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Sellers must pay Buyers’ legal costs where vessel wrongly arrested after sale

In a recent arbitration (London arbitration 2/17), it was held that words in clause 9 of the Norwegian Sale Form (NSF) i.e. that sellers must indemnify buyers against  “all consequences of claims made against the vessel which have been incurred prior to the time of delivery” extends to situations where there is a wrongful arrest of the vessel and that wrongful arrest relates to a matter that occurred prior to delivery.   Similar words appear in clause 13 of the Nipponsale contract.

This arbitration re-affirms the Court of Appeal’s decision in Rank Enterprises v Gerard [2000] 1 Lloyds Rep 403.  In that case, Lord Justice Mance said that the indemnity “addresses claims made, the exposure of which stems from pre-delivery events, whether the liability asserted by such claims may prove to exist or not.  The Buyers are entitled to recover… any loss, expenses or damages sustained resulting out of or in connection with such claims.”

In this arbitration, the arrest came three months after the sale and related to a bunker supply made two years prior to the sale.  The owners were in a dilemma as they deliberated whether to put up security and/or contest the proceedings.   Eventually they got the arrest discharged on the basis that it was wrongful but they incurred some US$60,000 of losses as a result (legal fees, shifting costs, port costs and such like).  They were unable to recover these costs from the arresting party so they claimed them back from the sellers under the indemnity and the Tribunal upheld that claim.

The sellers put forward various spurious arguments to try to avoid the claim but in the end they focused on the conduct of the buyers to try to reduce the amount that they were being asked to pay.  It is important for the buyer to act in a reasonable and businesslike manner to show that they are taking all proper steps to mitigate the loss caused by the arrest.   In that regard, it may be said that the proper thing to do would be to put up security to reduce the losses caused by the arrest, although in this case that was superseded by the lifting of the arrest.   Our advice to buyers who find themselves in similar situations is to notify their insurers (if they have cover) and/or retain lawyers immediately to deal with the problem and, thereafter, consider a claim against the seller.

The other point to make is that, in many cases, the seller will have no assets having transferred their only asset to the buyer.   It is always wise to get a parent company or other guarantee from the seller to guard against potential arrests post-delivery.  Otherwise, the indemnity in clause 9 of the NSF and in clause 13 of Nipponsale may be worthless.  If buying via a judicial sale you may be able to obtain insurance cover to deal with this risk.   In today’s climate where insolvencies are common and the usual routes for a recovery are often difficult, claimants see the ship itself as their best chance of getting a recovery.   Whilst most jurisdictions have rules dealing with wrongful arrests, many jurisdictions are more open and may allow spurious claims.

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