Introduction
Bunker fuel is the primary fuel oil used to power ships. Its name derives from the containers on board ships and in ports in which it is stored (referred to as 'bunkers'). Bunker fuel constitutes a fundamental part of and one of the largest expenses in ship operations; in difficult market conditions, this causes bunker suppliers and traders to face delays in payment, non-payment or requests to provide credit terms.
A common feature of bunker supply contracts is the possibility for all or part of the purchase price to be paid after delivery of the bunker fuel. In past few years – when market conditions were difficult and bunker prices high – and even at present (especially after the collapse of OW Bunker), these credit terms have significantly affected unpaid bunker traders. Such circumstances put shipowners at a high risk of ship arrest pursuant to an action in rem initiated by an unpaid bunker trader or supplier which supplied the vessel at the request of the charterer.
The supply of bunkers at the request of the vessel's charterer or manager is the most common practice in the industry; it prevents the owner from exercising any control over the purchase of bunkers (and consequently the fulfilment of the charterer's or manager's obligations under the bunker supply contracts), especially where the charterparty is a time or bareboat charterparty.
Ship arrest is the most powerful tool used by creditors to obtain security for their claims and potentially prepare for a judicial sale of the vessel where necessary. In addition, ship arrest exerts considerable pressure on the debtor to settle the claim due to the disruption in business, which usually leads parties to the amicable settlement of the claim. Therefore, arrest may be a suitable remedy for a variety of creditors, including unpaid bunker traders.
Lebanon is a party to neither the International Convention on the Arrest of Seagoing Ships 1952 nor the International Convention on the Arrest of Ships 1999. In addition – and contrary to shipping laws in numerous other jurisdictions (eg, the United Arab Emirates and Qatar, where the supply of products or equipment necessary for the use or maintenance of the vessel is considered a maritime claim giving the creditor the right to arrest the supplied ship) – the Lebanese Merchant Shipping Code does not regulate the precautionary arrest of ships. However, the Merchant Shipping Code (Articles 73 and following) regulates the arrest of ships in the context of an enforcement procedure commenced against the owner (the creditor applying for enforcement against the ship should hold a deed ascertaining its claim, such as a court judgment or an arbitral award).
Therefore, the precautionary arrest of ships in Lebanese territorial waters is regulated by the Civil Procedure Code, which grants creditors the right to apply to the judge of the Execution Bureau for conservatory seizure of the debtor's assets in order to obtain security for its claim (Article 866).
The application of the Civil Procedure Code to the arrest of ships in Lebanon has generated numerous legal principles which fill the gaps in the Merchant Shipping Code regarding this subject and are of interest to maritime creditors in general and bunker traders in particular. These legal principles are as follows:
- In general, a ship can be arrested for any claim which a claimant has against the shipowner, provided that the claim is prima facie proven to be serious and grounded. In other words, in order to apply for the arrest of a ship, its owner must be responsible for the claimed debt. The only exception to this principle are maritime liens over ships, which give the creditor the right to arrest the ship even if the owner is not the debtor (Article 48 of the Merchant Shipping Code).
- The arrest of a sister ship is generally possible, provided that both ships are owned by the same party which is a debtor of the claimant in the arrest application. The arrest of associated ships may succeed (although the chance of success is generally minimal) only if close links between the two entities can be proven. However, if the arrest succeeds, it is not certain that the judge will maintain it if the actual registered owner challenges the arrest. Thus, applying for the arrest of an associated vessel involves a great degree of uncertainty.
- The arrest of a ship due to the debt of a charterer is impossible if the debt does not grant the creditor a maritime lien as defined in the Merchant Shipping Code.
- A ship may be arrested by an unpaid creditor irrespective of its flag.
The arrest procedure in Lebanon is relatively quick, as the judge of the Execution Bureau renders the arrest order on an ex parte basis on the filing date of the arrest application (or as soon as possible thereafter), and in principle without the applicant's provision of countersecurity.
The claim must be proven prima facie and the judge may request additional documents from the applicant in case of any doubt. In addition, the judge has discretion to make the issuance of the arrest order conditional on the applicant's provision of countersecurity. However, this discretion is rarely exercised in practice.
