STELLAR OCEAN TRANSPORT LLC v. THE OWNERS AND/OR DEMISE CHARTERERS OF THE SHIP OR VESSEL “RUBY STAR”

HCAJ 126/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO 126 OF 2013

____________________

Admiralty action in rem against: the ship or vessel “RUBY STAR” (Hong Kong flag)

____________________

_______________

J U D G M E N T

_______________

Introduction

1.  This is a rather unusual case.

2.  Stellar Ocean Transport LLC (“Stellar Ocean”), the Plaintiff in these proceedings, were the ship managers of the vessel “Ruby Star” (“vessel”) under a ship management agreement dated 20 December 2009 (“SMA”) with the demise charterers, Stellar Shipping Corporation Limited (“Stellar Shipping”), the Defendant in these proceedings.

3.  Stellar Shipping became the demise charterers of the vessel pursuant to a bareboat charter dated 14 January 2010 (“Charter”) entered into with Asset Wonder Limited (“Asset Wonder”), the registered owner of the vessel.

4.  Stellar Ocean’s claim in these proceedings is against Stellar Shipping for sums due under the SMA. The Writ of Summons was issued on 15 July 2013 and served on the vessel on 2 September 2013. Stellar Shipping has not filed an acknowledgement of service in these proceedings. Stellar Shipping has admitted the claim.

5.  Stellar Ocean has no claims against Asset Wonder. Nevertheless, Asset Wonder filed an acknowledgement of service in this action in its capacity as owner on 11 September 2013 and subsequently on 22 November 2013, as a matter of abundant caution, also obtained leave to intervene in these proceedings. Meanwhile, Stellar Ocean made it clear it had no claims against Asset Wonder by serving a notice of discontinuance of its action against Asset Wonder on 7 November 2013.

6.  Separately, Asset Wonder has made claims against Stellar Shipping for breaches of the Charter in HCAJ 129 of 2013. It has arrested the vessel in July 2013 and obtained judgment on admissions as well as summary judgment for parts of their claims against Stellar Shipping: see Asset Wonder Limited v Stellar Shipping Co LLC unrep., HCAJ 129 of 2013, 2 December 2013.

7.  There are before this court two applications:

(1) First, Stellar Ocean’s notice of motion dated 7 November 2013 for judgment in default of acknowledgement of service.

(2) Second, Asset Wonder’s summons dated 13 January 2014 under RHC O 12 r 8 for an Order setting aside the Writ in this action and for a declaration that the court has no jurisdiction in rem over the vessel in respect of the subject matter of the claim herein.

8.  I shall deal with them in reverse order.

Challenge to jurisdiction

9.  Mr Sussex SC for Asset Wonder submits that Stellar Ocean’s claim is not an in rem claim at all.

10.  While some of the specific items of Stellar Ocean’s claim, taken alone, may fall within the admiralty jurisdiction of the court under section 12A(2) of the High Court Ordinance, in reality, their claim is for the balance of a mercantile account which does not: The “West Friesland” (1859) Sw 454 at 460; The “Comtesse de Frègebille” (1861) Lush 329 at 333-4; The “Underwriter” (1870) 1 Asp Mar LC 127 at 128-9; The “El Salto” (1908) 25 TLR 99 at 99-100.

11.  In The “Skulptor Konenkov” (1998) ALR 131, the Federal Court of Australia held that the balance of a running account did not give rise to a general maritime claim against the proceeds of sale in circumstances where the balance was arrived at after the parties had indiscriminately offset both in rem and in personam claims and there had been an admixture of such debits and credits. It was thus inappropriate for an in rem claim to be brought for the general balance of mercantile account, following The “Comtesse de Frègebille” supra.

12.  In support of his contention that in reality the Plaintiff’s claim is for the balance of a running account, Mr Sussex SC refers this court to two letters dated 9 April and 3 July 2013 from Stellar Ocean to Stellar Shipping and the summary of accounts annexed to the Further and Better Particulars of the Statement of Claim. In the letters, Stellar Ocean demanded payment of outstanding operating costs and management fees for the periods of 1 January 2011 to 31 December 2012, as well as 1 January to 30 June 2013. The operating costs set out in the summary of accounts include crew salary, “technical”, “brok/port DA”, bunker, insurance and so on. The claims were in the sum of US$3,593,902 and US$769,593 respectively.

