Legal Case Study Archives

Court affirms scope and effect of Section 37 injunctions where security has been placed

April 22, 2021 Leave a Comment

In the recent case of Dr Ann Fenech as mandatory for and on behalf of Clearlake Shipping Pte Ltd v Global LNG Limited, the creditor obtained a Section 37 order on a provisional basis from the Maltese courts as security for a claim arising from a dispute under a charterparty concluded between the parties regarding the MV Portovyy (for further details please see “Court orders extension of effects of flag injunction to security deposited by debtor“). The purpose of the order was to prohibit the vessel’s sale, transfer or deregistration while the merits of the case were being determined in the appropriate fora – in this case, arbitration in London.

On 18 March 2020 the Maltese courts granted the Section 37 order on a provisional basis. This ex parte application seeking an immediate provisional order was filed, as is customary, together with the statutory sworn application containing the same demands. Such an application is then served on the other party which has 20 days to defend the application. The object of an ex parte application leading to an interim provisional order is to protect the status quo until the request is decided in due course. In this case, the owners eventually opted to file a cash deposit in the amount claimed by the charterers in the court registry, together with a request for the court to order that the Section 37 order be revoked.

By means of a 26 November 2020 decree, which was delivered in open court with the agreement of both parties, the court held that rather than ordering the revocation of the Section 37 injunction, it was, in terms of the law regulating the procedure (ie, Section 37 of the Merchant Shipping Act), ordering that the effects of said order would cease to exist insofar as the vessel itself was concerned, but would continue to apply exclusively to the cash deposit provided by way of security by the owners pending the final determination of the merits or settlement being reached by the parties.

The charterers subsequently filed an application before the Maltese courts requesting that the effects of the order be extended for a further year. This would align with the law, which envisages that any order of this nature granted by the courts expires within one year, unless a request for an extension is made by the creditor on the basis that such order was still required. The court granted this request by means of a decree of 8 February 2021.

Challenge to decrees

Given the above, it was of considerable surprise to the charterers when the owners subsequently filed a further application before the Maltese courts requesting revocation of both the 26 November 2020 and 8 February 2021 decrees.

The owners based their request for the revocation of the 26 November 2020 decree on the argument that, following the cash deposit made by the owners, the courts had never granted a final order and therefore procedures had effectively been extinguished. They further argued that when the law refers to the effects of the order applying to any amount deposited as security by the owners, reference is being made to a final order as opposed to a provisional order as had been granted in this case. The owners argued that there was no legal basis for revocation of either the 26 November 2020 or 8 February 2021 decree. In fact, there was every reason, given the purpose of the procedure provided by Section 37 of the Merchant Shipping Act, to extend:

the validity of the decrees by one year; and
the effects of the order to the cash deposit.

The charterers responded that it was indeed necessary for the court to extend the effects of the 18 March 2020 order to the security deposited by the owners pending the determination of the merits of the case. The charterers noted that when dealing with the extension of the effects of the order to the security deposited by the owners, the law makes no distinction between provisional and final orders. Further, if an order extending the effects of a prohibition from the transfer of the vessel to the free circulation of the security deposited instead of the vessel is not granted when an owner opts to deposit security, not only would such security remain unregulated, but the owners could effectively proceed with the withdrawal of the deposited sum pending the determination of the merits. The charterers argued that this interpretation contravened the scope of the Section 37 injunction, which provides a creditor with the possibility of obtaining security, pending the determination of the merits of the case, for the entire duration of the case.

Decision

By means of a 17 March 2021 decree, the court denied the owners’ requests and agreed with the charterers’ arguments in their entirety. The court held that the law made no distinction between provisional and final orders in allowing the effects of the Section 37 injunction to be extended to security deposited by the owners in the context of a Section 37 action. The court held that any differing interpretation would render Section 37 totally redundant, leading to circumstances where, if an owner deposited a cash security instead of leaving the attachment on the transfer of the vessel, the owners could freely withdraw the cash deposit irrespective of the fact that the action on the merits is ongoing and the security is still required. The court further denied the request for the revocation of the decree, extending the order for one year for the same reasons.

