Two recent judgments are making waves for marine lawyers. It should be appreciated that in these cases either party to a dispute might start proceedings to gain an advantage by freezing the other party’s assets in a pre-emptive strike. In both of our own examples mentioned below, the defendants in the actual claims were, for tactical reasons, claimants in what are known as “Rule B” proceedings.
STX Pan Ocean (UK) v Glory Wealth US Court of Appeals Second Circuit
On 19 March 2009, the United States Court of Appeals for the Second Circuit gave a judgment severely diminishing the ability of parties in marine cases to attach opponent’s funds in New York.
The way it has worked for years has been that if, for example, a charterer has a claim against a shipowner (it might be that a ship has suffered engine failure during a charter, the cargo has been delivered late and the charterer has a claim for loss of profit) the charterer can attach funds in US dollars transferred to that owners’ bank in New York.
The charterer and the shipowner might be in any jurisdiction worldwide and the charterparty may provide for arbitration in London under English law. The usual practice is for hire or freight due to owners to be paid in US dollars by electronic transfer. Over 95% of international dollar payments must, however briefly, pass through one of 15 banks which form the Clearing House Interbank Payments System [“CHIPS”]. So, all the owner’s income will be passing through one or more of these banks even if it is for just a few seconds.
The procedure is that the plaintiff applies ex parte to the court in New York for a Rule B Maritime Attachment Order.
Once the order is obtained, it is served on all the 15 relevant banks, daily by fax. Any served bank receiving funds apparently intended for the named defendant must contact the plaintiff’s attorney named in the order, and may only release funds after obtaining approval.
By far the most popular attachment has been that of funds transferred electronically. But it is also sometimes possible to attach bunkers (fuel oil in a ship), insurance proceeds, credits or even ships, depending on the judge involved and provided the asset is within the district of the Court. In some cases, it may even be possible to pierce the corporate veil and attach tangible assets of the defendant company’s alter ego.
Recent examples of such attachments in our own experience include:
- a charterparty dispute between Far Eastern companies, arising out of an incident in Africa, with arbitration proceedings in London, involving four Rule B attachments; and,
- a collision in the eastern Mediterranean, between a Hong Kong owned ship operated from Vancouver and a vessel owned and operated in the eastern Mediterranean, resulting in one Rule B attachment order.
Many claims worldwide have been dealt with in New York using this procedure, thus encouraging commercial settlement.
The increasing popularity of Rule B attachments has meant that New York judges have been overwhelmed by applications a trend that has been reinforced by the current economic climate. There is growing judicial resistance to such applications, no doubt encouraged by the banks who are obliged to incur huge costs dealing with the sheer volume of such orders.
Although the theory is that a Rule B attachment is meant to be available only in support of an arbitration outside the district (typically, in London), many judges have allowed its scope to be expanded to cover, for example, the collision damage claim in an eastern European court mentioned above.
The basic requirements for a successful application include:
- a prima facie maritime claim;
- the defendant’s property being within the district of the court hearing the application; and
- that the defendant is “not to be found” within the district of the court issuing the order.
All went well until the Sealand Investment Corp, Eastwind Transport Ltd and Atlantic Wind Ltd v Ingosstrakh Insurance Co decision in May 2008. In this case, Judge Buckwald in the southern district of New York wrote the following while declining to make the plaintiffs’ proposed order: “Because this Court concludes that, based upon authorisation to do business in New York and designation of a registered agent, the defendant can be found within the district, the Order of attachment will not issue.”
The approach varies from judge to judge but, broadly speaking, prior to this decision, the normal position was that the defendant had to be conducting substantial business in New York in order to avoid Rule B on these grounds.
Possibly as a result of the Ingosstrakh decision, many shipowners have recently been registering to do business in New York as a means of circumventing Rule B. A cottage industry providing off the shelf companies has grown up.
