Dainford Navigation Inc. v PDVSA Petroleo S.A. "Moscow Stars"

This is an application by the claimant, the owner of the vessel “MOSCOW STARS”, for an order for sale of the cargo of about 38,000 gross metric tons of Santa Barbara crude oil, and 12,000 gross metric tons of Anaco crude oil currently on board. The cargo was loaded in October 2016, pursuant to a time charter between the claimant and the defendant, PDVSA, the Venezuelan state-owned oil and gas company. This was one of a total of 14 time charters between PDVSA and companies within the Russian state-owned shipping group PAO Sovcomflot.

The application is made pursuant to section 44 of the Arbitration Act 1996. It is made with the permission of the arbitral tribunal, which was given on 13th December 2016, although this application was only issued on 5th May 2017.

It is the claimant's case that there have been repeated failures on the part of the defendant to pay time charter hire since January 2016, although some payments have been made. The cargo was loaded on 14th October 2016, at Puerto La Cruz, in Venezuela, and the vessel was ordered to proceed to Freeport, in the Bahamas, for discharge. The voyage should have taken only a few days. At that stage, according to the claimant, there was an outstanding balance of some US$4.5 million. As a result of the failures by the defendant to pay hire, the claimant gave notice of exercise of a lien over the cargo on 18th October 2016, when the vessel was off the intended discharge port. The charterparty provides, in the usual way, that the owner has a lien on all sums due under the charter. The vessel later sailed to Bullen Bay, Curacao, in accordance with further orders given by the defendant. It has remained there ever since.

On 26th November 2016 the claimant served a further notice of exercise of a lien. Since then, it has updated the defendant from time-to-time on the sums due, as hire has continued to accrue at the charter rate of US$29,000 per day. Some payments were made by the defendant in December 2016 and January 2017 but it appears that they were insufficient to clear the then-existing arrears. No payments have been made since then.

The charter contains a London arbitration clause, and arbitration has been commenced. The claimant claims hire and other outstanding sums, either as sums due under the charter or by way of damages. In financial terms, the claim for hire is the principal claim. As of today, the claimant says that about US$7.7 million is outstanding.

As already noted, in December 2016 the claimant sought and obtained permission from the arbitral tribunal to apply to the court for an order for sale of the cargo. At the same time its associated company, which is the owner of a vessel called “NS COLUMBUS”, obtained the same permission in an arbitration between it and PDVSA, the arbitrators in the two cases being the same.

On 21st December 2016 the claimant and three other companies in the Sovcomflot group arrested the cargo, with the leave of the Curaçao court. On 18th January 2017 a further eight Sovcomflot companies did likewise.

Accordingly the cargo is currently subject to a contractual lien being exercised by the claimant for hire and other sums due under the charter, as well as being subject to arrest at the suit of the claimant and 11 other companies in the same group, who also have similar claims under different charters.

Steps were taken by the owner of the “NS COLUMBUS” to seek an order from this court for the sale of the cargo on board that vessel pursuant to the permission given by the arbitrators in that arbitration. It is unnecessary to set out the detail of those steps. It is sufficient to say that the sale was opposed by the defendant, which proposed instead that the cargo should be discharged into storage in St. Eustatius, a course which the owner of the “NS COLUMBUS” was prepared to agree. However, such storage proved impossible to arrange on satisfactory agreed terms. In the end, the “NS COLUMBUS” cargo was discharged into storage but there were considerable disputes and, eventually, the court in St. Eustatius made an order for the sale of the cargo. The cargo has not yet been sold and, as I understand it, the order made by the court there is subject to an appeal by PDVSA.

Meanwhile, the “MOSCOW STARS” and its cargo are currently drifting off Curaçao. The claimant is incurring all the usual costs of running the vessel, including not only paying the crew, but also paying for expenses, such as the supply of bunkers, which the defendant is obliged to provide and pay for under the charterparty but for which it is failing to pay. It is likely that the vessel's hull is becoming increasingly fouled. The vessel is scheduled to go into dry-dock in January 2018 for inspections required by SOLAS and by Class, and needs to be cargo-free in advance of this date in order for that to happen.

