DNB v. Acemex

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Den Norske Bank ASA v Acemex Management Co Ltd (The "Tropical Reefer")
English Court of Appeal: Brooke, Longmore, Jacob LLJ.: [2003] EWCA Civ 1559:7 November 2003

Michael Davey, instructed by Hill Taylor Dickinson, for Acemex (appellant /defendant)
Luke Parsons QC, instructed by Stephenson Harwood, for Den Norske Bank (respondent /claimant)

ship mortgage: whether mortgagee owed mortgagor common law or equitable duty of care: Whether mortgagee had duty to obtain a 'proper price' on sale: whether ship mortgagee obliged to respect shipowners' contracts with cargo: Whether separate defence for ship mortgages

The Court of Appeal unanimously dismissed an appeal by the original defendant, Acemex, from the first instance judgment, confirming that a mortgagee has no duty in common law or equity to take the debtor's interests into account if it (the mortgagee) was acting in good faith to secure repayment of its loan. It is entitled to sell the property in its current condition without investing money or time in increasing its likely sale value (Silven Properties v Royal Bank of Scotland [2003] EWCA Civ 1409, 21 October 2003). The appeal court rejected a further argument that as a ship is a chattel used for trading purposes, the mortgagee has a duty not to interfere with a shipowner's contracts to carry goods. It held that a ship mortgage is no different from a mortgage on land.

DMC Category Rating: Developed

Case note contributed by Ann Moore, Law Correspondent for Fairplay International Shipping Weekly. Ann Moore is a contributor to this website.

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.

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. Their P&I Club cover had been withdrawn. 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. Acemex 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. Acemex 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.

At first instance, the judge concluded that the Bank owed Acemex no duty of care in law, either in the timing of the arrest or in deciding whether to release the vessel at Panama. Even if there was a duty of care, the communications between the Bank and the borrowers before the arrest showed the action was reasonable. It followed that Acemex had no real prospect of establishing at trial that the duty had been breached. Acemex appealed.

Lord Justice Longmore gave a judgment with which Brooke and Jacob LLJ concurred.

He dealt first with the "equity argument", that - on the basis of the ordinary law of mortgages and real property - a mortgagee who decides to sell must do so in good faith and take reasonable care to obtain a proper price (Downsview Nominees Ltd v First City Corpn [1993] AC 295; Yorkshire Bank plc v Hall [1999] 1 WLR 1713).

He said Acemex' case was weakened by the Silven Properties judgment, handed down in the Court of Appeal shortly before the present appeal hearing (Silven Properties v Royal Bank of Scotland [2003] EWCA Civ 1409, 21 October 2003). Silven, a property mortgagor, had sued its mortgagee bank, and the receivers appointed under the mortgage terms, for having sold the property at an undervalue, arguing that a delay would have achieved a better sale price.

In dismissing Silven's appeal, the court had set out a number of principles:

a) a mortgagee should be "active in protecting and exploiting the security, maximising the return, but without taking undue risks" (Palk v Mortgage Services Funding Plc [1993] Ch 330);
b) he had "an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed" (Cuckmere Brick Co v Mutual Finance Limited [1971] Ch 949); but was "at all times free to consult his own interests alone whether and when to exercise his power of sale (Raja v Austin Gray [2002] EWCA Civ 1965);

c) "The mortgagee's decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagor..." (China and South Sea Bank Ltd v. Tan Soon Gin [1990] 1 AC 536);

d) "It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price..." (Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349).

The Silven judges disapproved Lord Denning MR's opinion (Standard Chartered Bank v Walker [1982] 1 WLR 1410) that in choosing the time of sale the mortgagee "must exercise a reasonable degree of care". This was inconsistent with the later authorities, which "state quite categorically that the mortgagee is under no such duty of care to the mortgagor in respect of the timing of a sale and can act in his own interests in deciding whether and when he should exercise his power of sale. The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value." If the mortgagor requires protection, appropriate provisions must be included in the mortgage agreement.

Longmore LJ rejected Acemex's argument that by arresting the Tropical Reefer in Panama and causing it to be sold by the Panamanian court rather than deferring the arrest until the vessel reached Hamburg, the mortgagee had impaired its value in breach of his duty to get the best possible price. This ran counter to Silven and the other authorities. Even if Panama was not the best possible market, the cost of transport must be taken into account and the possible risk of a further voyage, in view of the fact the "impecunious" owner's P&I cover had been withdrawn. He held the decision for arrest and sale in Panama involved no breach of duty, and there was no prospect of establishing such a duty at trial.

Longmore LJ also rejected as "hopeless" Acemex's "shipping argument", that absent any express term to the contrary, a mortgagee must not interfere with a shipowner's contracts for the carriage of cargo unless the mortgagee's security was impaired. The judge said the relationship between mortgagor and mortgagee was contained in the documents relating to the mortgage agreement. These included a provision that the mortgagee could exercise its rights "notwithstanding any rule of law or equity to the contrary." To succeed, the appellant would have had to assert an implied term in the contract, but any such term would be contrary to these express provisions.

He concluded "the shipowner had been in default for a long time, continued to be in default and had no effective proposals to rectify that default. In no way could the Bank's actions constitute a breach of the loan or mortgage contract."

The appeal was dismissed.

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