July 28 2009
As the economic turmoil continues, it appears that ship arrest is once again a remedy of which creditors to the marine industry should be aware.
Ship arrest is an excellent way to obtain security for a claim and potentially prepare for a judicial sale of the vessel, should that become necessary. Arrest may be a suitable remedy for a variety of creditors, such as owners that need to repossess the vessel under the charterparty, bunker suppliers that have not been paid, a bank that has terminated the loan facility and wishes to draw on its mortgage or crew members that have outstanding wages. Ship arrest is a relatively easy, inexpensive and quick solution in Norway.
This update summarizes the requirements for arresting ships in Norway. Many different and complicated legal questions may arise when arresting or attempting to arrest a ship, but this update merely outlines the main requirements under Norwegian law.
Norway is party to several international conventions within the maritime field, including the 1952 Arrest Convention. Norway has also signed the 1999 Arrest Convention, but has not yet ratified it pending international acceptance of the convention.
Norway is a civil law country, like most European countries apart from the United Kingdom, and domestic law is established mainly through governmental legislation rather than case law. International conventions are usually translated and incorporated into domestic legislation. For instance, the 1952 Arrest Convention has been incorporated into the Norwegian Maritime Code and is mainly found in Chapter 4 of the code.
Norway has also introduced additional requirements for the arrest of ships (which are applicable to the arrest of any property, not only ships). The important requirement in this regard is that an arrest will not be granted unless the claimant can show probable cause for the arrest. The mere existence of a maritime claim is not sufficient grounds for an arrest in Norway.
It is possible to arrest for security only and the claimant is not obliged to commence substantive proceedings in Norway regarding the claim itself. From time to time ships are arrested in Norway in order to obtain security where the main proceedings are being conducted elsewhere. The Norwegian courts may require the claimant to commence proceedings, in Norway or abroad, within a fixed period in order to maintain the arrest. However, experience suggests that the courts seldom demand the commencement of substantive proceedings. If the courts do not fix a time limit, the arrest will lapse if legal steps are not taken within one year of the arrest decree being passed.
Arresting a ship is a relatively straightforward matter under Norwegian law and can be arranged quickly at a reasonable cost.
The claimant must submit an application for arrest to the district court of the port where the ship has called or is expected to arrive, or alternatively to the district court in the judicial district where the debtor (the owner of the vessel) resides if the shipowner is Norwegian. Disputes involving the arrest of ships are seldom taken beyond the district court. The appeal court will normally be unable to hear a matter for some time after the appeal is made, and by that time the ship will usually have sailed and the dispute settled.
The application may be forwarded to the court prior to the vessel entering the port if evidence can be presented showing that the vessel will most likely call a named port in the near future. The application must specify:
Documents supporting the allegations are not mandatory, but should ideally be submitted. A well-presented case with supporting evidence increases the probability of obtaining an arrest award ex parte. In principle, the supporting documents should be in a Scandinavian language, but the courts will normally accept documentation in English.
A ship arrest application will be dealt with by the court either based on the written application or at an oral hearing. For practical purposes, the arrest of ships is always dealt with ex parte, as there will seldom be time to arrange a hearing before the vessel sails. However, the shipowner may apply for a subsequent hearing to be held if it intends to dispute the fact that the conditions for obtaining arrest are satisfied. Such a hearing will normally be scheduled within a few days.
If the district court accepts the application for arrest, the court will issue an arrest order. The decision is usually issued within 24 hours of receipt of the application. The arrest order is then served upon the master of the vessel by the bailiff (usually the local police), and the ship's certificates are then detained by the bailiff. The vessel will then be under an obligation to stay in port.
The claimant need not issue any formal power of attorney when instructing legal counsel in Norway in connection with the arrest application. In some jurisdictions such power of attorney must be submitted to the court, duly notarized and legalized. This may be a time-critical factor when preparing for an arrest.
No substantial fees are payable to the court in connection with an arrest - just a minor fee in the region of Nkr2,000 to Nrk3,000. However, the claimant may be requested to post security, as outlined below.
Basis for Arrest
All maritime claims as listed in Article 1(1) of the 1952 Arrest Convention, with the addition of compensation for wreck removal, may be the basis for arrest. These different claims are listed in Section 92 of the code as follows:
"Section 92 Maritime Claims
A ship can only be arrested to secure a maritime claim.
