No requirement of a cross-undertaking in damages when arresting a vessel

The Court of Appeal in Stallion Eight Shipping Co. S.A. v Natwest Markets plc (The MV Alkyon) [2018] has upheld a lower court decision that an in rem claimant was not required to provide a cross-undertaking in damages for the loss resulting from the arrest of a vessel, unlike a claimant seeking a freezing injunction. Damages for a wrongful arrest might be available to a shipowner only where the arresting party acted in bad faith or with gross negligence that implies malice.

Olga Kasatkina and Jessica Maitra wrote for lawyers Clyde & Co on the case, in which the bank lent $15.7m to the owner of 2015-built bulk carrier Alkyon, a one-ship owning company, pursuant to a loan agreement dated January 30th 2015. The loan was secured by a First Preferred Mortgage over the vessel.

On March 22nd 2018 the bank notified the owner that the market value of the vessel was less than the Value-to-Loan ratio, as was required in the loan agreement, and demanded an additional security of $1.75m.

Despite higher valuations provided by the owner, the bank notified it of an event of default. The bank allowed additional time to make good the shortfall. The owner failed to do so and on June 15th 2018 the bank served a Notice of Acceleration, declaring the loan immediately due and payable. The bank then issued an in rem claim form and obtained a warrant of arrest. On June 26th 2018 the vessel was arrested when it arrived at the Port of Tyne.

The owner brought an application under CPR 61.8(4)(b), requesting the Court to release the vessel from arrest unless the bank provided a cross-undertaking in damages for the loss resulting from the arrest, akin to that routinely provided by applicants for freezing injunctions. The owner contended that the arrest was causing a profit loss of $3,500 to $4,000 a day.

Mr Justice Teare in the High Court pointed out that, subject to procedural compliance with CPR, the issue of a warrant of arrest is of right. He observed that the bank was entitled to obtain the warrant without providing a cross-undertaking in damages.

Teare J made reference to The Evangelismos, which established that the arresting party might be liable for any damage caused by a wrongful arrest if and only if he acted in bad faith or with gross negligence that implied malice. If, however, these elements were not present and it was later found that the arresting party had in fact no claim, the owner would be left without remedy (The Kommunar (No. 3)). The cross-undertaking sought by the owner in the present case expressly intended to apply if the bank did not succeed in its claim, without the owner being required to satisfy The Evangelismos test for a wrongful arrest.

Mr Justice Teare observed that the Court’s power to order release was discretionary. This discretion was usually exercised on provision of security or if there was a second arrest, which amounted to an abuse of process. Whilst the Court’s discretion was not limited to such circumstances, it had to be exercised in a principled manner. Tear J referred to Bazias 3 and Bazias 4, in which the Court refused to require a cross-undertaking expressly because “this has never been the practice in Admiralty actions”.

The Judge concluded that ordering the release of a ship in the absence of a cross-undertaking would “cut across and negate” the clear and well-established principle that the claimant may obtain a warrant of arrest without providing a cross-undertaking in damages. This would amount to a very substantial change as to the circumstances in which an arrest can be obtained and maintained.

The owner’s application was refused on the grounds that:

(a) it ran counter to the principle that a claimant might arrest of right;

(b) it would be inconsistent with the court’s long-standing practice that such a cross-undertaking was not required;

(c) it would be contrary to established legal authority.

The question before the Court of Appeal was whether Mr Justice Teare erred in the exercise of his discretion under CPR 61.8(4)(b) in refusing to order the vessel’s release without requiring the bank to provide a cross-undertaking in damages.

The Court of Appeal reviewed academic literature on the fairness of The Evangelismos rule and noted that consensus was yet to be reached as to whether the rule should be reconsidered.

The Court of Appeal observed that the owner’s case would undermine longstanding law both as to an arrest being as of right and the unavailability of damages for a wrongful arrest unless bad faith or gross negligence is present. It would also cause far-reaching change to the well-established practice of requiring security to obtain release of a vessel, which dates back to more than 150 years.

The Court of Appeal pointed to several “formidable considerations” for maintaining the status quo, one of which was that there were commercial arrangements, based on settled law and practice, in accordance with which P&I Clubs and hull underwriters routinely gave undertakings to avoid arrest or secure the release of a vessel, and said that disruption of these arrangements should not be embarked upon lightly.

Whilst taking into account the owner’s inability to provide a P&I letter of undertaking as security, due to the loan agreement not being covered by liability insurance, the Court of Appeal noted that the case against the proposed change to the law and practice was overwhelming.

There was no case for the Court of Appeal to intervene on a discretionary matter when, on standard facts, the first instance judge followed the usual practice. As such, the Court of Appeal agreed that the owner’s appeal should be dismissed.

The Court of Appeal disagreed with the lower court on a single point. that it is for the legislature and the Rules Committee to alter the status quo. Attracted by the approach taken by the Singapore Court of Appeal decision in The Vasiliy Golovnin, the Court of Appeal ruled that it is open to the Court itself to do so with the benefit of views from the maritime community, but remarked that it “would think long and hard before departing from the usual practice”.

On the risk of injustice argument, the Court of Appeal concurred with the lower court in that the evidence of the owner’s inability to provide security ought to “condescend to particulars”, i.e. deal with not merely the owner’s own resources but also with his inability to provide security by calling upon the resources of his direct and indirect shareholders. Confining the enquiry to the resources of one-ship owning company would be “pointless and would give rise to the most obvious perverse incentives”. The appeal was therefore dismissed on this narrow ground as well.

The writers said that the fairness of The Evangelismos rule had been called into question by commentators, and the issue of whether it was still right to treat arrest cases differently from freezing injunctions had been a subject of much debate.

The Court of Appeal decision was, therefore, valuable in that it confirmed that, despite the fact that The Evangelismos rule could potentially bear harshly on a shipowner, the status quo was to be maintained.

The decision also made it clear that shipowners seeking to argue impecuniosity would have to present extensive evidence of the resources available to them, including those of their direct and indirect shareholders.