INNSBRUCK INC. v. THE O'WNERS OF THE SHIP OR VESSEL "C.C. ORIENT"

IN THE SUPREME COURT OF HONG KONG

ADMIRALTY JURISDICTION

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BETWEEN

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DECISION

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1. This is an application by cargo owners, to whom I shall refer as "the interveners", for leave to intervene.

2. For the purpose of this application, the facts are that the vessel was on a voyage from the U.S.A. to the Philippines. During the voyage, the plaintiffs exercised their right as mortgagees under a first preferred mortgage and took possession of the vessel on or about 15th August 1984. When the vessel reached Osaka, the plaintiffs told all cargo interests including the interveners that all cargo remaining on board must be discharged. Under protest, the interveners discharged and transhipped their cargo thereby incurring considerable expense. The voyage having been thus terminated by the plaintiffs, the vessel proceeded to Hong Kong where it was arrested by the plaintiffs on 21st September 1984.

3. On 5th December, the plaintiffs obtained an order from me giving them both judgment and priority, after Bailiff's fees and expenses, first in respect of subrogated rights for crew's wages and, secondly, as first preferred mortgagees. Payment out of the balance of the proceeds of sale then in Court was also ordered.

4. There was immediate discussion between the solicitors for the plaintiffs and for the interveners. As a result, agreement was reached that some HK$1.8 million would be retained in Court pending this application. In the meantime, the interveners issued their own writ in rem on 2nd February 1985 in respect of their claim for breach of contract. Judgment has not yet been obtained in that action, but it seems unlikely that the owners of the vessel will contest the action. However, any judgment which the interveners obtain in their action is likely to be an empty one unless they can in some way establish priority over the fund still in Court.

5. The interveners therefore seek to intervene in this action, to reopen the question of priorities and to have varied the order made on 5th December.

6. It is well established that, even where an order for payment of a fund has been made, the court may, before payment has been made, revoke or vary the order. In The Markland (1871) L.R.3 Adm. & Ecc.340, Sir Robert Phillimore said, at p.343:

"With regard to the fact that the order for payment in this case was actually signed by me, I cannot hold that upon that ground the Court is functus officio. The Court has not parted with the funds; and, after it has been apprised that by so doing it would be inflicting an injustice upon parties who have a prior legal claim over those funds, it would be strange indeed if the Court had not power to prevent the execution of the order. I am clear that I have power, and ought to exercise it, to prevent the execution of that order, the effect of which would be to do a wrong to a party who has established priority in his claim."

7. In The Fairport (No.4) (1967) 1 Lloyd's Rep. 602, Karminski J., when referring to The Markland, said at p.604:

"An important part of that decision, as I understand it, is this: that where, as here, the Court has not parted with the fund it has not completed its duty of adjudicating between the parties. In other words, it is not functus officio, and where the result of doing nothing might be to inflict an injustice, then it must act."

8. At p.605, he said:

"But the main thing which impresses me is the duty of this Court not to abstain from further action when there is a fund in Court, and where the result of such abstention may be to create an injustice."

9. It was, therefore, not in dispute between the parties that, if the interveners can show a prima facie case that they will be able to vary the order of priorities and that they will suffer injustice, if this is not done, the interveners should be permitted to intervene.

10. Put briefly, Mr. Smith's argument for the interveners is that the plaintiffs have behaved unconscionably by terminating the voyage and causing the interveners additional expense. Consequently, by the application of equitable principles, the plaintiffs should not be entitled to rely on their first preferred mortgage, and the interveners should rank at least pari passu for distribution of the remaining fund.

11. In dealing with equitable principles, Mr. Sussex complains that the interveners have adopted a broad brush approach. It is not enough, he contends, that the interveners should complain about injustice; they must be able to rely upon a recognized and established principle of equity.

12. As to that, Mr. Smith says that the plaintiffs have behaved unconscionably in terminating the voyage and should not be allowed to derive a benefit from their action. That seems to ma to be a sufficiently established principle, but the question is whether Mr. Smith has grounds to rely upon it.