A maritime claim means a claim based on one or more of the following circumstances:
a) damage caused by a ship in a collision or otherwise,
b) loss of life or personal injury caused by a ship or occurring in connection with the operation of a ship,
c) salvage and the removal of wrecks,
d) a charterparty or other agreement for the use or hire of a ship,
e) a charterparty or other agreement for the carriage of goods by ship,
f) loss of or damage to goods, including luggage, carried by ship,
g) general average,
k) goods or materials delivered anywhere to a ship for use in its operation and maintenance,
l) the building, repair or fitting out of a ship and costs and fees payable for docking,
m) wages and other remuneration due to the master and other employees on board in respect of their service on the ship,
n) a master's disbursements, including disbursements by shippers, charterers or agents on behalf of the ship or its owner,
o) a dispute as to the ownership of a ship,
p) a dispute between co-owners of a ship concerning its ownership, possession or use or the revenues from it,
q) any mortgage on or security in a ship, except for a maritime lien."
There has been a discussion in Norway as to whether this exhaustive list of claims should be expanded, in particular to include different types of environmental compensation claim. With the exception of claims arising from wreck removal, Norway has kept to the list of maritime claims as found in the 1952 Arrest Convention. As mentioned above, Norway has signed the 1999 Arrest Convention, and if this ever comes into force Norway will most likely ratify the convention. The list of claims will then be expanded in accordance with the 1999 convention and costs relating to salvage operations in order to protect the environment, insurance premiums and broker/agency fees, ship sale and purchase disputes may then be added to the list.
In order to arrest a ship in Norway, the claim for which the creditor is seeking security must fall within the scope of Section 92 of the code as outlined above. If the claim falls outside the scope of Section 92 and is thus not regarded as maritime claim, it is still possible to arrest objects other than the vessel (eg, the bunkers on board) to secure a claim for hire payment or a claim for insurance proceeds. From a practical viewpoint, arrest of the vessel's bunkers may be as effective as arresting the vessel itself and may often lead to security being put up for claims which are not maritime claims under the code and the 1952 Arrest Convention. However, the bunkers must be owned by the debtor and it is important to keep in mind that under a time charterparty, the bunkers are normally owned by the charterers, not the shipowner.
If the vessel in question is flying a Norwegian flag, it might also be possible to make a so-called 'register arrest'. This is practical if the claim is not a maritime claim, as this does not constitute an arrest of the vessel as such and Section 92 of the code is not applicable. A register arrest means that instead of physically seizing the vessel, the arrest order is registered by the Norwegian Ship Registry. If a creditor fears that the vessel may be sold and that it will thereby lose the only object that may provide security for the claim, this can be an effective alternative to arresting the vessel. A register arrest prevents sale of the vessel, but does not provide an offer of immediate security.
In addition to the main requirement for a maritime claim, the claimant must prove, on a balance of probability, that it has an 'arrest ground'. This requirement is not found in the 1952 Arrest Convention, but is imposed by domestic law in addition to the rules of the convention.
The requirement is set out in the Dispute Act, which contains rules on arrest in general which apply to arrest of ships and other assets. The relevant rule is found in Section 33-2 (1), which reads as follows:
"Arrest of assets of economic value can be decreed when the behaviour of the debtor gives reason to fear that the enforcement of the claim otherwise will either be made impossible or made substantially more difficult, or has to take place outside the kingdom."
In short, this means that the Norwegian courts have discretion as regards whether an arrest shall be granted. On this point, Norwegian law deviates from the 1952 Arrest Convention.
As opposed to arrest in most other jurisdictions, an arrest in Norway may be granted only if the debtor's conduct gives reason to assume that enforcement of the claim will be either impossible or significantly more burdensome if an arrest is not granted, or that any enforcement will otherwise have to be made abroad. (However, this latter alternative is applied very strictly and is not applicable purely when the debtor is a foreign entity.) If it may be proven that the debtor has tried to dissipate its assets (eg, by transferring assets to other companies), an arrest will most certainly be granted. The same will generally apply if its course of business indicates that there will probably be no money left unless an arrest is granted. Also, it may prove sufficient if the debtor has failed to settle or respond to an undisputed claim after a number of reminders. However, it is the debtor's actions which are relevant - the fact that a debtor is financially weak does not in itself constitute grounds for arrest.
