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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Anton Durbeck GmbH v Den Norske Bank Asa [2005] EWHC 2497 (Comm) (11 November 2005) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2005/2497.html Cite as: [2005] EWHC 2497 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/11/2005

MR JUSTICE CHRISTOPHER CLARKE

1. In this case a bank arrested in Panama a vessel carrying the claimant's cargo of bananas. As a result of the vessel's detention the bananas deteriorated so that they had to be discharged into the sea and were totally lost. The claimant's agreed loss is 2,396,213.88 euros. The facts of the case are unusual in that at the time of the arrest the vessel had no P & I cover; transhipment of the bananas was not feasible and there was no market for them in Panama. The question for decision is whether the claimant is entitled to recover damages in respect of their loss from the bank on the ground that it wrongfully interfered with the performance of the bill of lading contracts pursuant to which the bananas were being carried.

The Parties

2. The claimant – Anton Durbeck GmbH – was the consignee of the cargo. The bananas were shipped in Ecuador for carriage to Hamburg via the Panama Canal upon the "Tropical Reefer".
3. The defendant – DnB Nor Bank ASA – is a Norwegian bank ("the Bank"). It used to be called Den Norske Bank ASA.

The vessels and their owners

4. Three vessels feature in this case. The first is the "Blue Reefer" owned by Nexus Management Co Ltd ("Nexus Management"). The second is the "Spring Reefer" owned by Blue Nexus Shipping Company ("Blue Nexus"). These two companies are registered in the Bahamas. The third is the "Tropical Reefer" owned by Palmetto Shipping Company Limited ("Palmetto"), a Cypriot company. The ultimate beneficial owner of these three vessels was a Cuban corporation – Asociacion de Navieras de Cuba ("Antares"). Antares was the parent company of the three ship owning companies and was itself owned by the Cuban Ministry of Fishing. The managers of the vessels were Nexus Reefer – until February 2000 - and then Naviera Friomar ("Friomar"), both of which are Cuban.

The finance

5. By a Loan Facility Agreement of 1^st December 1997 ("the first loan") the Bank agreed to make available to Nexus Management, Blue Nexus and Palmetto ("the borrowers") US $6,000,000. It was to be repaid in nine quarterly instalments of $450,000 and a final instalment of $1,950,000. The purpose of the facility was to finance the purchase of "Blue Reefer" and "Spring Reefer" and to refinance Palmetto's indebtedness in respect of "Tropical Reefer". The security for the first loan included (i) first statutory mortgages over each vessel; (ii) a guarantee and indemnity provided by Acemex Management Company ("Acemex Management"), a Liechtenstein corporation; (iii) assignments of all insurances, earnings and charter hire; and (iv) deeds of covenants. The first loan is subject to English law. The loan agreement provided, inter alia, that the failure to pay any part of the Indebtedness or to perform any of the terms of the Security Documents was to constitute an Event of Default. One of the terms was that the relevant vessel should remain insured with a P & I Club. The mortgages and the deeds of covenant in respect of the "Tropical Reefer" are subject to the law of Cyprus but it is agreed that there is, for present purposes, no difference between English and Cypriot law.
6. In December 1998 the Bank entered into a second loan agreement with Arina Trading SA, a Bahamian company, under which it agreed to lend $1,375,000 in order to enable Arina to purchase the "Sky Reefer". Security similar to that of the first loan was taken with an additional guarantee from a company called Lomar.

The history

1999

7. From the Bank's point of view the financing had a chequered history. On 9^th March 1999 an instalment due under the first loan was not paid (it was eventually paid on 28^th May). On 9^th June another instalment was unpaid. On about 15^th June the Bank learnt from Nexus Management that "Spring Reefer" had suffered major damage to its main engine crankshaft, and by August it became clear that the vessel was likely to be declared a constructive total loss. Nexus Reefer reported that they expected a payment of about $1 – 1.5 million.
8. The first three vessels were insured for P & I risks with the West of England Ship Owners Mutual Insurance Association (Luxembourg), whose managers are The West of England Ship Owners Insurance Services Limited ("the West of England"). By a letter of 27^th July the West of England notified the Bank that they intended to cancel the P & I cover for those vessels if unpaid accounts were not settled by 16^th August. On or before 16^th August the West of England extended the cancellation date to 23^rd August. The premium was paid by that date and the cancellation threatened was withdrawn. On 9^th September there was a further default under the first loan.
9. By a letter of 7^th December the West of England told the Bank that cover on the three vessels had been terminated as from 6^th December. On 9^th December a notice of default was served on the borrowers in respect of the instalments due on 9th September and 9^th December and interest. By a letter of 20^th December the West of England confirmed that cover had been reinstated.

2000

10. In February Friomar – the new managers – told the Bank that insurance monies of $1.1 million on the "Spring Reefer" were likely to be forthcoming in March 2000. This was confirmed at a meeting that month attended by, amongst others, a representative of Lomar and Antares and payment of $400,000 in mid March and $500,000 in August was promised.
11. On 9^th March the instalment then due under the first loan was not paid. On 19^th April the insurance monies of $1,066,134.62 on the "Spring Reefer" were received and applied to the balance of the first loan. On 26^th May the Bank issued a notice of default under the second loan in respect of instalments due on 28^th February and 26^th May 2000, together with interest, and declared the outstanding Indebtedness due and payable. The outstanding principal instalments were paid with interest on 27^th July. On 9^th June 2000 the instalment due under the first loan was not paid. On 14^th June an account officer of the Bank indicated to Antares that if the Bank was paid $780,000 by the end of June – in the event that sum was paid in instalments by the end of July - a proposal would be put before the Bank's credit committee to extend the maturity of the loan by one year to the end of the next high season with low quarterly repayments in the low season and higher ones in the high season. By the end of June the final balloon repayment had become due under the first loan but was unpaid.
12. On 8^th August the Bank made an offer to Friomar to refinance both loans. That offer was revised on 21^st August. It was never signed by the shipowners, Antares or Acemex Management, to whom it was made. On 30^th August the Bank agreed to postpone payment of the balances under the two loans provided that the refinancing was agreed by 30^th September. As at 30^th August $2,233,290.22 was due and payable under the first loan.

2001

13. In the event no restructuring was agreed and on 5^th January 2001 the Bank served notices of default under both loans. On 18^th January there was a meeting between Antares and the Bank in London which led to a revised refinancing offer by the Bank subject to internal credit approval. The Bank was then told that the "Tropical Reefer" had been fixed under a charter with Antar Nico, a Panamanian company, for a 12 month period. A revised offer was made by the Bank on 26^th February, which required acceptance by 1^st March and completion of the documentation by 16^th March. By a fax of 28^th February Antares confirmed acceptance of the offer.
14. After this the Bank worked towards completion of the documentation for the restructuring of the two loans. In the course of that the Bank became aware that Nexus Management and Blue Nexus had been struck off the register of companies in the Bahamas since the registration fees (of something like $1500 per company) had not been paid. By May they had been restored to the register. On 16^th May representatives of the Bank met representatives of Friomar and Antares in Cuba. They were then told that "Tropical Reefer" remained on a 12 month time charter to Antar Nico, which had begun in October 2000, at a daily charter rate of $4,500, the vessel being used for the carriage of bananas from Guayaquil to Tartous, Syria via the Panama Canal. There were debts relating to the vessel of $235,237, which were owed to suppliers and a shipyard in the Canary Islands. The "Blue Reefer" was on time charter to the same charterers at a daily rate of $3,900 and there were debts relating to this vessel of $376,488, owed to suppliers and the Curacao Drydock Havana. By this stage "Spring Reefer" was to be sold for scrap. "Sky Reefer" had been dry-docked and it was proposed that she be chartered on the spot market. She had debts of $293,923 to suppliers and the Curacao Drydock.

