England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		The Rolls Building Royal Courts of Justice
		21st June 2013

1. These applications relate to claims made as a result of the loss of the bulk carrier ATLANTIC CONFIDENCE built in July 1995 and registered in Valetta, Malta. The facts as they appear at this stage are these. On the 30^th March 2013, while the vessel was in a position off Masirah Island, Oman, a fire broke out in the engine room which the crew were unable to control. The master ordered the crew to abandon ship and, despite the endeavours of the salvors, the vessel sank with its cargo of steel in deep water on the 3^rd April. It appears that the likely cause of the loss was the ignition of a leak of oil from a hot exhaust from a generator causing subsequent thermal stresses to the plating or damage to the sea water pipes in the engine room. All these matters will be investigated in due course in arbitrations.
2. All parties before the court properly describe themselves as "claimants" and it is convenient to describe the parties as the owners, who are represented by Mr. Macey-Dare, instructed by Clyde & Co., the three sets of cargo interests, first the Enka and Bechtel interests represented by Mr. Nigel Jacobs QC, instructed by Holman Fenwick, who claim under bills of lading issued by or on behalf of the master for the owners; secondly the Al-Rashed interests, represented by Mr. Collett QC, instructed by Ben Macfarlane & Co., who claim under a further set of bills of lading, and, thirdly, Cosmotrade S.A., represented by Mr. Mark Jones, instructed by Jackson Parton, who claim as charterers under a time-trip charter from Gemlik in Turkey to Oman.
3. On the 23^rd April the Enka and Bechtel interests were granted a worldwide freezing injunction in support of an arbitration claim against the owners from Hamblen J in the sum of $10,108,424, plus interest and costs, an overall sum of $11.5 million. The former figure represented the vessel's tonnage limitation under the 1996 Protocol to the 1976 Limitation Convention. The claim was said to be worth more than that but these cargo interests accepted that the sum frozen in respect of the principal amount of their claim should be confined to the limitation figure. The owners' assets were identified as the proceeds of the Hull and Machinery insurance.
4. On the 8^th May the Al-Rashed interests made a similar application to Popplewell J in support of their arbitration claim. He granted relief in the sum of $18.5 million which was calculated by adding the Al-Rashed interests claim of $7 million to the sum enjoined by the prior order of Hamblen J. Popplewell J accepted the argument that the amount frozen did not need to be limited by reference to the vessel's tonnage unless and until the owners either established a Limitation Fund or raised limitation as a defence.
5. On the 10^th May Cosmotrade made a similar application in respect of its claim or an indemnity under the head charter against potential claims from sub-charterers, and Field J granted an order in the sum of $30 million, which included the alleged value of the entire cargo plus interest and costs.
6. On the 13^th May the owners issued a claim form seeking to limit their liability in respect of loss and damage under the Merchant Shipping Act 1995 and the 1976 Limitation Convention to the sum of £6,595,767 plus interest until the Limitation Fund was constituted.
7. There are two matters which arise today, first an application by the owners made on the 22^nd May under CPR Part 25(1)(b) for an interim declaration that they are entitled to constitute a Limitation Fund by the provision of a P&I Club guarantee for the purposes of CPR Part 61, and Article 11(2) of Part 1 of Schedule 7 of the Merchant Shipping Act 1995. In his second witness statement Mr. Mills-Webb explained that the owners sought an interim declaration rather than final declaratory relief by summary judgment because they could not be certain that they have identified all those in the class of defendants described in the Limitation Claim Form. He explained that it was just and convenient to grant interim declaratory relief as against all defendants on the basis that those defendants who were not notified of this application could set aside the order under CPR r.3.3(5)(a).
8. The second matter which arises today is consideration of whether the ex parte freezing injunctions should be continued as the cargo interests maintain or should be discharged as the owners argue.
9. It is convenient to start with the limitation issue. On the 13^th May, the same day that they commenced the Limitation Action, Messrs. Clyde & Co. wrote to the Admiralty Judge, Teare J asking him for permission to constitute a Limitation Fund by the provision of a Club guarantee, as had been done in THE RENA, Garnier Shipping Co. v. Mediterranean Shipping S.A. [2012] Folio 225, referred to in vol.2 of the White Book at note 2(D)-76.1. The editorial comment can be read as suggesting some inconsistency between treating a Limitation Fund as being constituted by a guarantee in a Club letter of undertaking and the terms of CPR r.61.11(8), and, in these circumstances, Teare J directed an oral hearing. The first question then is whether a guarantee from the owners' Club, The Standard Club, is effective to constitute a Limitation Fund for the purposes of CPR Part 61 and the 1976 Limitation Convention scheduled to the 1995 Merchant Shipping Act. It might seem surprising in today's world that it could be argued that a suitably framed guarantee in an appropriate amount from a creditworthy provider is not effective security, and therefore suitable to constitute a Limitation Fund, and none of the cargo parties has argued that it would not be. Nevertheless it seems to me that the Court must approach this as a question of principle.
10. The starting point is s.185(1) of the Merchant Shipping Act 1995, which provides:

