XCHRX THE HALLA LIBERTY (South Korean flag)

HCAJ400/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY JURISDICTION

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J U D G M E N T

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The Application

1. In this Admiralty action the Court is seized with an application by the Defendants herein, the owners of the vessel "Halla Liberty", that all proceedings in the action be stayed, pursuant to Article 8(1) of the Uncitral Model Law, in favour of an on-going arbitration in Seoul, South Korea.

2. The background to this action is in relatively short compass. The vessel "Halla Liberty" was arrested in Hong Kong, at the instance of Dongnama Shipping Co. Ltd., the Plaintiff in this action, whose generally indorsed Writ claims, inter alia : -

"Amounts due from the Defendants to the Plaintiffs under a Slot Charter Agreement ('the Agreement') made in writing between the Plaintiffs and the Defendants dated 1st February 1997, together with contractual interest on the said amounts due ...."

3. I am told by Mr Sussex, who appears for the Defendants, that a "slot charter" is not the charter of a vessel, but the charter of a number of slots on a vessel into which containers are loaded - a concept which in the fullness of time will doubtless lead to some interesting jurisdictional arguments as to whether, for example, this form of charter falls within the provisions of section 12B of the Supreme Court Ordinance Cap.4.

4. Any such jurisdictional challenge under Order 12 rule 8, however, lies in the future. For the present Mr Sussex bases his application for a stay of proceedings upon the existence of the arbitration provisions within Clause 14 of the Slot Charter Agreement, section 14(2) of which reads as follows : -

"14.2 All disputes, controversies, or difference which may arise between the Parties, out of or in relation to or in connection with this Agreement or for the breach thereof, shall be finally settled by arbitration in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial Arbitration Board and Under the laws of Korea. The award rendered by the arbitrators shall be final and binding upon the Parties concerned."

5. There is no dispute about this, nor that an arbitration is actually under way (and has been since April 1998), nor that the arbitration agreement falls within the meaning of Article 8(1) of the Uncitral Model Law (as contained in the 5th Schedule to the Arbitration Ordinance Cap.341), which reads : -

"Article 8. Arbitration agreement and substantive claim before court

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."

6. Ergo, says Mr Sussex, given that the Plaintiff has brought this action in respect of "a matter which is the subject of an arbitration agreement", and that in the circumstances there can be no suggestion that the arbitration agreement is "null and void, inoperative or incapable of being performed", his client is undoubtedly entitled to the mandatory stay foreshadowed by Article 8.

The Argument

7. On all primary 'Article 8 points' Mr Kat, for the Plaintiff, does not demur, and at the outset of argument he confirmed that the sole issue currently dividing the parties is the ambit of such mandatory stay. In a nutshell, the dispute is this : Mr Sussex seeks what he terms the usual order, namely a 'blanket'" stay, subject only to the right of the Plaintiff to make such application as may be necessary to obtain interim protection along general "Rena K" principles, whilst Mr Kat argues, in effect, that it is open to the Court to bifurcate such stay, so that whilst what is termed the in personam element of the action is indeed stayed pending the resolution of the South Korean arbitration, nevertheless the in rem element of the proceedings (such as, for example, the determination of priorities) should be permitted to continue without restraint; and pursuant thereto, Mr Kat suggested the following form of Order which, he submitted, represents the Order the Plaintiff should have been requesting :

"1. The proceedings herein to determine the Plaintiffs' claims against the Defendants arising out of or in relation to or in connection with the Slot Charter Agreement dated 1st February, 1997 between those parties be stayed;

2. The proceeds of sale of the vessel be retained as security for the satisfaction of any award which is made in the arbitration between the Plaintiffs and the Defendants presently taking place in Seoul, Korea;"

8. At first blush it is perhaps not easy to appreciate why the Plaintiff is exercised about restricting the ambit of what is accepted must in principle be a mandatory stay of proceedings, and why it wanted to keep alive what Mr Kat chose to term "the rest of the in rem action". This is particularly so since the logical and predictable course of events consequent upon a stay appears straightforward. As Mr Sussex put it, what one could reasonably expect in the present circumstances would be that if and when the Plaintiff obtained an arbitration award in its favour it could return to the Hong Kong Court, request that the stay be lifted, and serve a Statement of Claim relying upon the arbitration award as constituting an issue estoppel on the question of the Defendants' liability under the Slot Charter Agreement. And thereafter, subject to jurisdictional arguments challenging the Plaintiff's entitlement to utilise the admiralty jurisdiction and to advance its claim in rem, the Plaintiff could obtain a judgment in rem enforceable against the proceeds of sale presently standing in Court. In this latter regard, the Plaintiff was well protected; the "Halla Liberty" had been appraised and sold pendente lite, and US$12 million is now in Court pending crystallisation of claims against the vessel, of which this action represented but one out of some 30 in rem writs.

