Australia: Demands for excessive security and the Admiralty Act

IN BRIEF: FOLLOWING A VESSEL ARREST, THIS CASE EXAMINED WHETHER THE DEMAND FOR SECURITY SOUGHT FOR THE VESSEL'S RELEASE WAS EXCESSIVE, UNREASONABLE AND WITHOUT GOOD CAUSE.

In a recent decision of Justice McKerracher in the Federal Court of Australia in Delaware North Marine Experience Pty Ltd v The Ship "Eye Spy" [2017] FCA 708, delivered on 23 June 2017, consideration was given to the principles surrounding demands for security for claims following a vessel arrest and the obligations on the arresting party.

While the lengthy judgment dealt in detail with factual and legal issues in dispute regarding damage to a chartered passenger ferry, including issues regarding vessel seaworthiness, latent defect and redelivery obligations under the charter, the underlying dispute was largely irrelevant to the issue of whether security sought for the vessel's release from arrest was excessive, unreasonable and without good cause.

LEGISLATIVE FRAMEWORK UNDER THE ADMIRALTY ACT 1988

Section 34 of the Admiralty Act 1988 (Cth) (Act) provides:

1. Where, in relation to a proceeding commenced under this Act:
2. 1. a party unreasonably and without good cause:
   2. 1. demands excessive security in relation to the proceedings; or
      2. (obtains the arrest of a ship or other property under this Act; or
   3. a party or other person unreasonably and without good cause fails to give a consent required under this Act from arrest of a ship or other property;

the party or person is liable in damages to a party to the proceeding, or to a person who has an interest in the ship or property, being a party or person who has suffered loss or damage as a direct result.

CIRCUMSTANCES WHICH LED TO THE ARREST OF THE VESSEL "EYE SPY" AND CONSEQUENT DECISIONS MADE IN THE COURT

The vessel "Eye Spy" was chartered for a minimum of 14 days from 6 February to 19 February 2015 but suffered a failure of her starboard stern tube assembly because of inadequate cooling water supply. As a result of the condition of her stern seal and a prohibition order issued by Maritime Safety Queensland on 10 February 2015, the vessel did not perform further voyages under her charter before return to the owners on 18 February 2015.

On 31 October 2015, the plaintiff issued a letter of demand for payment of a claimed loss of $316,000 plus interest. On 26 November 2015 the plaintiff caused the vessel to be arrested in Tasmania pursuant to section 17 of the Act on a general maritime claim within the meaning of section 4 (3) (f) of the Act, that is, "a claim arising out of an agreement that relates to the carriage of goods or persons by a ship or to the use or hire of a ship, whether by charter party or otherwise".

Following the defendant's application, the Court ordered the vessel be released from arrest upon the defendant posting security of $366,000, which was done by way of cash paid into Court on the following day. The vessel was released from arrest on 27 November 2105.

On 1 April 2016, following further application by the defendant, the Court ordered that $100,000 of the security paid into Court be returned to the defendant, reducing the amount of security to $266,000. It was also ordered that the balance of the security be paid into an interest bearing account.

While the defendant originally contended that the arrest was "unreasonable and without good cause", that unjustified arrest claim was ultimately abandoned at the trial. However the claim that the demand for security was excessive continued to be pursued, along with the other issues in dispute regarding the underlying claim.

PROVISION OF SECURITY FOR THE PLAINTIFF'S CLAIM

The plaintiff maintained that its letter of demand and the issue of the Writ were not a demand for security, that the Court had fixed the amount of security and there was no evidence that the amount fixed by the Court was unreasonable or without good cause.

Reliance was also placed upon the Australian Law Reform Commission Report 33 into Civil Admiralty Jurisdiction which had led to the Admiralty Act 1988, in which it was stated that:

It was submitted that the defendant needed to show that the demand was both unreasonable and without good cause at the time of the demand.

COURT SHOULD BE ABLE TO RELY UPON THE TRUTHFULNESS OF AFFIDAVITS

Reliance was placed by the Defendant on observations of Tamberlin J in Lloyd Werft Bremerhaven GmbH v The Owners of the ship "Zoya Kosmodemyanskaya" [1997] FCA 379 where he stated that "should it subsequently become apparent that evidence placed before the court on an arrest was incorrect then it is incumbent on the solicitors to correct it forthwith". He in turn had relied upon the observations of Hobhouse J in The Nordglimt [1988] QB 183 at 188 who said:

The defendant maintained that at the time of arrest the plaintiff and its solicitors must have known that the best case was only ever going to be approximately $120,000 yet the vessel remained under arrest until $366,000 was posted as security.

SECURITY DEMANDED WAS EXCESSIVE AND WITHOUT GOOD CAUSE

Justice McKerracher rejected the plaintiff's argument that the Court had fixed the amount of security rather than the plaintiff demanding an excessive amount. He noted that in ordering security the Court was guided by the evidence of the plaintiff. As no invoices to support the amounts sought in the letter of demand were provided until some time after the arrest, the judge noted that the non disclosure of the invoices and proof of payments in support of the alleged debt and/or damages at the time of the arrest affidavit meant that the Court and the defendant had no information to assess the appropriate level of security other than the assertions in the supporting affidavit.

While it was accepted that the Act and the Admiralty Rules 1988 contain no express requirements that an applicant for an arrest of a ship must disclose any matters other than those expressly stated in the Admiralty Rules and has no unqualified obligation to make full and frank disclosure of other material facts (see per Rares J at Atlasnavios Navegacao LDA v The Ship "Xin Tai Hai" (No. 2) 2012, 215 FCR 265), the affidavit in support claimed $316,000 unsupported by documentary evidence.

He found that the plaintiff had many months to collate the invoices and proof of payment prior to the demand and vessel arrest and ought to have realised the security sought was excessive.

Accordingly, he found that the assertions made in the affidavit in support of arrest and the security that was obtained on the basis of it was unreasonable and without good cause.

The judge awarded damages of $1,200 to take into account the interest paid on the borrowings for the security payment between the original order for security and the date of its reduction, less interest actually received on the invested funds.

ARRESTING PARTIES SHOULD NOT REQUIRE EXCESSIVE SECURITY IF THE RECOVERABLE CLAIM IS KNOWN TO BE SIGNIFICANTLY LESS THAN WHAT IS DEMANDED

The lesson to be learnt from the decision is that the arresting parties should not require excessive security if, at the time of obtaining such security, it is aware that the recoverable claim will be for a significantly lesser amount than that demanded.

While in many cases that information regarding likely recoverable quantum will not be available at the time of arrest, if it is available, as was the situation in this instance, then appropriate disclosure to the Court should be made.

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.