The arrest of a ship to obtain security for a maritime claim in jurisdictions where this is permitted is a powerful weapon in the armory of a claimant in shipping disputes.  There has, however, been a concern that a claimant can no longer arrest a ship after it has obtained an arbitration award since the maritime claim it previously had has been lost, merged into the arbitration award.   This anomaly has now been addressed in the recent Hong Kong case of Handytankers KS v Owners of the "ALAS"[1].

Background

In the ALAS case, the claimant owners chartered a motor tanker to the defendant charterers for five years under a charter contract which contained a London arbitration clause. The charterers failed to pay hire on time in full and the dispute between the parties was referred to arbitration.  The owners obtained a final award in their favour in March 2013.  In April 2014, the owners invoked the Hong Kong court's in rem jurisdiction[2] and applied to arrest the charterers' vessels including "Dewi Umayi" (the vessel) as security for their claims.

In their application, the owners highlighted to the court that (1) the claim was put as one falling under section 12A(2)(h) of the High Court Ordinance, being a claim "arising out of any agreement relating to .. the use or hire of a ship" (i.e a maritime claim), and (2) the arrest was sought for the purpose of providing security for the anticipated judgment in rem in the action and not as a means of enforcing the award. It is worth noting that despite the final arbitral award being in the sum of US$9,599,464.30 by way of damages and unpaid hire, the total amount of security sought in the owners' application reflected their original claims of US$11,311,032, which was more than the award.

Citing previous English and Hong Kong cases, the charterers applied to the court to set aside or to strike out the arrest of the vessel on the grounds that the proceedings and her arrest were in the nature of an application to enforce the award, and therefore an abuse of process.  The charterers further submitted that the procedure of arrest is not available once the owners' claim has crystallised into a judgment or arbitration award and that the owners no longer had a maritime claim after the final award was issued.

Decision

The court rejected the charterers' submissions. It held that the owners were entitled to arrest the vessel because the plaintiff's claim as pleaded was for damages for breach of and for unpaid hire under the charter, and was therefore a claim under section 12A(2)(h) of the ordinance, not a claim on the award.  The court also rejected the charterers' further submissions, and followed the principle that a cause of action in rem does not merge into a judgment in personam, but remains available so long as, and to the extent that, the judgment remains unsatisfied. This principle also applies to arbitral awards.

Comment

A claimant who obtains a maritime award in its favour should now be aware of the option of arresting a ship in Hong Kong.  Such arrest will impose enormous pressure on the owner of the ship. This is because, if the owner wishes to release the ship, it must provide alternative security (e.g. in the form of payment into court, bail bond or guarantee in lieu of bail), which the claimant can quickly enforce against.

The reason why previous cases (such as The Bumbesti[3]  and The Chong Bong[4]) have failed is because they sought to arrest on the basis of the arbitration award, not the maritime claim. What should have been done was the opposite, i.e. arrest on the basis of the maritime claim. Great care needs to be taken when preparing the arrest papers, and this ought to be done by lawyers experienced in the arrest of ships.

This decision, while sensible on its face, seeks to divorce the original maritime claim from the eventual arbitration award. In such circumstances, a claimant who has only succeeded in its claims in part of the arbitration would be allowed to arrest a defendant's ship for the amount of the original claim in full, and this was exactly what happened in the ALAS case.  This may seem oppressive to a defendant, especially if the original claim substantially exceeds the arbitration award. While the defendant in the ALAS case did not seem to have an issue with this, it will be interesting to see how the court would reconsider such a situation when a defendant makes a challenge on this point in the future.