Shippers turn to SA as economic turbulence escalates

Apr 1, 2009
Author: Shepstone & Wylie

Article by Shepstone & Wylie Attorneys

The world-wide shipping industry turmoil with losses of hundreds of millions of US Dollars and companies going into liquidation or receivership almost daily, is resulting in massive maritime claims, says Shane Dwyer, partner of Shepstone & Wylie’s International Transport, Trade and Energy Department and an expert in the shipping field.

Many of these arise from operators trying to redeliver (hand back) ships on charter to them as they simply don't have cargo to carry, or owners who bought second hand ships or ordered new buildings, trying to walk away from the sales, even if they forgo deposits.

“As strange as it may seem this extreme situation, and an increasing inability to make use of the popular New York Rule B attachment procedure, is helping South Africa regain its reputation as a jurisdiction in which shippers can seek assistance in obtaining security for their claims, or having obtained a judgment or arbitration award in their favour, their money back,” say Dwyer.

From the promulgation of the Admiralty Jurisdiction Regulation Act (AJRA) in 1983 until about three years ago South Africa was a leader in this field as the Act enabled the arrest of ships, and in particular associated or sister ships, to obtain security for claims to be pursued in arbitration abroad.

In the shipping industry most ships are owned by separate "one ship owning" companies, specifically formed so as to limit or "ring fence" liability. The AJR Act provides a way to enforce claims against, or obtain security for foreign legal proceedings from, one ship owning companies, by arresting another ship in the same "fleet."

If one can show that there is common direct or indirect control of the shares in the different companies, in law or in fact, then one can arrest one of the other ships, owned by such a commonly controlled company which is not itself the debtor, to secure ones claim. One can then proceed against the "associated" ship in South Africa or litigate elsewhere.

While it may be difficult to establish direct shareholding, ownership or control the law allows for a measure of hearsay evidence to be submitted, together with circumstantial factors, to satisfy the court that there is direct or even indirect, common control of the respective companies.

This includes factors such as common signatures on financing documents and other important agreements, cross collateralization of ships under mortgages, common corporate guarantors for loans, similar or related ship names, common funnel or fleet markings, public statements about ownership or group financial results, public data-base information, common operators and a single manager.

It is this procedure of arresting an associated ship, being more than a sister ship and akin to lifting the corporate veil of ship owning companies controlled by the same person or persons, which excited the greatest interest and South Africa quickly become a favoured forum for obtaining security, says Dwyer.

Through the ups and downs of the shipping industry in the 1980’s and ‘90s literally hundreds of ships were arrested or threatened with arrest, for security in one or other of the country’s ports.

Then came the innovative US’s Admiralty Rule B attachment (which only can be obtained in the state of New York) about three years ago and knocked the AJRA from its pedestal.

Payment under most shipping contracts is in dollars and Rule B, with very little procedural requirement, enables a court order to be obtained to attach money being remitted in US Dollars through the New York banking system, to an owner or charterer and freeze it as security. Hence its rapid rise in popularity.

Rule B, considered quick and inexpensive, has been so popular that US financial institutions were reported to spend as much as $ 14million a year in staff salaries to monitor transfers daily and check for transfers being made to or from named respondents (or their so-called alter egos) in Rule B attachment orders.

However, contrary to what many US attorneys may say, it is becoming increasingly difficult to get a Rule B attachment order in certain courts in New York State. “Literally it depends on who the judge is and it seems that some judges are very anti the recent prevalence of Rule B applications, requiring ever more strict compliance with execution of the orders, if granted,” says Dwyer.

Furthermore, companies are increasingly finding ways to avoid Rule B by either concluding contracts designated payment in other currencies or opening an office in New York which constitutes nothing more than a desk, chair and a VAT registration, and most often does not trade. This has recently been held to be sufficient to create a situation where the company is said to be "found" in New York, so the Rule B procedure cannot be resorted to.

Another drawback is that in a claim, for millions of dollars, it is possible that the first transfer that is attached may be a nominal amount and Rule B then “fails” in that the ‘guilty’ company becomes aware of the claim and makes alternative arrangements for transfers in the future.

The economic meltdown and Rule B becoming increasingly contentious (with defendants being more prepared to contest proceedings or lodge counter-claims) has seen the number of enquiries regarding ship arrests in South Africa escalate tenfold the past few months, says Dwyer.