Rich pickings for ship managers in Hong Kong

In The Oriental Dragon [2014] 1 HKLRD 649, the Admiralty Judge decided that a manager was entitled to arrest for a lump sum fee which included a fee payable for “ship management”. While the reasoning behind the decision is not entirely clear, he appears to have relied upon the case of The Westport No. 2 [1966] 1 Lloyd’s Rep 342, which held that a ship’s agent is entitled to include a reasonable figure for his own services in his claim for disbursements made on account of a ship.If the claim that arose related to services provided in respect of a named ship, for her operation or maintenance, it could fall within either section 12A(2)(l) (i.e. a claim in respect of goods or materials supplied to a ship for her operation or maintenance) or (12A(2)(o) (i.e. any claim by a master, shipper, charterer or agent in respect of disbursements made on account of a ship) of the High Court Ordinance. Although the lump sum fee in The Oriental Dragon was payable under a consultancy agreement, some of the services being rendered by the “consultant” were ship management services.

In Hong Kong, it has until now been generally accepted that managers have no right of arrest in respect of unpaid management fees since management fees are essentially remuneration payable to the ship manager for services rendered to the shipowner and not related to a ship. The decision in The Oriental Dragon represents a departure from this generally accepted position and gives managers grounds (in some cases) to argue that they are entitled to arrest for unpaid management fees in Hong Kong.

On the run

The second case, The Ruby Star [2014] HKCU 205, concerns ‘running accounts’. A running account is essentially an active account running from day to day which is predicated upon a continuing relationship of creditor and debtor between the parties to the running account. Payments in are reflected as a credit in the account and set-off against an earlier debit regardless of that debit’s characterisation.

There is a long line of English cases flowing from The West Friesland (1859) Sw 454 and The Comtesse de Frègebille (1861) Lush 329, which have held that an in rem claim cannot be brought for the general balance of a mercantile account. The judicial reasoning for these decisions has been that, in maintaining a running account, parties have indiscriminately set off sums received against in rem claims and in personam claims and it was not the Court’s place to settle accounts between parties.

However, in 1997, Mr Justice Clarke decided in The Kommunar [1997] 1 Lloyd’s Rep 1 that, since these old cases were decided under older versions of the currently applicable statutes, the correct position under s 20(2) of the Supreme Court Act (the equivalent of s 12A(2) of the Hong Kong High Court Ordinance) was not that a claim on a general account must always fall outside the admiralty jurisdiction of the court; what was important was the underlying nature of the claims being advanced.

Until the recent case of The Ruby Star [2014] HKCU 205, there was no Hong Kong case directly on this point. The new Hong Kong Admiralty Judge has now decided that the old line of English cases was overly mechanistic and preferred the approach of Mr Justice Clarke adopted in The Kommunar.He has held that a manager can arrest in respect of a running account provided that the “underlying nature of the costs or invoices comprising the unpaid balance of a running account” falls within one of the recognised maritime claims under section 12A(2) of the High Court Ordinance.

The shipowner, who intervened in the proceedings, has applied for leave to appeal this decision. Unless or until it is overturned, however, the decision can be relied upon in applications for arrest in Hong Kong.

Notwithstanding this potential development, a prudent manager should structure his accounts and demands for payment so as to avoid, if possible, creating a running account or the impression of a running account in the first place.

Paying up

The third case, The King Coal [2013] 2 HKLRD 620, considers assignees of claims to crew wages. The provision of ‘services of crew and officers to a ship’ comes within the ambit of section 12A(2)(l) of the High Court Ordinance as it is accepted that a claim for services falls within the meaning of the words “goods or materials supplied to a ship” (The Edinburgh Castle [1999] 2 Lloyd’s Rep 362; The Nore Challenger [2001] 2 Lloyd’s Rep 103). Hong Kong law recognises that no distinction is to be drawn between a claim by the person who actually supplied the goods, materials or services to the ship and a claim by the person who pays for or “renders himself liable to pay for” the supply.

The question that came before the Hong Kong Court recently was this: what is the position of an assignee of a crew’s rights to wages given in exchange for payment of them by the assignee? In The King Coal [2013] 2 HKLRD 620, the Claimant based its application to arrest on section 12A(2)(n) as a claim “by a master or member of a crew for wages”. The Judge held that an assignee of a crew’s claim for wages cannot claim an in rem right under section 12A(2)(n).

His reasoning was as follows: “… In my view, the legislature in enacting Section 12A had decided to expressly introduce these particular words: ‘Any claim by a Master or member of the crew’ in section 12A(2)(n). That is what the legislature had done by clear words. There may or may not be good reasons for that, but it is not for this court to speculate those reasons.

“In light of the express words and the way Section 12A(2)(n) is drafted, the clear words of it mean that it is only limited to a claim for wages brought by the Master or a member of the crew. I therefore do not think it is reasonably capable of construing it to mean (as what Mr Wright has suggested) a claim in respect of wages of Master and officers or crew members brought by anyone …”

Parting comment

While The King Coal reflects the current state of the law in Hong Kong on this point, we make two comments. First, it is arguable that this judgment blurs the distinction between a maritime lien and a statutory lien.

That a maritime lien is not assignable under Hong Kong law is not disputed. However, it was held in The “Wasp” (1867) L.R. 1 A. & E. 367, that the assignment of a choice in action had the effect of transferring with the claim a statutory right in rem (a procedural right). On this basis, it ought to be possible to assign the statutory right in rem in respect of a claim for crew wages without also transferring the maritime lien which would have afforded the claim a priority status.

Second, the better basis for the application would have been under section 12A(2)(l), although this has not been itself tested by the Hong Kong Courts in recent years.

In our view, these recent decisions do not have the effect of introducing sweeping revisions to Hong Kong law. They do, however, open up new avenues for arguing that the admiralty jurisdiction of the Court can be invoked for certain claims which ship managers may have.

While they present an opportunity for obtaining security from the Hong Kong Court through an arrest, any applicant must ensure that it complies with the full and frank disclosure obligations in the arrest affidavit. Citing the arguments both for and against the Court exercising its jurisdiction is crucial, particularly as the initial arrest application may not come before the admiralty judge. Failure to do so would risk a successful application being subsequently set aside on the grounds of material non-disclosure.

Author information

Rory Macfarlane and Su Yin Anand are partners in the Hong Kong office of Ince & Co specialising in shipping litigation. Rory can be contacted on rory.macfarlane@incelaw.com and Su Yin on suyin.anand@incelaw.com.