BANQUE WORMS v. THE MAULE (THE OWNERS OF)

IN THE COURT OF APPEAL

1994, No. 187
(Civil)

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J U D G M E N T

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Bokhary, J.A.:

Introduction

1. This case concerns a ship of Cypriot registration, the Maule. And it arises in this way. The plaintiff is a French bank. It entered into a re-financing arrangement with three Cypriot shipowning companies in the same group. One of those companies, Division Shipping Co. Ltd, is the defendant. It is the owner of the Maule.

The loan agreement

2. The arrangement was embodied in a loan agreement dated January 20, 1993.

3. Under that loan agreement, the plaintiff made available to the three companies, as joint and several borrowers, facilities of up to US$13,255,000.

The security

4. The plaintiff took various forms of security. That included, from the defendant, a first priority mortgage (registered in Cyprus) on the Maule together with a deed of covenant supplemental to that mortgage.

An event of default

5. Clause 7.01(g) of the loan agreement deals with a drillship, the Foresight Driller II, owned by one of the borrowers, Zeeland Navigation Co. Ltd. It provided that if employment was not found for that drillship by December 31, 1993, Zeeland had to sell it within 60 days of a notice from the plaintiff to do so. Employment for the drillship was not found by that date. Such notice was given. But it was not complied with.

6. The defendant accepts for present purposes that such non-compliance constitutes an event of default under clause 9.01(c) and (r) of the loan agreement.

The loan agreement on the consequences of default

7. That brings us to Clause 9.02 of the loan agreement. It reads:-

"Upon the occurrence of an Event of Default:-

(a) the Lender, by notice to the Borrowers, may terminate the obligations of the Lender under this Agreement, whereupon the same shall be so terminated; and/or

(b) the Lender, by notice to the Borrowers, may declare the Loan, accrued interest thereon and all other amounts payable under this Agreement either immediately due and payable or payable on demand, whereupon the Loan, accrued interest thereon and all other amounts payable under this Agreement shall become immediately due and payable or (as the case may be) payable on demand by the Lender; and/or

(c) the Lender may take any other action, exercise any other right or pursue any other remedy conferred upon the Lender by this Agreement and/or by all or any of the Security Documents or by any applicable law or regulation or otherwise as a consequence of such Event of Default.

provided that in the case of the occurrence of an Event of Default referred to in Clause 9.01(g)(i), the Loan, accrued interest thereon and all other amounts payable under this Agreement shall automatically become immediately due and payable without the need for any demand from the Lender or notice to the Borrowers (or either of them) or other action of any kind whatsoever and the obligations of the Lender under this Agreement shall thereupon automatically terminate."

The arrest and then release

8. On August 24, 1994, while the Maule was in Hong Kong, the plaintiff issued a writ against the defendant in an admiralty action in rem. At the plaintiff's instance, the Maule was arrested on the same day. The ship has since been released. That was at the instance of the charterers. They came in as interveners, and obtained an order of release on December 26, 1994.

The indorsement of claim

9. The indorsement of claim in the writ merely stated that the plaintiff claims under the mortgage as security for the defendant's obligations under the loan agreement.

The motion to strike out

10. On September 1, 1994, the defendant took out a motion to strike out the writ or stay the action and to set aside the warrant of arrest.

The summons to amend

11. On the 9th of the same month, the plaintiff took out a summons to amend the indorsement of claim so as to make it state that what the plaintiff was claiming pursuant to the mortgage was "to exercise a right of sale as a result of an Event of Default".

The statement of claim

12. Between those two dates, on the 7th, the plaintiff delivered a statement of claim. The prayer in that pleading is for: (i) an order that the Maule be sold pursuant to clause 7(e) of the deed of covenant and/or Cypriot statutory law; and (ii) costs.

The order appealed against

13. By his order dated September 28, 1994, Barnett J ordered that: (i) the writ be struck out; (ii) the warrant of arrest be set aside; (iii) there be enquiry as to damages suffered by the defendant; (iv) there be liberty to apply for directions; (v) the summons to amend the writ be dismissed; (vi) the defendant's application for a sale pendente lite of August 26, 1994, be withdrawn with no order as to costs; and (vii) save as otherwise stated above, the plaintiff pay the defendant's costs of the plaintiff and the defendant's applications.

