XCHRX DONGNAMA SHIPPING CO. LIMITED v. OWNERS OF THE SHIP OR VESSEL "ALACRITY"

1994, Folio No. AJ-232

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ADMIRALTY JURISDICTION

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Admiralty action in rem against: the ship or vessel "ALACRITY"

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J U D G M E N T

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1. This is an application by the Defendants for the release of their vessel. The vessel was arrested on 28th June upon the basis of an affidavit by the Plaintiff's solicitor, Mr. Day, who very properly disclosed the existence of an arbitration clause in the charterparty between the parties, and that the object of the arrest was to obtain security because of a real risk that any arbitration award might be unsatisfied. The Defendants' application is not by summons or motion, but simply on notice to the Plaintiff. No real point has been taken about the absence of a formal application although the Defendants' solicitor, Mr. Wilding, did offer to undertake to issue an appropriate summons. I am satisfied that in Admiralty proceedings, where the release of a vessel under arrest is often of an urgent nature, the method of proceeding adopted by the Defendants was proper.

2. Following arrest of the Defendants' vessel, on 5th July the Defendants commenced AJ 236/94 against the Plaintiff in respect of a claim arising out of the same charterparty. The Plaintiff's own vessel was arrested on 5th July, but released the following day upon payment into court of US$583,000 by the Plaintiff. There were also negotiations for the release of the Defendants' vessel. On 30th June, the Plaintiff's solicitors wrote to the Defendants' solicitors saying:

"As to the form of security, we confirm that we would recommend our client to accept a first class Hong Kong bank guarantee subject to agreement on terms."

3. On 20th July, the Defendants' solicitors enquired whether the Plaintiff's client would accept a letter of guarantee from the Union Bank, Hong Kong in the form supplied. This was unacceptable to the Plaintiff's solicitors who submitted their own form of guarantee which was headed:

"To be typed on note paper of Hong Kong Bank, Standard Chartered Bank, Bank of East Asia, Bank of China or Citibank."

4. Agreement could not be reached as to which bank was and what terms were acceptable. Accordingly, Mr. Wilding and Mr. Day appeared before me late on Friday 22nd July upon Mr. Wilding's application for release of the vessel. At that stage, Mr. Wilding's application foundered upon a preliminary point as to the amount of the guarantee. The Plaintiff's demand for security had been in the sum of US$933,000. Upon the Defendants' application to a judge, the amount was reduced to US$743,000 which amount appeared in the Defendants' proposed guarantee. The Plaintiff has appealed against that reduction. I said that any guarantee would have to be for the higher sum in case of a successful appeal. Subject to that, I expressed the hope that the parties might be able to agree upon the terms of the guarantee. Sadly, that hope was not realized, because although the amount of the guarantee was increased to the higher sum, the Union Bank properly on the advice of its solicitors would not accept the wording proposed by the Plaintiff. Mr. Wilding, with Mr. Day in opposition, appeared before me again on 26th July to pursue his application.

5. An in rem action which enables a plaintiff to arrest a vessel is the exercise of an exorbitant jurisdiction. It gives a plaintiff a very powerful advantage. It is, accordingly, a jurisdiction which is very closely scrutinized by the court. It is Mr. Wilding's submission that the court has a wide, inherent, equitable jurisdiction to ensure that a vessel is not kept unreasonably under arrest.

6. Historically, the practice of the court was that a defendant could only obtain release of a vessel by way of bail bond. See the Christiansborg [1885] 10 PD491. A bail bond was an undertaking to the court and represented the vessel itself. See The Nied Elwin [1811] Dods Adm. 50. Additionally, a defendant could pay the amount of security claimed by a plaintiff into court. Since the 19th century, however, the practice has developed of the parties coming to a private arrangement between themselves, whereby a defendant gives security for a plaintiff's claim direct to a plaintiff by way of undertaking, indemnity or guarantee given by a P & I Club or a bank. This practice has grown to the extent that bail is almost unheard of while payment into court is unusual.

7. No doubt because of the earlier practice, and no doubt because private security arrangements have been made by agreement between the parties and not by any direction of the court, the learned editors of the Annual Practice at note 75/13/1 and Meeson, Admiralty Jurisdiction and Practice have found it proper to state that the court appears to have no power to order security in any form other than bail or payment into court if a plaintiff so insists. It is clear, however, that the court does have a measure of jurisdiction over private security arrangements, notwithstanding statements to the effect that they are nothing to do with the court. See for example British Shipping Laws, Part I, Admiralty Practice p.139 para. 321. In The Cap Bon [1967] 1 Lloyd's Rep. 543 Brandon, J. (as he then was) in dealing with a somewhat irregular form of bail bond said:

"..... There is, of course, nothing whatever to prevent parties making an agreement whereby the claim of one or other in an arbitration is secured by the promise of a third party, and such guarantees are often given in commercial matters; but if there is such an agreement it seems to me it is a private agreement outside the sphere or scope of any action which may be brought in the Court."

8. The same judge did, however, release a security consisting of a written guarantee given by a third party. That was in The Wladyslaw Lokietek [1978]2 Lloyd's Rep. 520. It is to be noted, however, that that case concerned limitation and Section 5 of the Merchant Shipping (Liability of Ship Owners and Others) Act 1958. In the Andria [1984] 1 All ER 1126, the Court of Appeal released a letter of undertaking from a P & I Club because the arrest of the ship amounted to an abuse of the court's process.

