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English Courts Refused to Require Cross-Undertakings in Ship Arrests

In Natwest Markets Plc v Stallion Eight Shipping Co. SA (The Alkyon) [2018] EWHC 2033 (Admlty), the High Court of England reasserted the position that an arresting party may not be required to provide a cross-undertaking in damages as a pre-condition to arrest, in the same form as usually required in applications for freezing orders. Although the decision does not come as a surprise in light of consistent authorities from the Court of Appeal, it does call for examination of the current position in Russia.

The facts of The Alkyon are as follows. The claimant bank (Natwest) lent money to the defendant shipowner (Stallion Eight Shipping) secured by a mortgage on the vessel. Following the market value of the vessel falling below the required value-to-loan ratio and the defendant failing to cure the shortfall in security, the claimant declared the loan immediately due and payable, and applied for, and obtained, the issue of a warrant of arrest against the vessel. The vessel was subsequently arrested. The defendant losing hire profit each day the vessel remained under arrest and asserting that it was unable to secure the release of the vessel by providing alternative security in the usual way (since the vessel’s P&I cover did not extend to the claim under the loan agreement), it applied for the release of the vessel from arrest, unless the claimant provided a cross-undertaking in damages in respect of any losses caused to the defendant if the arrest was later held to have been unjustified.

Mr. Justice Teare declined to release the vessel and to require the claimant to provide a cross-undertaking. It was held to be contrary to long-standing authorities from the Court of Appeal establishing that a claimant in rem may arrest of right (e.g. The Varna [1993] 2 Lloyd's Reports 253]) and that such cross-undertakings were not required (The Bazias 3 and Bazias 4 [1993] QB 673 and dicta of Lord Clarke in Willers v Joyce [2016] UKSC 43 at [68]). The judge considered that effecting such a radical change in the law would be best left to Parliament.

The position in England (and in some common law jurisdictions that follow the English approach) has been criticised as inequitable to shipowners, most prominently by Sir Bernard Eder (Wrongful Arrest of Ships: A Time for Change 38 Tul. Mar. L.J. 115 (2013-2014)). At the same time, most civil law jurisdictions either require a cross-undertaking in damages as a statutory pre-requirement for arrest (e.g. Germany, Sweden and Nigeria) or leave the decision to the court’s discretion (e.g. Greece, Denmark, the Netherlands, Norway). Similarly, Art. 6(1) of the 1999 Arrest Convention allows courts of signatory states to require such security as a condition of the arrest.

The relevant piece of legislation in Russia – Art. 393 of the Merchant Shipping Code 1999 (MSC) – is almost a verbatim adoption of Art. 6 of the 1999 Arrest Convention and states that the court may, as a condition of ordering or maintaining the arrest, require the arresting party to provide security in connection with any losses (i) which may be caused as a result of the arrest, including (but not restricted to) by wrongful or unjustified arrest or by demanding and receiving excessive security and (ii) for which the arresting party may be liable. The court has discretion in determining the amount of such cross-undertakings and the terms on which they must be provided.

It must be emphasized that rules in Art. 393 are not mandatory and the court will assess whether security from the claimant is necessary on a case-by-case basis. The security provided by the claimant may match the amount of the claim plus interest, but may never be less than a half of the claim value. Whether the arresting party has sufficient funds to deposit with the court as security is generally irrelevant in determining the amount (see Judgment of the 5th Appellate Commercial Court, case А51-3615/2014: the claimant state-owned real estate management enterprise unsuccessfully appealed against an order setting the amount of security at half the vessel’s market value (RUB 28.5 million); the Appellate Court rejected the claimant’s argument that it only had RUB 394,000 on its accounts and was unable to furnish such security).

Russian courts have not been consistent in setting the amount of security: there are cases where the claimants were required to deposit sums covering a half of the vessel’s value (case А51-3615/2014), half of the claim value (cases А06-9099/2012 and А21-9774/2009) or full claim value (case А06-1656/2011).

General civil procedure rules on cross-undertakings apply to arrest applications as well. These rules are mainly found in Art. 94 of the Commercial Procedure Code (CPC). According to this provision, the court issues an order for cross-undertaking within one day after the arrest application has been received. If the arresting party fails to provide the security required in the court’s order, the application for arrest will be denied (see Art. 94(6) CPC; Judgment of the Federal Commercial Court for the Povolzhsky Circuit, case А06-1656/2011: the claimant shipping agent failed within three weeks to deposit with the court $43,000 as security for full claim value; the claimant’s application for arrest denied; two appeals on this point unsuccessful).

Interestingly, it is not only defendants who may apply for cross-undertakings. Under Russian law, third parties as well may make such applications (see Judgment of the 13th Appellate Commercial Court, case А21-9774/2009).

Finally, cross-undertakings may not be required when the claim is for Master’s or crew’s wages (Art. 393(1) MSC).