13. In the Leoborg ⁽¹⁾ necessaries men sought priority over first and second mortgagees for crew wages and repatriation expenses which they had paid. They submitted that the Court should on equitable grounds give them a priority superior to that of the mortgagees. In his judgment at p. 383 Hewson, J. said:

"This Court does exercise, and has exercised a wide equitable jurisdiction and there have been cases in the past where the Court has exercised it in case of this kind."

14. The claim failed because there was insufficient evidence as to how the payments to the crew came to be made.

15. In the Pickaninny ⁽²⁾ necessaries men intervened and sought priority for part of their claim because the expenditure was for repairs to the vessel, the benefit of which had accrued directly to the mortgagees. They had already obtained judgment for their claim in their own action. In his judgment at p. 537 Hewson J. said:

"It seems to me that there would have to be very strong reliable evidence before a Court could upset the normal run of priorities established by judgments over many years in the Admiralty Court."

and after referring to several cases went on:

"These cases, so far as they assist me in this particular motion, indicate that the Court must be slow to depart from the usual order of priorities. As I have already said, Mr. Sheen stressed upon me that where you adopt the benefit of something you also take the burden. Well, that is a statement of natural justice which, of course, is true. He says that it would be wholly inequitable to postpone a claimant who has expended his money directly to the benefit of the mortgagees if, at that time, the mortgagees knew that the mortgagor was insolvent and also that at that time the mortgagees had knowledge that the money had been so spent by the claimant."

16. The learned judge was not satisfied with the evidence before him and rejected the claim by the necessaries man. However, as Mr. Smith points out, in both this case and the previous case, the Court recognized the possibility of departure from the usual order of priorities on equitable grounds.

17. In the Lyrma ⁽³⁾ the Court had to determine priorities between salvors and a claim by master and crew for wages and other disbursements. At p. 33 Brandon J. said:

"It has long been an established principle that a maritime lien on a ship for salvage has priority over all other liens which have attached before the salvage services were rendered. The basis for the principle is an equitable one, namely that the salvage services concerned have preserved the property to which the earlier liens have attached and out of which alone, apart from personal remedies against the ship owners, the claims to which such liens related can be satisfied."

and later went on :

"The equitable basis of the principle appears to me to be sound. Even if I thought otherwise, however, the principle has been established for so long that I do not consider that I should be justified in departing from it, unless perhaps it could be shown that, on the special facts of a particular case, the application of the principle produced a plainly unjust result."

18. It is worth noting the argument in the Lyrma. The crew pointed out that the salvor's claim would absorb the whole fund. This result would conflict with the basis of the principle namely that salvors had preserved property out of which claims could be satisfied wholly or in part. The judge e rejected the argument. He said that a salvage award is made on the basis of the value of the salved property at the time and place of termination of services. The award is never the full amount of such value, otherwise there would be no benefit to the owners or other persons interested in the salved property. Unfortunately, the vessel in question was not sold expeditiously. The value of the vessel fell through being laid up, market conditions changed and the marshal's expenses mounted to a substantial figure. The benefit gained by the salvage was therefore lost.

19. The case, therefore, emphasizes that in admiralty proceedings injustice usually results to at least one innocent party. Mr. Sussex on behalf of the plaintiffs urges that the fact that the interveners may suffer injustice is no reason for disturbing the usual order of priorities which have been founded upon well-established equitable principles.

20. The difficulty which Mr. Smith faces is that, in each of these cases, the party seeking variation of the usual priorities had either taken some action or spent his own money so that the vessel itself or its value had been preserved. From these cases, Mr. Sussex seeks to draw the conclusion that the Court will upset the usual order of priorities, on equitable principles, only where a claimant has preserved or benefited the res. In the present case, says Mr. Sussex, there is no benefit to the res itself. Mr. Smith concedes this, but contends that the plaintiffs have maximised their interest at the interveners' expense. Because the plaintiffs required the interveners to discharge their cargo in Japan, the vessel when arrested was a more readily saleable commodity and the fund was not diminished by the possibility that the discharge of cargo after arrest may have become at least part of the Bailiff's expenses and taken priority over the plaintiffs' claim.

