Moondance Maritime Enterprises SA v Carbofer Maritime Trading APS

The Defendant (“CMT”) makes two applications: (i) for an order under s. 70 (7) of the Arbitration Act 1996 (“the Act”) that the Claimant (“MME”) make a payment into court in respect of costs that it is contended are payable under an arbitral award made on 1 February 2012 (“the first award”); and (ii) for an order under s. 70 (6) of the Act that MME provide security for costs in the sum of £42,000 in respect of an application by MME under s. 68 of the Act challenging the first award.

The claim leading to the first award was made in respect of a time charter on an amended NYPE form dated 17 August 2009 by which CMT chartered the vessel Moondance II for a minimum of 32 months to a maximum of 38 months. After the conclusion of the charterparty, CMT entered into a sub-charter which was unknown to MME until very much later. When it learned of the sub-charter, MME claimed damages on the basis that the charterparty had been induced by misrepresentations made by CMT that: (i) the vessel would be used for in-house cargoes; (ii) CMT had not formed any intention to re-let the vessel for any substantial period; and (iii) the charterers would discuss with MME any desire to fix the vessel on the market for a period basis before approaching any third parties. The Tribunal held by a majority of 2:1 that MME had failed to prove the alleged misrepresentations and held unanimously that even if the misrepresentations had been made, no loss had resulted to MME. The Tribunal therefore dismissed MME’s claim and awarded and directed that MME should pay CMT’s costs, the assessment of which they reserved to themselves.

Pursuant to an order made by the Tribunal on 21 March 2011, MME had provided security for CMT’s costs in the sum of £80,000. On 29 October 2011, the Tribunal refused CMT’s application for further security in the sum of £40,000.

On 15 March 2012 The Moondance II was withdrawn from the charterparty for non-payment of hire and on 20 April 2012 CMT was declared bankrupt in the Bankruptcy Court in Copenhagen.

MME’s claim for unpaid hire and damages for repudiatory breach of the charterparty was referred to arbitration and on 18 May 2012, the sole arbitrator, Mr Stephen Hofmeyr QC (who had been a member of the first Tribunal), awarded MME (by way of an interim partial award): (i) agreed unpaid hire and associated debts in the sum of US$ 200,728.63; (ii) US$1,156,340.00 by way of damages; and (iii) its costs. In a second interim partial award dated 7 August 2012, the sole arbitrator assessed MME’s costs in the amount of £18,631.75.

Before embarking on an assessement of CMT’s costs, the first Tribunal required proof that CMT’s solicitors remained instructed and upon being provided with the terms of CMT’s FD&D insurance and an undertaking from the insurers, RaetsMarine, to pay the costs of assessing CMT’s costs, the Tribunal agreed on 1 August 2012 to undertake an assessment. However, no assessment had been issued by the date of the hearing of these two applications.

In its first application under s. 70 (7), CMT seeks a payment into court comprising: £30,609.89 being the difference between the total costs claimed by CMT in respect of the first award and the £80,000 provided by way of security; £2349.12 and £5,000 in respect of costs incurred after the first award.

S. 70 (7) provides:

The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with.

Mr MacDonald for MME submits that in the absence of a costs assessment none of the sums CMT claims should be paid into court is “payable under” the first award and therefore the court has no jurisdiction to make the order sought. Mr Thomas QC for CMT contends that the sums are payable under the first award because the Tribunal awarded and directed in that award that MME should pay CMT’s costs. In my judgment, s. 70 (7) is predicated on there having been a specific sum of money ordered to be paid under the award appealed or challenged and Mr MacDonald’s submission is correct. Accordingly, since CMT’s costs have not been assessed, its first application fails.

Turning to the second application made under s. 70 (6), two principal questions arise for determination. First, has CMT established the conditions contained in CPR 25.13 (2) (c) or (d), namely, that MME will be unable to pay CMT’s costs of the s. 68 application if ordered to do so and/or MME has taken steps in relation to its assets that would make it difficult to enforce an order of costs against it? Second, assuming an affirmative answer to the first question, do the sums awarded by the sole arbitrator in the second reference (unpaid hire, damages and costs) constitute a set-off which provides security for CMT’s costs or do they afford a discretionary reason for not ordering security?