The insurance

15. On 20^th May the West of England withdrew cover on the "Tropical Reefer" and the "Blue Reefer" on account of non payment of premium. The Bank did not learn of this until a fax from the West of England of 13^th June. On the same day the Bank faxed to Friomar's Cuban lawyers saying that the Bank regarded this as extremely serious. On 18^th June Antares told the Bank that there had been a mistake in the routing of the transference of the funds and the matter would hopefully be resolved within days. Friomar had given the Bank a similar message on 14^th June. On 21^st June the Bank was told that owners were meeting with the West of England in Cuba on Monday 25^th June.
16. On 7^th June Friomar sent to the Bank's solicitors, Stephenson Harwood a copy of documents described by them as "notices of assignment of freight" relating to "Blue Reefer" and "Tropical Reefer". These were signed by Antar Nico. They acknowledged receipt of a notice from the Bank and confirmed that, if required to do so, they would deliver up the vessels to the mortgagee i.e. the Bank immediately or, if the vessel was not then in port and cargo free, as soon as she had completed discharging in port. These documents, which, according to Mr Anton, were drafted by Stephenson Harwood, related to the refinancing then in contemplation, which was to include an assignment of earnings.
17. On Tuesday 26^th June at a meeting in Havana the Bank was told that Antares had agreed to pay $250,000 to West of England by 5^th/6^th July in return for which cover was to be reinstated retrospectively, with the balance of about $600,000 to be paid in instalments. The Bank was also told:

(i) that the time charter of the "Tropical Reefer" was to be cancelled when she arrived at the Panama Canal on 3^rd July, bound for Ecuador to load bananas for shipment to the Mediterranean (Mr Anton of the Bank assumed that this meant she would be going to Syria from which she had come), because more could be earned on a voyage charter basis, and that Antar Nico was to enter into some new contract of affreightment for the charter of her and "Blue Reefer";

(ii) that "Blue Reefer" had suffered a major engine breakdown at sea when bound for Brazil from Ceuta on 24^th June and was to be towed by "Sky Reefer" to Las Palmas, her charter having been cancelled in Ceuta on 22^nd June;

(iii) that the sale of the "Spring Reefer" had not yet been completed and was expected to produce $110,000 of which the bank would receive $100,000. Friomar agreed to pay the Bank $200,000 on or about 15^th July and $50,000 at the end of July.

18. On 5^th/6^th July the $250,000 was not paid to the West of England. On 6^th July the Bank learnt that Bridge Oil were intending to arrest the "Sky Reefer" in Las Palmas for non payment of bunkers in the sum of $40,000 and that Friomar owed Bridge Oil about $200,000 in all. On 15^th July the Bank was not paid the promised $200,000. On 17^th July it was told by Friomar that the "Sky Reefer" had not been arrested and that Antares was negotiating with the West of England about outstanding amounts.

The Bills of Lading

19. Between 10^th and 16^th July 2001 a large quantity of bananas was loaded on board "Tropical Reefer" at Guayaquil and Puerto Bolivar for shipment to Europe for delivery to the claimant. The bills incorporated the terms of a charterparty between Antar Nico and Excelban.
20. At this stage (but without the Bank's knowledge), Friomar were in grave difficulties in that:

i) Antar Nico had advanced refurbishment, bunkering, and other running costs in respect of the "Tropical Reefer" which were to be recovered from future earnings of the vessel. Antar Nico had entered into a Baltime charter, dated 11^th January 2001, with the owners of the "Tropical Reefer" and Blue Reefer with 12 month periods of hire beginning with delivery in November 2000 and March 2001 respectively. The charter provided for charterers to deduct disbursements made for owners from hire. Antar Nico had not at that stage been informed about the mortgages to the bank.

ii) In June 2001 Antar Nico had been contacted by Friomar and asked to sign the documents of 7^th June to which I have referred. According to Mr Miranda of Antar Nico this was the first time he heard of the mortgage debt. When Mr Rivero of Friomar was asked by him to explain what was going on he said that Friomar needed to have some evidence that they were to receive $60,000 a month in respect of "Tropical Reefer" and "Blue Reefer" but that there would be no difficulty in agreeing deductions that were to be made by Antar Nico from this sum either to cover debts of Friomar to be paid by Antar Nico or other sums that Antar Nico might be asked to pay. He said that signing the document would not change the current arrangements in any way. In the end on or before 7^th June Antar Nico signed the documents. They, also, signed a sham voyage charter with Palmetto Shipping for the carriage of a cargo of bananas from Elvadir to Europe with a lump sum freight of $65,000 payable 5 days after sailing from Cristobal east bound. The function of this document was to show the Bank that it would receive at least $60,000 from the fixture. This document, which was sent to the Bank, was not intended to affect the existing agreement between Antar Nico and Friomar.

iii) On the first voyage for the claimant "Tropical Reefer" had been detained by the port authorities in Hamburg and had had to have work undertaken for which Antar Nico had paid. Tramp Oil had threatened to arrest the vessel for outstanding bunkers and Antar Nico had paid $ 100,000 to avoid her detention.

iv) On the southbound ballast voyage the vessel had been arrested by Cepsa and Antar Nico had agreed with the claimant that Antar Nico would advance a sum to settle that claim. She was also threatened with arrest by other cargo interests and a further sum had been advanced by the claimant against the freight.

21. On 19^th July 2001 further notices of default were served on the borrowers and Arina which stated that $2,003,238 was due under the first loan and $561,737 under the second. In addition there had been a failure to observe the covenants in the first loan – a reference to the failure to maintain P & I cover. On 20^th July the Bank learnt that sums of the order of 51,000 Euros were due to the Classification Society in respect of "Blue Reefer". On 23^rd July the Bank learnt that Tramp Oil had arrested the "Tropical Reefer" in Panama on 19^th July 2001 – at Balboa on the Pacific side of the canal - for unpaid bunker debts, in respect of supplies to the "Sky Reefer" and the "Blue Reefer" of $297,574. This intelligence was of concern to the Bank because it indicated the possibility of arrests by other creditors and, as Mr Anton of the Bank put it, "basically the end game". It was certainly the trigger for the Bank to arrest the vessel itself. Had there been no Tramp Oil arrest, the Bank would probably not have arrested the vessel because it would not have become aware when she was transiting the canal. On 24^th July 2001 further notice of default was served on the borrowers under the first and second loan agreements. By now the sum outstanding under the first loan agreement was $2,004,476 and under the second loan $562,186.

The Arrest

22. On 24^th July the Bank obtained an arrest order in Panama in respect of the "Tropical Reefer". On 25^th July the Marshal of the Panama Court served the arrest documentation on the vessel at Cristobal. On 26^th July the Bank received a fax from the charterers' lawyers that told them that the vessel was bound for Hamburg, and one from Friomar, dated 23^rd July, in which Friomar said that that it had not been possible to pay the amount due to the West of England or to the Bank "due to lack of liquidity". The latter fax informed the Bank that Friomar was discussing with Tramp Oil a freight assignment in the amount of $120,000 (instead of paying $300,000) to secure the release of the vessel. It indicated that $1,000,000 should be recoverable from the insurers of the "Blue Reefer", which would be paid to the Bank, and proposed a renegotiation of the two loan agreements involving payment over 12 or 14 instalments starting in January 2002. The Bank rejected that the next day, pointing out that there could be no assignment to Tramp Oil because the freight had already been assigned to the bank. On the same day Friomar faxed the Bank telling them that no agreement had been made with Tramp Oil in relation to the assignment because the Tramp Oil arrest was unlawful, and confirming that all freight in respect of the "Tropical Reefer" would be paid to the Bank "according to the assignment made by …… Antar Nico". Also on the same day the Tramp Oil arrest was set aside because Tramp Oil had brought their claim against Friomar in the erroneous belief that Friomar were the owners rather than the managers of the vessel. The claims against Blue Reefer and Sky Reefer remained and Tramp Oil later arrested "Blue Reefer" in Las Palmas on 8^th August 2001.
23. After 27^th July "Tropical Reefer" stayed in Panama under the Bank's arrest. On 1^st August 2001 Stephenson Harwood, told Antar Nico and the claimant, through its Dutch lawyer, Dr AJ Dolk, who had been demanding the release of the vessel, that they would not oppose any reasonable application by those interested in the cargo to the Panamanian Court to tranship or store the cargo. In the event no such application was made and no security was put up. On 2^nd August Friomar offered payment of $200,000, if the vessel was allowed to go to Hamburg. I shall return later in this judgment to the sequence of events that followed.
24. On 5^th September the Panamanian court ordered a sale of the "Tropical Reefer". On 12^th September the cargo was, by order of that court, discharged overboard at sea. On 16^th October the vessel was, at the second attempt, sold by public auction for $1.15 million. The net proceeds were $785,000.

The issues

25. The issues for determination are the following:

i) which system of law is to decide whether or not the arrest and its continuance were improper?

ii) if the answer to (i) is the law of Panama, was the arrest wrongful by that law?

iii) if the answer to (i) is the law of England & Wales, is The "Myrto" still good law or, in the light of later authorities, should there be a more restricted approach to recovery? Whichever approach is taken was the arrest unlawful?

Which system of law?

26. Section 11 (1) of the Private International Law (Miscellaneous Provisions) Act 1995 provides that the general rule is that the applicable law of a tort is the law of the country in which the events constituting the tort occurred. Section 11 (2) provides that where elements of those events occur in different countries the applicable law under the general rule is to be taken as being (for a cause of action other than one in respect of personal injury or death resulting therefrom or in respect of damage to property) the law of the country in which the most significant element or elements of those events occurred. For a cause of action in respect of damage to property the law is the country where the property was when it was damaged. Section 12 of the Act provides that if it appears, in all the circumstances, from a comparison of:

(a) the significance of the factors which connect a tort with the country whose law would be the applicable law under the general rule; and

(b) the significance of any factors connecting the tort with another country,

that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of that other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country.

