Agent s Failed Attempt To Rank Its Expenses As Sheriff s Expenses In Ship Arrests Introduction Ship arrests are vital in providing security in admiralty actions. However, even when the vessel is eventually sold, the proceeds may not be sufficient to satisfy all the claims. In such situations, the ranking of claims becomes especially important. It is clear that Sheriff s expenses rank ahead of ordinary claims. This ranking can also be allocated to the expenses incurred by a vessel s agent for the maintenance of the vessel during the period of arrest. In the cases of The Makassar Caraka Jaya Niaga III-39 [2012] SGHC 175 and The Pontianak Caraka Jaya Niaga III-34 [2012] SGHC 176, the Court examined the circumstances in which this holds true. Both cases involved two long-drawn ship arrests, in which the agent of the vessels incurred significant expenses in respect of the arrests. The agent sought to have these expenses included as part of the Sheriff s expenses, thus granting them priority over other claims. However, the applications were dismissed by the High Court. It was held that, having regard to the equities of the case, the expenses incurred by the agent should not qualify as Sheriff s expenses. This was largely due to the fact that the agent, throughout the period of arrest, had behaved in a manner that suggested it was acting as an agent of the shipowner, and not as an independent party acting to preserve and maintain the vessels. The applications were successfully opposed by Leong Kah Wah and Dedi Affandi Ahmad of Rajah & Tann LLP. The decision highlights that the category of Sheriff s expenses will not be enlarged to encompass an agent s expenses in respect of an arrest where the agent is looking to its own principal for reimbursement of the same. Brief Facts (1) Pursuant to an agency agreement, the Applicant agreed to provide agency services to the shipowners in respect of The Makassar Caraka Jaya Niaga III-39 and The Pontianak Caraka Jaya Niaga III-34 ( the Vessels ) in Singapore. 1 Rajah & Tann LLP
(2) In 2009, the Vessels were arrested at the instance of the Plaintiff. The shipowners successfully set aside the arrest of the Vessels, but the decision was subsequently reversed on appeal. The Vessels were eventually sold. (3) From the time of arrest until July 2010, the Applicant acted as the agent of the Vessels. During that period, it incurred significant costs in the maintenance and preservation of the Vessels. It subsequently sought to have them ranked as Sheriff s expenses. (4) Unfortunately, the sums raised from the sales of the Vessels were inadequate to satisfy all the claims against the Vessels. Should the Applicant s expenses be ranked as Sheriff s expenses, there would be very little left behind for the Plaintiff and the other claimants. (5) The Plaintiff thus sought to resist the applications. Issue The Plaintiff s objections were based on the following grounds: (i) The Applicant s conduct was wholly inconsistent with that of a Sheriff s agent. It was instead acting as the shipowners agent during the period of arrest. (ii) The equities of the case did not favour the Applicant. The Court thus had to determine whether or not to rank the Applicant s expenses as Sheriff s expenses. Holding of the High Court The Applicant was found to be acting in a manner which suggested that it was looking to its principal (the shipowners) for reimbursement of its expenses relating to the Vessels. On the facts, the equities of the case led the Court to determine that the Applicant s expenses should not be ranked as Sheriff s expenses. The applications were thus dismissed. 2 Rajah & Tann LLP
General law Generally, a ship s agent who incurs expenses to maintain and preserve a vessel has a contractual claim against the owners of the vessel. If the vessel is arrested, the agent s claim has no special priority and ranks alongside those of other statutory lienees. However, if the agent s services are provided to the vessel under arrest at the instruction of the Sheriff, or pursuant to an order of court, the costs of the services will rank as Sheriff s expenses and enjoy priority over all other claims against the ship. In certain situations, even if there is no prior authorisation, the Sheriff may adopt the expenses incurred by the agent. The Court may also allow necessary and proper expenses to be ranked as Sheriff s expenses, having regard to the equities of the case. The equities of the case The Court held that the equities of the case were not in favour of the Applicant. The facts suggested that the Applicant had, throughout the period of arrest, been incurring its expenses as an agent of the shipowners, and not following an independent course with the primary purpose of preserving and maintaining the Vessels while under arrest. The Court relied on certain suspicious transactions which suggested that the shipowners had funded some of the expenses allegedly incurred by the Applicant. These were effected through direct payment or by payment via a third party. The Plaintiff also pointed to certain evidence which seemed to indicate that some of the payments made by the Applicant had in fact been loans to the shipowners. Further, the Applicant s actions were not consistent with its supposed non-reliance on the shipowners credit. The Applicant had not taken early action to apprise the Sheriff, the Court or the Plaintiff of the expenses it would be incurring and that it would be looking to the Vessels for reimbursement. Even after informing the Sheriff of its expenses and being subsequently told that it had to obtain a Court order to obtain reimbursement, the Applicant waited more than nine months before making the application. The Applicant s dilatory conduct in asserting their alleged rights thus left room for further doubt. The Applicant attempted to compare its situation to prior cases in which the balance of equities led to a determination that certain expenses should be ranked as Sheriff s expenses. However, the Plaintiff successfully distinguished these cases from the case at hand. 3 Rajah & Tann LLP
(i) In the first of those cases, the owners of the vessel were insolvent. Further, the applicant in that case had made full disclosure of all facts within their knowledge, and had made payment not as a volunteer but after consultation with the Sheriff and pursuant to an order of Court. (ii) In the other cases, the shipowners had abandoned the vessel, and the expenses incurred by the applicant in those cases were necessary to preserve and maintain the vessel. (iii) Here, the Court found that the shipowners had not abandoned the vessels, and were not insolvent. There was thus little danger of leaving the Applicant without redress. Further, the Applicant had not taken prompt action to seek the Sheriff s authorisation or apply for a Court order. Concluding Words This case demonstrates how a Court would exercise its discretion in deciding whether or not expenses incurred by a ship agent throughout the period of arrest should be ranked as Sheriff's expenses. Generally, the reported decisions can be rationalised on the basis of the protection of the res and the equities of the case. In the present case, the relationship between the agent and the shipowner, as evidenced by the documentary trail and the agent s conduct, allowed the Court to decide that it would be inequitable for these expenses to be ranked as Sheriff's expenses. In light of this case, agents of a vessel under arrest should be aware that the expenses incurred in maintaining and preserving the vessel will not necessarily be ranked as Sheriff s expenses as a matter of course. As demonstrated in this case, the Court will not allow the agent to rank its expenses as Sheriff s expenses if it is found that the agent was looking to another party, such as the shipowner, for payment of these very expenses. An agent thus cannot seek to hedge its bets by looking to both the Sheriff and its principal for reimbursement of its expenses. This case is also a timely reminder to prospective arresting parties of the extent to which their undertaking for an arrest may be called upon in the event the proceeds are insufficient to satisfy the Sheriff s expenses. 4 Rajah & Tann LLP
Contact Leong Kah Wah Partner D (65) 6232 0504 F (65) 6428 2074 kah.wah.leong@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam and Thailand, as well as associate and affiliate offices in Malaysia, Indonesia, Cambodia and the Middle East. Our Asian network also includes regional desks focused on Japan and South Asia. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or e-mail the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP