HONG KONG UNITED DOCKYARDS LTD. v. THE DEMISE CHARTERERS OF THE SHIP OR VESSEL M.V. "SEA EMPIRE" FORMERLY M.V. 'TRIDENT ENDEAVOUR' (BARAIN FLAG)

1991, Folio No. AJ-158

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Admiralty action in rem against :
the ship or vessel m.v. "SEA EMPIRE' formerly
m.v. 'TRIDENT ENDEAVOUR' (Bahrain Flag)

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J U D G M E N T

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1. The intervener is the owner of a number of vessels, two of which are the subject of these proceedings. The vessels were demised to various companies in the Gulf Shipping Group by way of Bareboat Charter in 1987. The Sea Empire was chartered to Dace Maritime SA on 27th August 1987 for a period of five years. The Trident Dawn was chartered to Rascasse Shipping SA on 17th July 1987, also for a period of five years. Writs were issued in Hong Kong against the two vessels on 13th and 24th June 1991 respectively, and arrests were effected on 20th July and 6th July respectively. The claims were for repairs and necessaries.

2. The interveners were given leave to intervene on 24th July and on 24th September issue motions under order 12, Rule 8(1)(a) for setting aside service of the writ.

3. The issue concerns section 12B(4) of the Supreme Court Ordinance which reads:

"(4) In the case of any such claim as is mentioned in section 12A (2) (e) to (q), where -

(a) the claim arises in connection with a ship; and

(b) the person who would be liable on the claim in an action in personam ("the relevant person") was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the ship,

an action in rem may (whether or not the claim gives rise to a maritime lien on that ship) be brought in the High Court against -

(i) that ship, if at the time when the action is brought the relevant person is either the beneficial owner of that         ship as respects all the shares in it or the charterer of it under a charter by demise; or

(ii) any other ship of which, at the time when the action is brought, the relevant person is the beneficial owner as respects all the shares in it."

4. There is no dispute that there was a claim against the two demised charterers in personam. The question which arises is whether, at the time when the writs were issued, those charterers were still the demised charterers of the two vessels.

5. For the intervener, Mr. Smith submitted that the charterparties came to an end on 29th May 1991 when the intervener exercised its right to withdraw the vessel from the service of the charterers in accordance with the terms of the charterparties. Thus, when the writs were issued, the relevant persons were no longer charterers by demise.

6. Clause 9 of the Charterparties relates to hire and provides for one month's payment in advance on the 15th day of each month. Paragraph (e) provides:

"In default of payment beyond a period of 7 banking days in New York, the owners to have the right of withdrawing the vessel from the service of the charterers without noting any protest and without interference by any court or any other formality whatsoever and without prejudice to any claim the owners may otherwise have against the charterers under the charter."

7. Mr. Smith argued that a charter by demise of a vessel is a form of lease or hiring of a chattel. See Carver's Carriage by Sea, Volume 1, 13 Edition, paragraph 585. It is therefore permissible, he said, to consider the general law in relation to chattels, in particular hire purchase which is a species of hire of a chattel. He referred to Chitty on Contracts 26 Edition, paragraph 3626 which reads:

"Termination of the hiring. It is well established as a general rule of the law of bailment that any act which is basically inconsistent with the terms of the bailment, such as a sale, or pledge, of the chattel bailed, determines the bailment and the immediate right to possession of the chattel reverts to the bailor. The fact that the agreement makes specific provision for termination of the hiring, e.g. on notice, in the event of default by the hirer does not ordinarily displace this rule. But, in other events, the terms of the agreement must be looked at to ascertain what the rights of the owner are in respect of the event which has taken place. Where the agreement states that the hiring is automatically to determine, it will be terminated forthwith if the event occurs. But if the termination is made contingent upon notice being given or a declaration being made, the hiring is not terminated until the notice is given or the declaration is made.

A term in the form that the owner "may forthwith and without notice terminate the hiring" does not automatically terminate the hiring upon the happening of the event, and there must be some further unequivocal act on the part of the owner (such as seizure of the goods) which demonstrates his intention to terminate the hiring. But since the owner can terminate the hiring at any time, he has an immediate right to possession of the goods and this entitles him to retake possession of them from the hirer, or to claim damages from any person who wrongfully interferes with the goods."

