On 1 February 2022, the Russian Maritime Law Association (RUMLA) held its second online seminar, where lawyers discussed the Draft Convention on the Judicial Sale of Ships. Philipp Vagin, Maria Erokhova, Konstantin Krasnokutskiy, Konstantin Putrya, Evgeniy Sukachev, Petr Falileev, Alexander Zimmerman and Igor Yastrzhembskiy took part in the discussion. The seminar was devoted to the possibility of contesting a court decision on the sale of a ship and the fate of arrests made in the state of ship registration. The participants also discussed the fate of ship arrests taken by courts of different states.

The discussion was moderated by Konstantin Krasnokutskiy, President of the Russian Maritime Law Association “RUMLA”, a recording of the seminar is available on the Association’s YouTube channel.

The United Nations Commission on International Trade Law (UNCITRAL) is working on the Draft Convention on the Judicial Sale of Ships (the “Draft”). The document should eliminate the problem of excluding a ship from one state’s register if the decision to sell has been made by a court in another state. The convention is scheduled to be adopted in 2022.

Despite the international crisis since 24 February 2022 caused by Russia’s military action in Ukraine and the subsequent economic sanctions that states are taking against each other, it remains hopeful that people will return to a peaceful life and international cooperation. People will be able to agree on rules for living together and, in particular, the Draft will be a working document that many countries will ratify.

The Centre for International and Comparative Legal Studies represented by Igor Yastrzhembskiy participates in the work of the Commission as an observer from Russia. RUMLA invited Igor Yastrzhembskiy to take part in the second seminar where members of the Association and other invited experts discussed two issues of the Draft.

1. Should it be possible to challenge the judicial sale of a ship that has taken place abroad in a court of its state of registration? What should be the grounds for such an action? (Issues under Articles 9-10 of the Draft).

The first speaker was Igor Yastrzhembskiy. He noted that the main idea of the Convention is that for the state of registration, the sale effect should be exactly the same as in the state of sale. Logically, an action against such a sale and its effects should take place in the state of sale. However, the Draft allows to challenge a sale in the state of registration if there is a clear violation of public policy. The possibility of an action against the sale in the state of registration creates an opportunity for abuse of discretion on the part of the debtor. Without any desire to lose the right to the ship, the debtor will be able to attempt to challenge the sale by reference to a clear violation of public policy. A radical, and perhaps correct, solution would be a complete ban on any actions against the sale in the state of registry. However, it is unlikely that such an option would be supported either in drafting or ratification. Following the current views on the problem, the scope of the public policy clause should perhaps be narrowed by stating that the ground for non-recognition of the effect of the sale may be a clear conflict with international public policy (see Article 1(4) of Federal Law No. 260-FZ dated 30 September 2013 “On Amendments to Part Three of the Civil Code of the Russian Federation”) rather than simply national public policy.

In any case, clauses 3 and 4 of Article 9 of the Draft should be supplemented by an explicit statement to the intent that all the effects of a judgment on the challenge of a sale rendered in the state of sale should also be the same in the state of recognition. It should be removed that such effects are only recognised if the decision of the court in the state of sale is final.

Then Konstantin Putriya took the floor and drew attention to the fact that if an action against the sale in the state of registration is allowed, a mechanism of legal consequences of invalidation should be envisaged. What will happen after the recognition of the sale null and void? Who, what and to whom must return what, and is there a reciprocal performance.

Alexander Zimmermann spoke about the content of the public policy and pointed out that it can be substantive and procedural.

Philip Vagin tried to give a possible example of a clear contradiction to public policy in the state of registry. In his view, this is a change in the ownership record of a ship as a result of a judicial sale contrary to the court’s provisional measures. Suppose a provisional measure was taken in the state of registry. Then there was a public sale of the ship in another state. Let’s answer the question: will the registrar change the record of ownership of the ship amid the earlier provisional measures?

Maria Erokhova suggested that the record of ownership would not change if the interim measures were taken, but if the record were to change, it could not be considered a violation of the public policy of the country of registration. The purpose of the Draft was precisely to ensure that if there was a certificate, the record would change despite the provisional measures. However, this is the second issue of the workshop.

According to Maria Erokhova, challenge of the judicial sale of a ship in the state of registration raises many problems, in particular relating to the grounds for the challenge, the understanding of the public policy, the scope for expansion of this evaluative category, and the subsequent recognition of the challenge of the sale in the state of sale. In order to avoid these problems, it would be desirable for the Convention to prohibit challenges of sales in the state of registration of the ship and to establish the exclusive competence of the courts of the state of sale. As Igor Yastrzhembskiy pointed out, the idea may be a good one, but it is extremely unpopular and unlikely to be supported.

2. How to apply the rules against arresting ships as security for other claims filed in a country other than the country of the judicial sale of the ship and how to remove earlier arrests, especially considering that the decision to arrest may have been made in another state? (Problem with Article 8 of the Draft).

Igor Yastrzhembskiy pointed out that Article 8 of the Draft, as well as the International Convention for the Unification of Certain Rules relating to the Arrest of Ships (concluded in Brussels on 10 May 1952) and the International Convention on the Arrest of Ships (concluded in Geneva on 12 March1999) should clarify what is “a court”. According to him, it is any competent judicial authority of a State.

Furthermore, in his view, it is not entirely clear from the text of the article whether it refers to arrests to secure a future maritime claim, or whether the regulation includes the seizures in execution of a judicial act to be enforced, or generally speaking, seizures as law enforcement activities.

