Arrest of ships in Chile, by Estudio Cavello Ltd
ESTUDIO CARVALLO LTD
Emilio Sahurie - Claudio Barroilhet
Tel. : (56-2) 676 9355
Fax: (56-2) 234 4167
www.estudio-carvallo.cl
1. INTRODUCTION
Arrest of ships is dealt with in Book III of the Chilean Commercial Code on Navigation and Maritime Commerce, which was entirely replaced by the Act No. 18.680 of 1988. The new Book III updated maritime law and incorporated various international conventions, including the so-called Hamburg Rules.
The former Book III did not contain any Arrest of Ships provisions, although the Code of Civil Procedure general precautionary remedies a tool that is available for any civil or commercial creditor- were used to secure the prospective results of a maritime action, namely, the retention of the assets of the defendant.
After the 1988 amendments, Book III of the Commercial Code regulates maritime liens and arrest of ships on the basis of the revision both to the 1926 and 1967 Maritime Liens and Mortgages Convention, and the 1952 International Convention Relating to the Arrest of Sea Going Ships, as carried out by the Committee Maritime International in Lisbon, Portugal, in 1985.
2. REQUIREMENTS TO ARREST A SHIP
2.1 JURISDICTION TO ARREST A SHIP
The arrest shall be requested to the Civil Court with venue where the vessel lies, or to the Civil Court with jurisdiction on the merits. An arbitrator (whether appointed by the parties or by a Civil Court) is entitled to issue a decree of arrest in respect of the claim subject matter of the litigation before him.
The objective of the arrest is to secure the exercise of the maritime privilege upon a vessel or to enforce a judicial decision that might result into an order of her auction. The arrest is a precautionary procedure aimed to retain the vessel to secure the payment of a prima facie maritime privilege; it is not a trial to discuss the maritime privilege on its merits. Hence, the arrest may be initiated (1) before, (2) together or (3) after the trial of the merits.
(a) In the event of a pre-trial arrest, once the vessel is arrested, the petitioner has 10 extendable days to inchoate the proceeding in order to discuss the claim on its merits, by filing the lawsuit before the court / arbitrator with jurisdiction to hear it or by initiating the judicial proceeding in order to appoint the arbitrator. The latter is quite frequent, as the general rule in Chile is that Maritime Law disputes (including marine insurance) are subject to arbitration. If the parties fail too agree on the arbitrator, the competent court shall make the appointment. In this case, the duty to initiate litigation after the arrest will be discharged by filing a petition to the Court for the appointment of the arbitrator.
It is possible to arrest a ship and file thereafter the lawsuit in a court/arbitration located in a foreign jurisdiction, provided that the 10 extendable day s time limit is complied with. In Chile, the only requirement for an arrest to be granted is that the credit to secure is a maritime privilege in accordance to our Law. In fact, Chilean law clearly states that the goal of the arrest is to secure the exercise of the maritime privilege upon a vessel or to enforce a judicial decision that might result into an order of her auction, but is not required to litigate on the merits in Chile.
There are some cases where the arrest of a ship will vest jurisdiction on the merits to the court that issued the decree of arrest the so-called forum arresti. It takes place in the carriage of goods by sea under bills of lading and in the salvage claims. In such cases, the court that has issued the order of arrest of the carrying vessel, or a sister ship, or the salved vessel, will be competent to hear the respective claims on the merits.
(b) Once the trial on the merits has begun, the arbitrator or court hearing the case is the only one who may order an arrest. If the trial shall be submitted to arbitration, the civil court with venue will be entitled to arrest a ship until the arbitration tribunal is appointed and installed.
(c) In accordance to Chilean rules of civil procedure, a court or arbitrator who has issued a judgement is entitled to order the arrest of the subject matter vessel, as a way to secure the enforcement of the judgement. It is also possible that the auction proceedings may be initiated before a different court that, under the general rules, has jurisdiction to carry out the auction proceedings. Such a court is also competent to order an arrest. Such would be the case of a judgement rendered by an arbitrator, who has power to order an arrest or another precautionary injunction, but has not faculties to pursue the auction proceedings, in which coercion is inherent and is regarded as proper of a public authority.
