Arrests In Rem by Physical Bunker Suppliers: Position in the US and Russia

25/6/2020

What are arrests of ships in rem?

An arrest in rem can broadly be described as an arrest of a ship by a person who has a maritime claim against it, although neither the ship’s owner nor its charterer are liable to the claimant. Such arrests are sometimes ordered to secure claims of a bunker supplier who delivers fuel to the ship on orders of a bunker trader (an intermediary who resells fuel) but then does not get paid by them. Often, the trader subsequently becomes insolvent and, as a result, the supplier has little choice but to try to arrest the vessel to which they delivered the fuel.

On 17 June 2020, the US Court of Appeals for the Fifth delivered an important judgment in Martin Energy Services v. Bourbon Petrel M/V,[1] which deals with the right of a physical bunker supplier to arrest a ship in rem in this exact situation.

Facts

The dispute in Martin Energy forms part of the continuing saga started by the insolvency of OW Bunker group – once the world’s largest bunker supplier. In 2014, a company called CGG conducted seismic surveys in the Gulf of Mexico off the coast of Louisiana, using three seismic vessels it owned. CGG also chartered three support vessels (including the Norwegian-flagged Bourbon Petrel) to supply fuel and equipment to the seismic ships. In October and November 2014, CGG ordered several bunker deliveries from OW Bunker USA (a trader). The bunkers were physically delivered to the support vessels by Martin Energy pursuant to orders from OW Bunker. Then these support vessels carried the fuel to the seismic ships in the Gulf, in separate cargo tanks.

Soon after that, OW Bunker filed for bankruptcy. By then, CGG had not yet paid it for the fuel, but the two companies subsequently settled. However, OW Bunker never paid the physical supplier, Martin. The supplier arrested all three support vessels chartered by CGG and sued them in rem (in the US, an arresting party can sue the vessel itself), demanding payment from CGG – the end buyer of the fuel. It is important that only the support ships which carried fuel to the seismic ones were arrested, but not the seismic ships themselves.

Analysis

Under US law, a plaintiff must have a maritime lien on the vessel in order to arrest it in rem.[2] In particular, a lien will arise if that plaintiff provides so-called ‘necessaries’ to the vessel on the order of its owner or other person authorized by the owner.[3] ‘Necessaries’ are widely defined as things and services that a prudent owner would provide to enable a ship to adequately perform its functions and to save it from danger.[4] Bunker fuel is clearly a must for a ship to adequately perform its functions and so counts as necessaries.[5]

But to which vessel does the maritime lien attach if the fuel is first physically delivered on the support ship which then carries it to the main vessel? In Martin Energy v. Bourbon Petrel M/V, the bunker supplier argued that the fuel they delivered to the support vessels was necessary for these vessels to adequately perform their function – i.e. to serve as floating gas stations for the seismic vessels in the Gulf. Therefore, Martin Energy must have had a lien over the support vessels (and a corresponding right to arrest them in rem).

The Fifth Circuit dismissed this argument and ruled against the bunker supplier. The fuel was meant for use on the seismic vessels, not on the support ships carrying it. The support vessels did not consume the fuel. On the contrary, it was all burned by the seismic vessels. In effect, the support ships merely carried that fuel as cargo – in special cargo tanks separated from the fuel used for propulsion. Cargo, however, is not something ‘necessary’ for bunkering vessels to adequately perform their functions – for example, they are still performing their function when they proceed in ballast (i.e. sail empty) back to the shore. As a result, the supplier had no lien on the support vessels and was not entitled to arrest them in rem.

The court did not have to consider whether Martin Energy had a lien on the seismic ships owned by CGG which actually consumed the fuel. Despite indications in the judgment that a lien could  have arisen, it appears doubtful that Martin would be able to arrest the seismic ships in rem (even if the ships were physically present in Louisiana).  This is because for a lien to exist, bunkers must have been supplied to a specific, previously identified vessel. In other words, if fuel is delivered to the end buyer and the accompanying documents (invoices, bunker notes, receipts, etc.) do not specify that it is meant for a particular vessel, the lien has nothing to attach to and the bunker supplier cannot arrest any of the ships which ultimately burn the fuel.[6] On the facts of the case, the invoices only referred to the support vessels and to CGG, but not to the seismic vessels. Although CGG owned the seismic vessels, it was not clear which of its ships the fuel was intended for. On the balance, it is more likely that Martin had no lien on the seismic vessels either.

The holding in Martin Energy Services v. Bourbon Petrel M/V makes the position of physical bunker suppliers in the US more vulnerable, because it limits their ability to arrest bunkering and off-shore supply vessels to which they initially deliver their fuel. The outcome of the case also demonstrates how important it is for physical suppliers to specify in bunker invoices and other accompanying documents the particular vessels for which fuel is supplied.

Position in Russia: an irreconcilable split?

