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Can claimants who arrest vessels be required to give cross-undertakings in damages? No

31st Jul 2018

NatWest Markets plc v Stallion Eight Shipping Co. S.A. [2018] EWHC 2033 (Admlty)

In a decision that will be of interest to all shipping and admiralty lawyers, Robert Bright Q.C., Charles Holroyd and Marcus Mander instructed by Watson Farley Williams, have successfully defended an application by a vessel owner to have its vessel released from arrest unless the claimant bank provided a cross-undertaking in damages in the same form as that typically required on applications for freezing orders.

The vessel had been arrested on the application of the claimant bank, in its capacity as mortgagee, in the following circumstances: following a periodic valuation of the vessel, the bank had required the owner to provide additional security in order to maintain the applicable loan to value ratio under the relevant loan agreement.  The owner refused to do so, alleging that the valuation in question was excessively low, and contending that the demand for additional security had been made in bad faith.  The bank therefore declared the owner to be in default and, following the owner’s refusal to cure the default, ultimately accelerated the loan and proceeded to enforce its rights under its mortgage by arresting the Vessel.

The owner then applied for an order that the vessel be released unless the bank provided a cross-undertaking to pay any damage found to have been suffered by the owner while the vessel remained under arrest.  The owner contended that it was unable to put up security to obtain the release of the vessel, essentially on the grounds that its P&I cover did not extend to a dispute under a loan agreement and that it had no other assets which it could borrow against apart from the vessel, which was mortgaged to the claimant.  It said that the result was that, if the bank’s claim failed, it would have suffered serious losses through disruption to its business which it would be unable to recover unless it could make out the tort of wrongful arrest.  It argued that in such circumstances it was appropriate for the court to require the bank to provide a cross-undertaking in damages as a condition of maintaining the arrest.   

The differences between the Admiralty procedure of arrest and the equitable remedy of an injunction (such as a freezing order), and in particular the absence of any cross-undertaking in damages in the case of arrest, have been much remarked upon by commentators over the last 25 years.   A number of commentators, including Sir Bernard Eder writing extra-judicially in a series of well-known articles, have strongly contended that a cross-undertaking in damages ought to be required in the case of arrest and that the Court should therefore be willing to order the release of vessels unless such an undertaking is given.  However, this was the first occasion on which the question has come before the courts.

Teare J. dismissed the owner’s application, accepting the bank’s argument that the proposed order would be inconsistent with an in rem claimant’s entitlement to arrest as of right, and with the established law governing liability for wrongful arrest.  He also held that the order sought would be inconsistent with the long-standing practice of the Admiralty court, and with the decision of the Court of Appeal in The Bazias 3 and the Bazias 4 [1993] 1 Lloyd’s Rep. 101, as well as with dicta of Lord Clarke in Willers v. Joyce [2016] 3 WLR 477.  He concluded that it was not open to a first instance judge to grant the order sought, and that any change to the current practice was a matter for the legislature or at least the Rules Committee after proper consultation.  

To view the judgment please click here.

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