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    04:40 PM Wu Junneng (LLB (Hons), University of Bristol)

    Shipowner’s lien and interim measures of protection in aid of International Arbitration – Reflections from The Moscow Star and Five Ocean Corp v Cingler Ship Pte Ltd

        

    Introduction

    National Courts are empowered to order interim measures of protection in aid of international arbitrations where the arbitral tribunal is unable to act effectively. This power applies equally to both seats and non-seats of arbitration. In Singapore, such interim measures of protection include inter alia making orders for preservation, interim custody or sale of any property which is, or forms, part of the subject-matter of the dispute (s 12(1)(d) read with s 12A(1)-(2) International Arbitration Act (“IAA”)).

    In Singapore, the High Court in Five Ocean Corp v Cingler Ship Pte Ltd (PT Commodities & Energy Resources, intervener) [2016] 1 SLR 1159 (“Five Ocean Corp”) considered whether to make an order for sale of the cargo under s 12(1)(d) IAA, in the light of the Plaintiff’s and shipowner’s exercise of lien over the cargo.

    More recently, the English Commercial Court (for the first time) grappled with a similar issue in The Moscow Stars [2017] EWHC 2150 (Comm) (“The Moscow Stars”). In this commentary, by reference to the two aforesaid decisions, I propose to examine the circumstances under which an application for sale can be made, where a lien has been exercised over the cargo. This will then be followed by a discussion on the potential difficulties that may arise in such applications for sale.

    A shipowners’ lien

    A shipowners’ lien is a contractual right granted to the shipowner to retain possession of the cargo as security for unpaid charter freight or hire (per Grose J, Hammonds v Barclay (1802) 2 East. 227). As the lien is possessory in nature and is only enforceable against a party to the contract of carriage (see generally Time Charters (6th Edn., 2008) at [30.1]-[30.3]), a shipowner may only exercise a lien over cargo belonging to the charterer and not cargo belonging to a third party. However, an exception applies if the charterparty’s lien clause had been incorporated into the bill of lading (“BL”) issued to the third party (see The Chrysovalandou Dyo [1981] 1 Lloyd’s Rep 159 at 165).

     

    Facts and Findings of Five Ocean Corp and The Moscow Star

    Five Ocean Corp (Singapore High Court)

    In this case, the plaintiff time chartered the vessel Corinna from her owners. The plaintiff then voyage chartered the vessel to the defendants, who subsequently voyage chartered the vessel to PT Commodities & Energy Resources (“CER”). CER then shipped its cargo on the vessel and a BL was issued by the shipowner naming CER as shipper and an Indian Company as the notify party.

    Subsequently, the defendant failed to pay freight to the plaintiff. Thus, pursuant to a lien clause under the head charterparty between the plaintiff and defendant, the plaintiff and the shipowner each gave notice of lien and exercised lien over the cargo. The plaintiff also issued a notice of lien over sub-freight due from CER to the defendant.

    The plaintiff commenced arbitration thereafter. However, as the cargo on board was deteriorating and the vessel and crew’s well-being was at risk, the plaintiff made an application for sale of the cargo under s 12A(4) IAA read with s 12(1)(d) IAA. While the defendant did not oppose the application, CER as interveners objected. The threshold issue for the Singapore High Court was whether the plaintiff had a contractual right of lien over the cargo that was not in its possession; and the plaintiff also had to satisfy the Court that the requirements under s 12A(4) IAA are satisfied – namely, whether the plaintiff’s right to detain amounts to an “asset” within s 12A(4) IAA.

    First, in relation to the threshold issue, the Court held that it was incorrect for the plaintiff to claim to assert a contractual lien over the cargo because it was the shipowner who was in possession of the cargo. But, the Court observed that evidentially as a fact, until freight was paid, the plaintiff had (a) a right to postpone discharge and delivery of the cargo; and (b) an equitable or beneficial right derived from the shipowner’s exercise of its lien (as trustee for the plaintiff’s benefit) under the BL against CER (at [31]-[36]).

    Second, the Court held that the plaintiff’s right to detain amounts to an “asset”, which could be preserved through an order for sale. The Court was satisfied that the plaintiff’s combined rights in the cargo i.e. its right to postpone discharge and delivery of the cargo until it received payment and its derivative right in the benefit of the shipowners’ security amounted to an interest similar, though not equivalent, to a security interest and qualified as an “asset” within the meaning of s 12A(4) IAA (at [44]-[46], [55]).

    Accordingly, the Court held that an order for sale should be granted because the evidence showed that (a) the condition of the cargo, the living conditions of the crew and the safety of the vessel were dire; (b) there was a “non-negligible risk” that the value of the cargo would be diminished over time; and (c) there was evidence that the defendant was unable to pay the sums it owed to the plaintiff under the head voyage charterparty nor did CER appear to have the requisite funds or willingness to make payment into Court to obtain the release of the cargo.

