Admiralty Concept: Who Is the Offender the Ship owner or the Ship and Who Pays for It

ADMIRALTY CONCEPT: WHO IS THE ADMIRALTY CONCEPT: WHO IS THE OFFENDER THE SHIPOWNER OR THE SHIP AND WHO PAYS FOR IT? By Adeel Abid Advocate High Court THE ARREST OF VESSEL The Admiralty Jurisdiction of High Courts Ordinance, 1980 does not anywhere provide for the arrest but in a suit filed in rem the vessel is ordinarily arrested by an order passed ex parte on an application under Rule 731 of the Sindh Chief Court Rules (O.S.) which reads as follows:-- 731. When a suit is instituted in rem, any party may on filing an affidavit, obtain from the Court a warrant for the arrest of the property proceeded against. Based on the above rule and words, "When security shall have been given in the sum in which the suit has been instituted or such sums shall have been paid into Court..." occurring in Rule 748 it was attempted to argue that the Court has no discretion but to order security in the entire sum which has been claimed in the suit. The Court repelled the argument and held in the Alexander's Faith (1), that "This rule referred to above cannot override the power of the Court to order release of the property arrested either unconditionally or upon such condition as it may deem fit in the circumstances of the case, upon hearing the parties while disposing of the application for arrest of property finally." Thus the plaintiff is bound to make out strong case for the arrest of the vessel and has to satisfy the Court as to the genuineness of his claim as well as the maintainability of the suit before he can obtain an order of arrest. It may, however, be distinctly remembered that an admiralty suit cannot be equated with an ordinary suit filed on the original side. The Court, therefore held in Nedon (2), that the principles on which an order of injunction or an attachment before judgment is passed are not quite relevant to an application for the arrest of a vessel. Foreign vessels call at the ports in Pakistan for the specific and avowed purpose of discharging and loading cargo and then to sail away. The argument that the vessel is likely to sail away is misplaced for the purpose of an order for arrest. The object of arrest therefore is to obtain security for the claim or nothing else. WARRANT OF ARREST Warrant means an authority or a precept under hand and seal to some officer to arrest an offender or a vessel to be dealt with according to due course of law. (3) The High Courts of Sindh and Balochistan have exclusive jurisdiction on its Admiralty Side to entertain a suit in respect of damage caused by a ship to property on the high seas. The damages can be claimed in the said High Courts either by proceeding in rem, that is against the body of the ship, or by proceedings in personam, that is against the owners of the ship. Such damages can be filed in the said High Courts in its jurisdiction on the Admiralty Side. When a suit is instituted in rem, any party may, on filing an affidavit, obtain from the Court a warrant for the arrest of the property proceeded against. (4) Immediately after an action in rem is commenced, an application supported by an affidavit may be made for an arrest warrant to be issued in respect of the ship or property concerned. It is common practice in Pakistan, for an arrest of the vessel the Court's Order may be served instead of warrant. An action in rem is an action against a ship or cargo or other property on, or related to, the ship. In such an action, a ship coming into Pakistani territorial waters may be arrested for the purpose of providing security for money claimed from the ship-owners, operators and charterers. If security is not provided, a Judge may order the sale of the ship to provide funds to pay the claims. In suits in rem service of summons or warrant against ship, freight or cargo on board is to be effected by nailing or affixing the original summons or warrant for a short time on the main-mast or on the single most of the vessel and taking off the process, by leaving the copy of it issued under the provisions of the Code nailed or affixed in its place. (5) Where the proceeding is an action in rem against a ship or other property on the ship, the Admiralty Rules provide that service is affected by securely affixing a sealed copy of the Court's order or original summons to a mast or some other conspicuous part of the ship. Where the action in rem is against property that is not at the time of service on board the ship, service is effected by securely affixing a sealed copy of the Court's Order or original summons to the property or to a package or container containing the property. In the case of Bangladesh Shipping Corporation v. M.V. Nedon (6), where the Division Bench of Sindh High Court laid down the principle governing the writ of arrest in an action in rem and observed as follows: Admiralty Jurisdiction of High Courts Ordinance, 1980- Admiralty Jurisdiction---Action in rem---Action in rem lies against ship without making it defendant---Real defendant described