27. The claimant's complaint is that the defendant has wrongfully interfered with the contracts contained in or evidenced by the bills of lading in that the arrest of the vessel has prevented the fulfilment of those contracts as a result of which the claimant has suffered damage. In my judgment the most significant elements of the events constituting the alleged tort occurred in Panama since that was the place where the vessel was arrested and detained and where the cargo became a total loss. Mr Nigel Meeson QC on behalf of the claimant submitted that there were a number of further elements constituting the tort which took place, or were situate, outside Panama i.e.:

i) the Bank's decision to enforce the mortgage and its instructions to arrest the vessel;

ii) its decision to maintain the arrest after Tramp Oil had withdrawn their arrest;

iii) the bill of lading contracts and the vessel herself;

iv) the financial loss of the market value of the cargo.

Elements (a) and (b) occurred in England and Norway. The claimant originally contended that the bills of lading contracts were governed by English law, but since they provide for arbitration in Amsterdam or Rotterdam, they are probably governed by the law of Holland and, in any event, can be enforced there. The vessel is a Cypriot registered vessel. The financial loss was suffered in Germany, where the claimant is domiciled and where the cargo would have been sold.

28. I entertain some doubt as to whether the draftsman of section 11 intended that "the events constituting the tort" should be regarded as embracing all the matters which would fall to be proved in a particular case in order to establish a cause of action, as opposed to those elements that made what happened tortious, but, even if that is so, the elements to which Mr Meeson refers are markedly less significant than those connecting the case with Panama. Mr Meeson also pointed out that (i) the alleged tortfeasor was the London branch of a Norwegian bank, (ii) the alleged victim was German, (iii) the loan agreement enforced was subject to English law, secured by a Cypriot mortgage, (iv) the contracts interfered with were governed by Dutch (or Ecuadorian) law, (v) the cargo was on a Cypriot ship and (vi) the arrest took place in Panama. None of these circumstances seem to me to call for the application of a law other than that of Panama.
29. It was submitted on behalf of the claimant that the property that was damaged by the tort complained of was the chose in action under each of the bills of lading contracts, which are governed by Dutch law, so that the property damaged was located in Holland. Accordingly the general rule called for the application of Dutch law. I do not accept that the reference in section 11 (2) (b) to "damage to property" was intended to apply to cases of wrongful interference with a contract. In such a case the contract is not "damaged" by such interference, although its due performance is prevented. Nor is the chose in action derived from the contract impaired. If I am wrong on that, then it seems to me that the law of Panama is substantially more appropriate than that of Holland. Further, if section 11 (2) (b) is applicable to torts other than wrongful interference with goods, and applies to an arrest which leads to damage to property, the subsection provides for the place where the property was damaged i.e. Panama to be the country whose law is applicable under the general rule. In the alternative Mr Meeson submitted, relying on certain dicta^[1] of Donaldson. J., as he then was, in "The Angel Bell" [1979] 2 Lloyd's Rep, that the ship should be considered as in effect a floating warehouse so that the cargo should for present purposes be treated as being in a warehouse in Cyprus. I see no need to adopt any such fiction.
30. Mr Meeson further contends that, even if, in accordance with the general rule, Panamanian law is prima facie applicable, it is substantially more appropriate that the lawfulness of the arrest and its consequences should be determined by the law of the vessel's registration, namely the law of Cyprus, which is accepted to be the same as that of England. The fact that the vessel was arrested in Panama was fortuitous. She happened to be there when the Bank decided to arrest her. But the resolution of what is essentially a conflict between the competing rights of the Bank and the bill of lading holders ought not to depend on the vagaries of where the Bank chooses to affect an arrest. It should be a question capable of being answered consistently and predictably so that both banks and cargo owners may know in advance in what circumstance banks can interfere with the performance of the bill of lading contracts. Such certainty can only be achieved by taking the law of the ship's registry.
31. I am not persuaded that the factors connecting the tort relied on with Cyprus make it substantially more appropriate that the lawfulness of the arrest should be judged by that law as opposed to the law of Panama. The critical events – arrest and loss of the cargo - all happened in Panama, where the Bank availed itself of a judicial procedure which, in the result, caused loss to the claimant. The law pursuant to which that procedure was put in force by the Bank should also determine whether the Bank misused its right to invoke it. These are factors that establish a close connection with Panama. They are of considerably greater significance than the fact that the law of the ship's flag would lead to certainty. To some extent it would, in that it would only be necessary to ascertain the law of one country. But banks choose where to arrest their vessels, some places being more favourable for their purposes than others. They are well able, with the assistance of their lawyers, to familiarise themselves with the relevant law of those places where they are likely to wish to arrest. Cargo interests can do the same, although in most cases they will have a remedy against the vessel and her insurers.
32. For these reasons I hold, as did Mr Nigel Teare QC, sitting as a deputy judge when considering whether to stay the present proceedings, that the applicable law is that of Panama.

Panamanian Law

33. It is common ground that, under Panamanian Law, at the time of the arrest, the Bank, as mortgagee was entitled as against their mortgagor, the owner of the "Tropical Reefer", to arrest the vessel because of the default of the borrowers under the first loan agreement. By virtue of the mortgage the bank had a privileged maritime credit which gave it that entitlement: see Articles 1507 and 1527 of the Commercial Code. The arrest itself was in accordance with Article 164 (3) of the Maritime Procedural Code of Panama, which allows a vessel to be arrested in order to make privileged maritime credits effective; provided that an action is filed against the vessel: see Article 525 of the same Code. Article 185 of that Code imposes liability in damages on anyone who "through fault, error, negligence or bad faith" sequesters property which does not belong to the defendant, or who sequesters in breach of an agreement not to do so, or in execution of privileged maritime credits which have been extinguished[e.g. by payment]^[2]. None of these circumstances apply. Otherwise the Code says nothing about the circumstances in which someone who arrests a vessel can be liable to a third party for having done so. It is to be noted that the conditions for recovery under Article 185 ("fault, error, negligence or bad faith") are less onerous than those that apply to a claim in English law for wrongful arrest.
34. Two provisions of Panamanian law have a potential bearing on whether or not a third party such as the claimant, can nevertheless recover damages in respect of damage to property caused by the arrest. Article 1644 of the Panamanian Civil Code provides:

"He who by his actions or omissions causes damage to another, there being fault or negligence, is obliged to repair the damage caused".

This Article, like similar provisions in other civil jurisdictions, establishes a general principle of liability in tort or delict. It is common ground that it must give way to any special provision such as Article 217 of the Panamanian Judicial Code which provides:

"The parties will be liable for the damages that they cause to the other party or to third parties with their procedural acts undertaken with temerity or bad faith"

The last words in Spanish are "con sus actuaciones procesales temerarias o de male fe".

The Expert Evidence

35. I have read and heard the evidence of Dr Jorge Fabrega, who was called by the claimant and Dr Eligio Salas, who was called by the defendant. They are both distinguished Panamanian Lawyers. Dr Fabrega has been a practising lawyer in Panama since 1955 and is currently a partner in the law firm Moreno y Fabrega. He is a former alternate Justice of the Court of Appeal (First Judicial District) and a current Alternate Justice of the Supreme Court of Panama and has been such since 1970. Dr Salas was from 1996 to 2001 a Supreme Court Justice and is currently in private practice. Their task (and mine) is rendered more difficult by two matters. First, Panama, like many civil law countries, does not have a doctrine of precedent similar to ours. But the Panamanian Courts have adopted the approach that three Supreme Court decisions constitute a "probable doctrine", which should be followed in comparable or analogous circumstances. Even then it sometimes happens that the continuum of development of the law is broken. In that case a judgment would have to be given explaining the reason for the change. Second, neither expert was aware of a case in which damages had been awarded in favour of someone in the position of the claimant, i.e. an innocent third party who suffered loss from an arrest that was valid as between ship and arrestor, nor one in which they had been refused.
36. Dr Fabrega's view was that, although Article 185 of the Maritime Procedure Code was not directly applicable, it established that there could be liability for effecting an arrest which arose from error, and that, by analogy with it, the standard set in Article 217 of the Judicial Code should be set more liberally when dealing with damage done to innocent third parties in maritime cases. Article 31 of the Code provides that:

"Any circumstances not contemplated in the proceedings, or doubts in the interpretation of this Law, shall be decided applying analogy, procuring in each case respect for the rights of defence, and principles of procedural Law".

