China: PRC Supreme Court's Position To Forced Sale Of Ships Arrested Securing Claims Against Bareboat Charterers----Review And Prospect

Last Updated: 30 May 2014
Article by Chen Xiangyong and Lucas Feng


Before Special Maritime Procedure Law of the People's Republic of China took into force in 2000 (SMPL 2000), three judicial interpretations were issued by the PRC Supreme Court to regulate forced sale of ships. They are the Provisions regarding Arrest of Vessels before Litigation 1986 (Arrest Interpretation 1986), Provisions regarding Maritime Courts Arrest of Vessels before Litigation 1994 (Arrest Interpretation 1994) and Provisions regarding Maritime Courts Auction of Vessels to Pay Debts 1994 (Sale Interpretation 1994).

According to the Arrest Interpretation 1986, the court can only arrest the vessels registered owned by the opponent. Then the range of vessels subject to arrest was expanded by the Arrest Interpretation 1994 according to which the court can arrest vessels operated or chartered by the opponent. The SMPL 2000 repealed the Arrest Interpretation 1986 and Interpretation 199. Regarding the Sale Interpretation 1994, the Supreme Court also scheduled to repeal it as expressed in the Maritime Trial Working Conference 2012 held by the Supreme Court. And according to Article 29 of the Consulting Draft of Provisions of the Supreme People's Court on Several Issues Concerning Arrest and Forced Sale of Vessels which was issued on November 2013 (Consulting Draft 2013), it was confirmed that the Sale Interpretation 1994 would be repealed after entry into force of the Provisions.

The Issue

The issued is that while the court can arrest vessels bareboat chartered by the opponent according to Article 3 of Arrest Interpretation 1994, however the vessels cannot be sold because the court can only force to sell the vessels registered owned by the opponent according to Article 1 of the Sale Interpretation 1994. The conflict was still not resolved by SMPL 2000, which supersedes the Arrest Interpretation 1994. Article 12 of SMPL 2000 prescribes that the court can preserve the "property" owned by the opponent. Furthermore, according to Article 23 and Article 29, the court can arrest and force to sell the opponent bareboat chartered vessels. The law is still not clear whether bareboat chartered vessel can be sold.

The Supreme Court's Position

Regarding the conflicting issue, the Supreme Court's position can be tracked back to 2012. In the Maritime Trial Working Conference 2012, Judge Liu Guixiang, President of the fourth law court of Supreme People's Court, expressed that the court can force to sell all the arrested vessels including those opponent bareboat chartered vessel in accordance with Article 29 of SMPL 2000. This position was followed by the maritime courts in different degrees.

In March 2013, the Supreme Court held a forum regarding the Arrest and Auction of Ships Related Issues at Guangzhou and further discussed the issue. The preliminary view of the Supreme Court was that the court can force to sell the opponent bareboat chartered vessel but the registered owner can rebut upon the nature of creditor's right and maritime lien.

However, the Supreme Court's position was different eight months later. According to Article 3 of the Consulting Draft 2013, "in the case where vessels are arrested due to the bareboat charterer's liability for maritime claim, maritime claimants could apply to auction the vessel in order to settling the debt according to Article 29 of SMPL 2000. However, the before provisions shall not prejudice other maritime claimants to exercise their rights against the registered owner".

The public consultation was closed on 15 December 2013. However, for the sake of prudence, the Supreme Courts has been consulting shipping law practitioners since March 2014.

Analysis and Comments

China is not a country to International Convention on the Arrest of Ships 1999 (Arrest Convention 1999). However, SMPL 2000 was drafted concerning the Convention.

According to paragraph (3) Article 3 of the Arrest Convention 1999, "the arrest of a ship which is not owned by the person liable for the claim shall be permissible only if, under the law of the State where the arrest is applied for, a judgment in respect of that claim can be enforced against that ship by judicial or forced sale of that ship". The provision can be viewed as reconciliation between common law systems and civil law systems as well as balance between shipping interest countries and cargo interest countries. It left space for the contracting countries to regulate the issue in its own domestic law and Article 3 of the Consulting Draft 2013 is such domestic law in China. It can be said that Article 3 of the Consulting Draft 2013 is in line with the aim of the Arrest Convention 1999. And it can solve the difficulty in the current practice that after arresting the bareboat charterer's vessel the court can neither release nor auction the vessel.

From the respect of domestic law, demise charter is a specific charter form under Chinese Maritime Code. The nature of demise charter has fundamental distinction with other forms of charter. The demise charter operates as a lease of the ship pursuant to which possession and control passes from the owners to the charterers whilst other charter forms, primarily comprising time and voyage charters, are in essence contracts for the provision of services. In the duration of the charter, the demise charterers are the de facto "owners" of the vessel, they employed the master and crew and through them they have possession of the vessel. Therefore, when the court arrested the vessel, the demise charterer shall be liable up to the limit of the vessel's value. If the vessel was auctioned later, the registered owner could seek indemnity according to the demise charterparty.

In the forum held by March 2013, the preliminary view concluded by the Supreme Court was similar with the law of Norway. According to Article 93 (4) of Norwegian Maritime Code, the range of vessels subject to arrest must be ascertained through reference to the enforceable assets prescribed in Norway Judicial Enforcement Act, i.e. Article 7 (1) and Article 11(4) of the Act. In another word, in most cases the court cannot arrest the vessel demise chartered by the opponent. However, there is an important exception which allows arrest and forced sale when the claim was secured by one of the maritime lines prescribed under Article 53 of Norway Maritime Code. Similarly, the Supreme Court's preliminary view is similar that if the maritime claim was protected by maritime liens the court may reject the registered owner's opposition and auction the vessel.

However, the Supreme Court's position is different eight months later when the Consulting Draft 2013 was issued. The Supreme Court then took an approach more like English law as provided under Article 21 of High Court Act 1981. Forced sale of demise chartered vessel was allowed without prejudice to the rights of other creditors. The result would be more balanced that the claimant had to consider whether there exist other creditors whose debt ranks before his, such as the right of the bank who was the mortgagee and supplied finance for the ship.

It is estimated that the Consulting Draft 2013 will be finally approved and enter into force within 2014. After entry into force, it may be needed to amend Article 111 of SMPL 2000 concerning Article 3 of the Consulting Draft. According to Article 111 of SMPL 2000, the creditors may register with the court "debts relating to the vessel". In order to avoid future conflict, it is advisable for the Supreme Court to further define the range of "debts relating to the vessel" and clarify whether it only means maritime claims or it includes other civil and commercial debt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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