as owner of or persons interested in ship---Writ of arrest may be effected by serving it on ship and such writ may be accepted by master or owner or by nailing or pasting it on mast or other conspicuous part of ship-Owner or person interested in rem appearing and putting defence, such person, held, becomes party to action and personally liable for whatever decreed against him. It was observed at page 249 of the above judgment that an action in rem is against a ship without making it as a defendant. The real defendants are described as owner of or person interested in the ship, and writ of arrest may be effected by way serving it on the ship which may be accepted by the master, owner or by nailing or pasting it on the mast or other conspicuous part of the ship. As a consequence of such service if the owner or any person interested in the res enters appearance and puts up defence then the person so appearing becomes party to the action and thereby becomes personally liable for whatever may be decreed against him. If no appearance is entered the action remains as an action in rem operating only against the ship arrested and if a judgment is passed in favour of the plaintiffs it can be enforced by sale of the ship but not against the owner personally or any of his property. If any authority is needed reference can be made to the observations made by the Lord Denning M.R. in the case of "The Banco" (7). A ship may only be arrested in an action in rem. The Admiralty Rules do not provide for how an action in personam is to be commenced that such an action cannot be commenced by the same initiating process as the process initiating an action in rem as it is difficult to reach the owners, operators or charterers of the vessel if they are not residing within the jurisdiction of the Court., RELEASE FROM ARREST In cases where the arrested ship is released on security being furnished being for the plaintiffs claim, the suit, unless compromised, will proceed to trial and judgment in the normal course. The main object for an arrest of the ship is to obtain security from the owners of the vessel or other interested parties. When the security is furnished the vessel should be released without any delay. In the case of Eastern Navigator the Supreme Court of Pakistan observed that: (8) "Admiralty Jurisdiction of High Courts Ordinance, 1980-- Arrest of vessel- Object---making of specific prayer for arrest of vessel in the body of plaint---Validity---Arrest of vessel is only obtained for security purposes---Where the security is furnished, the vessel is released---No legal requirement either in the English Law or in Pakistani Law to make prayer for arrest of the vessel in body of the plaint." Under Pakistan Merchant Shipping Ordinance, 2001 provided that: (9) 546. Release of Ship, etc.--(1) Where a vessel or other property is detained in connection with a claim which appears to the High Court to be founded on a liability to which a limit set by section 541 or 542 applies, or security is given to prevent or obtain release from such detention the High Court may, if the guarantee was given in a port which, in relation to the claim, is the relevant port, order the release of the vessel, property or security if the conditions specified in subsection (2) are satisfied; where the release is ordered, the person on whose application it is ordered shall be deemed to have submitted to the jurisdiction of the High Court to adjudicate upon the claim. (2) the conditions referred to in subsection (1) are- (a) that security which in the opinion of the High Court is satisfactory (in this section referred to as "guarantee") has previously been given whether in Pakistan or elsewhere, in respect of the said liability or any other liability incurred on the same occasion and the High Court is satisfied that if the claim is established, the amount for which the guarantee was given or such part thereof as corresponds to the claim will be actually available to the claimant; and (b) that either the guarantee is for an amount not less than the said limit or further security is given which, together with the guarantee is for an amount not less than that limit. The ship is usually released from arrest after security has been provided by the ship-owner or any other person who directly or indirectly effected for the arrest. The security may be in the form of bail bond, payment of money in the Court, bank guarantee, insurance company guarantee or a letter of undertaking (LOU) from the ship owner's protection and indemnity club (P&I Club). The owners may request the immediate release upon providing a sufficient bank guarantee or any other security which the Court may accept covering the amount of the claim of the arrestor. Unlike arrest, the release of a ship from arrest is discretionary. However, the usual practice of the Court is only to order release upon the provision of sufficient security t cover the amount of the claim, plus interest and costs, on the basis of claimant's reasonably best arguable case (10). The amount of security