Wednesday, 13 September 2017

When an owner can sell its charterers’ cargo: an application to the English Court

September 13, 2017.

Dainford Navigation Inc. v. PDVSA Petroleo S.A. (Moscow Stars) [2017] EWHC 2150 (Comm)

In this case, the Owners had exercised a contractual lien over their Charterers’ cargo on board the vessel due to failure to pay hire. The hire dispute was being resolved in arbitration proceedings but, during this time, the Owners’ vessel was effectively being used as a floating warehouse as the cargo could not be discharged into storage. The decision provides an illustration of when an owner can obtain an order for sale of cargo on board before the conclusion of arbitration proceedings, thereby releasing the vessel for other employment.

The background facts

The vessel was time-chartered to PDVSA, the Venezuelan state owned oil and gas company. The Owners stated that there had been repeated failures to pay hire since January 2016. On 14 October 2016, a cargo of crude oil, owned by the Charterers, was loaded in Venezuela and the vessel was ordered to proceed to the Bahamas for discharge. On 18 October, while the vessel was off the discharge port, the Owners exercised a contractual lien over the cargo due to the Charterers’ failure to pay hire. The Charterers subsequently ordered the vessel to Curacao, where she had remained ever since with the cargo on board. The Owners commenced arbitration against the Charterers for the unpaid hire and now brought an application to the English Court for an interim remedy, requesting an order for the sale of the cargo on-board the vessel, with the proceeds to be held as security pending the outcome of the arbitration.

The Commercial Court proceedings

“Goods the subject of the proceedings”

Under s. 44(2) of the Arbitration Act 1996, a party to an arbitration can apply to the English Court for sale of goods if those goods are “the subject of the proceedings” (meaning the arbitration proceedings). This gave rise to the question whether the cargo in this case was “the subject of the proceedings”. The Charterers argued that the cargo was not the “subject”– the alleged unpaid hire was the subject of the proceedings – and so this requirement was not satisfied. The Court rejected this argument. It stated that, because of the lien, neither party could deal with the cargo until the arbitration dispute was resolved. Accordingly, even if the arbitration was not “about” the cargo, the arbitration would certainly determine what would happen to the cargo. The Court did not comment on what the position would be if the cargo had been owned by a third party that was not a party to the arbitration.

 “Good reason…to sell quickly”

The Court also needed to satisfy the requirements of Civil Procedure Rule 25.1, which states that an order for sale of goods could only be made where the goods are of a perishable nature (not applicable here) or which, for any other good reason, it is desirable to sell quickly.

The Owners argued that there was good reason to order sale of the cargo in this case. Although there had been efforts to arrange discharge of the cargo into storage, for various reasons this had not proved possible. The cargo had been on board the vessel for over nine months at this point and, even if the Owners were successful in the arbitration, it would likely remain on board for many more months. During this time, the Owners incurred the usual operating expenses but were not receiving hire. Additionally, the vessel needed to be cargo-free for drydocking in January 2018 as SOLAS and Class inspections were due.

The Court agreed with the Owners that there was good reason for an order for sale. It also noted that the day before the hearing, the Charterers had made an open offer to sell the cargo themselves and pay the sale proceeds into escrow. This made it clear that any order for sale would not be interfering with the Charterers’ proprietary rights in the cargo, as it was going to be sold anyway.

The Court concluded that the sale of the cargo should be ordered as the jurisdictional and discretionary factors were satisfied.

Comment

Where owners have exercised a lien over the cargo on board their vessel, the parties are often faced with an impasse. The Charterers cannot deal with the cargo because it is held under lien, but the Owners cannot deal with the cargo either, as often the Owners’ right to the lien must be established in arbitration – which might take many months. If no suitable storage can be found, then the Owners are faced with the unpleasant prospect of storing the cargo on the vessel, thereby removing her from employment.

This Court decision will provide the Owners with some degree of comfort that, in such a situation, it is possible to apply to the English Court for an order for sale of the cargo as an interim remedy, pending resolution of the dispute in arbitration.

Source: http://www.incelaw.com/

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