He accepted that it was very unlikely that a debtor who was adversely affected by an arrest brought by a legitimate creditor could sue for damages in reliance on Article 217. But it would not be impossible if, say, a creditor were to sequester the operations of a plainly solvent company instead of seeking to arrest a cash account. He expressed the opinion, based on the Court of Appeal case to which I refer below - Cintia Cristina Corro Batista v Prudencia Ramos Peralta - that a Panamanian Court could find that the Bank was liable if it could without injury to itself have refrained from exercising its rights or could have exercised them in a manner that did not injure a third party.

37. Dr Salas' opinion may be summarised as follows:

i) Article 1644, which is the general provision for delictual liability in the Civil Code is inapplicable. The complaint here is that the claimant has suffered damage as a result of a procedural act. That is dealt with by Article 217 of the Judicial Code. Article 217 applies to claims by both defendants and third parties.

ii) In order to succeed under 217 there must be evident bad faith and an intention to do harm. This was supported by Supreme Court decisions and textbook writings including Dr Fabrega's own.

iii) If, but only if, that was shown it was possible to fall within Article 217 even if a legitimate right was exercised.

38. In my judgment Panamanian law gives a bill of lading holder, whose cargo is damaged or lost on account of a valid arrest of the carrying vessel a right to sue if the arrest, albeit legitimate as between the arrestor and the ship, was carried out in bad faith or with the deliberate intention of harming the bill of lading holder. The fact that an arrest would be likely to cause or, at any rate, risk causing damage to cargo is not sufficient. I reach that conclusion for a number of reasons.
39. First, Article 217 is expressed disjunctively and, although the distinction between "bad faith" and "temerity" may be difficult to draw, the two concepts are not identical. Second, Article 217 is dealing with at least two situations: a claim by a successful defendant to an action against the unsuccessful claimant, and a claim by a third party who has been injured by legal action that has been successfully taken against another and, qua him, legitimately. In the former case the decisions of the Supreme Court, to which I refer below, indicate that a very high test has been adopted and there is, to my mind, no reason why the test should be lower in the latter.

The Supreme Court decisions

40. In a ruling of 3^rd August 1982 the Supreme Court said:

"…temerity that serves or should serve as a basis for a finding of temerity in the action and the sequestration and which gives rise to indemnity for prejudice to which article 380 of the Legal Code alludes (previously in force)^[3] is serious negligence or malice, which the quoted precept distinguishes as bad faith."

41. In a ruling of 11^th September 1985 in the case of Rivera v Jimenez the Court said:

"…a licit act cannot generate liability and the holder of a right who exercises it without trespassing the limits of its content, acts lawfully. This means that the exercise of judicial or administrative actions need not necessarily imply an abuse of right, because for there to be this there must have been proven that there had been intent [dolo^[4]] or fault [culpa] with the deliberate purpose of harming the opposing party."

That was a case in which a lady had obtained from the Mayor a suspension of a construction permit having learnt that the now claimant was proposing to build on land which he said he owned, and which she said was owned by the municipality and designated as a projected street. As a result building works had been delayed for 4 months.

42. In a ruling of 11^th December 2000 the Supreme Court determined a case relating to the Castillero family. The claimant asserted that various Castillero siblings had commenced a series of unsuccessful legal proceedings with the purpose of disabling the declared heir of their brother from taking possession of the property left to him by will. In its ruling, given by a court including Dr Salas and Dr Fabrega's cousin, the Court said this:

"The topic corresponding to temerity and abuse of the right to go to law, as well as its consequences within the scope of third party liability, is found in our positive law, in great measure, in a state of indefinability which has been responsible for contradictory jurisdictional pronouncements. Even accepting that the reckless litigant is one who acts without the assistance of any law, the fact is not easy to establish in the absence, in the procedural code, of more precise rules that define temerity or malice and the form of recognising it …With these difficulties, in the majority of their pronouncements, our courts have opted for a rigorous posture at the time of recognising it, requiring from the plaintiff who alleges temerity as a source of indemnity, full proof that he has to demonstrate."

The ruling went on to cite, inter alia, the rulings referred to above. The Court said:

"It should be understood that temerity, represented by the abuse of going to law which may have involved any of the parties in the proceedings, in order for this to be converted into a source of liability it must be characterised by excesses that place it beyond the simple exercise of procedural right under the law"

and

"The abuse of the right, when the damage arises from abnormality in the exercise of the right, to be thus configured requires that the conduct mentioned should have been carried out in a disproportionate and exorbitant way that involves the serious intention to cause harm [la grave intencionalidad de perjudicar]. In other words it is necessary that they should have acted with malice and clear bad faith [con dolo y evidente mala fe]."[emphasis added].

43. These decisions appear to me to amount to a probable doctrine as to the ambit of Article 217, and, even if they do not, I find in them a helpful guide as to the approach of the Panamanian Supreme Court. Mr Meeson submits that the decisions do not have that character because they do not concern innocent third parties such as the claimant but, rather, those who have been unsuccessfully sued by a claimant whom they now sue or someone in an analogous position. I do not regard this as a significant difference. Both the cargo owner and the person against whom a claim is unsuccessfully brought are "innocent" parties; and, as I have said, I see no reason in principle why the ability to claim should be easier because the person who seeks to do so is a "third party" particularly when, as here, the person against whom he seeks to claim had a right of arrest against the vessel arrested. I do not ignore the fact that a further distinction may be made between the case in which A unsuccessfully sues B and one in which A successfully sues B and then seeks to execute judgment against him, or where A seeks interim relief against B before judgment; and that the Supreme Court decisions do not relate to these latter circumstances. But I do not accept that the test for what amounts to "temeridad" should be different in those cases and the decision of the Court of Appeal in the Cintia Cristina case suggests that it is not.
44. Third, neither the Panamanian Supreme Court nor the Panamanian Court of Appeal has adopted the test suggested by Dr Fabrega in evidence that light negligence ("culpa leve") suffices. In its ruling of 26^th July 2002 in the Cintia Cristina case the defendant Peralta had arrested Mrs Batista's van for a period of three years as a result of which she suffered loss. The Court of Appeal in its ruling cited a work of an Argentinean author Dr Peraino Facio "Extra Contractual Liability", published in 1981, in which he indicated that:

"…in some cases the legal awareness is felt inclined to consider that the damage caused must be recompensed or made whole, either because the offender may, without harm to himself, have not exercised his right, or because he might have exercised it in such a way that would not harm third parties….There will be abuse of law when, when acting in an officially legal manner, the subject of a duty conducts himself in a substantially illegal way and, furthermore, when he acts with malice, fault or negligence.."

The Court went on to quote from Castillero and a passage from the work of a respected author, Dr Arroyo Camacho, named "5 Years of Jurisprudence 1981-5" which includes the following:

"..the exercise of legal or administrative actions cannot necessarily imply abuse of law, because for this, it must be proved that there was damage^[5] or fault with the deliberate intention to damage its counterparty".

It concluded that:

"..as the plaintiff has not proved that the arrest was unnecessary, that it overstepped the limits of the claimed duty ^[6]or that the temerity of this had the intention of causing damage, it is unsustainable, since on the contrary, the claim maintains elements of legitimacy, notwithstanding it is an evidential error^[7], which leads the judge to reject the claim."

45. Fourth, such a conclusion appears to me consistent with principle. In the present case the Bank availed itself of its legal right to arrest the vessel. That arrest has never been set aside; nor has it been suggested that there were grounds to do so. The circumstances in which someone who invokes against X a procedural remedy given to him by the law which causes damage to Y ought to be limited. The cargo owner is not thereby without legal remedy since he will have a remedy against the other party to the bill of lading contract. In most cases, but not this one, that other party will be insured.
46. Fifth, such a conclusion is consistent with Dr Fabrega's own book "Medidas Cautelares" [Precautionary Measures], 1998 Edition, in which under the heading of "Damages caused by the sequestration" he writes

"Where must the idea of temerity be found: in the sequestration, in the proceedings or in both? We certainly feel that temerity must be produced in the sequestration, but that there is a certain link with the main proceedings. It could be understood, for the moment that if the defendant has sufficient assets – namely a bank to all intents and purposes solvent and the administration of its establishment is sequestered for an insignificant sum and without right that the defendant undisputedly acted with temerity. It specifies that the action should be taken into consideration as a whole and that we need to examine in each case the concrete terms and conditions of this. To a great extent the temerity is found when the actor sequestrates in bad faith, knowing that this was unnecessary, with the exclusive intention of intimidating and with awareness – to be judged by objective standards – of what was lacking of just cause to encourage the verdict or indeed under circumstances of inexcusable negligence." (emphasis added).