for release of a ship must be reasonable and its assessment approximates (11). Problems are, however, encountered in those cases where the ship is not released, usually because of the owner's bankruptcy and the master and crew have also abandoned the ship then the Nazir of the Court/authorized officer of the Court who has the custody and care of the ship is expected to take steps involving expenses for protecting the ship and its equipment and take necessary measure or precautionary steps in order to prevent thefts of valuable equipment and damage to the ship. In the case of "Vanessa Ann" (12), Justice Lord Staughton observed that "The Court may release arrested property without such security being provided, but this is only done in exceptional circumstances, and only where some satisfactory alternatives to ordinary security is provided." For example the Court could order the release on terms of a fishing vessel whose continued detention deprives the defendant of his livelihood and ability to pay the claim, where no injustice would be done to the claimant. RELEASE OF PROPERTY ARRESTED BY SATISFACTION OF: Where property has been arrested, the owner of the property need only tender security up to the value of the property. A maritime claimant who has instituted an action in rem against a vessel is entitled to sufficient security to cover the amount of his claim with interest and costs on the basis of his reasonably arguable best case. A following type of securities may be furnished by the ship-owners for the satisfaction of the Court in case of arrest of the vessel. (a) Bank Guarantee When the vessel is arrested, different claimants may enter caveat in the Admiralty caveat warrant book in order to safeguard their interests. The owner of the ship may also enter caveat nor to its arrest. Persons entering caveat need to be notified before the arrest takes place. In order to avoid any losses, the owner usually provides a bank guarantee so that his vessels will be released. The object of bank guarantee is not to insure against risks from which shipbuilder or other manufacturer might suffer loss; it is simply to enable him to borrow from his bank, at reasonable interest, without correspondingly reducing his capacity to borrow. (13) In 4th edition of Halsbury's Laws of England, which was published in 1973, the following appears: (14) 'The usual step following an appearance in an action in rem is for the owner of the property arrested to procure its release by giving security for the plaintiffs claim. This may be done either by paying the amount of the plaintiffs claim into Court, or by providing bail in a sufficient amount, or by furnishing a guarantee acceptable to the plaintiff. The third method is nowadays the most common in practice." Thus all that the Court does is to issue an arrest mostly ex parte and direct that the vessel be detained unless the claim amount in full is not deposited or an equivalent bank guarantee is provided for the said amount. Apprehensive of disrupting schedules, the vessel chooses to provide the bank guarantee than risk a prolonged arrest and detention. Once the bank guarantee is furnished, the matter is relegated to the appropriate civil Court where a long drawn civil battle awaits the vessel and its owners for the entire period of which the bank guarantee has to be kept alive. Banks insist on heavy interest for keeping the bank guarantee live for inordinate long period, and this acts as an economic duress on the vessel owner to settle the matter at the earliest at terms favourable to the claimant. (b) Letter of Guarantee by the P & I Club Mutual Insurance has been found to be particularly appropriate to third party liabilities and although it is now possible to underwrite primary "P & I" (Protection & Indemnity) in the shipping industry. Mutuality means that the Club's interests are identical to the interests of the members. The mutual aims include the safe and pollution-free operation of vessels. Naturally, given the nature of shipping, it is impossible ii to eradicate all accidents. That is why the P and I Club places such emphasis on service excellence in casualty situations. Their priority is to help the member solve the problem at hand as quickly as possible, so ensuring the vessel's swift return to I trade. The guiding principle in all things is a guarantee of fair and equitable treatment. This extends from the assessment of risk to the fixing of premiums and the settling of claims. For this purpose, the ship owners do not obtain insurance from the insurance companies. They issue their insurance cover themselves and act as an insurance company for every ship. The basic regime is to minimize the risk for supplementary calls to provide for a possibility for the Members to budget their future costs for the P & I cover. In this method the amount of security submitted by the Protecting and Indemnity Clubs but it is subsequently found to be unsatisfactory since, especially in the case of large claims, litigation and settlement of claims might take years to