UK: Mortgagees’ Duties (Again)

The Bank had lent three companies (the "Borrowers") US$6 million for the purchase of three vessels. The security for the loan consisted of mortgages on the vessels and a guarantee from Acemex. The Borrowers were in default under the loan facility in a number of respects, which led to the Bank enforcing its security by arresting one of the vessels, the "Tropical Reefer", in Panama. At that time it was carrying a cargo of bananas, en route from Ecuador to Germany where they were to be sold. However, since the bananas were perishable cargo and the vessel was to be sold in Panama, they had to be discharged overboard at sea. The expense of discharging the cargo formed part of the costs of the arrest of the vessel and was to be deducted from the proceeds of sale of the ship. The owners of the cargo began proceedings in Panama for damages for breach of the contract of carriage. They claimed to have a maritime lien over the cargo and were therefore entitled to payment from the sale proceeds in priority to the Bank’s claim under the mortgage. Subsequently, the Bank demanded payment of sums due pursuant to the loan facility from Acemex as guarantor, in the Commercial Court in London. At first instance, summary judgment was given in the Bank’s favour. This was upheld in the Court of Appeal.

Acemex argued that, in accordance with his general equitable duties, a mortgagee must exercise his power of sale in good faith for the purpose of obtaining repayment and that upon sale he must take reasonable care to obtain a proper price. The Bank had not, however, taken reasonable care to obtain a proper price because had it waited until the vessel had arrived in Germany and arrested it there, it would have avoided the costs of discharging the cargo and the proceedings in the Panama courts that there was a maritime lien taking priority to the Bank’s mortgage.

Acemex’s second argument, which was specific to ship mortgages, shall not be dealt with here but was also unsuccessful.

The Court of Appeal cited various passages of the Silven judgment which included the principle that a mortgagee need only consider his own interests in deciding whether, and when, to exercise his power of sale. Furthermore, the mortgagee did not need to take into account whether the exercise or non-exercise of his power would cause loss or damage to the mortgagor and was entitled to sell the property in the condition in which he finds it without having to invest time or money in increasing its likely sale value. The Court therefore dismissed the argument that the arrest and sale of the vessel should have been deferred until the ship had reached Germany. There was no need to sell at the place where the best price was obtainable, although this may not be the case where there is no true market for the chattel concerned in the place it is to be sold. In this case, it could not be argued that there was no market for the sale of a ship in Panama as ships were often sold there. Finally, even if the Bank had been under a duty to consider whether the vessel should have been allowed to proceed to Germany, it could not be said to have breached that duty. The vessel’s P&I insurance cover had been withdrawn, making any such journey extremely risky. Also the Bank was already owed US$2 million, with little prospect of recovering such amount.

For all these reasons, the Court of Appeal agreed with the first instance decision that Acemex had no real prospect of establishing at trial that the Bank owed a duty of care to Acemex in deciding when to arrest the vessel and whether to release it from arrest. This case serves as a useful reminder of the limits upon the basic duties owed by a mortgagee and should be considered before a challenge is made.

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