|August 22, 2014|
Previously published on August 20, 2014
The maritime industry has traditionally favoured arbitration as a method of dispute resolution. Disputes under charterparties, shipbuilding contracts, ship management and sale & purchase agreements will typically be subject to arbitration. Given the international character of shipping, obtaining financial security for arbitration claims through the arrest of ships has always been of vital importance.
As would be expected of a leading maritime centre, Hong Kong is supportive of arbitration, with strong legal institutions and a favourable statutory framework. Arbitration awards made in countries that are parties to the New York Convention are readily enforceable, and any court proceedings brought in breach of an arbitration agreement are subject to a mandatory stay. In addition, section 20(6) of Hong Kong’s Arbitration Ordinance provides that the court may order that the ship arrested, or the security given, be retained for the satisfaction of any award made in the arbitration. The court will so order if there is a risk that the award may not be satisfied due to the defendant shipowner’s inability or refusal to pay.
Generally, a claimant will try to obtain security for its claim at the outset of a dispute, as there is little point incurring costs in proceeding to an ‘empty’ judgment or award which cannot be enforced. Circumstances may however arise where an award is obtained at an early stage, before security can be obtained, perhaps because the ship has not yet called in a favourable arrest jurisdiction such as Hong Kong. The availability of ship arrest post-award was the subject of the recent judgment in Handytankers KS v. Owners and/or Demise Charterers of Alas  HKEC 1206.
In the Alas case the Plaintiff applied for a warrant of arrest of the vessel in Hong Kong after it had obtained a London arbitral award in relation to unpaid hire. In so doing, the Plaintiff commenced in rem proceedings (i.e., against the ship) in respect of the underlying charterparty claim under section 12A(2)(h) of the High Court Ordinance.
Modelled on English law, the High Court Ordinance governs the admiralty jurisdiction relating to arrest. Section 12A(2) of the Ordinance lists 18 classes of claims in respect of which the Hong Kong court can exercise its admiralty jurisdiction, encompassing maritime claims such as charterparty, crew wages, salvage, and necessaries, etc. However, a claim on an arbitration award does not fall within the 18 classes and therefore does not generate a right of arrest.
Rejecting the Defendant’s challenge to admiralty jurisdiction, the Hong Kong court followed the decision in The Rena K  QB 377 which established the principle that a cause of action in rem (i.e., against the ship) does not merge in a judgment in personam (i.e., against the shipowning company), but remains available so long as the judgment remains unsatisfied, a principle which also applies to arbitration awards. The judge, Peter Ng J, observed:
“If a plaintiff is entitled to pursue its in rem claim notwithstanding the existence of an arbitral award, he must be entitled to invoke the Admiralty jurisdiction of the Court to arrest a vessel as security for that in rem claim ... it is perfectly legitimate for the Plaintiff to invoke the in rem jurisdiction of the Court to arrest the Vessel and keep her under arrest as security in respect of any judgment which it may obtain”.
Provided that the claim has been framed so as to fall within the s.12 classes of maritime claim, an arrest can be carried out for the underlying purpose of enforcing the award. There is thus an element of form over substance, as a claim brought solely on the award would be susceptible to challenge.
One loose end remains, namely, the anomaly that is the well-known House of Lords decision in The Indian Grace (No.2). In that case the Plaintiff, who had obtained a judgment in personam in proceedings in India, was prevented by section 34 of the Civil Jurisdiction and Judgments Act 1982 from pursuing an in rem action in England. The section reads:
“No proceedings may be brought by a person in England ... on a cause of action in respect of which a judgment has been given in his favour in proceedings between the same parties, or their privies, in a court ... of an overseas country, unless that judgment is not enforceable or entitled to recognition in England ...”
This turned on whether the Defendant in the in personam proceedings in India and the Defendant in the in rem action in England were “the same parties” for the purpose of section 34. The House of Lords held that they were the same so that, after the in personam judgment had been obtained, the in rem action could not be pursued.
In Hong Kong, section 34 of the 1982 Act finds its equivalent in section 5(1) of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance. Section 5, like section 34, only becomes relevant where there is a judgment of a foreign court, as opposed to an arbitration award. The section does not affect the rule that an in rem action survives, i.e., does not merge in, an arbitration award.
In summary, Hong Kong does permit ship arrest for the underlying purpose of enforcing an arbitration award on a maritime claim.