8. Mr. Smith said that on termination of a bailment the bailor or owner of the chattel has an immediate right to possession, a right which accrues even where the contract itself provides for notice to be given. Accordingly when the intervener gave notice terminating the hire on 29th May an immediate right to possession of the vessels vested in them. The subsequent activity which took place, culminating in the interveners recovering possession of the vessels, i.e effective control and management, only after the writs had been issued was a mere matter of mechanics and irrelevant to the termination of the charterparties.

9. For his submission Mr. Smith sought assistance from The Munster (1983) 1 Lloyd's Law Reports 370. There the Court of Appeal had to answer a question identical to the one in the instant case, namely, had the demise charter been determined before the proceedings began. On 6th April 1982 the demised charterers telexed the owners saying that they had lost their entire capital, that they could no longer operate the vessel, and that they wished to re-deliver the vessel as soon as possible. The owners replied on the same day saying that they treated the telex as a repudiation of the charterparty, that they were formulating their claim and would be suing the charterers in due course. The Court of Appeal had no difficulty in rejecting an appeal by the plaintiffs. At page 371 Ackner L.J. said:

"Thus to my mind, the answer in this case is a short and simply one: on 6th September the charterers repudiated the demised charter and that repudiation was accepted."

10. Mr. Smith contended that the Court of Appeal not having thought it necessary to investigate the secondary question of physical redelivery of the vessel, that question is clearly irrelevant to the termination of a charterparty.

11. For the plaintiffs, Mr. Shaw had two strings to his bow. He gave them a preliminary tensioning by submitting that the intervener's motions should be dismissed in limine because of their failure to comply with an order for discovery made on 16th December 1991 in aid of the motions. He said that although a wealth of documentation had been discovered by the intervener, a substantial amount was still missing. These documents related to matters such as charter hire, crew's wages, insurance and stores on board the vessels. matters which were relevant to the date when the vessels were redelivered to the interveners. For reasons which will become apparent, I do not propose to dilate upon this submission.

12. Mr. Shaw's primary argument was that Mr. Smith is wrong in law. He said that a charterparty by demise is not terminated, and the demised charterer does not cease to be such, until the vessel has been redelivered to the owners or the owners have regained possession of it. In the present cases, the intervener's notice of withdrawal of the vessels, even assuming that the notice was justified, was only the first of two necessary steps before the charterparty terminated.

13. For his argument, Mr. Shaw relied upon The Andrea Ursula (1971) 1 Lloyd's Law Reports 145. In that case Brandon J. was discussing the nature of a demised charter and at page 147 said:

" A ship which is demise chartered is an example of a ship which is possessed and controlled by a person not the legal or equitable owner in the way that I have described. Frazer v. Marsh, (1811) 13 East 238, by Lord Ellenborough at p. 239; Scheibler v. Furness, [1893] A.C. 8, by Lord Herschell, L.C., at pp. 14 to 15 and 18 to 19. Because of the extent of his possession and control, a demise charterer has often been described as the owner pro hac vice or the temporary owner. The Lemington, (1874) 2 Asp.M.C. 475, by Sir Robert Phillimore at p. 478; The Tasmania, (1888) 13 P.D. 110, by Sir James Hannen, P., at p. 118; The Hopper No. 66, [1908] A.C. 126, by Lord Atkinson at p. 136. The same approach has been adopted in the U.S.A.; see the Law of Admiralty by Gilmore and Black (1957), at p. 218.

There may be other cases, besides those of a ship under demise charter, in which a ship is possessed and controlled by a person not the legal owner in the way mentioned. The Ruby Queen, (1861) Lush. 266; The Ripon City, [1897] P. 226.

It was decided in four of the cases to which I have referred, namely, The Ruby Queen, The Lemington, The Tasmania and The Ripon City, that the personal liability of the party other than the legal owner in possession and control of the ship gave rise to a maritime lien on the ship and could be enforced by an action in rem against her. The correctness of these cases in this respect, despite the authority and experience of the Judges who decided them, was doubted in The Sylvan Arrow, [1923] P. 14; (1922) 13 L1.L.Rep. 50; [1923] P. 220; (1923) 16 L1.L.Rep. 307, on the ground that the cases were not consistent with the principles laid down by higher Courts in The Parlement Belge, (1880) 5 P.D. 197; The Castlegate, [1893] A.C. 38, and The Utopia, [1893] A.C. 492. My provisional view on this point is that there is not necessarily any inconsistency between the two groups of cases. The latter group of cases established clearly the rule that a maritime lien could only be created if there was personal liability of the person who was the owner of the ship at the time when the cause of action said to give rise to the lien arose. The cases did not, however, decide, because the point never arose for decision in them, that, for the purposes of that rule, owner meant only the legal owner and did not include the owner pro hac vice or the temporary owner. As to this, see the judgment of Sir Gorell Barnes in The Ripon City, sup., at pp. 234 to 247, where the matter is discussed at length. Whatever the answer to this point - and, since it is only relevant to the law as it was before the coming into force of the Administration of Justice Act, 1956, it is not necessary to decide the matter now - the four cases concerned serve well to illustrate the concept of temporary ownership based on full possession and control, which I regard as relevant in this matter."

