Fair Stood the Wind for France – or at least a change of direction has taken place on bunker arrests there
There is no doubt that France has long been considered an arrest friendly jurisdiction. Associated ship arrests are possible and French domestic law is almost unlimited when it comes to the types of claim which can give rise to the right to arrest.
French law also permits an arrest of bunkers for an almost limitless list of claims. Moreover, the vessel carrying the targeted bunkers frequently has no connection whatsoever with the claim giving rise to the right to arrest them.
Creditors have been quick and ready to exploit this situation to obtain security or rapid settlement of outstanding debts.
Where the debtor is a time charterer, the creditor will simply argue (even without disclosing the time charter, which it will almost never have) that as time charterer the debtor owns the bunkers. The creditor is likely to obtain its arrest order because French domestic law requires merely that the applicant should demonstrate that its claim “appears in principle to be founded” and there is a risk that it will not recover the debt from the time charterer.
However, the consequent arrest of the bunkers places the vessel and its owners also under a type of “associated” arrest as the vessel is unable to leave the jurisdiction until the matter is resolved. This is easier said than done, when the debtor/time-charterer is or appears to be in dire financial straits.
A quick revision of French law and arrests
There are two sets of legislation conferring the right of arrest in France; the 1952 Arrest Convention (International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-going Ships) and the French domestic code – principally the Transport Code and Civil Enforcement Code.
Although French law is wider than the Arrest Convention in terms of the types of claims for which an arrest application can be made, the French transport code provides for a tougher test. It requires the applicant to show that the claim is founded in principle whereas the Arrest Convention only requires an arguable claim.
In cases of an arrest of bunkers, French law will be applied because it is possible to arrest for almost any type of claim whether or not it is of a maritime nature.
Latest legal opinion in France on the arrest of bunkers considers that as bunkers are an element of the vessel the Transport Code should apply. There remains however contradictory opinion suggesting that another code (the Civil Enforcement Code) applies to the arrest of bunkers. It should be noted that the enforcement code, in addition to showing that a claim is founded in principle, also requires the applicant to demonstrate a risk that the debt will not be settled.
As the position is not clear-cut, it is the often the case that an application for arrest of bunkers is based on the two French codes.
The case of the “UNITED MIRAVALLES”
UNITED MIRAVALLES was under time charter to Egyptian Bulk Carriers at Dunkirk.
The creditor first out of the starting blocks was Cosco Bulk Carriers Americas. Egyptian Bulk Carriers (EBC) had previously chartered one of Cosco’s vessels and failed to redeliver her with the correct quantities of bunkers. Despite several months of chasing and failed promises from EBC, including the admission that they had cash flow problems, Cosco found itself with a claim against EBC for US$557,020.00.
Clearly, neither the UNITED MIRAVALLES, nor its head owners, its charterers or sub-charterers, had any link whatsoever to Cosco’s claim against EBC.
In its arrest application Cosco merely stated that EBC was time-charterer of the UNITED MIRAVALLES, that the time-charterer pays all charges linked to the commercial exploitation of the vessel including the bunkers and therefore EBC owned the bunkers. It did not provide a copy of the relevant time charter.
Cosco obtained an arrest of the bunkers.
There then followed six further arrests of the bunkers by various parties all seeking security for their claims against EBC. The total values of all 7 arrest orders exceeded US$4 million.
1. EBC was clearly in great financial difficulty and did not appear to have the means to pay its mounting debts.
2. The value of the bunkers on board UNITED MIRAVALLES was about US$350,000, a mere fraction of the total claims against EBC.
3. The vessel was laden with wheat. The cargo was desperately needed in the Yemen.
In each case, the judge ordered an arrest of the bunkers in the total amount of the debt in question, irrespective of the actual value of the bunkers arrested.
To the owners and various sub-charterers (including EBC) this made no sense.
To take an arrest to its logical conclusion, ultimately, the court could order a judicial sale of arrested property? In this scenario, after court costs, the various arresting parties were unlikely to be able to divide between themselves much more than US$300,000 against a total claims value exceeding US$4 million!
The problem with this logic was an old, 1986 decision from the Court of Appeal in Rouen (25/04/86 2e Ch. CA Rouen Role N° 1172/86). In that case, the first instance court had ordered an arrest of the bunkers against security for the entire claim. Once again the value of the bunkers arrested was significantly less than the value of the claim. The debtor challenged the arrest order, seeking a “cantonnement” or “restriction” of the amount of the arrest order, based on Article 50 of the old French Civil Procedure Code which permitted the court to “restrict” the arrest to a sum sufficient to guarantee the “causes of the arrest”. The court agreed with the debtor and restricted the arrest to the value of the bunkers. The creditor appealed. The court of appeal overturned the 1st instance decision, ordering the release of the bunkers against security to the value of the entire claim. The court of appeal said that “causes of the arrest” under Article 50 could only mean the principal claim, and therefore no “restriction” should be applied.
