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Court of Appeal confirms ship arrestor does not have to provide cross-undertaking in damages

24.01.2019 Maritime

Christian Dwyer

Christian Dwyer Global Head of Admiralty

Theo Hall

Theo Hall Associate

Stallion Eight Shipping Co SA v. NatWest Markets PLC (MV Alkyon) [2018] EWCA 2760

The Court of Appeal has upheld the Admiralty Court’s decision not to order an arresting party to provide a cross-undertaking in damages. In doing so, both the first instance and appellate court have confirmed the traditional position under English law, which is that there is no right to damages in circumstances in which an arresting party acts in good faith and without gross negligence, but is later unsuccessful in pursuing the claim.

The background facts

In brief, a mortgagee bank had arrested the MV Alkyon in Newcastle on the basis that there was an alleged event of default under the loan agreement that provided the Owners with the money to purchase the vessel. The Owners disputed that there was any event of default and were unable to provide alternative security that would allow the vessel to be released from arrest. They sought an order from the Court that the vessel should be released from arrest absent a cross-undertaking in damages from the Bank. The form of the cross-undertaking was intended to be similar to that normally offered in the case of freezing orders and would, if granted, allow the Owners to subsequently recover damages for any losses sustained as a result of the arrest without having to show wrongful arrest.

The Admiralty Court decision

The Admiralty Court declined to make the order. Provided that the Court had in rem jurisdiction and the arresting party had complied with the procedural rules, it could obtain a warrant of arrest “as of right” and there was no requirement that the arresting party must provide a cross-undertaking in damages. Damages could only be awarded against the arresting party where it was guilty of acting in bad faith or (effectively) gross negligence. Furthermore, the normal practice of the Court was to order release of the arrested vessel only when security had been provided to cover the claim, interest and costs on the arresting party’s reasonably arguable best case. In this case, such security had not been provided.

The Owners appealed.

The Court of Appeal decision

The Court of Appeal dismissed the appeal. The availability of arrest was the unique feature of a claim in rem and the courts needed to exercise caution before restricting or hindering access to this right. Furthermore, there was nothing unusual about the circumstances of this case. If the Owners succeeded in their arguments, this would result in cross-undertakings being given routinely in ship arrest cases. The costs of arresting would increase and this would deter the use or threatened use of the right of arrest, even in apparently meritorious cases. The Court added that arrest, or the threat of it, was an efficient way of obtaining security from a ship-owner. This could be discerned from the relatively small number of arrests that occurred. In addition, the current system allowed for the provision of security in most cases. Where security was not provided, it was often the case that the potentially high costs of arrest were often borne by ship-owners who were, or were soon to be, insolvent. In such cases, it was the claimant's interests that were most in need of protection.

In the Court of Appeal’s view, ship arrests and freezing orders were not analogous. A ship arrest was asset specific; it did not "freeze" or paralyse the entirety of the ship-owner's business in the same manner as a freezing order might do and the English courts had not in the past been sufficiently compelled by the comparison to suggest that a cross-undertaking should be required in the context of maritime arrest.

The Court of Appeal found that the case against an "overnight" change to the settled law and practice was overwhelming. Moreover, the Judge’s decision was a discretionary one and was made on completely standard facts and in circumstances in which the Judge had followed the usual practice. On that basis, the Court of Appeal saw no reason to interfere with his discretionary decision.

Comment

The Court of Appeal was inclined to the view that the law has remained as it is because there has been no significant pressure from the maritime industry for a change in the balance struck for so long between ship-owners and potential maritime claimants. It suggested that, so far as the maritime industry and the court procedural rules were concerned, there were already satisfactory arrangements and systems (such as the provision of security by P & I clubs) in place. Furthermore, while the Court of Appeal did not agree with the Admiralty Judge that any change to the current law required the intervention of Parliament or the Rules Committee, it stated that the courts would need a clear understanding of the industry implications before reconsidering the position on cross-undertakings.

Article authors:

Christian Dwyer Theo Hall