9. Against such a procedural scenario, Mr Kat relied, I think, upon one principal line of argument, which itself involved reference to forthcoming Notices of Motion due to be heard before this Court on 14th September 1998. In short, the point appears to be this. There is running through the divers cases spawned by the "Halla Liberty" an issue as to the validity of a mortgage over the vessel in favour of the Intervener in the present proceedings, one Donghwa Leasing Co. Ltd. ("Donghwa"), a Korean company also represented by Mr Sussex and those instructing him, albeit not, Mr Sussex tells me, upon this application. The point which troubles the Plaintiff herein, and which appears to form the crux of the present argument, is that if it be established that Donghwa indeed has a valid mortgage in its favour, then, subject always to prior claims of crew, bailiff and arrest expenses, such a mortgage debt, if established, would effectively scoop the pool in terms of the monies presently standing in Court, given its higher ranking in the table of priorities. If, therefore, a way could be found to determine the mortgage validity issue, and hence the 'priorities pecking order' at an earlier than usual procedural stage, this would obviously enure for the benefit of all unsecured creditors, who might be minded to pursue their claims to judgment if there was the likelihood of a reasonable recovery, but perhaps not otherwise; and it is this reasoning, I apprehend, which motivates the applications the subject of the forthcoming Notices of Motion, in both this and other proceedings, which motions seek the consolidation of a number of actions involving this vessel, together with the consolidated hearing of what are termed "Common Issues". As Mr Kat submitted, the Intervener in these proceedings, the alleged mortgagee, is not privy to the Slot Charter Agreement or to the arbitration provisions therein, and he maintained that there was good reason in principle to permit the in rem elements within the case which concern the rights in the vessel - of which the issues of mortgage validity and beneficial ownership of the vessel are the most obvious - to proceed untrammelled by the mandatory stay of the in personam element of the action; an additional and very obvious advantage, he said, would be a very substantial saving in the costs involved in determining such issues, since these were costs which could be shared by a number of parties instead of by the present Plaintiff alone. Descriptive comparison perhaps does not do justice to the argument, but that, at least, was the gist of Mr Kat's submission.

10. In support of his argument, Mr Kat placed significant reliance on the judgment of Robert Goff LJ (as he then was) in The "Tuyuti" [1984] QB 838, the source relied upon by the learned editors of Mustill and Boyd, 2nd Ed, at 406, to substantiate the proposition that :

"The proceedings will be allowed to continue for the purpose of adjudicating on matters falling outside the terms of the agreement to arbitrate, or to enable the plaintiff to obtain interim relief in aid of his claim which does not involve the court adjudicating on the merits of the claim, for example by the arrest of a ship as security for the claim."

11. Mr Kat also further cited in support the observations of Sheen J. in"The World Star", [1986] 2 Lloyd's LR 274 and [1987] 1 Lloyd's LR 452, although here, I think, he is in some difficulty, "The World Star" being a decision based squarely upon the provisions of section 26 of the Civil Jurisdiction and Judgments Act 1982, which statute is not in force in Hong Kong.

12. So far as The "Tuyuti" is concerned, and argument based upon the observations of Goff LJ (in particular, at pp.62-63), it seems to me that Mr Kat is reading more into that case than, at bottom, ultimately is justified. Lord Justice Goff's example of two claims being advanced in proceedings, only one of which is within the relevant arbitration agreement, so that such claim is stayed and the other claim allowed to continue unaffected, is not this case; in the present proceedings, the lis between the present Plaintiffs and Defendants is solely based upon the Slot Charter Agreement, and I do not accept the submission that intervention by Donghwa in these proceedings constitutes "a claim" or an "issue in the action". In the circumstances of this case the intervention by Donghwa, pursuant to the provisions of Order 75 rule 17, is little more than the formal registration of an interest in the sale proceeds of the "Halla Liberty", which funds, of course, currently stand in Court.

13. I further agree with Mr Sussex's contention that what was emphasised in the decision of the Court in The "Tuyuti" was that the "Rena K" exception continues to be good law in that, notwithstanding a stay of proceedings, the Court nevertheless is able to permit the security of the res to be retained for the purpose of execution of an ultimate judgment in rem to be obtained by means of an arbitration award, and that Goff LJ was not suggesting that all aspects of an admiralty action in rem can or should continue regardless of such a stay.

14. I therefore reject the suggestion that the observations of Goff LJ in The "Tuyuti" justify an exception to the normal form of 'blanket' stay order, with liberty to the Plaintiffs to apply to the Court to lift the stay in terms of any application for relief by way of interim protection (such as is specifically recognised by Article 9 of the Model Law) or, in this case, since there is already in place such interim protection with the monies standing in Court, possibly with regard to any matter which may arise in connection with the retention of, or dealing with, such security.

15. So I am against Mr Kat upon his interpretation of the effect of that case. Moreover, looking at the matter in the round, it is not easy to see why the issue of the validity of the mortgage (or, for that matter, the jurisdictional argument relating to the beneficial ownership of the vessel) requires to be dealt with in this action co-terminus with the stay in favour of the on-going South Korean arbitration. The mortgage validity issue is already directly raised in AJ60 of 1998, wherein Donghwa Leasing Co. Ltd. is the Plaintiff, the owners of the "Halla Liberty", the Defendants, and the Plaintiff in these proceedings, Dongnama Shipping Co. Ltd., is the Intervener. This is the mortgage action to which Mr Sussex made frequent reference during argument, in which such action an Amended Notice of Motion dated 2nd June 1998 is also returnable on 14th September 1998 requesting the hearing of the mortgage validity/beneficial ownership issues at the same time as the "Common Issues" in the intended consolidated actions, relief which substantially mirrors that prayed for in the Notice of Motion in the present proceedings returnable on the same date.