9. The courts have held, however, that release of a vessel is unusual. In The Myrto [1977] 2 Lloyd's Rep. 241 Brandon, J. said at p.259:

"There is the further point that an order for the release of the ship, made in interlocutory proceedings before trial, is a drastic order which should in my view only be made in a clear case, and this case, whatever else it is, is not such a case."

10. In The APJ Shalin [1991] 2 Lloyd's Rep. 62 Sheen, J. said at p.66:

"Although the Court has inherent jurisdiction to order the release of a ship under arrest, such an order made in interlocutory proceedings before the trial is (as was said by Mr. Justice Brandon in The Myrto [1977] 2 Lloyd's Rep. 243) a drastic order which should only be made in a clear case. I would go further and say that in circumstances such as the application now before the Court it should never be made. I cannot foresee any circumstances in which it would be right for the Court to order the release of a ship without security being given against the wishes of a creditor who has properly exercised his right to arrest the ship."

11. The two latter cases involved applications for release of a vessel where mortgages on the vessels meant there was little or no equity remaining in them. Release was sought to enable the vessels to continue trading so as to earn money to pay off the claims. It is perhaps unsurprising that both judges thought the cases were not so exceptional as to warrant release. Whether the court would have required some form of security to be given was not investigated.

12. It is not difficult to see why a court will discharge a private form of security upon release of a vessel whose arrest was wrongful or for some reason an abuse. In such circumstances, the whole foundation for the private security has been removed. The courts have in equity always exercised a power to order the surrender or cancellation of false or ineffective instruments. Brandon, J. touched upon this in The Wladvslaw Lokietek at p.533. In my judgment, however, it is quite another thing for the courts to enter the arena and adjudicate upon the competing proposals for security put forward by the respective parties. In my view, which was one that Mr. Wilding was reluctant to accept, the court would in such circumstances be formulating the agreement for the parties. It is no function of the court and, as I understand it, it has never been, to write a contract for parties before the court. There is no authority on this point. This does not seem surprising in the circumstances. An in rem action confers a valuable albeit draconian, right upon a plaintiff. I see no warrant for obliging that plaintiff to take an alternative form of security that he does not find acceptable and for which the party giving the security is not, as in the case of bail, immediately answerable to the court. I decline jurisdiction in the circumstances.

13. Mr. Wilding further submitted that, even if the court has no jurisdiction to help a defendant who is faced by an intransigent plaintiff, the circumstances of this case are so exceptional that the court in the exercise of its equitable jurisdiction should assist the Defendants. He pointed out that the vessel was arrested as security for an award that may be made in arbitration. That arbitration is non-domestic and, therefore, subject to a mandatory stay under Article 8 of the Model Law if application for stay is made. Mr. Wilding said that such application will be made, and it will then be for the court to consider release of the vessel, and if so, on what terms. The Defendants would then, if unsuccessful in the present application, renew their plea for the vessel to be released upon the security which is now offered by them.

14. Mr. Wilding made the point that bail is not available to the Defendants in this case. He pointed out that the prescribed form of bail bond is not apt for an award in arbitration proceedings. He pointed out that in The Cap Bon Brandon, J. held that Order 1 r.9 does not authorize a variation in that form which would have the radical affect of extending the bond to cover a purpose which is not the purpose of proceedings in rem.

15. Two things have to be noted about The Cap Bon. First, the vessel there was arrested as security for a claim for cargo damage. Subsequently, the defendants gave a bail bond adapted to provide security for pending arbitration under the charterparty between the parties. So, the proceedings brought were plainly not for the purpose for which the bail bond was given. Second, it is now accepted, as in the current case, that a plaintiff may invoke the in rem jurisdiction to obtain security in relation to a possible arbitration award where the plaintiff can show it is likely that the award will not be met. Plainly, the arrest in this case is a legitimate purpose of in rem proceedings. Accordingly, I have no doubt that the view taken by Brandon J. in The Cap Bon is confined to the facts of that particular case. I am satisfied that if the Defendants so wish they could give bail in this case, in the prescribed form suitably adapted to meet an arbitration situation.

16. Third, Mr. Wilding complains that the Plaintiff has waived its right, if such right exists, to insist upon bail or payment into court because of the offer to accept a guarantee. He said that the Defendants have relied upon that offer to their detriment, by arranging for a guarantee from their bank, for which they have had to put up security, so that they are now unable to make a payment into court.

17. I do not think that the Plaintiff has either waived its right or is estopped from insisting upon a guarantee satisfactory to it, failing which the Defendants should put up bail or make a payment into court. The letter from the Plaintiff's solicitors containing the offer was couched in careful terms. Whilst there may be room for argument about whether a first class bank should be viewed subjectively or objectively, it is plain that terms had to be agreed, upon which a recommendation would be made to the Plaintiff itself. It seems to me that the Defendants have only themselves to blame for rushing to obtain their bank's guarantee before agreement in principle had been reached with the Plaintiff's solicitors. For reasons which I have already given, it is still open to the Defendants to give bail. There is nothing to prevent them making a payment into court, if the money can be raised. It is to be noted that the Plaintiff has made payment into court in order to obtain release of its own vessel.

18. In all the circumstances, the Defendants' application is dismissed. I make an order nisi that the Plaintiff should have the costs of this application in any event.