Foreign judgements, stemming both from courts or arbitrators, may be enforced in Chile through an exequatur proceeding, whereby the Supreme Courts, after checking the accomplishment of certain formal requirements, authorizes its execution. If the foreign judgement which order the arrest is not a final judgement, the local court in charge of its enforcement will have the power to arrest the subject matter ship only when it entails a maritime privilege.
2.1 THE PRIVILEGED MARITIME CREDIT
The arrest of a vessel is the procedure to enforce a privileged maritime credit, which is the Continental Law version of a Maritime Lien. However, it should be noted that the privilege is extinguished after a brief period (normally 90 days) following the sale of the vessel. The privilege is a legal benefit which entitles a creditor to pursue the vessel/watercraft (the so called droit de poursuite ), to arrest it, to make it to be sold through a judicial auction and to collect its credit in the respective order where his privilege ranks.
Chilean privileges attach the credit as an accessory. Hence, if the credit is assigned or extinguished, the privilege will, respectively, benefit the new creditor or will be terminated. The only exception to this rule is the judicial and non-judicial sale of the ship: both will extinguish the privilege without, necessarily, extinguish the credit too. Privileges are also extinguished after a year of their inception. Privileges are not subject to the Public Registration System, as opposite to the maritime mortgage, which shall be registered to have legal effect.
The privileged credits are gathered in two groups enumerated and ranked in articles 844 and 846. Article 844 rank the credits as follows:
1. Judicial costs and disbursements incurred for the common benefit of the creditors for the conservation of the vessel or its auction;
2. Wages and other benefits related to the labor contracts for the crewmen, including death and personal injuries indemnities that have arose out of accidents connected to the vessel exploitation;
3. Ports, pilotage, waterways and signal duties;
4. General average contributions, salvage rewards and disbursements/losses incurred to prevent/minimize the damages caused by pollution in the event that the special limitation fund established in the Navigation Act has not been constituted after the casualty, and
5. Indemnities for losses or damages caused to other vessels, port premises, berths, waterways, cargo or baggage as a result of collisions and other accidents in the navigation, when the respective action is based on tort grounds, and the personal injuries inferred to the passengers and crewmen of those other vessels.
Privileges and rankings established in article 846 privileges are as follows:
1. Credits for the prices of sale, building, repair and outfitting of the vessel;
2. Credits for the supply of products or materials necessary for the vessel exploitation or conservation;
3. Credit arisen out of the contracts of passage, charter and carriage of goods, including indemnities for damages, shortages and losses in the cargo and baggage, and the credits for damages caused by pollution or spillage of hydrocarbon or other damaging substances;
4. Credits for master, agents or other third parties disbursements, performed on behalf of the owner for the exploitation of the vessel, including agents services, and
5. Credit for hull or liability insurance premiums in respect of the vessel.
In between both classes of privileges, there are credits secured with maritime mortgages and pledges, which rank below the article 844 and above the article 846 privileges.
The privileges may be enforced upon the vessel/watercraft (including either while on construction, but only after it is afloat), the freights, charter hires and passages uncollected, that have been arisen in the voyage when the privilege was born. Privileges can also be exercised upon the payment to be received from the vessel s insurer. Article 844 privileges may furthermore be exercised upon indemnities owed to the vessel, including freights, general average contributions and salvage rewards, but only if they have been originated in the same voyage.
3. PROCEDURE FOR ARREST
After checking that it has jurisdiction to arrest, the requested court or arbitrator shall issue the decree of arrest if the plaintiff submits prima facie evidence of the existence of a privilege. In the absence of such evidence, the court shall require the petitioner to present a bond to cover the potential damages in case that the arrest is deemed to be entirely groundless or wrongful.