Comment

This case confirms what is already stated clearly in Article 37(4) of the law, which reads as follows:

Where the respondent either deposits in court the amount of the claim… or gives security… where the court has issued the order, it shall revoke the same with respect to the ship or the share therein, and the provisions of this article shall thereupon be applicable with respect to the amount so deposited or the security so given as the case may be.

This decision illustrates the effectiveness of the Section 37 injunction as a tool available to creditors seeking to obtain security for a claim pending the determination of the merits of the case. While the law allows owners to opt to deposit security, thereby removing the effects of the injunction from the vessel itself, the legislature has catered for these instances to ensure that creditors’ rights are not prejudiced.

by Dr Ann Fenech and Dr Alison Vassallo, Fenech & Fenech Advocates

Source: ILO

Court orders extension of effects of flag injunction to security deposited by debtor

February 12, 2021 Leave a Comment

Creditors’ ability under Maltese law to file an application before the courts for an injunction prohibiting the sale, transfer or deregistration of Maltese-flagged vessels has proven to be a useful and effective tool to protect maritime claims.

Section 37 injunction

In essence, the Section 37 injunction allows creditors, in certain circumstances which give rise to a maritime claim attracting the jurisdiction of the Maltese courts in rem, to obtain a court order which prohibits the vessel from being sold or entering any further mortgages until the merits of the case have been decided in the appropriate jurisdiction. When granted, the order is served on the registrar of Maltese ships and is recorded against the vessel’s entry in the registry. This obliges the registrar to refrain from:

recognising any transfer of ownership;
recognising any further mortgages; and
issuing any deletion certificate for the vessel.

Further, if a transcript of register is issued, the injunction will appear on the transcript.

The law provides that the demand for the order must be made by sworn application as though the party were commencing an action. As with all such applications, this must be served on the defendant, which has 20 days to file a defence. The matter is also given a hearing date. Submissions and ultimately a court decision follow. The court will decide whether to agree to the request to order that no further transfers can be effected until the matter on the merits is decided. As this will take time and because any forewarning in the issuing of the injunction may defeat the object of the exercise, the law allows creditors to file an ex parte application together with the statutory sworn application, containing the same demands and requesting that the court agree to the order immediately and on an interim basis until the statutory sworn application has been heard and decided definitively. This caters for the element of urgency which often accompanies the necessity of obtaining such injunctions to ensure timely protection of creditors’ interests.

Case law

In the recent case of Dr Ann Fenech as mandatory for and on behalf of Clearlake Shipping Pte Ltd v Global LNG Limited, the creditor followed the above procedure in seeking security for a claim arising from a dispute under a charterparty concluded between the parties in relation to the MV Portovyy. While the merits were, in terms of the arbitration clause contained in the charterparty, subject to arbitration in London, the charterers were keen to ensure that their rights would be secured in the eventuality of them obtaining a favourable award.

The Maltese courts granted the Section 37 order on a provisional basis on the same day as the filing of both the statutory sworn application and the ex parte application (as described above). The owners eventually filed a cash deposit in the amount claimed by the charterers in the court registry, together with a request for the court to order that the Section 37 order be revoked.

By means of a 26 November 2020 decree, the court held that rather than ordering the revocation of the Section 37 injunction, the effects of said order would cease to exist insofar as the vessel itself was concerned but would continue to apply exclusively to the cash deposit provided by way of security by the owners, pending the final determination of the merits or a settlement being reached by the parties.

Comment

This case illustrates the practical efficacy of these procedures, which are an efficient tool for obtaining security while allowing owners to continue to make full use of their vessels. Further, the law allows owners to shift the effect of such an injunction from the vessel itself onto adequate security that may be provided by them in terms of law.

By Alison Vassallo, Fenech & Fenech Advocates

Source: ILO

Court lifts physical bunker supplier’s arrest of vessel

March 23, 2017 Leave a Comment

Following the issuance of a provisional arrest warrant for a yacht at the request of a physical bunker supplier, the Maltese court determined that it was not vested with jurisdiction in rem and accordingly lifted the arrest.

