by Michael Murray, LLB, Dip Crim, FAAL Visiting Fellow, QUT Law School
author of Australian Insolvency Management Practice.
A significant appeal is listed for hearing on 25 February 2016 that raises issues of international and conflict of laws, maritime law and its liens, and, in the background, cross-border insolvency. The outcome of the hearing, listed before a specially constituted Federal Court bench of five Judges, could see Australia departing from the approaches taken by the UK and comparable common law jurisdictions to the recognition of foreign laws and maritime liens.
A single Judge of the Australian Federal Court has held that the recognition and enforcement of maritime liens are to be determined according to the lex causae, law of the country under which the maritime claim arises, and not the lex fori, the law of the jurisdiction in which the maritime claim is being heard. In its decision – Reiter Petroleum v The Ship Sam Hawk – this meant that the Federal Court decided that it should determine the validity of a contested maritime lien for bunker supplies to a ship, or “necessaries”, according to US law, even though this would not have been recognised as a maritime lien were Australian law to be applied.
In so deciding, the Federal Court rejected the 1981 Privy Council decision of The Halcyon Isle that the existence of an asserted maritime lien is merely a procedural issue, to which, according to principles of private international law, the lex fori applies. The Australian High Court had decided in John Pfeiffer v Rogerson that a claim that goes to the existence, extent and enforceability of a party’s rights is a matter of substantive law, to which the lex causae should be permitted to apply. On that basis, the Sam Hawk decided that the determination of a maritime lien is substantive, and the lex causae, US law, should apply. This would avoid the unfortunate outcome that the determination of a lien would depend on the law of whatever jurisdiction the ship happened to be found.
Reiter Petroleum initiated the Federal Court proceedings, applying for the arrest of the Sam Hawk when she was in Australian waters. Its claim was primarily based on its maritime lien for unpaid bunker supplies for the ship ordered by the ship’s charterer. The owners of the Sam Hawk immediately applied to strike out the claim for want of jurisdiction, in effect saying that the maritime lien had no validity, in light of The Halcyon Isle decision. On 11 September 2015, the Federal Court dismissed the strike out application, saying that Reiter should be permitted to argue its claim in a further hearing.
Without Reiter’s claim having had time to proceed, the Sam Hawk applied for leave to appeal from what was an interlocutory decision, and this and the appeal itself, are to be heard on 25 February 2016.
The Halcyon Isle
The Halcyon Isle has been the subject of much legal debate since 1981 and its passing was not unexpected. Nevertheless, Australian courts have accepted it over the years, although the judge in The Ship Skulptor Vuchetich commented, after reviewing much of the literature, that the Privy Council decision had “certainly yielded a deal of both judicial and academic disagreement”.
Apart from the issues of private international law, the significance of the Sam Hawk in maritime law is that many foreign jurisdictions allow a wider range of circumstances to found the existence of a maritime lien than does Australia. Section 15 of the Admiralty Act 1988 (Cth) confines those circumstances to salvage, damage done by a ship, wages of the master or crew, and the “masters disbursements”.
Reiter’s claimed lien was for the supply of bunker (fuel) supplies to the Sam Hawk. Claims for necessaries give only a statutory right in rem against the ship under Australian law, but they found a secured maritime lien under US law.
This decision might be said to make Australia a more “arrest and enforcement-friendly” maritime jurisdiction, or, more formally, one more ready to take a universalist approach to creditor rights. That is an issue in cross-border insolvency, which traverses between territorialism and universalism in its approach to choice of forum and choice of law in recognition and enforcement of international insolvency claims. That is assisted by the UNCITRAL Model Law on Cross-Border Insolvency, which largely adopts the universalist approach, consistent with the approach taken in the Sam Hawk. The Model Law is adopted as law in Australia by the Cross-Border Insolvency Act 2008 (Cth), and by many other countries, including the US, the UK, Japan and other major trading partners.
Given the inherent internationalism of maritime operations and disputes, and the current decline in the fortunes of international shipping, the issue raised by the Sam Hawk presents the potential for an increased level of intersection between maritime law and cross-border insolvency. While insolvency law might accept the potential for a wider group of maritime claims to be made, based on foreign law, there is a question as to the continued justification for the maritime lien itself.