"The provisions of the Convention on Limitation of Liability for Maritime Claims 1976, as set out in Part 1 of Schedule 7 (in this section and Part 2 of that Schedule referred to as 'the Convention') shall have the force of law in the United Kingdom."

Chapter III of the 1976 Convention is entitled "The Limitation Fund". Article 11, which is entitled "Constitution of the Fund" provides:

"1. Any person alleged to be liable may constitute a fund with the Court or other competent authority in any State Party in which legal proceedings are instituted in respect of claims subject to limitation. The fund shall be constituted in the sum of such of the amounts set out in Articles 6 and 7 as are applicable to claims for which that person may be liable, together with interest thereon from the date of the occurrence giving rise to the liability until the date of the constitution of the fund. Any fund thus constituted shall be available only for the payment of claims in respect of which limitation of liability can be invoked.

2. A fund may be constituted, either by depositing the sum, or by producing a guarantee acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the Court or other competent authority."

Article 14 in the same chapter provides:

"Subject to the provisions of this Chapter the rules relating to the constitution and distribution of a Limitation Fund, and all rules of procedure in connection therewith, shall be governed by the law of the State Party in which the fund is constituted."

Before the incorporation of the 1976 Limitation Convention into United Kingdom law limitation had been governed by s.503 of the Merchant Shipping Act 1894, as amended to reflect the 1957 Limitation Convention. That convention contained no guidance as to how and where the fund was to be constituted but left it to the domestic courts of each country: see Griggs, Williams & Farr, Limitation of Liability of Maritime Claims, 4^th ed. 2005, pp.65 to 66. In England the courts required a party wishing to constitute a Limitation Fund to make a payment into court. The question is whether the position has been changed by the 1976 Convention.

11. In his skeleton argument Mr. Macey-Dare has very properly drawn the court's attention to three pieces of material which are contrary to his argument: first, a passage in Griggs at p.69:

"There is nothing in the MSA to indicate that this situation has changed."

Second, a short passage in Fogarty, Merchant Shipping Legislation, second ed., 2004, para.15.183:

"A guarantee not acceptable in the United Kingdom for purpose of constitution of fund. United Kingdom legislation does not provide for the acceptance of guarantee or other security in lieu of a cash payment into court for the purposes of constitution of a Limitation Fund."

Thirdly, a decision in the Federal Court of Australia, Bard A.S. v. AbbPower Systems [1995] FCA 1602, where Sheppard J observed, at para.10:

"I should say in passing that it is to be noted that the fund may be constituted either by deposit or by the production of a guarantee 'acceptable under the legislation of the State Party'. There is no such legislation in force in Australia and it would appear that the fund must be constituted by deposit."