Facts

The motor yacht Vicky was arrested in Malta on January 4 2017 by Thevenin & Ducrot for a claim relating to unpaid bunkers supplied to the yacht. The owners of the yacht subsequently filed an application before the Maltese courts challenging the arrest and arguing, among other things, that the Maltese courts lacked jurisdiction in rem.

The court had to examine whether the requirements set out under Articles 742B and 742D of the Code of Organisation and Civil Procedure and Article 50 of the Merchant Shipping Act were satisfied when the arrest warrant was issued.

Maltese law and jurisprudence dictate that three essential requirements must be satisfied in order for an arrest in rem to be validly issued:

The vessel must be physically situated within Maltese territorial waters.
The claim must fall under Articles 742B of the Code of Organisation and Civil Procedure, which lists all maritime-related claims for which a claim in rem may be brought and includes dues “in respect of goods, materials, provisions, bunkers, supplies and necessaries supplied or services rendered to a ship for her operation, management, preservation or maintenance”.
The requirements set out under Article 742D of the Code of Organisation and Civil Procedure must be satisfied.

Article 742D provides that unless the claim is privileged in accordance with Article 50 of the Merchant Shipping Act, an arrest in rem may be brought against a ship only when the person liable for the claim:

was the owner or charterer, or in possession or in control, of the ship or vessel when the cause of action arose; and
is the owner, beneficial owner or the bareboat charterer of the ship when the action is brought.

The yacht owners argued that this requirement had not been satisfied.

The owners alleged that they were not liable for Thevenin & Ducrot’s outstanding dues. They further maintained that they had no juridical or legal relationship with the physical supplier that arrested the yacht. It transpired that the owners had not directly ordered the bunker supply in question. Instead, they had ordered bunkers from an intermediary fuel trader, Mastco Group AG. The latter entity subsequently used a third-party broker to purchase the fuel product from the physical supplier. However, when the bunkers were furnished to the Vicky, Mastco Group failed to pay the physical supplier. That said, the yacht owners had paid Mastco Group AG for the bunkers.

The physical supplier defended the arrest by arguing that although its invoices were issued to Mastco Group, the owners were aware of the order and accepted the fuel product. To this effect, the arresting party presented its bunker delivery note and argued that since this document bore the vessel’s stamp and was signed by the chief engineer, the owners were also liable for payment of the fuel product.

Decision

The court disagreed with the supplier’s argument, holding that the bunker delivery note was nothing more that proof of receipt of the fuel consignment. Moreover, the fact that it was signed by a representative of the vessel in no way meant that the vessel or the owners had participated in the contract of sale or were party to the agreement.

The supplier also alleged that its claim was in fact a privileged one in terms of Article 50(m) of the Merchant Shipping Act and that in any event, Article 742D of the Code of Organisation and Civil Procedure should not apply. However, in order for a claim to be deemed privileged, the debt in question must have been contracted directly by the owner of the ship, the master or an authorised agent of the owner. To this effect, the supplier argued that when Mastco Group AG ordered the bunkers it did so as an authorised agent for and on the behalf of the vessel. The court disagreed with this contestation as no substantial evidence was produced to prove, even on a prima facie basis, that Mastco Group AG had acted as the agent of the owners or vessel when purchasing the fuel product.

The court thus concluded that the Maltese courts were not vested with jurisdiction in rem and ordered that the arrest warrant be lifted.

Comment

In light of the growing spate of claims brought by physical suppliers against shipowners, this judgment sheds important light on the onus of proof with which an arresting creditor is burdened. The court held that it was insufficient merely to procure evidence of knowledge of the supply or proof of acceptance of the product from the supplier; there must be a more genuine juridical link between the physical supplier and the owner of the vessel. In this regard, the court may have reached a different conclusion had the bunker delivery note included a statement or declaration incorporating the physical supplier’s terms and conditions (which, in turn, may hold a shipowner jointly and severally liable for the payment). In this scenario, there are arguments both in support and against any arrest in rem made on this basis. That said, this remains a moot point, as it is still untested by the Maltese courts. Further, it would appear that a claim for unpaid fuel product ordered by a third party may in certain circumstances be considered privileged, provided that there is unequivocal evidence that the third party made the order in its capacity as an authorised agent of the owners.