A hearing was held in the arbitration in July 2017, in order to deal with the claimant's principal monetary claims. The Tribunal has indicated that it will produce its award as soon as possible, and the claimant hopes that this will be before the end of this month. A further hearing to deal with remaining issues has been fixed to take place during the week beginning 18th September 2017.

However, there is unchallenged evidence from the claimant, that even if it obtains an award in its favour, it would be likely to take a further three to four months to enforce any award in Curaçao and, potentially, this would take very much longer if the defendant objects or seeks to frustrate this enforcement.

It is reasonable to suppose that the defendant will take whatever steps it can to resist enforcement of any award which the claimant may obtain. On any view, therefore, a resolution of the current impasse is likely to be many months away.

These, in brief, are the circumstances in which the current application is made.

Mr. Michael Davey QC for the defendant submits that there are three reasons why the claimant's application should be dismissed, although he recognises that the latter two overlap.

They are as follows: (1), there is no power to order the sale of a cargo under section 44(2)(d) of the Arbitration Act 1996, unless the cargo is the "subject" of the arbitral proceedings, and that is not the case here; (2), if there is such a power, it can only be exercised within the scope of CPR 25.1(c)(v), which requires either that the cargo is perishable (which it is not), or that there is some other good reason why it should be sold "quickly", and that is not the case; and, (3), in any event, the exercise of such a power would be inappropriate in all the circumstances.

Section 44(1) of the Arbitration Act 1996 provides:

"(1)

Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about the matters listed below as it has for purposes of and in relation to legal proceedings".

Section 44(2) provides:

"Those matters are -

(a)

the taking of the evidence of witnesses;

(b)

the preservation of evidence;

(c)

making orders relating to property which is the subject of the proceedings or as to which any question arises in the proceedings -

(i)

for the inspection, photographing, preservation, custody or detention of the property, or

(ii)

ordering that samples be taken from, or any observation be made of or experiment conducted upon, the property; and for that purpose authorising any person to enter any premises in the possession or control of a party to the arbitration;

(d)

the sale of any goods the subject of the proceedings;

(e)

the granting of an interim injunction or the appointment of a receiver".

In the present case the application is made under section 44(2)(d). Accordingly the court has power to order the sale of the cargo, only if the cargo comprises "goods the subject of the proceedings". There is no issue about "goods"; the issue is whether the cargo is "the subject of the proceedings", that is to say, the arbitration proceedings.

It appears that orders for the sale of cargoes have been made by Commercial Court judges in the past in circumstances similar to those in the present case. One example is The Stelios B, 24th March 2006, a decision of Tomlinson J, of which a brief summary only is reported in the Lloyd's Maritime Law Newsletter. Unfortunately that summary contains no indication whether the judgment addressed the issue whether the cargo ordered to be sold was the subject of the arbitration proceedings in that case.

Although such orders appear to have been made also in other cases, it is not apparent in what circumstances (for example, whether they were opposed and, if so, on what grounds). In the end I have not been referred to any case in this jurisdiction in which the question has been the subject of a reasoned decision.

The question has arisen in Singapore, where the relevant arbitration legislation is similar in some respects, although not identical. Section 12(1)(d) of the International Arbitration Act 2002 gives the arbitral tribunal power to order "the preservation, interim custody or sale of any property which is or forms part of the subject-matter of the dispute", while section 12A gives the same power to the court. The phrase "which is or forms part of the subject-matter of the dispute" is, for all practical purposes, equivalent to the phase "the subject of the proceedings" in our 1996 Act.

