Most charterparties give owners the right to lien cargo for unpaid hire or freight. However, it may be necessary to sell the cargo in order to obtain payment. The English Commercial Court has recently considered the circumstances in which it would be prepared to order the sale of cargo held under a shipowners' lien.
In The "MOSCOW STARS", the Commercial Court had to consider (apparently for the first time) the scope of its power to order the sale of goods "the subject of [arbitration] proceedings".
The power arises under section 44(2)(d) of the Arbitration Act 1996 and is one of a number of powers given to the Court to support arbitration proceedings. As is often the case, the application was made with the approval of the arbitral tribunal.
The dispute arose under one of a series of charterparties between members of the Sovcomflot group (as owners) and PDVSA (as charterers). Owners claimed several million dollars of unpaid hire and exercised a lien over a cargo of 50,000 mt of crude oil belonging to charterers. At the time of the application, the vessel had been drifting off Curaçao for over 9 months.
Although the tribunal was expected to issue an award shortly, owners produced unchallenged evidence that it would take at least 3-4 months to enforce an award in Curaçao, and much longer if charterers resisted enforcement. Owners therefore applied for an order for sale of the cargo.
Charterers opposed the application on 3 grounds:
- the cargo was not "the subject of the [arbitration] proceedings",
- there was no "good reason … to sell quickly", and
- the Court should not exercise its discretion to order a sale.
Somewhat surprisingly, while similar orders have been made in many other cases, the parties had not found any English authority on the first point. In a 2015 Singapore judgment on the equivalent provision of their International Arbitration Act 2002, it was held that the Court did have power to order the sale of cargo in similar circumstances.
Charterers argued the requirement meant that there had to be a dispute "about" the goods, and that the power to sell should only be exercised where it will not be known until the dispute is resolved who is entitled to sell the goods.
The Judge rejected this argument. He concluded that there was a sufficient connection between the cargo and the arbitration proceedings where owners were exercising a lien over the cargo as security for their claims for hire which were being pursued in the arbitration. As the Judge said, "even if the arbitration is not 'about' the cargo, it will certainly determine what will happen to the cargo".
The second point arose because the Court's power to order sale of goods in support of an arbitration can only be exercised on the same basis as in Court proceedings. In that regard, CPR 25.1 gives the Court power to order sale of property "which is of a perishable nature or which for any other good reason it is desirable to sell quickly".
The oil cargo was not perishable, so it had to be decided whether there was another good reason to sell it quickly. This point overlapped with the more general discretionary considerations.
Owners' primary argument was that the cargo had already been on board the vessel for over 9 months and (if not sold) would remain there for many more months. In that time, owners were incurring the costs of operating the vessel (without being paid hire) and losing the opportunity to trade the vessel elsewhere. Owners also argued, and charterers accepted, that there was no viable alternative such as discharge into storage.
Charterers argued that owners had brought this situation on themselves because they allowed the cargo to be loaded in circumstances where charterers already owed substantial amounts of hire. While this argument may have some commercial force, the Judge did not accept it was relevant to the legal analysis.
Charterers also criticised owners' delay in making the application between the tribunal giving permission in December 2016 and the Court proceedings being commenced in May 2017. Owners' explanation, accepted by the Court, was that there was a lot of activity during this period in relation to the other disputes between Sovcomflot group companies and PDVSA, including an application for sale (and subsequently the discharge into storage) of the cargo on board another vessel, "NS COLUMBUS".
Finally, the day before the hearing, charterers made what the Judge described as a 'last-minute' offer to sell the cargo themselves and pay the proceeds into escrow. Charterers argued that they were best placed to maximise the sale proceeds. As a tactic, however, this failed because the Judge interpreted it as an acceptance by charterers that the cargo had to be sold. Any offers charterers obtained for the cargo could notified to owners and if necessary the Court.
This is an encouraging decision for owners faced with defaulting charterers. Often, the exercise of a lien by itself will lead to payment. However, if it does not, and if (as in some jurisdictions) the lien cannot be maintained after discharge, or if storage facilities are not available, then an order for sale gives owners the ability both to recover the use of the vessel and to obtain a fund against which to enforce their claims.
One word of warning is that such an application might not be as straightforward where the cargo is owned by a third party which is not a party to the arbitration proceedings. In this case, that issue did not arise because the cargo was owned by charterers.