14. The plaintiff now appeals against the whole of that order. It seeks: (i) the reinstatement of the writ; (ii) leave to amend as indicated; and (iii) costs here and below.

The acceleration of the loan

15. Going back to August 1994, what happened was this: it was not until the 25th, one day after the writ was issued, that the plaintiff accelerated the loan under clause 9.02(b) of the loan agreement.

The second action

16. A route by which the plaintiff might obtain an order for the sale of the Maule is the one embarked upon by taking the very simple step of accelerating the loan under item (b) of clause 9.02 of the loan agreement. Indeed, that is the route mapped out by a writ issued by the plaintiff on September 5, 1994, in a second admiralty action in rem against the defendant (suing for US$6,228,961.61 as principal and interest due under the loan agreement for which the mortgage of the Maule is security).

The plaintiff's argument

17. But the plaintiff contends that there is an alternative route, namely, the one mapped out in the writ which has been struck out. The argument in support of that contention runs along these lines.

18. The alternative route is embarked upon by relying on item (c) of clause 9.02 of the loan agreement. That immediately brings one to item (e) of clause 7 of the deed of covenant which entitles the plaintiff to sell the Maule upon the occurrence of any event of default. And it also brings one to the Cypriot statute known as The Merchant Shipping (Registration of Ships, Sales and Mortgages) Law.

A matter of construction

19. In my view, the question of whether or not the alternative route exists must depend on the true construction of the contract since the statute does not impose upon contracting parties terms which they have not agreed between themselves.

The deed of covenant on the consequences of default

20. Clause 7 of the deed of covenant reads:-

"UPON the occurrence of any of the Events of Default specified in the Loan Agreement, then and in each and every such event the Mortgagee shall become forthwith entitled as and when it may see fit to put into force and to exercise all the powers possessed by it as mortgagee and chargee of the Ship and in particular:-

(a) To take possession of the Ship without having to tender accounts in respect of the management thereof to the Owner;

(b) To require that all policies contracts and other records relating to the Insurances (including details of and correspondence concerning outstanding claims) be forthwith delivered to such brokers as the Mortgagee may nominate;

(c) To collect, recover, compromise and give a good discharge for all claims then outstanding or thereafter arising under the Insurances of any of them and to take over or institute (if necessary using the name of the Owner) all such proceedings in connection therewith as the Mortgagee in its absolute discretion thinks fit and to permit the brokers through whom collection or recovery is effected to charge the usual brokerage therefor;

(d) To discharge, compound, release or compromise claims against the Owner in respect of the Ship which have given or may give rise to any charge or lien on the Ship or which are or may be enforceable by proceedings against the Ship;

(e) To sell the Ship or any share therein with or without prior notice to the Owner and with or without the benefit of any charterparty by public auction or private contract at such place and upon such terms as the Mortgagee in its absolute discretion may determine with power to postpone any such sale and without being answerable for any loss occasioned by such sale or resulting from postponement thereof;

(f) Pending sale of the Ship to manage insure maintain and repair the Ship and to employ sail or lay up the Ship in such manner and for such period as the Mortgagee in its absolute discretion deems expedient and for the purposes aforesaid the Mortgagee shall be entitled to do all acts and things incidental or conducive thereto and in particular to enter into such arrangements respecting the Ship her insurance management maintenance repair classification and employment in all respects as if the Mortgagee were the owner of the Ship and without being responsible for any loss thereby incurred;

(g) To recover from the Owner on demand any such losses as may be incurred by the Mortgagee in or about the exercise of the power vested in the Mortgagee under sub-clause (f) above with interest thereon at the rate prescribed in Clause 3.04 of the Loan Agreement from the date when such losses were incurred by the Mortgagee until the date of payment whether before or after any relevant judgment;

(h) To recover from the Owner on demand all expenses payments and disbursements incurred by the Mortgagee in or about or incidental to the exercise by it of any of the powers aforesaid together with interest thereon at the rate prescribed in Clause 3.04 of the Loan Agreement from the date when such expenses payments or disbursements were incurred by the Mortgagee until the date of payment whether before or after any relevant judgment.

