By Marc de Man
Canada is a privileged jurisdiction in that it has a legal system derived both from the Common Law and the European Continental Civil Law. In the Province of Quebec, the juridical systems of England and France are amalgamated, adopting the Common Law in certain areas and the Napoleonic Code, or Civil Law, as amended in others.
This fusion of legal systems has given rise to four extraordinary effective legal remedies used in situations where the claim of the Creditor has to be protected when the Debtor is in a position to dissipate its assets prior to a final judgment, or where there is fear that upon the obtention of a final judgment, there will be no funds available to satisfy a Court judgment or arbitration award against the Debtor.
A) THE ACTION IN REM
This action is specifically provided by the procedural Rules of the Federal Court of Canada. It originates in the English laws of Admiralty, and is a direct action against the res (or “thing” in Latin) generally, the ship. The Canadian Federal Courts Act, at section 22, provides for the circumstances where the action in rem may be invoked. The recourse is available for cargo owners who have suffered damaged due to the unseaworthiness of the vessel, for bunker suppliers who have not been paid by the ship, for suppliers of necessaries, etc. Thus, if a ship enters into the Canadian jurisdiction, and it has caused extensive damage to cargo, the cargo claimant will institute an action in rem in the Federal Court through the issuance of a Statement of Claim, accompanied by an affidavit to lead warrant. The affidavit will be reviewed by the District Administrator or Prothonotary of the Federal Court, and if it establishes a valid prima facie claim against the particular ship in accordance with the Federal Courts Act, the warrant of arrest will be issued. The warrant is then served upon the ship itself by the Sheriff or Marshall. In the old times, the warrant of arrest was nailed on the mast of the vessel and a fouled anchor was drawn with chalk on the deck of the ship. Today, wooden masts are rare, and the Sheriff or Marshall will scotch tape the warrant of arrest on the bridge in front of the helm. The arrest in rem effectively paralyses the ship where she is berthed, and the warrant will be released only upon the ship providing adequate security for the claim, such as a P & I Club Letter of Undertaking, a bail bond, or other suitable guarantee, or if not, until the ship is sold in justice.
The action in rem is thus specifically designed to prevent the culprit ship from escaping the jurisdiction without some assurance that there is security for the debt after judgment. Although a very useful procedure, the action in rem has limitations. It can only be asserted against the ship that caused the damage. If the ship has collided, or run aground, there may be no value to her, and sometimes no security can be obtained. Finally, it does not extend to other assets belonging to the Debtor.
B) THE SISTERSHIP ARREST
This legal remedy was introduced in Canada during the month of February, 1992. At section 43(8) of the Canadian Federal Courts Act, the action in rem was extended to any vessel, which at the time of the institution of the action was beneficially owned by the person who was the owner of the ship which was the subject of the action. The term “beneficial owner” becomes important, and the Canadian Federal Court is presently faced with the task of defining this term. This recourse has been very useful for claimants against shipping fleets, as was demonstrated in the years 1996 and 1997 against Baltic Shipping Company.
C) THE MAREVA INJUNCTION
This is a common law legal remedy, first introduced in May 1975. Lord Denning, Master of the Rolls of the English Court of Appeal, the judge who started it all, has called it the greatest piece of judicial law reform in modern times. The civil law jurisdictions, such as France or the Province of Quebec, looked for once with contempt at the Common Law, because, in France, there was always the saisie conservatoire, and in the Province of Quebec, at Article 733 and following of the Code of Civil Procedure, the saisie avant jugement or seizure before judgment, which has had a long history of application. But, the United Kingdom, and the common law jurisdictions were bogged down by the authority of Lister & Co. v. Stubbs (1886-90 All E.R. Rep. 797) where Lord Justice Cotton said:
I know of no case where, because it was highly probable that if the action was brought to a hearing the Plaintiff could establish that a debt was due to him from the Defendant, the Defendant has been ordered to give security until that has been established by the judgment or decree.
Thus, until, 1975, nothing could be done in the Common Law to preserve the claim of the Plaintiff/Creditor against the Defendant/Debtor before judgment. Lord Denning then walks onto the scene, and cleans up the cobwebs in the first « Mareva » type case.