complete, and the members would thus be left for a considerable time uncertain of their ultimate liabilities. The Clubs also investigate and settle passenger and cargo claims for government account on requisitioned ships, and administrated schemes providing for compensation to seamen's departments, in respect of those vessels seized by the enmity at the outbreak of war, and or payments on release to captured officers and seaman. (15) The purpose of indemnity club was to indemnify ship owners against their liability for loss of or damage to cargo, which began to assume serious proportions after the case of Westenhope in 1870. (16). The first indemnity club was formed in 1874. (17) A Club undertaking is always dependent upon the financial status of the Club. When there is doubt as to the Club's standing, a bank guarantee is to be preferred. Most commonly security is negotiated and put up in an agreed form being either a P & I Club letter of undertaking or a guarantee put up by a recognized bank. There are currently 13 P & I clubs who are members of the International Group. This group provides liability insurance for more than 90 per cent of the world's ship-owners. The current members of International Group are: (18) Assuranceforeiningen Gard (Norway) Assuranceforeiningen Skuld (Norway) The Britannia Steamship Insurance Association Ltd. (UK) The Japan Ship Owners' Mutual Protection and Indemnity Association (Japan) The London Steamship Owners' Mutual Insurance Association Ltd. (UK) The North of England Protection and Indemnity Association (Luxembourg) The Standard Steamship Owners' Protection and Indemnity Association Ltd. (Bermuda) The Steamship Mutual Underwriting Association Ltd. (Bermuda) Sveriges Angfartygs Assurans Forening (The Swedish Club) (Sweden) The United Kingdom Steamship Assurance Association (The UK Club) (Bermuda) The West of England Ship Owners' Mutual Insurance Association (Luxembourg) The American Club (USA) (c) By Depositing the Cash In circumstances where the claimant will not agree to either the form of security tendered, or the amount, or the wording of any undertaking or guarantees is unacceptable, then the owner of the property arrested or attached is in the unhappy position of having to decide whether to tender either cash or a bank guarantee to the Nazir of the Court. The actual position in this regard has not been made clear in the relevant legislation and there is, as yet, no helpful guidance from the Courts. In the case of M.T. Eastern Navigator a learned Single Judge of Sindh High Court observed that: (19) "Upon warrants of arrest being served upon the vessel anybody can appear in Court on behalf of the vessel and furnish security and defending plaintiffs claim. Indeed it is a cardinal principle of Admiralty law that the appearance of a party to defend a vessel makes the said party liable for the full claim of the plaintiff even if it exceeds the value of the vessel but if none appears to defend the vessel then regardless of the amount of the claim in suit the vessel's owner would be liable only to the extent of the value of the vessel." Where the vessel has been arrested under the admiralty jurisdiction, the claimant is entitled to be secured to the full extent of its claim before he need agree to the release of the vessel so arrested. However, where the arrested vessel is valued at far less than the amount claimed, the owner of the vessel and other interested person in a ship may then abandon that vessel to the claimant, alternatively, threaten to do so and simply tender security to the value of that vessel. In the case of M.T. "Zaima Navard" (20) the Court observed that it is a matter of ordinarily practical common sense, that when the security takes merely the form of a letter, coming from reputed company signed by its Director. It is the easiest thing to change its figure in the letter. It is not so easy, when the form of the security is money security. Thus the type of security and the amount of security are both important. Further, if the plaintiffs seriously object, it would be neither proper nor open to the Admiralty Court to accept security by way of a letter of or a guarantee issued from a foreign party, be their economic credentials and business reputation ever so high. After the money security had been furnished, and even before or after the ship has sailed away, it will be open to the defendants to apply in the Court below, or to use affidavits in answer to the arrest applications in the Court below or do both and pray there for reduction or even total release of the money security and for any other just reliefs. They will be entitled to take all points regarding facts there, including the point of mitigation. (d) Insurance Company Guarantee The insurance companies played a very essential role by submitting a sufficient amount of security in case of arrest of the vessel. It is universally recognized by all mature maritime jurisdictions that to avoid the arrest of a ship or to secure the release of an arrested ship, a proper security in