Samsun Logix Corp v Oceantrade Corp

There are before the court competing applications by Samsun Logix Corporation (“Samsun”) and Deval Denizcilik Ve Ticaret AS (“Deval”), each in effect claiming, inter alia, priority in respect of the same sum of money held in the client account of a firm of solicitors, Mills & Co (“Mills”).

Though at first blush a little confusing, the background may be shortly summarised. As will be seen, the villain of the piece, so to speak, is an entity Oceantrade Corporation (“OTC”), incorporated in the Marshall Islands, currently and since about September 2005 subject to Chapter 11 proceedings under the jurisdiction of the US Bankruptcy Court of the Southern District of New York (“the US Bankruptcy Court”). Both Samsun and Deval, almost in parallel, chartered vessels to OTC. Both have unsatisfied claims against OTC; hence the competing claims to the funds held by Mills. I turn to outline how this position has come about.

Samsun: By a time charterparty dated 3^rd March, 2005 on an amended NYPE form and with additional clauses, Samsun, as disponent owners, chartered the vessel, the “NORD MONACO” to OTC (“the Samsun charterparty”).

Plainly, all was not as it should have been under the Samsun charterparty and, on the 18^th August, 2005, Samsun obtained, ex parte, a worldwide freezing injunction from Aikens J (“the Aikens order”) against OTC. The Aikens order prohibited OTC from removing from this jurisdiction any of its assets in England and Wales up to the value of US$3.5 million. The order made specific reference to:

Pausing there, as will become apparent, the “ORHAN DEVAL” was a vessel time chartered by Deval to OTC and sub-voyage-chartered by OTC to Helm AG (“Helm”); at the time in question, hire was due from OTC to Deval and freight was due from Helm to OTC.

Returning to the Aikens order, it contained an additional prohibition (not in standard form) as follows:

give directions for and/or request the payment of and/or receipt of and/or acceptance of any sums due or becoming due to [OTC] from Helm AG in respect of freight payable under a voyage charterparty relating to the vessel ‘ORHAN DEVAL’”

Both the injunction and the prohibition contained in para 9(1) of the Aikens order were challenged by OTC at the inter partes hearing before Smith J on the 30^th August, 2005. In the event, by order of Smith J, made on that day (“the Smith order”), the Aikens order was varied, with particular reference to the payment of freight in respect of the “ORHAN DEVAL”. On the undertaking of Mills & Co. to hold the “ORHAN DEVAL” Freight (as defined later in the order) to the order of the Court, the Aikens order was varied, insofar as presently material, as follows:

On the material before me, on or about the 7^th September, 2005, Helm paid the freight due from it (the “ORHAN DEVAL” Freight, as defined in the Smith order) in the amount of US$662,040.64 to the relevant Mills account (“the Mills account”). On the 9^th September, 2005, using the money in the Mills account, OTC paid hire to Deval in the sum of US$322,812.50, apparently representing sums already due for certain instalments of hire; as this sum is greater than that set out in para. 4(1) of the Smith order, I assume that appropriate consents were obtained. Also on the 9^th September, 2005, again using the money in the Mills account, OTC paid US$103,184.82 to Samsun in the ordinary course of business. These payments having been made, there remained – and still remains - a balance of about US$236,000 in the Mills account The competing applications before me, in effect relate to that sum of money.

Continuing with the history so far as concerns Samsun, its disputes with OTC proceeded to arbitration. In an award dated 19^th October, 2005 (“the Samsun award”), the arbitration tribunal held that OTC, in repudiatory breach of the Samsun charterparty, had redelivered the “NORD MONACO” prematurely and was liable to Samsun in damages in the amount of US$1,244,666.82, plus interest and costs. By order of Field J, dated 3^rd April, 2007, Samsun was given permission to enforce the Samsun award as if it were an order or judgment of the court. As I understand the position, the Samsun award remains unpaid.

Deval: By a time charterparty on the NYPE form, as amended and with additional clauses, dated 8^th February, 2005, Deval chartered the vessel, the “ORHAN DEVAL” to OTC (“the Deval charterparty”).

