Recent case clarifies two cargo sale issues

Ms Agapi Terzi, Syndicate Executive Americas Syndicate at Steamship Mutual, has written on the recent case of Dainford Navigation Inc v PDVSA Reptroleo SA (The Moscow Stars) which dealt with an application made by the owners of the vessel for an order for the sale of cargo under section 44(2)(d) of the Arbitration Act 1996.

Terzi noted that in so doing the court clarified two legal issues:

  • the legal concept of the phrase ‘’goods the subject of proceedings’’ set out by section 44(2)(d) of the Arbitration Act 1996; and
  • the requirement for ‘’good reason for sale’’ under current English Civil Procedure Rules (CPR).

A cargo of crude oil was loaded on board ’Moscow Stars’ on October 14th 2016 within a time charter at Puerto La Cruz, Venezuela. The vessel was ordered to proceed to Freeport, Bahamas to discharge. Due to the charterer’s repeated failure since January 2016 to pay hire, there was an outstanding balance of $4.5m.

On October 18th 2016 and November 26th 2016 the owners gave notice in order to exercise a contractual lien over the cargo.

The vessel then sailed on the charterers’ orders to Bullen Bay, Curacao where she remained and where the owners arrested the cargo with the permission of the local court.

Although the charterers made some payments, they remained in arrears. Therefore the owners commenced arbitration proceedings under the  London arbitration clause of the applicable charter party, in respect of claimed owings of $7.7m. The owners were by now also incurring all the running costs of the vessel, as well as the cost of bunkers.

On May 5th 2017, the owners applied to the English High Court to obtain an order to sell the cargo on board the vessel under the Arbitration Act 1996. The Court heard this would enable the vessel to be redelivered to the owners with the security rights under the lien and the arrests transferring to the sale proceeds.

The charterers argued against this on the basis that the cargo was not the subject of the proceedings and, in any event, there was no good reason to order a quick sale of the cargo.

Legal requirements

Under the Arbitration Act of 1996 English courts can order the sale of cargo on board the vessel when the goods are the ‘’subject of the arbitral proceedings’’.

Under the CPR such power can be exercised if the cargo is perishable or if there is some other ‘’good reason that it has to be sold quickly’’.

(1) ‘’Goods the subject of the proceedings’’

Only if the cargo of crude oil was the subject matter of the arbitral proceedings would the court have the power to order the sale.

The charterers argued that the phrase should be interpreted narrowly, requiring the goods and cargo to be the subject of the dispute, whereas in this case the proceedings were focused on unpaid hire.

Mr. Justice Males disagreed, he said that the facts of the case indicated there was an impasse between the parties which required the court’s assistance. While an arbitral decision was pending, the parties were not currently able to determine what would happen to the cargo. Without the arbitral decision, the owners could not enforce its lien and the charterers could not obtain delivery. Therefore, even if the arbitration was not about the cargo itself, it would certainly determine what would happen to it.

In practice the lien was exercised over the cargo as a security for the claim which was advanced in arbitration.

On this basis, the Court held that there was sufficient nexus between the cargo and the arbitral proceedings due to the fact that the lien was exercised in support of the arbitral claim and the court had the power to order its sale.

(2) ‘’Good reason… to sell quickly’’

The second requirement was that the Court’s power could only be exercised if the goods were perishable in nature — which in this case they were not — or there was another good reason to sell them quickly. The Court had to decide whether it was appropriate to exercise this discretionary power.

The owners argued that the cargo had been on board the vessel for more than nine months and, absent the Court’s order, it would remain so for an unknown period of time. The owner’s position was prejudiced as they were not receiving hire, while simultaneously they were incurring the operational costs of the vessel and could not re-employ her. Finally, deadlines to comply with Class and SOLAS requirements were approaching.

The Court noted that the charterers had made a last minute offer to arrange for the sale of the cargo and pay the funds into escrow, which appeared to be a belated recognition that the sale of the cargo was the only viable course. The Court saw a number of difficulties if Charterers were to arrange a sale.

Mr. Justice Males held that, in the absence of a viable alternative, the sale by the owners could convert the cargo to money, which would benefit all parties and the vessel would be free to seek her next employment.

Ms Terzi said that, despite the fact that orders for sale had been made by courts before, this decision was a welcome development for owners. It was a fully reasoned judgment which did not enable courts to make sovereign orders for sale as a freestanding relief, but which set out specific requirements by clarifying the relevant law. “Additionally, it provides a possible solution for owners when they face a commercial and contractual impasse pending an arbitral decision. However, the judgment is based on the particular facts of the case and the Court made clear they were not commenting on a situation where the cargo was owned by a third party and not by Charterers”, concluded Ms Terzi.