Federal – court rules require ship owner as party in admiralty proceedings despite arbitration agreement

In Norstar Shipping and Trading Ltd. v. The Rosy (Ship), 2019 FC 1572, parties to an arbitration disputed the amount of bail to be paid into court to free a ship arrested as security for the claims made in the parties’ arbitration.  The ship’s arrest was authorized by the Federal Courts Rules, SOR/98-106 which further required the seizing party to name its other arbitral party, the ship owner, as a party to the litigation.  Naming the other party did not qualify as waiver of the arbitration agreement and the parties’ argument before Madam Justice E. Susan Elliott was not considered a breach of any confidentiality agreement regarding the arbitration.

On March 18, 2019, Norstar Shipping and Trading Ltd. (“Norstar”) chartered the ship “Rosy” owned by Rosy Marine Corporation (“RMC”).  Disputes arose as to whether RMC repudiated the charter and, on October 11, 2019, Norstar filed a statement of claim in Federal Court against the “Rosy” in rem, “the Owners and all other interested persons in the ship “Rosy”” and RMC. 

Norstar sought US $635,870.00, plus interest and costs.  RMC denied liability and claimed that Norstar owned RMC a balance of US $137,484.79 for deductions from hire made by Norstar during the charter. 

Norstar’s admiralty action involved an in rem claim against the “Rosy” as well as others interested in the subject matter as required by Rule 477(4) of the Federal Courts Rules (“Rules”).  The arrest of the “Rosy” was made under Rule 481 and lead to the bail application under Rule 485 for the release of the “Rosy” as arrested property.  In an in rem action, only the owner of the ship can defend the action against the ship as set out by Rule 480(1).

In order to free the “Rosy” and put the vessel back into service, RMC sought to fix bail at CAD $328,535 plus 30% “uplift” for interest and costs. Norstar maintained that bail should be fixed at US $635,870 plus an “uplift” of 30% for interest and costs resulting in a total of US $826,631. The task before Elliott J. involved what amount of bail should be set in order to free the “Rosy” from arrest.

Elliott J. reviewed Norstar’s claims for lost profits at paras 14-20 which she identified as composing two (2) issues: exercise of an option and re-positioning the “Rosy” to Nigeria – paras 24-31; and, mitigation and available market – paras 32-39.  For both issues, having canvassed the arguments made by each party, Elliott J. concluded that the “factual matters” will be determined by an arbitration to be conducted in London (“London Arbitration”).

[40] The parties have agreed to resolve their dispute through arbitration to take place in London, England. Clause 90 of the charter stipulates that the charter shall be governed and construed under the laws of England and any dispute arising out of or in connection with the charter shall be referred to arbitration in London.

[41] At the hearing of this motion, the Court was advised that the arbitrators have been selected and that the arbitration is expected to take two years.

[42] The London arbitration will determine issues related to:

– interpreting the terms of the charter or fixture recap;

– whether the option for an additional six months was triggered;

– whether a breach occurred;

– whether there was a repudiation;

– whether Nigeria was a war-like country;

– determining the final accounting between the parties, including the calculation of any damages and any lost profits; and

– any other matter in dispute that arises.

Elliott J. prefaced her analysis by confirming the parties’ agreement that the general rule in determining bail for the release of an arrested ship required that bail be equal to the “the reasonably best arguable case, plus interest and costs as limited by the value of the arrested vessel”. 

Elliott J. cited Striebel v. Chairman (The), 2002 FCT 995, para. 14 of the Schedule to Reasons appended to that decision.  At para. 18 of the Schedule to Reasons, an unreported decision Lundberg v. The Manitou III, 6 December 1988 T-2180-88, [1988] F.C.J. No. 1124 explained the “usual practice” of setting the bail to include plaintiff’s claim and other amounts including costs (and the “uplift” mentioned by both RMC and Norstar):

The not unusual practice in admiralty and maritime law suits of exacting bail in a somewhat larger sum than the total of the plaintiff’s claims, in order to release a ship from arrest is a crude technique: some would say crude, but effective. It is crude because that not unusual practice exacts security in whatever amount the plaintiff claims, plus an allowance for interest and costs. On the other hand, this is not the stage of the action at which an accurate assessment of the plaintiff’s claims is to be, or can be, readily performed. Indeed, here, the plaintiff asserts claims for damages in what most probably are round, global estimates.”

