Den Norske Bank ASA v Acemex Management Company Ltd

This is an application for summary judgment pursuant to Part 24 of the CPR. The Claimants, Den norske Bank ASA, seek judgment in the sum of US$815,277.09 against the Defendants, Acemex Management Company Limited, pursuant to a Guarantee and Indemnity signed by the Defendants and dated 1 December 1997.

The background to the claim is as follows. By a US$6 million secured Loan Facility Agreement dated 1 December 1997 between the Claimants and three companies collectively described as the Borrowers the Claimants agreed to make available to the Borrowers a loan of US$6 million for the purchase of 3 vessels, one of which was TROPICAL REEFER. The loan agreement was subject to English law. The security for the loan included mortgages on the 3 vessels which were governed by the law of Cyprus, where the vessels were registered. Further security included a Guarantee provided by the Defendants. It was governed by English law.

Thereafter there were events of default and on 25 July 2001 the Claimants arrested TROPICAL REEFER in Panama pursuant to its rights under the mortgage of that vessel. At the time of the arrest TROPICAL REEFER was laden with a cargo of bananas. They had been shipped in Ecuador and were to be discharged in Germany. The bananas were of course a perishable cargo and in order to sell the vessel in Panama they had to be discharged overboard at sea. The expense of doing so, $204,140, was part of the costs of arrest and formed a deduction from the proceeds of sale. In addition the owners of the cargo commenced proceedings in Panama against the proceeds of sale claiming damages for breach of the contract of carriage. In respect of that claim the owners of the cargo say they have a maritime lien and on that account claim to be entitled to payment out of the proceeds of sale in priority to the claim under the mortgage. Subsequently on 6 February 2002 the Claimants demanded payment of the outstanding indebtedness from the Defendants and on 19 February 2002 the Claimants issued proceedings in this Court against the Defendants under the Guarantee for the sums due under the loan facility. The Part 24 application for summary judgment has been made in those proceedings.

The claim is resisted by the Defendants on the grounds that the Claimants, in breach of duty to the Defendants, arrested TROPICAL REEFER in Panama when she was laden with bananas instead of arresting the vessel after she had arrived in Germany where the proceeds of sale would not have been diminished by the costs of disposing of the bananas or encumbered by a lien on those proceeds in respect of a cargo damage claim. It was said that the proceeds of sale would have been sufficient to discharge the outstanding debt and that in those circumstances the Claimants are unable to proceed against the Defendants under the guarantee for the sums claimed.

The Claimants say that the Defendants have no real prospect of establishing any such defence because they owed no duty to consider the interests of the Defendants in deciding when to exercise their power of arrest and because, even if they owed such a duty, the Defendants have no reasonable prospect of establishing at trial that they breached such duty. I shall first refer to the security documentation and then set out the events which led up to the arrest in Panama as disclosed by correspondence between the Claimants and the Borrowers and internal memoranda of the Claimants.

These were in familiar form and I need not set them out. Nothing turns upon the wording of the loan facility and mortgage.

Pursuant to clause 3 of the Guarantee and Indemnity dated 1 December 1997 the Defendants “irrevocably and unconditionally guarantee to discharge on demand the Borrowers’ Obligations, including Interest from the date of demand until the date of payment, both before and after judgment”. Pursuant to clause 15.6 “any certificate or statement signed by an authorised signatory of the Bank purporting to show the amount of the Indebtedness or of the Borrowers’ Obligations or of the Guarantors’ Liabilities (or any part of them) or any other amount referred to in any of the Security Documents shall, save for manifest error or on any question of law, be conclusive evidence as against the Guarantor of that amount.” Nothing turns upon any other provision of the guarantee.

On 9 December 1999 the Claimants gave notice to the Borrowers of two events of default under the loan facility, firstly a failure to make a repayment instalment of US$450,000 on 9 September 1999 and secondly a failure to make a repayment instalment of $450,000 on 9 December 1999. On 30 August 2000 the Claimants agreed to postpone payment of the balance of the loan pending a refinancing which was to be completed by 30 September 2000. However such refinancing was not completed and so in January 2001 the Claimants gave notice of a further event of default (the failure to make a repayment instalment on 30 June 2000) and reserved the right to declare the whole indebtedness of US$2,233,290 due and payable together with interest. This notice was copied to the Defendants.

