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Will an arresting party ever have to produce a cross undertaking to the ship-owner?

News / / Will an arresting party ever have to produce a cross undertaking to the ship-owner?

Natwest Markets plc (formerly RBS PLC) v. Stallion Eight Shipping Co. SA (MV Alkyon) [2018] [EWHC 2033 (Admlty)

In this case, the Owners of an arrested ship applied to the Admiralty Court for a cross undertaking against the Bank (the arresting party) to pay damages arising as a result of the arrest. The Court rejected the application on the basis that it would cut across and negate the Claimant Bank’s right to obtain a warrant of arrest.

The background facts

The Claimant Bank lent US$15.7m to the Owner of the MV Alkyon, a 36,056dwt bulk carrier, on which the loan was secured by mortgage. The Bank obtained a valuation showing that the market value of the vessel had fallen to US$15.25m, meaning that the Owners were in breach of the mortgage’s Value to Loan (VTL) ratio of 125%. The Bank notified the Owners that further security of US$1.75m was required.

The Owners did not provide security and disputed the valuation obtained by the Bank and, in due course, the Bank notified the Owners that an event of default had occurred. The Bank called in the loan and issued an in rem claim form against the Vessel, which was arrested in Newcastle in June 2018.

The Owners alleged that no event of default had occurred and that the Bank had acted in bad faith. The arrest was costing the Owners between US$3,500 to US$4,000 a day in lost profits and the Vessel was the Owners’ only income-producing asset.

The Owners were unable to produce security either by way of a P&I Club Letter of Undertaking (because P&I cover does not extend to a disputed claim under a loan agreement) or by a bond (because the Owners’ only asset was the vessel and that was already mortgaged).

The Owners applied to the Court for an order that the vessel be released from arrest unless the Bank provided a cross-undertaking in damages in the form usually given in freezing orders. This meant that if the Court later found that the arrest had caused loss to the Owners, the Owners could recover damages from the Bank without having to demonstrate wrongful arrest of the vessel.

The Admiralty Court decision

After having conducted a wide-ranging review of the relevant case law, the Court rejected the Owners’ application. It concluded that there was no past authority that supported the Owners’ position. Under English law, there is no right to damages in circumstances where an arresting party acts in good faith and without gross negligence, but is later unsuccessful in pursuing a claim.

Whilst the Court has the right to order a release of a vessel at its discretion, the power is normally exercised where alternative security is provided by the owner or where a second arrest is an abuse of process. There were few other instances of a vessel being released from arrest and, based on the authorities, it was not the practice of the Admiralty Court to require security in respect of the damages recoverable for a wrongful arrest. Furthermore, while the Court’s discretion was not restricted to these circumstances alone, the discretion to release had to be exercised in a principled manner.

One of the fundamental principles was that a claimant in rem can obtain a warrant of arrest as of right. When the Court receives an application for arrest that complies with the relevant procedural rules, then the rules dictate that "the court will issue an arrest warrant" – it is not within the Court’s discretion to refuse. To require a claimant to provide a cross undertaking was at odds with this right.

The Court also rejected the argument that arrest was analogous to a freezing order. Unlike an arrest, a freezing injunction was not obtainable “as of right” – it required the active order of a court. Furthermore, owners can avoid arrest by posting bail, whereas a defendant cannot protect itself in this way when a freezing order is made against him that may affect all his assets, not just one.

The Court acknowledged that the Owners would suffer a loss of profits due to the arrest, and a loss as a result of putting up security, but this was the case with every arrest. The circumstances of this case were unexceptional and did not justify any change in the Court’s traditional approach.

The Court also rejected the Owners’ argument that, because the Bank already had a mortgage over the vessel and various personal guarantees, an arrest was unjustified. Arrest was a way of realising the security and selling the vessel through the Court, the benefit of which was selling the ship on without any prior encumbrances.

The Court also found that the Owners had not provided sufficient evidence to establish that they were unable to provide alternative security. The Court could not, therefore, exercise the discretion it had to release a vessel where continued arrest would constitute an injustice.

On a more general note, the Court indicated that widespread cross undertakings of the type sought by the Owners would discourage parties from exercising their right of arrest. In addition, insurers might not as readily provide security for arrested ships because there would be greater uncertainty about whether an arrest would be maintained. Given these potentially far-reaching consequences, the Court thought that this was a policy matter for Parliament rather than the Court.

Comment

The case illustrates the vulnerability of ship-owners when faced with the arrest of their vessel. It is difficult for owners to demonstrate that an arrest is wrongful, nor is it usually possible to recover losses where the arresting party’s claim is unsuccessful. In the Court’s view, ships are mobile assets that may be within a jurisdiction for only a short period of time, and the right of arrest may be essential to claimants obtaining justice.

This case has been appealed. We will report on the appeal decision in due course.

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