Some aspects of ship arrest in Russia

Key words: ship arrest, maritime arrest, security measures, commercial procedure, maritime claim, ship detention.

Introduction

Ship arrest is the detention or restriction of the ship’s movement when the vessel is in Russia based on the rulings of courts, commercial courts and the Maritime Arbitration Commission (MAC) (Art 389 of the Merchant Shipping Code of the Russian Federation, MSC). Ship arrest is distinct from general arrest according to the Commercial Procedure Code of the Russian Federation (CPC), which restricts property disposal (Art 91).¹

Ship arrest legislation in Russia consists of international instruments, special arrest provisions and general procedural provisions.

International instruments include the Arrest Convention 1952 and the MLM Convention 1993. Russia is a party to both these Conventions.

Chapter 23 of the MSC stipulates special arrest provisions. This regulation is based on the Arrest Convention 1952 and the Arrest Convention 1999. Russia is not a party to the Arrest Convention 1999. The MSC reflects the provisions of the said Convention regarding the list of maritime claims, rearrests, and multiple arrests. In this context, the relevant provisions of the Arrest Convention 1999 are applied as domestic rules.

Chapter 8 of the CPC provides for general procedural provisions. The application of the relevant legislation to ship arrest was discussed in the Informational Letter of the Supreme Commercial Court of Russia No 81, dated 13 August 2004. Section 16 states that the provisions of the CPC apply to the ship arrest to the extent they do not contradict the MSC.

The note deals only with some problems and the most important aspects that have affected judicial practice over the last years.

Arrest Procedure

Before discussing the problems arising from ship arrest, it can be beneficial to describe the arrest procedure briefly. The description is based on the stages the arrest case may follow.

Ship detention

The harbour master has the power to detain the ship in the port for up to 72 hours pending the arrest if the claim is for the damage the ship caused (Art 81 of the MSC). Detention is not part of the arrest procedure. Rather, it is an additional, rapid preliminary remedy.

The list of claims for which the ship can be detained is narrower than that of maritime claims. So, the ship cannot always be detained when it can be arrested.

Arrest application

The state courts and the MAC have the power to arrest the ship (Art 388 of the MSC).² The MAC has this power for historical reasons. It may use this power only when it is competent to consider the dispute on the merits. Usually, the arrest application shall be submitted to the court at the ship’s location (Art 99(3) of the CPC). During arrest, the ship must be in a Russian port. Otherwise, it can be a separate ground for dismissing the arrest.³ The ship’s location is the region where the relevant port is located (s 2 of the Resolution of the Plenum of the Supreme Court of Russia No 18 dated 20 November 2003).

The applicant must demonstrate the grounds for arrest. These grounds can be divided into substantive and procedural ones. Substantive grounds are a maritime claim, a connection between the liable person and the ship (ownership or charter by demise) and, if applicable, a maritime lien (Art 390 of the MSC). The CPC stipulates procedural grounds. In general, this ground is the impossibility or difficulty of the judgment enforcement if the measure is not granted. These grounds are discussed in more detail in s 14 of the Resolution of the Plenum of the Supreme Court of Russia No 15 dated 1 June 2023 (Resolution No 15).

The time limit for considering the arrest application is the next day after the application receipt (Art 93(1.1) of the CPC RF). In reality, this limit starts from the day of receipt and registration of the relevant application. So, the ruling on the arrest can be issued later than one day after the application submission. The delay can be a key factor. If the ship calls out of the port, it cannot be arrested. The applicant should control the receipt and registration of the application. At the same time, the parties do not have direct tools to expedite the application consideration.

Alternative security

If the vessel is arrested, the shipowner or another interested party can apply for a change of security (Art 391(1) of the MSC). The amount and form of the alternative security should be agreed upon by the parties. If the parties fail to reach an agreement, the court can stipulate the amount and form of alternative security. The amount of security cannot exceed the arrested property value (Art 391(2) of the MSC).

The general rules on change of security and counter security (Arts 94 and 95 of the CPC) regulate the provision of alternative security instead of arrest.

Setting the arrest aside

The court can set the arrest aside (Art 391(4) of the MSC, Art 97(1) of the CPC RF). The arrest is set aside if, after providing additional information, the court finds that there have been no grounds for the arrest. The time limit for considering this application is five days (Art 97(2) of the CPC).

Appeal

The ruling dismissing the application to set the arrest aside can be appealed (Art 93(7) of the CPC). However, the ruling granting an arrest warrant cannot be appealed. This change was introduced to the CPC on 5 January 2024. However, the ruling dismissing the arrest application can be appealed.