On 21 May 2001 a meeting took place in Havana, Cuba between the Claimants and the Borrowers. The Claimants were informed that TROPICAL REEFER and BLUE REEFER were under charter but that each had debts to suppliers and repair yards of approximately $235,237 and $376,488 respectively. SKY REEFER was awaiting work on the spot market but also had debts to suppliers and repair yards of approximately $293,923. SPRING REEFER was shortly to be sold for scrap.

A further meeting took place in Havana on 26 June 2001. The Claimants were informed that one of the Borrowers’ P&I Clubs, the West of England, was owed calls and had withdrawn cover on TROPICAL REEFER but would re-instate cover if US$250,000 were paid by 5/6 July 2001. Thereafter the balance due to the West of England of about $600,000 was to be paid in instalments. They also learned that TROPICAL REEFER was en route for Ecuador to load bananas for shipment to Europe and that BLUE REEFER had suffered an engine problem and was due to be towed by SKY REEFER to Las Palmas. The proceeds of scrapping SPRING REEFER, expected to be about $110,000, were to be paid to the Claimants. In addition $200,000 was to be paid to the Claimants on 15 July 2001.

The sums agreed to be paid by the Borrowers to the West of England and to the Claimants on 5 and 15 July 2001 were not paid. The Borrowers’ managers later informed the Claimants on 23 July 2001 that the payments had not been paid “due to lack of liquidity”.

On 19 July 2001 the Claimants gave notice to the Borrowers of events of default, in particular the failure to make payments when due and the failure to observe covenants made in the Loan Agreement. The latter was a reference to the failure to maintain P&I Cover. The current indebtedness was said to be over $2 million. This notice was copied to the Defendants.

On or about 23 July 2001 Tramp Oil arrested TROPICAL REEFER in Panama on account of payments due in respect of bunkers.

The Borrowers’ managers informed the Claimants on 23 July 2001 that they proposed to sell BLUE REEFER for scrap and transfer the net proceeds to the Claimants. They also intended to recover from underwriters about $1 million in respect of her engine damage which sum would be paid to the Claimants. They proposed a renegotiation of the loan facility in respect of TROPICAL REEFER and SKY REEFER with instalments commencing in January 2002 “considering that the 2^nd.part of this year 2001 the reefer market is down season.”

On 24 July 2001 the Claimants, by a letter to the Borrowers copied to the Defendants, declared that the outstanding indebtedness of over $2 million was immediately due and payable pursuant to the terms of the loan facility. On the same day arrangements were made to arrest TROPICAL REEFER in Panama and the next day, 25 July, the vessel was arrested.

On 27 July the Claimants replied to the Borrowers’ managers’ letter dated 23 July informing them that the Claimants had demanded repayment of the outstanding indebtedness and had commenced enforcing its security by arresting TROPICAL REEFER. They said that the proposal made by the managers was unacceptable. On the same day the arrest made by Tramp Oil was set aside due, I was informed, to a procedural problem with the proceedings commenced by Tramp Oil .

On 30 July 2001 Spanish lawyers acting for the owners of TROPICAL REEFER advised the Claimants that the cargo of bananas was deteriorating and suggested that the vessel be released from arrest in order that she may proceed to Hamburg “where the Bank might act in the way it would think better for its interests”. On 1 August Stephenson Harwood replied on behalf of the Claimants saying that the Claimants had lawfully exercised their right to arrest the vessel but would not oppose any reasonable application by the cargo interests to the court in Panama as to how to deal with the cargo.

On 2 August 2001 the Borrowers’ managers complained to the Claimants that their arrest was preventing the payment of hire which would fall due 5 days after the vessel had crossed the Panama Canal and would damage the cargo of bananas. They offered to pay US$260,000 in return for the vessel being released from arrest. The Claimants rejected that offer the same day.