13.  Mr Sussex SC submits that by sending these demand letters, Stellar Ocean has made an appropriation generally to the running account between Stellar Ocean and Stellar Shipping. Stellar Ocean’s claims in the demand letters, by the way they were drafted, must be claims in respect of the balance of a running account which falls outside the court’s admiralty jurisdiction. Alternatively, Mr Sussex SC submits that at least as late as the issue of the Writ of Summons herein, Stellar Ocean, by claiming only the balance due on the account with Stellar Shipping, must have made such an appropriation – this is borne out by the way paragraph 9 of the Statement of Claim is pleaded. As a matter of law, such an appropriation, once made, is irrevocable.

14.  With respect, this court is unable to accept Mr Sussex SC’s submissions.

15.  Firstly, as Mr Coleman SC submits, Stellar Ocean’s ledgers show that there is no running account between Stellar Ocean and Stellar Shipping of the debits and credits with regard to the vessel. Instead, they contain only an itemised breakdown of the outgoings and receipts for the vessel during the relevant periods – in other words, they are just a historical representation of what transactions occurred in relation to the operation and management of the vessel. As far as outgoings are concerned, as I say earlier, they comprise several items, some of which are clearly within the in rem jurisdiction of the court e.g. provision of crew services: The Edinburgh Castle [1999] 2 Lloyd’s Rep 362; TheNore Challenger [2001] 2 Lloyd’s Rep 103, and bunkers: The Riga (1872) LR 3 A & E 516, 522; The Decurion (No.2) [2013] 2 HKLRD 930 para. 14, and some clearly outside it e.g. insurance: The Sea Friends [1991] 2 Lloyd’s Rep 322.

16.  Secondly, the summary of accounts show that what actually happened was that Stellar Ocean used the receipts in respect of the vessel to first pay off “Bank Payments”, being the hire due from Stellar Shipping to Asset Wonder under the Charter, and left the balance ie “Net Funds” to meet all operational expenses and management fees. The summaries of accounts do not show that Stellar Ocean has indiscriminately offset both in rem and in personam claims in the course of its dealings with Stellar Shipping during the periods in question – historically, there was no offset of any claims for operational expenses, whether in rem or in personam.

17.  Thirdly, the claims stated in the demand letters are for the sums of US$3,593,902 and US$769,593 respectively, being the difference between the “Net Funds” and the totality of the operating expenses and management fees.  Similarly, in paragraphs 9.1 and 9.2 of the Statement of Claim, Stellar Ocean is claiming the same two lump sums without attributing the claim to any particular item(s) of operating expenses in question. In my view, claiming a lump sum without attributing it to any particular item(s) of operating expenses is consistent with Stellar Ocean not having made any appropriation, and not the other way round. A fortiori, when Stellar Ocean have made clear its intention to assert a maritime claim against the vessel in the letters, although they have wrongly described their maritime claim as “maritime lien”.

18.  In this regard, Mr Coleman SC refers this court to The “Mecca” [1897] AC 286 which appears to be directly on point.

19.  In The “Mecca”, the House of Lords held that when a debtor paid money on account to his creditor and made no appropriation to particular items, the creditor had the right of appropriation and might exercise the right up to the last moment, by action or otherwise; the application of the money was governed, not by any rigid rule of law, but by the intention of the creditor, expressed, implied or presumed. The rule in Clayton’s Case, (1816) 1 Mer. 585, did not apply to a case where there was no account current between the parties, or where from an account rendered or other circumstances it appeared that the creditor intended, not to make any appropriation, but to reserve the right.

20.  On the available evidence, it seems to this court that there is no account current between Stellar Ocean and Stellar Shipping and what happened was this: Stellar Ocean did not intend to make and has not made any appropriation of the “Net Funds” to any particular item(s) of operating expenses, rather it intended to reserve its right up to the last moment. Hence, its claim for the lump sums without attributing them to any particular item(s) of unpaid operating expenses at the time of the Writ or the Statement of Claim. The rule in Clayton’s Case, (1816) 1 Mer. 585, has no application to this case.

21.  In Chitty on Contracts 31^st Ed. vol. 1 para. 21-062, the learned editors explain “the last moment” in these terms: 

“What is “the very last moment” depends on the circumstances of each case. In one instance the creditor was held entitled, in the witness-box during the course of his action, to exercise his right to appropriate a payment by his debtor, as nothing had previously happened to determine his right of election. The creditor need not make his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. An entry in the creditor’s books applying a payment to a particular debt does not constitute an election which will preclude the creditor from afterwards applying it to another debt, unless the entry has been communicated to the debtor.”