the full amount of the claim, plus interest and costs, is required. A proper security for most maritime Courts would generally be either a bank guarantee or a guarantee from a reputable insurance company or P & I Club. If the insured vessel collides with another vessel that is then pushed on to another vessel, or vessels, the liability of the insured vessel to those other vessel is recoverable by receiving a letter of guarantee by the insurance company, In The "Christiansburg" (21), a ship had been arrested in Holland and released by the Court against an insurance company guarantee. Subsequently the ship was arrested in England in respect of the same cause of action. It was held that the arrest in England was oppressive and against good faith and the ship would therefore be released. (22) (e) Any other Security to the Satisfaction of the Court If vessel is arrested then the owner or anybody whose interest in a ship can appear on behalf of the vessel to defend the claimant's claim and obtain the release of that vessel by putting up security in a form acceptable to either the claimant or the Nazir of the High Court or, in the case of a dispute, to the satisfaction of a High Court Judge. In the case of M.V. Ghantout-I (Ex-Bismillah), Justice Wajihuddin Ahmed a learned Judge of Sindh High Court observed that: (23) "Admiralty Jurisdiction of High Courts Ordinance, 1980-- Arrest of vessel-Essentials-Plaintiff having purchased vessel and having advanced some of the instalments, towards payment of price as per agreement and having spent substantial amounts and its repair and insurance had established lien over the same---Vessel was ordered to remain arrested during pendency of suit to subject to condition that if and when defendants deposited in Court a specific amount and same was to be released--Such amount would ensure to the benefit of plaintiff, if he succeeded, otherwise same would be returnable to defendant who had deposited the same." Further observed at P.84 of the above judgment that: "It has already been seen that the plaintiff has established a prima fade case. It has also been seen that the defendants Nos.2 and 3 have no assets in Pakistan except the defendant No.1 vessel and whole suit may be frustrated if appropriate orders to protect the rights of the plaintiff are not passed. Balance of convenience thus lies in favour of the plaintiff. Likewise, plaintiffs loss, if the defendant No.1 is allowed to sail away, though calculable in terms of money, would become irreparable as the ship may never show up within the territorial waters of this country, once it leaves the same." To obtain the security in support of a claim by the arrest of the ship is a powerful weapon, which can put ship-owners under oppression commercial pressure. Usually, it is possible to obtain security for the full amount of the claimant's claim inclusive of interest and costs. Security can be obtained either by the arrest or attachment of property, or through negotiation. It also places pressure on the ship-owner to settle the claim. In certain circumstances the security provided can be increased. Personal guarantee may also be accepted by the Court if other side has no objection on it. IS A THIRD PARTY DIRECTLY LIABLE? Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination. Marine Liability is insurance for liability or property damages to a third party, while engaged in marine related operations. Insofar as the ship owner's liability insurance is concerned, protection and indemnity (P & I) club rules generally cover the ship owner's liability for breach of its obligation to care for cargo and for unfitness of the insured vessel. Liability for deviation is also covered by particular rules. However, the P & I club should, in addition, exercise its powers under the rules of association to make by-laws regulating the system and method of carriage, storage, custody and handling of the cargo. This would ensure stringent conditions of cargo-worthiness are complied with ship-owners. A person, who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters. If he does diminish the loss, he must account for the diminution to the underwriters. (24). It means if a person is already recovered from his loss to the underwriters then he cannot recover it from the ship-owners and after the recovery of the said insurance amount he is not entitled to claim more than one. A marine policy typically covers only three-quarter of the insured's liabilities towards third parties. The typical liabilities arise in respect of collision with another ship, formerly known as running down and wreck removal. The collision liability clause indicates that the insurer is only required to indemnify the insured for three quarters of any sum and sums paid by assured to any other persons or persons by reason of the assured becoming legally liable by way of damages. (25). In the 19th century, ship-owners banded together in mutual underwriting clubs known as Protection and Indemnity Clubs (P & I), to insure the remaining one-quarter liability amongst