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Bank entitled to 'arrest' ship without providing damages undertaking

A bank is entitled to 'arrest' a ship without providing the same cross-undertaking in damages typically required by the courts when granting a freezing order, the Court of Appeal has confirmed.13 Dec 2018

Shipping law expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com, said that the judgment would nevertheless be read with interest by many in the shipping industry. The appeal court disagreed that current practice could only be changed by an act of parliament or by the Comite Maritime International (CMI), which seeks to unify maritime law; raising the possibility that a court may be able to require a cross-undertaking in damages in different circumstances in the future, he said.

"The court was reluctant to depart from the long-established and widely-used practice, without consensus among commentators or pressure from the maritime industry," he said.

"Arrest, therefore, remains a valuable right and tool for claimants to ensure that claims against ship owning companies, which usually have no assets other than the ship itself, are worth pursuing," he said.

NatWest had seized a vessel belonging to Stallion Eight Shipping Co. SA as part of a dispute over the outstanding balance of a substantial mortgage over the ship. Stallion Eight had failed in its application to the High Court to have the vessel released or for the bank to provide a cross-undertaking in damages, which would cover it for any losses it sustained as a result of the arrest.

The right to 'arrest' a ship in order to obtain security for a claim against the ship's owner, or against the vessel itself in some circumstances, is long established in England and in many other countries. In these cases, what often happens is that the owner's indemnity insurer or P&I club, or the hull and machinery insurer, will put up security to enable the ship to be released and continue trading.

If the arrest turns out to have been wrongful, because the underlying claim was not well-founded or is withdrawn, then the ship owner has no remedy against the arresting party unless they were grossly negligent or acted in bad faith. This differs from the position where the court grants a freezing injunction or other injunction, as in these cases the court is required to balance the rights of all the parties. A vessel that remains under arrest can cause significant losses to the owner, particularly if the owner only has one ship and no other assets.

In this case Stallion Eight was not able to obtain security from its insurers, because the bank's claim was based on a loan secured by a mortgage on the vessel. It therefore applied to the court to exercise its discretion to lift the arrest, or to require the bank to provide a cross-undertaking in damages. High Court judge Mr Justice Teare refused to do so, while also noting that under the existing case law a ship owner had no right to damages in circumstances where the bank had acted in good faith and without gross negligence.

The Court of Appeal upheld the High Court's judgment, after an extensive review of the case law and practice in both England and overseas. It noted that Stallion Eight's case "would undoubtedly undermine very longstanding domestic law, both as to maritime arrests as of right and the unavailability of damages for wrongful arrest save in cases of bad faith or gross negligence"; and that there were no unusual features about the case to justify a departure from existing law and practice.

However, the Court of Appeal disagreed with Mr Justice Teare that intervention by parliament or the CMI was required to change the rules. In its view, "it is open to the court itself to reconsider the position, but it should only do so if properly informed as to the views of the maritime community, including the practical ramifications of any proposed changes and the preferred route to be adopted if any such changes are decided upon".