This additional requirement arguably means that Norway has not adopted the 1952 Arrest Convention in the way it was intended to work. One of the advantages of the closed list of maritime claims in Article 1 of the convention is that if the claim falls within the scope of maritime claims, one can be certain that an arrest will be granted. This is how the convention works in many jurisdictions (eg, the United Kingdom). The Norwegian approach means that it is more difficult to predict in advance whether the courts will grant an arrest, as the Norwegian courts have been provided with a discretion they are not supposed to have under the convention. In practice, however, the courts seldom apply this additional requirement strictly and an arrest is often made without this requirement being a major obstacle. The claimant can usually produce some kind of evidence showing disloyal behaviour on the part of the shipowner (eg, several reminders which have not been answered).
However, there is one important exemption to this additional requirement: a claimant whose claim is secured by a mortgage or lien on the vessel can arrest the vessel without showing any other cause for arrest if the secured claim has fallen due. This rule is set out in Section 33-2(3) of the Dispute Act. In practice, two different categories of claim may be secured in this way. First, claimants with loans secured by a registered mortgage on the vessel can arrest the vessel with no additional reason for arrest, other than the fact that the claim is due. The claimant will usually be a bank, acting as lender and mortgagee.
Second, a claim secured by a maritime lien will also be entitled to arrest without this additional requirement. Maritime liens are recognized under Norwegian law and the list of maritime liens in Section 51 of the code corresponds to the list in Article 4(1) of the 1967 Maritime Lien Convention. However, Norway is not a signatory to the 1967 convention. The following claims are secured by a maritime lien in Norway:
Ownership of Vessel
Unlike in some jurisdictions, Norwegian law is strict in requiring that the debtor be the owner of the vessel that is being arrested. Claims against time or bareboat charterers do not give a right of arrest, as the vessel is not owned by the charterers. The Norwegian legislature has deviated from the 1952 Arrest Convention on this point, as claims against bareboat charterers may be subject to arrest pursuant to Article 3(4) of the convention. However, under a time charter, arresting the bunkers on board may still be a possibility, as the bunkers usually are owned by the charterers.
The legal principle that the debtor must be the owner of the ship is set out in Section 93(4) of the code: "Arrest can only be effected if the ship can serve as an object for the enforcement of a claim according to the general provisions of the Enforcement of Claims Act."
Turning to Sections 11-4 and 7-1 of the Enforcement of Claims Act, it is clearly stated that the debtor must be the legal owner of the asset that is being arrested.
Sister Ship Arrest
In principle, the only ship that may be arrested is that in relation to which the claim arises. However, in accordance with the 1952 convention, Norwegian law recognizes the right of sister ship arrest. If vessels A and B are owned by the same legal entity and this legal entity is the debtor for the claim, either vessel may be arrested, even if the claim arises only in relation to vessel A. In principle, both vessels must be owned by the same legal entity in order to allow for arrest of the sister ship. If the ownership of vessels is organized with a holding company and single purpose companies as the registered owner of each vessel, arrest of a sister ship will not be possible under Norwegian law.
In theory, it may be possible to pierce the corporate veil under Norwegian law, but there are few court cases on the subject and the principle has not been litigated with respect to the arrest of a sister ship. It may be anticipated that the Norwegian courts will accept the structure of the companies and will be unlikely to pierce the corporate veil in connection with the arrest of a sister ship.
The Norwegian rule on arrest of sister ships is set out in Section 93(1) of the code:
"Arrests can only be effected against a) the ship to which the maritime claim relates, or b) if the owner of the ship to which the maritime claim relates is personally liable for the claim: other ships owned by that person at the time when the claim arose."
The court has sole discretion to make the arrest order conditional on the claimant providing security for wrongful arrest in a fixed amount. If such request is issued, then in accordance with the Enforcement of Claims Act the claimant must raise security in the form of a cash deposit with the court or a bank guarantee from a Norwegian bank.
It is difficult to know in advance whether the court will request counter-security, as it varies from judge to judge and from case to case. However, the court is more likely to request counter-security if in doubt as to whether the claimant has a probable maritime claim and sufficient cause for arrest. Experience suggests that the courts seldom request counter-security. However, a few years ago a large number of arrest attempts were made on Russian fishing vessels discharging their cargo in the northern parts of Norway. One particular court, which received most of the arrest applications, requested counter-security on a regular basis. The security is intended to cover liability for wrongful arrest, which would usually be the loss of hire due to the arrest.