22.  In the present case, there is no entry in Stellar Ocean’s ledgers applying a receipt to a particular debt. There is nothing in the demand letters which convey the impression, meaning or intention on the part of Stellar Ocean to attribute the “Net Funds” to any particular item(s) of operating expenses. In these circumstances, Stellar Ocean is entitled to exercise its right of appropriation up to the last moment. On the materials before this court, the first time Stellar Ocean has made its intention plain was when it served its Further and Better Particulars of the Statement of Claim, to which I shall return.

23.  Finally, this court is not persuaded that it should follow The “Comtesse de Frègebille” line of cases.

24.  The rationale of excluding a claim for the balance of a mercantile account from the court’s in rem jurisdiction, as explained by Dr Lushington in The “Comtesse de Frègebille” supra, appears to be this: (1) the statute [which gave the court admiralty jurisdiction in respect of “necessaries”] looked to an immediate necessity, not to the liquidation of a mercantile account, where credit was given by the agent in the ordinary course of business; (2) if the court were to entertain a claim upon the liquidation of a mercantile account where credit was given by an agent in the ordinary course of business, the court might have to settle accounts between merchant and agent to an unlimited extent.

25.  Rationale (2) was adopted by the Federal Court in The “Skulptor Konenkov” (1998) ALR 131, 136.

26.  However, as Clarke J (as he then was) pointed out in The “Kommunar” [1997] 1 Lloyd’s Rep 1 at 5, the “Comtesse de Frègebille” line of cases were decided under the old statutes which conferred admiralty jurisdiction on the court in respect of the supply of “necessaries” viz s 6 Admiralty Court Act 1840, s 5 Admiralty Court Act 1861 and s 22 Supreme Court of Judicature (Consolidation) Act 1925. Clarke J was of the view that whatever the position might have been under the old statutes, the legal position under s 20(2) of the Supreme Court Act 1981 (the equivalent of s 12A(2) of the High Court Ordinance) was certainly not that where the Plaintiff’s claim was a claim on a general account, it must be outside the admiralty jurisdiction of the court. It all depended on the underlying nature of the claim.

27.  With regard to The “Comtesse de Frègebille” supra, Clarke J said at p 6 :

“…[Dr Lushington’s] conclusion that the statute looks to an immediate necessity is, with respect to him, wrong. It follows from that, that there is, in my judgment, nothing in this case which assists the defendants to advance any general proposition that where the claim is for a balance of account it must be outside the terms of the statute which gave the Court jurisdiction in respect of necessities; a fortiori the later statutes which are in different terms.”

28.  It would appear that the point is free from authorities binding on this court. In the view of this court, the approach in The “Comtesse de Frègebille” line of cases is over rigid and mechanistic. Provided that the underlying nature of the claim falls within one of the recognised maritime claims under s 12A(2) of the High Court Ordinance e.g. (l) “any claim in respect of goods or materials supplied to a ship for her operation or maintenance”, it is difficult to see why the mere fact that this claim happens also to be the remaining balance of a general account between a plaintiff and a defendant should make any difference to the in rem nature of the claim. The fact that the court may have to settle accounts between merchant and agent is, in my view, not a sufficient reason to adopt a mechanistic approach to the construction of s 12A(2) of the High Court Ordinance. In many cases, like the present one, the rules as to a debtor or a creditor’s right to appropriate, as the case may be, will determine the matter, whether or not a defendant chooses to acknowledge service of the writ and defend the action.

29.  In these circumstances, this court would respectfully follow the approach in The “Kommunar” and examine the underlying nature of the Plaintiff’s claim, as presently pleaded. Looking at the matter in this way, the answer is clear. While paragraph 9 of the Statement of Claim is silent on the matter, in the Further and Better Particulars, Stellar Ocean’s solicitors explained that the claims for US$3,593,902 and US$769,593 were in respect of “bunker costs”, after utilising the funds on account of US$5,101,438 and US$1,628,271 to pay off other operational/management expenses shown in the summaries of account. In other words, Stellar Ocean has elected to appropriate the “Net Funds” on account to expenses other than bunker costs.

30.  Mr Sussex SC submits that this is not permissible: “Skulptor Konenkov” supra. However, what underlies the decision is the Federal Court’s acceptance of the validity of the The “Comtesse de Frègebille” line of cases. This court begs to differ, for reasons stated above. Further, unlike “Skulptor Konenkov”, in the present case, there is no evidence of Stellar Ocean having indiscriminately offset both in rem and in personam claims or an admixture of such debits and credits in Stellar Ocean’s ledgers. “Skulptor Konenkov” is therefore distinguishable.

31.  To conclude, this court is of the view that, at the very least, the bulk of Stellar Ocean’s claim ie US$3,593,902 and US$769,593 out of a total claim of US$4,885,921 is within the court’s in rem jurisdiction under section 12A(2)(l) of the High Court Ordinance as being “any claim in respect of goods or materials supplied to a ship for her operation or maintenance”. That is sufficient to give this court admiralty jurisdiction: The “Oriental Dragon” unrep. HCAJ 162 of 2012; 9 December 2013.

32.  For these reasons, this court will have to dismiss Asset Wonder’s summons dated 13 January 2014.

Judgment in default

33.  It is not seriously in dispute that the registered owner of a vessel is entitled to acknowledge service of an in rem writ against the vessel. Mr Sussex SC for Asset Wonder submits that since his client has filed an acknowledgement of service, there is no default in acknowledgment of service of the writ in this in rem action - logically therefore Stellar Ocean cannot obtain judgment in default of acknowledgment of service of the writ.

34.  To start with, I accept Mr Sussex SC’s submissions that, whilst Stellar Ocean may have no in personam claim against Asset Wonder, its notice of discontinuance cannot have the effect of changing the status of Asset Wonder as a defendant in this in rem action. Nor can this court see how the notice of discontinuance can somehow vitiate the acknowledgment of service filed by Asset Wonder. “Withdrawal and Discontinuance” is governed by RHC O 21 and there is nothing in it which can remotely be regarded as having that effect. Further, a plaintiff who discontinues an action must pay the costs of the defendant: HongKong Civil Procedure2014 para. 21/5/13; RHC O 62 r 10(1). If a notice of discontinuance has the effect of vitiating the status of a defendant who has filed an acknowledgment of service in a writ action, there will be little room for the application of RHC O 62 r 10(1).

35.  The question for this court is whether the relevant default in acknowledgement of service must be that of the party said to be liable in personam ie Stellar Shipping. In my view, the answer should be “Yes”.

36.  First, as no direct authority has been cited, this court will go back to first principle.

37.  In The Mogileff [1921] P 236 at 242-3, Hill J said this:

“Before coming to the sections and cases, it is well to warn oneself, as one has often to do in this Court, not to be misled by our habit of personifying the ship. We speak of a ship being to blame, when we mean that some person is guilty of negligence in relation to the ship. We speak of advances to a ship, when we mean that money is lent for ship’s purposes to some person who becomes liable as debtor. It is convenient to speak in brief of advances made upon the credit of the owner as advances made upon the credit of the ship. But it is an essential element of all actionable claims for necessaries that there should be a debtor, liable in personam. This personal liability may or may not be enforceable by proceedings in rem against the ship. But a proceeding in rem is only machinery for enforcing a right in personam. There is no such thing in a necessaries case as an advance upon credit of the ship detached from the credit of some person who is personally liable as debtor.” (emphasis added)

38.  In my view, that passage is sufficient to dispose of the question on first principle. Since the present in rem action is only machinery for enforcing Stellar Ocean’s claim in personam and Stellar Ocean’s claim in personam is only against Stellar Shipping, it should be Stellar Shipping’s acknowledgment of service, or default in filing one, which counts.

39.  Second, if Stellar Shipping acknowledges service of a writ in rem, no default judgment can be entered against it but an acknowledgment of service constitutes a submission to the jurisdiction of the admiralty court, with all the legal implications that submission entails, and the action then proceeds in a hybrid form – as an action in rem as well as an action in personam: The “Gemma” [1899] P 285; The August 8 [1983] 2 AC 450; The Maciej Rataj [1992] 2 Lloyd’s Rep 552; The Decurion (No 2) supra. The reverse is also true. In this way, the Rules of the High Court operate in a way which finely balances the interest of a claimant in proceeding to judgment with expedience and minimum costs and the interest of a defendant who wishes to undermine that interest by acknowledging service of the writ. Allowing Asset Wonder’s acknowledgment of service to count in the present case and block Stellar Ocean’s application for default judgment distorts that balance, without any justification.