On the 22nd day of May, 1975, Lord Denning heard the Nippon Yusen Kaisha v. Karageorgis case (1975) 1 W.L.R. 1093. The facts were as follows:
Japanese shipowners entered into charter parties with two Greek gentlemen. The shipping slump overtook the Greeks. They did not pay the hire, and they disappeared. Their office in Piraeus was closed. But they had funds with a bank in London. The Japanese owners feared that the two Greek gentlemen would transfer those funds to Switzerland or some other country. It could be done in a moment by telegraphic transfer. So, the solicitors for the Japanese issued a writ for service out of the jurisdiction and immediately, before service, applied to the English Court for an injunction to stop the funds from being removed outside the jurisdiction. The trial judge refused it on the simple ground that nothing of that kind could be done in England. The Japanese shipowners came to the English Court of Appeal and an injunction was granted.
Lord Denning said:
It seems to me that the time has come when we should revise our practice. There is no reason why the High Court or this court should not make an order such as is asked for here. It is warranted by section 45 of the Supreme Court of Judicature (Consolidation) Act 1925 which says that the High Court may grant a mandamus or injunction in all cases in which it appears to the court to be just or convenient so to do. It seems to me that this is just such a case.
Four weeks later, on June 23, 1975, the judgment was rendered which gave its name to this new procedure, namely Mareva Compania Naviera SA v. International Bulkcarriers SA The MAREVA (1980) 1 All ER 213, (1975) 2 Lloyd’s Rep. 509. The facts were as follows:
Shipowners let their vessel, the MAREVA, to time charterers on terms which required hire to be paid half monthly in advance. The charterers defaulted on the third instalment. But there was money in a London bank in their name. These monies had been paid to the charterers by the Government of India as freight for the voyage and was money which the time charterers should have used to pay hire.
Lord Denning said:
If it appears that the debt is due and owing, and there is a danger that the debtor may dispose of his assets so as to defeat it before judgment, the court has jurisdiction in a proper case to grant an interlocutory injunction so as to prevent him disposing of these assets. It seems to me that this is a proper case for the exercise of this jurisdiction.
The defendants submitted to judgment and the funds in the Bank were used to pay the debt.
In May, 1977, The SISKINA (1977) 3 All ER p. 803 was heard in the House of Lords. The facts in this case are fascinating:
The SISKINA was a motor vessel owned by a one ship Panamanian company, but she was managed by Greeks in Piraeus. Early in 1976, she was chartered by an Italian firm for a voyage from North Italy to the Red Sea. She arrived at the Port of Carrara close to Genoa and took six thousand tons of cargo of marble slabs and tiles for the wealthy homes of Saudi Arabia. There were also refrigerators, gas cookers and thousands of blankets. All cargo was to be carried to Jeddah on the Red Sea and there were many different parcels from many different shippers to many different consignees.
All the buyers in Saudi Arabia paid the freight for the cargo in advance. They bought the cargo C.I.F. from the sellers in Northern Italy by means of irrevocable letters of credit. Thus they paid the invoice value, freight and insurance, and all the documents were in order.
The vessel never got to Jeddah. She went through the Mediterranean until she was near the entrance of the Suez Canal. There she stopped and waited four weeks. The shipowner ordered the master to turn back and to go to Cyprus to unload the cargo there. The cargo was unloaded and the marble tiles and slabs were left in the open suffering breakage and chipping. The cargo was worth $5,000,000.00. Soon after discharge, the vessel left Cyprus in ballast without cargo. She disappeared and sank in the Mediterranean Sea. The shipowner made a claim to the London underwriters who would have paid $750,000.00 for the loss of the vessel.
In England, the solicitors for the cargo owners were anxious about the insurance monies which were payable to the shipowners for the loss of the SISKINA. The ship-owning company had no assets except for these insurance monies, and the cargo owners did not want these monies paid to the shipowners, because they would then be beyond reach. An application was made to attach the insurance proceeds.
Lord Denning granted the injunction, invoking the principle of the Mareva case. The shipowners appealed to the House of Lords, and the Master of the Rolls was overruled. Fortunately, it was reversed on narrow grounds, and none of the Law Lords cast any doubt on the principle.
The criteria which the Plaintiff/Creditor must adhere to in order to obtain the Mareva Injunction were set out in the Third Chandris Shipping Corp. v. Unimarine (1979) 2 Lloyd’s Law Reports,
p. 184, by Lord Denning. These criteria have been modified by the case law and according to the laws of England, they may be summarized as follows:
- The Plaintiff must have a cause of action against the Defendant within the jurisdiction of the court.