PROVIDED ALWAYS that upon any sale of the Ship or any share therein by the Mortgagee pursuant to sub-clause (e) above the purchaser shall not be bound to see or enquire whether the Mortgagee's power of sale has arisen in the manner herein provided and the sale shall be deemed to be within the power of the Mortgagee and the receipt of the Mortgagee for the purchase money shall effectively discharge the purchaser who shall not be concerned with the manner of application of the proceeds of sale or be in any way answerable therefor."

Three things to be noted : the first

21. As to whether item (e) of that clause has the effect contended for by the plaintiff, the first thing I would note is this. The powers covered by the clause are those possessed by the plaintiff "as mortgagee and chargee" of the Maule. Delivering the advice of the Privy Council in Downsview Nominees Ltd v. First City Corporation Ltd [1993] AC 295, Lord Templeman said (at p.311) that a "mortgage, whether legal or equitable, is security for repayment of a debt". Our attention has been drawn to Lindley MR's statement in Santley v. Wilde [1899]2 Ch.474 at p.474 that " a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given.".

22. But it does not matter for present purposes whether Lord Templeman was identifying what mortgages normally involve or was laying down the limits of what can be done by way of mortgage transactions. The mortgage in the present case is security for repayment of a debt. That is clear from the terms of the mortgage itself. And that being so, it would be odd if the mortgagee could realise the security even though the debt is not due.

23. Such oddity looms even larger when the reason why the debt is not due is because the mortgagee has refrained from taking a very simple step which would have made it due. And since the present case concerns what the mortgagee is entitled to do upon the occurrence of an event of default, it is to be remembered that the very thing which entitled the plaintiff to take that step is just such an occurrence.

The second

24. Secondly, I turn to the events which the loan agreement provides shall constitute events of default. These are set out in items (a) to (s) of the loan agreement. They are many and varied. And their number and nature point strongly against a construction which means that upon the occurrence of any event of default a ship mortgaged to secure the repayment of a debt can be sold even though the debt is not due.

And the third

25. Thirdly, there is this. Realising of course that a party's cause of action must be complete before its writ is issued, the plaintiff has had to go so far as to contend that it could obtain an order for sale without ever having accelerated the loan. But, as I see it, if the loan is not accelerated, then there is no reason why the plaintiff should be entitled to repayment other than under the repayment schedule laid down in clause 4.01(a) of the loan agreement, which is as follows:-

26. Such repayment is of course wholly incompatible with what would have to happen - and which the plaintiff seeks to achieve - under a sale.

Result

27. We have yet to hear counsel on the discrete issue of whether an enquiry as to damages ought to have been ordered. Save as to that issue, I would dismiss this appeal.

28. I would do so on this basis. The loan was not accelerated until after the writ had been issued. But it is plain and obvious that the contract between the parties did not entitle the plaintiff to sell the ship without first accelerating the loan. Accordingly, the cause of action which the plaintiff seeks to rely upon did not exist at the time when the writ was issued. And that being so, the writ was liable to be struck out.

29. As can be seen, I have arrived at that conclusion on the basis of what the parties actually agreed rather than by reference to any limitation which the law may place on what people can bindingly agree. The present case provides no authority as to any such limitation. That may be of some comfort to the plaintiff whose primary motive for bringing this appeal notwithstanding the release of the ship is, we are told, its anxiety over what the judge said or may be taken to have said as to such limitation.

Litton. J.A.:

30. The judge formulated "the key issue" in the court below in this way:-

"The issue which has crystallised between the parties is whether or not a debt or sum must be due and payable to a mortgagee before the mortgagee can exercise a general power of sale under the mortgage".

Question of Law?

31. Looked at in the cold, this would seem to be a pure question of law: that is, whether there is some rule of law that prohibits a mortgagee from exercising a power of sale when no debt is due and payable, irrespective of what the security documents, read as a whole, actually say. In other words, that the ingenuity of man, or at least of lawyers, will never be able to devise such form of words as to achieve the result for which the bank strives in this case, since it is the law itself which frustrates such a result. It is this proposition, says Mr Thomas Q.C., counsel for the plaintiff bank, which has sent shivers of despair through banking circles in the City of London.