On 8 and 9 August the Havana office of ING Bank informed the Claimants that on behalf of the Cuban Ministry of Fishing the bank would pay $700,000 on 15 August in order to secure the release of the vessel. It appears from the terms of an e-mail dated 13 August 2001 from Stephenson Harwood to lawyers acting on behalf of the cargo interests that this offer was not accepted because terms could not be agreed.

Thereafter, in September 2001, the cargo of bananas was discharged overboard at sea and in October 2001 the vessel was sold by the court in Panama. The gross proceeds were US$1,150,000. However, after deducting the costs of the sale including the costs of disposing of the bananas the net proceeds in court are about US$780,000.

Certain payments have since been made to reduce the outstanding indebtedness, including payment of the proceeds of sale of SKY REEFER and of the proceeds of an insurance claim on BLUE REEFER. The sum now due and owing to the Claimants is $815,277.09. That sum is proved by a statement pursuant to clause 15.6 of the Guarantee. At the hearing it was not challenged that there had been events of default under the security documentation, that the Claimants were entitled to declare the outstanding indebtedness due and owing and that the statement pursuant to clause 15.6 of the Guarantee was conclusive evidence of the amount due, subject of course to the defence now put forward.

The Defendants have pleaded a defence to the claim brought against them but the way in which they put their defence was amplified in the course of the hearing without objection from the Claimants. They submit that the Claimants owed to the Defendants in equity a duty of care in and about deciding when to exercise their right of arrest. They further submit that having exercised their right of arrest they owed a duty of care in and about deciding whether or not to release the vessel from arrest. The Claimants deny that they owed such duties.

Whether or not a creditor in the position of the Claimants owed the suggested duties to the Defendants depends upon the general law relating to the duties of mortgagees. (It was not suggested in oral argument that the terms of the security documentation gave rise to or precluded the suggested duties.) The relevant case law largely concerns mortgages of land and property other than ships. However, the principles established in such cases are generally applicable to mortgages of ships; see Fletcher and Campbell v City Marine Finance [1968] 2 Ll.rep.520 at p.535 (per Roskill J.) and Zeeland Navigation Company Limited v Banque Worms [2002] EWH 1307 at para.54 (per Tomlinson J.).

In China and South Sea Bank Limited v Tan Soon Gin [1990] 1 AC 536 a company mortgaged to a creditor shares allegedly worth twice the sum advanced. The debtor defaulted on the date for repayment but the creditor did not exercise his power of sale over the shares even though they were still worth more than the loan. After the shares had become worthless the creditor sued the surety who had guaranteed repayment of the debt. On an application for summary judgment by the creditor the surety argued that he should be given leave to defend because it was arguable that his liability was extinguished or reduced by reason of the creditor’s failure to exercise his power of sale over the mortgaged shares. He intended to prove that the creditor knew or ought to have known of the declining value of the shares and sold them before they became worthless. The Privy Council held that the creditor was entitled to summary judgment. Lord Templeman, who delivered the judgment, said:

“The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety. If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. …….. No creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or either of them for a decline in value of mortgaged property, unless the creditor was personally responsible for the decline.”

In Downsview Nominees Limited v First City Corporation [1993] AC 295 Lord Templeman again delivered the judgment of the Privy Council. The case concerned the duties owed by a first debenture holder and his receiver and manager to a subsequent debenture holder. However, in determining the duties of the debenture holder Lord Templeman said that there was no difference between a debenture holder and a mortgagee because both a mortgage and a debenture created a security for a debt; see p.311. Lord Templeman said, at p.312:

“Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the payment of a debt and, secondly, that a security for the repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and, secondly, that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower.”

Lord Templeman made plain at p.314 that there was no room for the common law of negligence in determining the duties of a mortgagee.

“The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co.Ltd. v Mutual Finance Ltd. [1971] Ch.949 is a Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. …….. The duties imposed by equity on a mortgagee ……. would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company.”

Lord Templeman added that it was not possible to measure a duty of care in relation to a primary objective (to enforce a security by recouping the moneys which it secures) which is quite inconsistent with that duty of care.

