This case note is based on an Article in the December 2005 Edition of the ‘Marine Bulletin’, published by the Marine team at the international firm of lawyers, DLA Piper Rudnick Gray Cary. . DLA is an International Contributor to this website

Background
The bank was the mortgagee of the "Tropical Reefer". The vessel and two others formed part of a security for a US$6 million loan. By July 2001, after a chequered history of missed instalments and last-minute payments, over US$2 million was outstanding under the loan. In addition, of the three vessels, one was to be sold for scrap, the other had serious engine trouble and all three had various debts outstanding against them.

The last straw, as far as the bank was concerned, was when, on 23 July 2001, it heard that the "Tropical Reefer" had been arrested in Panama by Tramp Oil for unpaid bunker debts of just under US$300,000. On 13 July, the bank had learned that P&I cover had been withdrawn for non-payment of premium, but it had been under the impression that the vessel was still at a port in Spain. It was a term of the bank's loan that P&I cover would be maintained.

Concerned that there might be other creditors waiting to take action, the bank obtained an arrest order from the court in Panama on 24 July. Tramp Oil released the vessel on 27 July, but the bank continued to maintain its arrest. On 5 September, the Panamanian court ordered a sale of the vessel. On 12 September the cargo of bananas (by now a total loss) was discharged over board. On 16 October, the vessel was sold by public auction for US$1.5 million, resulting in net proceeds of US$785,000.

Anton Durbeck was the purchaser of the cargo of bananas. It claimed damages from the bank for wrongful interference with the contract of carriage. Rather than detain the vessel and its perishable cargo for months in Panama, the bank should have allowed it to sail to Hamburg and arrest it once the cargo had been safely discharged. Alternatively, the bank should have arrested the vessel on the outwards journey, before the cargo was loaded.

Applicable law
The first question was what was the applicable law of the claim. Wrongful interference is a tort so the Private International Law (Miscellaneous Provisions) Act 1995 applied.

The general rule is that the applicable law of a tort is the law of the country in which the events constituting the tort occurred. Where events occurred in different countries, it is the law of the country where the most significant elements of those events occurred. The general rule can be displaced if other significant factors mean that it is substantially more appropriate for the applicable law to be the law of another country.

Various possibilities were put forward: the bank's decisions to arrest and to continue the arrest were made in London, Anton Durbeck is a German company, the loan agreement was subject to English law but secured by a Cypriot mortgage, the bills of lading were governed by Dutch law, the cargo was on a Cypriot ship and the arrest took place in Panama.

In the judge's view, however, none of these factors was sufficient to displace the general rule. The most significant elements of the alleged tort took place in Panama, as that was the place where the vessel was arrested and detained and where the cargo became a total loss. Consequently, Panamanian law applied.

Third party's right to claim
Could a third party, such as Anton Durbeck, claim for damage to its cargo under Panamanian law? After hearing expert evidence, the judge was satisfied that Panamanian law gave a bill of lading holder whose cargo was damaged or lost on account of a valid arrest a right to sue if the arrest was carried out in bad faith or with the deliberate intention of harming the bill of lading holder.

The judge also considered the position if, contrary to his conclusion, Cypriot law applied. It was accepted for the purposes of the hearing that the law of Cyprus applies the same principles as English law in this respect. Under English law, if an owner has made a contract with a third party that does not impair the security of the mortgage, the mortgagee is not entitled to exercise rights under the mortgage that interfere with that contract (The Myrto [1977] 2 Lloyd's Rep 243).

The bank argued that the same principles should apply here as to mortgagees of property. A mortgagee of property is entitled to take steps to defend and protect its equal or superior right under the legal charge, whether or not its actions harmed the interests of a third party (Edwin Hill and Partners v First National Finance Corporation plc [1989] 1 WLR 225). By analogy, the same principle applied.

The judge, however, did not think that it was open to him to depart from a line of authority that went back to the 19th century. In any event, he did not consider that mortgages over property provided a direct analogy with mortgages over ships. The mortgagee of a ship can be taken to have allowed the owner to enter into contracts with third parties to enable the ship to carry goods from port to port. In such circumstances, the mortgagee cannot be regarded as having rights equal to or superior to those third parties so as to entitle it to interfere with those contracts, provided they do not impair its security.

No breach of duty
However, whichever system of law applied, the judge was satisfied the bank had acted reasonably throughout. There had been a long history of default and by 24 July, any realistic prospect of payment or restoration of P&I cover had receded. The alternative would have been to allow the vessel to sail to Hamburg without insurance cover, exposing the bank to the risk that it might be arrested by another creditor, when there would be no means of releasing it unless the bank itself provided security. Nor could the bank be criticised for maintaining the arrest when, throughout this period, the vessel remained without P&I cover.

Applying the principles of Panamanian law, there were no grounds for inferring that the bank intended to harm Anton Durbeck, or even that it was recklessly indifferent to whether it did so or not. Bad faith was not alleged. The bank was entitled to look at its own interest and to take advantage of the security to which it was lawfully entitled, even if that prejudiced a third party to whom it owed no duty of care.

Had English law applied, the judge would have reached the same conclusion. The question was whether releasing the vessel to sail - uninsured - to Hamburg would have impaired the bank's security. In the judge's view, it would have. He rejected Anton Durbeck's argument that, having not arrested the vessel on its outwards journey to Ecuador before any cargo was loaded, the bank could not claim the adequacy of its security was impaired. On the outward journey, there had still been some realistic prospect of a substantial payment being made towards the loan arrears. By the time the vessel had been arrested, circumstances had changed and the chances of insurance cover being restored had become very remote.