UK: The "MOSCOW STARS" – Charterers Challenge Court's Power To Sell Cargo In Arbitration Dispute

Last Updated: 29 November 2017
Article by Simon Jackson and Elliot Boler

In a recent case1, the High Court was asked to determine the scope of the court's jurisdiction to sell cargo, an issue which was pertinent to an arbitration dispute over unpaid hire and other outstanding sums. In the process, the Court had to examine the wording of section 44(2)(d) of the Arbitration Act 1996 which sets out the Court's power to make an order for sale, and reviewed both the jurisdictional requirement of "good reason" for a sale under CPR 25.1 and the discretionary considerations.

Background

On 14 October 2016, the crude oil tanker "MOSCOW STARS" (the Vessel) was loaded in Puerto La Cruz, Venezuela, under a time charter between the claimant, owner of the Vessel, and the respondent charterer. The Vessel was ordered to discharge the cargo in Freeport, Bahamas.

Owing to repeated historic failures by the charterer to make payment of hire fees, the owner served notice of its exercise of a lien over the cargo, in October 2016, and again in November 2016, after which, at the order of the charterer, the laden Vessel sailed to Bullen Bay, Curaçao,.

The owner, subsequently, commenced arbitration in London against the charterer in respect of overdue hire fees, and other outstanding sums, totalling approximately USD7.7 million. In December 2016 and January 2017, whilst the cargo was subject to the contractual lien, it also became subject to arrest by the owner and other companies in the same corporate group (Sovcomflot) as security, following leave from the Curaçao Court

The owner then applied for an order to sell the cargo pursuant to section 44 of the Arbitration Act 1996, having received prior permission from the arbitral tribunal. The application was considered in the High Court before Mr Justice Males. The principal money claim had previously been heard by the arbitral tribunal and it was undisputed that any award, if granted, would likely take many months to enforce.

The issues

The three reasons submitted by the charterer for the dismissal of the application for an order to sell the cargo, were as follows:

  1. the Court did not have jurisdiction to order the sale of the cargo under section 44(2)(d) of the Arbitration Act 1996 (the Act);
  2. even if that power existed, it must be exercised within the scope of CPR 25.1(c)(v), the requirements of which were not met in the present case; and
  3. in any event, the Court should not grant the order in the circumstances.

Court jurisdiction

Section 44 of the Act sets out that the Court has, for the purposes of, and in relation to arbitral hearings, the power to make an order for "the sale of any goods the subject of proceedings" (section 44(2)(d)).

In the present case, the issue concerned whether the cargo was the "subject" of the arbitration proceedings. Males J agreed with the owner that, in the circumstances, for the Court to have no power to order the sale would be unsatisfactory, but held that this argument should not be the determining factor. The charterer submitted that the Court's jurisdiction was limited to circumstances in which the underlying proceedings were "about" the goods2 and where, in advance of a resolution of that dispute, there was no way of knowing which party was entitled to them, to sell or otherwise.

Males J held that, in the present case, until the underlying arbitration was resolved and entitlement to the hire claim established, it was not possible to say what should happen to the cargo. Put simply, a final decision would be required by the arbitral tribunal before either the owner could enforce its lien against the cargo, or the charterer would find itself in a position to obtain delivery. Thus, effectively, an impasse existed which required the assistance of the Court.

Males J noted that, even though the arbitration concerned unpaid hire fees and was not "about" the cargo, the outcome would determine what would ultimately happen to it. In dismissing the charterer's submission, he determined that there was sufficient nexus between both the cargo and the arbitral proceedings in circumstances where a contractual lien was being exercised over a charterer's goods as security, for a claim being advanced in arbitration.

Males J held that there was power for the Court to order a sale of the liened cargo pursuant to section 44 of the Act.

Scope of CPR 25.1(c)(v) and discretion of the Court

The power for making orders the court has in an arbitration case is the same power it has for the purposes of legal proceedings (as expressed in section 44(1) of the Act). In this case, the relevant power is found in CPR 25.1. This is the power to make an order "for the sale of relevant property which is of a perishable nature or which for any other good reason it is desirable to sell quickly" (CPR 25.1(c)(v)); the latter part being relevant in this case.

In considering whether there was good reason to order the sale, the Judge pointed to a number of factors raised by the owner which included: the length of time the cargo had been on the Vessel; the likelihood it would remain there for many more months during which the owner would not be receiving hire fees; the owner's operational costs during this period; the Vessel's forthcoming deadlines in order to meet SOLAS and Class requirements; the fact that the sale of the cargo would be for the benefit of both parties and would leave the owner free to engage its vessel in other operations; the lack of a viable alternative (for example, discharge into storage).

The Judge rejected the charterer's submission that the situation was of the owner's own making, and did not accept it as being a material factor against making the order applied for. Males J stated that neither party could have contemplated in October 2016 that the cargo was going to remain on board for over nine months, nor could the owner have contemplated that the charterer would fail to pay hire for that length of time.

The charterer also relied upon the delay of the owner in issuing its application. Males J deemed this criticism to be outweighed by other factors, noting the significant activity taking place in other arbitrations by Sovcomflot companies against PDVSA over the same period.

Lastly, the charterer made an open offer, just prior to the hearing, to carry out the sale of cargo itself, and hold the sale proceeds in escrow in London. Males J noted the risk that if no order for sale was made at this juncture, then it could drag out the position indefinitely. Additionally, Males J used this open offer as evidence of recognition, on the part of the charterer, that sale of the cargo was the "only viable course". Consequently, he deemed any further consideration of the charterer's submissions that a sale would be prejudicial to its position, unnecessary.

Comment

In giving his fully reasoned judgment, Males J reiterated that section 44(2)(d) of the Act did not provide power to the Court to make a free-standing order for sale as a form of independent relief, and that there had to be a sufficiently close nexus between the goods and the arbitration proceedings. This was held to be satisfied on the facts. Accordingly, the Court made an order for the sale of the cargo, the proceeds of which were to be held to the order of the Court pending the outcome in the underlying arbitration.

Also, it should be noted that since the Respondent charterer was the owner of the cargo, Males J emphasised that the decision did not extend to consider the position of the cargo being owned by a third party not involved in the underlying proceedings.

Footnotes

[1] Dainford Navigation Inc. v PDVSA Petroleo SA (The " MOSCOW STARS") (2017) - EWHC 2150 (Comm) (02 August 2017)

[2] Judgment of Lord Millett in On Demand Information Plc v Michael Gerson Finance Plc [2002] UKHL 13, [2003] 1 AC 368

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