Supporting documents must be attached to the arrest application, translated into Arabic (the official language of the Lebanese courts) if in a foreign language and submitted in their original form. In addition, power of attorney – notarised and legalised at the Lebanese embassy or consulate of the place of issuance – must be attached to the application. However, the judge may waive any of these requirements at his or her discretion.
The arrest order may be challenged within five days of service. The procedure for challenging an arrest order is usually complex and lengthy, and success is conditional on a number of legal requirements. Therefore, the quickest way to arrange for the lifting of a ship arrest is to put up a bank guarantee issued by a local bank for the value of the arrest (the amount of which usually covers the principal amount of the claim plus 10% for costs) or the deposit of a cash deposit with the judge who issued the arrest order. An undertaking letter from the protection and indemnity club of the arrested ship is not considered satisfactory security for the judge to lift the ship arrest. The release procedure for the ship involves the submission of an application for the lifting of the arrest along with suitable security.
In addition to the arrest application, within five days of the date of the arrest order the applicant must file its substantive claim on the merits, failing which the arrest order will be void ab initio. In this context, the Lebanese courts will not accept jurisdiction over the substantive claim once a vessel has been arrested. Such an action must be brought within five days of the date of the arrest order before a court or arbitration panel that is competent to deal with the merits of the claim.
There are no legal precedents on liability for wrongful arrest of a ship. However, under the general principles of civil law, a claim for wrongful arrest will succeed if the party claiming indemnification can prove the bad faith of the arresting party and its own losses arising from the arrest. The damages that can be awarded for wrongful arrest may cover all direct losses sustained by the shipowner as a result of the arrest (eg, port dues and associated costs, crew wages) and possible indirect losses (including loss of profit).
Will a bunker claim give rise to a maritime lien?
A maritime lien is a secured right in a property (whether vessel, cargo, freight or bunker) which arises with a claim without registration or other formalities and which travels with the vessel, surviving its conventional sale (not its judicial sale). In general, whether an unpaid bunker trader has the right to a maritime lien differs between jurisdictions. For example, under English law, maritime liens are strictly limited to a number of claims (eg, salvage claims, damages caused by the ship and crew wages) and bunker traders have no right to maritime liens. In contrast, the US Maritime Lien Act provides that an unpaid bunker trader has a maritime lien against a vessel where the bunker was ordered by "a person authorised by the owner". This act states that an officer or agent appointed by the charterer is "presumed to have authority to procure necessaries (bunkers) for the vessel". In this context, it remains possible to rebut the presumption that the charterers had authority to order the bunkers for the vessel.
Article 2 of the International Convention for the Unification of Certain Rules of Law Relating to Maritime Liens and Mortgages 1926 enumerates the claims that give rise to a lien on:
- freight for the voyage during which the lien claim is made;
- accessories of the vessel; and
- freight accrued since commencement of the voyage.
Lebanon is a party to the convention and Article 48 of the Merchant Shipping Code contains similar wording to that in Article 2 of the convention. This article exhaustively lists the available maritime liens on ships. The claim for "necessaries" listed in Article 48 is defined as:
"Claims resulting from contracts entered into or acts done by the master outside the port of registry by virtue of his legal powers for the actual maintenance of the vessel or the continuance of the voyage."
Therefore – and since bunker supplies are considered "necessaries" for the ship and voyage – the bunker trader or supplier will have a maritime lien over the ship if the conditions enumerated in Article 48 of the Merchant Shipping Code are satisfied.
The strategic position of the port of Beirut (especially after its adoption as a transshipment hub for major shipping lines) and the Lebanese judicial system contribute significantly to the promotion of Lebanon as a ship arrest-friendly jurisdiction. Judges can even be approached with a ship arrest application outside normal working hours and during weekends, while judgments are usually issued on the same day or the day after at the latest.
For further information on this topic please contact Zeina Wakim at Wakim & Associates by telephone (+961 3 776 432) or email ([email protected]). The Wakim & Associates website can be accessed at www.wakim-law.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
