UK: Ship Arrest Abroad Not In Breach Of Undertaking In Worldwide Freezing Order

Last Updated: 1 July 2013
Article by David McInnes and Silvia Mahringer

E v. M [2013] EWHC 895 (Comm)

This Commercial Court decision is of practical importance because there appears to be no previous authority on one of the principal points considered, namely whether a claimant who has obtained a worldwide freezing order ("WFO") from the English Court will be in breach of the standard undertaking in the WFO (not to seek a similar order abroad without the Court's permission) if it subsequently arrests a vessel belonging to the defendant in another jurisdiction in order to obtain security for its claim. Mr Justice Hamblen held that the arrest did not constitute a breach of the Claimant's undertaking in the WFO and refused to discharge the WFO.

The background facts

The underlying dispute related to non-payment of hire under an amended NYPE charterparty that eventually led to early termination of the charterparty by the Owners on the grounds of the Charterers' repudiatory breach of charter. The dispute went to arbitration. The Owners sought and obtained a WFO from the Court against the Charterers in support of their arbitration claims. The WFO contained the usual undertaking that the Claimants would not "without the permission of the court seek to enforce this order in any country outside England and Wales or seek an order of a similar nature including orders conferring a charge or other security against the Respondent or the Respondent's assets."

The Owners subsequently arrested a vessel that belonged to the Charterers in another jurisdiction in order to obtain security for the underlying arbitration proceedings, but did so without first seeking the English Court's permission to make the arrest application. Security was not provided and the vessel remained under arrest. The Charterers sought to have the WFO discharged on the basis that the Owners were in contempt of court for arresting the vessel in breach of the WFO undertaking and contended that the Owners should release the vessel from arrest in order to purge their contempt.

The Commercial Court decision

The Charterers argued that the Owners were in breach of their undertaking as the purpose of the arrest was the same as that of the WFO, namely to ensure that there would be assets against which an award could be enforced. They maintained that the arrest abroad was subjecting them to a separate set of proceedings which was effectively duplicating the English proceedings. The Owners submitted that the arrest order was not of a similar nature to a WFO and that it was only a charge or security "of a similar nature" to a WFO that required the Court's permission.

Mr Justice Hamblen held that the arrest of the vessel did not constitute a breach of the undertaking given under the WFO because it did not involve seeking "an order of a similar nature" to the WFO and, therefore, the Owners were not obliged to seek the English Court's permission before applying for the arrest order abroad. The Judge added that the foreign court's jurisdiction to grant such an order did not depend upon or derive from the English Court's WFO. In this respect, it is worth remembering that a WFO is not a form of security over the frozen assets as it does not confer any proprietary rights over those assets. Rather, it is an interim order that seeks to preserve the defendant's assets by prohibiting him from disposing of them or dealing with them until judgment can be obtained or satisfied.

Mr Justice Hamblen highlighted that the main purpose of the WFO undertaking is to prevent an inappropriate or oppressive extension of the WFO through its enforcement abroad or its duplication. However, a ship arrest is a different and independent right to security available abroad and is not precluded by the undertaking. Its only relevance in terms of the WFO is that, if the arrest abroad were to result in security being obtained, the Owners would be under a duty to bring that to the English Court's attention as part of their duty of disclosure and the Court might then exercise its discretion to vary the amount covered by the WFO.

Another issue the Judge was asked to consider was whether the WFO should be varied to include assets that were neither legally nor beneficially owned by the Charterers on the basis, as argued by the Owners, that the Charterers had the power to dispose of or deal with those assets, either directly or indirectly, as if they were the Charterers' own assets. In very broad terms, the assets in question were securities belonging to companies that were the Charterers' Chief Executive's private investment vehicles. The Owners alleged that the Charterers' Chief Executive was the "controlling mind and will" of those companies and, through him as their Chief Executive, the Charterers had effective control of those companies' assets.

Mr Justice Hamblen dismissed this argument. The person in control was the Charterers' Chief Executive, not the Charterers. The fact that he was the Charterers' Chief Executive did not give the Charterers control over him and there was no evidence that the Charterers exercised any control over the companies in question. The only circumstances in which the Court may make a freezing order over assets neither legally nor beneficially owned by a defendant is where the Court is satisfied that there is good reason to suppose either: (i) that the Defendant can be compelled (through some process of enforcement) to cause the assets held by the non-party to be used to satisfy any eventual judgment; or (ii) that there is some other process of enforcement by which the Claimant can obtain recourse to the assets held by the non-party. These requirements were not satisfied in this case. The mere fact that the Charterers might be able to prevail upon one of the Charterers' Chief Executive's companies to use its assets to pay any judgment against the Charterers was insufficient to justify freezing that company's assets. If anything, it would be the Charterers' Chief Executive, not the Charterers, who might prevail upon the company to do so and the Charterers' Chief Executive and the Charterers were not one and the same.

Comment

In the current market of increasing charterparty disputes, mainly as a result of non-payment of hire, it is worth keeping in mind that obtaining a WFO against a defaulting counterparty does not rule out the option of arresting a vessel abroad in order to obtain security for the underlying proceedings. A freezing order merely preserves the assets until a judgment or award can be enforced, it does not provide any security over the frozen assets, nor does it give the claimant priority over the defendant's other creditors.

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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