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Caveator beware: abuse of process in admiralty proceedings - International Law Office

International Law Office

Shipping & Transport - New Zealand

Caveator beware: abuse of process in admiralty proceedings

March 16 2011

Facts
Claims
Decision
Comment


In a judgment dated February 7 2011 the High Court found that a caveat against the release of a vessel was unfounded and an abuse of process.(1)

Facts

In June 2009 a company called Yachts West entered into a contract with boat builders, Boat 90 Limited, for it to construct a boat - the Luana - for Yachts West. The purchase price was over NZ$3 million. By December 2009 Yachts West had made payments of NZ$3.5 million to Boat 90 for the Luana. It was a term of the construction agreement that the Luana and all materials for its construction were the property of Yachts West at all times.

Boat 90 was a wholly owned subsidiary of Salthouse Marine. Mr Norman was a director of Yachts West and was also a non-executive director of Salthouse Marine. Boat 90 went into liquidation and Salthouse Marine went into receivership on February 4 2010. On March 11 2010 the receiver of Salthouse Marine agreed that Yachts West could take possession of the Luana, even though it was not entirely complete, as it was clear that Boat 90 would be unable to complete construction.

On March 19 2010 a warrant of arrest for the Luana was served by Boat 93 Limited, another subsidiary of Salthouse Marine. Yachts West agreed to pay NZ$350,000 into a trust account as security for the claims of Boat 93, which agreed to release the vessel from arrest. However, the solicitors for Boat 93 also acted for General Marine Services Limited, the plaintiff in these proceedings. General Marine Services Limited had provided fittings to Boat 90 in the construction of the Luana, for which it had not been paid. The solicitors for Yachts West notified Boat 93's solicitors at 10:00am on April 1 2010 that NZ$350,000 in cleared funds was in trust in accordance with the arrangement. At 12:00pm they sent a draft release of arrest to Boat 93's solicitors, who advised that they were attending to the release. At 2:30pm Boat 93's solicitor advised the registrar of the High Court that he had the release and would file it "at the earliest opportunity". At 4:15pm the solicitors filed a caveat against the release on behalf of the plaintiff; at 4:55pm they filed the release on behalf of Boat 93.

Yachts West applied for the plaintiff's claims to be struck out and for the caveat against release to be discharged.

Claims

The plaintiff's claim was for just under NZ$2,190 for fittings supplied to the Luana during construction. Its causes of action were:

  • under Sections 135 and 136 of the Companies Act 1993, on the basis that Norman and Yachts West had been fraudulent in getting the plaintiff to supply fittings, knowing that Boat 90 would be unable to pay for them, and then releasing the Luana to Yachts West. On the basis of these allegedly fraudulent acts, it claimed an "institutional constructive trust over the Luana to the extent of its $2,189.46 plus interest and costs";
  • a right of part ownership in the Luana by way of institutional constructive trust, as the plaintiff had provided no consideration for the provision of marine fittings; and
  • under the Property Law Act 2007 for the reversal of the transfer of title and possession of the Luana to Yachts West, as it claimed that the transfer was intended to prejudice it as a creditor of Boat 90. It claimed also that it had a security interest in the Luana which, if transferred back to Boat 90, it would be entitled to enforce.

Decision

Causes of action
The court held that the plaintiff's claims were unsustainable and should be struck out. The first claim, based on Norman's alleged breaches of duty under the Companies Act 1993, was properly against Norman personally, not against the Luana. In any case, the court held that the cause of action would not have entitled the plaintiff to relief, as the obligations of directors are owed to the company (ie, Boat 90), not to third-party creditors. Furthermore, the court held that the claim to a constructive trust had no basis in principle, as the claim should have been for the recovery of the fittings, rather than a claim to an undefined share of the boat.

In relation to the second cause of action, the court held that the authority on which the plaintiff had relied (ie, The Venture(2)) had no application on the facts. It was clear to the court that a resulting trust had not been created in this instance, as the relationship between the parties was one of vendor and purchaser, and that the plaintiff expected to receive payment for the fittings, rather than an interest in the Luana.

In respect to the third cause of action, the court held that although title had always remained with Yachts West, the transfer of possession could amount to a disposition under the act. The transfer was authorised by the receiver of Salthouse Marine and so it could not be held that Boat 90 had any intent, fraudulent or otherwise, in the transfer. In any case, relief under the Property Law Act was for the benefit of creditors as a body, not an individual creditor in order to allow it to perfect a security interest that it had failed to register prior to title passing. This cause of action was also dismissed.

Abuse of process
Having assessed each of the causes of action, the judge held that there should be summary judgment for the defendant and that the caveat against release of the Luana should be set aside. The court also held that the caveat and subsequent commencement of the plaintiff's action were abuses of process, as they were without merit and had been contrived to nullify the consequences of the arrangements between Yachts West and Boat 93, particularly in light of the small claim amount.

Full indemnity costs (on a solicitor and own-client basis) were awarded to Yachts West. However, this order was subject to a condition that it not be enforced for three weeks, giving the plaintiff the opportunity to seek independent advice on the conduct of its solicitors and counsel and, potentially, to seek indemnity from them or third parties.

Comment

The decision is a salient reminder of the consequences of abusing the admiralty jurisdiction and of the dangers of acting for more than one party wishing to obtain recovery from a vessel.

For further information on this topic please contact Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700), fax (+64 9 915 5701) or email (felicity.monteiro@wilsonharle.com).

Endnotes

(1) General Marine Services Limited v The Ship "Luana", HC Auckland, CIV-2010-404-2435, Woodhouse J, February 7 2011.

(2) [1908] P218(CA).


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