- The Plaintiff must establish that he has a « good arguable case ». This criterion has been modified by Canadian jurisprudence in the Supreme Court of Canada decision of Aetna Financial Services Ltd. v. Figelman 1985, 1 S.C.R. 2, to the establishment of a « strong prima facie case » on the merits rather than a good arguable case.
- The Plaintiff must satisfy the Court that the Defendant has assets within the jurisdiction.
- The Plaintiff must show a real risk that the Defendant will remove his assets from the jurisdiction or dispose of them within the jurisdiction. This has been called the heart and core of the Mareva jurisdiction. The courts have to decide what degree of evidence would satisfy the requirement that there be a real risk of removal of assets from the jurisdiction, or disposal of assets within the jurisdiction. The English Courts have, to a large degree, accepted circumstantial evidence pointing to some foreign element combined with an unstable asset position. The Canadian courts, however, have tended to require more conclusive evidence of unusual activity motivated by some fraudulent intent.
- As a result of the defendant’s disposal of assets, the Plaintiff will be unable to execute judgment against him.
- The balance of convenience must be in favour of granting the injunction.
- As with all interlocutory injunctions, the Plaintiff must give an undertaking as to damage.
A few aspects are relevant:
The Mareva Injunction does not operate as an attachment on property, but is relief in personam which restrains the owner of the assets from dealing with them. The Defendant is told « if you have assets, do not dispose of them ». In order to enforce this order, the persons holding the assets, such as banks or other third parties have to come into the picture. Thus the injunction has a direct effect on third parties (banks, financial institutions) who are notified of the injunction and who hold the assets comprised in the order. If the third party knows of the injunction but breaches it, it would be held in contempt of court.
The Mareva injunction can be presented in all the Canadian Court of Common Law jurisdictions, including, of course, the Federal Court of Canada which has jurisdiction over shipping and admiralty matters.
D) SEIZURE BEFORE JUDGMENT
This legal remedy is the equivalent of the Mareva Injunction in the Civil Law, derived from the French Napoleonic Code.
The Quebec Code of Civil Procedure, at article 733, provides as follows:
The plaintiff may, with the authorization of a judge, seize before judgment the property of the defendant, when there is a reason to fear that without this remedy the recovery of his debt may be put in jeopardy.
The seizure before judgment has been utilized efficiently in the Province of Quebec against Empresa Cubana de Fletes (Cuflet) which is the chartering arm of Cuba. This entity does not own ships, and is thus immune to attack by way of an action in rem or sistership arrest. Moreover, the seizure before judgment does not require the presentation of security for eventual damages which is imposed by the Mareva Injunction.
More particularly, during the month of February, 1993, the prestigious English firm of solicitors, Richards, Butler, instructed the author to act on behalf of P & I Clubs and Greek shipowners against Cuflet. This latter had chartered two ships from Greek shipowners, and accumulated a large debt of $2.5 Million for unpaid charter hire. Cuflet admitted the debt, and signed an agreement setting out instalment payments during the year 1992.
Unfortunately, nothing was paid by December, 1992.
At the end of the month of February, 1993, the ship BAHIA DE LA HABANA entered Canadian territorial waters, and berthed at Port Cartier, Province of Quebec. This vessel appeared in the Lloyd’s Register as the property of Empresa de Navegación Mambisa (Mambisa) and the Government of the Republic of Cuba. This information further appeared in Lloyd’s World Shipowning Groups.
A Writ of seizure before judgment was presented in front of the Quebec Superior Court against Mambisa, Cuflet and The Government of the Republic of Cuba. The Superior Court Judge granting the seizure (Mr. Justice Melançon) was satisfied that the doctrine of sovereign immunity could not be invoked, and on this ground, allowed the writ to be issued. The BAHIA DE LA HABANA was seized, and allowed to sail, under seizure, from Port Cartier to the Port of Montreal, Province of Quebec, Canada.
Mambisa attacked the seizure in two stages. The first was based on a jurisdictional issue. Mambisa claimed that the charter parties entered into with Cuflet provided that in the event of a dispute the only appropriate jurisdiction would be England, on account of the London arbitration clauses found in the charter parties. The issue was argued at length, but the Quebec Superior Court judge (Mr. Justice Gomery) held that as the debt was admitted by Cuflet, there was no dispute between the parties, and the London arbitration clauses in the charter parties did not apply.
The second attack by Mambisa was to quash the seizure on grounds that the property seized, the Ship BAHIA DE LA HABANA did not belong to Cuflet or the Government of the Republic of Cuba, that Mambisa and the Government of the Republic of Cuba were not liable for the debts of Cuflet, and that since no fraud was alleged, in support of the seizure, there were no grounds for a seizure before judgment.