Contributed by Dr Adrian Attard, Fenech & Fenech Advocates

Source: ILO, 22 March 2017

Unnecessary risks constitute breach of marine insurance policy

May 2, 2016 Leave a Comment

On October 7 2015 in AJD Tuna Ltd v Citadel Insurance plc the Maltese Civil Court held that underwriters need not make payments under an insurance policy when the loss or damages occurred due to a fault or negligence on the part of the assured and where the assured’s behaviour constitutes a breach of policy.

Facts

The proceedings revolved around a claim brought by AJD Tuna Ltd against its underwriter in respect of the loss of the assured’s vessel, the Pippo II. The fishing vessel was berthed in Xemxija (a harbour in the north of Malta) when, during a storm, it broke off its mooring and ended up grounding on some nearby rocks.

As a result, the vessel started taking on water and risked sinking. The dangers were further compounded by the fact that there were a number of bluefin tuna farms in the vicinity and the owner of the vessel was concerned that the bunker fuel onboard could leak and cause environmental damage. The owner immediately informed the insurer of the incident, and the latter sent a representative to assess the situation.

The owner carried out some temporary repairs onboard the vessel in order to attempt to navigate it to a nearby port. However, rather than opting for one of the nearer ports recommended by the underwriter’s representative, the owner sailed the ship north towards the Mgarr Port in Gozo, an island just north of Malta. Along the way, the vessel encountered further difficulties and eventually sank in the channel between the islands.

The owner subsequently demanded reimbursement for its losses from the underwriter. The underwriter argued that the owner had breached its obligations under the respective policy and that no payment was owed as compensation.

The insurer argued that the owner took unreasonable and unnecessary risks when it decided to sail the boat across the channel to Gozo. Furthermore, the underwriter contended that it had instructed the owner that the vessel should either be left in Xemxija or alternatively taken to one of the nearby harbours. The insurer referred to the insurance policy, under which the underwriter was entitled “…to decide the port to which vessel shall proceed for docking or repairs.” Thus, the insurer contended that by deviating from its instructions and taking the vessel to Gozo rather than to the suggested ports, the owner had violated its obligations under the insurance policy.

In addition, the insurer argued that the owner’s actions resulted in the vessel sinking in deep waters, preventing the possibility of any investigation. Moreover, had the vessel sunk in shallower waters, it could have been salvaged, thereby reducing the loss suffered.

Decision

The court appointed an expert to assess the extent of the damages initially suffered by the vessel during the storm based on given testimony and available evidence. In addition to the fact that water had entered through cracks in the hull, a part of the keel was missing which further aggravated the risk of sinking during the storm. The court-appointed expert also advised that the vessel should not have undertaken such a voyage in this state unless it was in calm waters and under tow. The court shared the same sentiment as the expert and concluded that the decision to take the vessel to Gozo was imprudent, bearing in mind the state of the vessel and the weather.

Interestingly, the court also noted that the underwriter, on its part, had failed to provide the owner with a surveyor when the incident occurred in order to help it assess the extent of the damage and the repairs which needed to be carried out. The court also observed that the owner had every reason to request the assistance of a surveyor, as this was in its interest. The court considered this shortcoming when deliberating which party should pay the court’s costs and expenses.

The court nonetheless concluded that the owner had acted unilaterally and imprudently when it took the vessel to Gozo and consequently dismissed its claim for any damages.

Naturally, the court placed considerable weight on the insurance policy and found that by making certain decisions, the owner had failed to adhere to its obligations under the relevant policy.