A little later he quotes from a ruling of 1949:

"Temerity or bad faith, synonymous terms, constitutes the action of what is risked without a mediating examination^[8] of the danger, or of what form a legal judgment takes without grounds. It is applied to the litigant who claims something without right to it" (emphasis added).

The conclusion is also consistent with his definition of "temeridad" in a legal dictionary that he published (for students) in 2004 with others as "conscious of lacking a right", although he cites other dictionaries which give it a lesser meaning such as recklessly, rashly, inconsiderately or imprudently. These include the respected Diccionara Juridico Espasa which defines "temeridad" as "failing to take the care and diligence which the least careful, attentive or diligent person may be required to take".

47. The law of England cannot determine the law of Panama. It is, however, noticeable that the test which I hold applicable under the law of Panama is close to that which applies in England in cases of wrongful arrest or malicious prosecution.
48. In the light of the matters to which I have referred I do not accept that Article 217 should be given a broader interpretation so as to impose liability in the case of an arrest which affects third parties if there is negligence. Mr Meeson urged upon me that temerity was a flexible concept which, in the present context, extended to acting without any proper consideration of the rights of others. The Panamanian Supreme Court, he submitted, would, if this novel question – as to the full extent of "temeridad" - were put to it, surely start from the general principle (accepted as such by Dr Salas) that one person should not exercise his rights in a way that harms the rights of others, and conclude that a person ought not to exercise rights in a way harmful to others if there was an alternative course open which would avoid such damage without damage to themselves i.e. the test adumbrated by Dr Facio; or at any rate the Court would apply the definition in the Diccionara Juridico Espasa. But, as it seems to me, such a conclusion would go against the grain of authority in Panama, including the decision of the Court of Appeal which did not adopt Dr Facio's test. I accept that "temeridad" is a flexible concept but the context in which it appears in Article 217, dictates a restrictive interpretation and, as the Supreme Court has said, a rigorous requirement of proof. Further, there is an intrinsic difficulty in using the concept of negligence in the context of the exercise by a mortgagee of his security rights^[9].
49. I have reached my conclusion on the basis of the relevant statutory material, the rulings of the Panamanian Courts and text book authority. I should add, however, that I derived greater assistance from the evidence of Dr Salas than that of Dr Fabrega. Dr Fabrega's report of 29^th March 2005 dealt mainly with matters of Panamanian private international law. In one passage he appeared to suggest that only mortgages registered in Panama gave rise to a maritime credit enforceable in Panama by arrest (page 8, 2^nd full paragraph)^[10], and, whilst mentioning Article 1644 of the Civil Code he made no mention of Article 217 of the Panamanian Judicial Code. He said in evidence that he was not familiar with the Supreme Court cases to which I have referred. His supplementary report cited the Cintia Christina case but less than fully, since he only referred to the quotation from Dr Facio and not the remainder of the judgment. At the same time I note that Dr Salas' first report expressed the view, which finds support in some of the dicta in the authorities but from which he departed in giving evidence, that it was impossible to conclude that a litigant had acted with temerity, bad faith, fault or negligence if the Court had recognised the substantive merits of the action on the basis of the maxim "qui iure suo utitur nemine facit injuriam".

Cypriot/English Law

50. My conclusion that the relevant law is that of Panama means that any view that I express on English, and, therefore, Cypriot law, will be obiter. Since, however, the question has been extensively argued, I propose to deal with the submissions that have been made and my conclusions upon them.
51. In "The "Myrto" [1977] 2 Lloyd's Rep 243, 253-4 Brandon J, as he then was, summarised the applicable principle of English law as follows:

"Where the owner makes a contract with a third party for the employment of the ship, of such a kind and made or performable in such circumstances that the security of the mortgage is not impaired, and the owner is both willing and able to perform such contract, the mortgagee is not entitled, by exercising his rights under the mortgage, whether by taking possession, or selling, or arresting the ship in a mortgage action in rem, to interfere with the performance of such contract" (emphasis added).

52. Mr Luke Parsons QC, on behalf of the Defendant submits that the law on the enforcement of mortgagee's rights has developed in the nigh on 30 years since "The Myrto" was decided and that the authorities now establish that a mortgagee must exercise its powers in good faith for the purpose of obtaining repayment but owes no general duty of care to either the borrower or a surety even though the consequences of his exercising those rights may be damaging to them. A mortgagee will only be restrained (bad faith apart) from acting where the enforcement of his security would be in disregard of the rights of third parties which are superior to the mortgagee's rights. Any interference by the mortgagee with an inferior right, such as a contract between the mortgagor and a third party, even if the contract is a pre-existing one of which the mortgagor has notice, is justified because such interference is in defence and protection of the superior or, at least, equal right of the mortgagee. To restrict the mortgagee from arresting a vessel, unless the mortgagee's security would be impaired if the arrest were lifted, creates an unjustifiable inconsistency between the principles applicable to ship mortgages and those applicable to mortgages of land or other property. It is also inconsistent with general Admiralty practice in relation to arrests which precludes shipowners from recovery unless the arresting party is guilty of mala fides or that "crassa negligentia" which implies or is equivalent to malice: see The "Evangelismos" [1858] 12 Moo Pc 352. This was followed in The "Kommunar" ...no 3) [1997] 2 Lloyd's Rep 22, in which Colman J, treated mala fides as shown when the arresting party had no honest belief in is entitlement to arrest and "crassa negligentia" as shown where there was so little basis for the arrest that it may be inferred that the party acted without any serious regard to whether there were adequate grounds for the arrest of the vessel. There is no reason, Mr Parsons submitted, why a third party should be in a better position than the owner of the vessel.

The nineteenth and early twentieth century authorities

53. Mr Meeson submits that the rule in The "Myrto" is based on two sources: De Mattos v Gibson [1859] 4 De G & J 276 and Collins v Lamport [1864] 11 LT 497. The latter authority has stood unchallenged for over 140 years during the course of which it has been approved by the Court of Appeal on four separate occasions, such that, even if its validity was now to be doubted, the principle, which is in no way irrational or unsatisfactory, should not now be altered.
54. In De Mattos v Gibson the Lord Chancellor held, at the hearing of the cause, that a mortgagee who took with full knowledge of a charter, must abstain from any act which would have the immediate effect of preventing its performance, but he refused relief against the mortgagee who sought to sell the vessel in circumstances where it had become apparent that the shipowner was wholly incapable of continuing the charter voyage. That is not a decision applicable to present facts where the bill of lading contracts postdate the mortgage.
55. In Collins v Lamport Lamport was one of several mortgagees of a vessel, whose owner had chartered it to Collins and another and had contracted to sell it to one Webb. The mortgagee also had an intended purchaser. The question in the case was whether there was anything in the provisions of the Merchant Shipping Act 1854 that empowered the mortgagees "at their own good will and at any time to arrest everything which has been done by the mortgagor and to take possession of the ship, stripping her entirely of any contract or engagement to which she had been previously subjected by the mortgagor". Sections 70 and 71 of that Act provided:

"70 A mortgagee shall not by reason of his mortgage be deemed to be the owner of a ship or any share therein, nor shall the mortgagor be deemed to have ceased to be owner of such mortgaged ship or share except in so far as may be necessary for making such ship or share available as a security for the mortgage debt

71 Every registered mortgagee shall have power absolutely to dispose of the ship or share in respect of which he is registered and to give effectual receipts for the purchase-money …"

Very similar provisions are now to be found in Schedule 1 paragraphs 9 and 10 of the Merchant Shipping Act 1995.

56. The Lord Chancellor held that the statute was intended to reverse the result of earlier statutes whereby the mortgagee became, upon registration, the owner of the property the owner being treated as his quasi agent. Under the new statute the mortgagor was to be deemed to be the owner. But the exception ("in so far as may be necessary for making such ship.. available as a security") was interpreted as meaning that, if the security was impaired, the owner/mortgagor's authority ceased:

"So long, therefore as the dealings of the mortgagor with the ship are consistent with, and do not materially prejudice and detract from or impair the sufficiency of the mortgagee's security, the mortgagor has Parliamentary authority to act in all respects as owner of the vessel, and therefore to enter into all contracts touching the disposition of her necessary to assure to him the full value and benefit of his property. But whenever a mortgagee can show that the act of the mortgagor prejudices or injures his security, he ceases to be bound by the Parliamentary declaration as to the ownership of the mortgagor, and can claim the full benefit of and exercise the rights given to him by his mortgage. Every contract, therefore, entered into by the mortgagor remaining in possession is a contract which derives validity from the declaration of his continuing to be owner, but, at the same time, every such contract is a contract into the benefit of which the mortgagee may at any time enter by giving notice to the person who under that contract is to pay to the mortgagor that he requires payment to him, the mortgagee.

