News & Thinking
Ship Arrests – How Do They Work?
This article Appeared in the October 2020 issue of The Shipping Gazette
The drama surrounding recent ship arrests in New Zealand has captured the attention of the shipping fraternity here, with several readers emailing me to try and grasp what is going on.
The specifics of the cases in question are emerging via complex High Court rulings, and perhaps when the legal dust settles, I’ll be able to look at the specifics and translate them into layperson language so we all grasp exactly what were the arguments and counter-arguments.
For now, I thought it would be helpful for the shipping fraternity to get an overview of the mechanics of ship arrests, to understand how the legal process works in these cases.
With several legal firms involved in the current cases, I contacted an independent transport and logistics lawyer with no connection to the proceedings, Chris Dann of law firm Anthony Harper, to assist me with answers to basic questions.
First, why is a ship arrested? In general, because of an unpaid debt relating to the vessel. Says Chris: “A unique feature of Admiralty law is that a person with a certain type of claim related to a vessel (or her cargo or other property) can have that vessel, cargo or property arrested and either held as a form of security until that claim is settled, or sold with the proceeds used to meet the claim (and any other third party claims).
“Arrest is available for claims that give rise to a maritime lien (e.g. damage by the vessel, salvage and seafarers’ wages) and claims listed in the Admiralty Act 1973, including claims relating to:
- possession or ownership of or security over a vessel
- death or injury as a result of a defect in a vessel or its equipment
- the carriage of goods on a vessel
- goods, materials or services supplied to a vessel
- the construction or repair of a vessel or for port charges, or
- salvage, towage or pilotage
“The vessel which is the subject of a maritime lien can be arrested regardless of who owns it. Other claims under the Admiralty Act can only be brought against a vessel if the person who owes the debt is also the owner or demise charterer of that vessel (or, in some cases, a sister ship).”
So who can initiate an arrest?
“Anyone with a claim of the type referred to above. They initiate an arrest by issuing proceedings against the vessel in the High Court and apply for a warrant of arrest. The party seeking the arrest must provide an indemnity and security (usually upfront payment) to the Registrar for the costs likely to be incurred in relation to the vessel, such as port and crew costs.”
“In bygone days the arrest warrant was served by nailing it to the mast but now it is served by attaching a copy to the bridge or some other conspicuous part of the vessel and leaving a copy with the person in charge. It can be served in port or by helicopter or boat anywhere in NZ’s territorial waters.”
From then, the Registrar is in custody and control of the vessel and no one can deal with it without the Registrar’s say so.
The arrest procedure is quick, relatively inexpensive (although the upfront payment as security for the Registrar’s costs can be significant) and available against any vessel regardless of whether NZ- or foreign-flagged.
Chris says that arrest is usually an efficient and effective remedy because the vessel owner/operator will normally be highly motivated to deal with the underlying claim (either by settlement or by posting security for the claim) in order to get the vessel released – “The cost, inconvenience and potential for further third-party claims as a result of having a vessel out of action because of arrest, incentivises rapid resolution.”
Should the ship owner/operator dispute the claim, they will make a payment into Court as security for the claim, so that the ship can be released. If the claim is covered by insurance, the insurer will usually offer security to obtain release of the vessel.
Normally, cargo is not arrested with the ship but a Court order would be required to obtain a discharge of the cargo while the vessel remains under arrest. Those costs, delays and resulting further claims against the vessel operator are further motivating factors to obtain a release of the ship as soon as possible.
If the claim is not resolved, any party to the proceeding (not just the arresting party) can seek the sale of the vessel by the Court with the proceeds distributed in a manner determined by the Court. The arresting party is not entitled as of right to any particular priority to those proceeds, although the costs of arrest are generally the second highest priority (after the Registrar’s costs).
However if the vessel owner or operator is insolvent, matters can become more protracted and complex. In the collapse of South Korean container line Hanjin Shipping in 2016, a swag of parties became involved including the receivers of Hanjin, owners, charterers, mortgagees, cargo owners, fuel suppliers, provedores and ports.
The ship can only be released if the arresting party allows it to be (and pays the Registrar’s costs in connection with the arrest) or the Court orders release.
While the ship is detained, there may be cargo onboard that is unconnected to the dispute. Who compensates the shipper/importer for any time delays?
Liability for those delays depends on a number of factors, including the terms of the contract of carriage (which will often exclude any liability for delay) and the terms of the sale contract for the cargo (e.g. at what point do the seller/consignor’s delivery responsibilities end, and is that party liable for delay?).
That takes us to bills of lading, and the legal status of ownership of the goods while the ship is on the water. I should note the following point is general and not necessarily relevant to the recent log ship arrests.
Ownership of cargo is usually determined by the supply contract between the buyer and seller. Title normally passes to the buyer on payment which may be before, during or after the delivery voyage. Often, payment is made and title passes to the buyer on issue of the bill of lading when the goods are loaded at the load port. Once the buyer is in possession of the original bills of lading, they have evidence of their entitlement to the cargo on arrival at the destination port.
If the vessel is under arrest, a court order is required for the release of cargo on board, although such an order should readily be obtained if the consignee can present clear evidence of ownership or entitlement to the cargo (such as a bill of lading, although other evidence may also suffice).
Further issues could however arise if other parties have an interest in the cargo, e.g. the carrier may have a lien over the cargo for any unpaid freight (although that lien may be defeated by arrest of the vessel). Or, the port may exercise a lien over the cargo for unpaid port charges, including stevedoring charges for unloading and/or storing the cargo (which is what happened in the Hanjin Shipping debacle).
The above gives us a general overview of arrest procedures and cargo ownership provisions. It is not intended to be specific to the cases currently being disputed, but I hope it gives readers a better grasp of the mechanics of how arrests play out.
My thanks to Chris Dann for providing guidance on the legal mechanics involved.
Article written by Dave MacIntyre