Are ship arrests unconstitutional?
Constitutional Court declines to consider whether associated ship arrests are unconstitutional
Malcolm Hartwell, Director, Head of Transport and Master Mariner at Norton Rose Fullbright takes a look at the implications of the Constitutional Court rejecting an application for leave to appeal brought by a shipowner, Parakou Shipping Pte Ltd against a judgment of the Supreme Court of Appeal (SCA) upholding the arrest of an associated ship. In doing so, the Constitutional Court found that the application for leave to appeal did not raise a constitutional issue. The effect of this is that the SCA’s judgment, which favours a broad interpretation of the associated ship arrest provisions in the Admiralty Jurisdiction Regulation Act of 1983, remains South African law. Plaintiffs should be pleased by this development and shipowners should be aware of it.
The judgment has in its genesis the collapse of financial markets in 2008 which saw charterparty rates plummet by 95% almost overnight. In July 2008, Parakou Shipping had just concluded a five year time charter for a vessel at the high prevailing rates. When the owner of that vessel Galsworthy Pty Ltd (Galsworthy) tendered delivery of the vessel, Parakou Shipping refused to accept delivery because similar vessels were then available at around 5% of the agreed rate. This resulted in London arbitration awards in favour of Galsworthy of approximately US$60 million which Galsworthy sought to enforce by way of the arrest of associated ships in South Africa.
The Act provides that a claimant can obtain an order for the arrest of ship or arrest a ship in rem if it is has a claim in personam against her owners or if the ship to be arrested is an associated ship to the ’wrongdoing’ vessel. For the purposes solely of association, the charterer is deemed to be the owner of the wrongdoing ship. Galsworthy effected three arrests over a period of several years on the basis that the arrested ships were owned, at the time of the arrest, by a company which was owned or controlled by the same person who owned or controlled Parakou Shipping at the time Parakou Shipping concluded the charterparty on the original vessel.
Two of the arrests were set aside by the trial court and one was upheld. The latter arrest was then set aside by the KZN High Court acting as the first appeal court. Galsworthy took that decision on appeal to the SCA.
The second arrest effected by Galsworthy was of the mt Pretty Scene. The Judge hearing Parakou Shipping’s application to set aside that arrest advised on a Friday that he intended handing down a judgment the following Monday advising whether or not the arrest should be set aside. Without advising the Registrar of the existing arrest, Galsworthy obtained a warrant of arrest on identical terms under a new case number and arrested the vessel again. In his Monday judgement, the Judge set aside the first arrest of the vessel and Parakou Shipping brought an application to set aside the second arrest. This was on the same grounds as the first arrest and in addition Parakou argued that the second arrest was an abuse of process and in breach of Court Rules. The abuse was on the basis that firstly Galsworthy did not set out any allegations regarding association and secondly that the KZN High Court Practice Directives required an arresting party to draw to the attention of the Registrar any relevant issues when obtaining a warrant of arrest.
Parakou argued that where there was an existing arrest for the identical claim, this was the fact that should have been drawn to the attention of the Registrar.
As a result of the second arrest, the mortgagee bank applied for and obtained an order for the sale of the vessel by way of judicial auction and all of the proceeds of that sale were allocated to partial discharge of the mortgagee bank’s claim leaving nothing for any of the other creditors, including Galsworthy. The second arrest was subsequently upheld by a different Judge. Both arrests were set aside by the Full bench of the KZN High Court.
During the intervening years, Parakou Shipping was liquidated in Singapore. On further appeal to the SCA, the owner of the arrested ships argued that Galsworthy’s claim arose at the time the arbitration awards were handed down. This was on the basis that English law provides that an arbitration award replaces the claimant’s original cause of action under the charterparty and on the basis that the charterparty provided that any disputes under it were to be governed by English law. Parakou Shipping accordingly argued that when Galsworthy’s claims arose, it was not the actual charterer and accordingly not the deemed owner of the original vessel and that, at that time, the charterer was in liquidation and accordingly under the control of the liquidator and not of the original shareholders in the company who owned the companies that owned the arrested vessel.
The SCA rejected these arguments and upheld the arrest.
In doing so, the SCA held, amongst other things that:
- Parakou Shipping knew, or ought to have known the basis on which Galsworthy alleged the ships were associated because this issue had been dealt with in the first arrest and, after the second arrest, the attorneys acting for Galsworthy advised Parakou Shipping’s attorneys of the basis of association. This, the SCA held, was sufficient to discharge the obligation on Galsworthy to set out the basis for its arrest. This effectively allowed Galsworthy to make out its prima facie case by way of correspondence and in its subsequent particulars of claim. Given the onerous consequences of an arrest which, in this case, led to the sale of the vessel, this was surprising;
- Although the charterparty and arbitration awards were governed by English law, the SCA was of the view that South African law would apply as to whether or not the arbitration awards constituted a new cause of action which replaced the original cause of action under the charterparty (which is the position under English law) and held that the arbitration awards merely reinforced the underlying claim. The relevant time for determining association was accordingly when the underlying claim arose;
- The fact that Parakou Shipping did not take delivery of the vessel under the charterparty and accordingly was never the factual charterer of the ship, did not mean that they were not the charterer and accordingly the were held to be the deemed owner for the purposes of association;
- The second arrest of the mt Pretty Scene was not an abuse of process even though both arrests were on identical terms for the same cause of action. Given that this resulted in the sale of the vessel, this finding is surprising as it means a claimant can effectively prevent an arrest from being set aside by repeatedly arresting the same ship for the same claim; and
- The court directive requiring arresting parties to draw relevant circumstances to the attention of the Registrar when seeking an arrest warrant were not in line with the judgment in another matter which induced the court to issue the directive. In any event, the first arrest of the vessel was not, for inexplicable reasons, a relevant circumstance that should have been drawn to the attention of the Registrar considering the issue of the second arrest warrant.
Parakou Shipping brought an application for leave to appeal to the Constitutional Court on the basis that the association ship provisions should be given a very narrow interpretation rather than the broad interpretation favoured by the SCA. This was because the effect of the associated ship provisions was to deprive Company A of its private property for debts owed by Company B. This was allegedly in breach of the Constitution’s guarantee of the right to private property. The complaint was not that the associated ship provisions themselves are unconstitutional simply that they should be interpreted narrowly.
The Constitutional Court rejected the invitation to consider this constitutional argument and accordingly the broader approach favoured by the SCA stands.
That judgment means that, on the face of it, multiple arrests for the same claim do not constitute an abuse of process. In addition, strict compliance with the Court Rules that require parties to set out the allegations and conclusions in law that they rely on to advance the claim is not required. In addition, the KZN High Court directive can, in the vast majority of cases be ignored. These three consequences have unfortunate implications for shipowners and their insurers.