…

Such being as well a reasonable interpretation of the statute – as making the law, with regard to this description of property, in a great measure analogous to the law as it exists with regard to mortgagees of real estate – as also according to my present impression, the true interpretation of the statute, I cannot…,allow the mortgagees here, in the absence of everything to shew that this charterparty, if permitted to be carried into execution, will at all prejudicially affect the sufficiency of the security, to interfere with its being carried into execution, but shall grant an injunction restraining then, and also the purchaser from them, from dealing with the ship in any way inconsistent with, or which may interfere with or prevent, the execution of the charterparty".

From the above citation it appears that the Lord Chancellor envisaged that the mortgagor could interfere with the performance, and not just the making, of a contract, if his security was impaired; and that he was seeking to fashion the law so as to make it consistent with that applicable to a mortgage of real estate.

57. In Brown v Tanner [1868] 3 Ch App 597 the owner had mortgaged the ship to Tanner; and then entered into a charter under which freight was to be paid on delivery of the cargo. During the voyage the owner assigned the freight to Brown who knew of the mortgage. When the ship arrived at the discharge port and before the whole of the cargo had been discharged or any freight become payable the mortgagee took possession of the vessel and was held to be entitled to freight in priority to Brown, on the basis that the decision in Collins v Lamport permitted the mortgagor to bind the mortgagee by a charterparty "being, to that extent, in a different position from the mortgagor of real property, who cannot bind his mortgagee by a lease", but did not mean that the mortgagor could mortgage the freight before it became due so as to prevent a mortgagee who took possession before that date from receiving it. The only question was whether the freight had become due before such taking of possession, and it was held that it had not.
58. In The Heather Bell [1901] P 272 the plaintiff chartered a steam vessel to run excursion trips for about six weeks on terms that the profit after expenses should be shared, that he would advance money to free part of the machinery from a lien for repairs, and that in respect of that and other advances the plaintiff should have a charge and lien on the boat ranking in the highest position possible. The mortgagee seized the vessel alleging that the agreement was not binding on him because it impaired his security. The Court of Appeal, applying Collins v Lamport held that it was binding on him because the mortgagor's dealings did not impair his security. In the course of his judgment Lord Alverstone CJ, pointed out that the test in Collins v Lamport had been discussed, without disapproval, in the House of Lords in Keith v Burrows [1877] 2 Ch App 636.
59. In Law Guarantee & Trust Society v Russian Bank for Foreign Trade [1905] 1 KB 815 the mortgagors chartered out three vessels for the carriage of coals from Barry to Vladivostok during the course of the war between Russia and Japan. The coals were intended for the Russian government. The vessels were, therefore, at risk of capture by the Japanese, in respect of which they were uninsured. The Court of Appeal, following Collins v Lamport held that the mortgagee was not bound by the charterparty on the ground that it impaired their security. The Court described the principle as "laid down some forty years ago and recognised ever since".
60. In The Manor [1907] P 339 the question was whether the mortgagee, in the absence of a default under the mortgage, could enter into possession if the mortgagor dealt with the ship in such a way as to impair the security. The Court of Appeal, applying the Collins v Lamport test held that he could. In that case the ship had become burdened with maritime liens which the insolvent shipowner had no means of discharging and was about to be sent off on a nine month voyage where further debts would be incurred.

The modern authorities

61. The contention on behalf of the defendants is that The "Myrto" has been superseded by more recent authority. In Downsview Nominees Ltd v First City Corporation [1993] AC 295 the Privy Council held that a mortgagee, in that case a debenture holder, owed no general duty to the mortgagor or subsequent encumbrancers to use reasonable care in the exercise of its powers. But Equity imposed on them specific duties including the duty to exercise their powers in good faith for the purpose of enabling the assets comprised in the security to be preserved and realised for the benefit of the mortgagee, even though, subject to that duty, the exercise of their powers might cause detrimental consequences to the mortgagor. See, also to like effect, Yorkshire Bank Plc v Hall [1999] 1 WLR 1713, 1728 per Lord Justice Walker. Similarly in Den Norske Bank ASA v Acemex Management Company Limited [2004] 1 Lloyd's Rep 1, the claim against the guarantor of the first loan, the Court of Appeal, following Silven Properties Ltd v Royal Bank of Scotland Plc [2003] EWCA Civ 1409, confirmed that a mortgagee owes no duty to the mortgagor in respect of the time at which he sells (although he does owe a duty to use reasonable care to achieve the best price reasonably obtainable at the date of sale); and no duty of care in deciding whether to arrest the vessel or whether to release the vessel from arrest. These authorities are of no direct application to the present case which is concerned with what duty, if any, is owed to a party with whom the mortgagee has no contractual connection and who is not a fellow incumbrancer. They are relied on to show the restricted limits in which equity will intervene to prevent an arrest. The defendants submit that the approach should be even more restrictive when third parties, to whom no duties are owed by the mortgagor either in contract or in equity, are concerned.
62. In Edwin Hill and Partners v First National Finance Corporation Plc [1989] 1 WLR 225 the defendant bankers held a first legal charge on freehold property as security for the indebtedness of a developer. The developer did not have, and could not raise, enough money to repay the loan or carry out the development for which the plaintiffs had been appointed as architects. The bank agreed to provide the finance needed on condition that the plaintiffs were replaced, as in the event they were. The plaintiffs claimed damages against the bank for procuring a breach of contract. They failed on the basis that the bank's interference with their contract was justified as being in defence and protection of an equal or superior right of the bank under the legal charge to be repaid its loan. The Court held that the bank could have exercised its power of sale, or appointed a receiver, either of which would have justifiably brought the plaintiff's contract to an end. It could achieve the same result by reaching a sensible accommodation with the developer that he would dismiss the plaintiffs and continue the development. So, it is submitted, in this case the Bank was entitled to interfere with the bill of lading contracts by arresting the vessel and maintaining the arrest in protection of their equal or superior right under the mortgage, recognised by a Panamanian judicial act, to arrest the vessel in order to secure payment.
63. I am not persuaded that I am either free to depart from the line of authority from Collins v Lamport to The "Myrto", or that, if I am, I should do so. As to the former the rule in Collins v Lamport has been treated as good law in at least four appellate decisions. It has now been applied for nearly 1 ½ centuries. In those circumstances I do not think it should be altered now and certainly not by me. I bear in mind the observations of Lord Mansfield in Vallejo v Wheeler [1774] 1 Cowp 143. cited with approval in the House of Lords in The "Jordan II" [2005] 1 Lloyd's Rep 57 at paragraph 16:

"In all mercantile transactions the great object should be certainty; and therefore it is of more consequence that a rule should be certain, than whether the rule is established one way or the other because speculators in trade then know what ground to go upon"

I am prepared to accept that it is not immediately apparent how the rule is to be reconciled with the approach taken in Edwin Hill, or why shipowners whose vessels have been wrongly arrested should only be able to recover if mala fides or something close to it can be shown, whereas a cargo owner may be able to recover if a lawful arrest is effected in circumstances where the mortgagee's security is not impaired. But the foundation of the rule rests at least in part upon the consequences were it otherwise. As the Lord Chancellor said in Collins v Lamport, in respect of the suggestion that the provisions of the Merchant Shipping Act 1854 enabled the mortgagee to override any engagement entered into by the shipowner:

"The inconvenience, to say nothing of the injustice of such a construction of the statute, is palpable. No mortgagor could deal with his vessel in the ordinary way. Every operation would be incumbered by the necessity of resorting to the mortgagee for his concurrence or approbation, with a result of infinite difficulty and delay and expense and inconvenience in the transaction of ordinary mercantile business"

64. Moreover the rule, as it seems to me, may in fact be reconciled to the approach in Edwin Hill in the following manner. Firstly, despite dicta that equate the law of ship mortgages with that relating to other mortgages, there is authority that the mortgagee of a ship is not in an identical position to that of any other mortgagee: see Brown v Tanner (a shipowner "can bind the mortgagee by a charterparty, being to that extent in a different position from the mortgagor of real property who cannot bind his mortgagee by a lease"). That that is so is justified by the particular characteristic of a ship which carries goods from port to port in the course of which her owners will enter into contracts of affreightment, carriage or hire, which will in turn generate subsidiary contracts. The parties to ships' mortgages may properly be taken to have intended different incidents to apply to such mortgages to those that apply to mortgages of land or shares. Thus in Johnson v Royal Mail [1867] LR 3 CP 38,42 the Court of Common Pleas observed:

"Without entering into the question of mortgages of land further than to say that we have given it our consideration – the case of a mortgagee and mortgagor of a ship appears to be one of quite a different complexion because the mortgagee, so long as he does not interfere and claim the possession may fairly be taken to have allowed the mortgagor to enter into all engagement for the employment of the ship of the sort usually entered into by a person who has the apparent control and ownership of a vessel".