The Fifth Circuit’s judgment in Martin Energy Services v. Bourbon Petrel M/V provide san opportunity to analyze whether arrests in rem are recognized in Russia and how a similar dispute would be decided under Russian law. Suppose a Russian bunker supplier cannot recover from his immediate contractual counterparty, a bunker trader, and attempts to arrest in Russia a Norwegian-flagged support vessel owned by the fuel’s ultimate buyer.

Since the ship is Norwegian and Norway is a party to the 1952 Arrest Convention, a Russian court will primarily apply the Convention,[7] while domestic legislation such as the Russian Merchant Shipping Code and the Code of Commercial Procedure will apply to the extent they do not contradict the Convention.

Unlike in the US, an arresting party in Russia does not have to have a maritime lien on the ship[8] and claims under bunker supply contracts are not secured by a lien at all.[9] This does not mean, however, that the supplier’s attempt to arrest the vessel is doomed. Under the Arrest Convention, the supplier’s claim qualifies as a so-called ‘maritime claim’[10] and gives a right to arrest. But what happens if the supplier’s contractual claim is not against the ship’s owner or charterer, but against an insolvent or uncooperative trader who has no relation to that ship at all?

The outcome will likely depend on where in Russia the supplier files for arrest, because Russian courts interpret the same provisions of the Arrest Convention very differently. Art. 3(1) of the Convention provides, in the relevant part (emphasis added): «Subject to the provisions of para. (4) of this article and of article 10, a claimant may arrest either the particular ship in respect of which the maritime claim arose, or any other ship which is owned by the person who was, at the time when the maritime claim arose, the owner of the particular ship, even though the ship arrested be ready to sail».

In turn, Art. 3(4) of the Convention states: «When in the case of a charter by demise of a ship the charterer and not the registered owner is liable in respect of a maritime claim relating to that ship, the claimant may arrest such ship or any other ship in the ownership of the charterer by demise, subject to the provisions of this Convention, but no other ship in the ownership of the registered owner shall be liable to arrest in respect of such maritime claim. The provisions of this paragraph shall apply to any case in which a person other than the registered owner of a ship is liable in respect of a maritime claim relating to that ship».

The approach in the North-Western Circuit[11]

Russian courts are deeply divided over the interpretation of these two articles. On the one hand, commercial courts sitting in the North-Western Circuit read Art. 3(1) of the Arrest Convention literally to mean: «a claimant may arrest … the particular ship in respect of which the maritime claim arose»  – i.e. whether or not that ship is owned or chartered by the person liable on the claim.

In the opinion of these courts, Art. 3(4) should be interpreted just as literally: «When … the [demise] charterer and not the registered owner is liable in respect of a maritime claim relating to that ship, the claimant may arrest such ship… The provisions of this paragraph shall apply to any case in which a person other than the registered owner of a ship is liable in respect of a maritime claim relating to that ship». That is, a ship may be arrested if its demise charterer is liable, but also if any person other than the owner is liable (e.g. a bunker trader).

This reading of the Convention means that, in effect, a maritime claim arises against a vessel (in rem) and not against a liable person (in personam). Put differently, the claim ‘attaches’ to the ship to which the fuel was delivered regardless of who the supplier contracted with. If the fuel was delivered to a vessel controlled by the ultimate buyer, the supplier can arrest that vessel even if his supply contract was with a trader who has nothing to do with the ship.

Despite certain criticism in Russia, this interpretation of the 1952 Convention is permissible[12] and was adopted, for example, in Belgium[13] and Poland.[14] In substance if not form, the approach is very similar under US law, although the US has not ratified any of the arrest conventions. The right to arrest a ship in rem significantly improves the bunker supplier’s position: to obtain arrest, he merely has to show delivery of the fuel to that ship and non-payment by the trader. He need not show that the ship’s owner or charterer is somehow liable to him or that the trader has an interest in the vessel.

The Approach of the Supreme Commercial Court and the North-Caucasian Circuit[15]

On the other hand, the (now defunct) Supreme Commercial Court and courts located in the North-Caucasian Circuit have consistently denied the availability of in rem arrests in Russia. These courts consider that Arts. 3(1) and 3(4) of the 1952 Convention permit arrest only if the shipowner or charterer is personally liable on the supplier’s maritime claim. That is, if the supplier contracts only with the trader, the supplier cannot arrest a ship to which he physically delivered his fuel – because the party liable to him under the contract (trader) is neither the ship’s owner nor its charterer.

The requirement that the person liable to the arresting party must be the shipowner or a charterer is not expressly stated in Art. 3(1) or 3(4) of the Convention. However, Russian courts often rely on domestic legislation, which contains this requirement – Art. 390(1)(4) of the Merchant Shipping Code, to remedy the deficiency.

