By Frazer Hunt, Partner and Diana Lee, Law Graduate

The ability to obtain a warrant to arrest a ship is a key feature of in rem proceedings in the admiralty jurisdiction. Most ships are owned by one-ship owning companies based overseas, so if you have a claim against a ship, it is worth obtaining security for your claim and local jurisdiction by arresting the ship. Generally, ship owners and their P&I Clubs who cover their liability for such claims will offer security for the claim by way of a letter of undertaking in order to prevent arrest or to have the vessel released from arrest so that they can continue to trade.

While there are clear advantages to a claimant in agreeing to accept reasonable security instead of keeping a ship under arrest, they should carefully consider whether the security is sufficient before agreeing to release the ship. A claimant should also conduct due diligence on the entity offering to provide the security to ensure that it will meet its obligations to provide security. Drawing on the Federal Court of Australia’s paper on the arrest of ships,[1] this article will discuss factors that a claimant should consider before agreeing to accept security to release an arrested ship or instead of arresting it.

Forms of security

A ship owner may provide various forms of security to a claimant as an alternative to the arrest of the ship. These can include “of a bail bond pursuant to Part VII of the [Admiralty Rules 1988 (Cth)], a letter of undertaking, letter of guarantee, bank guarantee or cash deposited with the Court”.[2] A claimant can agree to accept any one of these alternative forms of security in exchange for releasing an arrested ship.

Amount of security

In deciding whether to accept alternative security, you need to consider whether the amount of security proposed by the ship owner is sufficient.

Generally, a claimant is entitled to security in an amount “equal to its “reasonably arguable best case” including interest up to the likely date of judgment and its costs of the proceedings (Freshpac Machinery Pty Ltd v the ship “Joana Bonita” (1994) 125 ALR 683) or the value of the ship arrested, which ever is the lesser.”[3]

As security will be sought at a very early stage in court proceedings or when a ship is approaching an appropriate jurisdiction for arrest, it is not necessary nor possible for the claimant to quantify the exact amount of its anticipated damages. The Court has adopted the approach that if the amount sought by the claimant is reasonable based on evidence available to the claimant at the time of the security request, the claimant will be entitled to that amount.[4] Similarly, a claimant can refuse to accept security from the ship owner if they consider that it is not a reasonable amount.[5]

It is important not to accept security which is less than a reasonably arguable best case. This is because it may be difficult for a claimant to secure any further amounts beyond the security amount from the ship owner if the judgment amount exceeds the security amount. At the point that judgment is obtained, the ship owner may have diverted their assets or be insolvent, making it difficult for the claimant to secure additional funds.

Advantages for accepting reasonable security

There are a number of clear advantages to a claimant in accepting reasonable security in exchange for releasing an arrested ship.

Apart from the ongoing costs of arrest, a ship may deteriorate in value during its arrest, which may reduce the amount that the claimant can recoup from the ship.[6] While there are ways for a claimant to mitigate this, such as by obtaining judicial sale of the ship before judgment is handed down,[7] accepting alternative security may be simpler.

Additionally, security is often provided by a third party, such as a bank, insurer or a P & I Club. In these circumstances, it is particularly advantageous to accept alternative security as this avoids situations where a ship owner cannot meet its obligation to provide security due to bankruptcy.[8]

Further, if you reject a reasonable offer of security, you could potentially be exposed to a claim for damages for wrongful arrest.

Conclusion

In considering whether to accept security from a ship owner in exchange for releasing an arrested ship, the claimant should first consider whether the proposed security amount is reasonable and sufficient. Additionally, the claimant should undertake due diligence on the entity proposing to provide security to ensure that that entity can meet their obligation to pay the security. If the security amount is reasonable and the entity is willing and able to meet its obligation to pay the security amount, accepting the security in exchange for releasing an arrested ship will provide the claimant with clear advantages, as outlined above.

[1] Gregory Nell SC, ‘The Arrest of Ships – Some Legal Issues’ (Federal Court of Australia Paper, 21 May 2009) < https://www.fedcourt.gov.au/law-and-practice/national-practice-areas/admiralty/admiralty-papers/20090521>.

[2] Ibid [11].

[3] Ibid [13].

[4] Ibid [16].

[5] Ibid.

[6] Ibid [19].

[7] Ibid.

[8] Ibid [12].