The phrase to take any other similar measure against a ship also requires clarification. For example, whether this includes a ban on disposal and/or registration actions.

It is not clear whether the claims of crime victims are included in the concept of claim, given that civil substantive law applies to the claims of civil claimants in Russian criminal proceedings.

If Russia ratifies the Draft, which is desirable, the status of possible claims by the Russian tax authorities is not entirely clear. In accordance with the new Article 73(2.1) of the RF Tax Code, the tax authority’s seizure and prohibition of the alienation of the taxpayer’s property to secure the tax payment obligation entails the tax authority’s right of a private lien on the seized property. Thereafter, the rights of the tax authority are exercised in accordance with the civil law on the pledge.

Konstantin Krasnokutskiy expressed concern about the possible conflict (competition) of different arrests and suggested reflecting on how would be resolved the issue of a maritime lien colliding with an arrest adopted in another state.

Philip Vagin recalled that maritime law distinguishes between arrests and provisional measures that prohibit a change of title (right) to a ship.

Evgeny Sukhachev suggested the option of selling the ship in one state and guaranteeing the rights of creditors from other states, in whose favour arrests or provisional measures have been taken, to join in the distribution of the proceeds.

Maria Erokhova suggested that the decision should be consistent with the principle that all encumbrances at the sale at auction (guarantee of a clean title) should be removed. Seizures and provisional measures can be imposed and taken in different countries before a ship is sold at auction, but a public sale should be grounds for their removal in any state party to the Convention.

Evgeny Sukhachev added that the proper solution is comparable to the principle of pledge elasticity: in a public sale of a ship, all encumbrances are transformed into the right to receive money from the sale.

Konstantin Krasnokutskiy raised the question of the fate of restrictions and seizures made by tax and customs authorities.

All participants in the discussion supported the position that the tax or customs authority should have the same rights as a private creditor.

Peter Falileev took the floor and drew the audience’s attention to the fact that the main issue for Russia is the conflict of the Draft with the Convention on Maritime Liens and Mortgages, 1993 (which binding for the Russian Federation, unlike for many lobbying states in the Draft), which, however, was not discussed. For other countries and delegations it is not important, but for the RF and its delegation it is highly relevant.

Meanwhile, according to P. Falileev, the Convention regulates quite clearly and distinctly the consequences of the judicial sale of ships, including in the State of registry (Article 3 (deregistration) and Article 12 – (termination of mortgages, maritime liens, deregistration) of the Convention). There are no public policy infringement clauses in the Convention, which is fair and proper. In fact, the Draft is intended to have the same effect. Article 13(1) of the Draft declares that “nothing in this Convention shall derogate from any other ground of recognition <...> under other international conventions”. It is obvious that such a declaration in no way regulates/eliminates a conflict. Obviously, the conflict remains. And the interests of justice and adequacy are on the side of the Convention.

The Convention governs the sale implications under discussion, unifies the rules on mortgages and their international recognition, maritime liens, other debts and expenses, providing for broad and reciprocal obligations between ship-selling states and states of ship registration and encumbrances.

Firstly, under Article 1 of the Convention, mortgages are recognised and enforceable in States Parties.

Secondly, Article 2 of the Convention clearly and precisely defines the law applicable to the priority of satisfaction of mortgages as well as to the effects on third parties.

Thirdly, Article 2(2) of the Convention states that a ship registered in one State shall not be registered in another State until it is excluded or claimed to be excluded.

Fourth, Article 4 of the Convention contains a closed list of claims secured by maritime liens. Article 5 (paragraph 1) contains the rule on the priority of such claims over mortgages and only such mortgages; paragraphs 2 to 4 set out the procedure for maritime liens.

Fifth, Article 9 of the Convention provides clear time limits for the settlement of maritime liens.

Sixth, the rules of the Convention apply to ships registered in a State Party (Article 13(1)).

On the other hand, the Draft creates obligations for all but the states of sale, with the exception of issuing a certificate (Article 5 of the Draft), but the important issues of sale and satisfaction of the various requirements are not fixed in the Draft, i.e., left to the discretion of the states of sale outside any required international legal uniformity in this regard. Even if the notifications are not sent, what liability will arise for the selling state? Even the time limit for such notifications has not been set.

The draft does not provide rules under which the proceeds of the sale will be distributed.

The draft does not provide for the free transfer of the proceeds of the forced sale.

One of the many conflicts, given the above points, would arise, for example, if in the state of sale of the Russian ship, notwithstanding Article 13(1) and other provisions of the Convention, other claims that should not receive such priority under the Convention were given priority over mortgages and, for that reason, mortgage creditors would not be satisfied. This raises a critical question for the Russian Federation: should it exclude mortgages in such circumstances? In practice, it must and will inevitably lead to heated litigation with unpredictable results in one case or another. Accordingly, instead of achieving the aim normally pursued in international legal unification, the opposite result will be obtained.

Petr Falileev suggested that the Russian Maritime Law Association should, in one way or another, draw the Russian delegation’s attention to this essential problem, as long as it at least concerns the Russian Federation and other parties to the 1993 Convention.

Igor Yastrzhembskiy objected that he does not see a contradiction between the Draft and the Convention. The Convention regulates the same issues in more detail, but there is no contradiction.

Konstantin Krasnokutskiy proposed to organise another seminar and to compare the Convention with the Draft.

International rules of the judicial sale of ships should be understandable and beneficial to all.

The convenience of the rules will ensure that the Draft will be ratified by many states. It remains to be hoped that international cooperation in all spheres will gradually resume and that hostilities will remain in the pages of history textbooks. ■