The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 35 of 1996

 

Banque Worms Appellants

v.

(1) Owners of the ship or vessel "Maule"

(Cyprus Flag) and

(2) Compania Sud Americana Vapores S.A. Respondents

 

FROM

 

THE COURT OF APPEAL OF HONG KONG

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 24th February 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Hope of Craighead

Lord Hutton

Sir John Balcombe

  ·[Delivered by Lord Lloyd of Berwick]

 

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1. The central issue on this appeal is whether the plaintiffs, Banque Worms, were entitled to arrest the "Maule" pursuant to a mortgage dated 4th February 1993, whereby the vessel was mortgaged as security for the performance of the defendants' obligations under a Loan Agreement dated 20th January 1993.  The loan was repayable by instalments over five years.  The plaintiffs say that they were entitled to arrest the vessel under an express power in the Deed of Covenant dated the same day as the Mortgage.  The defendants say that they were not so entitled, because there was no instalment outstanding under the Loan Agreement on the day the writ was issued.  The plaintiffs' power to accelerate repayment of the loan was not exercised until the following day.

 

2. On 1st September 1994 the defendants issued a Notice of Motion to strike out the writ as disclosing no cause of action.  On  28th  September  1994 Barnett J. granted relief.  He ordered that the writ be struck out and the warrant of arrest set aside.  He also ordered that there be an enquiry as to damages for wrongful arrest.  The plaintiffs appealed.  The Court of Appeal held that the judge had been right to strike out the writ, but remitted the question whether there should be an enquiry as to damages to be determined afresh.  There is now an appeal to Her Majesty in Council.

 

3. At the material time the "Maule" was registered at the port of Limassol in Cyprus.  The mortgage was in the form required by Cyprus law, which is the same in all material respects as the Merchant Shipping Act 1894.  The 1894 Act is now consolidated in the Merchant Shipping Act 1995, but it is convenient to refer to the old section numbers.

 

4. The owners of the "Maule" are one of three shipowning companies in the same group which entered into the Loan Agreement with the plaintiffs.  One of the other shipowning companies owned a drilling vessel known as the Foresight Driller II ("FDII").  Clause 7.01(g) of the Loan Agreement provided that if the owners of the FDII had not secured employment for the vessel by 31st December 1993 on terms set out in the Loan Agreement, the plaintiffs should be entitled to give notice requiring the sale of the vessel within 60 days.  The owners of the FDII failed to secure employment of the vessel by 31st December 1993.  Accordingly the lenders gave notice on 3rd March 1994 requiring the vessel to be sold.  The 60 days expired on 3rd May 1994.  But the FDII had not been sold by that date.  Accordingly there was an Event of Default within the meaning of clause 9 of the Loan Agreement not only by the company owning the FDII, but also by the defendants because clause 7.01 required the defendants to procure compliance with their undertakings by the owners of the FDII.

 

5. Clause 7 of the Deed of Covenant provides:-

"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

...

 

(e)To sell the ship or any share therein with or without prior notice to the owner ...

 

6. 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 inquire 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 ..."

The three shipowning companies brought proceedings in the Commercial Court for a declaration that the lenders were not entitled to sell the FDII.  By a judgment given on 15th June 1994 in Zeeland Navigation Co. Ltd. v. Banque Worms [1995] 1 Lloyd's Rep. 251 Rix J. held that the notice given on 3rd March 1994 was valid, and the lenders were entitled to enforce the sale of the FDII.  The vessel was duly sold later the same month, and the proceeds of sale applied in reduction of the indebtedness under clause 8(i) of the Deed of Covenant.

 

7. Then on 24th August the plaintiffs issued a writ in the following terms:-

"The Plaintiffs' Claim 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' (Cyprus Flag) (formerly known as `Amer Deep') in favour of the Plaintiffs as security for the Defendants' obligations under a Loan Agreement dated the 20th day of January 1993 made between, inter alia the Defendants and the Plaintiffs."