Various applications to challenge the arrest were made in the UNITED MIRAVALLES. The vessel had now been under arrest for more than a month and time and again, the arresting parties produced arguments based around the 1986 Rouen decision and the French 1st instance judges seemed unprepared to listen to any arguments to the contrary. At this point Thomas Cooper stepped in on behalf of the head time-charters.
At the Court of first instance it was argued that the vessel itself was under a forced arrest, and that the cargo was at risk. Security to the value of the bunkers was proposed on the basis that such security could not prejudice the arresting parties as the security was replacing the value of property arrested. The court disagreed, citing the 1986 Rouen decision and stating that to limit security to the value of the property arrested, would undermine the whole mechanism of a conservatory arrest, i.e. as a way of placing “nuisance” pressure upon the debtor. In doing so, the court even recognised that the “appellant” was not the debtor! In effect the court was saying that rights of the arresting parties prevailed over parties completely unconnected to the claims, and was ignoring the fact those parties were exposed to substantial daily costs and the risk of cargo deterioration.
On further appeal several interesting points of procedure were addressed but as to the substantive matter, the principal issues were:
Ownership of the bunkers
Much debate had taken place as to the ownership of the bunkers. The time charter between head charterers and EBC provided that 600 tonnes of fuel would be delivered to the vessel by the head charterers at the start of the charter period and EBC would pay advance hire together with the value of estimated bunkers to complete the voyage. An invoice was issued to EBC including the advance hire and US$361,860 being the invoice price of the fuel delivered with the vessel at the start of the charter period. EBC paid that invoice in full.
The Court of Appeal held that as soon as the bunkers had been paid for by EBC and in the absence of any clear provision to the contrary, the bunkers became the property of EBC.
Article 512-1 of the Code des Procedures Civiles d’Execution – in reaching its decision the court paid particular attention to this article, being the rule which allows the court to substitute the arrest order with any other measure which will “properly safeguard the interests of the parties”, in other words by providing security.
The Court of Appeal accepted the proposal of security in an amount equal to the value of the bunkers as this measure “properly protected the interests of the parties” and placing such sum in an escrow account (with the French bar’s account (CARPA) in Dunkirk) could be done rapidly.
So not only has a French Court of Appeal confirmed that an escrow account is a satisfactory form of security but more importantly it has held that the amount, being a sum equivalent to the value of the bunkers, is sufficient to safeguard the interests of the arresting parties. In doing so, it stated that the arresting parties would “be assured to have at their disposal the equivalent of the price which could otherwise be obtained in the case of the most favourable court ordered sale (of the bunkers), and without the constraints of being exposed to the fees of such a court ordered auction”.
The Court of Appeal went on to say that the arresting parties were wrong to argue, where the head charterer was neither the guarantor nor the co-debtor, that it had to assume and settle all the debtor’s liabilities in order to resume the full use of the vessel. The head charterer should be able to exempt itself from the effects of an arrest where the arresting parties had no claim against it.
Accordingly, the result was that as against arrest orders for claims exceeding USS4 million, head charterers were able to obtain the release of the arrest of the bunkers (and the “de facto” arrest of the vessel and her cargo) in return for the deposit of US$361,860 into a designated escrow account.
The UNITED MIRAVALLES decision is important and many French lawyers and French insurers are happy with the result because it brings with it, logic, sense and fairness. It also corrects French law. As the lawyer who acted in the 1986 Rouen case has said, the Rouen application would never succeed today because the Civil Procedure Code has changed and the new code does not contain an equivalent to the old Article 50.
It took the Court of Appeal in the UNITED MIRAVALLES to address and correct the position and explain how Article 512-1 of the Execution Code should be interpreted. Happily this interpretation took full account of the commercial effects on the vessel whose bunkers are under arrest and the owners and insurers of the cargo on board at the time.
It is a clear and pragmatic decision and as a matter of practice it will mean that when bunkers are arrested, ship owners and other parties interested in the maritime adventure but who have no connection to the claims, now have the relative comfort of knowing that where the debtor is unable or unwilling to provide security, they can work together to provide security, possibly splitting the costs of a more limited demand.
France remains an enticing jurisdiction in which to arrest but after the UNITED MIRAVALLES decision we can also say that arrests, at least in the case of bunkers, are no longer available to unscrupulous parties as a means of exerting pressure, if not commercial blackmail, upon innocent parties.