At BDM we devote most of our time and attention to winning cases. However, it’s important not to forget that winning is only half the battle. A judgment or an arbitration award is a worthless piece of paper if it cannot be turned into hard cash. With that in mind, we have set out a list of things for clients with good legal claims to consider before they go into battle.
- Have you done the necessary due diligence on the counterparty? An established corporate will find it difficult to avoid enforcement but a trading entity established in Panama may be nothing more than a brass plate. As we enter more uncertain times it seems likely that even established shipping and trading companies may face financial difficulties. Bear in mind that it may take months or even years to get a judgment or award on any claim. How likely is it that the counterparty might go into administration or be the subject of some form of insolvency proceedings over that time frame? It’s also worth asking what is behind the claim. Is the counterparty in financial difficulty? We often see that in cases where charterers stop paying hire. If the counterparty is in financial trouble, then that may switch the emphasis to causing as much fuss as possible in an attempt to secure an early resolution before other creditors weigh in with their claims.
- Is there any scope to get security for the claim and, if so, how? The starting point is to consider the contractual position. Do you have something that you can hold on to as leverage? By way of example, a shipowner may have a right to hold on to the receivers’ cargo in connection with a claim for unpaid freight. Do you have the right to intercept something that is due to be paid to the counterparty? For example, if sums are owed to a ship owner by a charterer then they may be permitted to intercept freights due to be paid to that charterer. There may also be possessory rights under a contract or at common law. For example, it is generally accepted that a repair yard can hold on to a ship until it has been paid for the repairs.
- If these routes are not viable, then if the claim is of a “maritime” nature and the counterparty owns ships then it may be possible for a claimant to arrest a ship to get security for its claim. The rules dealing with arrest are complex and they vary depending on the jurisdiction. However, there are international conventions in place which have been implemented in many jurisdictions. One of the first things we look at when a client comes to us with a claim is whether it is possible to arrest one of the counterparty’s vessels to obtain security. The very fact of having security in place can also lead to a quicker resolution of the claim.
- If arrest is not a possibility, then consider other options such as an attachment of the counterparty’s property on a ship. For example, it may be possible to attach a time charterers’ interest in bunkers on a ship owned by someone else. There may be an option to attach money in a bank account or other property of the counterparty in the US (although attachments of wire transfers of hire payments are no longer possible there).
- Absent arrest or attachment, the options are more limited. Whilst there is an inherent jurisdiction for arbitrators to make orders preserving the subject matter of any dispute and to secure claims, those powers are generally pretty useless in circumstances where the counterparty is a foreign company with no assets in the jurisdiction. The better option may be to apply to the English High Court for a worldwide freezing order over the assets of the counterparty because that carries with it a penal notice for non-compliance. Freezing orders can be extended to third parties who hold assets on behalf of the counterparty and, in some cases, to directors of the counterparty. Whilst they may be outside the jurisdiction of the Court, a penal notice can often lead to committal proceedings / a warrant of arrest being issued against an individual within the jurisdiction. It may be possible (and indeed we have done it before) for an individual to be arrested at Heathrow whilst on a business trip to the UK in connection with a claim against a corporate entity with which they are associated. The problem with freezing orders is that they are expensive and difficult to obtain. They involve proving that there is a risk that the counterparty is about to dissipate assets. They require a cross-undertaking in damages which in many cases needs to be backed up by suitable security. It is also important not to confuse a freezing order with security. A freezing order is no use if the counterparty goes bust as there is no prior charge on the assets. However, they can lead to security being provided in exchange for the release of the freezing order.
- Is there an insurer behind the counterparty and, if so, can anything be done to persuade / force them to put up security? Most P&I insurers’ terms of cover seek to avert such claims but there is a growing trend for direct rights of action against insurers in many jurisdictions, for example in Scandinavia, the US, Spain and Turkey. In one such case1, the P&I Club in question successfully obtained an injunction to prevent the charterers of the YUSUF CEPNIOGLU from suing them directly in Turkey (and obtaining security there via an attachment of other Turkish members’ premiums), but the point is that, if one makes enough noise, then the easier option for the P&I Club may be to post security, particularly if the claim in question is insured anyway.
- If all of the above options come to nothing, then consider if it is worth proceeding with the claim and how easy it will be to enforce. If the claim is in arbitration, then is the counterparty based in a state that is a party to the New York Convention? Whilst most states have signed up to this Convention there are some notable exceptions. Even if the state has signed up, it is prudent to get advice on enforcement before spending money on the arbitration itself. Otherwise, you may spend a lot of money for a piece of paper that is ultimately worthless. The same goes for English Court judgments. Are they enforceable in the place where the counterparty has its assets? If the counterparty has assets in the EU, then it is worth checking if the post-Brexit legislation covers enforcement – for example, under the Hague and Lugano Conventions and under bilateral treaties with countries mentioned in the Foreign Judgments (Reciprocal Enforcement) Act.
- If you are minded to proceed in the absence of security, then it is prudent to maintain a vigilant watch on the counterparty to ascertain if the business is being wound down. In some cases, corporates lend money to other companies within the group which can be a form of dissipation if those loans are forgiven. It may be sensible to engage a financial investigator as they can often find out more about the counterparty than would be available via the corporate filings. If the financial investigator can locate a bank account where, for example, freight is being received, then steps can be taken to enforce against that account via a form of garnishee proceedings (or the equivalent in the state where the bank account is located).
- Finally, even on a good claim, do not rule out the value of an offer of cash now versus the risk of less cash later. It’s a well-known negotiating tactic for a suitably ring-fenced counterparty to offer to compromise a good claim. It may be galling for the claimant to accept less than the sum owed but in the long run it may be the better option given the costs and risks involved with obtaining security and/or enforcing the final award or judgment.
- Shipowners’ Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Nakliyat Ve Ticaret AS  EWCA Civ 386.
Constantin von Hirsch