21. It is a well-established rule that, where upon arrest of a vessel cargo has to be discharged, the cargo owner must bear the expenses of discharge. See the Jogoo ⁽⁴⁾, the Myrto ⁽⁵⁾ and the Mingren⁽⁶⁾. However, Mr. Smith points out that there is no suggestion in any of these cases that the mortgagees had behaved inequitably. Further, he has drawn attention to a dictum of Cons, J. (as he then was) in the Mingren where at p. 163 he said:

"If he (the mortgagee) takes undue advantage in any particular circumstance, the court may take that into account against him when exercising its discretion."

22. As I have said, the basis of the interveners' complaint is that the plaintiffs as mortgagees in possession terminated the voyage in Japan. I must confess that I can see little distinction either in law or in practical terms between termination of a voyage by a mortgagee in possession, and arrest by a mortgagee. In either case, the mortgagee is seeking to assert rights under the mortgage and realise a financial asset in order to recover money lent. In either case, the cargo owner will be the loser because, if he wishes to recover his cargo, he will incur the expenses of discharge and transhipment.

23. Mr. Smith suggested that where a mortgagee arrests a vessel other than at its final destination, there might be a case for cargo owners to claim priority. This is not a point which has been taken, so far as I am aware, in previous cases where vessels have been so arrested. It is a point which I think would be unlikely to succeed. In any event, Mr. Smith did not seem to put any great faith in it.

24. In addition to their claim in rem, the interveners may also have an action in personam against the plaintiffs. Mr. Smith contends that by taking possession of the vessel, the plaintiffs put themselves in the shoes of the ship-owners and were bound to perform the contractual duties incurred by the ship-owners. The plaintiffs assumed personal responsibility for the fulfilment of all subsisting bill of lading contracts. Mr. Smith submits that the interveners should not be put to the trouble of pursuing this claim separately when the interveners undoubtedly have a good claim in rem and a better claim to the fund than the plaintiffs. However, Mr. Sussex says that, while the facts are notinissue for the purpose of this application, there will be very real factual disputes. The proper way to resolve these disputes is by separate action, not by intervention (although it was not mentioned, I have no doubt that any judgment so obtained by the interveners would not be empty).

25. The authorities cited by Mr. Smith all deal with situations where the res itself or its value was preserved. Further, it is an established principle that a cargo owner must discharge and tranship his cargo after arrest at his own expense. As I said, I cannot perceive any real distinction between arrest and termination of a voyage. I am, therefore, unable to say that the action of the plaintiffs constitutes taking an undue advantage of the interveners as contemplated by Cons J.. There is no suggestion by the interveners that the plaintiffs have been unnecessarily obstructive or caused problems other than those inherent in an unexpected need to discharge cargo. Accordingly, I see no prospect of the interveners being successful in disturbing the priorities which have already been determined.

26. Even if I am wrong about that, I would not in any event give leave to intervene. In the Markland and Fairport the parties had claims which carried priority on established principles. The interveners not only have no established priority but not even a judgment to which priority might attach. They do, however, have a cause of action against the plaintiffs in which, if the plaintiffs have acted wrongly, they will recover their loss. Thus, while there may be inconvenience, there will be no injustice.

27. The application is therefore dismissed with costs.

(1)     The Leoborg (No. 2) (1964) 1 Lloyd's Rep. 380

(2)     The Pickaninny (1960) 1 Lloyd's Rep. 533

(3)     The Lyrma (No.2)(1978) 2 Lloyd's Rep. 30

(4)    The Jogoo (1981) 1 Lloyd's Rep. 513

(5)    The Myrto (No. 2) (1984) 2 Lloyd's Rep. 341

(6)    The Mingren Development 1979 H.K.L.R. 159