themselves. Protection and Indemnity associations have been formed with the object of mutually protecting ship owners against those risks for which they are not covered under the usual form of Lloyd's policy. These Clubs are still in existence today and have become the model for other specialized and un-commercial marine and non-marine mutual'sfor example in relation to oil pollution and nuclear risks. Indemnity cover of the club is subject to the rule of 'pay to be paid' which is in other words means that the claimant's claim will have to be first quantified if found in order according to law and in case if the liability of the owners is established in the proceedings by the Admiralty Court then the P & I Club will satisfy the decree. It means that when the liability of the owner would be determined and quantified and paid finally according to law then the Indemnity club would come forward to satisfy the claimant's claim. In the case of KPT v. Polembros Shipping Ltd. and others (26), a learned Judge of Sindh High Court Mr. Justice Amir Hani Muslim recently decided the above issue in a civil miscellaneous application filed by the plaintiffs to seek direction against the owners of the said vessel in order to furnish their insurers, Protection and Indemnity Club (P & I Club), security to the satisfaction of the Nazir of the court for an amount of US$ 1 billion in the form of a bank guarantee during pendency of the captioned matter. The plaintiff's counsel contended that there is an agreement between the owners and Charter Party wherein the P & I club ensured all risks in case of accident, which includes oil pollution insurance. He relied on clause 6 of the Agreement which is reproduced therein below:-- "6. Oil pollution Insurance Clause.--Owners warrant that during his charter party the vessel is covered by their P & I for oil pollution damages upto US$ 1,000,000,000 (one Billion) for all pollution risks, each accident or occurrence." The Court dismissed the plaintiffs application by accepting the argument of the defendants that the clause 6 of the charter party agreement between the defendant No.2 and PNSC (charterers) only provides for an indemnity to the extent of US$ 1 billion which would ensure to the benefits of the charterer and nobody else. Further the proceeds of the vessel (M.T. "Tasman Spirit") and the other ship which are claimed to be owned by the defendants Nos.1 and 2 were being sold and the entire sale consideration is lying in the hands of the Official Assignee. Further, there is also an undertaking given on behalf of the defendants in the counter affidavit that in case if the liability of the said defendants is proved in these proceedings the P & I Club will satisfy the decree. In view of the given circumstances the Court held that:-- "When the liability is yet to be determined and damages are to be quantified, prayer of the nature cannot be allowed, moreso, when the undertaking is already provided by the defendants." The appeal was also dismissed by the Appellate Bench of Sindh High Court comprising Mr. Justice Mushir Alam and Mr. Justice Aqeel Ahmed Abbasi (27) and upheld the decision of the leaned Single Judge. References:-- 1. PLD 1983 Karachi 459 2. PLD 1981 Karachi 419 3. Maritime and Shipping Dictionary of Agha Faqir Muhammad, page 643 4. Sindh Chief Court Rules (O.S.), Chapter XXXII Rule 731 5. Sindh Chief Court Rules (O.S.), Chapter XXXII, Rule 735 6. PLD 1981 Karachi 246 (c) (DB) 7. (1971)1 AER 524 8. PLD 2001 SC 57 rr. Page 64 9. See section 546 of Pakistan Merchant Shipping Ordinance, 2001 10. The "Bazias 3" (199311 Lloyd's Rep.101(C.A.), at page 105, col.1. 11. Modern Admiralty Law by Aleka Mandaraka-Sheppard, P.130 12. The "Vanessa Ann" [1985] 1 Lloyd's rep.549 13. See para. 566 at P.247 of British Shipping Laws Vol.13, Ship Owners by Sindh and Colinvaux 14. In para 377 at P.253 of the title on Admiralty in Vol 1 of the 4th edition of Halsbury's Laws of England. 15. British Shipping Laws Vol.13, Ship Owners by Singh and Colinvaux at P.235, para 531 16. The Westenhope (1870) Unreported. Cited in Arnould's Law of Marine Insurance and Average, 16th Ed. Vol.1, British Shipping Laws, para.130, P.86 17. Arnould's Law of Marine Insurance and Average by Sir Michael J. Mustill and Jonathan C.B. Gilman, 16th Ed. Vol.1, British Shipping Laws. London: Stevens, 1981, para.130, P.85. 18. Gard Handbook on P & I Insurance, 5th Edition by Edgar Gold at P.71 19. 1999 CLC 996 rr. P.1002 20. AIR 1999 Calcutta 64 21. (1885)10 P.D.141 (C.A.) 22. Third Edition of Maritime Practice in India by Shrikant Hathi and Binita Hathi, P.141. 23. 1991 MLD 75(c) 24. Arnould's Law of Marine Insurance and Average by Sir Michael J. Mustill and Jonathan C.B. Gilman, 16th Ed. Vol.!!, British Shipping Laws. London: Stevens, 1981, Para.1299 P.1080. 25. Gard Handbook on P & I Insurance, 5th Edition by Edgar Gold at P.91 26. Suit No.1167 of 2003, CMA No.8255 of 2005 Court's Order dated 18-11-2008 (Unreported) 27. Suit No.1167 of 2003, HCA No.5 of 2009 Court's Order dated 2-2-2010 (Unreported)