ROY DUBONGCO AND OTHERS v. The owners and/or demise charterers of the ship or vessel “FEARLESS I” or as may be describing the property against which the action is brought

HCAJ 197/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO 197 OF 2012

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Admiralty action in rem against:
the ship or vessel “FEARLESS I”
or as may be describing the property
against which the action is brought

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(Heard Together)

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J U D G M E N T

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Introduction

1.  This case raises one point of law which can be formulated in the following terms: whether a party who has no valid claim in rem against a vessel but has nonetheless arrested her should be reimbursed, out of the proceeds of sale of the vessel, for its own costs of arrest and the costs and expenses it paid to the Chief Bailiff for the arrest and maintenance of the vessel, in priority to all claims except those of the Chief Bailiff.

The Application

2.  There were two substantially identical applications before this court by the Intervener Centel Shipping Company Limited (“Centel”) in relation to the sale proceeds of two vessels viz Fearless I and King Coal previously under arrest and then sold by orders of the court in the present actions (respectively “HCAJ 197” and “HCAJ 198”).

3.  By notices of motion dated 23 May 2013 Centel sought orders for:

(1) reimbursement of the costs and expenses in the sum of HK$623,675.10 paid by Centel to the Chief Bailiff for the arrest and maintenance of “Fearless I” from 15 October to 13 December 2012;

(2) reimbursement of the costs and expenses in the sum of HK$650,000 paid by Centel to the Chief Bailiff for the arrest and maintenance of “King Coal” from 11 October to 13 December 2012;

(3) summary assessment of Centel’s own legal costs of and incidental to the arrest of both vessels;

(4) payment of the above out of the sale proceeds of the two vessels in priority to all claims except those of the Chief Bailiff for their commission, costs and expenses.

4.  The applications were opposed by another Intervener Commerzbank Aktiengesellschaft (“Mortgagee”), the mortgagee of the vessels.

The Brief Facts

5.  The facts of the case were uncontroversial and could be stated very briefly.

6.  On 8 October 2012, Centel, as the assignee of the master’s and crew’s wages from July to September 2012, issued admiralty writs in rem in HCAJ 171 & 174 of 2012 (respectively “HCAJ 171 & HCAJ 174”) against the vessels. Also on 8 October 2012, Maryville Maritime Inc (“Maryville”), the manager of both vessels, issued admiralty writs in rem in HCAJ 168 & 176 of 2012 (respectively “HCAJ 168 & HCAJ 176”) against the vessels.

7.  On 11 October 2012, Centel obtained a warrant of arrest against King Coal from Suffiad J. On 15 October 2012, Centel obtained a warrant of arrest against Fearless I from Andrew Chan J.

8.  On 26 October 2012, the Defendants (“Defendants”) obtained an order for release of King Coal in HCAJ 171 upon payment of US$ 215,000 into court. No payment in was made. On 29 October 2012, Maryville obtained a warrant of arrest against King Coal in HCAJ 168. Thus, King Coal was at the time under two arrests, one by Centel and the other by Maryville.

9.  On 5 November 2012, the master and crew issued admiralty writs in rem in the present actions against the vessels. Their claims were in respect of wages from October 2012 until they signed off from the service of the vessels, which took place on 22 and 23 November 2012 respectively.

10.  On 13 December 2012, Au J, upon the Defendants’ application, set aside Centel’s writs in rem and warrants of arrest in HCAJ 171 & HCAJ 174. Au J also ordered Centel to pay the Chief Bailiff’s fees and expenses in connection with the arrest of the vessels and the care and custody of them while under arrest.

11.  The learned judge gave two reasons for his decision: The King Coal [2013] 2 HKLRD 620.

12.  First, Centel’s claims as an assignee of the master’s and crew’s wages did not come within the admiralty jurisdiction of the High Court under section 12A(2)(n) of the High Court Ordinance, Cap. 4.