The following argument is also used on occasion. If the Convention gives a bunker supplier the right to arrest and that supplier’s maritime claim ‘attaches’ to the ship and not the persons liable, then the claim must necessarily follow the ship. This means that, in effect, the Convention creates a new lien which is not yet recognized under Russian law. However, Art. 9 of the Convention states expressly that nothing in it should be meant as creating any maritime liens which do not exist under domestic law. It follows that the bunker supplier has no right to arrest.

This restrictive interpretation of the 1952 Convention has been adopted in most states parties to it[16] (e.g. in England and France) and is supported by the preparatory works.[17] Nevertheless, it substantially weakens the bunker supplier’s position – if the bunker trader is insolvent or refuses to pay, the supplier is unable to arrest the ship to which he physically delivered the fuel.

This sharp split between Russian courts concerning the availability of in rem arrests in general, and in rem arrests to secure claims of bunker suppliers in particular, continues for almost two decades. It is very likely to persist until the Supreme Court decides to weigh in.

This material and all other materials on RUMLA’s website are intended for general information purposes only and do not constitute legal advice.

[1] Martin Energy Servs., L.L.C. v. Bourbon Petrel M/V, No. 19-30612, 2020 WL 3261709 (5th Cir. June 17, 2020)

[2] Supplemental Rules of Civil Procedure, Rule C(1)(a).

[3] 46 U.S.C. §31342(a)(1).

[4] Equilease Corp. v. M/V Sampson, 793 F.2d 598, 603 (5th Cir. 1986); Clubb Oil Tools, Inc. v. M/V George Vergottis, 460 F. Supp. 835, 840–41 (S.D. Tex. 1978)

[5] Gulf Oil Trading Co. v. M/V CARIBE MAR, 757 F.2d 743 (5th Cir. 1985); Valero Mktg. & Supply Co. v. M/V Almi Sun, IMO No. 9579535, 893 F.3d 290, 294 (5th Cir. 2018)

[6] Foss Launch & Tug Co. v. Char Ching Shipping U.S.A., Ltd., 808 F.2d 697 (9th Cir. 1987)

[7] The 1952 Arrest Convention, Art 8(1); Information Circular of the Presidium of the Supreme Commercial Court of 07.07.2004 №78 “Review of commercial courts’ case law concerning interim security measures”, Art. 21.

[8] The 1952 Arrest Convention, Art. 2; Russian Merchant Shipping Code, Art. 390.

[9] Russian Merchant Shipping Code, Art. 367(1).

[10] The 1952 Arrest Convention, Art. 1(1)(k)

[11] Judgment of the 13th Commercial Court of Appeal (CCA) of 18.07.2005, case №А56-6876/2005; Judgment of the Commercial Court for the North-Western Circuit (NWCC) of 28.12.2009, case №А56-55305/2008; Judgment of the NWCC of  06.03.2009, case №А56-41606/2008; Judgment of the 13th CCA of 29.04.2010 case №А21-9774/2009; Judgment of the 13th CCA of 13.03.2012, case №А56-1406/2012; Judgment of the 15th CCA of 28.08.2013, case №А53-9370/2013; Judgment of the 13th CCA of 27.05.2015, case №А56-20657/2015; Judgment of the 13th CCA of 11.09.2018, case №А21-5673/2018; Judgment of the NWCC of 05.02.2019, case №А21-5873/2018; Judgment of the NWCC of 05.03.2019, case №А56-118902/2018.

[12] Martin Davies, In Defense of Unpopular Virtues: Personification and Ratification, 75 Tulane Law Review 337, 405-406 (2000).

[13] Walter P. Verstrepen, Arrest and Judicial Sale of Ships in Belgium [1995] 1 Lloyd’s Maritime & Commercial Law Quarterly 131, 143-144; Francesco Berlingieri, Berlingieri on Arrest of Ships, Volume 1 (6th ed., Informa, 2016), 11.32, fn. 27.

[14] Berlingieri, 11.66

[15] Judgment of the Presidium of the SCC of 19.11.2002 N 9284/02; Order of the SCC of 17.02.2014 N ВАС-9003/13,case N А40-132100/12; Order of the SCC of 07.03.2014 N ВАС-2562/14, case N А13-7433/2013; Judgment of the 15th CCA of 21.06.2014, case N А32-5384/2014; Judgment of the 15th CCA of 12.08.2016, case N А53-1485/2016; Judgment of the Commercial Court for the North-Caucasian Circuit of 07.11.2016, case N А53-1485/2016; Judgment of the 15th CCA of 18.08.2017, case N А53-28539/2016; Judgment of the 15th CCA of 09.02.2018, case N А53-34565-2017; Judgment of the 15th CCA of 21.05.2019, case N А32-1584/2016; Judgment of the 15th CCA of 22.02.2019, case N А32-1584-2016.

[16] Berlingieri, 11.45-11.77.

[17] Ibid, 11.33-11.44.