U.K.: Proceeds of Sale of Arrested Vessel – Priority for Wages or Damages?

(A Case commentary on Owner of the Yacht ''Carbonnade'' and anr. v Owners of the Ship ''Ruta''¹).

 

Facts

 

On October 1997, ''Ruta'', a small general cargo vessel manned by a crew of nine was outward bound from Ipswich. In the course of her passage she came out of the channel and collided with three yachts lying at anchor, ''Carbonnade'', ''Shamal II'' and ''Lutra II''. All ships were severely damaged and raised substantial claims.

On September 15, 1998 the owners of ''Lutra II'' took over the arrest of "Ruta" originally instituted by the latter vessel's mortgagees. Following negotiations the owners of ''Lutra II'' accepted a letter of undertaking from ''Ruta's'' P&I Club and the vessel was released on the same day.

 

Claims

 

On November 2, 1998 "Ruta" was arrested by the owners of "Carbonnade" and "Shamal II" at Immingham and eventually removed to Hull were she remained until she was sold. In the meantime a substantial backlog of unpaid crew wages had built up in respect of the ship's crew that had embarked upon the vessel after the collision in October 1997. The owners of "Carbonnade" and "Shamal II" and the crew claimed against the proceeds of sale. A claim against the proceeds of sale was also made by the owners of "Lutra II" who sought to enforce their security as the value of the letter of undertaking now had diminished owing to the collapse of "Ruta's" P&I Club. The claims by far exceeded the proceeds of the sale.

 

Issues

 

The issues for decision were:

 

1. Did a damage claimant have priority over a wage claimant or vice-versa?

2. On what terms as to priority could a claimant who had earlier obtained contractual security proceed against the proceeds of sale?

 

Held

 

1. The questions of priority were not capable of being compartmentalised in the form of strict rules of ranking but rival claims had to be ranked by reference to considerations of equity, public policy and commercial expediency, with the ultimate aim of doing that which is just in the circumstances of each case. The decisive factor in resolving the present issue was the fact that the wages' claimants had no alternative forms of redress as the owners of "Ruta" were insolvent. Where the only remedy open to the wages claimants was recovery from proceeds of sale, consideration of public policy justified according to them a very high level of priority; therefore, on the facts of the present case, the wages claimants had priority over the damage claims;

2. It would be appropriate for the claim of the owners of "Lutra II" against the proceeds of sale to have the same priority as that of the owners of "Carbonnade" and "Shamal II"; this conclusion reflected the general equitable approach to issues of priority, reinforced by consideration that the circumstances would justify permission to re-arrest "Ruta" because the Club letter was no longer of any value.

 

This decision is extremely important in circumstances in which the fund constituting the proceeds of judicial sale is not sufficient to satisfy competing maritime claims.

                                                                                                                

With thanks to Mark O'Neil of Sinclair Roche &Temperley for preparing this article².

 

¹ [2000] 1 Lloyd's Rep 359
² This article was published on the Steamship website in May 2000