13.  Second, there was material non-disclosure, both on the law and on the facts, at the ex parte applications for the warrants of arrest. The learned judge said this at [23] – [25]:

“23. Firstly, I think insofar as the questionable nature of the jurisdiction is concerned in bringing the claim as mentioned above, there is material non disclosure in the following way:

(1) The applicant through its solicitor when appearing before the ex parte judge rightly drew to the attention of the learned judge the fact that O75 r5(10)(i) spelt out that it had to be a claim brought by the master or member of the crew. After doing that, she further cited to the judge certain paragraphs relating to the right of “subrogation to wages lien if payment made with leave of court” in Meeson, Admiralty Jurisdiction and Practice (3^rd ed) to apparently address the difficulty the plaintiff’s claim may face under s 12A(2)(n).

(2) However, in doing this, the solicitor did not at the same time highlight to the judge that (a) there is a distinct difference in principle between a right of subrogation (which is not the present case for the plaintiff) and an assignment (which is the present case), (b) there is apparently no authority to show that the principle relating to subrogation of maritime liens on wages could simply apply to an assignment situation, and (c) there is in fact a clear authority in Hong Kong which says that maritime lien for wages is not assignable (See: The Sparti [2000] 2 Lloyd’s Rep 618 at 623 per Waung J).

(3) In light of plaintiff’s own anticipated potential challenge to its right to arrest on the basis of lack of jurisdiction, in my view, the matters identified at subparagraph (2)(a), (b) and (c) above are clearly relevant to the ex parte application and should have been disclosed to the learned judge. The failure to do so amounts to material non-disclosure.

24. Second, given the circumstances of this case, it should also have been relevant for the plaintiff to disclose to the ex parte judge a number of facts. These include the fact that (a) Maryville, being the manager of the chartered vessel, the charterer and the assignee, ie the plaintiff, are all members of the same group of companies, (b) the owners had already issued notices to the charterer very close to the time of the issue of the writ that they (the owners) were going to terminate the charter very soon because of the charterer’s failure to pay the hire, and (c) the crew members and master had threatened to sign off from the service of the vessels because of the charterer’s failure to pay their wages.

25. I believe these facts would be relevant to the judge’s exercise of discretion in deciding whether or not to grant the writ of arrest, because these would give rise to a consideration as to whether there was an abuse by the plaintiff of the admiralty and arrest jurisdiction of this court.

(1) Had the charterer themselves discharged the obligation to pay the crew members’ wages, they would not have any right or claim (whether in rem or in personam) to look to the defendants as owners of the vessels for such payments.

(2) However, by not discharging their own obligation to pay the crew, the plaintiff (which comes from the same group of companies of the charterer) paid off the crew members. As a result, not only did the charterer continue to have the use and benefit of the service of the crew members (who had threatened to sign off their service for lack of payments) and thus the use of the vessels, the plaintiff would also have been able to mount an in rem claim against the defendants and secure such payment by arresting the vessels.

(3) The arrest was also made possible by the charterer by (a) disregarding the owner’s said notice to terminate the charter, and (b) specifically directing the vessel to come to Hong Kong after being given the notice.”

14.  There was no appeal from Au J’s decision.

15.  To be fair to Centel’s legal representatives (who also represented the master and crew in the present actions as well as Maryville in HCAJ 168 & 176), this court should mention that they had given some innocent explanation for the material non-disclosure in the affirmations filed in support of Centel’s present applications. For reasons which would become apparent later in this Judgment, whether or not the warrants of arrest were tainted by material non-disclosure and whether the non‑disclosure was innocent or deliberate, the outcome of the present application would be the same.

16.  On 14 December 2012, the Defendants obtained an order for the release of Fearless I but the vessel was re-arrested the same evening by the master and crew. At this point in time, Fearless I was under arrest by the master and crew while King Coal was under arrest by Maryville.

17.  On 21 January 2013, the master and crew entered judgment in default in the present actions.

18.  On 22 January 2013, the master and crew also obtained a warrant of arrest against King Coal.

19.  On 28 January 2013, the master and crew obtained orders for judicial sale of the vessels. It was expressly provided in the orders that inter alia the costs and expenses of and incidental to the application, together with their costs of arrest, be paid from the sale proceeds in priority to all claims except for the Chief Bailiff’s costs and expenses. On 2 April 2013, the vessels were sold and the sale proceeds paid into court.

20.  On 28 May 2013, the master and crew of the vessels obtained orders that their judgment sums and costs of the present actions be paid out of the sale proceeds.

