In recent years Rule B relief in New York has gained the reputation for being an effective and low cost means by which to obtain security for a maritime claim through the attachment of US Dollar electronic funds transfers ("EFTs") transiting the New York banking system.

The utility of the Rule B on EFTs has been on the wane but for a claimant who needed security with no obvious target, it has provided a lifeline.

However, on 16 October this year, the United States Court of Appeals for the Second Circuit issued its judgment in The Shipping Corporation of India Limited v. Jaldhi Overseas Pte Limited which has the effect of bringing to an end the Rule B attachment in its most common form.

The Court held that its earlier 2002 decision in Winter Storm Shipping v. TPL, which formed the legal basis for the attachment of EFTs, permissible under Rule B of the US Admiralty Code, was to be overruled. Indeed, because it concluded that it was going to have to overrule an earlier case which in legal terms had only recently been decided, the Court thought it wise to canvas the views of all the judges of the Court "in active service". In short, the Court concluded that Winter Storm was "erroneously decided and therefore should no longer be binding precedent in our Circuit".

The court gave two reasons why Winter Storm was wrongly decided:

Firstly, its reliance on Daccarett1, a case involving the attachment of proceeds of crime, to conclude that EFTs were attachable property, was wrong.

Secondly, public policy reasons. The "effects of Winter Storm on the federal courts and international banks in New York are too significant to let this error go uncorrected", simply to avoid overturning a recent precedent. Indeed, it is clear from the Court's judgment that it was heavily influenced by submissions that the volume of Rule B applications had reached such a level that, it concluded, New York's preeminence as a world financial centre and the role of the US Dollar as a reserve currency were both in jeopardy as a consequence.

For now (subject to appeal), the position appears to be as follows:

EFTs which are being remitted to the defendant/target of the Rule B are definitely off-limits. The Court concluded that these cannot be considered to be intangible property of the defendant. With regard to EFTs remitted by the defendant, so-called "orginator EFTs", this remains an open issue, at least until someone challenges the attachment of such EFTs. The case has actually been sent back to the first instance court so it can consider this issue, but there is a high probability that it will never be heard of again because of the likelihood the parties will settle their differences.

Going forward

There are countless commercial arbitral references and court cases in London where a party has obtained security by way of a Rule B application.

If, following a successful Rule B attachment of funds, a defendant has provided security by way of a bank guarantee, P&I Club Letter of Undertaking, insurance bond, or cash, the beneficiary should remain secure, notwithstanding this decision.

However, if the security held by a beneficiary is represented by frozen EFTs, under Rule B, then the beneficiary of the frozen funds may find that such security evaporates because either the banks unilaterally decided that they are no longer bound by the Court's earlier order, as a consequence of this judgment, or, alternatively, as a result of an application for the funds to be released. It would seem difficult to resist such an application.

Alternatives

Rule B can still be relied upon to attach hire, a bank account and/or bunkers. Other possibilities are the arrest of vessels, cargo and bunkers, and/or the attachment of debts owed by, for example, banks. Some jurisdictions have a reputation for offering a fast and relatively low cost form of arrest and/or attachment, e.g. the Netherlands and Switzerland. Finally, many common law jurisdictions offer freezing order relief.

Conclusion

Although there are many other alternatives available for obtaining security, none are as low cost and easy to obtain as the Rule B and claimants will be disappointed that this remedy has apparently been consigned to the history books.

Those who have been on the receiving end of Rule B will however be delighted. Where they have registered in New York, to protect themselves from Rule B, they may now wish to reconsider this decision given their potential exposure to US jurisdiction generally.

Footnote

1 (United States v Daccarett (2d Circ. 1993))

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.