16. In this connection Mr Sussex submits that the logical place to try the validity of the mortgage is in this mortgage action, with pleadings to be drawn on the issue (including an Intervener's Defence), and that there is no conceivable justification, within established rules of admiralty procedure, to permit Dongnama to carve out such a novel form of stay along the lines now suggested in order to enable Dongnama to proceed with its Notices of Motion in both AJ400 and AJ60 of 1998 and in effect to anticipate any arbitration award that in fact it may obtain. He further submitted that the issues as to the validity of the mortgage and beneficial ownership could not begin to arise in the present proceedings until Dongnama had obtained an arbitration award in its favour in its dispute with owners under the Slot Charter Agreement; and until that stage (which it is possible might never transpire) these issues are merely 'blips' upon the litigation horizon, and academic 'blips' at that.

17. I agree with Mr Sussex. In my view the analysis points one way. The proceeds of the sale of the res are in Court, and the Plaintiff therefore already has the measure of interim protection which, upon established "Rena K" principles, is unaffected by the stay of the action. But the fact remains that in the present proceedings the Plaintiff does not get past first base unless and until it returns to this jurisdiction with an arbitration award in hand, and seeks to lift the stay in order to enforce what by then will have become an enforceable right in rem. To hold otherwise, in my view, would be to cut across the bows of the principle laid down in the "Rena K" wherein Brandon J. (as he then was) carved out an exception to the rule that a vessel cannot be arrested as security for an arbitration award by formulating the now well-established principle that the arrest (or the proceeds of sale) can continue to stand as security when a party ultimately is seeking to obtain a judgment in rem by means of such an award.

18. Accordingly, the obtaining of an arbitration award is the key. As Mr Sussex pointed out, if these proceedings had been the only action in rem against this vessel, as opposed to being but one of some 30 such actions, the Plaintiff could have had no legitimate interest in any other aspect of the res, save and except to ensure that the vessel, or the sale proceeds, were safely secured, and thereby to be placed in the position to return and enforce a judgment in rem to be obtained on the basis of an arbitration award, and it was solely because of the extraordinary procedural efforts which (as was accepted by Mr Kat) now have arisen in a bid to defray costs which otherwise would accrue to Dongnama that resistance to an otherwise straightforward stay application had been mounted. In my view, also, Mr Sussex may well be correct in surmising that the complex procedural framework now proposed may itself be based upon a misconception; priorities can be determined in any of the actions in rem against this vessel, and need not necessarily be determined in these proceedings at all, although the determination of such priorities appears to have influenced, in part at least, the procedural relief the subject of the forthcoming Notices of Motion; as Mr Kat succinctly put it, "a stay should not have the incidental effect of holding up the general allocation of priorities".

19. Be that as it may. At the end of the day I do not consider that there is any justification for departing from what is the usual order in stay applications pursuant to Article 8, namely a stay of the entire action : see, for example, the Court of Appeal decision in Tai Hing Cotton Mill Ltd. v. Glencore Grain Rotterdam BV & Anor., [1996] 1 HKC 363.

Decision

20. It follows from the foregoing that in my judgment the Order sought by the Defendants is correct. Articles 8 and 9 of the Uncitral Model Law plainly contemplate that there will be a blanket stay of proceedings, the Plaintiff herein having already obtained all the interim protection required, and I am not persuaded that the mandatory stay should be limited in the manner contended for by the Plaintiffs; and if I am wrong in that conclusion I should in any event have been minded to grant a stay of all rem aspects of this action pursuant to the Court's inherent jurisdiction. In my view, there is no justification for permitting the action herein to continue in the manner contemplated by the Plaintiffs, the broad effect of which, it seems to me, is effectively to drive a coach and horses through tried and tested Admiralty procedure.

21. Accordingly, I make an order in terms of the Defendants' Summons dated 20th May 1998. Out of abundance of caution, I make the costs order therein an order nisi, although this would seem to be eminently a case in which costs should follow the event.

22. I would add only that in acceding to the Defendants' application I do not consider my Order to be at variance with existing Orders of Waung J. in this action, Orders Mr Kat characterised in argument as constituting "a roadmap" for these proceedings. Waung J. made the directions the subject of his Orders prior to the issuance of the present stay application, and I do not read those directions as inhibiting or precluding the Order now made; indeed, there has been no suggestion in argument that this would be the case. As to the forthcoming Notices of Motion returnable before this Court on 14th September, I make no further comment. There had been passing reference in argument to the adjournment of the present application to the hearing of those Motions, but ultimately Mr Kat did not pursue the matter and was content that the Defendants' application be determined without further delay, a course which, by this judgment, has now been achieved.