21.  Also on 28 May 2013, upon Maryville’s application, this court ordered that:

(a)     The expenses incurred by the Chief Bailiff in respect of the arrest and maintenance of King Coal while under arrest between 14 December 2012 and 24 January 2013 in the sum of HK$458,101.90 be paid out of the sale proceeds of the vessel to the Chief Bailiff as part of the Chief Bailiff’s costs and expenses in HCAJ 198.

(b)     The costs and expenses of and incidental to the arrest of the King Coal incurred by Maryville be taxed if not agreed, and be paid to Maryville out of the sale proceeds of the vessel in priority to all claims except for the Chief Bailiff’s costs and expenses in HCAJ 198.

22.  Meanwhile, upon the Chief Bailiff’s requests, Centel had paid the Chief Bailiff’s expenses in arresting and maintaining Fearless I and King Coal up to 13 December 2012. Centel now claimed reimbursement of these expenses from the sale proceeds of the two vessels in priority to all claims except those of the Chief Bailiff on the basis that it was the first arresting party and was a producer of the sale proceeds for the general benefit of all creditors.

Discussion

23.  Before examining the authorities, this court would like to say a few words about the basics.

24.  The crucial differences between an admiralty action in rem and an action in personam are three-fold:

(i)     First, a claim in rem may be brought provided the ship, rather than the defendant shipowner or demise charterer, is within the jurisdiction - service of the in rem writ can be effected on the ship itself. On the other hand, a writ in personam must be served on the defendant itself and this can only be done if the defendant is within the jurisdiction, unless the claimant obtains leave to serve the writ outside the jurisdiction under RHC O 11.

(ii)   Second, it is only by proceeding in rem that a claimant is able to procure the arrest of the ship and thereby obtain security for his claim: the arrested ship may either be released by the court upon the defendant providing security for the claim or the ship may be sold and the proceeds of sale be retained by the court as security for all claims against the ship.

(iii)   Third, the in rem jurisdiction of the admiralty court is limited by inter alia the subject matter of the claim ie only those claims which fall within section 12A of the High Court Ordinance, Cap. 4, can be proceeded with as an in rem action. Those falling outside section 12A can only be proceeded with as an in personam action ‑ the claim of Centel as an assignee of the master’s and crew’s wages is a ready example.

25.  These features reflect the distinct juridical aspects of a claim in rem: as a means of establishing jurisdiction for a claim by service of the writ on the ship itself (or simply by arresting the ship) and as a means of obtaining security for a claim by arrest.

26.  The fact that only a claimant in rem can invoke the court’s jurisdiction to arrest and sell the arrested ship is also reflected in the various provisions of RHC O 75:

(i)     RHC O 75 r 5(1) provides that after a writ has been issued in an action in rem a warrant for the arrest of the property against which the action…is brought may, subject to the provisions of this rule, be issued at the instance of the plaintiff.

(ii)    RHC O 75 r 21(7) provides that an application to the Court under this rule (for judgment by default in an action in rem) must be made by motion and if, on the hearing of the motion, the Court is satisfied that the applicant’s claim is well founded it may give judgment for the claim …and may at the same time order the property against which the action …is brought to be appraised and sold and the proceeds to be paid into court.

(iii)   RHC O 75 r 22(1) provides that where in an action in rem against a ship the Court has ordered the ship to be sold, any party who has obtained or obtains judgment against the ship or proceeds of sale of the ship may apply to the Court by motion for an order determining the order of priority of the claims against the proceeds of sale of the ship.

27.  In the present case, if Centel did not have an in rem claim against the Defendants (or the vessels themselves) and could not invoke the admiralty in rem jurisdiction of this court, several consequences would logically follow:

(a)     It could not issue an in rem writ and could not effect service of the writ on the vessels – it could only issue an in personam writ and serve it on the Defendants.

(b)     It had no right to apply for a warrant of arrest against the vessels.

(c)     It had no right to participate in the sale proceeds of the vessels paid into court.

(d)     Its substantive claim as assignee of the master’s and crew’s wages and its claim for costs had no priority whatsoever.

28.  This court would proceed to examine the authorities relied upon by Centel and consider whether they compel a different conclusion.