Mr. Macey-Dare might have added that other text books by other distinguished authors also cast doubt on the proposition that the fund can presently be constituted by a guarantee: see Jackson, The Enforcement of Maritime Claims, 4th ed., para.24.84, and Meeson & Kimbell, Admiralty Jurisdiction and Practice, 4^th ed., para.8.1.40. However, he submits that these observations should not dissuade the court from adopting the course he advocates.

12. The effect of s.185(1) of the 1995 Act and Article 11(2) of the 1976 Convention, he argues, is that a claimant in a Limitation Claim in England is entitled to constitute a Limitation Fund by means of a guarantee provided only that the particular guarantee proffered is acceptable under English legislation and provided that it is considered adequate by the English court. Article 14 allows English law to determine the rules relating to the constitution of a fund but only "subject to the provision of this Chapter", including Article 11(2). The proper interpretation of Article 11(2) is that contracting states cannot rule out the provision of security by way of guarantee. Thus any subordinate legislation which purports to have the effect of a blanket exclusion on guarantees must be read, if possible, as not having that effect, and if it cannot be so read it should be struck down as ultra vires. This approach, he says, he consistent with the travaux préparatoires of the 1976 Convention which suggests that guarantees were expected to be the normal method of constituting a Limitation Fund. Thus, for example, at p.290 of the commentary on the Hamburg Draft Convention:

"… Normally the security which has been put up (guarantees) does not carry interest and the actual interest payable from the constitution of the fund until the payment is made must be determined by national law."

He also referred to further passages which assume that a guarantee will be the usual way of establishing a Limitation Fund and the United Kingdom representative's express assent to a Swedish proposal along these lines.

13. CPR Part 61.11 sets out the rules in relation to limitation claims. Sub-rule 14 provides:

"When a limitation decree is granted the court -

(a) may …

(ii) order the claimant to establish a Limitation Fund if one has not been established or make such other arrangements for payment of claims against which liability is limited."

Sub-rule (18), which was the subject of the editorial comment in the White Book, provides:

"The claimant may constitute a Limitation Fund by making a payment in to court."