Elliott J. noted that, without more information from the London Arbitration, she would not take costs into consideration for setting bail as terms involving the cost consequences in the arbitration had not been shared with her.

[43] Neither the arbitration agreement nor the terms of the arbitration were put before the Court on this motion. It is not known, for example, whether each party will bear its own costs in the arbitration. As a result, that is not a factor that will be taken into account in setting the amount of bail.

In addition to acknowledging at paras 31 and 30 that the merits would be determined in arbitration, Elliott J. noted that the Federal Court’s more limited task to set bail still involved some estimate of the “reasonably best arguable case”.

[46] Looming large in the analysis of the reasonably best arguable case in this matter is the fact that everything in dispute, except the amount to be set for bail, is going to be determined by the arbitrators in London, England.

Though only expected to set bail as a “rough measure”, Elliott J. also observed, without constituting a critique, that she did not have a full view into the facts.

[49] That the amount of bail is at best a rough measure is readily supported by the fact that the evidence in this motion has not been tested; nor is it complete. That is not meant as a criticism. It is simply a description of the difficulty in arriving at an amount for bail that is anything more than a rough and ready measure.

[50] For example, the full charter terms, including riders, were not part of the record. The number of matters in dispute are relatively extensive. The opposing affidavits were fulsome, each critiquing the other, but no cross-examination has taken place. There are a number of facts and, in particular, accounting practices upon which there is significant disagreement.

Despite the lack of jurisdiction over the merits of the claim between Norstar and RMC, Elliott J. still had jurisdiction to set a bail amount.

[51] Both counsel are experienced and seasoned maritime law litigators. They each mounted reasonable arguments for the respective positions of their clients. In and of itself, the fact that this litigation will be settled through arbitration and that the arbitration is expected to take two years indicates the disagreements are complex and the arguments of each party have some merit.

Based on the limited record containing contradictory but untested evidence, Elliott J. did consider the claims made by Norstar and the competing arguments by Norstar and RMC regarding the strengths/weaknesses of those claims.  She set the bail for the release of the ship “Rosy” in the amount of the Canadian equivalent of US $826,631, being $1,101,733.10 to be paid into Court. 

Elliott J. also ordered that Norstar as a corporation ordinarily resident outside of Canada pay security for costs the Canadian equivalent of 12% of CAD $1,101,733.10 or CAD $132,207.97.

urbas arbitral – Norstar and RMC were bound by contract and undertook by that contract to arbitrate their disputes in London.  The “Rosy” was not party to the charter or the arbitration agreement.

First, neither RMC nor Norstar appeared to raise the involvement of RMC in the court litigation as Elliott J.’s reasons make no mention and none would be expected. Because Norstar’s and RMC’s contract involved admiralty matters, the Rules provided that resolution of their dispute authorized undertaking an in rem in Federal Court against the ship used in the charter.  Despite the arbitration agreement, the Rules required that Norstar “shall” name RMC as a party even though it had undertaken not to pursue litigation in court.  This situation is not unusual and Norstar naming RMC in the court proceedings would not be considered by experienced admiralty law practitioners to be a breach or waiver (express or implied) of the undertaking to arbitrate. 

Second, an in rem action against a ship is particular to admiralty actions and provides arbitral parties with security for their eventual awards.  In exchange for that added security, the parties concede, at least in part, the confidentiality of their dispute.  Again, neither RMC nor Norstar appeared to raise the confidentiality of their arbitration procedure as no mention was made in Elliott J.’s reasons and, again, none would be expected.

Despite confidentiality provisions in the arbitration agreement, if any, and absent agreement on the amount of bail to free an arrested ship, the arbitral parties would be expected in any court bail hearing to disclose the substance of their dispute and argue the relative strengths of their arguments and weaknesses of the other’s.  Such argument in court should not be perceived as an intentional breach of any undertaking for confidentiality but more a consequence flowing from a measure accessory to the arbitral proceeding involving admiralty matters.  The parties could also opt to agree on an amount bail to be filed in trust with a third party rather than expose the substance of their dispute into a court record.