29.  In The Falcon [1981] 1 Lloyd’s Rep 13, a ship was under successive arrests, first by the mortgagees and then by the cargo‑owners. The ship was sold in the mortgagees’ action. The question before the court was (1) whether the cargo-owners were liable to bear a share of the expenses incurred in maintaining the ship while under arrest and if yes, (2) whether the cargo-owners could recover such expenses from the sale proceeds of the ship.

30.  Sheen J answered the first question in the negative. The learned Admiralty Judge went on to explain, at page 17, the practice of the Admiralty Court regarding the expenses of arrest and maintenance of the ship under arrest:

“…A ship is usually arrested in order to provide security for the plaintiff’s claim. The extent of that security is measured by the net proceeds of the sale of the vessel. The amount of the net proceeds of sale is arrived at by deducting from the gross proceeds of sale the expenses of that sale and other expenses incurred by the Admiralty Marshal and the necessary costs of the plaintiff in whose action the ship was arrested up to the moment of arrest and all subsequent expenses of maintaining the arrest up to and including the completion of the sale of the ship...In my judgment, the proceeds of sale of a ship which has been sold by order of the Court should be used first to pay the Admiralty Marshal’s charges and expenses; secondly, to reimburse the plaintiff or plaintiffs who has or have incurred expense in preserving the property by arresting the ship and maintaining that arrest. Those expenses will of course include the necessary costs of that plaintiff up to the moment of that arrest.”

31.  In The World Star [1987] 1 Lloyd’s Rep 452, the ship was arrested at the behest of the plaintiffs charterers. The plaintiffs had, upon request, paid the Admiralty Marshal a total of £47,100 to cover his fees and expenses.

32.  Sheen J held that the plaintiffs were entitled to recover that sum in priority to all claims against the sale proceeds other than the claim of the Admiralty Marshal. The reason was that by arresting World Star, the plaintiffs had preserved a fund which, subject to priority of payment, was available to all those who were entitled to proceed in rem against the ship. Further, there would not be injustice to any claimant resulting from a payment out to the plaintiffs of the sum of £47,100 ‑ whichever claimant arrested the ship would have had to make that payment. Sheen J went on to hold that the plaintiffs were also entitled to recover their legal costs of arresting and maintaining World Star and such costs enjoyed the same priority.

33.  It should be noted that in both cases, Sheen J held that only bad faith would disentitle a plaintiff arrestor from recouping his costs and expenses of arrest and maintenance of the ship.

34.  In The Rubi Sea [1992] 1 Lloyd’s Rep 634, the applicants issued a writ in rem against Rubi Sea claiming US$121,641.25 for goods and materials supplied to her at the request of the owners. On the same day a warrant of arrest was issued and Rubi Sea was arrested. Subsequently, the vessel was released by the applicants but was immediately re‑arrested by the mortgagees. In due course, the vessel was sold, the Admiralty Marshal’s costs were deducted and the balance paid into court. The mortgagees applied for payment out but the applicants contended that they were entitled to recover their costs of arrest of the vessel in priority to the mortgagees. There being no suggestion of bad faith, Sheen J ordered that the applicants could recover their costs of the arrest in priority to all claims other than the Admiralty Marshal’s charges and expenses.

35.  InPatrick Stevedores No 2 Pty Ltd v The Ship “Turakina” [1999] FCA 1615, Tamberlin J held that the costs incurred by the plaintiff in successfully resisting the owner’s application to release the ship from arrest formed part of the costs of arrest and enjoyed priority of payment from the sale proceeds in court just after the Admiralty Marshal’s fees and expenses.

36.  The learned Judge observed at [16] that:

“The expression ‘costs of arrest’ is a wide one and is capable of encompassing the maintenance of the arrest against claims for release on the ground that there was no proper basis or jurisdiction for the arrest. If the vessel is released the security provided by the arrest of course comes to an end. Therefore, steps taken in order to keep the security on foot and defend the arrest so that the basic purpose of the arrest can be effected, is a cost of the arrest.”