The time limit for considering the appeal and cassation appeal is general and stipulated by the CPC. These terms make the appeal an ineffective tool. If the ruling to grant the arrest is appealed, the ship remains in the port, is not used and causes damages to the shipowner. A more sensible course of action would be to settle the dispute or provide an alternative security. If the ruling to dismiss the arrest is appealed, the ship can leave the port and cannot be arrested even though the ruling to dismiss the application was wrong.⁴

Practical Issues

After discussing the arrest procedure, the following text focuses on some practical aspects of the relevant procedure. Problematic moments are emphasised.

Time limit violations

The ship’s specific feature is its exceptionally high mobility. It can be in high waters for a long time and quickly enter and leave the state’s territory. In this context, the issue of following time limits plays a key role in ship arrest.

The time issue is relevant for each stage of the arrest procedure. Although the arrest application shall be considered the next day after its receipt, this term is the next business day after its registration. Sometimes, the courts may be overloaded and cannot receive and register the application on the same day. The consideration is delayed. If the harbour master does not detain the ship, the ship can leave Russia during the period of delay.

The same concerns apply to considering the application to set the arrest aside. The time limit for this is five days. In reality, it may take around a month or even more.⁵ During this time, the ship remains in the port, and the shipowner and interested parties suffer losses. The arrest transforms into the mechanism of putting pressure upon the shipowner, and makes the interested parties settle the dispute on worse terms.

Change of security

An effective way to get the ship released is to provide alternative security instead of an arrest.

From the international practice perspective, one of the most convenient tools for doing so is the P&I Club’s Letter of Undertaking (LOU). The Russian courts accepted LOUs.⁶ However, this is not an established position.⁷

The difficulties arise regarding the amount of security. The amount of sufficient security depends on the amount of the claim. Finding the justified claim amount is often a substantive issue critical for the case’s merits. In this case, the court can refuse to consider this issue at the preliminary stage and accept the claim’s calculations.⁸ So, the amount of alternative security depends entirely on the claimant and can be unfairly increased. This situation makes it more difficult to get the ship released and causes additional losses to the shipowner and other interested parties. At the same time, there are cases where the alternative security is accepted for an amount lower than the claim’s value.⁹

Besides increasing the claim’s value, there are other ways to make releasing the vessel more difficult. One of them is an artificial division of claims. The clearest example is salvage. Salvage agreements are often concluded in an emergency and do not stipulate the services covered sufficiently. The salvors can extract part of the services and claim them as a non-contractual debt. Afterwards, they can arrest the ship for both contractual and non-contractual claims.¹⁰ Whether the salvage agreement covers the relevant service is a substantive question that cannot be resolved at the preliminary stage. Shipowners and other interested parties are put into a position where they must provide two separate alternative securities in two separate proceedings. This conduct makes it possible to circumvent the provision on the limit of the alternative security (Art 391(2) of the MSC).

Proportionality requirement

When granting security measures, the court takes into account the proportionality of the claim to the consequences of the measures to be applied (s 14 of Resolution No 15).¹¹ The consequences of ship arrest are substantial. Shipowners and other interested parties suffer losses in connection with the cargo onboard the ship, breach of their obligations before the shippers and charterers, and loss of profit. The claim secured is not always proportional to these.

A clear example is the crew wages claim. This is a maritime claim, secured by a maritime lien (Art 367(1)(1) of the MSC). The claim for wages is often much lower than the arrest consequences and the ship’s value. The court can dismiss the arrest application due to the lack of proportionality.

In merchant shipping, it is a common practice to use one-ship companies. One-ship companies are judicial persons usually incorporated in convenient jurisdictions that own only one ship and no other property. If the ship is unavailable, the creditor cannot get their claim enforced because the shipowner has no other property. So, it is essential for the claimant to have security. The proportionality requirement narrows this possibility.

On the example of wager claims, it can be demonstrated that this may cause unjustified consequences–the crew cannot protect their rights. The applicability of the proportionality requirement to ship arrest is questionable due to the international character of merchant shipping.