Comment

While the owner’s situation is sympathetic given the distressing circumstances under which it had to act, this judgment highlights the importance of ensuring that owners are familiar with the content of their insurance policies – in particular, with the responsibilities arising thereunder. Moreover, the court’s decision illustrates the importance of having an emergency procedure in place that complies with any contractual duties arising under an insurance policy. As this case has shown, failure to do so could result in the assured receiving no compensation.

Contributed by Adrian Attard, Fenech & Fenech Advocates

Source: International Law Office, April 27, 2016

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Photo © jkb/Wikimedia Commons

Compensation for Salvage

January 11, 2016 Leave a Comment

The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi in the case ‘Charles Grech and Brian Galea v Paul Azzopardi’ on December 15, 2015, held, among other things, that compensation for salvage was due even if no notice was given to the ‘receiver of the wreck’.

On September 22, 1996, Charles Grech and Brian Galea discovered a boat called Ray Jay underwater in the limits of Mellieħa. They performed salvage works to resurface the boat, with the assistance of divers, a cabin cruiser and inflatable buoys and towed it to Għajn Tuffieħa. They also obtained the assistance of third parties against payment.

Grech and Galea demanded compensation for the salvage operation from the owner of the boat who refused to pay them. Faced with this situation, Grech and Galea proceeded to file legal proceedings against Paul Azzopardi, the owner, requesting the court:

To declare that they were entitled to payment for their services for salvage;
To liquidate the compensation due to them; and
To condemn Azzopardi to pay such sum so liquidated together with legal interests.

In reply, Azzopardi contested the legal proceedings. He claimed that Grech and Galea’s motives were to appropriate the boat for themselves. Instead of notifying the owners of the salvage operation, they resurfaced the boat allegedly with the intention of keeping it and it was only by accident that he intervened to recover his boat.

Azzopardi claimed that Galea and Grech had caused damage to the boat, in respect of which there was a separate lawsuit.

It was not relevant that they did not give the police the registration number of the boat. They voluntarily tried to save the boat. If there was a valid reason, it was not necessary to notify the ‘receiver of the wreck’

It resulted that Azzopardi was the owner of the boat. On September 15 to 22, 1996, the boat, which was moored in Ġnejna Bay, broke loose and was later found underwater in the limits of Mellieħa.

Salvage had to be a voluntary act whereby a person rescued a seacraft in distress not out of any contractual relations nor to take the boat for himself.

Article 332 of Chapter 234 provides:

Where any person finds or takes possession of any wreck within the limits of Malta, or finds or takes possession of any wreck outside such limits and brings such wreck within the said limits, he shall:

(a) if he is the owner thereof, give notice to the receiver of wreck that he has found or taken possession of the same, and describing the marks by which the same may be recognised;

(b) if he is not the owner thereof, as soon as possible, deliver the same to the receiver of wreck;

And if any person fails, without reasonable cause, to comply with this article he shall for each offence be liable to a fine not exceeding 200 units and shall, in addition, forfeit any claim to salvage.

The court noted that compensation was due even if the wreck had sunk, or if it was a danger to navigation. It said that it did not appear that Grech and Galea failed to deliver the boat to the receiver of the wreck.

Article 343(1) Chapter 234 provides:

Where any vessel, whether Maltese or foreign, is wrecked, stranded or in distress at any place on or near the coasts within the territorial jurisdiction of Malta and services are rendered by any person in assisting that vessel or saving the cargo or apparel of that vessel or any part thereof, or where any services are rendered by any person other than a receiver of wreck in saving any wreck, they shall be payable to the salvor by the owner of the vessel, cargo, apparel, or wreck, a reasonable amount of salvage limited to the amount of the property saved.

The elements in a salvage operation were as follows:

Rendering licit service to the boat or to its merchandise;
The service had to be voluntary;
The boat had to be in distress;
The assistance had to consist in salvage work;
The assistance had to be successful.

The court had no doubt that Grech and Galea had rescued the boat with their hard work. It did not result that they tried to steal the boat nor did they carry out the operation in hiding. They acted in broad daylight, in the presence of onlookers. Their intention was to recover the boat from the bottom of the sea; to raise it to the surface and to take it ashore and this constituted salvage.