In Medforth v Blake [2000] Ch.86 Sir Richard Scott V-C referred with approval to a summary of the law relating to mortgagees’ duties by Robert Walker LJ in Yorkshire Bank PLC v Hall [1999] 1 WLR 1713:

“Those cases [which included the China South Sea Bank case and the Downsview Nominees case] establish or re-affirm that a mortgagee’s duty to the mortgagor or to a surety depend partly on the express terms on which the transaction was agreed and partly on duties (some general and some particular) which equity imposes for the protection of the mortgagor and surety. The mortgagee’s duty is not a duty imposed under the tort of negligence, nor are contractual duties to be implied. The general duty (owed both to subsequent encumbrancers and to the mortgagor) is for the mortgagee to use his powers only for proper purposes, and to act in good faith ….. the specific duties arise if the mortgagee exercises his express or statutory powers ……… If he exercises his power of sale, he must take reasonable care to obtain a proper price.”

In the present case these principles have to be applied to a ship mortgagee who decides to exercise his power of arrest. The power of arrest is the first step which must be taken by a ship mortgagee who wishes to enforce his security by having the vessel sold by an Admiralty Court. It is to be distinguished from the power of sale expressly granted by the terms of the mortgage. A sale by an Admiralty Court has the important advantage that it passes a title free of encumbrances and so enhances the value of the security; see The Cerro Colorado [1993] 1 Ll.Rep.58 at p.61 (per Sheen J.). Whilst the ship mortgagee may agree to release the vessel from arrest he would only be expected to do so if he were offered alternative security equal to the value of the vessel (or of his claim if that were less than the value of the vessel). Unless he were offered such security he would ordinarily be entitled to proceed to judgment and to procure a judicial sale of the vessel and so realise the security created by the mortgage.

No case has been cited to me in which the equitable principles to which I have referred have been applied to a ship mortgagee deciding to exercise his power of arrest. However, in my judgment it is clear that those principles lead to the conclusion that a ship mortgagee when deciding whether to enforce his security by arresting the vessel must do so in good faith for the purpose of obtaining repayment of the loan. He does not owe the mortgagor or surety a general duty in negligence or in equity to take reasonable care in dealing with the ship which is, usually, the only asset of the mortgagor. So long as the mortgagee acts in good faith for the purpose of obtaining repayment of the loan he can arrest the vessel notwithstanding that such action might harm the interests of mortgagor or surety.

The timing of an arrest may affect the sale price. The sale and purchase market may be at a low ebb and so the vessel may be sold for less than she would fetch had she been sold at a different point in the market cycle. The costs of the arrest and sale, and so the net proceeds of sale, may depend upon the circumstances of the vessel and her crew at the time of the arrest. Thus the crew may be owed wages and have to be repatriated, in which case the costs of paying them off and repatriating them may form part of the costs of the sale. Or, as was the case with TROPICAL REEFER, she may be laden with a perishable cargo which must be disposed of before the vessel can be sold. All of these matters may affect the net price achieved by the arrest and sale of the vessel and thereby the interests of the mortgagor and surety. But in my judgment the mortgagee may decide to arrest and sell the vessel notwithstanding the damaging effect on the interests of the mortgagor and surety so long as he acts in good faith for the purpose of obtaining repayment of the loan.

It was submitted that once the mortgagee has exercised his power of arrest he has a duty to take reasonable care in deciding whether to continue with the arrest and sale of the vessel or to release the vessel in order to re-arrest her in another jurisdiction where the net proceeds of sale would be greater because, for example, she would not be laden with a perishable cargo. In my judgment such a duty would be inconsistent with Lord Templeman’s analysis of the duties of a mortgagee. The arrest is the first step in procuring a sale of the vessel by an Admiralty Court. The arrest and sale of the vessel is the procedure by which the ship mortgagee seeks to enforce his security and obtain the repayment of the loan. If a ship mortgagee is entitled to decide to arrest a vessel without owing a general duty of care to have regard to the interests of the mortgagor and the surety so he must be entitled to proceed to a sale of the vessel by the Court without owing a general duty of care to have regard to the interests of the mortgagor and the surety. It would make no sense to hold that a mortgagee was entitled to arrest a vessel without considering the interests of the mortgagor and surety but then to hold that the mortgagee, having arrested the vessel, was obliged to consider whether the interests of the mortgagor and surety required him to release the vessel from arrest.