14. Emphasising the final words of that passage, Mr. Shaw said that possession and control of a vessel are crucial to a determination of whether or not a charterparty by demise still exists. Until they have been relinquished by the charterer and recovered by the owner, the charterparty continues to survive.

15. I do not find the case to be of assistance to Mr. Shaw. The judge there was considering the nature of a demise charter in the light of the English legislation as it then existed which provided for an action in rem only where the person against whom an action could be brought in personam was the beneficial onwer of all the shares in the vessel. The nature of a demised charter was therefore crucial to the question of whether or not an action in rem might be brought against a vessel where the action in personam lay against the demised charterer thereof. In any event, the judge did not decide whether the demised charterer was still the demised charterer because, upon the arrest of the vessel, he said at page 146:

"At that date the demise charter to Anglo-Med was, as I find, still in force. Anglo-Med had purported to cancel it, but the evidence before me does not show that they had any legal right to do so, nor that they had effectively divested themselves of the possession and control of the Andrea Ursula which they had under it."

16. Mr. Shaw also sought comfort from Attica Sea Carriers Corporation v. Ferrostall Poseidon Bulk Reederei G.M.B.H. (1976) 1 Lloyd's Law Reports 250. There the demise charterparty in broad terms required the charterer to effect such repairs before redelivery that the vessel should be in the same order and condition as on delivery. Substantial repairs were required to the vessel, repairs which the charterers found to be totally uneconomic. They sought to redeliver the vessel without effecting the repairs. At page 256, Lord Denning, M.R. said:

"In my opinion, therefore, on the true construction of the charter-party, the answer to the first question is this: the redelivery of the vessel on Sept. 23, 1975, was effective, notwithstanding the fact that the surveys had not been completed, or the fact that the vessel was not in class without recommendations, and was not in proper repair."

17. Again Mr. Shaw argued that the case demonstrates that redelivery and thus the parting with possession and control are crucial to the termination of a demise charterparty. Again, I do not find the case to be of particular assistance to Mr. Shaw. First, it depends on its own facts which were that the period of the charterparty had already expired and that the court found that the obligation to repair was not a condition precedent to the right to redelivery but rather a stipulation giving a remedy in damages. Second, it does not involve a consideration of the position where an owner has an accrued right to withdraw the vessel and the consequences of such withdrawal.

18. Mr. Shaw also referred to the charterparty itself, to the provision in Clause 9(a) for hire to continue to be paid until the vessel is redelivered, and to Clause H which provides for delivery and redelivery of the vessel in specified areas. These provisions demonstrated, he said, that redelivery is of the essence to the determination of a demise charterparty. Specific areas are required for redelivery so that both parties will know precisely how the charterparty can be determined by such redelivery.

19. With respect, the latter submission appears to me only to demonstrate the falsity of the argument for the plaintiffs. If a charterparty can only be terminated by redelivery, particularly if that redelivery is to be in a specific area, skilful handling and manoeuvre of the vessel on the part of the charterers could presumably extend the charterparty for a prolonged period, if not indefinitely. In my judgment, Mr. Smith's submission is correct and the true position is as set out by Palmer in his work on Bailment, at page 86, where he says:

" X. THE TERMINATION OF BAILMENT

A distinction must be drawn between, on the one hand, the termination of a contract underpinning a bailment and the revival of a bailor's right of immediate possession, and on the other hand the cessation of the bailee's responsibility for the goods as a bailee. When the bailee performs an act fundamentally at variance with the terms of the bailment (for example, by deviating from an agreed route) no formal conduct is required on the part of the bailor in order to determine the accompanying contract or to crystallise his immediate right to possess. But the bailee's liability outlives the contract, and this is so whether the contract is discharged by the bailee's own breach, or by the operation of some external event amounting to frustration, or by mere expiration of time. Admittedly, his responsibility may vary according to the circumstances in which the contract is terminated, and in cases where neither the termination itself nor the fact that he is still in possession of the goods is due to the fault of the bailee, that responsibility may be significantly lighter. The fact remains that his obligations are essentially those of a bailee and arise essentially out of the continuing bailment relation."

