Shipping & International Trade Law: Security And Arrest.

Hong Kong is a party to the International convention on the Unification of Certain Rules relating to the Arrest of Sea-going Ships 1952 (the ‘Arrest Convention 1952’).

Sections 12A – 12B of the High Court Ordinance (Cap. 4) are the key provisions incorporating the Arrest Convention 1952.

This means that as far as possible, the Hong Kong courts will construe the local legislative provisions relating to the arrest of vessels in rem consistently with the Arrest Convention 1952 (The Oriental Dragon [2014] 1 HKLRD 649, at [43], citing the House of Lords’ decision in The Eschersheim [1976] 1 WLR 430, at 436).

2. Which claims afford a maritime lien in your jurisdiction?

Though statute allows for the arrest of vessels where there is a maritime lien, as in England, there is no statutory definition of maritime liens (section 12B(3) of the High Court Ordinance, Cap. 4). Following English admiralty case law, the following claims give rise to maritime liens:

• damage caused by a ship;
• salvage;
• seaman’s wages;
• master’s wages and disbursements;
• bottomry and respondentia (both outmoded).

3. In any event, to what extent does a mortgagee have priority over claims for loss and damage which are not maritime liens?

The Hong Kong courts follow the same general rules of priority in admiralty claims as the English courts. In The Sparti [2000] 3 HKLRD 561, at 564, Waung J observed:
‘[T]he general order of priority for maritime claims usually seen in the admiralty courts of the United Kingdom and Hong Kong is as follows:

(1) Costs of arrest;
(2) Possessory lien of repairer;
(3) Salvage (maritime lien);
(4) Collision (maritime lien);
(5) Wages (maritime lien);
(6) Mortgage;

(7) Statutory rights in rem such as necessaries claims, agent claims, cargo claims, charterer’s claims, towage claims, etc.’

Therefore save for extreme circumstances, maritime lien claimants will usually rank ahead of mortgagees, who will in turn rank ahead of statutory right of action in rem claimants (for examples of such extreme circumstances, see The Eva (1921) 8 Lloyd’s Law Rep 315, The Fairport (1885) LR 10 PD 13 and The Veritas [1901] P 304).

As between mortgages, registered mortgages rank ahead of unregistered mortgages. The former rank by the date of registration between themselves, while the latter rank by the date of creation between themselves.

4. Is there any suggestion that an arrest claim might lead to the founding of substantive jurisdiction?

In admiralty proceedings, the Hong Kong courts will apply the same principles as those enunciated by the House of Lords in The Spiliada [1987] AC 460. In basic terms, where jurisdiction in Hong Kong has been founded as of right, a stay will only be granted where it is shown that there is another forum which is clearly or distinctly more appropriate than Hong Kong.

In the context of an arrest claim in Hong Kong giving rise to jurisdiction here, the res provides security for the claimant(s). This provision of security has been described as a unique feature of the admiralty jurisdiction (The Peng Yan [2009] 1 HKLRD 144, at [23]). As such, the burden on the party applying for a stay based on forum non conveniens grounds (ie, to show that there is another clearly or distinctly more appropriate forum than Hong Kong) where a vessel has been arrested in Hong Kong as of right will not be a light one. Possible ways for a person applying for a stay to discharge this burden may include (see The Ocean Friend [1981] HKLR 253):

• the plaintiff having brought the Hong Kong action in breach of a foreign jurisdiction clause/arbitration agreement; and/or
• the fact that alternative security (eg, payment into court) has been put up in the purported forum conveniens.

5. To what extent can sister/associated ships be arrested?

Hong Kong does not allow for ‘associated ship’ arrests in the wide sense that South Africa (famously) does.

‘Sister ship’ arrests are permitted in Hong Kong, and Hong Kong law governing such arrests is mostly in line with the rest of the common law world (compare, eg, section 21(4) of the Senior Courts Act 1981 (UK); section 19 of the Admiralty Act 1988 (Australia, Cth); and section 5(2)(b) of the Admiralty Act 1973 (New Zealand) – these legislative provisions all stem from the Arrest Convention 1952).