It was submitted on behalf of the Defendants that in the context of a dispute of this nature it was not possible for the court to be satisfied that the defence had no real prospect of success because the scope of the mortgagees’ duty would depend upon the facts and circumstances of the particular case which could not fully be known until trial and because the authorities recognised that there were circumstances where the mortgagee had to have regard to the circumstance that a short delay in selling might result in a higher price.

As to the first point the Defendants placed special emphasis on a passage in the judgment of Sir Richard Scott V-C in Medforth v Blake [2000] Ch.86 at p.102 where he said that the extent and scope of any duty additional to that of good faith will depend upon the facts and circumstances of the particular case. Medforth v Blake concerned a claim against receivers who, it was claimed, had negligently conducted the business which had been put into receivership. In that context it is readily understandable that the court said that the scope and extent of any duty additional to that of good faith would depend upon the facts and circumstances of the particular case. However, I do not understand the court to have contemplated that a mortgagee might owe a duty of care beyond that of good faith when deciding whether, and if so when, to exercise a power to realise his security. Sir Richard Scott V-C said at p.93

“The proposition that, in managing and carrying on the mortgaged business, the receiver owes the mortgagor no duty other than that of good faith offends, in my opinion, commercial sense. The receiver is not obliged to carry on the business. He can decide not to do so. He can decide to close it down. In taking these decisions he is entitled, and perhaps bound, to have regard to the interests of the mortgagee in obtaining repayment of the secured debt. Provided he acts in good faith he is entitled to sacrifice the interests of the mortgagor in pursuit of that end. But if he does decide to carry on the business why should he not be expected to do so with reasonable competence.”

That passage is inconsistent with the proposition that a mortgagee might owe a duty of care beyond that of good faith when deciding whether, and if so when, to exercise a power to realise his security. Equally inconsistent with that proposition is Sir Richard Scott V-C’s approval of the passage from the judgment of Robert Walker LJ in Yorkshire Bank v Hall which I have already quoted.

As to the second point reliance was placed on the decision of the Court of Appeal in Standard Chartered Bank v Walker [1982] 1 WLR 1410 and the decision of Lawrence Collins J. in Meftah v Lloyd’s Bank [2001] 2 AER (Comm) 741.

In the first of these cases, Standard Chartered Bank v Walker, there was an application for summary judgment by a bank against the borrower. Leave to defend was sought on the grounds that the bank’s receiver had sold the borrower’s assets at a gross undervalue because the sale had been held at the wrong time of the year and had been insufficiently advertised and poorly organised and because the bank had instructed the receiver to sell the assets as quickly as possible. Leave to defend was given by the Court of Appeal. Lord Denning, with whom Watkins LJ agreed, said that it was at least arguable that in choosing the time of sale a mortgagee must exercise a reasonable degree of care. He said that the source of the duty was the general duty of care emanating from Donoghue v Stevenson [1932] AC 562. That must now be regarded as a wrong analysis. Fox LJ said that it was common ground that a mortgagee can choose his own time for sale but agreed that leave to defend should be given because it was possible that the sale had been negligently conducted. The decision of the majority was not that a mortgagee must exercise a reasonable degree of care in the timing of a sale but only that it was arguable that such was the case. I do not consider I am bound to hold, on the authority of the decision of the majority, that a ship mortgagee must exercise reasonable care in deciding when to arrest a vessel with regard, not only to his own interests, but also to the interests of the mortgagor and surety.

In the second of these two cases, Meftah v Lloyd’s Bank, Lawrence Collins J. summarised the relevant principles concerning the duties of a mortgagee and said this:

“(g)

The mortgagee can sell when it likes, even though a better price might be obtained if it waits, and even if the result of an immediate sale may be that instead of there being a surplus for the mortgagor the purchase price is only sufficient to discharge the mortgage debt: the Cuckmere Brick Co.Ltd. case [1971] 2 AER 633 at 646, [1971] Ch.949 at 969; Tse Kwong Lam’s case [1983] 3 AER 54 at 59. [1983] 1 WLR 1349 at 1355.