14. Mr. Macey-Dare argues first that there is a distinction to be drawn between the words "establish" and "established" on the one hand and "constituted" on the other in r.61.11 and para.10 of the Practice Direction. The word "constitute" is found in Article 11(2) of the Convention, the words "established" or "establish" are not. "Establish" he submits means constitute by a payment into court, whereas constitute includes payment into court and provision of a guarantee. It is implicit from r.61.11(13), which applies after the limitation decree is granted, that the court has power to order that a fund be constituted either by a payment into court or other means. Secondly, and necessarily as an alternative, he submits that the words "establish" and "constitute" are used interchangeably. In any event, he submits the word used in CPR 61.11(18) is "may", which is permissive, and the fact that express provision is made for the regulation of a Limitation Fund established by making a payment into court does not apply where the fund is constituted by a guarantee. The fact that nothing is said about the regulation of a guarantee is not material since any guarantee has to be considered adequate by the court, and no guarantee is adequate unless it covers the amount stipulated in CPR PD para.10.10 and 11. Finally, he submits that if CPR Part 61 and the Practice Direction are inconsistent with a fund being constituted by a guarantee (and submits that they are not), then by the terms of s.185 of the 1995 Act and Article 11(2) of the 1976 Convention the former must yield to the latter.
15. Leaving aside whether a P&I Club guarantee should normally be considered adequate security, the real question is whether any guarantee is "acceptable under the legislation" of this country. It seems to me that Mr. Macey-Dare is driven to relying on three possible ways in which a guarantee could be "acceptable under the legislation". (1) It is acceptable under the legislation which enacted the 1976 Convention into English law, in other words the Merchant Shipping Act 1995. The difficulty with this argument is that it is circular. The 1995 Act gives the force of law to Article 11, but Article 11(2) is clearly looking at legislation which applies specifically to guarantees. (2) It is acceptable according to "rules relating to the constitution and distribution of a Limitation Fund and all rules and procedure in connection with therewith" within the meaning of Article 14 of the Convention, including the CPR. I am not persuaded that Article 14 assists since it does no more than make clear that the procedural matters, such as the form of the security, are for the laws of the state party, nor, and despite the skilful advocacy of Mr. Macey-Dare, am I persuaded that the CPR enables the court to direct that the fund can be constituted other than by payment into court. The CPR only contemplates that, if the owner decides to constitute a Limitation Fund and thereby obtains the protection of Article 13, this must be done by a payment into court. Furthermore, the Practice Direction PD 10.10.10 to 13 are entirely directed to the constitution of the fund by payment into court. (3) It is acceptable under the general body of English statute law affecting guarantees such as the Statute of Frauds. This might seem a more promising avenue. However, the words of Article 11(2) do not say "enforceable under the legislation" but "acceptable under the legislation". If such a change to the long-established previous practice were to be made then one would expect clear words. As Mr. Jacobs observed in para.11(ii) of his skeleton argument, there is nothing in the 1995 Act or CPR Part 61 to justify reversing the previous well established practice. I would add that there is nothing that makes the provision of a guarantee "acceptable under the legislation" of this country.
16. I have therefore come to the conclusion that without a specific statutory provision that a guarantee is acceptable the rule remains that a fund may only be constituted by making a payment into court. In coming to this conclusion I have had in mind the further objections in paras.8 to 11 of Mr. Jacobs's skeleton argument and the difficulties identified in making an interim declaration that they are entitled to constitute a Limitation Fund by the provision of a P&I Club guarantee which have been identified by Mr. Jones in para.13 of his skeleton argument.
17. I hope from what I have said that I have made clear that consideration should be given to effecting a change in the law; and, in any event, since there is likely to be more than one view of the matter, I have decided to give permission to appeal.
18. I turn then to the second issue, whether the freezing injunction should be continued or discharged. The position has changed so far as the figures are concerned since all cargo claimants accept that the sum enjoined should not exceed the limitation figure of £6,584,920, plus a figure representing costs and interest. I have also been told by Mr. Macey-Dare that the Club undertakes to put up cash in order to constitute the Limitation Fund and that it is hoped will occur in the next 14 to 21 days.
19. The issues which remain are, first, whether the injunction should ever have been granted and, if not, should now be discharged, and, secondly, questions of detail on the amount of costs and interest which should be secured.
20. Turning to the first issue, Mr. Macey-Dare makes three points. First, the proceeds of the Hull and Machinery policy were not assets of the owners since they had been assigned to a mortgagee bank long before the injunction was sought. The owners have nothing but a worthless equity of redemption. It follows that unless the cargo interests can identify other assets the court had, and has, no jurisdiction to make the order. Secondly, and linked to the first point, there was no justification for applying ex parte under s.44(3) of the Arbitration Act. The application should have been made under s44(4) on notice. This would have given the judge a better opportunity to consider the underlying merits of the application. Thirdly, and in any event, there was no real risk of unjustified dissipation of assets as is required if such injunctions are granted.
21. So far as the first point is concerned, the cargo interests point to particular assets: (a) the balance of the Hull proceeds over and above the sum payable under the mortgage; and (b) a claim for $271,818 as hire due to the owners from Cosmotrade under the charterparty. So far as (a) is concerned, they accept the insurance proceeds have been assigned to the bank under the loss payable clause. However, the indebtedness is in the sum of $15.5 million-odd and the insurance proceeds are of the order of $22 million. Mr. Jacobs and the other counsel accept that there is a Loan Agreement with a provision for cross-collateralisation in favour of one of the owner's affiliates, Capella Shipping Ltd., and that on the face of it this balance of the Hull proceeds is payable to the bank to discharge Capella's indebtedness. However, they submit that this leaves the owners with a potential claim against Capella to the extent that it has discharged Capella's debts as envisaged by the 2010 loan agreement which gives rise to these obligations. So far as this point is concerned, it is sufficient to say that I am extremely doubtful whether this sort of potential claim is to be treated as an asset of the owners, particularly in the light of Mr. Macey-Dare's argument as to the true effect of clause 19.2. So far as (b) is concerned, Mr. Macey-Dare argued that the hire too had been assigned and was therefore not an asset of the owner. The trouble with this submission is that it is contrary to para.50 of his skeleton argument which accepts that the owners' claim for hire is an asset, but takes the point that it cannot be disposed of easily. The hire is also treated as an asset in the second disclosure affidavit made by Mr. Agayoglu on behalf of the owners.
22. So far as the second point is concerned, Mr. Macey-Dare submitted that there was no need for an urgent application because, as the Enka and Bechtel claimants must have known, there was no immediate prospect of the insurance being paid out quickly. They knew this because Clyde & Co. were instructed by a marines claim supervisor at AXA Corporate Solutions and AXA Corporate Solutions were the leading company subscribing to the Hull policy. I do not accept that this meant that Clyde & Co. were unjustified in submitting to the Judge that the application was urgent. They had received information that the brokers were being asked to get the claim paid quickly and it seems inherently likely, as Mr. Jacobs submitted, that the person giving instructions was not able to ask the person making the decisions on behalf of the leading underwriter what was going on. Whether she should have received information from the brokers is another matter. In any event, the position was, in my view, explained satisfactorily to Hamblen J.
23. Finally on the risk of dissipation of assets, it seems to me wrong to rely on decisions refusing permission. The case of Mediterranean Feeders L.A. v. Burnt Maering Schiffahrts (5^th June 1997) before Evans and Hobhouse LJs raises no point of principle and shows no more than the very experienced Lords Justices applying well established principles to the facts before them when refusing permission in a necessarily abbreviated judgment. The principles relating to the risk of dissipation are summarised conveniently in the judgment of Flaux J in The Nicholas M [2008] 2 Ll.Rep.602 at para.49.

