The Federal Court of Australia recently rejected an attempt by a dissatisfied newbuild ship buyer to proceed in rem against another vessel under construction as security for the buyer’s claim against the shipbuilder (i.e. as a surrogate or sister ship).1 The case considers whether/when a newbuild vessel under construction is a “ship” under Australian admiralty law and the concept of ownership for the purpose of surrogate ship claims.

Facts

In 2010, Austal Ships (Austal) delivered to Virtu Fast Ferries (Virtu) the JEAN DE LA VALETTE, a ferry to be operated between Italy and Malta carrying 800 passengers and 156 cars. After delivery, Virtu alleged that the ferry had latent defects caused by poor welding/workmanship. Virtu commenced arbitration against Austal in London alleging breach of contract.

The CAPE LEVEQUE was a customs patrol boat under construction by Austal for the Commonwealth Government. The CAPE LEVEQUE had been launched, but not yet delivered to the Government. In February 2015, Virtu commenced arrest proceedings against the CAPE LEVEQUE as a surrogate ship seeking security to satisfy any award in the arbitration.

To commence proceedings against a ship under the Admiralty Act 1988 (Cth), the plaintiff must have a recognised maritime lien or claim, which includes “a claim in respect of the construction of a ship (including such a claim relating to a vessel before it was launched)”.

Under section 19 a plaintiff can commence in rem proceedings against a surrogate ship where the following applies:

  • The relevant person (i.e. the party who would have been liable in proceedings in personam) was the owner, charterer, possessor or controller of the “ship” to which the claim relates when the cause of action arose.
  • The relevant person is the owner of the surrogate ship when proceedings were commenced.

Austal applied to set aside the writ on the grounds that:

  • Austal was not the owner of a “ship” to which the claim relates when the cause of action arose (because the cause of action arose pre-launch when the ferry was a vessel but not a “ship”, or alternatively because the claim arose after Virtu became the owner).
  • At the time of the writ, Austal was not the owner of the CAPE LEVEQUE.
  • At the time of the writ, the CAPE LEVEQUE was a “government ship” and so exempt from the Admiralty Act.

Outcome

The trial judge considered that ownership of the surrogate ship means the right of dominion and true ownership (i.e. the right both to use the vessel and to sell and keep the proceeds). The CAPE LEVEQUEwas almost complete and the government was in a position to seek a court order requiring Austal to finish performance of its contractual obligation to deliver the completed boat. While property may not have passed, the government was the beneficial owner of the CAPE LEVEQUE and so the court set aside the writ.

On appeal, the court struck out the writ as Virtu’s claims lacked a reasonable prospect of success. In commenting on the merits of a surrogate claim, the court noted that causes of action arising out of defective works pre-launch arise prior to the vessel being a “ship” for the purpose of the act and therefore not capable of supporting a surrogate claim:

“If a vessel under construction were contemplated to be a “ship” for the purposes of s 19(a), then there would be clear words indicating that.”

Comment

Given that many claims in respect of poor design, construction and workmanship will most likely arise prior to launch and most launched ships will likely be nearing completion and so beneficially “owned” by the buyer the case makes it very difficult for a dissatisfied buyer to arrest a surrogate vessel under construction as security for their claim. Prospective buyers should consider seeking alternative forms of security for performance such as extended warranties, latent defect guarantees and performance bonds.