Maritime claims in insolvency
A maritime lien is different from other types of lien, based as it is on peripatetic nature of ships and the consequent special needs of maritime commerce. Maritime law invests the ship itself with its own personality, responsible for performing its contracts and for damage it itself causes. Lienors are better protected by their right to have the ship herself arrested for unpaid debts before she sails out of port. The maritime lien gives the lienor a proprietary interest in the ship, not dependent on possession, which accrues at the moment when the debt is created or the damage done, and which travels with the ship, and prevails over any innocent purchaser. In the Sam Hawk, the lien is being pursued by Reiter even though the contract for purchase of the bunker supplies was not the ship owner but the charterer.
Traditionally, and in Australia, a maritime lien can be claimed by a person whose property has been damaged by the ship, say through a collision with another ship, or with port infrastructure. It can also be claimed by a ship’s crew or master for unpaid wages, harking back to the days of injustice through the ship offloading an unsuspecting and unpaid crew and sailing on with a new company.
While both unpaid wages, and damages, are well recognised unsecured claims in insolvency, a maritime lien allows a secured claim against the ship herself, not necessarily revealed in any records, and a claim that follows the ship irrespective of its sale. The lien may only be removed either by payment of the creditor’s substantiated claim or by sale of the ship pursuant to a maritime court process. The lien allows the rather dramatic, in insolvency and general debt recovery terms, “arrest” of the ship by the marshal, and conceivably on behalf of the ship’s master for unpaid expenses. The right to arrest a ship “has become, in effect, a pre-emptive security device available virtually on demand”.
A maritime lien is a secured claim about which insolvency practitioners appointed to shipping companies should be aware. It has to be factored into any attempts to restructure the operations of the ship owner. The unliquidated bases for maritime liens, and the nature of evidence substantiating them, also raise the prospect of disputes about the existence, validity and quantum of the claims.
Another type of maritime lien, that securing the costs of salvage of a ship, has been adopted in equity and in insolvency law. Indeed, the term salvage is used in those contexts in relation to a monetary claim made by a person for their skill and labour in preserving another’s property, whereby an equitable lien can be granted over the property to secure payment. Such a lien, including a maritime lien, can give the lienor priority over a mortgagee.
Maritime and cross-border insolvency
Given the international nature of shipping and maritime law, and its present economic condition, the further potential arises when the shipping company enters insolvency in its home jurisdiction, with its major asset moored in some overseas port, or mid-ocean. Maritime lien claimants may apply to arrest the ship, at the same time that the insolvency appointee is seeking to secure it, often relying upon, in any Australian proceeding, remedies under the Model Law on Cross-Border Insolvency.
In Yakushiji v Daiichi Chuo Kisen Kaisha, the Court had to resolve such a looming conflict between the foreign (Japanese) liquidator and potential maritime lien claimants. While orders were made recognising the foreign liquidation as a “foreign main proceeding” under the Model Law, thereby giving the ship interim protection from all claimants, the Court was careful to say that this stay did not necessarily serve to determine or defeat any valid maritime lien subsequently claimed.
Speaking extra-judicially, the Chief Justice of the Federal Court was recently quoted in reporting a recent “unprecedented” number of ship arrests ordered by the Court. This increase was said by the industry to be connected with the current state of international trade and shipping, and a collapse of a major marine fuel trader. The Sam Hawk may now add to that arrest activity.
Some caution needs to be exercised, given the pending appeal, in predicting which way Australia will proceed. Academic and extra judicial commentary suggest that The Halcyon Isle, already listing, will be scuttled.
At this stage the appeal is set down for hearing on 25 February 2016 before five judges, including the Chief Justice. Given the significance of the departure from accepted law by the trial judge, this appeal bench is no doubt warranted. The outcome, including any further appeal to Australia’s High Court, will be watched with interest from both here and overseas.
Insolvency practitioners will also watch to see whether the range of maritime lien claims is to be potentially expanded, as the Sam Hawk allows, resulting in what some might see as a further erosion of the pari passu principle of equality between creditors upon which insolvency law relies. Insolvency properly recognises foreign claims and secured and equitable claims being paid out of the insolvent estate, based on whatever area of law substantiates the claim.
A question that might be asked is whether maritime liens should still exist, despite their long history in international maritime law, and under maritime conventions, at least in the context of insolvency of the ship owner.