Here too concerns must have arisen, because on the 9^th September, 2005, Deval’s solicitors, E.G. Arghyrakis & Co. (“Arghyrakis”) wrote to Mills, acknowledging receipt of the US$322,806.93 and going on to say this:

Cl. 18 of the Deval charterparty, reflecting the NYPE standard form, provided as follows:

It will at once be appreciated that Deval’s purported exercise of its rights under the cl.18 lien came two days after the payment by Helm of the “ORHAN DEVAL” freight into the Mills account.

Subsequently, on the 30^th September, 2005, Deval obtained a freezing injunction from Tugendhat J (“the Tugendhat order”) against OTC, inter alia prohibiting OTC from removing from England and Wales any of its assets in England and Wales up to the value of US$880,000.

Disputes having arisen under the Deval charterparty, Deval commenced London arbitration. In the arbitration, Deval claimed various amounts, by way of damages or otherwise and also claimed a declaration that it was entitled to and had validly exercised a lien over sub-freights from the 9^th and/or the 20^th September, 2005. As I understand it, the arbitration was conducted by way of written submissions; Mills, who continued for a time to represent OTC, disputed Deval’s claim, including its entitlement to the declaration sought as to the exercise of the lien. In the event, by an award dated 25^th April, 2007 (“the Deval award”), the arbitrator found in favour of Deval. He awarded Deval the total sum of US$783,026.09; additionally, he declared that Deval had at and from the 9^th September, 2005 validly exercised its right to a lien under cl. 18 of the Deval charterparty over sub-freights held in the Mills account and that those sub-freights were subject to Deval’s lien and were accordingly due to Deval. With regard to the exercise of the lien on sub-freights, the arbitrator expressed his conclusion in the following terms:

There has been no appeal against the Deval award but, as I understand the position, it remains unpaid. No application has been made to enforce the Deval award as if it were an order or judgment of the court.

Applications: Against this background, I come to the applications before the Court. By way of Application Notice, dated 6^th June, 2007 (“the Samsun application”), Samsun sought the following relief:

By way of Application Notice dated 4^th September, 2007 (“the Deval application”), Deval claimed the following relief:

Dismiss [Samsun’s] application dated 6^th June, 2007”

In fairness to Deval, I should record that at the hearing before me, Mr. Happé (for Deval) while resisting Samsun’s application throughout, indicated a reluctance to press ahead with Deval’s application. As it seemed to me, this was due in part to some inter partes skirmishing which, with respect, carried the matter no further forward. More pertinently, this stance was also consistent with the substantive submission (of which more below) that I should not proceed to a ruling, alternatively, that any ruling of mine should be most narrowly confined. Still further and appropriately, Deval’s stance was based on concern as to the position of OTC and whether it had effective notice of these proceedings. Happily, this aspect of the matter was clarified overnight when, at my urging, the parties jointly made contact with Mr. Brendan Scott, the administrator of OTC pursuant to the Ch. 11 proceedings, specifically drawing his attention to the Samsun application. By e-mail dated 11^th September, 2007, Mr. Scott responded in the following terms:

With OTC’s position thus clarified, the hearing before me proceeded, essentially (i) by reference to Samsun’s application and (ii) focussed upon the issue of priority (if any) as between Samsun and Deval, rather than any question of a payment out to either party. In my judgment, it was either not in dispute, alternatively indisputable, that any suggestion of this court making an order for payment out of the funds from the Mills account must, at the least, await an appropriate and prior determination by the US Bankruptcy Court. For completeness, although Deval was not a party to the Samsun application, whereas Samsun was a party to the Deval application, this curiosity had no bearing on the substance of the dispute; if need be and if asked to do so, I will consider whether any “tidying up” order should be made.

For Samsun, Ms Melwani submitted that Samsun was not and could not be bound by any ruling made in the Deval arbitration to which it was not a party; no finding made in that arbitration was capable of creating a right in rem nor indeed did the cl.18 lien confer a proprietary interest. In any event, by the time that Deval purported to exercise its right of lien, on the 9^th September, 2005, it was too late; Helm had already discharged its obligation to pay freight by paying the funds to Mills, on or about the 7^th September, 2005 – regardless of the capacity in which Mills held the funds. It followed that Deval enjoyed no priority over Samsun in respect to the funds in the Mills account; if anything, Samsun, as a judgment creditor enjoyed priority over Deval. It was appropriate for this Court to go at least as far as making a declaratory ruling to such effect. The funds in question were in this jurisdiction, in the bank account of English solicitors and held subject to a freezing injunction imposed by this Court. The foundation for Deval’s claim to priority was the cl.18 lien, contained in the Deval charterparty, a contract governed by English law. Even if the US Bankruptcy Court would not be bound by any ruling of this Court, it would in no way be offended by this Court proceeding to make such a ruling; per contra, the US Bankruptcy Court had given permission to the parties (by way of lifting the Ch. 11 stay of proceedings) to have this issue determined by this Court so that it would be unfortunate if this Court declined to entertain or deal with it.