32. I doubt very much whether Barnett J's judgment (delivered on the day counsel's arguments were concluded) read as a whole can be fairly construed in that way.

33. It goes without saying that the first priority mortgage, deed of covenant and loan agreement form the contract between the parties in this case and, like all contracts, falls to be construed by the courts. I know of no rule of law that prohibits a mortgagor and mortgagee from contracting in the way contended for by Mr Thomas. Mr Ribeiro Q.C., counsel for the defendant, has not argued otherwise. The real question is: have the parties in fact done so?

Freedom of contract

34. It is of course a basic principle of the common law that parties to a contract are free to determine for themselves what primary obligations they will accept. When I say "determine for themselves" I mean of course, in the context of a case such as this, determine with the assistance of their respective lawyers. What, however, must be borne in mind is this: that we are concerned here with a ship mortgage and that the relationship of mortgagor and mortgagee is well-known to the law. From that relationship certain rights and obligations flow by necessary implication. As Lord Diplock said in Photo Production v. Securicor [1980] AC 827 at 848F:-

"... in practice a commercial contract never states all the primary obligations of the parties in full; many are left to be incorporated by implication of law from the legal nature of the contract ... But if the parties wish to reject or modify primary obligations which would otherwise be so incorporated, they are fully at liberty to do so by express words".

The legal nature of a mortgage

35. What, then, is the legal nature of the contract in this case? The mortgagor Division Shipping Co. Ltd. said, as have countless other ship mortgagors down the ages, in express terms in the mortgage deed dated 4 February 1993:-

"And for the purpose of better securing to the mortgagee the payment of such sums as aforesaid [the US$13,255,000] we do hereby mortgage to the mortgagee all One hundred and one hundredth shares of which we are the owners in the Ship ..."

36. By this, the bank acquired the rights of a mortgagee over the ship, but the rights of ownership remained with the mortgagor; as mortgagee the bank looks to the ship as security for the repayment of the debt but cannot exercise the rights of the owner until the debt has become due and payable: that arises by necessary implication from the words used.

37. If one looks at the deed of covenant one sees words to the same effect. Clause 3 of the deed says:-

"By way of security for repayment of the Outstanding Indebtedness the Owner as Beneficial Owner hereby mortgages and charges to and in favour of the mortgagee all its interest present and future in the ship".

38. In the light of this, and bearing firmly in mind that the purpose of a mortgage is primarily to secure the repayment of an indebtedness, how can it be argued that the power of sale can be exercised without the debt being due and payable?

Clause 7(e) of the deed of covenant

39. Mr Thomas relies heavily on clause 7(e) of the deed of covenant which enables the bank, upon the occurrence of any of the events of default specified in the loan agreement, to sell the ship with or without prior notice to the owner. But, as Mr Ribeiro points out, the rights specified in clause 7 are those exercisable by the bank "as mortgagee and chargee of the ship". How, upon a proper construction of the contract as a whole, can those rights be exercisable when no indebtedness has accrued?

The judge's approach

40. Barnett J said:-

"It is clear to me that an event of default other than non-payment does not itself give rise to a right to sell unless specifically provided for ...

Clause 7 of the deed of covenant does not confer any peculiar powers on the plaintiff. It simply asserts that the Plaintiff is entitled to exercise a mortgagee's powers and, to avoid doubt, spells out certain of those powers including power of sale. But implicit, I am satisfied, is that such powers must be exercised in accordance with general law and that law requires that a debt is first due before a power of sale can be exercised. The vessel remains, as was intended, security for the performance of other obligations. Quite simply an additional step is required between an event of default other than for no-payment and sale of the vessel" (emphasis added).

41. It seems to me, in the passage quoted above, that the judge was simply giving effect to the contract. By "the general law" he means nothing more than that the case law, summarised in the earlier passages of his judgment, establishes the proposition that a mortgage, generally-speaking, is security for the repayment of a debt.

