Unfortunately for maritime litigants around the world, the US Courts have recently determined that it is no longer going to be as effective.
The Development of Rule B Attachments
The transient nature of international shipping and marine commerce has encouraged the evolution of mechanisms unique to Admiralty and Maritime law for ensuring the availability of sufficient security for prospective claims against the carrier and, to a less marked extent, against charterers and/ or cargo interests.
These mechanisms, sought on an ex parte basis, are legitimately employed to secure and preserve assets against which any Judgment or Award can then be enforced; they are also less scrupulously used to apply pressure on or exert leverage against an intransigent party in order to stimulate and expedite settlement.
The most widely recognised mechanism is that of arrest, whereby a vessel can be physically detained within territorial waters by an application to the relevant country's Courts on the simple basis of a prima facie "maritime claim", as determined and prescribed by that jurisdiction's laws.
A less well known, but equally effective, mechanism was that of a Rule B attachment under the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure in the U.S. The requirements to obtain such an attachment were:
- The cause of action must arise within the Court's admiralty and maritime jurisdiction – i.e. it must be a "maritime claim";
- The defendant "cannot be found" within the district; and
- The defendant has, or shortly will have, assets within the district.
The Rule B attachment, granted on similar grounds to an arrest rather than the more onerous conditions applying to the civil/ commercial law variety, was not restricted to maritime property (vessel, cargo, freight or bunkers) but could be employed against any goods or chattels of the defendant located within the jurisdiction of the federal district court seized of the maritime claim. Therefore, it could be used to secure both tangible and intangible assets, including, notably, bank accounts and transfers.
Attachment of Electronic Funds
In a 2002 case, Winter Storm Shipping, Ltd. v. TPI, the Court of Appeal for the Second Circuit (New York) held that a Rule B attachment could be used to intercept and attach an electronic funds transfer (EFT) being processed by an intermediary bank within the jurisdiction, including all of New York's clearing banks. As a consequence, the mere passage of U.S. currency through an intermediary bank for the purposes of clearance would be sufficient to vest jurisdiction in the Southern District of New York's Courts.
Given that the majority of international shipping transactions were conducted in U.S. currency, there was an extreme likelihood that bank transfers from a defendant generated in the course of their normal commercial operations would pass through one of the New York clearing banks and become subject to the Rule B attachment.
As a result, Rule B attachment proceedings directed towards every major bank in New York became exceptionally popular. From October 1st 2008 to January 31st 2009, maritime plaintiffs filed 962 lawsuits seeking to attach a total of US$1.35 billion, such lawsuits constituting 33% of all lawsuits filed in the Southern District of New York.
Such a potentially draconian measure could not be without controversy or its critics.
Rule B Attacks
The volume and extent of the resulting maritime writs of attachment was deemed by its critics to be having a negative effect on U.S. currency transactions, including:
- Introducing significant uncertainty into the international funds transfer process.
- Undermining the efficiency of New York's international funds transfer business.
- Discouraging commercial parties from entering dollar-denominated transactions thereby damaging New York's standing as an international financial centre.
There were jurisprudential arguments too, including:
- Whether the actual electronic transfer could in itself be considered property owned by the defendant.
- Whether the process of clearing the funds placed them within the district and jurisdiction from which the order of attachment had been issued.
Finally, the relative ease of securing a Rule B attachment had exposed this legitimate mechanism to abuse by cynical and vexatious claimants and their legal representatives.
Given the increasingly aggravated contentiousness surrounding the usage and effect of a Rule B attachment, it is not surprising that the U.S. Court has since taken an opportunity presented to them to revisit the Rule B rulings.
Rule B Reined In
On 16th October 2009, the Court of Appeals for the Second Circuit held in The Shipping Corporation of India Ltd v Jaldhi Overseas Pte Ltd, that EFTs passing through the New York banking system were not property for the purposes of a Rule B attachment order, thereby overruling the finding of Winter Storm.
The dispute itself arose from a charterparty subject to London arbitration. A Rule B attachment had been successfully filed in New York to obtain provisional security for the claim which was then to be referred to arbitration.
The Court of Appeals considered the question of the ownership of the asset critical to the validity of a Rule B attachment: whether the asset, or res, at issue was the property of the defendant at the moment it was attached. If the asset or res was not the property of the defendant, then the court would lack jurisdiction.
The Court found no compelling reason to conclude as a matter of federal law or of New York state law that an EFT was the defendant's personal property while briefly in the possession of an intermediary bank. As such, Winter Storm was erroneously decided and Rule B would no longer allow for the attachment of EFTs.
This decision clarifies and modifies the influence of Rule B, ending the practice of attachment of electronic bank transfers but still allowing the more traditional securing of vessels, bunkers and the like for maritime claims.
There will doubtless be a noticeable shift in the resolution and management of maritime disputes and more emphasis will be placed on vessel arrests. While defendants can now relax if they have no physical assets within the jurisdiction of the U.S., claimants have lost a highly persuasive and often compelling weapon for obtaining security and/ or encouraging settlement.
The Rule B attachment had been an extremely effective mechanism affording global parties an opportunity to both secure and settle their maritime claims, however, ultimately, the volume of claims, many dubious, misplaced or indeed wrongful, had subverted and distorted its original purpose.
The decision left the issue of existing security arrangements in respect of EFTs in New York's banking system already obtained under a Rule B attachment (or, further, where alternative security had been provided in order to have a Rule B attachment vacated) unaddressed and, therefore, unresolved.
There remains much uncertainty over what steps are now required to have any such attached funds released: whether the banks are now authorised to immediately release said funds or whether a Court order is required has not yet been sufficiently settled.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.