"The relevant legal principle in determining whether for the purposes of granting or maintaining a freezing order a claimant has shown a sufficient 'risk of dissipation' is that the claimant will satisfy that burden if it can show that (1) there is a real risk that a judgment or award will go unsatisfied in the sense of a real risk that unless restrained by injunction the defendant will dissipate or dispose of his assets other than in the ordinary course of business. In Ninemia Maritime Corporation v. Trave Schiffahrt Sgesellschaft m.b.h. Co. K.G. (The Niedersachsen) [1983] 2 Ll.Rep.600, Mustill J, as interpreted by Christopher Clarke in TTMI Ltd. of England v. ASM Shipping Ltd. of India [2006] 1 Ll.Rep.401 at p.406, paras.24 to 27; or (2) that unless the defendant is restrained by injunction assets are likely to be dealt with in such a way as to make enforcement of any award or judgment more difficult unless those dealings can be justified for normal and proper business purposes; Stronghold Insurance Co. Ltd. v. Overseas Union Insurance Ltd. [1996] LRLR.13, pp.18 and 19, per Potter J, and Motorola Credit Corporation v. Uzan (No. 2) [2004] 1 W.L.R.113 at p.153, paras.142 to 146, where the Court of Appeal was applying the same principle in the context of disclosure of assets by the defendant."

In the present case this was a one ship company, now a no ship company, which is no longer trading and whose assets cannot be applied to any proper business purposes and in respect of which no Angel Bell type of application has been made. The owners' corporate capital is $2,000 and they have never filed and never been obliged to file any accounts, nor does the explanation of the trading history give any confidence that any assets will be dealt with for normal and proper business purposes.

24. For these reasons I decline to discharge the injunction although they will be reduced to take into account the matters to which I have already referred and the final matters to which I now come.
25. So far as the costs of the arbitration are concerned, it seems to me that these should be limited to £250,000 in respect of each of the three cargo interests represented today. There is no justification for an overall figure of £1.25 million in a case such as this.
26. So far as interest is concerned, I will hear the parties.
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