In those circumstances the mortgagee is not to be regarded as enjoying a right equal or superior to that of the bill of lading holder to interfere with the bill of lading contract provided his security is not impaired thereby. If the effect of that is to place the bill of lading holder in a better position than that of the shipowner in the event of an arrest of the vessel, that is a consequence of the relationship created by the mortgage and the provisions of what is now paragraph 10 of Schedule 1 of the Merchant Shipping Act 1995.

Is the Bank liable?

65. I turn therefore to consider whether the Bank is liable under either Panamanian or Cypriot/English Law. In addition to the documentary evidence I heard the evidence of Mr Nigel Anton, who was the executive director of the Bank's London branch and Mr Stefan Hanson, the senior Vice President of the Bank's shipping division. At the material time Mr Anton was in the Special Finance Section of the Shipping Division, a section that dealt with problematic shipping loans. He reported to Mr Hanson. In order to evaluate the position taken by the Bank it is necessary further to examine events as they unfolded.
66. On 22^nd June 2001 the vessel left Ceuta, without P & I cover. The Bank knew that cover had been withdrawn when they received the fax of 13^th June to which I have previously referred. But until 26^th June 2001 they were under the impression that the vessel was still in port at Ceuta, although they could probably have found that she was not if they had made use of Lloyd's Intelligence. It would have been possible to arrest her in Ceuta. Mr Anton's evidence was that their experience in Spain was that the judicial system was extremely slow and cumbersome. It would, also, have been possible for the Bank to have taken possession of the vessel at Ceuta and take her to Gibraltar where the vessel could very easily have been arrested in a jurisdiction that the Bank regarded as satisfactory. Mr Anton told me, and I am not surprised, that the Bank did not take possession of vessels because they would have the risk of running her as a normal owner i.e. the risks of being a mortgagee in possession. Other banks might have taken possession of the vessel on the basis that they would get a better price by private as opposed to judicial sale. Or they might have taken possession of the vessel in Ceuta and then caused the vessel to be arrested in Gibraltar. But the Bank was entitled not to take either of those courses.
67. At the meeting on the 26^th June Mr Anton learnt that the vessel had left Ceuta and was proceeding to Ecuador to load bananas and that cover could be expected to be retrospectively granted on the West of England being paid $250,000, which was to happen by 5^th/6^th July, that the time charter was being cancelled and replaced by a more profitable arrangement, and that the Bank would be paid $200,000 by 15^th July. Whilst in other circumstances the Bank could be criticised for allowing a vessel to transit the Canal in ballast and then arresting her when she came back, laden, no such criticism is, to my mind, available on the facts of this case.
68. On 12^th July Mr Anton spoke to the West of England and learnt that cover had not been put back in place. He immediately faxed Friomar for an explanation. By now the vessel had nearly completed loading cargo at Guayaquil. On 23^rd July Tramp Oil arrested the vessel. As appears from the history to which I have referred above, by that stage:

i) The Bank was owed over $2 million under the first loan agreement (and over $560,000 under the second);

ii) Of the vessels the subject of the first loan agreement "Spring Reefer" was about to be sold for scrap; "Blue Reefer" had suffered major engine damage and was not under charter but in port for repairs; and "Tropical Reefer" was in the Panama Canal with her cargo of bananas bound for Hamburg.

iii) Neither the "Tropical Reefer" nor the "Blue Reefer" had any P & I cover.

iv) Tramp Oil had arrested "Tropical Reefer". Bridge Oil appeared to have claims of up to $200,000 in respect of Friomar managed vessels; which would, however, rank below the Bank's claim;

v) The $200,000 due to be paid to the Bank on or about 15^th July had not been paid

vi) On 17^th July the Bank had been told that Antares was negotiating with the West of England about outstanding amounts. So the resolution of the P & I cover issue was far from over.

vii) On 20^th July the Bank had been notified of long outstanding liabilities to Germanischer Lloyd on the "Blue Reefer" and the "Sky Reefer" and that the class certificates were vital for the insurance claim on the "Blue Reefer".

In those circumstances I cannot see that the Bank is to be criticised for arresting the vessel when they did. There had been a long history of default. There was no realistic sign of immediate payment of any substantial portion of the debt (although there appear to have been two amounts of about $105,000 and $18,000 available to reduce the indebtedness – there was also a prospect of recovery from the insurance of the Blue Reefer at some stage) or restoration of P & I cover. The alternative would be to allow the vessel to sail on to Hamburg, without P & I cover. As the Court of Appeal said in the Acemex case:

"It was quite unclear what would happen if there were a serious accident en route to Hamburg. US $2 m was due to the bank with no serious proposals for repayment. Even if there was in theory a duty to consider whether the vessel would be allowed to proceed to Hamburg, it is impossible to argue that the decision to arrest and proceed with the sale of the vessel was a breach of [any] duty to the guarantor"

I agree. As will become apparent I do not think that it was a breach of any duty to the claimant either.

69. The Bank had the benefit of a guarantee from Acemex Management. Mr Anton's evidence was that it was a company of whose value the bank had no understanding. I regard that as something of an understatement. Mr Anton's file note of 21^st May 2001 records a meeting on 17^th May 2001 with the President and Vice President and joint owners of Acemex, a Liechtenstein company operating in Cuba. The note describes Acemex as engaged in joint ventures in tankers, dry bulk and container ships, shipping agencies in the Caribbean and Mexico, shipyards in Havana and Curacao and a container terminal in Cuba. Acemex had, it was explained to Mr Anton, agreed to guarantee the loan as a favour to the Ministry of Fisheries which owned Antares. He was told that the guarantor company was small but that it would be embarrassing for Acemex to have the guarantee called. Mr Anton noted that:

"These were impressive people who have a very good operation. I think we can use this guarantee to our advantage".

But the Bank did not, at any rate at this stage, have any accounts, although the two individuals present at the 17^th May meeting promised to send them. So far as I am aware it did not receive them. In the event, and after the matter had gone to the Court of Appeal, the Bank obtained a judgment under the guarantee for the amounts remaining due under the first loan, after giving credit for other recoveries such as those under the insurance of the "Blue Reefer", which judgment has been satisfied. But whether that was going to be so was at this stage uncertain. Mr Anton, who seemed when he gave evidence to be unaware that the Bank was entitled to have resort to any of its security in any order (as paragraphs 6.7. and 6.8. of the guarantee confirmed) and to have thought that he had some form of obligation to see what could be recovered from other sources before calling on the guarantor, told me that the policy of the Bank was to treat enforcement of the mortgage as the first step in recovery. This does not surprise me. The Bank was entitled to proceed first with their in rem rights against the vessel, which had a relatively certain value and in respect of which they had a priority claim, rather than under a guarantee of uncertain value against a guarantor who might be the subject of other claims, and who was a secondary obligor.

70. Thereafter the Bank maintained the arrest until the sale of the vessel in October. By 10^th August the bananas had deteriorated to such an extent that they could no longer be carried to Hamburg so as to arrive in sound, or sound enough, condition. On September 12^th they were discharged overboard.
71. I do not think that the Bank is to be criticised for maintaining the arrest during this period. Throughout it the vessel remained without P & I cover. Tramp Oil did not release the vessel from arrest until 27^th. On 26^th July the Bank had learnt that it had not been possible to pay the West of England or the Bank because of a lack of liquidity. On 1^st August the Bank's Panamanian lawyers were told by the owners' Panamanian lawyers that owners could not pay the amount due and that the crew was owed a lot of money, suggesting scepticism about the ability of the bank to recover from the proceeds of a judicial sale.
72. The Bank indicated in correspondence with the interested parties that it was prepared to release the vessel against the provision of suitable security and the reinstatement of P & I cover but nothing was proffered initially and, then, when an acceptable sum was suggested, agreement could not be reached on the terms. Thus:

i) The owners: Friomar proposed by its fax dated 23^rd, received on 26^th July, a new loan with payments not to start until January 2002. The Bank rejected this the next day but indicated that it would not oppose an application for transhipment. On 1^st August the Bank's Panamanian lawyers suggested to the Panamanian lawyers for the ship and cargo that a bond be put up of the value of the vessel which they put at $1.5 million. On 2^nd August Friomar proposed a prompt payment of $260,000 in order to permit the vessel to proceed to Hamburg and thereafter to clear the debts gradually. This the Bank rejected. On the same day the owners' Panamanian lawyers proposed that the vessel be released and re-arrested in Europe to avoid (a) the cost of disposal of the cargo, (b) the possibility of cargo owners filing claims that they suggested might rank ahead of the mortgage, and (c) a claim against the Bank by cargo. The Bank's Panamanian lawyers replied to the effect that cargo claims did not rank before the mortgagee in Cypriot law. They do not do so in Panamanian law. On 3^rd August Friomar informed the Bank that cover could not be reinstated by the West of England until its Board met on 18^th September.