The writ is clearly defective on its face since it does not disclose a cause of action.  In an affidavit sworn by a partner of Messrs. Deacons he explains that he intended to insert the words "to exercise a right of sale as a result of an Event of Default" after "The Plaintiffs Claim ...".  But he was not feeling well at the time, and he simply forgot to do so.  The vessel was arrested in Hong Kong at 19.00 hours on 24th August.

 

8. From the statement of claim served on 7th September 1994 it appears that the Events of Default relied on in support of the arrest of the "Maule" were the same as those relied on in respect of the FDII.  For reasons which do not now matter, it was not argued that the Events of Default had been cured or remedied by the subsequent sale of the FDII before the issue of the writ on 24th August.

 

9. As already mentioned there were no instalments outstanding under the Loan Agreement when the writ was issued.  It was not until the following day that the lenders gave notice to accelerate repayment of the loan.  On 26th August the plaintiffs issued a notice of motion for appraisement and sale pendente lite.  On 8th September the Time Charterers of the vessel applied to intervene in the proceedings.  On 22nd September they issued their own notice  of  motion  to  set  aside  the arrest.  On 26th September Barnett J. ordered that the vessel be released without the provision of alternative security, whereupon she sailed for Taiwan.  On 22nd February 1995 the loan was repaid.

 

10. Since the loan has now been paid off, and the mortgage discharged, there would not appear to be any remaining live issue between the parties, save as to costs, whether under the original writ, or the proposed amendment, or under a subsequent writ issued on 5th September 1994 claiming sums due under the Loan Agreement.  But Mr. Aikens Q.C.has persuaded the Board that there is still a theoretical claim by the borrowers for damages for wrongful arrest, and the case is in any event said to have caused some concern in Hong Kong, and elsewhere, among those who lend money on the security of ships.

 

11. Barnett J. held, on the authorities to which he referred, including The Cathcart (1867) L.R. 1 A. & E. 314 and Fletcher & Campbell v. City Marine Finance, Ltd. [1968] 2 Lloyd's Rep. 520, that a power of sale under a mortgage can only be exercised when a sum is due.

"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."

 

12. He went on to hold that clause 7 did not confer any special powers on the plaintiffs.

"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."

 

13. Barnett J. concluded that an additional step was required between an Event of Default (other than for non-payment) and the sale of the vessel, namely, the acceleration of the loan.

 

14. In the Court of Appeal Bokhary J.A. held, in their Lordships' view correctly, that the question depended solely on the true construction of the contractual documents.  He made no reference to what Barnett J. had called the "general law".  Nevertheless he agreed with the judge's conclusion.  He held that on the true construction of clause 7 it was "plain and obvious" that the lenders were not entitled to sell the ship without first accelerating the loan.  Nazareth V.-P. and Litton J.A. agreed.  In an elegant submission Mr. Aikens formulated the question for decision as follows:-

 

"Did the parties expressly agree that the lenders should have the power of sale in the event of a non-financial default, even though no sum of money was due under the Loan Agreement?".  On the face of it, clause 7(e) of the Deed of Covenant would seem to confer just such a right.  But Mr. Aikens drew attention to the words "entitled ... to exercise all the powers possessed by it as mortgagee".  He also drew attention to the language of the proviso:-

"Provided always that upon any sale of the ship ... pursuant to sub-clause (e) the purchaser shall not be bound to see or enquire whether the mortgagee's power of sale has arisen in the manner herein provided ..."

 

15. According to Mr. Aikens, this wording reflects the distinction which exists in land law between the power of sale arising under a mortgage and the exercise of a power of sale, once the power has arisen.  Thus by section 101(1)(i) of the Law of Property Act 1925 the power of sale arises when, and only when, a sum of money has become due under the mortgage.  But section 103 provides that the power of sale conferred by the Act shall not become exercisable until there has been a breach of some provision contained in the Mortgage Deed or in the Act.  By the same token clause 7 describes the powers which are exercisable on an Event of Default, but only if the power of sale has already arisen; and the power of sale does not arise (so the argument goes) until a sum of money is due under the mortgage.