Sanctions

One of the results of imposing sanctions for Russian commercial proceedings is the introduction of Arts 248.1 and 248.2 to the CPC on the exclusive competence of Russian courts and anti-suit injunctions with regard to cases involving sanctions against Russian artificial and natural persons. The EU prohibited the enforcement of the Russian courts’ judgments based on the relevant Articles.¹²

If the judgment is taken based on sanctions-related Arts of the CPC, there is a high risk that it will not be able to be enforced outside Russia. This is a separate ground for granting security measures, including ship arrests.¹³

In other cases, sanctions can be the basis for claims and, accordingly, the ship arrest. For example, when the company terminates the contract due to the impossibility of its performance because of sanctions, the Russian counterparty brings the claim to the commercial court.¹⁴

Due to the sanctions, the court can decline an alternative security in the form of the P&I Club’s LOU. The reasoning is that it is possible that the Club will not be able to perform its undertakings under LOU because sanctions may prohibit it.¹⁵

Non-acceptance of the LOUs is not the only consequence of sanctions in insurance. The departure of P&I Clubs from the Russian market led to an increase in the number of arrests. The LOUs were used not only as an alternative security to the court but also as a measure to prevent the arrest. The P&I Clubs’ departure reduced the number of LOUs ensured by the insurers’ reputation. This causes fewer claims to be secured and, therefore, an increased number of arrests.

The number of arrests is inversely related to economic stability.¹⁶ The overall market decadence connected with the Russian economy’s isolation affects the paying capacity of the market participants and increases the number of arrests. Ship arrest statistics confirm this.

Ship Arrest’s Features

The special ship arrest regulation relates to the peculiarities of its application. In particular, the ship arrest procedure is more complex than other security measures.

Maritime claims

The main feature of ship arrest is that the ship can be arrested only for a maritime claim (Art 389 of the MSC). So, besides the general requirements, the claimant must prove that its claim is on the list of maritime claims. The claimant’s failure to demonstrate the claim’s maritime nature can be a separate reason to dismiss their arrest application.¹⁷ However, in most cases, the lack of maritime nature of the claim is usually accompanied by the failure to meet the procedural requirements.¹⁸

Whether a ship can be arrested in the form of its detention for a non-maritime claim is questionable. At least, these measures are applied in insolvency cases.¹⁹

Person liable is a ‘shipowner’

Under the general rule, the property not owned by the person liable cannot be arrested to secure the claim against this person. The ship that can be arrested should be owned or chartered by demise by the person liable. This is an exclusion from the general rule. This exclusion is provided by law (Art 390(1)(4) of the MSC).

Even though the possibility of arresting the ship in charter by demise is stipulated by law, it is unclear how such an arrest secures the claim against the debtor, as they do not own it. If the arrest of the property owned by a third party cannot secure the claim against the debtor, then the arrest of such property cannot be considered necessary under the CPC criteria.²⁰

Maritime liens

A maritime lien is a separate ground for ship arrest (Art 390(1)(1) of the CPC). A detailed discussion of the nature of the maritime lien is not a subject of the present paper. Briefly, the paramount maritime lien’s effect is the possibility of enforcing the judgment from the ship’s value, irrespective of ownership rights, and the highest priority of claims secured by a maritime lien (Arts 368, 370 of the MSC).

This does not mean there is no need to demonstrate the procedural grounds for the arrest when a maritime lien secures the claim. The claim, secured by a maritime claim, does not transform into an in rem claim or a claim against the vessel’s new owner in case of its disposal. It remains the claim against the person liable. So, if the court believes that the lack of an arrest will not result in the impossibility or difficulty of the judgment enforcement against the debtor, it can dismiss the arrest application.²¹ There is an opposite practice stating that the procedural grounds do not need to be shown to arrest the ship for the claim secured by a maritime lien.²²

Conclusion

The note deals with the main peculiarities of ship arrest in Russia. The ship arrest is a separate security measure that differs from general security measures stipulated by the CPC. The main feature is that the ship can be arrested only for a maritime claim. This legislation can relate to the fact that the arrest provides for the ship’s detention. However, ship detention can be achieved through other maritime remedies.

Furthermore, the special ship arrest provisions do not provide for the exclusion or restriction of the general procedural law requirements. In this case, the special ship arrest regulation makes it more difficult to arrest the ship. It does not make it more available to the creditors due to the ships’ exceptional mobility. The reason for the special regulation of ship arrest is not apparent.

The main characteristic of ship arrest in Russia is uncertainty. It is seen from the judicial practice that there is no reasonable expectation of whether the ship will be arrested or released. This position has a negative effect on the general state of the market and may scare away the creditors who are sure that the ship can be arrested in a different jurisdiction. However, this approach opens the room for opportunism. Considering the relatively inexpensive and rapid justice, claimants may rely on chance when applying for ship arrest and have minimal risks. ■

Notes