In Five Ocean Corporation v Cingler Ship Pte Ltd [2015] SGHC 311, it was held that this gave the court power to order a sale of cargo in circumstances similar to the present case. Belinda Ang Saw Ean J said at [54]:

"In Emilia Shipping, Chan J held that the cargo was the subject matter of the proceedings as it formed the subject-matter (ie, the lien) of the claims for freight. This was squarely applicable in the present case – the dispute between FOC and Cingler was for unpaid freight and other sums, and the arbitration would determine Cingler’s liability for such claims and the validity of FOC’s exercise of its right to detain possession including the assertion of a lien over the Cargo by CMI for the benefit of FOC for such claims".

Mr. Michael Coburn QC submits on behalf of the claimant that the phrase "goods the subject of the proceedings" requires no more than that the proceedings in question should relate to or concern the goods in question. To my mind, however, that states the position too widely. The phrase "the subject of the proceedings" requires, in my judgment, a closer nexus between the cargo and the arbitral proceedings than would be sufficient if the statute required only that the goods should relate to the proceedings, or vice versa, in some way.

Mr. Coburn submits also that it would be unsatisfactory if the court had no power to order sale in circumstances such as the present. That appears to me to be correct. For example, if the defendant's submission is correct, neither the court nor the arbitrators would have power to order the sale of the cargo, even if it was deteriorating significantly in condition and value. That would be in nobody's interests.

Mr. Davey responds that, in such an event, the cargo and its condition would become a major issue in the arbitration, such that the cargo would become "the subject of the proceedings", even if it had not originally been so. No doubt, that would sometimes be the case, but it is not necessarily so.

However, the unsatisfactory result which would apply in some cases if the defendant's submission is correct cannot be decisive. The fact is that if goods are not "the subject of the proceedings", the court has no power to order their sale pursuant to section 44, however convenient it would be if there were such a power.

Mr. Davey, for the defendant, submits on the other hand that the phrase "goods the subject of the proceedings" is deliberately narrow. It is to be contrasted with the wider expression "property which is the subject of the proceedings or as to which any question arises in the proceedings", in paragraph (c). He says that this is not surprising, because a power of sale is a draconian order to make on an interim basis, because it has the effect of depriving a party of its ownership of goods. In contrast, the orders contemplated by paragraph (c) – inspection, photographing, preservation, custody, detention, sampling, observation and experimentation – are much less intrusive and can, therefore, be made in more extensive circumstances. He points out that the Singapore legislation contains no phrase equivalent to "as to which any question arises in the proceedings" and, therefore, that the contrast on which he relies in the present case could not have applied there. He says that in order for goods to be "the subject of the proceedings" within paragraph (d), there must be a dispute "about" the goods and that the power to order sale on an interim basis while that dispute is resolved is limited to a situation where it is impossible to know until the dispute is resolved which party is entitled to sell the goods or determine what is to happen to them.

In this connection Mr. Davey relies on what was said by Lord Millett in On DemandInformation Plc v Michael GersonFinance Plc [2002] UKHL 13, [2003] 1 AC 368, at [33]:

"My Lords, Order 29, rule 4 gave the court power to make an interim order for the sale of any property (other than land) which is of a perishable nature or likely to deteriorate if kept or which for any other reason it is desirable to sell forthwith. The Order does not give the court power to make a free-standing order for sale as a form of independent relief. The property in question must either form the subject-matter of the proceedings in which the order is made or be property as to which a question arises in those proceedings. It is the existence of the proceedings or question which gives rise to the difficulty and makes it necessary to invoke the assistance of the court. The paradigm case is where the ownership of the goods is in dispute, so that they cannot be sold except by agreement between the parties or order of the court. The purpose of the court in exercising the power to order a sale is to avoid the injustice that would otherwise result by the property becoming worthless or significantly reduced in value during the interval between the application for sale and the determination of the proceedings or question."

Nobody is suggesting that section 44 of the Arbitration Act gives the court power to make a free-standing order for sale as a form of independent relief. The power is limited to a case where the goods are "the subject of the proceedings”. No doubt a paradigm case is where the ownership of goods is in dispute, but I do not read this passage as providing a definition applicable in all circumstances of when that requirement is satisfied.