20. In my judgment, therefore, apart from the more usual methods of termination, a demise charterparty is terminated when, in accordance with the provisions of the charterparty, an owner acquires a right to withdraw the vessel and asserts that right. Such assertion could, as in the present cases, be no more than a formal notice to the charterers. If the vessel is conveniently located the right might be asserted by the owner taking actual possession. The recovery of possession from the charterer is not, however, crucial to the termination of the charterparty. The charterparty terminates, I am satisfied, upon the owner asserting his right to withdraw the vessel from the charterer.

21. Mr. Shaw is obliged therefore to loose his second string. It was his contention that, even if Mr. Smith is right in law, (as I have found him to be), the evidence is insufficient or ambiguous as to whether the intervener was justified in giving a notice of withdrawal; and as to whether termination took effect from 29th May or from some later date, perhaps after the issue of the writs, following discussion between the parties.

22. Mr. Shaw made a number of points. First, he said it is not clear when the 7 banking day grace period under Clause 9 of the charterparties expired. As to that, I can only say that it has consistently been asserted by the intervener that it expired on 24th May, that it has not been specifically disputed by the charterers in any of the correspondence discovered, and if the plaintiffs felt there was anything in this point they could easily have ascertained the true position.

23. Second, he said, there is correspondence to show that the charterers asserted that they had paid within the grace period and challenged the intervener's right to withdraw the vessels. Whilst that is correct, the correspondence also shows that the intervener's bankers had not received payment even on 25th May and that only on 30th May was a sum received of approximately half the hire due. This sum was shows not accepted as payment on account of hire and was placed in a suspense account. I can readily understand why the charterers should seek to dispute the owners' action, but in my judgment the documents make it plain that that action was justified.

24. Third, the documents indicate that there was considerable discussion between the parties, into which sub-charterers were drawn, the net effect of which was that the intervener only recovered possession of the vessels, as Mr. Smith acknowledged, after the writs were issued. It suggests, said Mr.Shaw, that the intervener may have waived the effect of the notice of withdrawal and terminated the charter parties only when it became apparent that the problem between the parties could not be resolved to their mutual satisfaction. I reject that suggestion. It flies in the face of the documents in which the intervener consistently asserts that the notices were not withdrawn or waived and that the charterers had no further rights in relation to the vessels. I am satisfied that, although there may be documents not yet discovered, such discussions as there were were those natural and necessary to the resolution of the mess in which all parties found themselves consequent upon the notices of termination.

25. I must add here that, after I reserved judgment but before I delivered it, the parties reappeared before me at the instigation of the plaintiffs who wished to adduce further evidence. That evidence consisted of a letter dated 2nd July 1991 from the intervener to Gulf Marine Services, the defendants' agents. It expressed itself as "a last attempt to find a solution", and offered the defendants certain terms upon them waiving any claims or causes of action and redelivering the vessels by 1700 hours on 3rd July. On a copy of that letter, the defendants' agent endorsed his agreement at 1320 hours on 3rd July. These documents the plaintiffs obtained from a source other than the intervener.

26. Shortly before that further hearing, the intervener exhibited another 40 pages of documents which evidenced, inter alia, the on-going discussion between the defendants and intervener.

27. I do not consider, however, that these documents advance the matter for the plaintiffs. Certainly they demonstrate that the intervener was trying to come to terms with the defendants, but only in the context of a right that it was seeking to enforce in the face of uncooperative charterers. As Mr. Smith put it, the intervener had to offer some inducement to get its vessels back.

28. In my judgment, therefore, the intervener correctly exercised its right to withdraw the vessels on 29th May, the effect of which was immediately to terminate the two charterparties. The intervener is therefore entitled to the relief sought. I set aside service of the writ in each action.

29. The intervener has behaved very badly. It largely ignored an order of this court for discovery because it did consider the documents to be relevant or material to these motions. If so, it should have appealed against that order. Discoverable documents were still being produced during the hearing. Undoubtedly there are still more. I am of the view that its behaviour should be penalized. Accordingly, I make an order nisi that there be no order as to costs between the intervener and the plaintiffs on these motions.