For Deval, Mr. Happé submitted that the arbitrator, who alone had jurisdiction to determine the question, had determined that Deval had validly exercised its right of lien over the Helm sub-freights. There had been no appeal from the Deval award and this Court had no jurisdiction to rule upon it. Any debate as to the proprietary or other nature of the cl. 18 lien or the position of third parties was nothing to the point, as the lien had been validly exercised, as had been determined by the arbitrator. He had ruled that the money had been intercepted in time. As between Deval and Samsun, Deval accordingly enjoyed priority in respect of the funds in the Mills account. If this Court was to make any ruling, that was the conclusion to which it should come; however, the utility of any ruling by this Court was seriously open to question. No such ruling would bind the US Bankruptcy Court and it was that Court, taking such view as it did of the rights conferred by the cl.18 lien and the Deval arbitration award, which would determine the fate of the funds in the Mills account. In particular, Mr. Happé urged caution, in that the treatment of liens such as that conferred by cl.18 was or might be different under English and US law. The procedural question of how to get the funds out of the Mills account could properly be addressed after the US Bankruptcy Court had reached its decision.

In reply for Samsun, Ms Melwani underlined that Mr. Happé had not argued that the cl. 18 lien in the Deval charterparty had been validly exercised, other than by way of reliance on the Deval award. If that lien did give rise to proprietary rights, how could Samsun not be heard on this issue? Conversely, if that lien did not give rise to proprietary rights, how could Samsun be bound?

The issues raised by the rival cases can conveniently be addressed under the following broad headings:

Utility (Issue (I));

Principle: contractual rights and third parties (Issue (II));

Timing (Issue (III)).

It is not in dispute that the ultimate fate of the funds in the Mills account rests (at least primarily) in the hands of the US Bankruptcy Court, by reason of that Court’s jurisdiction over the Chapter 11 proceedings concerning OTC. In the course of its administration of the affairs of OTC, the US Bankruptcy Court will be confronted with a variety of matters not before this Court. By way of example, it is that Court not this, which is likely to be faced with issues going to the enforcement of the Deval award under the New York Convention, together with argument by Deval that the status of the cl. 18 lien under US law means that the funds in the Mills account are not available to OTC or the general body of its creditors. To such extent, Mr. Happé was undoubtedly right in urging caution on this Court. Against this background, as already remarked, by the conclusion of the hearing before me there was no or no realistic question of this Court at this stage making any order for payment out of the funds in the Mills account.

In my judgment, however, it does not follow that this Court should express no view on the question of whether, as a matter of English law, by virtue of the cl. 18 lien, the Deval claim to the funds in the Mills account enjoyed priority over the Samsun claim. Given that the contract (the Deval charterparty) under which the cl. 18 lien arose was governed by English law, that the funds are in this country, in the bank account of English solicitors and held subject to a freezing injunction imposed by this Court, there are ample connections with this jurisdiction. Moreover, as it seems to me, at some stage in the US Bankruptcy Court proceedings, notwithstanding the importance likely to be attached to the lex fori, the question of whether or not the cl. 18 lien was validly exercised as a matter of English law, so according Deval priority over Samsun in respect of the funds in question (under English law), will inevitably arise: see Dicey, Morris & Collins, The Conflict of Laws (14^th ed.), at para. 7-033. Even if a decision of this Court will not bind the US Bankruptcy Court (concerned as it will be with an assortment of issues not before this Court, some to be determined under US law), it is likely to be of assistance to the US Bankruptcy Court to know the view of this Court on this issue. Indeed it appears to me, with respect, implicit in the permission granted by the US Bankruptcy Court to Samsun for these applications to be pursued, that a decision of this Court would be of assistance to that Court. The alternative, on the face of it less satisfactory, is that the US Bankruptcy Court would have to consider for itself, what this Court would have done as a matter of English law.

