BIRNAM LTD v. THE OWNERS OF THE SHIP OR VESSEL “HONG MING”

HCAJ 105/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO. 105 OF 2011

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Admiralty Action in rem against:
The ship or vessel “HONG MING”
(of the Republic of Panama flag)

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J U D G M E N T

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1.  The Warrant of Arrest will be set aside. The Writ will also be struck out.

2.  The key underlying facts are not really in dispute.

3.  On 16 July 2011 the Defendants entered into a Memorandum of Agreement (MOA) with Star Matrix or nominee for the sale of the vessel.  On the same day Star Matrix nominated Birnam as buyers.  A new MOA was entered into between the Defendants and Birnam.  That was signed on 19 July 2011.

4.  By MOA cl. 2 Birnam was to pay a deposit of 20% (that is, US$663,968) within 3 banking days of the MOA’s signing.  However, as at 26 July 2011, Birnam had only paid a deposit of US$400,000.

5.  Later, Birnam requested a variation of the MOA to reduce the deposit payable to US$400,000.  The Defendants rejected this request.  Instead, the Defendants cancelled the MOA on 27 July 2011.  The cancellation was communicated to Birnam’s brokers and the latter informed Birnam by email.

6.  Birnam sought to negotiate further with the Defendants to keep the MOA alive.  Birnam, for example, offered to guarantee that the balance of the deposit would be paid by 2 August 2011.  The Defendants rejected Brinam’s proposals.

7.  Birnam then demanded a refund of the partial deposit which it had paid.  But on 28 July 2011 Birnam suggested via its brokers that the Defendants “extend instead of refunding the amount”.

8.  On 3 August 2011 at 1211 hours Hong Kong time the Defendants proposed entering into a new agreement based on similar terms to the previous MOA.  Under the proposal the balance of the deposit would be payable by 1000 hours on 5 August 2011.

9.  At 1311 hours Birnam countered with a variation relating to bunkers.

10.  That evening Birnam applied to Macrae J (the Duty Judge) for the Warrant of Arrest.  Birnam filed its Writ on the following day.

11.  On 4 August 2011 at 0156 hours Birnam made a revised counter-offer.  Among other things, it was proposed that the Vessel be delivered in Hong Kong rather than Singapore and that there be inspection of the vessel in Hong Kong.

12.  Birnam’s offer stated:-

“[W]e are very very close to get the deal done. Buyers’ asked for vessel’s inspection because they need to be 100% sure that all machinery of the vessel are in working condition because place of delivery change and the distance to the place of beaching is almost double. Please try to provide me with position for inspection and agents asap in order to arrange immediately.”

13.  By email at 1012 hours the Defendants replied that it would not be possible to bring the Vessel to Hong Kong.

14.  At 1712 hours Birnam insisted on inspection in Hong Kong.  Birnam’s email stated:-

“We are ready to all terms and price offered at Delivery Hong Kong .... At this stage we hereby confirm that our previous MOA stands Null and Void and please ask owners to return our deposit money urgent.”

15.  The Defendants then changed their mind and agreed to inspection of the Vessel in Hong Kong.

16.  On 14 August 2011 the Vessel arrived in Hong Kong for inspection.  It was arrested by the Defendants at that point.

17.  The Writ alleges a claim for possession or ownership of the Vessel arising out of the original MOA with Birnam.  In the alternative, the Writ seeks a refund of Birnam’s deposit or damages.

18.  High Court Ordinance (Cap. 4) (HCO) s. 12A(2) does not include claims arising from contracts for the sale of a ship or a claim by a buyer for breach of a contract for the sale of a ship as giving rise to a right to arrest the ship.  The 1952 Arrest Convention does not include such claims either.

19.  In the application for the Warrant of Arrest, it was asserted that Birnam’s claim fell within HCO s. 12A(2)(a), namely, a claim to the possession or ownership of a ship or to the ownership of any share therein.

20.  I do not think that Birnam can claim such possession or ownership. 

21.  The original MOA with Birnam has been terminated as a result of Birnam’s failure to pay the full deposit.  It follows that property in the ship must now be fully vested in the Defendants. There can be no prospect of obtaining specific performance of a contract which has been terminated.  It cannot therefore be argued (even speculatively) that a right of specific performance gives rise to some sort of equitable interest in the vessel.  I say “speculatively” because I should not be taken to accept that the specific performance analysis advanced by Birnam is correct in the first place.  See Re Wait [1927] 1 Ch 606 (per Atkin LJ at 635-6).

