NO CLAIM AGAINST VESSEL FOR LOAN TO VESSEL OWNER


In a previous article published in Fishing Industry News (“Price is King”) we focused on the terms of loan and supply agreements and in particular the importance of price determination.

 

Another equally important issue is how the lender would proceed against the borrower under such an agreement in the event of a breach and in circumstances where the borrower is also the owner of the catching vessel.

 

In brief our courts have the usual Common Law jurisdiction but in terms of the Admiralty Jurisdiction Regulation Act (AJRA) they also have an Admiralty Jurisdiction in respect of maritime claims. This Admiralty Jurisdiction allows for the arrest of a vessel either to proceed against the vessel in an action or as security for an action against the owner of the vessel. These remedies provided an efficient means for enforcing a claim under an agreement and the arrest requires proof of a claim merely on a prima facie basis.

 

In addition an arrest warrant for a vessel can be obtained from the court within a matter of hours. Once the vessel is arrested it can only be released if it settles the claim, brings a successful application for the setting side of the arrest or furnishes security not only for the capital claim but also for  interest for a 2 year period and for the legal costs of suit calculated to the end of the trial. Ultimately the arresting party is placed in a strong position which could force the vessel owner to reach an amicable settlement in order that the vessel can continue its operations.

 

However to proceed with an arrest of a vessel under Admiralty Jurisdiction the underlying claim must fall into the definition of a maritime claim in terms of the AJRA. The AJRA has a list of various maritime claims against the vessel including a general catch all claim which is stated to be as follows:

 

any other matter which by virtue of its nature or subject matter is a marine or maritime matter, the meaning of the expression marine or maritime matter not being limited by reason of the matters set forth in the preceeding paragraphs;”

 

On the face of it this cover-all definition appears very wide and one would assume that it would cover many different types of claims where a vessel was involved. However recent case law has shown that the courts are interpreting the definition of a maritime claim and in particular under this catch all section on a very narrow basis.

 

In the 2006 case of the MFV “Galaecia” the Durban High Court  held that there was not a maritime claim in a situation where the owner of the vessel had sold a consignment of Patagonian tooth fish to the buyer (being the arresting party). The consignment was seized upon import into the United States and forfeited due to the fact that there was incorrect or faulty documentation submitted by the vessel owner to the purchaser. The documentation related to the catching activities of the vessel. The court held that the contract was simply one of purchase and sale of frozen fish. The court went  further to state that the mere fact that the subject matter of the claim is fish caught by a fishing vessel in the sea cannot in the courts view bring the arresting party home under the provisions of the AJRA.

 

In a more recent  2014 case  in the Durban High Court the arrest of the MFV “El Shaddai” (ironically also a Patagonian tooth fish vessel) was set aside by the court. The arresting party had loaned money to the vessel owner in order for the vessel owner to fund the carrying out of its commercial fishing operations. The agreement also provided for the repayment of such loan out of the proceeds of the vessels fishing operations. Notwithstanding the apparently wide provisions of the AJRA the court interpreted such provisions restrictively and held that the agreement was simply a loan agreement which did not give rise to a maritime claim notwithstanding that the repayment of the loan was to be from the proceeds of the fishing operations.

 

The court in this matter quoted from the textbook “Admiralty Jurisdiction Law and Practice in South Africa” by Gys Hofmeyr and stated as follows:

 

… it is important to note that the special rule and procedures relating to the exercise of admiralty jurisdiction are justified by the need to accommodate peculiarities of admiralty matters. There is no need, nor should there be any desire, to extend admiralty jurisdiction to matters which have what the learned author refers to as no meaningful maritime connection, and by which I would understand him to mean the extension of admiralty jurisdiction to matters which can otherwise easily be dealt with within the usual jurisdiction of the High Court.”

 

In the circumstances, it is clear that lenders under a traditional loan and supply agreement in the fishing industry should not just assume that they have a right of arrest of the catching vessel in the event of a breach. Depending on the circumstances it may be that in future agreements of this nature can be structured in a different way so as to preserve the advantage of having a maritime claim and the remedies that arise there from (i.e. arrest). For instance it may be more prudent to pay for and supply the vessel with necessaries instead of simply loaning funds to the owner to cover operating expenses. The supply of necessaries would constitute a maritime claim and allow for proceedings under admiralty jurisdiction. However, a failsafe method of providing a maritime claim would be for the registration of a marine bond over the vessel which of course is a maritime claim under the AJRA. But a supply of necessaries claim ranks higher against a vessel than a marine bond should the vessel be arrested and sold in admiralty.

 

There is certainly some food for thought with regard to loan and supply agreements and the restructuring thereof to provide for more effective remedies.