     

    The Moscow Star (English Commercial Court)

    In The Moscow Star, the claimant was the shipowner of the vessel “MOSCOW STARS” and the defendant was a state-owned oil and gas company which had time chartered the vessel to ship cargoes of oil from Puerto La Cruz, Venezuela to Freeport, Bahamas. Subsequently, as a result of the defendant’s failure to make payment for time charter hire, the claimant shipowner exercised a lien over the cargo for sums due under the charterparty (at [3]).

    As the charterparty contained a London arbitration clause, the claimant then commenced arbitration against the defendant, claiming inter alia charter hire and outstanding sums due under the charterparty. In the interim, the vessel and its cargo continued to drift off Curacao and the claimant continued to incur cost for running the vessel. Furthermore, the vessel was scheduled to go into dry-dock for inspections and needed to be cargo-free (at [10]). Consequently, the claimant sought and obtained permission from the arbitral tribunal to apply to the English Commercial Court for an order for sale of the cargo pursuant to s 44(2)(d) Arbitration Act 1996 (at [6]).

    The defendant resisted the application for sale for three reasons. First, there was no power to order the sale of the cargo under s 44(2)(d) AA 1996 unless the cargo was the “subject” of the arbitral proceedings. Secondly, if there was such a power, it could only be exercised within the scope of CPR 25.1(c)(v) which requires either that the cargo is perishable, or that there is some other good reason why it should be sold “quickly”. Finally, the exercise of such a power would be inappropriate in all the circumstances.

    As the Court explained, an application for sale can only be made under s 44(2)(d) AA 1996 if the cargo comprises “goods [which are] the subject of the proceedings”. Thus, it had to be satisfied that the cargo is the “subject of the proceedings” (cf. charter hire) (at [19]).

    In reaching its decision, the English Commercial Court noted that they have “not been referred to any case in this jurisdiction [England and Wales]” in which the issue was whether the cargo ordered to be sold was the subject of the arbitration proceedings (at [21]). On the other hand, this issue had been dealt with by the Singapore High Court in Five Ocean Corp (see above) where the applicable arbitration legislation applied is similar (at [22]).

    Taking into account the decision of the Singapore High Court in Five Ocean Corp (at [23]), the English Commercial Court held that the cargo formed part of the subject of proceedings as there was a “sufficient nexus” between the cargo and the arbitration in circumstances such as the present (e.g. where a contractual lien is being exercised over a defendant’s goods as security for a claim which is being advanced in arbitration). The English Commercial Court reasoned that s 44(2)(d) AA 1996 is not to be construed narrowly, and it does not depend on whether there is formally a claim in the arbitration for a declaration that the claimant is entitled to exercise such a lien. It is sufficient that the lien is being exercised in support of the arbitral claim (at [32]).

    The English Commercial Court then held that an order for sale should be granted in the circumstances. By and large, it accepted the claimant’s arguments that the claimant will continue to be prejudiced because the cargo remained on board in addition to it not receiving charter hire. Also, the claimant would continue to incur expenses of operating the vessel and was faced with the approaching deadlines to comply with the SOLAS and Class requirements. Accordingly, if the cargo was sold, the cargo could be turned into cash for the benefit of all parties and the claimant would be free to employ the vessel (at [36] and [43]).

    Commentary

    First, one of the key issues that arose in The Moscow Stars was whether the cargo could constitute the “subject” of the arbitral proceedings, when in fact, it was the charter hire that was being claimed. Notably, under s 44(2)(d) AA 1996, the English Court’s power is limited to “the sale of any goods the subject of the proceedings”. The same issue (arguably) did not arise in Five Ocean Corp because under s 12(1)(d) IAA, the power of the Singapore High Court extends to “any property which is or forms part of the subject-matter of the dispute”.

    Nonetheless, the English Commercial Court’s decision is significant in the sense that it developed the test of “sufficient nexus” vis-à-vis the property and subject of the proceedings. In essence, the English Court adopted Chan J’s (as his Honour then was) approach in Emilia Shipping Inc v State Enterprise for Pulp and Paper Industries [1991] SGHC 36 (at [30]) that as the cargo formed the subject-matter (i.e. the lien) of the claims for freight, it follows that the cargo was the subject matter of the proceedings.

    This must be correct. The “sufficient nexus” test overcomes the lacuna in s 44(2)(d) AA 1996, which, on a plain reading, is unduly narrow. It is submitted that there can be situations where the main subject-matter of the proceedings may not be the cargo/property itself. However, while the “sufficient nexus” test is welcomed, the ambit of the test has to be properly defined and developed by the Courts. It is suggested that perhaps, a good starting point would be to query whether the cargo or the condition of the cargo will have an impact on the status quo of the parties to the dispute (see Halsbury’s Laws of Singapore at [20.083]).

