. In recent years, however, these ship owners have realised this weakness in their owning structures and have set up one ship owning companies to protect their fleet. Most countries in the world permit sister-ship arrests. Certain countries, such as South Africa and France, permit the arrest of an “associated ship”. This is possible when it can be proved from the ship’s registry that the Directors or Officers of the ownership companies are virtually the same.
Ship agents appointed by charterers, who do not pay them, may still be able to take action against the ship in certain limited circumstances. This is possible because some debts give rise to what is known as a maritime lien. In simple terms the debt attaches to the ship and legal action can therefore be taken against the ship.
There are some important limitations to this form of action. The disbursements that can be recovered are from a limited range and include items such as pilotage, harbour and tug dues. The agent’s own fees are not included and cannot be recovered in this way.
Agents must exercise their rights promptly. The time allowed to bring an action against the ship may be as little as six months or a year, depending on the jurisdiction involved.
Ship agents should also consider whether they were actually appointed by the charterers. Some voyage charterparties provide that the charterers have the right to nominate the agents, who are then employed by the owners (e.g. Shellvoy 5, clause 24). In these cases the owner and not the charterer is the debtor.
Another form of action is the recovery of funds from the time charterer through the attachment of bunkers on board a ship. This form of action is useful if a charterer owes funds for services rendered to a ship , but the hire of that particular ship comes to an end, and the debtor goes on to charter another ship. The bunkers are normally owned by the time charterer, and as long as the Club has solid evidence to this effect, we will attach the bunkers. Again, this type of action depends on the jurisdiction in which one is arresting. The USA and Northern Europe are good examples of jurisdictions where this type of action can be executed.
The main problem when seeking to arrest bunkers is that it is difficult to ascertain whether the debtor/charterer actually owns the bunkers (they could be owned by the shipowner or by a voyage charterer). Another practical difficulty could be that in order to secure the Member’s position it may be necessary to remove the bunkers from the ship (e.g. by bunker barge). This can be expensive and in some ports would not be allowed. The best time to arrest bunkers is when the ship is loaded and ready to sail, not when the ship is under arrest or idle awaiting orders.
The arrest of ships is a useful weapon but one which is not always available. It is sometimes necessary to instigate legal proceedings directly against the debtor. We will look at such debt collection procedures in a future issue of “The Intermediary”.