After considerable cross examination on Affidavits presented by representatives of the Greek shipowners, representatives of Mambisa, the case was presented in front of Mr. Justice Tingley of the Quebec Superior Court (Med Coast Shipping Ltd. et al v. The Government of the Republic of Cuba et al – The BAHIA DE LA HABANA, 1993 A.M.C. 2530).
On the issue of ownership of the BAHIA DE LA HABANA, the learned Judge stated that Mambisa had possession and use of the ship, and the right to dispose of same. Mambisa had assumed all the risks generally associated with an owner under the bareboat charter it entered into with the Spanish shipbuilder. Moreover, the vessel was registered under the Cuban flag as represented by the Ministry of the Interior of the Republic of Cuba.
Mr. Justice Tingley quoted Lloyd’s “World Shipowning Groups” as follows:
Shipping is also the international industry par excellence. Though the subject of increasing regulation at operational levels, shipping still enjoys considerable freedom of movement. Ships change flags, shipowners move their operating base, subsidiaries are established, vessels change hands, restructurings are announced, there are bankruptcies and takeovers, buy-outs and selloffs – and all on an increasingly international scale. Liberia may have the world’s largest fleet, but who owns these ships and where are they based? A ship may fly the Cyprus flag but be owned by Russians. A German owner may operate out of Monte Carlo, register his ship in Panama, bareboat it out to the Philippines, and delegate the operation to managers in Hong Kong. The variety is kaleidoscopic. It is also baffling, even to those within the industry.
The learned Judge concluded that Mambisa enjoyed all the incidents of ownership and the obligations of an owner.
He next proceeded with his analysis of the relationship between Mambisa and Cuba. At pages 2535/2536, he states:
What then is the relationship between Mambisa and Cuba? The former was created as a consolidated state company by the latter in 1961 to take certain shipping assets seized from private corporations and banks following the Revolution in 1959 and, with these assets, to operate a shipping business for Cuba. By its charter, it has one director who is responsible for the “government and control” of the company. That person is appointed by Cuba and may be removed by it. Cuba may also remove the company’s management. The company was created for an unspecified period but may be dissolved at any time by decree.
In substance, Mambisa is a creature of Cuba and subject to its complete control and governance. It is a state controlled agency, an arm of Cuba. From the evidence so far adduced in these cases, the Court concludes that the property of Mambisa is in reality the property of Cuba. Mambisa’s mandate is to operate and administer the property given or assigned to it by Cuba for the benefit of Cuba. Mambisa is an agent of Cuba for the purpose of carrying on a shipping business worldwide. Mambisa’s debts and obligations are Cuba’s debts and obligations. There is nothing in Mambisa’s charter to prevent a creditor from reaching the true owner of Mambisa’s property and undertaking.
On the second issue, relating to the liability of the Republic of Cuba for the debts of Cuflet, the learned judge stated that Cuflet’s debt arose from contractual obligations to pay assumed by State Corporations of Cuba, including Mambisa and Cuflet. Since Cuflet and Mambisa were agents or departments of Cuba, this latter was liable for the debts claimed.
On the issue of fraud, the learned Judge held that the failure or refusal to pay an acknowledged debt when due constituted a fraud.
Shortly after the decision was rendered (April 6, 1993) Mambisa appealed the decision – Cuflet appointed lawyers in Montreal, and a second attempt was made to quash the seizure.
During examinations of a representative of Cuflet in Montreal, in preparation of a second hearing, the suggestion was made to organize a meeting between representatives of the Greek shipowners and Cuflet. This suggestion was adopted by both parties, and after several meetings, the parties agreed to settle their differences.
An agreement was reached on a figure, and payment effected.
Mambisa dropped its appeal.
The BAHIA DE LA HABANA sailed from Montreal on November 21, 1993, nine months after she was seized in Port Cartier.
The decision of Mr. Justice Tingley had immediate repercussions for creditors world wide. The decision permitted a foreign creditor of Cuba to invoke the Canadian Courts (in the Province of Quebec) to enable it to obtain satisfaction for its debt by seizing a Cuban asset (ship or other asset of value). Thus, a series of creditors, including bunker suppliers, ship repairers, banks and others, sought relief in the Province of Quebec, Canada. The majority of the claims were eventually settled prior to the institution of legal proceedings, based on the BAHIA DE LA HABANA decision.