Trade and Transport Bulletin - Re-arrest under a settlement agreement

In the context of ship arrest in Admiralty, settlement or compromise agreements are a contractual arrangement between an arresting party and the ship owner that provide conditions of release. A breach of these conditions usually anticipates a right to re-arrest.  However, a recent New Zealand High Court decision (UAB Garant v The Ship ‘Aleksandr Ksenofontov’  HC Auckland, CIV 2006-404-4167, 21 December 2007, Williams J) highlights the risk that unless a compromise agreement clearly preserves the validity and continuation of the original arrest proceedings, the original in rem action may be converted into a simple claim for debt owed.

Background

The 'Aleksandr Ksenofontov' (ship) was a victim of repeated misfortune.  Continued breach of her owner’s assurances to repay an outstanding balance owed to a Lithuanian creditor (UAB) led to three arrests prior to the most recent and current.  To further complicate matters, the ship was also pending a hearing on forfeiture as a result of offences under the Fisheries Act 1996 (NZ).  No doubt frustrated by the repeated failure of the owners to honour the terms of re-release, UAB applied to have the ship sold pendente lite based on deterioration of the vessel by accruing costs of maintaining arrest.  To determine the appraisal and pendente lite application, the Court had to be satisfied the ship was validly arrested under the Admiralty jurisdiction.

The ship’s objections to re-arrest

Neither side disputed that UAB’s original claim under section 4(1)(m) of the Admiralty Act 1973 (Act) entitled UAB to bring an action in rem; and, that re-arrest was a remedy available (in limited circumstances) to a Court exercising its inherent jurisdiction.

However, the owner argued that for the latest arrest there was no Admiralty jurisdiction; hence validity to arrest the ship. They argued this was due to the fact that a prior compromise agreement, entered into by UAB and the owner of the ship, converted the original claim for the balance owing for repairs  to a simple claim in debt. 

In support, counsel relied on The Dilmun Fulmar [2004] 1 SLR 140, a Singaporean decision, where Belinda Ang J decided a compromise agreement extinguished the original claim. In that case, the compromise agreement provided that in the event of breach, the repairer could proceed against the owner and/or re-arrest the vessel or any of her sister ships and/or claim for the amount outstanding.

Judgment

The agreement between UAB and the owner was to secure payment of the balance owing to be paid by way of instalments.  The agreement provided that in the event of breach by the owner:

…UAB 'Garant' reserves the right to undertake any necessary legal measures to protect its own interests including, but not restricting, re-arrest of the [Aleksandr Ksenofontov].

…The legal procedure started in New Zealand 18-07-2006, remains valid and, in the case of breach of the present agreement might be renewed at any moment.

The Court acknowledged the above term in the agreement allowed UAB to exercise its right to re-arrest the vessel for breach, yet what distinguished this agreement from that in The Dilmun Fulmar was that the parties also contractually agreed to the preservation and continuation of the original arrest proceedings. Including words to that effect prevented the UAB's in rem proceedings from being subsumed into an action for debt.

Breach of the security arrangement by the owners was then seen as an ingredient further justifying re-arrest on the balance of competing equities.

Implications

Claimants entering into agreements with owners of an arrested vessel on release should be alive to the wording used to ensure their original claim is not extinguished.  If the compromise agreement merely purports to allow for re-arrest of the vessel without asserting continuation of the initial rights, re-arrest may be denied in light of The Dilmun Fulmar.

The prudent claimant should ensure that in the compromise agreement they maintain their in rem action.  The question of whether the re-arrest is upheld would still, however, require analysis of the parties competing equities under the general doctrine of re-arrest.

For more information please contact:

Neil Beadle, Special Counsel
+64 9 300 3865
neil.beadle@dlaphillipsfox.com

Aisha Lala, Law Clerk
+64 9 9163744
aisha.lala@dlaphillipsfox.com

New Sydney appointment

We are delighted to welcome Cheri (pronounced Sheree) Chestnut as a Foreign Associate in our Sydney team, where she will join Natalie Mason, who works with Andrew Tulloch and Ron Salter.

Cheri grew up in New Orleans, where she graduated from the prestigious Tulane Law School in 2002 as Juris Doctor with a Certificate in Maritime Law. From mid 2002, she worked with the well-known New York boutique maritime, transport and insurance firm, Kennedy Lillis Schmidt & English, handling a broad variety of transport-related work, including all types of cargo claims, marine liability claims, insurance disputes, salvage and collision, personal injury, and energy cases.

Cheri will bring an added dimension to our practice both in Sydney and elsewhere in Australia and New Zealand, and we look forward to the opportunity of introducing her to our clients and friends over the next few months.