In the Pan Ocean appeal circuit Judges Walker, Calabresi, and Wesley held that to be “found” within the jurisdiction required two things:
- “found” for jurisdiction; and
- “found” for service of process.
Mere designation of an agent to accept service is insufficient.
Registration under S1304 New York Business and Corporation law requires appointment of the Secretary of State as agent to accept service of process and that would satisfy the requirements so “a company registered with the Department of State is ‘found’ for the purposes of Rule B … for Admiralty or Maritime claims and Asset Forfeiture Actions”.
It follows that companies can circumvent Rule B simply by being registered with the Department of State.
Another way of circumventing Rule B is to arrange for a payment to be made in a currency other than US dollars, for examples Euros or Singapore dollars.
Allianz v West Tankers
On 10 February 2009, the European Court of Justice gave a decision that is thought by some to threaten the position of London arbitration as the leading forum in the world for settling marine claims.
The background facts were straightforward. A ship struck a jetty in Syracuse. Although the charterparty was subject to an English law and jurisdiction clause, the charterers’ insurers started subrogation proceedings against the owners in Italy. The owner then applied to the English courts for an antisuit injunction against the Italian proceedings on the basis the dispute was subject to the jurisdiction clause in the charterparty.
The House of Lords asked the European Court of Justice to resolve the conflict between:
- the decision in Turner v Grovit (ECJ) that European Council Regulation No 44/2001 prevents the court of one EU country from issuing an antisuit injunction against proceedings in another EU country; and
- the fact that arbitrations are expressly excluded from the application of Regulation 44/2001.
The ECJ found that permitting a court in one country to make an antisuit injunction against arbitration in another “amounts to stripping [the member of state] court of the power to rule on its own jurisdiction under [the] regulation”.
As a direct consequence, where an arbitration agreement provides for arbitration in London under English law – as most charterparties do – it will not be possible to get an order in England stopping either party from starting or continuing court proceedings in another EU jurisdiction. A charitable commentator might say that it will make little difference because (among other things):
- an antisuit injunction in support of a London arbitration clause will be easily obtainable in any EU court;
- the sanction of damages for breach of contract including the costs of the abortive foreign court proceedings will be readily obtainable in any other EU jurisdiction and will be a sufficient deterrent to prevent unnecessary proceedings; and
- people choose London because it has an established procedure and practice for maritime arbitration so they will not seek to avoid London arbitration.
This writer’s view is less charitable. While the decision does not sound the death knell for London maritime arbitration, it is likely to lead to a significant increase in attempts to circumvent or simply obfuscate the process which has been contractually agreed, thereby causing expense and delay. In some cases, local courts may refuse to recognise the jurisdiction clause. Consequently, a claimant could be faced from the outset with the knowledge that it must go through several levels of appeal to have the dispute decided by arbitration in London and under English law, as set out in the contract.
While it is clear how the New York Appeal Court came to its decision severely weakening Rule B and how the European Court of Justice came to its decision in the Allianz case, the effect in each instance will probably not help those who are regularly involved in marine litigation or arbitration as part of their business.
In the case of Rule B, the best way to encourage a reluctant party to negotiate is to freeze its assets. The cause of the huge volume of Rule B applications is not that there is something wrong with Rule B. It is the huge volume of transactions, some US$2 trillion per day, passing through “CHIPS”. Any deterioration of this procedure will increase the number of long-running claims, and lead to many claimants going uncompensated for their losses.
Companies wishing to protect themselves against Rule B attachments should register under S1304 as soon as possible. It can be done on line.
In the case of antisuit injunctions, the best way for a reluctant defendant to avoid a claim is to force it to be brought in a remote court which is sympathetic to the defendant and has little or no experience of the matters involved.
This article is just a brief summary of the issues involved. It cannot address all the pitfalls. Particularly the case of Rule B, the law is changing almost daily. The important thing for anyone faced with these issues is to obtain early strategic legal advice from someone who can see the global picture; and, good local legal advice from someone in the countries in question before starting litigation or arbitration