In a recent ruling, the Superior Court of Justice considered a charterer liable for damages suffered by a shipowner due to the arrest of the latter's vessel in Brazil as security for a claim based on an alleged breach of a charter agreement. The main ground for qualifying such an injunction as a wrongful arrest was the lack of initiative and action by the arresting party regarding the inception of an arbitral proceeding in London after the main proceedings in Brazil had been dismissed due to the Brazilian courts' lack of jurisdiction.
The parties executed a charter agreement to transport goods from Brazil to Belgium. However, after loading, the charterer alleged that the vessel did not meet the technical requirements conditions for the transport. The charterer filed an injunction in Brazil, which was granted, requesting the vessel's arrest as a guarantee of its claims for non-performance of the contract. The charterer also filed a lawsuit claiming for the payment of damages due to the breach of the contract, which was dismissed due to an arbitration clause in the charter contract.
The vessel remained arrested for 431 days in a Brazilian port, which caused damages to the owner. After the dismissal of the charterer's claim, the arrested vessel's owner filed a lawsuit against the charterer for damages for loss of earnings.
Rio de Janeiro's first- and second-instance courts rejected the owner's claim, determining that the charterer was not responsible for the damages given the likelihood of the claim's accuracy and the probability of damages alleged when the arrest was filed.
The owner appealed to the Superior Court of Justice, which, by a majority decision, overturned the previous decisions and granted the special appeal, holding that the charterer was liable for the damages suffered by the owner as a consequence of the arrest.
In his decision, the reporting justice pointed out that, under Brazilian procedural law, the mere existence of damage is sufficient for the arresting party to be held liable when a lawsuit is dismissed on its merits. The judge also highlighted that the obligation to compensate the owners' damages had also arisen as an immediate effect of the main lawsuit in Brazil being dismissed due the existence of the arbitration clause; therefore, the arrest, as a precautionary measure, had ceased to have effect.
Therefore, the Court concluded that since the charterer had not demonstrated the start of the arbitral proceedings in London and that the main lawsuit in Brazil had been dismissed, the charterer should indemnify the owner for the wrongful arrest.
However, one of the justices of the bench disagreed with the reporting justice and voted to maintain the previous decision, understanding the lack of charterer liability to indemnify, since, in her view, strict liability should not be misunderstood as a full-risk absorption by one of the parties and, in this case, the owner had brought about the arrest due to the vessel's precarious condition.
As regards the argument that the precautionary measure would not have caused damage to the owner as a consequence of the vessel's poor condition and non-operative status, the reporting justice emphasised that if the dispute had been limited to the vessel's condition, the charterer should have limited the injunction request to the cargo unloading and not included the vessel's arrest. He also stressed that the owner had not refused to make the repairs required by charterer, but had had to bear losses for more than a year because the charterer had failed to initiate arbitration as called for in the charter agreement.
Thus, in a majority decision, the Court recognised the charterer's liability to indemnify the owner for the wrongful arrest. The amount will be determined and adjusted at the enforcement stage of proceedings.
In Brazil, an arrest is made via a precautionary measure with an injunction request that can be filed in any Brazilian court, usually within the jurisdiction of the vessel's next port of call. If the contract has an arbitration clause, the arrest may be filed at court as a pre-arbitral request based on the Arbitration Act. However, the claimant should initiate the arbitration proceedings in a timely manner (usually 30 days after the arrest order) in the jurisdiction provided by the contract. In the present case, it seems that one of the main reasons that the Court granted the damages on behalf of the owner was that the charterer had failed to start arbitration at the proper contractual venue, even after the Brazilian proceedings had been dismissed due to a lack of jurisdiction.
Further, as Brazil has not ratified any of the international ship arrest conventions, it can be challenging to construe the Brazilian jurisdiction for a ship arrest to secure disputes where a foreign court or arbitral tribunal has been chosen by the parties. Therefore, a careful assessment must be made before deciding to arrest a ship in Brazil in order to secure a claim to be heard abroad on its merits. Thought must also be given to the adverse consequences of a wrongful arrest.
For further information on this topic please contact Godofredo Mendes Vianna or Alice Studart at Kincaid | Mendes Vianna Advogados by telephone (+55 21 2276 6200) or email ([email protected] or [email protected]). The Kincaid | Mendes Vianna Advogados website can be accessed at www.kincaid.com.br.