MME is a one ship company registered in the Marshall Islands, a jurisdiction where fairly minimal information relating to companies is required to be made publicly available. It is also reasonably clear that the vessel Moondance II is managed and operated by third parties under a set of arrangements whose effect is that income earned by the vessel, save possibly for that needed to service a mortgage, is channelled away from MME. On the basis of this evidence I conclude that MME has taken steps in relation to its assets that would make it difficult to enforce an order for costs made against it. There were put before the court draft unaudited finance statements for MME consisting of a balance sheet and statement of income as at 17 February 2011 and a letter from Bremer Landesbank stating that MME “has been current” with all payments due under the relevant loan agreement. The balance sheet shows shareholders equity of $24,906,007 and the income statement shows a loss of ($204,123). In my judgement, these documents do not alter the fact that MME is being operated in a manner that would make it difficult for CMT to enforce a costs order in its favour in the estimated sum of £42,000.

Turning to the set-off issue, MME undertakes that if necessary it will permit CMT to set-off against MME’s entitlement to the sums awarded by the sole arbitrator any sums for which MME is liable in respect of costs of the arbitration or of CMT’s applications under s. 70 (6) & (7). It follows, submits Mr Macdonald, that even if CMT would otherwise be entitled to security for costs, security ought not to be ordered because CMT is “otherwise secured” and/or as a matter of discretion.

In my judgment, it is first necessary to decide whether, putting CMT’s bankruptcy to one side, MME’s claim for the sums awarded by the sole arbitrator in the second reference would constitute an equitable set-off in respect of an order for costs in CMT’s favour in the s. 68 application. The law of equitable set-off has been the subject of yet further consideration by the Court of Appeal in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667. After a review of the leading cases, Rix LJ concluded (para 43 (v)) that the impeachment of title test should no longer be used and instead there should be a single one-stage test which involves considerations of both the closeness of the connection between claim and cross-claim, and of the justice of the case. In paragraph 43 (vi) Rix LJ stated that Lord Denning’s test in The Nanfri shorn of any reference to the concept of impeachment was the best restatement of the test, namely: “cross-claims …. so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.”

An order of costs in favour of CMT in MME’s s. 68 arbitration claim would be connected with MME’s cross-claims on the monetary awards made in the second arbitration in that both arbitrations were brought under and in connection with the charterparty dated 17 August 2009. However, I do not think that MME’s cross-claims would be so closely connected with a costs award in favour of CMT as would make it manifestly unjust to allow CMT to enforce a costs award without taking into account the cross-claims. I say this because the s. 68 challenge is based on the first reference which was begun sometime before 4 February 2011 when MME was making no complaint of non-payment of hire. Further, MME’s claim in that reference was for misrepresentation and that claim was roundly rejected by the majority of the tribunal, whereas the second reference was an entirely separate proceeding begun on 5 April 2012 following an email of 14 March 2012 from CMT to MME stating that it could not perform the charterparty. In short, MME’s success in the second arbitration ought not in justice to result in washing out the positive cashflow consequences for CMT of costs orders in its favour arising out of MME’s failure at the arbitral and curial level in its misrepresentation claim.

If MME cannot claim an equitable set-off, I do not think it can set any store by its offer to allow CMT to set-off the cost awards in its favour in the first reference and the s. 68 application against MME’s claims based on the sole arbitrator’s awards. In the result, therefore, I find that: (i) putting on one side the question of set-off, it is just to order security for CMT’s costs in the s. 68 application; (ii) the condition in CPR 25.13 (2) (g) is satisfied; and (iii) the existence of the monetary awards made against CMT in favour MME afford no reason for not ordering security for CMT’s costs whether as a matter of set-off or as a matter of discretion.

Accordingly, I propose to order that MME provide security in the sum of £42,000 for CMT’s costs in the s. 68 application within 21 days, failing which MME’s s. 68 application will be dismissed.