This was raised as a broader issue by the Australian Law Reform Commission back in 1986, its Civil Admiralty Jurisdiction Report questioning “whether admiralty should simply be abolished as a separate jurisdiction.” Instead, reform might better be focused on the main area of maritime law’s concern, “elusive foreign defendants, unfettered by the need to remain within a framework which, mainly for historical reasons, focuses on ships …”. European countries do not place emphasis on a separate admiralty jurisdiction, and the Report contemplates that under EU influence, England might itself diminish the jurisdiction. The Report notes that “as long as admiralty remains a small and rather esoteric jurisdiction, problems will continue to occur along the boundary with the general jurisdiction of courts”, referring to, among other areas, insolvency, including their conflicting creditor priorities. But the Report then goes on to explain the legal difficulties for what would be a major change, including the limitations of private international law. The Report also rejected the adoption of insolvency priorities for maritime claims, including liens.
But as the Report suggests, maritime liens’ long standing and often eloquently expressed justification – to protect those who deal with a “peripatetic” ship, an “elusive debtor” which can incur liabilities from, for example, collisions with other vessels or port infrastructure “before sailing away across the deep blue sea”, being “literally here today and gone tomorrow” – may be less relevant in today’s more technologically equipped world, and ships are certainly less elusive than many other assets that creditors, and liquidators, are called upon to locate.
This may be the subject of further review once the outcome of the Sam Hawk is decided.
LLB, Dip Crim, FAAL
Visiting Fellow, QUT Law School
Australian Insolvency Management Practice.
  FCA 1005, Justice McKerracher
 The actual law applicable is yet to be determined; it could also be Hong Kong or Turkish law, in which countries the Sam Hawk also bunkered.
 Bankers Trust International Ltd v Todd Shipyards Corp (The Halcyon Isle)  AC 221
 John Pfeiffer Pty Ltd v Rogerson  HCA 36; (2000) 203 CLR 503
 As at the time of writing.
 See for example, “Maritime liens, renvoi and conflicts of law: the far from Halcyon Isle”  Lloyd’s Maritime and Commercial Law Quarterly 183, Justice Steve Rares.
 Morlines Maritime Agency Ltd v the Proceeds of Sale of the Ship “Skulptor Vuchetich”  FCA 1627;  FCA 432, Sheppard J
 “Consistency and conflict – cross-border insolvency” (FCA)  FedJSchol 11, Justice Steven Rares.
 These being the traditional types of maritime liens; although an extension to new types of liens is not precluded.
 Shell Oil Company v The Ship “Lastrigoni”  HCA 27; (1974) 131 CLR 1. See Admiralty Act 1988 (Cth) s 17.
 There is a further possibility that the maritime laws of Hong Kong or Turkey, at which the Sam Hawk bunkered, might apply.
 Cross-Border Insolvency Law, Gopalan and Guihot, Lexis Nexis Butterworths, 2016, chapters 1 and 2.
 It is thus said that the damage must be “the fault of the ship itself”: Currie v M’Knight  AC 97.
 For further explanation of maritime liens see Yakushiji v Daiichi Chuo Kisen Kaisha  FCA 1170.
 Kim v Daebo International Shipping Co Ltd  FCA 684. See however s 34 Admiralty Act which allows a shipowner a claim for damages for obtaining the arrest of a ship unreasonably and without good cause. That section is discussed in Fuk Hing Steamship Co Ltd v Shagang Shipping Co Ltd  FCA 682.
 A ship is however typically owned by one company, even if that company is part of a group. Ship financing is generally secured over the fleet of ships owned by the group.
 See Re Universal Distributing Co Ltd (in liq)  HCA 2; (1933) 48 CLR 171, Coad v Wellness Pursuit Pty Ltd (in liq)  WASCA 68 and cases there discussed.
  FCA 1170
 Orders were made that any such claimants be allowed to file their claims to be heard another day. At the time of writing, it does not appear that any claims have in fact been filed.
 “Ship arrests rise as fuel firm sinks: James Allsop”, the Australian, 26 December 2015, Nicola Berkovic. See also Restructuring in the shipping industry, August 2014, Ferrier Hodgson, Ryan Eagle.
 As to maritime liens, cross-border insolvency, and the principle of “salvage”, and other issues discussed in this paper, see Australian Insolvency Management Practice, Murray Taylor, CCH
 ALRC 33, at