37.  In all these cases, there was no question as to the locus of the plaintiff arrestor in bringing a claim in rem or its entitlement to invoke the admiralty jurisdiction of the court to arrest the ship. The plaintiff arrestor could justifiable be considered the producer of the fund in court ie the sale proceeds of the ship, for the benefit of all creditors. The same could not be said of a wrongful arrestor like Centel. The most which could be said of Centel was that it had held up the vessels within the jurisdiction, rendering them available for other legitimate in rem claimants to arrest them. It was really the legitimate plaintiffs/arrestors viz. the master and crew of Fearless I and Maryville who had produced the funds in court for the benefit of all creditors.

38.  None of these authorities support Centel’s position that even a wrongful arrestor was entitled to his costs and expenses in arresting and maintaining the ship as long as all the creditors derived some de facto benefit from the arrest. Such an extravagant proposition is not only unsupported by authorities - The Ile de Ceylan [1922] P 257 is in fact an authority against that proposition. 

39.  In The Ile de Ceylan, the sheriff had seized a ship under a writ of fi fa pursuant to a judgment debt, and taken it in his possession. The admiralty marshal subsequently arrested the ship under a writ in rem issued by the ship’s master for wages and disbursements. The master’s claims for wages and disbursements, which attracted a maritime lien and which would exhaust the sale proceeds, were owed before the date of the seizure by the sheriff. The ship was subsequently ordered to be sold. The sheriff claimed his fees and expenses to be paid out of the sale proceeds in priority to the claims of the master.

40.  Hill J dismissed the sheriff’s application. At page 258, the learned Judge gave his reasons as follows:

“The master, therefore, …had a maritime lien at the time the sheriff seized. A sheriff put in by an execution creditor can only seize that which is the property of the execution debtor. Therefore he could seize the ship subject only to any maritime lien which was attaching to it. To allow the sheriff to have a first charge on the fund would be, it seems to me, to say that the sheriff is entitled to disregard the maritime lien on the property seized, and, in effect, to say that the sheriff’s expenses are to be paid, not by the execution creditor, but by the master who has a maritime lien on the property of the execution debtor. The sheriff in my opinion has no such right.”

41.  In the view of this court, whether as a matter of principle or policy, a distinction must be drawn between the costs incurred by a lawful arrestor and those by a wrongful one.

42.  The underlying rationale for awarding priority to the costs and expenses of a lawful arresting plaintiff is that, since the general body of creditors stand to benefit from the acts taken and expenses incurred, it would be inequitable for the costs to fall entirely upon the particular creditor who happened to take the initiative. The usual example given is where a person who has supplied goods to a ship arrests her, but subsequently a mortgagee comes along and takes the whole of the sale proceeds by virtue of its priority: Meeson & Kimbell Admiralty Jurisdiction and Practice 4^th Ed. para. 6.35.

43.  The same cannot be said of a wrongful arrestor who does not have a valid claim in rem and should not have taken the initiative to arrest the ship in the first place. There is nothing inequitable about a rule which obliges a wrongful arrestor to bear the legal and financial consequences of its own action. To hold otherwise would only serve as a judicial encouragement for wrongful arrests.

44.  Moreover, in many common law jurisdictions, the legal threshold for a shipowner to obtain damages for wrongful arrest is notoriously high: Derrington & Turner The Law and Practice of Admiralty Matters paras. 7.76 - 7.79; Mobil Oil New Zealand Ltd v The ship “Rangiora” [2000] 1 NZLR 49, 65. Damages will only be awarded where the arresting party has no honest belief in his entitlement to arrest the vessel or has acted without any serious regard to whether there are adequate grounds for the arrest: The Kommunar (No. 3) [1997] 1 Lloyd’s Rep 22, 30. In that case, Colman J observed that it was in the latter sense that the traditional formulation of the requirements for damages, crassa negligentia or gross negligence, are used, as implying malice or its equivalent. That is also the position in Hong Kong: The Maule [1995] 2 HKC 769.

45.  To award the costs of wrongful arrest priority of payment from the sale proceeds in court will only give a wrongful arrestor enhanced immunity from the consequences of its own action. Again, it would serve to encourage rather than deter wrongful arrests.

Disposition and costs order nisi

46.  To conclude, there is no justification, whether as a matter of logic principle or policy, to accede to Centel’s applications. The applications are therefore dismissed.

47.  This court would make an order nisi that Centel should bear Commerzbank Aktiengesellschaft’s costs of and occasioned by the applications, to be taxed if not agreed, with certificate for counsel.