In any event, on the facts of the present case the arbitration dispute between the parties does give rise to a difficulty which makes it necessary to invoke the assistance of the court. The difficulty is that, until that dispute is resolved, and the entitlement or otherwise of the claimant to the hire claim is established, nobody can say what should happen to the cargo. The claimant is exercising a lien, but cannot enforce its claim against the cargo until it has an award. The defendant cannot obtain delivery of its cargo without a decision by the arbitrators that it is under no obligation to pay hire. Even if the arbitration is not "about" the cargo, it will certainly determine what will happen to the cargo, which cannot be determined until the arbitrators produce their award.

I do not accept that the section is as narrow as the defendant submits. In my judgment, there is a sufficient nexus between the cargo and the arbitral proceedings in circumstances such as the present – that is to say, where a contractual lien is being exercised over a defendant’s goods as security for a claim which is being advanced in arbitration. That does not depend on whether there is formally a claim in the arbitration for a declaration that the claimant is entitled to exercise such a lien, although as it happens the claimant has made such a claim. It is sufficient that the lien is being exercised in support of the arbitral claim and that, as a result, there is an impasse between the parties pending issue of an award. I would add that in this case the defendant is the owner of the cargo. There is no need to say anything about what the position would be if the cargo were owned by a third party not a party to the arbitration.

This conclusion means that there is power in the present case to order a sale pursuant to section 44. It remains to consider whether, as a matter of discretion, that power should be exercised. In exercising that discretion, one factor which needs to be taken into account is that the order would deprive the defendant of its ownership of goods against its will in circumstances where the claimant's right has not yet been established. In an appropriate case, however, the court has power to make such an order.

The power which the court has in an arbitration case, as explained in section 44(1) is "the same power ... as it has for the purposes of and in relation to legal proceedings." The relevant power in relation to legal proceedings is contained in CPR 25.1. It is the power to make an order for "the sale of relevant property which is of a perishable nature or which for any other good reason it is desirable to sell quickly." "Relevant property" is defined as "property (including land) which is the subject of a claim or as to which any question may arise on a claim."

Accordingly the power can only be exercised if the goods are of a perishable nature (which is not the case here) or if for any other good reason it is desirable to sell quickly.  "Good reason" for a quick sale is, therefore, a jurisdictional requirement, but in practice, as both parties recognise, it overlaps with broader discretionary considerations.

The claimant submits that there is overwhelmingly good reason to order sale in this case. The cargo has already been on board the vessel for over nine months and, in the absence of an order, will remain there for many months to come. That will be the position, even if the claimant is successful in obtaining an award in the near feature. That prejudices the claimant, which is not receiving its hire; it is having to incur the expense of operating the vessel; and is faced with the approaching deadlines to comply with SOLAS and Class requirements. If the cargo is sold, the goods will be effectively turned into money for the benefit of all parties as held in the On Demand case, and the claimant will be free for employ its vessel in other employment. There is, says the claimant, little or no prejudice to the defendant from such a course, in particular where there is no viable alternative, such as discharge into storage.

For the defendant, Mr. Davey has not pointed to any viable storage possibility, but does suggest, without conceding that the claimant is entitled to take this course, that it may be possible for the claimant to accept the defendant's failure to pay hire as a repudiation, entitling it to terminate the charterparty and discharge the cargo elsewhere. However, I see no reason why the claimant should be required to take this course, particularly when the defendant does not accept that it is entitled to do so.

Mr. Davey submits that the current situation is of the claimant's own making, because it permitted the loading of cargo instead of terminating the charter for non-payment of hire in October 2016 when, on its own case, substantial hire was outstanding. He says that the claimant voluntarily went into a situation where it could contemplate that the defendant would continue to fail to meet its obligations to pay hire, so that the claimant would have to exercise its lien, and that this is what has happened.