Once the Court has granted the arrest, the decree shall be notified to the Port Authority who shall enforce it by denying the dispatch of the vessel, even if she is ready to sail. If the vessel is outside the venue of the court that ordered the arrest, the decree shall be conveyed to the Headquarters of the Maritime Authority, which are located in the Port of Valparaiso. Communication by fax, telex or another expedite mean is permitted in urgent cases.
The vessel may be arrested in the port where she is anchored, moored or the port she has called ahead. If the Court has jurisdiction on the merits, the arrest may be ordered for any other port/place where the vessel arrives.
It is not required to serve the petition and the order of arrest upon the defendant, unless the arrest is ordered during a trial, in which case the decree of arrest shall be served on him within 10 extendable days after its issuance. If this is not complied with the arrest shall terminate.
If the arrest is requested before the trial begins, the higher standards of the evidence as to the existence of the privilege and other formalities are required. If the Court is not satisfied with the evidence, it may order the petitioner to provide a bond as a condition to issue an order of arrest.
The right to a due process of law is protected, as the owner, charterer, operator, manager and/or any other party who may have the capacity as the future defendant in the trial, may assume the following reactions after the arrest:
(a).- Present an appropriate guarantee in order release the vessel. The Court shall resolve any dispute relating to the kind and amount of the guarantees.
Such security will replace the vessel until the trial has terminated. If the court rules for the plaintiff, the judgement may be enforced on that guarantee, which will be deemed as the subject matter of the privilege.
(b).- Discuss the legality of the arrest, based on any grounds, including the lack of jurisdiction or venue of the court, the absence of a maritime privilege entitling to arrest, the insufficiency of the evidence presented as to the existence or amount of the credit, etc.
As stated before, the discussion on the merits shall be postponed for the trial, as the arrest is a precautionary procedure aimed to obtain security of the enforcement of a future judgement.
(c).- Discuss the kind or the amount of the guarantee requested by the petitioner. The arresting court or arbitrator has full jurisdiction to rule on this issue.
4. ARREST OF SISTER SHIPS AND VESSELS UNDER THE SAME MANAGEMENT AND/OR OPERATION
Article 1234 of the Code of Commerce establishes the right to seek the arrest the involved ship (i.e., the vessel in which connection the maritime privilege arose), or any other vessel pertaining to the same ownership, or which is under the same administration, or is operated by the same person.
This sister ship provision was inspired in Article 3 (2) of the revised project for the International Convention of Arrest of Ships (the 1985 Lisbon Revision), that was then reproduced in Article 3 (2) of the 1997 Draft of the International Convention of Arrest of Ships (The 1997 draft), and finally became Article 3 (2) of the 1999 Arrest of Ships Convention.
As written, the provision encompasses three situations: the vessels that are owned by the same person; the vessels that are being administrated by the same person and the vessels that are being operated by the same person.
(a).- Vessels under the same ownership. This first situation deals with the so-called sister ship arrest, i.e., a vessel that belongs to the same owner of the involved vessel. This is the genuine sister ship arrest, where two or more vessels belong and are owned by the same person. When the vessel is registered in Chile, it can be evidenced by a copy of the vessel s register, as the person on whose name the vessel is registered is presumed to be the owner. Furthermore, pursuant to article 12 of the Chilean Navigation Act, to register a vessel, the solicitor has to show evidence of its ownership. Chilean maritime register system is strict as to condition the registration of a vessel and the use of our national flag to her ownership by a Chilean individual or company. Therefore, the Law is designed to prevent that vessels are to be registered on the name of other persons than her legal owner.
If the vessel is registered overseas, ownership may be evidenced by a copy of the registration, although it may be also proved by other means, e.g. copy of a register of ships published by a classification society, a charter party, a hull insurance policy, etc. A bill of lading will be prima facie evidence of ownership, shifting to the opposing party the burden of rebutting it.