40.  Third, in an ordinary High Court action where a plaintiff sues multiple defendants, each defendant must acknowledge service of the writ and state its intention to contest the proceedings (or otherwise), failing which it will suffer the consequences of being liable to a default judgment: RHC O 13; Hong Kong Civil Procedure 2014 para. 13/0/16. This court is unaware of any authorities whereby one defendant’s filing of an acknowledgment of service is held to preclude the plaintiff from entering default judgment against all other defendants who do not. None has been cited. Of course, RHC O 13 does not apply to actions in rem: see RHC O 75 r 21(10), but the principle should be the same, whether one is considering RHC O 13 or RHC O 75.

41.  For these reasons, this court does not accept the submission that Asset Wonder’s acknowledgement of service has the effect of precluding Stellar Ocean from obtaining judgment in default.

42.  That is not the end of the matter.

43.  In the course of his oral submissions, Mr Sussex SC makes the point that this court should not enter default judgment because Asset Wonder, as intervener, is entitled to defend Stellar Ocean’s claim on the merits. If Stellar Ocean is allowed to obtain default judgment, that will render nugatory his client’s right as intervener.

44.  In The Byzantion (1922) 12 Ll L Rep 9, at 11-12, Hill J explained the right of an intervener in these terms:

“Intervention may be for either or both of two purposes: (1) to defend the action either as to liability, or as to quantum, or both, and (2) to establish a prior claim to the res without defending the action. But where the intervener defends, he defends an action not against himself but against the res; and, as there can be no liability of the res unless there is a personal liability of the owner, he defends an action against the owner. The questions on such a defence are, is the owner liable to the plaintiff, and has the plaintiff a right in rem against the ship. It follows that the intervener cannot set up defences unless they are defences which the owner could set up…The position of the intervener is, qua defence, the same as that of an owner who appears under protest.”

45.  In the present case, Stellar Ocean’s claim is admitted by Stellar Shipping. That, however, should not be conclusive now that Asset Wonder proposes to come forward to defend the claim. As explained by Hill J in the passage above, Asset Wonder’s position, qua defence, is the same as that of Stellar Shipping. For reasons good bad or indifferent, a defendant may choose not to defend the action - it may even choose to admit the claim, as Stellar Shipping did in the present case: see paragraph 11 of the Statement of Claim.

46.  In the course of his oral submissions, Mr Sussex SC hints that Stellar Ocean and Stellar Shipping are closely related companies. He also suggests that Stellar Ocean’s claim for US$4,885,921 involves double counting – while Stellar Ocean is claiming the costs of bunkers on board the Vessel at re-delivery in the sum of US$422,000, those costs should already be included in the claim for expenses up to July 2013 when Stellar Ocean handed over the vessel to Asset Wonder upon the termination of the Charter: see paragraph 9.3.4 of the Statement of Claim. Whether or not these hints and suggestions are factually correct remains to be seen.

47.  Finally, by virtue of RHC O 75 r 21(7), in an application for default judgment, the court has to be satisfied that the plaintiff’s claim is well founded before allowing the application. If Asset Wonder proposes to demonstrate to this court that the claim, or part of it, is not well founded, it should be allowed to do so.

48.  In these circumstances, it seems to this court only fair that Asset Wonder should be given an opportunity to defend the claim on the merits and put forward defences, if any, which Stellar Shipping can, but has chosen not to, set up. This court will therefore decline to enter default judgment at this stage. Instead, this court will adjourn Stellar Ocean’s application for default judgment for substantive argument and give leave to the parties to file evidence. 

Disposition and costs order nisi

49.  This court hereby makes the following orders:

(1)   Asset Wonder’s summons dated 13 January 2014 be dismissed.

(2)   Stellar Ocean’s notice of motion dated 7 November 2013 be adjourned for substantive argument to a date to be fixed, not earlier than 42 days from the date of this judgment.

(3)   Leave to Asset Wonder to file evidence in opposition to the notice of motion, if any, within 21 days from the date of this judgment.

(4)   Leave to Stellar Ocean to file evidence in reply, if any, within 21 days thereafter.

(5)   liberty to apply.

50.  This court will leave it to the parties to agree on the estimated length of the substantive hearing.

51.  There will be an order nisi that costs of Asset Wonder’s summons be to Stellar Ocean, to be taxed if not agreed, with certificate for counsel. Costs of the notice of motion are reserved.