It is questionable whether the claimant may be held responsible for any loss of hire suffered if the arrest is deemed wrongful. The issue does not yet appear to have been finally resolved, but arguably the loss of hire should not be recoverable for any longer than it would take for the debtor to arrange for security and the release of the vessel - normally a few days. As a comparison, under Danish law such security is, by statute, limited to five days' loss of hire.
The claimant may be requested to provide security for port dues if the vessel is arrested while berthed at port facilities owned or operated by the municipal port authorities (the same applies if the vessel is subsequently moved to such port facilities while under arrest). According to Section 97 of the code, the claimant has one week from issue of the arrest order to arrange for security for the port dues. If such security is not posted, the arrest may be lifted upon request by the port authorities. The security must cover the port dues for at least 14 days and, in accordance with the Enforcement of Claims Act, should take the form of either a cash deposit or bank guarantee from a Norwegian bank. The port dues are not substantial but accrue on a daily basis, so a lengthy arrest may lead to a substantial liability towards the port authorities.
Release of vessel
If an arrest is granted, the debtor may arrange for the release of the vessel by putting up security. If the parties cannot reach an amicable settlement, a commercial shipowner will raise security in order to have the vessel back in a working condition as quickly as possible. Most protection and indemnity (P&I) clubs will issue a letter of undertaking which is very often commercially acceptable as a guarantee in order to lift an arrest. However, in accordance with the Enforcement of Claims Act, this is not a security recognized by law. In most cases the arrestor will accept a letter of undertaking from a reputable P&I Club, and the vessel will then be released according to such mutual agreement. However, if the claimant sticks firmly to Norwegian procedural requirements, the debtor may be forced to make a cash deposit or arrange for a bank guarantee from a Norwegian bank to be established.
Liability for Wrongful Arrest
In principle, Section 32-11 of the Dispute Act imposes strict liability on the arrestor for any loss of the defendant if the claim did not exist at the time the arrest was granted. This means that if the courts subsequently find that the claimant did not have a maritime claim (a claim which falls within the scope of Section 92 of the code), the claimant can be held liable for the economic loss that the debtor may have suffered due to the arrest, regardless of whether the claimant is to blame for giving misleading information.
Such strict liability is applicable only where the claimant has no maritime claim against the debtor at all. If the court subsequently overturns an arrest issued ex parte due to the lack of sufficient grounds for arrest, the claimant has no strict liability. However, in principle, it may be held liable if it has given wrongful or misleading information about the arrest ground and, as a result of such misrepresentation, is deemed to have acted negligently.
Even though the Norwegian rules are stringent in imposing liability for wrongful arrest on the claimant, these rules rarely come into play. There are few instances of a claimant being held liable.
Judicial Sale Proceedings
An arrest in Norway does not give an automatic right to initiate judicial sale proceedings of the vessel. Arrest merely provides security, and judicial sale proceedings are conditional on the claimant having an enforceable claim in accordance with the rules of the Enforcement of Claims Act. In practice, this means that the claimant can proceed with the sale of the vessel only once a final and binding court decision on the claim itself (the main proceedings) has been issued. A creditor with a registered mortgage can proceed on basis of the mortgage itself.
Such a decision can be either a final judgment from Norwegian courts or a foreign judgment. As a member of the European Economic Area, Norway has ratified the Lugano Convention (identical to the Brussels Convention within the European Union) on the acknowledgment and enforcement of foreign judgments. This means that a final court decision from an EU member state may be enforceable in Norway. Norway is also a party to the New York Convention on the enforcement of arbitration awards and a foreign arbitration award is enforceable in Norway in accordance with this convention.
Under Norwegian law, the proceeds of sale will be divided between the creditors in accordance with certain rules of priority. After all costs in connection with the judicial sale proceedings have been deducted, claims secured by a maritime lien or a mortgage on the vessel will be paid first. Any balance thereafter will be divided between the other creditors, with the time of registering the claim and obtaining an execution lien on the vessel being the decisive factors. This means that it may be important to obtain a final judgment in the main proceedings quickly and thereafter register the claim in the vessel as an execution lien. Importantly, a claimant holds priority from the time of the arrest, even if the final judgment and execution lien are established later (although the arrest will lapse after one year if sale proceedings have not been commenced within that time). Arrest of the vessel may thus be an important measure if a creditor's claim is competing with those of other creditors and the shipowner is financially weak. In this scenario It is advisable to act quickly in order to secure a claim with the best possible priority.
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