Note: This judgment has been upheld by the Court of Appeal, in a judgment delivered on 7 November 2003. To access the note of the Appeal judgment, click here 

Facts
In December 1997, under a Loan Facility Agreement with three companies, Den Norske Bank agreed a loan of US$6m to purchase three vessels, Tropical Reefer, Blue Reefer and Sky Reefer. Security included mortgages on the three vessels, and a guarantee and indemnity provided by Acemex Management. The Loan Facility and guarantee agreements were subject to English law. The ship mortgages were governed by the law of Cyprus, where the vessels were registered.

By July 2001 the Bank was owed more than US$2m in unpaid instalments plus interest. The three vessels had other substantial debts, and Spring Reefer and Blue Reefer were to be sold for scrap. Den Norske rejected proposals for renegotiation of the loan, or offers of partial payment, and arrested the Tropical Reefer in Panama, to realise its security under the mortgage. At the time of her arrest, the vessel was laden with a cargo of bananas, for discharge in Germany. The respondent claimed that if the vessel had been allowed to proceed to Germany without delay, before arrest, the proceeds of the subsequent Admiralty sale would have been enough to discharge the outstanding debt. As it was, the bananas deteriorated while the Tropical Reefer was under arrest and had to be jettisoned off Panama at a cost of US$204,140. This was deducted from the sale proceeds as part of the cost of the arrest. 

Den Norske asked the Commercial Court for summary judgment for US$815,277.09, the balance remaining after various repayments. The respondents argued that the Bank owed them a duty of care as to how it exercised its right of arrest, and having done so, it owed a further duty as to deciding whether or not to release the vessel. It was in breach of this duty in refusing to take steps to maximise the vessel’s sale price. The Bank said no such duty existed.

Lord Templeman said the general duty of care allegedly owed by a mortgagee to the mortgagor under the common law of negligence, was inconsistent with the rights and duties arising from these equitable principles. "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."

The judge in the present case said a ship mortgagee’s power of arrest was the necessary first step to enforcing his security by having the vessel sold by an Admiralty Court, and must be distinguished from the power of sale expressly granted by the terms of a mortgage. An Admiralty Court sale meant the value of the security was enhanced as the vessel was sold free of encumbrances.

A ship mortgagee would only be expected to release the vessel from arrest if he were offered security of equal value for paying off the loan. "He does not owe the mortgagor a general duty in negligence or in equity to take reasonable care in dealing with the ship... So long as the mortgagee acts in good faith for the purpose of obtaining repayment ... he can arrest the vessel notwithstanding such action might harm the interests of the mortgagor."

The judge dismissed the respondent’s argument that such a duty of care existed where re-arrest in another jurisdiction would enhance the proceeds of sale, as this would be inconsistent with Lord Templeman’s analysis of the duties of a mortgagee.

The respondents had also argued that summary judgment was inappropriate because a court could not be sure that the respondent had no real prospect of establishing at trial the existence of the duty claimed. That decision would depend on the facts and circumstances of the individual case, which could not be known before trial; in addition, the authorities recognised that there were circumstances where the mortgagee had to have regard to the fact that a short delay in selling might result in a higher price.

The judge held, however, that the precedents cited (Medforth v Blake [2000] Ch 86; Standard Chartered Bank v Walker [1982] 1 WLR 1410; Meftah v Lloyd’s Bank [2001] 2 AER (Comm) 741) did not establish that, in analogous circumstances, a mortgagee had any duty beyond that of good faith in arresting a vessel for debt.