I do not accept that this is a material factor against the making of an order for sale. In the first place, the situation where cargo was to remain on board for over nine months because of a failure by the defendant to pay hire cannot have been contemplated by either party as a realistic possibility back in October 2016. The defendant would not have wanted to load cargo on board which was going to be detained by the claimant in this way. Nor can the claimant have envisaged that the defendant would fail to pay hire for such a long period, when that would inevitably mean that the defendant would not get its cargo back. In any event, if the claimant had contemplated this situation, it would have contemplated not only that it would be entitled to exercise the lien, but also that it would have available to it the right to pursue a claim in arbitration and, if appropriate, to seek interim remedies under section 44 with the permission of the tribunal, including an order for sale of the cargo.

Mr. Davey criticises the claimant for delaying the issue of its current application from December 2016, when the tribunal gave permission for the application to be made, until May 2017, when the arbitration claim form was issued. He says that the apparent urgency which the claimant now asserts to exist could largely have been avoided if the application had been issued more promptly. Mr. Coburn, on the other hand, says that it was reasonable for the claimant to attempt first to achieve an order for sale (or alternatively, as matters developed, to achieve a consensual storage) of the “NS COLUMBUS” cargo before making the current application and that, in any event, a great deal of activity has been taking place in the numerous arbitrations by Sovcomflot companies against PDVSA. In my judgment, such criticism as may be made of the delay in pursuing this application is substantially outweighed by the other compelling factors in favour of an order for sale.

Finally, Mr. Davey relies on an open offer, made in correspondence yesterday, in which the defendant offered to undertake a sale of the cargo itself and to pay the proceeds of sale into escrow in London. He submits that the defendant should be given an opportunity to do this, because that represents the best prospect of maximising the proceeds of sale. However, this offer comes at a very late stage and there is, in my judgment, a substantial risk, given the previous history, that if no order for sale is now made, the present situation will drag on indefinitely. There is nothing to prevent the defendant, if it is able to obtain an offer from a buyer, from notifying that offer to the claimant and, if necessary, to the court. However, the possibility that the defendant may be able to obtain such an offer should not hold up the process of sale by the claimant, particularly as the claimant will need to arrange for the release of its lien and the lifting of arrests by other companies within the Sovcomflot group, which will be necessary in order for the cargo to be sold.

The last-minute offer by the defendant does indicate, however, a realistic recognition on the part of the defendant that the only viable course now is for this cargo to be sold. Previously, it was the defendant's evidence that a sale would prejudice it in two ways. The first was that the cargo is due to be delivered to a client of PDVSA in Curacao. The second is that one of the cargoes on board, Anaco Wax crude oil, is a heavy oil which requires refinement or blending prior to onward sale. Those submissions were not developed orally by Mr. Davey and, in my judgment, they were never of any weight. The defendant's belated recognition that the best course now is to sell the cargo, the only question being whether that should be done by the defendant voluntarily or by the claimant pursuant to an order of the court, means that they need not be further considered. It means, also, that the submissions made by Mr. Davey as to the draconian nature of an order for sale, because of its effect on the property rights of the owner of the cargo, have little or no force in the present case. The cargo is going to be sold anyway.

Considering the matter as a whole, I have no doubt that the sale of the cargo should now be ordered. The discretionary factors to which I have referred point overwhelmingly to that conclusion.

There are two points concerning the form of the order. The first is whether the claimant's undertaking in damages should be fortified by the provision of security at this stage. I consider that this is unnecessary. The probability, to say the least, is that the defendant owes the claimant substantial sums by way of hire, although this will ultimately be a matter for the arbitrators and nothing I say is intended to affect their decision. Further, if there is a dispute about the terms of any sale, the matter will have to come back to court and fortification of the undertaking can, if necessary, be considered then.

The second question is whether the order should include a direction to the defendant to sign any sale contract as the seller. I have no doubt that the court has power to make such an order, in order to give effect to the order for sale made under section 44, and that it would be convenient to do so in this case. The defendant can have no valid objection.

For these reasons, I make an order for the sale of the cargo in the terms proposed.