In the circumstances, without in any way trespassing into the territory of the US Bankruptcy Court proceedings, it seems to me that a ruling from this Court would neither be futile nor academic. Instead it is likely to be useful to the US Bankruptcy Court; indeed, for the reasons discussed, a refusal to rule might well be perceived as unhelpful by that Court. It is therefore appropriate for me to proceed. See, generally, the discussion in The “Rama” [1996] 2 Lloyd’s Rep. 281, at pp. 288-291. I remind myself that the issue for my determination is confined to the question of whether, as a matter of English law, by virtue of Deval’s purported exercise of the cl.18 lien, its claim to the funds in the Mills account enjoyed priority over the Samsun claim.

It will be recollected that Mr. Happé’s submission proceeded as follows: the arbitrator’s decision was conclusive as to the validity of Deval’s exercise of the cl. 18 lien; he alone had jurisdiction in the matter; there had been no appeal by OTC; this Court had no jurisdiction to interfere; any remaining issues were for the US Court if or when it came to consider enforcement of the Deval award under the New York Convention.

With the last point – as to the appropriateness of this Court making any ruling at all – I have already dealt. So far as concerns the balance of Mr. Happé’s submissions under this heading, I am, with respect, wholly unable to accept them. My reasons follow.

First, as a matter of principle, I find it difficult to conceive of a situation where a decision in rem, or binding on the world, could be made, without the opportunity for those affected to be heard. That, however, would be the effect of Mr. Happé’s submission, if well-founded. The arbitrator’s decision, right or wrong, would be conclusive as against Samsun, even though Samsun was not a party to the arbitration. I do not think that can be right.

Secondly, Mr. Happé’s submission would lead to a surprising conclusion, in that it is established, at least as a matter of English law, that the cl. 18 lien creates rights only as between the parties to the contract in which it is contained. This is so, both insofar as cl.18 provides a lien over cargo and a lien over sub-freights. Wilford, Time Charters (5^th ed.), puts the matter this way (at pp. 531 and 534):

Thirdly, as it seems to me, these considerations point to the true scope of the arbitrator’s decision in the Deval award. The arbitrator’s decision, that Deval had validly exercised the cl. 18 lien in the Deval charterparty, is conclusive but between and only between, Deval and OTC (subject only to any appeal by OTC, now well out of time). This Court has no jurisdiction to interfere in that process, as between those parties, even if it was minded to do so (which it is not). Conversely, however, the arbitrator’s decision does not, without more, bind anyone other than the parties to the Deval arbitration – and certainly not without any non-party, thus affected, having the opportunity to be heard.

I therefore conclude that in considering whether, as a matter of English law, by virtue of the purported exercise of the cl. 18 lien, the Deval claim to the funds in the Mills account, enjoys priority as against Samsun, the Deval award does not preclude further argument.

The short question which arises here, as between Samsun and Deval, is whether, by the time Deval purported to exercise its cl. 18 lien, it was too late to do so.

In English law, it is settled (i) that the lien on sub-freights operates by giving owners a right to intercept the sub-freights before they are paid by a shipper or other third party to charterers or their agents; and (ii) that this lien is lost if the sub-freights have already been thus paid: Wilford (op cit), at pp. 537-8. In Tagart Beaton & Co v James Fisher[1903] 1 KB 391, Lord Alverstone CJ put the matter this way (at p.395):

On the facts of the present case, Ms Melwani submitted that by the time the lien was purportedly exercised by Deval on the 9^th September, 2005, it was too late; the sub-freights had already been paid to Mills on the 7^th September. Mr. Happé submitted that the cl. 18 lien had been validly exercised; but, as already underlined, he relied solely on the decision by the arbitrator in the Deval award to this effect.

As will be seen, I have come to the clear conclusion that as between Deval and Samsun, it cannot be said that Deval validly exercised its cl.18 lien. I preface the reasons which follow by emphasising that the conclusion to which I have come involves neither disrespect for nor criticism of the decision of the arbitrator. I acknowledge that the Deval award was before the Court de bene esse, even though OTC had not given consent for such a course. I read and considered the award and the arbitrator’s reasons de bene esse, though I have little doubt that, notwithstanding OTC’s stance, I would have acceded to a formal application for the award to be before the Court had one been made. However, I have not seen the submissions advanced to the arbitrator nor am I aware of the evidence or other materials before the arbitrator.