Only a subset of all the possible heads of statutory rights of action in rem give rise to the ability to arrest a sister ship (listed in section 12A(2)(e) – (f) of the High Court Ordinance, Cap. 4). It is not possible to arrest a sister ship in reliance on a maritime lien.
Assume that Vessel A is the ‘guilty ship’, ie, the ship in connection with which the claim or question arose, and Vessel B is the ‘sister ship’.

• The first limb of the sister ship arrest test requires that when the cause of action arose, the person who would be liable in personam must be one of the following: owner of Vessel A; charterer of Vessel A; or in possession/control of Vessel A.
• The second limb of the test requires that when the cause of action is brought (ie, when the writ in rem is issued), the same person who would be liable in personam must be the ‘beneficial owner as respects all the shares’ in Vessel B. In the context of a registered ship, ‘beneficial owner as respects all the shares’ usually just means the registered owner of the ship (Re Resource 1 (2000) 3 HKCFAR 187, at 209).

If both limbs are satisfied, then a right of arrest exists against Vessel B, ie, the sister ship.

See also The Decurion [2012] 6 HKC 1 at first instance and [2013] 5 HKC 125 affirmed on appeal.

6. Is it possible to arrest ships for claims arising out of (a) MOAs; (b) ship repair; and (c) ship construction contracts?

It is possible to arrest ships pursuant to a memorandum of agreement (‘MOA’). The relevant statutory right of action in rem is found in section 12A(2)(a) of the High Court Ordinance, ‘any claim to the possession or ownership of a ship or to the ownership of any share therein.’ A claimant must be careful, however, to ensure that the underlying contractual arrangements are such that he/she can still legitimately assert a right of possession or ownership over the vessel when invoking this ground of arrest. For example, where the MOA has already been terminated so that no proprietary right in the vessel remained with the buyer/claimant, the buyer/claimant cannot arrest (The Hong Ming [2011] 5 HKLRD 139). The flipside is if title in the vessel has been irrevocably divested to the buyer/defendant, in circumstances where the seller/claimant can no longer assert a right of ownership and possession over the vessel, the seller/claimant may not arrest under the MOA even in the event of non-payment by the buyer/defendant (The Amigo (Unreported, 8 October 1991, Supreme Court, Barnett J, 1991 Folio No. AJ115) a case involving a dishonoured cheque drawn by the buyer/defendant).

A claim based on ship repairs can give rise to a right of arrest, as can a claim based on a ship construction contract. Section 12A(2)(m) of the High Court Ordinance allows for arrests based on ‘any claim in respect of the construction, repair or equipment of a ship’.

A shipbuilder or repairer who remains in possession of a vessel may also be able to assert a common law artificer’s lien (as opposed to a maritime lien) over the vessel (Pacific Islands Shipbuilding Co Ltd v Don the Beachcomber Limited (No. 3) [1963] HKLR 515).

7. To what degree can an arrest be anticipated/prevented by the lodging of security?

Arrest can be anticipated by filing a praecipe for a caveat against arrest under Order 75, rule 6 of the RHC (Cap. 4A). The party seeking to prevent arrest must undertake to:

• acknowledge issue or service of any in rem writ in any action begun against the property described in the praecipe; and
• give bail or pay into court a sum not exceeding the amount specified in the praecipe in the action within three days after receiving notice that the action has begun.

A caveat against arrest does not prevent a plaintiff from issuing or executing a warrant of arrest per se. Rather, the caveat works by making a plaintiff who arrests a vessel despite the existence of a caveat, and without good and sufficient cause, liable for damages to the defendant by reason of wrongful arrest (Order 75, rule 7 of the RHC).

A caveat against arrest entered upon the application of a shipowner does not extend to cover a claim in rem against the same vessel where the person who would be liable in personam is the demise charterer (The Jian She 33 (Unreported, 28 March 2001, Court of First Instance, Waung J, HCAJ 221 & 232/2000 & HCAJ 7/2001)).

8. If a vessel can be arrested, by what means can the claim be secured? Specifically:

Normally, the arrested vessel or her proceeds of sale represent(s) security for the plaintiff’s claim. This has been described as the ‘essence and purpose of admiralty jurisdiction in rem’ and this right to security is a statutory right for the plaintiff. As such, a defendant cannot demand that the action proceed in the absence of security as that would be tantamount to forcing an unsecured in personam action upon the plaintiff (The Al Dhabiyyah [1994] 4 HKC 414, at 422).

