Schoeller Holdings

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Schoeller Holdings Limited v. Beneficial Owners of Hull CZ007; Fiora Shipping Co. Limited as Intervener

Hong Kong High Court: Admiralty: Waung J: November 2001
Mr. Peter Graham, instructed by Messrs. Crump, for the plaintiff
Mr. Colin Wright, instructed by Messrs. Sinclair Roche & Temperley, for the Intervener
Fiora Shipping, as current owners of the vessel Silver Ocean, formerly Hull CZ007 of the Weihei Shipyard in China, sought unsuccessfully to lift an arrest placed on the ship in Hong Kong, in consequence of a dispute between Schoeller Holdings, the original purchasers of the ship and the Weihei yard. In particular, the Hong Kong court was not prepared to accept as proper maritime security, a ‘personal honour security’ accepted by the court in Qingdao on an earlier arrest of the ship or a mortgage of properties allegedly furnished later by the yard to the Qingdao court.

DMC’s Rating Category: Developed

Schoeller Holdings, the claimants, arrested the Silver Ocean, formerly Hull CZ007, in Hong Kong in November 2001, as security for claims against the shipyard that built the vessel, amounting to around US$2 million. The present owners of the Silver Ocean, Fiora Shipping, applied, as Intervener, for the arrest order to be set aside.

The background to the case was that, in 1995, Schoeller had contracted with two Chinese entities, the Weihei Shipyard of Shangdong province, and Hubei Machinery and Equipment Import and Export Corporation, for the construction and delivery of two vessels, hulls CZ006 and CZ007. The contracts contained a London arbitration clause. Hull CZ006 was duly delivered to Schoeller, but hull CZ007 was not; it was subsequently sold to Fiora. Disputes arose between Schoeller and Weihei Shipyard and were submitted to arbitration in London for resolution.

Schoeller had previously attempted to obtain security for its claim by arresting hull CZ007 in Qingdao. The Qingdao Maritime Court ordered the arrest, which was effected on 10 August 2000, and initially required security in the amount of US$2.9 in the form of a letter of guarantee from a financial organisation or an insurance company based in China. However, the Court accepted a letter of indemnity (a ‘personal honour’ guarantee) from the yard and ordered the release of the vessel on 21 August 2000.

On August 17 2000, Schoeller commenced proceedings in Hong Kong by obtaining the issue of a writ in rem. This writ was served on the vessel in August 2001. A warrant of arrest was obtained on October 6 2001 and served on the vessel when she was again in Hong Kong on November 20.

Fiora argued that the arrest order should be set aside on three grounds;
1 that there had been a material non-disclosure in the affidavit on which the arrest warrant was issued (the Warrant Affidavit);
2 that adequate security had already been given to Schoeller in the Qingdao court;
3 that the second arrest in Hong Kong was oppressive and vexatious, even if no adequate security had been furnished in the Qingdao court.

The judge held that Fiora’s arguments failed and that the arrest order should be confirmed.

1 Non-disclosure
Fiora’s argument under this heading was based on the allegation that a) the Weihei yard had furnished additional security to the Qingdao court, in September 2000, after the ship had left the port; b) Schoeller were aware of this or should have been aware of it and c) Schoeller should therefore have disclosed the existence of this additional security in the Warrant Affidavit. The additional security consisted of mortgages on three pieces of property of the Weihei yard and was evidenced by a ‘Supplementary Letter of Indemnity’ dated 1 September 2000 allegedly provided to the Qingdao court.

The judge said that ‘lying at the heart of this dispute is the wider dispute about the Supplementary Guarantee or how it is alleged it came into existence’. At the outset, the judge expressed considerable doubt whether the Weihei yard would have unilaterally offered such a letter to the Qingdao court, when it was under no compulsion to do so. That aside, the judge found, on examination of the evidence, that the Schoeller interests were not aware – and had no reason to be aware - of the alleged existence of the Supplementary Guarantee until it was referred to in an affidavit from Fiora dated 22 November 2001, four days before the hearing. Thus, the Schoeller interests could not be criticised for failing to mention the Supplementary Guarantee in their Warrant Affidavit.

