SUPREME COURT CLARIFIES INTER ALIA THAT SUPPLY OF NECESSARIES IS NOT A MARITIME LIEN

The recent judgment of the Supreme Court of India in the case of MV Nikolaos-S, Chrisomar Corporation v. MJR Steels Private Limited, Civil Appeal No. 1930 of 2008 (“MJR Steel Case”) provides clarity in the corpus of Indian admiralty and maritime jurisprudence on the following issues:

1.  A bunker supplier’s claim for the supply of necessaries to the Vessel would not give rise to a maritime lien;

2.  Ownership of the vessel to enforce a maritime claim has to be seen not at the stage of institution of the suit but on the contrary at the stage of arrest. The propositions of law laid down in The Monica S [1967] 2 Lloyd's Rep. 113 would be metamorphosed in light of the     1999 Arrest Convention; 

3.  The Court whilst interpreting a settlement agreement would not merely look at the nomenclature by which parties describe the agreement but scrutinize the purport of the underlying transaction to determine whether there is a merger of a cause of action;

4.  It is possible for parties to fashion ingenious settlement agreements wherein the order of arrest would be recalled during the pendency of the admiralty suit to enable the vessel to complete a voyage charterparty and that the freight payable under the voyage charterparty would be assigned to the Claimant to satisfy its claim and the Claimant would have the right to arrest the Vessel on the basis of the original cause of action;

5.  The forum selection clause in the settlement agreement entered into in an underlying contract providing for parties to submit to the “exclusive jurisdiction” of a foreign court would not oust the admiralty jurisdiction Indian Courts to adjudicate claim arising under the underlying cause of action;

6.  In ship demolition contracts involving back to back sales from the original settler to the middle buyers and thereafter to the end shipbreaker it is imperative for the ship-breaker to ensure that the middle buyer had proper title and property in the vessel;

Brief Facts:

The Claimant bunker supplier based in Liberia obtained an order of arrest against  a Cyprus flagged vessel (owned by a Cyprus entity) (“the Vessel”) from the Calcutta High Court for a claim arising from the bunkers supplied to the Vessel at Durban, South Africa. None of the parties to the litigation were Indian parties and no part of the cause of action for the underlying claim had arisen in India. The shipowner and bunker supplier entered into a settlement agreement in relation to the bunker supply claim which contained a forum selection clause providing that “this agreement is subject to Greek law and the exclusive jurisdiction of the Piraeus Courts.” The Settlement Agreement envisaged that the claim of the bunker supplier would be satisfied by assigning the freight earned under a charterparty for a voyage from Bangkok, Thailand to a port of West Africa, where the Vessel was the performing Vessel. The bunker supplier would have the right to re-arrest the Vessel in an event its claim remained unsatisfied by way of the assignment of the charter.

The Shipowner, without the knowledge of the bunker supplier sold the Vessel to a middle/cash buyer. Thereafter, there were a series of ship sale and purchase transactions between a number of other middle/cash buyers and ultimately the ship breaker purchased the vessel for demolition. The bunker supplier thereafter re-arrested the Vessel on account of the fact that the vessel did not undertake the charter from Bangkok, Thailand to a port of West Africa and therefore the bunker supplier’s claim remained unsatisfied.

Comments:

Maritime Lien:

The Supreme Court rejected the bunker supplier’s preliminary contention that they have a maritime lien for necessaries supplied to the vessel and even if the ship-breaker was a bona fide lawful owner of the vessel, the bunker supplier could enforce a maritime lien against the Vessel. The Supreme Court held that whilst under American law, the supply of necessaries gives rise to a maritime lien, under Indian law a party supplying necessaries for a vessel would not have a “marine lien” but only a “maritime claim.” This finding of the Supreme Court of India provides considerable amount of clarity on the issue of maritime liens as a matter of Indian law.

Whilst the Supreme Court of India in the case of Epoch Enterrepots v. MV Won Fu (2003) 1 SCC 305 (“Won Fu”) held that a claim arising under a charterparty does not amount to a maritime lien, in the case of MV Al Quamar v. Tsavliris Salvage (International) Ltd. (2000) 8 SCC 278 held that a claim for salvage done to a vessel amounted to a maritime lien and in the case of O. Konavalov Vs. Commander, Coast Guard Region, (2006) 4 SCC 620 recognized a maritime lien for seaman’s wages, there has till date been no conclusive pronouncement as to whether a bunker supplier for necessaries supplied to a vessel amounts to a maritime lien albeit in the Won Fu case, the Apex Court held that a maritime lien was restricted to a limited cluster of claims namely (a) damage done by a ship (b) Salvage (c) seamen’s and master’s wages; (d) master’s disbursement and (e) bottomry. The Appeal Court of the Gujarat High Court in the case of Eco Maritime Ventures Ltd v. ING Bank, O.J. Appeal No. 14 of 2016 (“Eco Maritime Case”) recognized at an interlocutory stage that a bunker supplier could prima facie assert a maritime lien over a vessel and had in principle recognized that a maritime lien can be created by way of a contract. This led to the opening of a pandora's box, wherein a number of bunker suppliers routinely sought to arrest vessels in the Gujarat High Court by asserting a maritime lien for necessaries supplied to the vessel even in circumstances where they demonstrably did not have privity of contract with the owner of the Vessel. The recent judgment of the Supreme Court of India in the MJR Steel Case conclusively lays to rest the debate as to whether a bunker supplier’s claim for necessaries supplied to a vessel tantamounts to a maritime claim or maritime lien.

