37 ReSolution | Nov 2017
-by Sarah Redding
The English High Court recently considered its jurisdictional power in support of arbitral proceedings under section 44 of the Arbitration Act 1996 to order the sale of cargo as goods ‘the subject of the proceedings’.
Background
In early 2016, PDVSA Petroleo S.A (‘PDVSA’) entered into a time charter agreement with Dainford Navigation Inc. (‘Dainford’). The charter was for the transport of crude oil by PDVSA on board Dainford’s vessel the “Moscow Stars”, and was one of 14 charters between PDVSA and other companies within a state-owned Russian shipping group.
Dainford alleged repeated failures by PDVSA to pay time charter hire since January 2016, culminating in an outstanding balance of approximately US $4.5 million by October 2016. As a result of PDVSA’s continual non-payment of charter hire, between October and November 2016 Dainford gave notice twice of its exercise of a lien over the cargo on board the Moscow Stars. In December 2016 and January 2017, PDVSA made payments towards the hire, but these were insufficient to clear the substantial arrears. With charter hire overdue and cargo still on the vessel, PDVSA continued to accrue the charter rate of US $29,000 per day as further debt owing to Dainford. No further payments by PDVSA were made.
Dainford commenced arbitration in London pursuant to the parties’ agreement in an attempt to recover the US$7.7 million it claimed was owing. Incurring the usual costs of running the vessel while it remained moored subject the lien, Dainford sought and obtained permission from the arbitral tribunal under section 44 of the Arbitration Act 1996 to apply to the High Court for an order for sale of the cargo. Dainford sought payment from the proceeds given the cargo had been on board the Moscow Stars for over nine months and there were no reasonable prospects of resolution. 11 other companies in the same state-owned Russian group also had similar claims against PDVSA under different charters.
In referring Dainford’s application to the High Court, the arbitral tribunal determined that their power to “preserve goods” under section 38 of the United Kingdom’s Arbitration Act 1996 did not extend so far as to order the sale of goods. PDVSA opposed the application.
At the time the High Court considered the application, the arbitral tribunal had not determined the award.
Mangatu then sought leave to appeal to the Court of Appeal against that judgment, on grounds including that the judgment failed to identify any error of law in the damages award, and wrongfully concluded that the arbitrator had pre-determined damages. Mangatu also sought permission to adduce further evidence relating to the arbitrator’s actions following the previous damages appeal decision, in support of its application for leave to appeal.
Case in Brief
Dainford Navigation Inc v PDVSA Petroleo SA; ‘Moscow Stars’ [2017] EWHC 2150 (Comm)
However, in a change of position attempting to maintain control of what seemed to be rapidly becoming an inevitable outcome, PDVSA also made a late offer during proceedings to sell the cargo itself and pay the proceeds into escrow.
Given any order for sale would be made before the issue of the arbitral therefore depriving PDVSA of its ownership of goods against its will, the Court carefully considered its discretion. Despite PDVSA’s offer to undertake sale of the cargo itself, the Court considered that without a formal order for sale, previous history between the parties indicated there was a substantial risk that the p situation of impasse would drag on indefinitely. The Court also took PDVSA’s last minute offer as an indication of its recognition that the only viable option was for the cargo to be sold.
In making an order for the sale of the cargo, the Court referred the security of damages back to the arbitral tribunal, pending their decision, and also noted that any dispute as to the terms of sale would need to be referred back to court for consideration.
Comment
This decision provides welcomed commentary on the interpretation of cargo as goods ‘the subject of proceedings’ pursuant to section 44(2) Arbitration Act 1996. The decision also demonstrates the application of frameworks included in legislation such as the Arbitration Act 1996 to support arbitral proceedings. However, the application of the decision to broader goods and in different factual scenarios remains to be seen. Males J made clear that this decision related only to goods owned by the defendant, deliberately excluding application to goods owned by a third party not a party to the arbitration.
Dainford Navigation Inc v PDVSA Petroleo SA Cont...
About the Author
Sarah Redding
Sarah graduated from the University of Otago with a Bachelor of Laws. She then worked as a graduate law clerk at the New Zealand Dispute Resolution Centre, and now is a solicitor at Kensington Swan.
Sarah Redding
Solicitor
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