Dealing with the matter on the materials before me, I am amply satisfied that, on the true interpretation of the scheme of the Smith order, Helm made the 7^th September payment of the “ORHAN DEVAL” freight to Mills as OTC’s agent but subject to the terms of the freezing injunction. The constraints of the freezing injunction do not in any way tell against the conclusion that the funds in the Mills account were OTC’s funds; they simply regulate the uses which could be made of those funds.

By way of brief elaboration:

So far as relevant to questions concerning the cl.18 lien, it was neither here nor there that Helm paid the “ORHAN DEVAL” freight to Mills rather than to OTC. The reason for paying the “ORHAN DEVAL” freight to Mills was because of the risk of dissipation by OTC had it received the moneys directly. Mills was designated as the recipient of the moneys for OTC because of the understandable confidence placed in the integrity of solicitors holding the money to the order of the Court. These arrangements were of the essence of the freezing injunction, as encapsulated in the Smith order but they do not alter the underlying nature of the Helm payment.

There is nothing in the Smith order to suggest that the moneys were deemed to remain Helm’s moneys; to the contrary, the scheme of the Smith order suggests otherwise. Para. 3(ii) of the Smith order gives rise to the natural inference that Helm was now out of the picture. If so and if payment to Mills had the effect of discharging Helm’s obligations as regards the payment of the “ORHAN DEVAL” freight, as of the 7^th September that could only be because the payment was to be treated as a payment to OTC; as of that date Deval had not yet purported to exercise its cl. 18 lien.

The subsequent payments out of the Mills account, permitted by the Court, are difficult to explain save on the basis that the funds were OTC’s to disburse – subject only to the constraints of the freezing injunction.

Accordingly, as a matter of English law and as between Deval and Samsun, my conclusion is that by the time Deval purported to exercise the cl.18 lien under the Deval charterparty, on the 9^th September, 2005, it was too late to do so, the sub-freights in question having already been paid by Helm to Mills, as agent for OTC. Therefore, under English law, Deval does not enjoy priority over Samsun to the funds in the Mills account. That conclusion is sufficient to decide the present matters before me in Samsun’s favour.

For completeness, I add that having reached this conclusion it is unnecessary to express any views on the following:

Ms Melwani’s further submission, as expressed in her skeleton argument, that whatever the true role or status of Mills:

The difference of opinion as to the true juristic nature of the lien on sub-freights, exemplified in particular by the observations (with respect, most probably obiter) of Lord Millett in Agnew v CIR [2001] UKPC 28;[2001] 2 AC 710 (PC), at [39] – [41] on the one hand and the decision of Nourse J (as he then was) in In re Welsh Irish Ferries[1986] Ch 471, esp. at pp. 374-5. In In re Welsh Irish Ferries, Nourse J, concluded, rejecting in the course of doing so the submissions of Mr. Millett QC (as he then was), that the cl. 18 lien on sub-freights created an equitable charge. In Agnew v CIR, Lord Millett said that the cl. 18 lien on sub-freights was not a charge at all but gave a merely personal right to intercept freight before it was paid, analogous to a right of stoppage in transitu. In the course of the hearing, I had wondered aloud as to whether, if I followed the observations of Lord Millett in Agnew v CIR, that might provide a short answer to this dispute, even if (contrary to my earlier conclusion), Deval had validly exercised the cl. 18 lien. In the event, I am not attracted to pursuing this line of thinking. First, to enter into territory disputed by (inter alia) Lord Millett and Nourse J, when it is unnecessary for my decision to do so, would seem at least rash. Secondly, even if the cl. 18 lien is not a charge because, in accordance with Lord Millett’s opinion, it confers no proprietary rights, if it is analogous to a right of stoppage in transitu, it is likely in any event to accord priority in bankruptcy: see, Benjamin’s Sale of Goods (5^th ed.., 1997), at para. 15-062. If so, then a consideration of this issue takes the resolution of the present dispute no further.

Finally, it is also correct to say that in terms of enforcement in this jurisdiction, Samsun, as a judgment creditor, is procedurally a step ahead of Deval – but that consideration has played no part in my decision.

I shall be grateful for the assistance of counsel in drawing up an appropriate order both reflecting my decision on the question of priority and making clear the limited nature of that decision. I shall also be grateful for the assistance of counsel on all questions of costs.