1. Can an arresting party insist on a cash deposit or a bail bond?

It is open to the in personam defendant not to provide alternative security and allow his/her property to remain under arrest and possibly be sold.

Accordingly, an arresting party cannot usually demand that the in personam defendant provide a cash deposit or a bail bond. The exception is where the in personam defendant or its solicitors have given an undertaking to put in bail when applying for a caveat against arrest. Breach of a written undertaking can result in committal for contempt of court.
Where the in personam defendant does seek the release of its res, he/she needs to obtain the consent of the arresting party by giving bail to the arresting party’s satisfaction. In such a scenario, the arresting party is entitled to insist on bail or payment into court. For practical reasons, though, it is commonly the case that an arresting party will be content with a guarantee or undertaking given out of court by the defendant’s bank or P&I club.

2. Will the court accept a letter of guarantee from a protection and indemnity club?

Whether an out of court letter of guarantee offered by the defendant’s P&I club is acceptable is for the plaintiff to decide. Unlike bail and payment into court, which are both given by the defendant to the court, a letter of guarantee is a promise given by the defendant’s bank or insurer to the plaintiff. Therefore the party offering a letter of guarantee is not immediately answerable to the courts, in the same way a party providing bail is. The courts will not enter into the arena and adjudicate upon competing proposals for the terms of a guarantee, as it has never been the function of the courts to write contracts for the parties (The Alacrity [1994] 2 HKC 659).

If the plaintiff and defendant cannot come to terms on a letter of guarantee, the defendant should put up bail or make a payment into court to secure the release of the res.

3. Does any guarantee have to be provided by a domestic bank or other acceptable guarantor?

In the case of a bail bond given on behalf of a defendant to the court to secure the vessel’s release, the court will examine the adequacy of the security and creditworthiness of the issuer of the bond in deciding whether to accept or reject the bail bond (see, eg, The Hua Tian Long (No. 2) [2008] 4 HKLRD 740).

As mentioned above, an out of court letter of guarantee given on behalf a defendant to the plaintiff is for the plaintiff to scrutinise. If the plaintiff adopts an overly relaxed assessment, then he or she takes on the surety’s credit risk.

9. Briefly summarise the further security options: eg, freezing orders, attachment of debts due to the defendant, etc.

Besides the arrest in rem for admiralty claims, Hong Kong law recognises four other security interests proper: the mortgage; the charge; the common law lien; and the pledge.
A creditor may also protect himself/herself with the following mechanisms and quasi security interests: rights of set-off; Quistclose trusts; Romalpa clauses; conditional sales; hire-purchase agreements; finance leasing arrangements; and negative pledge clauses.
Post-judgment enforcement options for a creditor include: Garnishee orders; charging orders; and writs of fieri facias. They serve the following functions:

• garnishee orders can be used to attach debts owed by third parties to the judgment debtor (ie, the judgment debtor’s receivables). Commonly, garnishee orders are used against bank accounts in credit held by the judgment debtor;
• charging orders can be used to attach the judgment debtor’s land and shares; and
• writs of fieri facias can be used against the judgment debtor’s chattels. It is possible to seize the judgment debtor’s vessels using writs of fieri facias so long as the bailiff is satisfied that the vessel in question belongs to the judgment debtor.

A plaintiff can also apply for a Mareva injunction pre-judgment so as to prevent a defendant from frustrating the claim (and eventual/possible judgment) by dissipating its assets. Section 21M of the High Court Ordinance (Cap. 4) further allows an applicant to freeze a debtor’s assets even in the absence of substantive legal proceedings in Hong Kong. Generally speaking, both types of freezing injunctions require the applicant to show:

• a good arguable cause of action against the debtor;
• that the debtor has assets within Hong Kong; and
•  a risk of dissipation of assets.

While it is possible to Mareva a ship or her proceeds of sale (see, eg, The Oriental Dragon [2014] 1 HKLRD 649), doing so would not elevate an unsecured creditor to the position of a preferred creditor in the way an admiralty action in rem would (The Cretan Harmony [1978] 1 Lloyd’s Rep 425). This is because the Mareva injunction is purely a type of in personam relief and is not a true security interest.

Shipping & International Trade Law