Commercial Court considers the equitable duties of a mortgagee in respect of vessels held as security.
Jason Robinson represented the successful claimant in a summary judgment application. The claim was for unpaid debts due under a loan agreement. The defence run by the defendants was that the bank had breached equitable duties owed as a mortgagee, with respect to the sale of two vessels which constituted the bank’s security for sums due from the defendants, and any sums due to the bank were extinguished by sums due by the bank to the defendants by way of an equitable account. The vessels were not sold by the bank. They were arrested by the bank in Djibouti, where they were already subject to arrest by other trade creditors. The vessels were ultimately sold by the Djibouti Port Authority, without the bank’s knowledge or consent.
The defendants’ case was that the bank breached its equitable duties by failing to ensure that a market price was obtained for the sale of the vessels. The Commercial Court found that there was no evidence that the sale was made at the behest, or on behalf, of the bank, and so the bank never became subject to any equitable duties that apply when a mortgagee exercises a unilateral right of sale (§9-§12). The defendants also argued that, when the bank arrested the vessel, it not only became subject to an equitable duty to arrest the vessels in good faith, but fell under an equitable duty whose scope depended on the facts of the case, which should be investigated in full at trial (relying on Medforth v Blake [2000] Ch 87, 102). The Court found that Medforth had no application, and the argument advanced by the defendants was precisely that which had been refused at first instance in The Tropical Reefer [2003] 2 All ER (Comm) 318 (§13). The defendants then argued that the bank was under a duty to force a sale when it had received expressions of interest from third parties to purchase the vessels. The Court found that a mortgagee bank is under no such duty, and has an unfettered discretion as to whether and when to exercise a unilateral right of sale (§14, citing Silven Properties Ltd v RBS [2004] 1 WLR 997). Finally, the defendants argued that the bank was under a duty to collect sums obtained by the Djibouti Port Authority upon the sale of the vessels. The Court found that this was unarguable in circumstances where all the bank had done was arrest the vessels, and therefore came under no duty other than to arrest the vessels in good faith (§15).
The Court also went on to affirm the extent of a mortgagee bank’s equitable duties when taking possession of vessels over which security is held, by reference to the first instance and Court of Appeal judgments in The Tropical Reefers (§16-§18).
This is a rare case considering the extent of a mortgagee bank’s equitable duties in a maritime context, which affirms the limited extent of that duty where the mortgagee arrests the vessels, and the nature of the duty in circumstances where the mortgagee either takes possession of the vessels, or exercises a unilateral right of sale.
Jason Robinson was instructed by Watson Farley & Williams LLP on behalf of the Claimant.