 

16. There are a number of difficulties with this ingenious argument.  In the first place their Lordships doubt whether, despite the wide definition of "property" in section 205 of the Law of Property Act, it is possible to draw any useful analogy between mortgages under that Act and mortgages under the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law of Cyprus 1963.  As already mentioned, sections 31-38 of the Cyprus Act correspond broadly to sections 31-38 of the Merchant Shipping Act 1894.  Section 35 is identical in both cases.  There is nothing in section 35, or elsewhere, which corresponds to the distinction drawn in sections 101 and 103 of the Law of Property Act.

 

17. Secondly both sections 101 and 103 are concerned with powers conferred on the mortgagee under the Act.  There is nothing in either section which touches on or restricts express powers conferred on the mortgagee by the Mortgage Deed itself: see section 101(3).  In the case of ships' mortgages, the rights and duties of the parties are "overwhelmingly dominated by contract": see the chapter by Alison Clarke in Palmer and McKendrick's Interests in Goods (1993) at page 75.  Mr. Aikens accepts that if the contract is clear enough, an express power of sale may be exercised even though there is nothing due under the loan.  So the argument comes back to the true construction of clause 7(e) of the Deed of Covenant.

 

18. Their Lordships find it impossible to square Mr. Aikens' argument with the actual language of clause 7.  There is nothing in the first part of the clause, under which the mortgagee is entitled "to put into force and to exercise" the power of sale which suggests that the exercise of the power is to be dependent on anything other than an Event of Default.  There is no room for any implied requirement or condition that money should first have become due under the Loan Agreement.  Nor can any such requirement be extracted from the words "all the powers possessed by it as mortgagee" upon which Mr. Aikens so strongly relied.

 

19. As for the proviso, on which Mr. Aikens also relied, it seems to point against his argument.  Why should the purchaser be relieved of any obligation to inquire whether the power of sale has arisen, in the sense for which Mr. Aikens contends, but not whether an Event of Default has occurred?  Such a construction makes no sense.  When the proviso refers to the power of sale having "arisen in the manner herein provided" it is clearly and obviously referring to the Events of Default specified in the Loan Agreement.  It follows that the suggested contrast between the power of sale arising (when a sum becomes due) and the power of sale becoming exercisable (on the occurrence of an Event of Default) simply cannot be reconciled with the language of clause 7.  In the context of this Deed of Covenant the two mean the same thing.

 

20. Mr. Aikens also argued that the power of the lenders to sell without notice, when nothing is due under the mortgage, would impair the borrowers' equity of redemption.  It is true that if the lenders were to seek to sell without giving the borrowers sufficient notice to allow them to redeem the ship, they would thereby improperly defeat the borrowers' right of redemption.  In such a case any sale without notice would be unlawful and give rise to a claim in damages: Fletcher & Campbell v. City Marine Finance, Ltd.  But the mere presence of a power to sell without notice does not render the whole power invalid.  If, as in the present case, the borrowers are aware of the proposed sale, they can give seven days notice to repay under clause 4.03(a) of the Loan Agreement and thereby redeem the ship.  The mere possibility that the power of sale could be exercised in an unlawful manner without notice does not invalidate the power of sale in circumstances where the borrowers have a full opportunity to redeem.

 

 

21. For the above reasons their Lordships respectfully disagree with the Court of Appeal in their construction of clause 7.  The plaintiffs were not obliged to give notice accelerating repayment of the loan before exercising their express power of sale under that clause.  It follows that the writ, though defective on its face, was capable of cure by amendment, and should not have been struck out.

 

22. Their Lordships will humbly advise Her Majesty that the appeal should be allowed with costs before the Board and in the Court of Appeal.  But since there were a number of loose ends left open before the judge, and since in particular it cannot be said what order for costs the judge would have made if he had granted leave to amend the writ as, contrary to his view, he could and should have done, the costs before the judge will be remitted for his further consideration.

 

© CROWN COPYRIGHT as at the date of judgment.