(b).- Vessels under the same administration. In this second case, the connecting criterion to arrest a second vessel is the common administration link . To administrate or manage, derives from the Latin word administrare, made of the reunion of ad (to) and ministrare (to serve), meaning to serve to . The common administration provision -also referred to in collision and salvage Chilean provisions when there is a collision or salvage services between two or more vessels under the same administration-, would cover any situation where two or more vessels are being used or exploited by a same individual or corporation, whichever might be the title or link that allows to make business with the ship, e.g., ownership, a charter party, (with or without demise), a sub-charter, a tonnage agreement, a slot charter and other contractual forms that would imply a transfer in the vessel exploitation. To determine if there is a common administration the decision maker will examine in detail if there are typical acts and contracts of vessel management, such as booking space for cargo, issuing bills of lading, contracting crew, appointing agents, offering towage or salvage services, etc.
(c).- Vessels under the same operation. The operator has been defined in the Book III. Article 882, paragraph 3 provides: Operator is the person who, without owning a vessel, acting as an agent of her owner, executes at its own name or on behalf its principal the carriage of goods by sea contract or other contracts necessary for the vessel exploitation, bearing the respective liabilities .
Despite the fact that the word operator was present in our law before its definition was passed, its drafters dealt in several occasions with this issue before arriving to the current definition. During the deliberations, it was stated, for the record, that the operator may not only carry out contracts for the commercial exploitation of the vessel, like charter parties and contracts of carriage of goods by sea, but he may also be in charge of her navigation and management. In other words, an operator may perform all the functions of an owner and therefore it would be proper to say he administers the vessel too.
It seems that the only difference between the operator and the administrator is that the relationship between the former and the owner is restricted by article 882 to an agency contract. Instead, in the latter there may be a charter, a lease, a sub-charter, a loan, etc.
The operator is also present in the single ships companies scheme, as the person who is in charge to manage/exploit a fleet integrated by vessels, which belong to different companies. In this basic scheme it may happen that one mother Shareholding Company owns the fronting Management/operating Company and each of the single ship companies, which has the real financial and strategic control of the fleet.
In the situations referred to above, there is no requirement that the owner of the vessel under the same administration or operation be the debtor of the privileged credit.
5. THE SHIP YARD RIGHT TO WITHHOLD A SHIP
A shipbuilding or repairing yard is entitled to withhold the vessel under construction or repair in order to secure the corresponding payment.
Retention of the ship shall be granted by a civil court, in a proceeding subject to the arrest of ship s rules, with the difference that the retained vessel will remain under the custody of the Yard, without prejudice to the duties and responsibilities of its captain.
Although the retention does not give rise to a possesory lien, it will rank above any hypotheca, mortgage or encumbrance subsequent to its the register in the Mortgages and Encumbrances Register of the Maritime Authority.
6. EFFECTS OF THE ARREST
Once it is arrested, the ship is not allowed to break ground and therefore will receive no clearance from the Port Authority to sail. It is bound to remain anchored or in the place designated by the Port Authority, although the vessel remains under the custody of her captain and to the owners risk. If the captain sails, his license shall be cancelled as a sanction, and if the vessel has a foreign flag, the owner shall be fined. Costs of seizing the arrested ship, increased by 50%, shall be borne by the owner.
An arrested ship is not subject to transfer in her ownership. Such a transfer shall be considered as null and void.
Finally, the petitioner may become responsible for the damages caused by an entirely groundless or wrongful arrest. This liability would be governed by tort rules, unless there exists a previous contract between the petitioner and the owner, manager or operator of the vessel who has sustained the damage.
The claim for wrongful arrest, including the existence of damages, the causal relationship and the alleged lack of any ground to arrest the vessel is a matter to be litigated in a different trial.
Emilio Sahurie L.
LL.B. Universidad Catolica de Valparaiso, Chile
LL.M., J.S.D. Yale University, U.S.A.
Claudio Barroilhet A.
LL.B. Universidad Catolica de Valparaiso, Chile
LL.M. Admiralty Law, Tulane University, U.S.A.
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