22.  It is alleged by Birnam that the payment of part of the requisite deposit gives some sort of interest in the vessel.  I disagree.   The full deposit was not even paid.  In that circumstance, I do not understand how the payment of part of what should have been paid gives rise to any proprietary or possessory interest in the ship.

23.  Under the MOA, the deposit was expressly payable as security for the performance by Birnam of its obligations as buyer.  Under the MOA, upon Birnam’s failure to comply with the MOA, the deposit would be released to the Defendants as sellers by way of compensation for Birnam’s default as buyer.  On the terms of the MOA alone, it cannot be asserted that the retention by the Defendants of the part deposit paid somehow enables Birnam to assert a proprietary right in the ship to get the deposit back. 

24.  The stark reality is that Birnam is the wrongdoer.  It failed to do what it ought to have done under the MOA, namely, pay the full deposit.  Birnam having failed to pay the full deposit within the stipulated time or any reasonable period thereafter, the Defendants were entitled to treat the original MOA as terminated.  The Defendants cancelled the MOA accordingly.  The Defendants in consequence were further entitled to treat the part deposit paid as forfeited by Birnam.

25.  The Defendants and Birnam then entered into negotiations for the subsequent resurrection and variation of the MOA.  Those negotiations may or may not have resulted in a concluded agreement.  But there has been no breach by the Defendants of the negotiation or any fresh agreement concluded as a result. 

26.  It was understood by all as a result of the negotiations that there would be a sale and delivery of the Vessel in Hong Kong subject to inspection.  The Defendants were seeking to comply with that understanding by having the Vessel sail to Hong Kong for inspection.  As of today, the Defendants have not breached any stipulation in the negotiations. There can be no basis for a claim against them, much less a claim in rem, based on the breach of the negotiations or any concluded agreement made as a result.

27.  I add that, contrary to the submission of Ms. Janet Ho (appearing for Birnam), I see no basis for characterising any ensuing communications or negotiations between Birnam and the Defendants (that is, following Birnam’s failure to pay the deposit) as amounting to a “waiver” of the Defendants’ cancellation of the original MOA.

28.  It follows there is no basis for Birnam’s claim.  The warrant of arrest should not have been issued.

29.  There are further difficulties with Birnam’s case.

30.  At the ex parte stage it was not drawn to Macrae J’s attention that conventional wisdom is that Birnam’s claim does not fall within the claims giving rise to a right of arrest.  It was simply asserted that Birnam had a right or interest in the vessel.  The judge was not provided with a fair, even-handed analysis of the authorities in connection with how such interest was alleged to arise. 

31.  Nor was the Court informed (as it ought to have been) of the later negotiations which took place following the issue of the Warrant of Arrest.  The duty of full and frank disclosure is a continuing one. The Court, however, was not informed that, on the day following issue of the Warrant, Birnam accepted that the original MOA had been terminated and was negotiating fresh terms with the Defendants.  That in my view was material (as I have discussed above) as to whether Birnam had any cause of action.

32.  On material non-disclosure alone, I would have set aside the Warrant of Arrest.

33.  At the time when it applied for the Warrant, Birnam does not seem to have seriously addressed its mind to any of the considerations discussed above.  It instead proceeded in what might be described as a “cavalier fashion”.  That, according to The Maule [1994] Civil Appeal No. 187 of 1994 (11 July 1995) could amount to “malicious negligence”.

34.  The chronology of events gives rise to a strong inference that the inspection requested by Birnam was merely a ruse to bring the Vessel into Hong Kong waters so it could be arrested here.  The arrest could then be used by Birnam as leverage or pressure in the negotiations with the Defendants for a revised MOA on terms favourable to Birnam or for the return of the part deposit previously paid by Birnam. 

35.  Such motive coupled with a cavalier attitude would amount to a misuse of the arrest process.  It would at least constitute the “malicious negligence” to which the Court of Appeal has referred in The Maule.  Birnam’s tactic could not have been a sincere use of the arrest mechanism to enforce a genuine in rem claim. 

36.  That conduct would, to my mind, justify an inquiry into the damages suffered by the Defendants as a result of the wrongful arrest.  In this connection, I note Birnam was aware, when applying for the Warrant, that the Defendants were also negotiating with other parties for the sale of the Vessel.  Arrest might well have affected the Defendants’ dealings with those other parties.

37.  The Defendants have asked in their summons for an inquiry as to damages for wrongful arrest.  In my judgment, for the reasons which I have given, they are entitled to such inquiry.