    Furthermore, where the cargo is being used as a form of security in the arbitration proceedings, the value of the cargo would be crucial. This would be even more so where the goods in question are perishable or where the goods are of time-critical market value which may substantially diminish in the course of arbitration.  Accordingly, in situations where there has been an exercise of lien over the cargo, it must remain open to the Court to make an order for sale.

    Second, it is noteworthy that in both Five Ocean Corp and The Moscow Stars, the charterers were the owners of the goods. However, Males J in The Moscow Stars made a critical observation and opined that “there is no need to say anything about what the position would be if the cargo were owned by a third party not a party to the arbitration” (at [32]). While this dictum may appear rather unassuming, it does suggest that an application for sale made against cargo owned by a third party may not be as straightforward. The difficulties faced could be seen both in the context of shipping law and/or arbitration law.

    In the context of shipping law, Males J’s dictum could indicate that a shipowner might be unable to exercise a lien over cargo owned by a third party, unless the BL incorporates the chaterparty’s lien clause. Therefore, the court may have to be satisfied that the words of incorporation used are wide enough to incorporate the charterparty lien clause before determining whether it is appropriate to make an order for sale in the circumstances (see Bills of Lading: Law and Contracts (2000) at [18.19]).

    Next, in the context of arbitration law, the English Commercial Court’s observation also suggests that it might be problematic to bring cargo owned by third parties within the ambit of s 44(2)(d) AA 1996 in an application for sale.

    For instance, can goods owned by third parties become “subject of the proceedings” without the third party being part of the arbitral proceedings? It is argued that it would be unfair for a court to exercise its power of sale in support of international arbitration vis-à-vis cargo not owned by parties to the arbitral proceedings. Such a power, if exercised, would cut against the fundamental basis of arbitration as a consensual process (where party autonomy is key). Hence, it is crucial to ensure that, the charterparty’s arbitration clause is also incorporated into the BL (see Voyage Charters (3rd Edn., 2007) at [18.51]).

    Alternatively, one way of overcoming this difficulty is to include the third party as a party to the arbitral proceedings under the joinder provisions available in the arbitral rules. However, under different sets of arbitral rules, a third party may or may not be joined to the proceedings. Rule 7 of the 2016 Edition of the SIAC Rules allows for third parties to be joined to the arbitration proceedings. But, the joinder of third parties can only be made where the third party is prima facie bound by the arbitration agreement (Rule 7.1); or where all parties, including the third party to be joined, consents to the joinder (Rule 7.2; see also the observations of the Singapore Court of Appeal in PT First Media TBK v Astro Nusantara International BV and others [2014] 1 SLR 372 at [178]-[185] on Rule 24(b) SIAC Rules 2007, which is similar to Rule 7 SIAC Rules 2016). Similar provisions also exist under the 2015 Edition of the SCMA Rules. Rule 33.3 provides a similar power to the Tribunal, but only if all the parties (including the third party to be joined) consents.

    However, it can be expected that a third party shipper would not consent to being joined into the arbitration because this would then allow the arbitral tribunal or the court to exercise jurisdiction over their cargo when they might have prior purchase orders to meet. Furthermore, it is contended that an application for sale of cargo owned by a third party should not be allowed merely because there is a “sufficient nexus” to the arbitration. After all, if party autonomy is key and the role of the court is to assist the arbitral tribunal, it would be inappropriate for a Court to exercise its powers against non-parties to the arbitration agreement (see Russell on Arbitration (24th Edn., 2015) at [7-196]; see also Cruz City 1 Mauritius Holdings v Unitech Ltd [2014] EWHC 3704 (Comm) at [48]-[50]). Accordingly, the third party’s consent could act as a procedural safeguard against an expansive application of the “sufficient nexus” test.

    Conclusion

    The decision of The Moscow Stars is a first for the English courts in ordering a sale of cargo under exercise of lien in support of arbitral proceedings. While the issue did not arise in both The Moscow Stars and Five Ocean Corp, the English Commercial Court has indicated that the Court’s ability to assist in arbitral proceedings may ultimately be limited where third parties are involved. Perhaps this could be a timely reminder that general words of incorporation are insufficient to incorporate terms of the charterparty into the BL. Words of incorporation of the greatest possible width such as “all terms and conditions” or “all clauses and exceptions” should therefore be used. This would then provide a clear indication that the charterparty’s lien and dispute resolution clause (arbitration or exclusive jurisdiction clause) are intended to also apply under the BL.

    * This blog entry may be cited as Wu Junneng, “Shipowners’ lien and interim measures of protection in aid of International Arbitration – Reflections from The Moscow Star and Five Ocean Corp v Cingler Ship Pte Ltd”  (22 September 2017) (http://www.singaporelawblog.sg/blog/article/194)

    **The author is grateful to Ms Tan Tian Hui (LLB (Hons), BCL (Oxon)) and an anonymous referee for comments on an earlier draft of this article. The usual caveats apply. 

    *** A PDF version of this entry may be downloaded here 

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