9.05.2018

Competing claims scuppered: A ship repairer’s priority rights following the ship’s arrest and sale

Alan Sherlock, Partner at Hesketh Henry, has been involved in a number of Admiralty cases, and has experienced the following recent success.
In Babcock Fitzroy Limited v The Ship “The M/V Southern Pasifika” [2012] 2 NZLR 652, the High Court ruled in favour of the plaintiff (“Babcock”), in what is now the leading New Zealand case on its particular issue.

Babcock had contracted with the owners of the M/V Southern Pasifika (“vessel”) and had carried out repair work. The vessel’s owners failed to pay, and Babcock commenced in rem proceedings against the vessel herself. Babcock was awarded judgment for approximately $1.5million, together with a warrant for the vessel’s arrest.

As a ship repairer in possession of the vessel, Babcock had what is termed a “possessory lien”. At common law an unpaid repairer (including a ship repairer) who has maintained possession of the item repaired is entitled to exercise a possessory lien, namely a right to retain the item until paid the amount due in respect of its repair. The right to exercise a lien is permanently lost if the lien holder voluntarily parts with possession.

Babcock wanted to have the vessel taken into the Court Registrar’s custody to be sold, so that its repair costs could be repaid from the sale proceeds; this would necessitate Babcock giving up possession so that the purchaser could take the vessel – thus losing its possessory lien. Therefore, Babcock sought and was granted Court orders that in the event of the sale of the vessel, Babcock was entitled to a lien attaching to the sale proceeds, such lien conferring priority rights in respect of the sale proceeds equivalent to those it already had under its possessory lien over the vessel herself.

Babcock invoked the Admiralty process of having the Registrar sell the vessel, because the sale of a ship by order of the Court gives any purchaser clear title (free of all maritime liens and other charges or encumbrances arising before the time of sale, as after the sale all previous claims or demands against the vessel can only be enforced against the proceeds of sale). In contrast, if Babcock itself moved to sell the vessel by auction under the power given to unpaid repairers by the Wages Protection and Contractors’ Liens Act Repeal Act 1987, there was no certainty the legal effect of that sale would be recognised by overseas courts (i.e. no clear title), which could have a severe downward impact on the price achievable, especially as the vessel would usually trade or voyage internationally.

A German bank (“OLB”) also had a judgment against the vessel, and, once the vessel was sold by the Registrar, asserted a competing claim to the sale proceeds for amounts due to it secured by a mortgage over the vessel. OLB claimed that, as mortgagee, it had a higher priority to the sale proceeds than Babcock did for its repair costs. Priorities were important in this case, as the sale proceeds were insufficient to pay both Babcock and OLB.

As a matter of principle, a possessory lien held by an unpaid ship repairer has priority over the rights of a mortgagee of the ship concerned. The issue for the Court was whether, by exercising its rights to arrest the vessel and invoking the Admiralty process for her sale, Babcock lost its possessory lien holder’s rights. As part of this inquiry, the Court had to decide whether its previous order that Babcock was entitled to a lien of equivalent priority, attaching to the proceeds when it gave up possession, was incorrect and ineffectual.

If, in an alternative scenario, Babcock had not applied for the arrest and sale of the vessel, and instead OLB had taken those steps while Babcock maintained possession of the vessel at its dock, then it was accepted that Babcock would have had priority over OLB because of its possessory lien. The Court found that, as a matter of policy, it would be absurd if (as in the alternative scenario) a possessory lien holder maintained priority when the Admiralty jurisdiction was invoked by another claimant, but lost priority when the holder itself invoked the jurisdiction. This result would lead to a stalemate, as the other claimants might sit on their hands hoping that mounting costs (such as for berthage) would force the ship repairer to take action, thus losing both its possessory lien right and, therefore, priority – while the repairer would of course have a corresponding incentive to sit tight and not pursue the Court action.

The Court concluded that when the vessel was arrested, Babcock had its possessory lien, and was entitled to ask the Court for an order that that lien be preserved by an equivalent “notional lien” over the sale proceeds once the vessel had been arrested and sold. Thus Babcock still had priority for its unpaid repair costs over the sum owing to OLB under its mortgage.

This decision follows a line of authority in Singaporean cases, and will be of comfort to New Zealand ship repairers.

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