The bank's cause of action

42. The contortions which the bank had to go through, by an artificial construction of the contract, can be illustrated by the peculiar indorsement in the writ of summons which, if the plaintiff's proposed amendment had been allowed, would have read:-

"The Plaintiff's claim to exercise a right of sale as a result of an Event of Default pursuant to a First Priority Cyprus Mortgage dated the 4th day of February 1993 which mortgage was granted by the Defendants over the ship or vessel "Maule" ... in favour of the Plaintiffs as security for the Defendant's obligations under a Loan Agreement dated the 20th day of January 1993 made between, inter alia, the Defendants and the Plaintiffs".

43. This is said to comply with Ord. 6 r2(1)(a) of the Rules of the Supreme Court as a "concise statement of the nature of the claim". What kind of claim is that? It asserts no violation of rights of any kind, and seeks no relief from the court.

44. It is said that such defects as there might have been in the writ have been cured by the service of the statement of claim where there is a prayer for relief: an order that the ship be sold. This invokes the judicial powers of sale, regulated by Ord. 75 r22. And when one looks at those Rules one sees that they contemplate there having been claims made against the ship; the order for sale is not a relief which is free-standing. Yet this is what, in effect, is asserted in this case.

Conclusion

45. In my judgment Barnett J came to the right conclusion. There was no cause of action when the writ was issued; the "claim" indorsed in the writ was not justiciable. The writ was rightly struck out. As to whether in the circumstances of this case the inquiry as to damages was properly ordered, we have yet to hear counsel. Subject to this the appeal must be dismissed.

Nazareth, V.-P.:

46. I agree that for the reasons given by Bokhary and Litton JJA., the appeal against the striking-out of the writ and setting aside of the warrant for arrest of the vessel must be dismissed. I would add the following.

47. Mr Thomas stressed the fears that have arisen that what Barnett J decided was that the "general law" prevented the parties to a ship mortgage from mutually agreeing to a power of sale where a debt was not due. Those fears seem to have arisen out of the following passage at pp.9 and 10 of the judgment:-

"Clause 7 of the deed of covenant does not confer any peculiar powers on the Plaintiff. It simply asserts that the Plaintiff is entitled to exercise a mortgagee's powers and, to avoid doubt, spells out certain of those powers including the power of sale. But implicit, I am satisfied, is that such powers must be exercised in accordance with general law and that law requires that a debt is first due before a power of sale can be exercised. The vessel remains, as was intended, security for the performance of other obligations. Quite simply an additional step is required between an event of default other than for non-payment and sale of the vessel."

However in the immediately preceding paragraph at p.9, Barnett J, having rejected the defendants' arguments in that regard, said this:-

"On the authorities, a power of sale can only be exercised when a sum is due. That must be distinguished from an enforcement of obligation as occurred in relation to the 'FD II'. It is clear to me that an event of default other than non-payment does not itself give rise to a right to sell unless specifically provided for. To trigger that right there must be a demand designed to accelerate payment so that the mortgagor knows what he must do to exercise his equity of redemption." (Emphasis supplied)

Here the judge was stating quite clearly that an event of default (other than non-payment) could itself give rise to a right to sell if specifically so provided in the contract.

48. Implicit in that statement is the acceptance by the judge that the law permits the parties to specifically provide for a right of sale. But that implication seems on its face to be inconsistent with the implication referred to in the later passage at p.10 of the judgment, i.e. that the mortgagee's powers spelt out, must be exercised in accordance with the general law. Mr Thomas characterised that apparent inconsistency "as an unhappy contradiction in the Judge's reasoning". If such it is, which must be open to doubt on the general law as the judge reviewed it in his judgment, I would yet sustain his conclusion on the proper construction of the contract arrived at by Bokhary and Litton JJA.

49. Accordingly, the appeal is dismissed save as to the order for an enquiry as to damages, submissions upon which were deferred and which the parties are at liberty to re-list for hearing.

50. We direct that if the appeal pertaining to the enquiry as to damages goes ahead each side lodges its skeleton arguments thereon seven clear days before the re-listed hearing commences.