The court said that the boat was in danger even if it sank. A boat could still be salvaged even if sunk, in order to prevent it from suffering greater damage.

The boat was in a reasonable condition despite what happened to it. It was shown that Grech and Galea had incurred expenses to resurface the boat from the bottom of the sea.

In absence of any agreement, compensation had to be liquidated by the court. Compensation had to be large and liberal if there existed all elements to claim salvage at the time when the vessel was in distress or passing through such danger. Compensation was due even if not requested.

Article 346(2) of Chapter 234 provides:

In determining the amount or the apportionment of salvage, the court shall have regard to:

the measure of success obtained and the efforts and deserts of the salvor;
the danger run by the vessel saved, by her passengers, crew and cargo;
the danger run by the salvor and the salving vessel;
the time expended, the expenses incurred and the losses suffered, and the risks of liability and other risks run by the salvors, and also the value of the property exposed to such risks, due regard being had to the special appropriation (if any) of the salvors vessel for salvage purposes;
the value of the property saved.

In view of the value of the boat (€11,650) and the damage (€7,000-€8,000), the value of the boat after it was rescued was €4,500. The court awarded €2,000 compensation to be divided equally between each claimant, Grech and Galea.

Aggrieved by the decision of the First Hall of the Civil Court, Azzopardi entered an appeal calling for its revocation.

He reiterated his claim that Grech and Galea carried out such operation not to salvage it but to take it for themselves. They should have notified the receiver of the wreck and as they failed to do so, they forfeited their right to salvage, he claimed.

The Court of Appeal maintained that save for serious reasons it would not disturb the first court’s appreciation of facts.

As a general rule, each time a vessel was in danger and given assistance, there was a ground for compensation. In Chorley & Giles’s Shipping Law, the situation was explained by the English courts (Kennedy case 1985

“On the one hand, [the danger] must not be either fanciful or only vaguely possible or have passed by the time the service is rendered. On the other hand, it is not necessary that distress should be actual or immediate or that the danger should be imminent, it will be sufficient if, at the time at which assistance is rendered, the subject-matter has encountered any misfortune or likelihood of misfortune which might possibly expose it to loss or damage if the services were not rendered… [T]here must be such reasonable, present apprehension of danger that, in order to escape or avoid the danger, no reasonably prudent and skilful person in charge of the venture would refuse a salvor’s help if it were offered to him upon the condition of his paying a salvage reward.”

In this case the vessel sank and under article 343(1) of Chapter 234 the right for salvage existed even if the boat sank.

This Court of Appeal agreed with the first court, as regards the elements to qualify for salvage. The danger need not be absolute.

The court said that Grech and Galea carried out salvage work. They had no obligation to assist and did so voluntarily with the intention of either keeping the boat or to request compensation.

This was an issue which had to be determined in the discretion of the court, hearing the case. In this case the first court found that there was justification for this failure.

Grech and Galea cooperated with Azzopardi and the police. They agreed to release the boat immediately to Azzopardi and demanded compensation.

This court said that the first court exercised its discretion reasonably and it agreed with its decision.

Article 345(2) of Chapter 234 was considered by the first court when it liquidated compensation to amount to €2,000. The court agreed with the liquidation of damages by the first court.

For these reasons, on December 15, 2015, the Court of Appeal dismissed the appeal of Azzopardi and confirmed the decision of the first court of July 7, 2011.

by Dr. Karl Grech Orr, shipping partner at Ganado Advocates and member of the MMLA

Source: The Times of Malta, 11 January 2016

Member of the Comité Maritime International

Court affirms scope and effect of Section 37 injunctions where security has been placed

Court orders extension of effects of flag injunction to security deposited by debtor

Court lifts physical bunker supplier’s arrest of vessel

Unnecessary risks constitute breach of marine insurance policy

Facts

Decision

Comment

Compensation for Salvage

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