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Tramp owners face ship arrests in third party payment disputes
Growing numbers of ship arrests globally have revealed a potentially huge problemfor tramp owners. “There has been a significant rise in ship arrests in recent months,” said DLA Piper lawyer Carsten Grau. “This could be explained by the economic crisis in general, and in particular by depressed financing arrangements, and by a decreasing paymentmorale.”
Schutzverein Deutscher Rheder, a traditional mutual insurance association for owners, has observed a marked increase in the number of its own members facing arrest. “That is a development you can see during every [economic] crisis,” said deputy general secretary of the association Michael Wester. Mortgagees responding to late repayments often trigger such arrests, he said.
Third parties are often affected by a ship arrest, as well as the company or individual that has defaulted. For example, owners that have chartered out a vessel to an operator can face arrest if the charterer fails to pay the bunker bill.
Tramp owners face arrest because charterers owe outstanding payments to bunker companies and other suppliers. “If a charterer does not fulfil its obligations for the payment of the bunker oil during a timecharter agreement, an arrest is likely during which the remaining bunker will be pumped out,” Mr Grau said. This forces the owner to claim costs and loss of time arising from the procedure from the charterer.
In some cases, a ship can be arrested after a change of ownership. In such cases, the new owner can face arrest, even though it was not responsible for the outstanding payments,Mr Grau said. This action is often taken under UK law, which has a legal principle of “action in rem”, he said. In such cases the new owner will have to claim costs from the previous owner.
Often, it is ship financing banks, shipyards or component makers and bunker suppliers that push for ship arrests. Banks most often arrest the ships for the purpose of foreclosing. In other cases, the arrest is lifted once the yards or bunker suppliers have been paid. SDR’s Mr Wester says that owners need to take precautions against ship arrests. They can place a contractual obligation to ensure that the charterer procures bunkers at its own expense,with no lien on the ship. Under US law he recommends that suppliers to the charterer confirm that they have taken note of this clause. Mr Wester says that such rules can be difficult to enforce, particularly in tough markets where charterers have a strong hold over tramp owners and will vigorously defend any question over their credit-worthiness. “It is very difficult to protect against such a situation,” he said.
Recent years’ sharp increases in bunker prices has only served to increase the sums subject to dispute. SDR says that its member companies owe up to €1m($1.3m) in unpaid bunkers. Tramp owners will frequently be lumbered with at least part of these expenses, Mr Wester said, partly a result of the legal framework, but also of commercial pressure to put the vessel back in operation and not wait for the outcome of lengthy court proceedings. In December, German KG tanker DS Performer was auctioned before the court of Aruba, part of the Kingdom of the Netherlands. The vessel was sold within five weeks of arrest. The mortgagee, Germany’s Commerzbank, was assisted by law firm VanEps Kunneman VanDoorne. “Aruba is an obvious choice of jurisdiction for the enforced sale of vessels due to its location and the reliability of its legal system,” said Eva Pennings, an associate with the law firm. Aruba had a very practical advantage over other places, Ms Pennings said, offering easy offshore anchoring that compensated for a shortage of berthing space in port.
Arresting ships has always been an international business, Mr Grau stressed. However, part of the game is to find a jurisdiction where prospects of success are highest. “Not all jurisdictions are comparably arrest-friendly,” he said. All jurisdictions based on UK law are more or less advantageous when it comes to arresting a ship, he said.Other classic locations include India, Australia,New Zealand and Israel. In Europe, the Netherlands and Belgium are arrest-friendly. Germany places the highest legal barriers preventing arrest, and is seldom chosen. In Germany claimants have to provide both a reason for the arrest, such as unpaid bills, and that there is danger that the claim will not be settled. But that could soon change.
A draft reform of the law does not include the need to prove danger of non-payment, said Mr Grau. DLA Piperwas involved in arresting six former Beluga vessels in Malta, Sri Lanka, France and India. The arrests were requested by shipbuilder Changjiang National Shipping Group in China due to outstanding payments for newbuildings that the heavylift company had ordered long before it collapsed. After the arrests, financier HSH Nordbank and Beluga’s successor Hansa Heavy Lift prepared to negotiate an agreement to settle the claims. VanEps Kunneman VanDoorne’s Ms Pennings warns that owners should not expect a pre-determined outcome fromship arrests. “In some cases negotiations following the arrest of a vessel may lead to a favourable outcome for our clients,” she said. “But lately, due to the world-wide economic climate, auctioning of vessels has become more common.”
Article by Patrick Hagen and Katrin Berkenkopf
Source: Lloyd's list, 25 January 2012