Moscow Stars - To sale or not to sail....?

February 2018

Video article

The recent case of Dainford Navigation Inc v PDVSA Reptroleo SA (The Moscow Stars) [2017] EWHC 2150 (Comm) dealt with an application made by Owners of the vessel for an order for the sale of cargo, pursuant to section 44(2)(d) of the Arbitration Act 1996. In doing so, the court clarified two legal issues:

a) the legal concept of the phrase ‘’goods the subject of proceedings’’ set out by section 44(2)(d) of the Arbitration Act 1996; and
b) the requirement for ‘’good reason for sale’’ under the English Civil Procedure Rules (‘’CPR’’) 25.1(c)(v).

Facts

A cargo of crude oil was loaded on board the ‘’Moscow Stars’’ on 14 October 2016 pursuant to a time charter between the claimant Owners and the defendant Charterers at Puerto La Cruz, Venezuela. The vessel was ordered to proceed to Freeport, Bahamas to discharge. Due to Charterer’s repeated failure to pay hire, since January 2016, there was an outstanding balance of US$4.5 million due.

As a consequence, on 18 October 2016 and 26 November 2016, the Owners gave notice in order to exercise a contractual lien over the cargo. On Charterers’ orders the vessel then sailed to Bullen Bay, Curacao where she remained and where Owners arrested the cargo with the permission of the local court. Although the Charterers made some payments, they remained in arrears. Therefore, Owners commenced arbitration proceedings, as per the relevant London arbitration clause of the applicable charter party, in respect of outstanding hire and other outstanding sums totalling US$7.7 million. Owners, in the meantime, were incurring all the running costs of the vessel as well as the cost of bunkers.

On 5 May 2017, Owners applied to the English High Court to obtain an order to sell the cargo on board the vessel under section 44(2)(d) of the Arbitration Act 1996. The Court heard this would enable the vessel to be redelivered to Owners with the security rights under the lien and the arrests transferring to the sale proceeds. Charterers argued against this on the basis that the cargo was not the subject of the proceedings and in any event there was no good reason to order a quick sale of the cargo.

Legal requirements

  1. As per section 44(2)(d) of the Arbitration Act 1996, English courts can order the sale of cargo on board the vessel when the goods are the ‘’subject of the arbitral proceedings’’.
  2. As per Part 25.1(c)(v) of the CPR, such power can be exercised if the cargo is perishable or if there is some other ‘’good reason that it has to be sold quickly’’.

‘’Goods the subject of the proceedings’’

The question was whether the cargo of crude oil was the subject matter of the arbitral proceedings; only then would the court have the power to order the sale.

Charterers argued that the phrase should be interpreted extremely narrowly requiring the goods and cargo to be the actual subject of the dispute, unlike here where the proceedings actually focused on the unpaid hire.

However, Mr. Justice Males disagreed noting that the facts of the case indicated there was an impasse between the parties which required the court’s assistance since, whilst the arbitral decision was pending, the parties were not able to determine what would happen to the cargo. Without the arbitral decision, the owners could not enforce its lien and the charterers could not obtain delivery and so, even if the arbitration was not about the cargo itself, it would certainly determine what would happen to it. In reality, the lien was exercised over the cargo as a security for the claim which was advanced in arbitration. On this basis, the Court held that there was sufficient nexus between the cargo and the arbitral proceedings due to the fact that the lien was exercised in support of the arbitral claim and the court had the power to order its sale.

‘’Good reason… to sell quickly’’

The second requirement is that the Court’s power (to order the sale as per section 44 of the Arbitration Act 1996) could only be exercised if the goods are perishable in nature (which in this case they were not) or there is a good reason to sell them quickly. The Court had to decide whether it was appropriate to exercise this discretionary power.

Owners argued the cargo had been on board the vessel more than nine months and in the absence of the Court’s order it would remain on board for an unknown period of time. Owner’s position was prejudiced as they were not receiving hire and at the same time they were incurring the operational costs of the vessel and could not re-employ her. Finally, deadlines to comply with Class and SOLAS requirements were fast approaching for Owners.

The Court took note Charterers had made a last minute offer to arrange for the sale of the cargo and pay the funds into escrow, which appeared to be a belated recognition that the sale of the cargo was the only viable course; although the Court saw a number of difficulties if Charterers were to arrange a sale.

Therefore, Mr. Justice Males took a realistic approach and held that in the absence of a viable alternative (storage of cargo was held not to be a viable solution), the sale by Owners could convert the cargo to money which would benefit all parties and the vessel would be free to seek her next employment.

Comment

Despite the fact that orders for sale have been made by courts before, this decision is a welcome development for Owners. It is a fully reasoned judgment which does not enable courts to make sovereign orders for sale as a freestanding relief but sets out specific requirements by clarifying the relevant law (section 44 of the Arbitration Act 1996 and part 25 of the CPR). Additionally, it provides a possible solution for Owners when they face a commercial and contractual impasse pending an arbitral decision. However, the judgment is based on the particular facts of the case and the Court made clear they were not commenting on a situation where the cargo was owned by a third party and not by Charterers.

Article by Agapi Terzi
Syndicate Executive
Americas Syndicate
Agapi.Terzi@simsl.com