(h)

The fact that the mortgagee can sell when it likes does not mean that it can ignore the consequences that a short delay might result in a higher price, and the bank and the receivers must fairly and properly expose the property in the market (cf the Cuckmere Brick Co.Ltd. case [1971] 2 AER 633 at 654, [1971] Ch.949 at 979, the Standard Chartered Bank case [1982] 3 AER 938, [1982] 1 WLR 1410) …………”

The issue in Meftah v Lloyd’s Bank was whether or not the sale had been properly advertised. It seems to me that the type of delay Lawrence Collins J. had in mind in proposition (h) was that necessitated by the need fairly and properly to expose the property to the market. This enables proposition (g) to stand with proposition (h). The fact that some delay may be necessitated by the need to canvass the market was also pointed out by Tomlinson J. in Zeeland Navigation v Banque Worms [2002] EWH 1307 (QB) at para.54.

It was submitted that just as there was a duty to consider a short delay in the circumstances contemplated in Standard Chartered Bank v Walker,Meftah v Lloyd’s Bank and Zeeland Navigation v Banque Worms so there was a duty upon the Claimants to consider releasing the vessel from arrest in Panama and re-arresting her and selling her in Hamburg. I do not consider that the circumstances are analogous. Delaying a sale to enable the sale to be properly advertised is very different from releasing a vessel from arrest. The former is a prudent step to ensure that the sale is properly conducted. The latter terminates the sale process notwithstanding that another sale process may be initiated by arrest in Hamburg in the event that TROPICAL REEFER crosses the Atlantic safely.

I do not consider therefore that the cases relied upon by the Defendants enable them to establish that they have a real prospect of establishing at trial that the Claimants owed a duty of care to the Defendants in deciding when to arrest TROPICAL REEFER or in deciding whether to release the vessel from arrest.

The Defendants also referred to the decision in The Myrto [1977] 2 Ll.Rep.243. However, that case concerned the circumstances in which a ship mortgagee by exercising his rights under the mortgage interferes with a contract made by the shipowner with a third party for the employment of the ship and commits a tort against the third party. Brandon J. approached the matter on the express basis that the mortgagee had a good claim against the mortgagor under the ship mortgage; see p.253. In the circumstances I do not consider that the decision in The Myrto enables the Defendants to show that they have a real prospect of establishing at trial that the Claimants owed a duty of care to the Borrowers and hence the Defendants in and about the timing of the decision to arrest TROPICAL REEFER or in and about deciding whether or not to release the vessel from arrest. Indeed, Counsel for the Defendants accepted in argument that whether or not a tort was committed in accordance with the principles in The Myrto was not determinative of the issue in this case between the Claimants and the Defendants.

I have therefore reached the conclusion that as a matter of law the Claimants did not owe to the Defendants a duty of care either in the timing of the decision to arrest or in deciding whether to release the vessel from arrest in Panama. It follows that the Defendants have no real prospect of establishing a defence at trial. For these reasons I have concluded that there must be summary judgment in favour of the Claimants pursuant to Part 24 of the CPR.

In case my decision on the law is wrong I shall state shortly how I would otherwise have dealt with this application. If the alleged duty of care is owed, or there is a real prospect that such a duty is owed, the question would arise whether the Defendants have a real prospect of establishing at trial that such duty was breached and that such breach extinguished or reduced the liability of the Defendants.

The Claimants say that they were entitled to arrest the vessel when they did so and that they acted reasonably in doing so. They rely in particular on the circumstances that certain repayment instalments had not been paid since September 1999, that the Borrowers had failed to maintain P&I Cover on TROPICAL REEFER, that the vessel had substantial trade debts to suppliers and repairers, as had associated vessels, and that the vessel’s managers admitted that the failure to maintain P&I Cover and make repayments to the Claimants was due to a lack of liquidity.

The Defendants say that the Claimants arrested the vessel at the most inopportune time and place because, as the Claimants knew, the vessel was laden with a perishable cargo. That circumstance, it is said, predictably led to expense in dealing with the cargo and with a resultant cargo claim which matters reduced the net proceeds of sale and therefore damaged the interests of the Borrowers and the Defendants. They also say that the Claimants gave no or no adequate consideration to the offers of payment made after arrest.