ii) The charterers: On 26^th July Antar Nico's lawyers requested the release of the vessel in the light of their client's acknowledgement of 7^th June 2001 and suggested that the "spirit of the settlement" was that the Bank would leave Antar Nico in possession of the vessel. Antar Nico also contacted Mr Anton by telephone to suggest that there had been an agreement that the Bank would not arrest the vessel whilst she was carrying cargo. The Bank's response was that it was entitled to exercise its rights under the security documentation, and had made no agreement not to do so. On 27^th the same lawyers told the Bank that the sale life of the bananas expired 25 days after loading. The Bank denied any liability but indicated that it would not oppose any application to the Court in Panama for transhipment. On 3^rd August Antar Nico issued a guarantee to the Bank that it would not take any legal action against the vessel during discharge in Hamburg or any other port provided that the vessel was allowed to sail that day. The Bank said this did not help.

iii) The claimant: On 30^th July 2001 Dr Dolk on behalf of the claimant demanded the release of the vessel but offered no security. He continued to do so in insistent terms thereafter, complaining of the unreasonableness of the Bank's behaviour. On 6^th August he indicated that the claimant would ask the shipowners to allow the balance of the freight to be paid to the Bank. On 7^th August Stephenson Harwood for the bank indicated that the Bank was prepared to meet in London with a representative of the receivers but this suggestion was dismissed by Dr Dolk as much too late and not useful.

73. As appears from the above the Bank thought at first – wrongly - that the cargo could be transhipped. On 31^st July Expertise Bureau Binnendijk ("the Bureau"), cargo surveyors appointed by the cargo underwriters, reported to the Bank that it was essential that the vessel continue to Hamburg immediately to avoid total loss and that discharge of the cargo would trigger off premature ripening. In the light of that advice, of which they may not have been aware, the two 1^st August faxes from Stephenson Harwood that told charterers' lawyers and Dr Dolk that the Bank would not oppose any reasonable application to deal with the cargo by transhipment or storage were inapposite. On 6^th August 2001 Sunscot, a Hong Kong company assisting the Bank, proposed to the Bureau that the owners and charterers put up about $1.5 million security whereupon the ship could sail; or that they purchase the mortgage for about that sum. On 7^th August a similar offer was made by the Bank to the lawyers for Friomar and/or Antares who had come to London. This produced offers of payment of $350,000 in immediate cash together with the suggestion of refinancing by another bank. This was increased on 8^th to $700,000 to come by way of an irrevocable payment letter from ING Bank. That bank confirmed on the same day that it had irrevocable instructions from the Cuban Ministry of the Fishing Industry to pay, on August 15^th at the latest, and on 9^th August that it had received all necessary internal approvals. The Bank initially rejected that offer. On 7^th August the Bureau advised that the end of the week would be the critical time and that if the vessel sailed after that the cargo would not arrive in sound condition.
74. On 9^th and 10^th August there were without prejudice discussions which led to Stephenson Harwood drawing up a draft settlement agreement between the Bank, owners, charterers and receivers, which provided for the Bank to receive payment from ING Bank of $700,000 and $65,000 from the claimant. Dr Dolk objected to the draft because it provided for a waiver of claims against the Bank and English law and jurisdiction. Friomar refused to agree the draft because it contained a waiver of any claim against the bank; and Antar Nico also failed to agree the draft.
75. The reinstatement of P & I cover never took place. Dr Dolk had recognised the importance of P & I cover – as appears from his e-mail of 9^th August to Mr Johnson of Stephenson Harwood ("Please let me know also in respect of the standpoint of owners who must also arrange that the P & I is covering this damage"). On the next day – 10^th August - Stephenson Harwood twice inquired of him by e-mail whether he was arranging P & I cover. For some reason – probably oversight – nothing was said about P & I cover in the draft agreement. Mr Anton told me, and I accept, that it was of importance to the Bank to get that in place. Dr Dolk told Stephenson Harwood that 1600 hours was the deadline, beyond which the claimant would not agree to the $65,000 being paid to the Bank. That deadline passed. Dr Dolk complained to the Bank that it had not been agreed that his clients should arrange P & I cover and that "the whole matter from the beginning to end is one big disaster created by your clients" and demanded payment of DM 5,000,000. On 11^th August he complained that the P & I issue was now being raised. On Monday 13^th Mr Johnson replied to the effect that the Bank was entitled to its security, had been prepared to accept less than its entitlement of security to the value of the vessel, and that it was entirely normal to have any agreement documented.
76. As this summary indicates the Bank steadfastly maintained its position that it was entitled to its security, or some lesser substitute in an amount and on terms acceptable to it, whilst the claimant insisted that it was wholly unreasonable and in no one's interests for the bank to detain a vessel with a deteriorating cargo rather than allow her to sail to Hamburg and arrest her there once her cargo was discharged. The cargo could not be discharged or transhipped. There was no Club to put up security; nor anyone else prepared to do so on terms acceptable to the Bank; nor was it possible to reinstate P & I cover in time.

Conclusion

Panamanian Law

77. Bad faith is not alleged. Nor, in my judgment, do the facts begin to support an inference that the bank intended to harm the claimant or even that it was recklessly indifferent to whether it did so or not. It was entitled to look to its own interests and to take advantage of the security to which it was lawfully entitled, even if that prejudiced the claimant, to which it owed no duty of care. In those circumstances the claimant has no claim against the Bank under Panamanian law.
78. Nor do I regard this as a case where the Bank could have abstained from arresting the vessel without harm to itself. To allow her to sail without P & I cover would have exposed the Bank to the risk that she might be arrested and detained for e.g. cargo, collision, pollution or crew claims with no means of releasing her, unless security was provided by the Bank. It may be that the mortgage would, in most cases, rank in advance of any claim by the arresting party, but in some jurisdictions that would not be so in respect of some claims. In addition there was potential harm to the Bank's reputation if, having arrested the vessel it then allowed it to sail without P & I cover of any kind.

English Law

79. If the issue is to be determined by reference to English law, the question is whether the release of the vessel would impair the Bank's security. Whilst it is true that the circumstances are nothing like as dramatic as the despatch of an uninsured vessel carrying contraband of war in the Law Guarantee case, or even the improvident charters in The "Manor" and The "Myrto", the security of the Bank would nevertheless have been impaired if the vessel was allowed to sail uninsured to Hamburg for the reasons identified in the previous paragraph. I reject the submission on the part of the claimant that the Bank was in no different position when the vessel was in Panama, after loading in Ecuador, than it had been when she passed through the canal in ballast, and that, not having arrested her on the outward journey, it could no longer say that the adequacy of its security was impaired. By the time that the vessel was arrested the prospect, which previously had seemed realistic, of a substantial payment and the restoration of P & I cover had far receded. But, even if the impairment of the Bank's security is to be regarded as the same, the Bank was not, in the absence of some agreement to that effect, precluded from arresting the vessel on her journey from Ecuador because it had not done so on her journey thither.
80. Thus, in my judgment, whichever law applies, the claim fails.

Note 1   “A ship is, in effect, a floating piece of the nation whose flag it wears and there is, therefore an analogy between foreign land and foreign ships”.    [Back]

Note 2   A summary application – called an a premio application – may be made to secure the release of a vessel arrested in the circumstances mentioned in Article 185.    [Back]

Note 3   The predecessor of Article 217.    [Back]

Note 4   Dr Fabrega confirmed that this meant an intention to do harm.    [Back]

Note 5   The Spanish is in fact “dolo”. The reference must be to the ruling of 11th September 1985 in Ivera v Jimenez: see paragraph 31.    [Back]

Note 6   The Spanish is “los limites del derecho pretendido” – semble the limits of the right claimed.    [Back]

Note 7   The Spanish is “es un desacierto probatorio” – semble an absence of the necessary proof.    [Back]

Note 8   The Spanish is “sin un meditado examen”: i.e. without any thoughtful examination.    [Back]

Note 9   See, for instance Downsview Ltd v First City Corpn Ltd [1993] AC 295,315G (“Their Lordships consider that it is not possible to measure a duty of care in relation to a primary objective which is quite inconsistent with the duty of care”).    [Back]

Note 10   But this may have been because he was confining himself to the law of Panama without reference to its private international law.    [Back]