The Supreme Court has held that:

“22….It is, thus, clear that a claim for necessaries supplied to a vessel does not become a maritime lien which attaches to the vessel.

23. Shri Divan, however, cited U.S. case law in support of his submission that a claim for necessaries raises a maritime lien. We are afraid that given the Indian case law on the subject read with the various international Conventions referred to above, the U.S. seems to stand alone in considering that claims for necessaries would amount to maritime lien enforceable against the vessel as such wherever it goes. It is clear that in our country at least claims for necessaries, though maritime claims, do not raise a maritime lien.”

Ownership of the Vessel at the time the arrest is filed – A rejection of the principle laid down in The Monica S [1967] 2 Lloyd's Rep. 113

Under the admiralty laws in certain common law jurisdictions such as England and Singapore a writ (order of arrest) can be issued by a Admiralty Court in relation to a maritime claim against the owner of the vessel even when the vessel is not within the territorial waters of that court and the vessel can still be arrested once the vessel enters the territorial waters of Singapore/ England even in circumstances where there is a change in ownership of the vessel after the issuance of the writ. The English Court in the case of The Monica S [1967] 2 Lloyd's Rep. 113 had taken the view that there was no reason why, once a plaintiff who had properly invoked the admiralty jurisdiction of the English Court by bringing an action in rem (for a claim which was not a maritime lien) should not, despite a subsequent change of ownership of the vessel, be deprived of his right to proceed in rem against the Vessel.

The Supreme Court of India in the MJR Steel Case has recognized that the proposition laid down in The Monica S would not hold true as a matter of Indian law as in light of the 1999 Arrest Convention, Article 3 of which mandates that the owner of the vessel ought to be in personam liable for the maritime claim at the time of passing of the order of arrest.

Hence, the Supreme Court has held as follows:

“28…. Thus, article 3(1)(a) sets the controversy at rest because a maritime claim can be asserted

only at the time the arrest is effected and not at the time of the institution of the suit. This being so, Shri Divan’s reliance on English judgments to the contrary, namely Monica S. (1967) 2 Lloyd’s Rep. 113 as followed in Re, Aro Co Limited 1980 1 All ER 1067, cannot be followed. Both judgments were prior to the 1999 Convention and it is this Convention that must be followed. It is, therefore, clear that the relevant date on which ownership of the vessel is to be determined is the date of arrest and not the date of institution of the suit.”

Recession of the original contract with a new contract

The MJR Steel Case appears to be the latest authority on the interpretation and application of section 62 and 63 of the Indian Contract Act, 1872 which stipulates as follows:

“62. Effect of novation, rescission, and alteration of contract.—If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

63. Promisee may dispense with or remit performance of promise.— Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.”

The Supreme Court in its interpretation of section 62 and 63 of the Indian Contract Act, 1872 has come to a finding that recession of the original contract would occur only in circumstances where the new contract has the effect of changing the essential character or goes to the root of the original contract. The mere fact that the parties describe an agreement as a “Settlement Agreement” would not by itself mean that the cause of action stemming from the underlying transaction has merged into a “Settlement Agreement” Furthermore, the Supreme Court stressed that it was imperative to interpret the agreement “through the prism of a businessman’s eye” and that the Settlement Agreement did not extinguish the original cause of action but was merely an agreement to alter the modalities of the payment obligation under the underlying agreement whereby the original cause of action continued to subsist.

The Supreme Court has recognized that contract law in India  law was at variance with English law inasmuch as where the parties settle or compromise pending proceedings, whether before, at or during the trial, the settlement or compromise constitutes a new and independent agreement between them made for good consideration. As a matter of English law, the effects are

1.     to put an end to the proceedings, for they are thereby spent and exhausted;

2.     to preclude the parties from taking any further steps in the action, except where they have provided for liberty to apply to enforce the agreed terms; and

3.     to supersede the original cause of action altogether

These propositions may not hold true as a matter of Indian law in circumstances where one party has already performed his obligations under the underlying contract and the settlement agreement merely seeks to set out a modality of making payment in relation to the underlying contract when one party in the underlying contract has already performed his obligations.

The Supreme Court has also come to a finding that the admiralty jurisdiction of the Indian Court was not ousted merely because during the pendency of the admiralty proceedings before the Indian Court, the parties to the litigation had entered into an  agreement wherein they have agreed to submit to the “exclusive jurisdiction” of a foreign court in circumstances wherein the Indian court can re-arrest the Vessel.

The back to back contracts in the ship demolition/recycling industry

An overwhelming majority of transactions in the international ship demolition/recycling industry consists of a number of middle intermediaries known in the industry as “cash buyers” who purchase vessel from the original seller and thereafter sell the same to the end buyer. Often the cash buyer does not take proper precautions to ensure that the documentation under the upstream ship sale & purchase contract with the original seller is in consonance with the documentation in the downstream ship sale & purchase contract with the ship breaker. In the instant case, the Supreme Court came to a finding that the documentation relating to the upstream and downstream ship sale and purchase were incongruent and that the ship breaker was unable to demonstrate that he had valid title and property in the Vessel at the time the order of re-arrest had been passed. In light of the same, it is imperative for parties to exercise due diligence to ensure that in ship sale purchase transactions of such nature, all transactional documents showing transfer of title in the vessel between respective parties in the transaction chain are in consonance with each other.

Amitava Majumdar (Raja), Managing Partner, Bose & Mitra & Co, Aditya Krishnamurthy, Associate Partner, Bose & Mitra & Co