It was submitted on behalf of the Defendants that it would be bold for a court to say on a summary judgment application that an allegation of negligence will be bound to fail and that it is only fair that the Claimants’ evidence is tested by cross-examination and that full disclosure be given.

If there is a duty of care, contrary to my conclusion on the law, the Claimants must nevertheless be entitled to give considerable weight to their own assessment of the need to obtain repayment of the loan by enforcing their mortgage on the vessel. The facts relied upon by the Claimants as showing that their action was reasonable are evidenced by correspondence between the Claimants and the Borrowers. I regard it as fanciful to suggest that full disclosure and cross-examination may show that those facts cannot be established. Those facts show that the Claimants had good reason to conclude that the time had come to realise such security as they had for repayment of the outstanding indebtedness.

In those circumstances it is difficult to see why it was unreasonable for the Claimants to arrest and sell the vessel in Panama because such an arrest may harm the interests of the Borrowers and the Defendants or because further offers to pay some but not all of the indebtedness were made after arrest. That difficulty stems from the circumstance that, as Lord Templeman said in Downsview v First City Corporation, it is not possible to measure a duty of care in relation to a primary objective (to obtain repayment by enforcement of the security) which is inconsistent with that duty of care. However, in making that observation I am reflecting my view of the law which, for present purposes, I must assume to be wrong. If the possible consequences to the Borrowers and the Defendants ought, pursuant to a duty of care, to be taken into account by the Claimants when deciding whether or not to arrest in Panama I accept that it is possible that the Defendants may establish a breach of duty at trial. However, in view of the good reason which, on the face of the correspondence between the Claimants and the Borrowers, the Claimants had for arresting the vessel in Panama I consider it improbable that they will do so.

If the Defendants establish a breach of duty there is a real prospect that the amount recoverable by the Claimants from the Defendants should be reduced by the costs of disposing of the cargo, which would not have been incurred had the arrest taken place in Germany. However, the cargo claim would only reduce the amount of the proceeds of sale available to the Claimants if the cargo claim gave rise to a maritime lien which took priority over the mortgage claim. There is unchallenged evidence before this Court that priorities in Panama are determined by the law of the flag. The law of the flag is the law of Cyprus. It was not disputed before me that the law of Cyprus relating to priorities is the same as English law. In English law a claim for damages for breach of a contract of carriage does not give rise to a maritime lien, unless it is “damage done by a ship”; see The Rama [1996] 2 Ll.Rep.281. It was not suggested that the cargo claim in the present case was “damage done by a ship” and so gives rise to a maritime lien in English law. It follows that there is no real prospect that the cargo claim in Panama will take priority over the Claimants’ claim and so no basis upon which the Defendants can claim to have their liability reduced by the amount of the cargo claim.

It was finally submitted that even if the cargo claim did not give rise to a maritime lien it would be inequitable for the Claimants, having decided to arrest the vessel in Panama when laden with bananas, to change tack and launch a claim against the Defendants once foreseeable problems had developed in Panama. I do not consider that this complaint has substance. It is clear from the passage of Lord Templeman’s judgment in China and South Sea Bank Limited v Tan Soon Gin which I have already quoted that the creditor’s remedies may be brought simultaneously, contemporaneously or successively. If the Claimants receive payment of the outstanding indebtedness from the Defendants and thereafter the court in Panama determines that the Claimants have priority over the cargo claimants the Claimants will be bound in equity to assign the net proceeds to the Defendants. There will therefore be no injustice to the Defendants.

I would therefore, in the event that I am wrong on the law, have still given judgment but for the lesser sum of $611,137.09 (that is $815,277.09 less $204,140) on the grounds that the Defendants have no real prospect of defending the claim to that sum. In relation to the balance of the claim I would have made a conditional order by ordering that it be paid into Court within 28 days and that in default the defence be struck out because the Defendants only had a possibility not a probability of a successful defence; see Part 24 PD paras.4 and 5.

However, for the reasons which I have endeavoured to express, I shall give judgment for the sum claimed on the grounds that the Defendants have no real prospect of establishing that the Claimants owed a duty to the Defendants as alleged.