2 Adequate full security in China
To succeed on this point, the judge said that Fiora must persuade the court that there is an enforceable, full and proper maritime security in Qingdao for this claim. He continued:
"It is universally recognised by all mature maritime jurisdictions that to avoid the arrest of a ship or to secure the release of an arrested ship, a proper security in the full amount of the claim, plus interest and costs, is required. A proper security for most maritime courts would generally be either a bank guarantee or a guarantee from a reputable insurance company or P&I Club….. What is important is that the security accepted can be easily enforceable without too much dispute and that it is not capable of fluctuating in value. For that reason, it is extremely rare to see a maritime court accepting stocks and shares or real estate properties. Real estate properties are particularly inappropriate as security for maritime claims because its enforceable values are often very uncertain….I do not know of a single instance where real estate had been accepted by the Admiralty Court of Hong Kong or of Singapore or of England for the release of an arrested ship."

As for the ‘personal honour’ guarantee accepted by the Qingdao court, the judge found it to have ‘no legal or commercial value’. "It is worthless security", he said "and, as far as I can see, it does not fit into any of the four types of maritime securities specifically referred to in Article 73 of the [Chinese Maritime} Code".

As for the Supplementary Guarantee, the judge noted that, in contemporaneous exchanges between the Weihei yard and Fiora, the yard had informed Fiora that it had given the Qingdao court a mortgage over two of its properties, which the court had accepted. These two properties were wholly different from the three properties set out in the Supplementary Guarantee. The judge expressed in consequence, ‘the gravest doubt as to the authenticity of the Supplementary Guarantee’. He noted also that the Chinese Maritime Code, Article 75, gives the maritime claimant the right to be consulted on the form and amount of the security. ‘But the Qingdao court sent no Supplementary Guarantee to [Schoeller’s lawyers] and did not ask the parties to consult on the Supplementary Guarantee nor did it issue any new order. I can only conclude that the Qingdao court as a proper court, did not take any of these acts because it was never in receipt of the Supplementary Guarantee of 1 September 2000."

3 Second arrest oppressive and vexatious
The grounds on which Fiora alleged that the arrest in Hong Kong was improper were;

a) there had been a prior arrest in Qingdao;
b) the Qingdao court had ordered the release of the vessel;
c) Fiora had acquired ownership after the vessel had been so released,

The judge held as to a) that the fact of an earlier arrest in another jurisdiction does not make the second arrest in another jurisdiction oppressive and vexatious. The circumstance of how proceedings are brought in two successive jurisdictions must be looked at and the lack of adequate security in the first jurisdiction in the context of admiralty cases would generally be fatal to any objection to the second arrest.

As to b), the judge could find no authority to support the proposition that the vessel once released by the Qingdao court, could not be arrested a second time. ‘A ship does not purchase its future freedom merely because there was an order of the court releasing the ship from arrest. Freedom from future arrest has to be earned by a ship and the only two sure ways it can earned so far as mature maritime jurisdictions are concerned, would be on the basis that the ship has been sold free of lien by a maritime court and on the basis that full security has been given to the maritime claimant thereby inducing the maritime court to order the ship’s release.’

As to c) the judge pointed out that the law of Hong Kong allows a maritime claimant to arrest a ship even in the possession of the new owner provided that the writ is issued before the change of ownership – as was the case here. ‘The new owner in such circumstances has to live with the consequences, so to speak, of the sins of the former owner and his remedy is not to have the ship released from arrest but to seek indemnity from the previous owner who is very often not worth suing.’

In the course of his judgment, the judge gave guidance as to the proper approach which his court would adopt in a case where much turns on the procedural law of a foreign maritime court and what is alleged to have happened in the foreign maritime court. He said:

"The Special Maritime Procedure Law of the People’s Republic of China (the Code) is a recent code enacted in China in late 1999 (to take effect from 1 July 2000) and internationally it is considered a sophisticated maritime procedural law designed to bring China into line with the modern maritime procedure and practice of mature maritime jurisdictions such as Britain, Singapore and Hong Kong. Where it is necessary for this Hong Kong court to be referred to the procedures alleged to have taken place in the Qingdao Court, I will, of course, give primacy to the written orders of the Qingdao Court exhibited as well as to the text of the Code exhibited. In so far as there is any difference between the parties as to the interpretation of the Code or the practice adopted in the Qingdao court under the Code, then I will take into consideration the expert opinions of the various Chinese lawyers. But where there is a dispute of doubt as to what the Qingdao court might or might not have done, on the basis of comity of nations I will assume (unless the contrary is convincingly proved) that the Qingdao court acted in accordance with the Code and not outside the Code and that it acted in a judicial and impartial manner in full accordance with the common judicial requirements of natural justice, namely not acting unilaterally in the absence of both parties and not acting without giving both parties a chance to be properly heard."


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